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Insolvency of a Compartment of a Luxembourg Umbrella Investment Vehicle
Ukrainian Schemes of Arrangement: Passing the Stress Test
Mexico’s Insolvency Response to Covid-19
Insolvency and Restructuring InternationalThe Journal of the IBA Insolvency Section
Vol 14 No 2 SEPTEMBER 2020 ISSN 1995-0241
Terms and conditions for submission of articles1. Articles published in Insolvency and Restructuring International
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CONTENTS
Co-Editors note 4
Insolvency Section Scholarship: Insolvency of crowdfunding 60Danny Quah
UNCITRAL finalising micro and small business insolvency legislative guide 64Gregor Baer
Vol 14 ISSUE 2 September 2020
Mexico's insolvency response to Covid-19Diego Sierra and Alejandro González
Ukrainian schemes of arrangement: passing the stress testAnton Molchanov
Insolvency of a compartment of a Luxembourg umbrella investment vehiclePhilippe Thiebaud and Laurent Henneresse
Brexit impact on insolvency avoidance actions under Italian lawGiuseppe de Falco
Delayed-action bankruptcy in RussiaSergey Petrachkov and Dmitry Kuptsov
Russia’s pandemic and insolvency regulationsSergey Treshchev, Nikita Beylin and Elena Malevich
Gibbs Principle: examining India's new cross-border insolvency regime and its potential challengesPart II
The Dutch scheme: a new European restructuring toolBarbara Rumora-Scheltema
French insolvency rules reformed in light of the Covid-19 pandemic: are they going too far?Anja Droege Gagnier and Amélie Dorst
Recent changes in directors' liability under Belgian law Bart De Moor and Sofie Onderbeke
The Corporate Insolvency and Governance Act 2020: permanent reforms and temporary protectionsPaul Keddie and Liam Preston
Debt buybacks in Spain: restructuring and insolvency considerationsIgnacio Buil Aldana and Guillermo Ruiz Medrano
Inter-se priority among secured creditors under the insolvency regime in India: striking the right balanceAvikshit Moral, Ashish Mukhi and Kamlendra Pratap Singh
Corporate debt restructuring under Argentine lawMartín Torres Girotti
Duties of a Swiss subsidiary's directors on the verge of a Covid-19-induced insolvencyBenedict F Christ
Main bankruptcy measures introduced in response to Spain's Covid-19 state of alarmBosco de Gispert
FEATURE ARTICLES
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Insolvency and Restructuring InternationalThe Journal of the IBA Insolvency Section
Vol 14 No 2 SEPTEMBER 2020 ISSN 1995-0241
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Insolvency and Restructuring International Vol 14 No 2 September 2020 1
All previous Insolvency and Restructuring International articles are now available online to Section members. To access them, please see: http://tinyurl.com/pastIRIarticles
2 Insolvency and Restructuring International Vol 14 No 2 September 2020
Past Section Co-ChairsRichard J Mason 2017–2018Kirsten Schümann-Kleber 2017–2018Gregor Baer 2015–2016Brigitte Umbach-Spahn 2015–2016Pekka Jaatinen 2013–2014Josef Krüger 2013–2014Judith Elkin 2011–2012David Jenny 2011–2012Leonard H Gilbert 2009–2010Carsten Ceutz 2009–2010Christopher Besant 2007–2008Alexander Klauser 2007–2008Ben Floyd 2005–2006Agustin Bou 2005–2006Kolja von Bismarck 2003–2004Michael Prior 2003–2004Gabriele Nadal Vallve 2001–2002Selinda Melnik 2001–2002Ole Borch 1997–2000Richard Broude 1997–2000E Bruce Leonard 1992–1996Hans-Jochem Luer 1992–1996
International Bar AssociationMark Ellis Executive Director
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Insolvency and Restructuring InternationalSeptember 2020 Vol 14 No 2 Citation (2020) 14 IRI
Insolvency and Restructuring International is published twice a year.The views expressed in this journal are those of the contributors and not necessarily those of the International Bar Association.
Section Officers 2020Officers for Insolvency Section 2020
Co-ChairsKaren O’Flynn
Clayton Utz, Sydney, New South [email protected]
Marcel WillemsFieldfisher, Amsterdam
Senior Vice-ChairsAnja Droege Gagnier
BMH, [email protected]
Robyn GurofskyBorden Ladner Gervais, Calgary, Alberta
Tomas ArayaBomchil, Buenos Aires
SecretaryCedric Alter
Janson Baugniet, [email protected]
Publications OfficersGareth SteenDentons, Dublin
Leon ZwierArnold Bloch Leibler, Melbourne, Victoria
Website OfficerPedro Arregui
Universidad de Burgos, [email protected]
Senior Vice-Chairs of MembershipAndreas F Bauer
GSK Stockmann, [email protected]
Andreas SpahlingerGleiss Lutz, Stuttgart
Membership OfficersRichard Harney
Bowmans, [email protected]
Teis Gullitz-WormslevKromann Reumert, Copenhagen
Membership Officer, EuropeEva Spiegel
Wolf Theiss, [email protected]
Membership Officer, North AmericaDaniel Joseph Saval
Kobre & Kim, New York, New [email protected]
Membership Officer, ChinaAudry (Hong) LiZhong Lun, Shanghai
Membership Officer, UKPaul Keddie
Macfarlanes, [email protected]
Membership Officer, IndiaShruti Singh
Khaitan & Co, Perlman Mediation and Legal Strategies, [email protected]
Membership Officer, South AmericaFernando Martinot
Estudio Martinot, [email protected]
Scholarship OfficerJana Essebier
Vischer, [email protected]
Vice-Chairs of ConferencesDario U OscosOscos, Mexico City
Huan TanBenvalor, Utrecht
Annual Conference OfficersFernando Quicios
Perez-Llorca, [email protected]
Patrick ElliotKeystone, London
Robert J FeinsteinPachulski Stang Ziehl & Jones, New York, New York
Robert Van GalenNautaDutilh, Amsterdam
Mid-Year Meetings Conference OfficersDaniel HajekH A J E K, Prague
Otto Eduardo Fonseca LoboLM Lobo & Martin, São Paulo
Vice-Chair of Organisation LiaisonSylvain Paillotin
Sekri Valentin Zerrouk, [email protected]
UNCITRAL LiaisonsAlexander Klauser
Brauneis Klauser Praendl, [email protected]
Christopher Besant491, The Kingsway, Toronto, Ontario
Constantinos KlissourasK P, Athens
Gregor BaerGregor Baer, San Francisco, California
Lewis KrugerStroock & Stroock & Lavan, New York, New York
Richard Joseph MasonChicago, Illinois
Diversity and Inclusion OfficerSarah L Cave
United States Magistrate Judge, New York, New [email protected]
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Holland & Knight, Tampa, [email protected]
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Tracanella, [email protected]
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Gomez-Acebo & Pombo, [email protected]
Private Equity Industry OfficerJinning Tu
Anderson Mori & Tomotsune, [email protected]
Industry Officer – Finance and InsuranceRicardo Reveco
Carey, [email protected]
Transportation and Infrastructure Industry OfficerTimothy Graulich
Davis Polk & Wardwell, New York, New [email protected]
Automotive Industry OfficerTushara Weerasooriya
McMillan, Toronto, [email protected]
Officers for Insolvent Financial Institutions Subcommittee
Co-ChairsAnton Molchanov
Arzinger, [email protected]
Pierre PetterssonCirio, Stockholm
Vice-ChairNina Martins
LexCase, [email protected]
Officers for Creditors’ Rights Subcommittee
Co-ChairsBeat Mumenthaler
Pestalozzi, [email protected]
Marcelo PerlmanPerlman Vidigal Godoy, São Paulo
Vice-ChairsDavid Steinberg
Stevens & Bolton, [email protected]
Natalija LacmanovicLacmanovic, Zagreb
Peter FissenewertBuse Heberer Fromm, Berlin
Insolvency and Restructuring International Vol 14 No 2 September 2020 3
Members of the Insolvency Section Advisory BoardBrigitte Umbach-Spahn
Wenger Plattner, [email protected]
Kirsten Schümann-KleberGÖRG, Berlin
Pekka JaatinenCastren & Snellman, Helsinki
Officers for Legislation and Policy Subcommittee
Co-ChairsJames M Sullivan
Windels Marx Lane & Mittendorf, New York, New [email protected]
Sergey TreshchevSquire Patton Boggs, Moscow
Vice-ChairsDouglas HawthornOsborne Clark, London
Lee PascoeNorton Rose Fulbright Australia, Melbourne, Victoria
Tommaso FocoPortolano Cavallo, Rome
Officers for Reorganisation and Workouts Subcommittee
Co-ChairsBart De Moor
Nederlandse Orde van Advocaten, [email protected]
Ryo OkuboNagashima Ohno & Tsunematsu, New York, New York
Vice-ChairsDavid Heems
HOUTHOFF, [email protected]
Sophia Rolle-KapousouzoglouLennox Paton, Nassau
4 Insolvency and Restructuring International Vol 14 No 2 September 2020
We are pleased to present the September 2020 edition of Insolvency and Restructuring
International.This edition is published when we are all in the
midst of a global pandemic, in which every jurisdiction has had to face unprecedented challenges and uncertainty. Global lockdowns in the wake of the Covid-19 pandemic have caused turnovers to crash in most countries and plunged the world economy into an unprecedented crisis.
We thank our authors who have taken the time to explain how governments and businesses in far-flung parts of the globe are dealing with the associated threats, and in the process helped us all understand how best to advise our clients and associates.
We extend our very best wishes to all our readers and their families, friends and colleagues as we deal with the fallout of the Covid-19 pandemic in our personal and working lives.
Submissions from members across a broad spectrum of jurisdictions are included in this edition, including: Mexico (Von Wobeser y Sierra); Ukraine (Arzinger); Luxembourg (Molitor Legal); Italy (Unlaw); Russia (ALRUD Law & Squire Patton Boggs); India Part II (National Law university, Jodhpur); Netherlands (NautaDutilh); France (BMH Avocats); Belgium (Strelia); London (MacFarlanes & Cuatrecasas); India (Juris Corp Advocates and Solicitors); Argentina (Bomchil); Switzerland (Vischer); and Spain (GrupoGispert).
In ‘Mexico’s insolvency response to Covid-19’, Diego Sierra and Alejandro Gonzalez examine proposed amendments to Mexican Concursos (Commercial Bankruptcy) law following a wave of bankruptcies expected to hit Mexico as a result of the pandemic. Their article looks at how the exceptional concurso proceeding could be quicker, more efficient, with a lower cost for the debtor, and favour electronic judicial proceedings.
In ‘Ukrainian schemes of arrangement: passing the stress test’, Anton Molchanov examines the Ukrainian insolvency reform, both Covid-19-related and general in light of the growing worldwide recession. He examines whether a pre-insolvency scheme of arrangement might be an effective alternative.
In ‘Insolvency of a compartment of a Luxembourg umbrella investment vehicle’, Philippe Thiebaud and Laurent Henneresse look at the impact of
Luxembourg’s insolvency/liquidation regime on the country’s investment funds and focus on a recent decision handed down by the Luxembourg Court of Appeal in March 2018, and its impact on claw back clauses and specific sanctions against members of the management body of the investment vehicle.
In ‘Brexit impact on insolvency avoidance actions under Italian law’, Giuseppe de Falco gives us his insights into the impact of the United Kingdom’s exit from the European Union. We learn that Brexit has direct consequences on claw back actions which might be brought against UK creditors by insolvency practitioners of EU Member States. He also looks at the impact on those situations where English law comes into play as governing law and a UK entity is the beneficiary of an act, a contract or a payment which is detrimental to all the other creditors.
In ‘Delayed-action bankruptcy in Russia’, Sergey Petrachkov and Dmitry Kuptsov delve into the impact of Russia’s bankruptcy moratorium, and its likely consequences going forward. They look at several practical consequences for both debtors and creditors of the bankruptcy moratorium introduced in Russia in April 2020 and offer some practical solutions to minimise the risks and ensure effective debt recovery.
In a second Russian article, ‘Russia’s pandemic & insolvency regulations’, three expert practitioners, Sergey Treschev, Nikita Beylin and Elena Malevich examine how Russia’s pandemic and insolvency regulations are working to support business in order to minimise the effects of the economic crisis. They look at the moratorium on bankruptcy of particular companies, used for the first time to delay bankruptcy for many Russian companies.
From India you may recall the first of a two-part article, published in April, ‘Examining India’s new-cross border insolvency regime and its potential challenges’. In the second part, ‘Gibbs Principle: a territorial fossil’, Sayak Banerjee and Akash Mukherjee continue the examination of India’s new cross-border insolvency regime and its potential challenges.
In ‘The Dutch scheme – a new European restructuring tool’, Barbara Rumora-Scheitema brings us a description of how this new and flexible restructuring tool can be used by and for debtors in financial distress, both in cross-border situations, as well as international or purely national situations.
Co-Editors note
Co-Editors noteSeptember 2020
Insolvency and Restructuring International Vol 14 No 2 September 2020 5
In ‘French insolvency rules reformed in light of the Covid-19 pandemic: are we going too far?’, Anja Droege Gagnier and Amelie Dorst weigh up whether French insolvency rules readjusted with the aim of preventing and limiting enterprise failures, are too far-reaching in their consequences as supporting companies encountering slowdown in growth or financial difficulties have become a major challenge to the French government, in both social and legal terms.
In ‘Recent changes in directors’ liability under Belgian law’, Bart De Moor and Sofie Onderbeke take us through the full implications of changes to directors’ liability in Belgium, based on their combined broad experience for more than 25 years in international transactions and in corporate restructurings and reorganizations. This article focuses on the new provision on wrongful trading in Belgian insolvency law and the differences with the English law concept of wrongful trading.
In ‘The Corporate Insolvency and Governance Act 2020: permanent reforms and temporary protections’, Paul Keddie and Liam Preston examine proposed changes to the UK’s insolvency regime and their likely impact. They helpfully summarise the key provisions of the Act and, in respect of the permanent reforms, explore the implications for companies and directors.
In ‘Debt buybacks in Spain: restructuring and insolvency considerations’, Ignacio Buil Aldana and Guillermo Ruiz Medrano examine Spain’s debt buybacks regime and provide a legal overview of the key issues that from a Spanish law perspective should be considered when analysing buybacks.
In ‘Inter-se priority among secured creditors under the insolvency regime in India: striking the right balance’, three members of Juris Corp, Avikshit Morai, Ashish Mukhi and Kamlendra Pratap Singh give us
another perspective on India’s insolvency regime. They examine one of the critical considerations which determines pay-outs for financial creditors, which is the ranking and priority which a secured creditor enjoys and determines the quantum of payouts for secured creditors in an insolvency or a liquidation scenario.
In ‘Corporate debt restructuring under Argentine law’, Martin Torres Girotti provides an insight into the impact of a significant part of the Argentine stock of corporate debt being held by foreign creditors. He reviews the main aspects of such mechanisms in order to evaluate the possible debt re-profiling scenarios that could appear in the near future.
In ‘Duties of a Swiss subsidiary’s directors on the verge of a Covid-19-induced insolvency’, Benedict F Christ discusses what he sees as the ten most important questions regarding the conflicts between the interests of a Swiss subsidiary and a group under the threat of insolvency following the Covid-19 pandemic.
In ‘Main bankruptcy measures introduced in response to Spain’s Covid-19 state of alarm’, Bosco de Gispert examines the many regulations recently published with the aim of trying to reduce the foreseeable negative effects that the State of Alarm declared in Spain, and the associated paralysis of a large part of the Spanish economy. He looks particularly at the legislative changes adopted in a bid to remedy the effects of this shutdown of activity and forced business closures.
Members interested in contributing to the next edition please contact us by email at [email protected] or [email protected].
In the meantime, there is much to absorb in this September 2020 edition of Insolvency and Restructuring International. We look forward to meeting you in person when international borders are once again open, and it is safe to travel.
6 Insolvency and Restructuring International Vol 14 No 2 September 2020
Mexico’s insolvency response to Covid-19
A wave of bankruptcies could soon be hitting Mexico as a by-product of the Covid-19 outbreak. Currently Mexican Commercial Concursos Law does not provide special rules to deal with emergencies, crises, disasters, or force majeure and acts of God events. The Bankruptcy and Restructuring Committee of the Mexican Bar Association has been preparing an amendment proposal to provide an extraordinary concurso proceeding in case of such emergencies. This article looks at how the exceptional concurso proceeding could be quicker, more efficient, with a lower cost for the debtor, and favour electronic judicial proceedings.
IntroductionThe Mexican Commercial Concursos Law (the ‘Concursos Law’) provides the only commercial insolvency proceeding available in Mexico, known as Concurso Mercantil. The Mexican Federal Government enacted the Concursos Law on 12 May 2000,1 and since then it has had four amendments (in 2007, 2014, 2019 and 2020).
The primary purpose of the Concursos Law is conservation of the company in general default of its payment obligations, and if not possible, payment to its creditors through liquidation.2 Moreover, it seeks to prevent jeopardising the viability of the debtor’s stakeholders.3
However, companies seldom use the commercial concurso proceedings in Mexico. According to data provided by the Mexican administrative authority in charge of overseeing commercial bankruptcy proceedings, the Federal Institute of Bankruptcy Proceedings (IFECOM), since 2000 the courts have admitted only 781 insolvency proceedings, amounting to about 40 cases a year.4 From these statistics, about 44 per cent of the concluded cases ended through a settlement agreement.5 These are negligible numbers for a country which ranks as one of the world’s 15th largest economies.6 In other words, companies shy away from the Concurso regime.
Mexican ordinary commercial concurso proceedings overviewUnder article 2 of the Mexican Concursos Law, a concurso proceeding has two successive phases: conciliation and liquidation. However, before the
conciliation stage (which begins with the concurso declaration judgment), there is a pre-concursal stage known as the ‘concurso declaration stage’ or ‘visit stage’.
The concurso declaration stage may begin through a request from the debtor or with a claim filed by a creditor, the Attorney General’s Office, or the National Institute to Return to the People that Which has Been Stolen.7 The petition must be filed with a federal court in the debtor’s domicile.
During this pre-concursal stage, there can be specific arguments and evidence filed by the parties regarding whether the debtor meets the insolvency standards provided by the law. The court also appoints a third-party specialist, known as a visitor, to analyse the company’s books and records and to conclude whether the debtor is in general default of its payment obligations. The visitor has the duty to prepare a report for the court establishing whether the company meets the insolvency standards provided under the Concursos Law.
Articles 10 and 11 of the Concursos Law provide that a company falls under general default of its payment obligations when it has two or more creditors and meets the following requirements: (1) 35 per cent of its total obligations have matured for at least 30 days; and (2) the company fails to have enough liquid assets and receivables to support at least 80 per cent of its overdue obligations. When the insolvent company is the petitioning party, meeting only one requirement suffices.
After the visit, and if the debtor is in general default of its payment obligations, the court enters the commercial concurso declaration judgment through which the court declares:8 (1) the debtor in concurso; (2) the outset of
Mexico’s insolvency response to Covid-19
Diego SierraVon Wobeser y Sierra, SC, Mexico City
Alejandro GonzálezVon Wobeser y Sierra, SC, Mexico City
Insolvency and Restructuring International Vol 14 No 2 September 2020 7
the conciliation stage (or the liquidation stage if the debtor expressly requests it); (3) judicial protection against the execution of the debtors assets; and (4) a debtor’s payment stay; among other decisions.
The conciliation stage seeks to restructure and preserve the company by a settlement agreement between the creditors and the debtor. The liquidation stage has the purpose of selling the company’s assets and paying off its debts.
In the conciliation stage, the court appoints a conciliator, a third-party specialist charged with supervising the company’s ordinary business operations, formulating a provisional and definitive list of creditors, and trying to reach a settlement agreement between the company and its creditors.
Conversely, in the liquidation stage, the court appoints a receiver, a third-party specialist charged with liquidating the debtor’s entire estate and paying its creditors.
Ample room for improvement in the Concursos LawAs mentioned above, in the last 20 years the concurso proceeding has not proved an efficient and predictable way to restructure a company facing insolvency problems. Below we identify some of the issues that we believe have held back the development of an efficient, reliable and predictable restructuring environment in Mexico:
Lack of specialised courts in commercial and insolvency matters
Under article 17 of the Concursos Law, only federal courts (district courts) are entitled to hear commercial concursos proceedings. Depending on each state, concursos proceedings are heard by mixed district courts, civil district courts, or commercial district courts.
According to the IFECOM, Mexico City, Jalisco, and Nuevo León account for more than 60 per cent of Mexico’s concursos proceedings.9 However, these states do not have commercial district courts, which means that district courts that hear concursos proceedings also hear civil and commercial federal procedures, family, civil, and commercial amparo claims (constitutional claims), and, in some cases, even administrative or labour amparo claims.
This lack of specialised commercial and insolvency courts means that judges and court personnel do not have experience and knowledge of accounting, finance, and insolvency in general. This situation also generates different and contradictory judicial interpretations of the law. It is noteworthy that in Mexico, law professionals rarely have any finance background. There is no
undergraduate system offering the possibility for future attorneys to obtain certain quantitative tools before seeking a law degree. High school students go straight into law school, which rarely offers courses on financial accounting, statistics or probability. Financial analysis is left to quantitative experts, not lawyers, who are taught to argue and explore human rights issues, not to see the world through the lense offered by balance sheets, profit and loss and cash flow statements.
In this sea of financial illiteracy, federal judges regard themselves as human rights judges whose mission is to protect companies and individuals from governmental breaches to individual rights set out in the constitution. Future judges often travel to Spain and South America to pursue masters degrees and PhDs in constitutional law. Only occasionally do they see any value in specialising in finance or accounting. Judges avoiding financial specialisation makes perfect sense when considering that the system offers practically no growth opportunities for their acquisition of such intellectual tools. As a result, Mexican justice genuinely has a vicious circle of lack of talent and lack of incentives for that talent to arrive and thrive in concursos.
Constant rejection of the Concurso petitions
Unsurprisingly, most of the concurso petitions (debtor’s requests or claims) are rejected by federal district courts, arguing the lack of, or imprecision of, the information and documentation attached to the petition. Therefore, even though there is always an urgency to begin the trial, and for the granting of injunctions to protect the estate, the courts admit very few concurso petitions, thereby obstructing justice and jeopardising the viability of debtors.
Lack of legal certainty in judicial decisions
The Concursos Law allows the parties to challenge all judicial decisions entered by the concusos court. Specifically, the law provides two types of ‘recourse’: repeal (recurso de revocación) and appeal (recurso de apelación).
Through an appeal, the parties can challenge the judicial decisions expressly indicated by the law (mainly, the Law provides that an appeal proceeds against concurso judgments). This kind of recourse is heard and resolved by a Unitary Court (a second-instance court). Instead, the repeal proceeds against any judicial decision in respect of which the appeal does not apply. The concursos courts hear and resolve the revocation.
Also, the parties can file amparo claims10 arguing the violation of their human rights against the appeal or repeal judgment. In some cases, an appeal is admissible to challenge amparo judgments.
8 Insolvency and Restructuring International Vol 14 No 2 September 2020
As a result, concursos judicial decisions entered by courts lack certainty and legal security, since there are several stages where they can be modified, even when already executed by the debtor or the creditors.
Excessive ancillary proceedings filing
Under article 267 of the Concursos Law, all the issues that arise during the concurso proceeding, and do not have a specific procedure, shall be brought through an ancillary proceeding. An ancillary proceeding is a small procedure among the concurso proceeding, and commonly there may be dozens of ancillary proceedings that delay the primary process.11
Additional areas of opportunity
The Mexican insolvency system offers abundant areas for improvement, including the following:• In practice debtor-in-possession (DIP) financing rules
eliminate this financing alternative. Some finance-specific statutes make it a crime to lend to companies posing a risk of default. In short, they scare away any remote possibility of a DIP financing market from ever gaining traction in Mexico.
• The labour authorities can execute their awards or judgments without informing the concursos court and without delivering the remanents of the sales or auctions.
• In certain cases the concursos courts have entered overstreched injunctions, whose legality may be seriously debatable, that do not benefit the estate and seriously affect creditors and third parties’ rights. These decisions seriously undermine the trust of companies and investors in the insolvency system.
• Verification visits (which only evaluate whether a company passes muster on the insolvency standards) often reach the ridiculous point of lasting for more than a year, due to the lack of organisation and accuracy of the debtor’s accounting books. Often by the time a court reaches a decision the company’s value has been gravely impaired.
• Lack of electronic processing of concurso proceedings.
Covid-19 and the concurso proceedings in MexicoMexico, like many of the world’s largest economies, is facing a severe health emergency due to the Covid-19 outbreak. As a consequence, the federal and state governments have adopted several measures to avoid the spread of cases. Specifically, on 30 March 2020, the federal government declared that Mexico was facing a
sanitary emergency and that the Health Ministry would enter general decrees to protect people.
On 31 March 2020 and 21 April 2020, the Health Ministry entered two decrees ordering the suspension of all non-essential activities in Mexico. Essential activities were defined as the health and pharmaceutical sector, public security, financial services, production and distribution of electric energy and hydrocarbons, telecommunications, sales of food, among others.
All these measures adopted to fight against the spread of Covid-19 have provoked, and will continue generating, a severe deterioration of the Mexican economy and serious damage to large companies and SMEs.
For instance, according to Mexico’s central bank, in the second quarter of 2020 the country’s GDP fell by 14.3 per cent, and in the third trimester of 2020 is expected to fall by a further 7.6 per cent.12 According to the Tourist Business National Council and Anáhuac Tourist Competitiveness Investigation Center, from March to June 2020, the Mexican receptive (international) and domestic tourism consumption fell by 80 per cent.13 Moreover, according to the Mexican Automobile’s Distribution Association, in April 2020, national automobile sales fell by 64.5 per cent.14
Under this adverse situation, Concursos Law does not provide special rules in the event of an emergency. As briefly touched upon above, the ordinary proceeding is inefficient, slow and unpredictable.
Key points of the amendment proposal to the Concursos LawIt is in this context that the Bankruptcy and Restructuring Committee of the Mexican Bar Association worked between March and June 2020 on an amendment proposal to the Concursos Law, to provide an effective and immediate solution to the harmful effects of Covid-19 outbreak and other potential future emergencies.
The proposal seeks to create an extraordinary, agile and exceptional proceeding that allows the restructuring of companies in general default of their payment obligations as a result of a disaster or emergency. It also wants to bring the concursos alternative closer to small and medium enterprises, making their reorganisation faster, more efficient, and more cost efficient. Some key features of the proposal include the following:• The exceptional proceeding will be extraordinary since
it will only apply in the case of an act of God or force majeure event, an official emergency declaration, a health contingency declaration, or an official natural disaster statement entered by the federal or local authorities.
Mexico’s insolvency response to Covid-19
Insolvency and Restructuring International Vol 14 No 2 September 2020 9
Notes1 Mexican Federal Official Gazette, Mexican Commercial Concursos
Law, published 12 May 2000: www.dof.gob.mx/nota_detalle.php?codigo=2054799&fecha=12/05/2000 accessed 21 July 2020.
2 Mexican Commercial Concursos Law, art 1.3 See n 1 above.4 See the Federal Institute of Insolvency Practitioners, Statistics of
Concursos filed under the Mexican Concursos Law regime: https://www.ifecom.cjf.gob.mx/applications/aspx/reporte.aspx?op=1&fiSemIni=1&fiSemFin=41&fiSemestreC=1&fiAnioC=2000 accessed 20 June 2020.
5 Federal Institute of Insolvency Practitioners, Statistics of Concursos finished under the Mexican Concursos Law regime: https://www.ifecom.cjf.gob.mx/applications/aspx/reporte.aspx?op=9&fiSemIni=1&fiSemFin=1&fiSemestreC=1&fiAnioC=2000 accessed 20 June 2020.
6 Caleb Silver, ;The Top 20 Economies in the World’; www.investopedia.com/insights/worlds-top-economies accessed 21 July 2020.
7 Mexican Commercial Concursos Law, art 21.8 Ibid, art 43.9 Federal Institute of Insolvency Practitioners, Statistics of Concursos filed
under the Mexican Concursos Law in the Mexican territory. https://www.ifecom.cjf.gob.mx/applications/aspx/reporte.aspx?op=13&fiSemIni=1&fiSemFin=1&fiSemestreC=1&fiAnioC=2020 accessed 20 June 2020.
10 An ‘amparo claim’ is a constitutional action that allows individuals and coroporations to seek federal judicial relief against authorities’ acts that violates human rights.
11 For example, separatory action, modification or suspension of injunctions, lack of jurisdiction motion, objections to the constitution of guarantees, objections to the selling of assets of the debtor, modification to the clawback period, among others.
12 Bank of Mexico, ‘Mexican Finance and Economic Data’: www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?sector=12&accion=consultarCuadroAnalitico&idCuadro=CA126&locale=es, accessed 21 July 2020.
13 Tourist Business National Council and Anáhuac Tourist Competitiveness Investigation Center, ‘Estimations of the damages in Mexican tourism sector due to the COVID-19 outbreak’ (18 May 2020): www.anahuac.mx/mexico/cicotur/sites/default/files/2020-05/Doc14_Cicotur_Estimacion_afectaciones_turismo__mexicano_Covid19.pdf accessed 21 July 2020.
14 Mexican Automobile’s Distribution Association, ‘Mexican automobile sales’ http://www.amia.com.mx/ventasp.html accessed 20 June 2020.
• Companies may use the extraordinary concurso proceeding from the time of the existence of the emergency, and up to six months after its conclusion.
• The extraordinary concurso proceeding shall only apply to the debtor’s request. If any third party seeks to claim the insolvency of a debtor, it shall use the ordinary concurso proceedings.
• Concursos courts shall process the extraordinary concurso proceedings through electronic files, without the need of a physical file.
• The extraordinary concurso proceeding does not provide a concurso declaration stage or a visit stage. Consequently, a debtor shall only file its concurso petition stating under oath that it is in a general default of its payment obligations, offering evidence to support that it meets the law’s standards. If the debtor fails to file supporting evidence, it must do so within ten days of the respective court entering the commercial concurso declaration judgment.
• The court, in its first decision, shall admit the concurso request and automatically enter the commercial concurso declaration judgment, with no recourse allowed.
• The concurso declaration judgment shall: (1) forbid the debtor to transfer the principal assets of the company and to make payments of overdue obligations except for expenses considered as indispensable for the ordinary operation, and credits to maintain the day-to-day operation and liquidity of the company; (2) lift attachments or bank account seizures; (3) suspend all attachment or execution of the debtor’s assets (except attachment or executions ordered by labour authorities to pay salaries or compensations); (4) forbid the termination or rescission of agreements indispensable for the ordinary operation of the company.
• The suspension of the execution of assets shall apply, during the conciliation stage, to any guarantee or joint obligor of the debtor.
• The court is entitled to grant any injunctions to protect the estate and the creditors’ rights in the commercial concurso declaration judgment.
• During the conciliation stage, the debtor can request and obtain debtor-in-possession financing to maintain the company’s ordinary operations.
• For the recognition of credits, the conciliator shall only have to provide a single list of creditors to the court. The creditors may object to the conciliator’s list.
• Tax credits shall be considered as ordinary creditors, except for secured tax claims. Labour claims shall receive the same preferential treatment as in the standard procedure, meaning that no matter the nature of urgency of the concurso proceeding, the employees shall always be protected, and their constitutional guaranties respected.
ConclusionThe Mexican Bar Association amendment proposal does not seek to fix all the outstanding issues of the concurso proceeding in Mexico: rather it opens the window to enhance the importance of the insolvency proceedings and fosters the discussion of a future comprehensive amendment to the Concursos Law.
Diego Sierra is a Partner and head of the Bankruptcy & Restructuring and Anticorruption & Compliance practices at Von Wobeser y Sierra, SC. He obtained his Law Degree at Escuela Libre de Derecho (2008) with honours and his LLM and Certificate in Business Administration at Northwestern University (2011) with honours. Co-Chair of the Insolvency Committee of the Mexican Bar Association (2017–2021). Officer of the IBA Anti-corruption Committee. Recognised as a Highly Recommended Lawyer in Civil & Commercial Litigation, Bankruptcy Litigation, and Compliance & Fraud by Leaders League Mexico 2020.Alejandro Gonzalez is an Associate at Von Wobeser y Sierra, SC. He obtained his Law Degree at Escuela Libre de Derecho with honours (2015), a Diploma in International Bankruptcy at Instituto Tecnológico Autónomo de México (ITAM) and a Diploma in Bankruptcy Law at Escuela Libre de Derecho. Secretary of the Bankruptcy and Restructuring Commission of the Mexican Bar Association (2017–2021). Author of several articles and works related to injunctions and commercial and insolvency proceedings.
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Background of the arrangement schemes in UkraineDespite being mentioned as a possible debtor-in-possession scenario in earlier legislation, a scheme of arrangement was only introduced de facto in Ukraine in 2013, by article 6 of the Law of Turnaround and Bankruptcy. It provided a general framework for the proceedings and the derived by-law approved by the High Commercial Court of Ukraine contained excessive procedural details.
In a nutshell, the 2013 scheme of arrangement allowed both a debtor and its creditors, by agreement with the debtor’s shareholders, to pursue the scheme of arrangement which, after approval by the majority of creditors, had to be approved by a commercial court at the place of the debtor’s domicile. The scheme’s two principal points were a cross-class cramdown mechanism, applicable to any creditor whether a party to the arrangement or not, and a statutory moratorium imposing a complete stay of individual action for every creditor, and a prohibition against switching to the formal insolvency process. The final scheme of arrangement could not exceed 12 months and was subject to approval by each of the debtor’s secured creditors, a simple majority of the unsecured creditors and the debtor’s shareholders.
Although the 2013 scheme of arrangement was seemingly attractive for debtors in distress, it nevertheless did not significantly influence the total number of turnaround cases, not exceeding 10 per cent of all Ukraine insolvency cases. Such low demand can be readily explained – in the absence of management\
shareholders liability for non-filing or wrongful trade, including lack of a restriction on the incorporation of new companies. A court-guided liquidation and subsequent incorporation of a new business were apparently a more attractive time/cost alternative.
Ukrainian Insolvency Code: the game changerSince late 2019, the role of schemes of arrangement in pre-insolvency estates has been significantly changed. The game changer was the adoption of the Ukrainian Insolvency Code (UIC) – the first codified insolvency Act in the country’s history – directly binding a distressed company’s management to file for insolvency in the case of the threat of over-indebtedness. The introduction of the UIC was followed in 2019 by amendments to the Law on LLCs, reflecting Article 19 of the Second Directive 2012/30 (EU). It carried an obligation on an LLC’s director to convene a shareholders’ general meeting if the company’s net asset value decreased by 50 per cent, compared with a previous financial year.
While the mechanism for applying schemes of arrangement was still left affected by article 6 of the UIC, the core principles of the process faced substantial changes.Preconditions for the arrangement. The scheme process may be sought solely by a debtor and should be supported by a liquidation analysis (the document confirming that, resulting performance under the scheme, a repayment ratio for creditors might be higher than in case of the debtor’s wind up).
Ukrainian schemes of arrangement: passing the stress test
Anton MolchanovArzinger, Kiev
In light of the ongoing recession influencing businesses worldwide, more Ukrainian debtors in distress are keen to find a remedy which, by providing effective restructuring tools, would not be associated with formal insolvency proceedings. Might the pre-insolvency scheme of arrangement (sanastiya do vidkryttya spravy pro bankrutstvo) be considered as such an effective alternative?
The author suggests here that the answer is a tentative ‘yes’.
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Secured creditors. The UIC requires consent of two-thirds of the secured creditors of any class to effectively apply the scheme. This shows a less radical approach as compared with the 2013 Law demanding unanimous consent of all secured creditors. Still, such consent is crucial in case the scheme provides cross-classing of the secured claims.Unsecured creditors. The scheme must be approved by a simple majority of non-secured and non-affiliated creditors of each particular class. As compared to the 2013 Law, the affiliated creditors have no influence over the scheme (which makes the process much less attractive for business groups and conglomerates often having huge amounts of the intra-company debts).Third-party claims and sureties. One of the pivotal issues for Ukrainian lenders was resolved by the UIC in an apparently flamboyant manner. Should a creditor (primarily a domestic or international lender) vote against the scheme, then any third-party claim (sureties and non-debtor-held pledges) should be valid and effectively enforceable. This provision was of enormous importance considering the relatively short (six-month) term of a surety enforcement under Ukrainian law.Tax claims. A special benefit of applying the Ukrainian scheme of arrangement refers to tax claims. Whenever the scheme provides deferment or instalment repayment for any of the company’s debts, the tax authority’s consent is not required for making such scheme valid. Any tax debts existing three years prior to approval of the scheme should be written off and any later-matured tax debt may be respectively deferred or allowed for instalment repayment, under the same conditions applicable to other non-secured creditors.Cross-class cram down. A general rule, reflected in both the 2013 Law and the UIC, is that dissenting creditors should not be subject to repayment conditions worse than those creditors approving the scheme. However, the UIC specifically excludes labour, pension and other social payment claims from any scheme of arrangement. Appointment of an administrator (turnaround supervisor). The scheme of arrangement may provide for the appointment of an external administrator determined by a simple majority of the voting creditors. With or without such administrator, the debtor keeps possession of all assets and regular activities, with only those limitations provided by the scheme directly.
The final authority for making the scheme of arrangement binding is a commercial court, as with Chapter 11 filing in the United States, and the Italian concordato. Before delivering a final decision approving the scheme (or otherwise refusing), the court checks whether:
• there was any breach of either law or procedure influencing the creditors’ vote of approval;
• a dissenting creditor proves that liquidation of the debtor increases the repayment ratio as compared with the scheme;
• the scheme’s potential of success is based on unreliable information.
During the formal process of approval, the court imposes a statutory moratorium valid until the scheme has been approved (or dismissed). For any secured claim the moratorium terminates after 60 days of the proceedings, regardless of whether the scheme has been approved or not.
Remarkably, unlike the 2013 Law, the total duration of the scheme is not limited to 12 months. This means in practical terms the scheme is valid for as long as it properly performs.
CriticismThe weakest point of the UIC approach to the scheme of arrangement is the lack of a general statutory moratorium/stay of individual action. Bearing in mind that the UIC cancelled a mandatory pre-litigation for creditors seeking to initiate the debtor’s insolvency, and no claim limits are required for considering the debtor as over-indebted, such lack of a moratorium may be a serious threat for both the debtor and the arranging creditors. In cases where a dissenting (or other non-arranging aggressive creditor) files for the debtor company’s insolvency or pursues an individual collection action, the very existence of the scheme of arrangement would not stop the action. This flaw will inevitably ruin any positive effect achieved from the scheme.
The Ukrainian scheme of arrangement would have surely benefited from borrowing a part of the Italian pre-insolvency procedures named ‘la domanda di concordato preventivo ‘in bianco’’ – the ‘blank’ filing being extremely useful in case of a race between several proactive creditors.
The Italian proceedings allow a debtor company to obtain the court protection without presenting a completed scheme of arrangement. This means that such action is available at the very beginning, even before any liaison with creditors has been initiated. After making the ‘blank’ filing the company has up to 120 days (plus an additional 180 days in special circumstances) for presenting a complete set of documents supporting the scheme.
Regrettably, an existing stay of action only applies if a full set of documents is filed with the court – meaning that before seeking insolvency relief, the debtor company must agree repayment conditions
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with half of its creditors. Given the actual enforcement conditions in the Ukraine, such a situation would be an impermissible luxury.
ConclusionsThe existing Ukrainian scheme of arrangement represents a real and effective alternative to the ‘classical’ insolvency procedures from both time/cost effectiveness and reputational perspectives. As the whole process is quite novel for Ukraine, it is certainly much less structured than the US Chapter 11 filing or the company voluntary arrangement process in the United Kingdom. However, it offers a number of benefits for the broad range of debtors, especially compared with the financial restructuring introduced in 2017, mostly suitable for large group companies.
After just eight months of the UIC being in place, the total number of filings for approval of the arrangement schemes has increased two and a half times. Ultimately, the true viability of the scheme may only become clear through a prism of systemic usage and change – both of which will surely be created by the upcoming recession.
Anton Molchanov is counsel head of Insolvency at Arzinger – an independent Ukrainian law firm with offices in Kyiv, Lviv and Odesa. For four years in a row the well-known domestic rating ULF: A Handbook for Foreign Clients, has named Anton a notable Ukrainian turnaround and insolvency specialist. With over 12 years of experience, Anton mostly focuses on agriculture, maritime and infrastructure matters, often acting on behalf of creditors – both domestic and international banks and financial institutions. He is an active speaker at the IBA and INSOL Europe conferences.
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IntroductionOver the last two decades, the Luxembourg fund industry has experienced a widespread use of umbrella structures used for investment purposes, that is, structures composed of multiple compartments (also named sub-funds if the compartments relate to an investment fund).
A compartment consists of a pool of assets in an umbrella structure, which is subject to a common investment policy and is only linked to the specific investors who have invested therein. This legal construction is commonly found in certain types of Luxembourg regulated investment vehicles and several unregulated entities when expressly permitted by specific laws (such as reserved alternative investment funds (RAIFs) and unregulated securitisation vehicles).
Although a compartment has no legal personality, its assets and liabilities are segregated from those of other compartments within the same investment vehicle. Therefore, the investment held by a given compartment in an investment vehicle is ring-fenced from creditors of other compartments.
In the scenario where a compartment becomes ‘insolvent’ so that the relevant criteria laid down under Luxembourg law to open insolvency proceedings against it would be met, the question arises as to whether those insolvency proceedings could be available to such compartment. Indeed, the relevant
Luxembourg legal provisions governing insolvency proceedings refer only to the opening of insolvency proceedings against a company having legal personality and they do not contemplate the ‘insolvency’ of the compartment of an umbrella structure whilst the other compartments of the structure are solvent.
The following developments will describe the concept of ‘compartment’ and the principle of segregation. After briefly defining the insolvency proceedings and judicial liquidation procedure that may be applicable to Luxembourg investment vehicles and their compartments, this article analyses a recent decision of the Luxembourg Court of Appeal which rules out the applicability of certain fundamental rules concerning bankruptcy proceedings to the judicial liquidation of Luxembourg investment vehicles and their compartments.
Concept of ‘compartment’
The existence of compartments was recognised for the first time in 1988 in respect of undertakings for collective investments in transferable securities (UCITS) and other regulated undertakings for collective investment (UCIs). The then existing legal provisions specified that provisions could be inserted in the constitutive documents of UCITS and UCIs, pursuant to which investors must treat the compartments within the
Insolvency of a compartment of a Luxembourg umbrella investment vehicle
Philippe ThiebaudPartner, MOLITOR Avocats à la Cour SARL, Luxembourg
Laurent HenneresseCounsel, MOLITOR Avocats à la Cour SARL, Luxembourg
Compartments of undertakings for collective investment have their assets and liabilities segregated from those of other compartments within the same umbrella structure. Since they lack legal personality, they are not eligible for bankruptcy but are subject to court-ordered dissolution and liquidation. When defining the liquidation method, the court can allow the applicability of the rules on ‘liquidation of bankruptcy’. This article focuses on a recent decision handed down by the Luxembourg Court of Appeal on 14 March 2018, according to which such term excludes any other provisions governing bankruptcy (such as clawback clauses and specific sanctions against member of the management body of the investment vehicle).
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same vehicle as separate entities. No similar legal rule had been set out in relation to creditors, so that their claims against one compartment could be repaid with assets belonging to another compartment within the same entity.1
Twelve years later, the Luxembourg legislator decided to expressly provide for the principle of segregation of assets and liabilities between compartments of UCITS and other regulated UCIs and to give it a legal binding effect on third parties.2
The segregation between compartments was later replicated in specific laws concerning other types of regulated and unregulated investment vehicles.3
Applicable procedures in case of insolvency of a compartment
Bankruptcy and court-ordered liquidation
As a matter of principle, bankruptcy, which is in practice the most common type of insolvency proceeding in Luxembourg, can be declared against Luxembourg regulated investment vehicles as well as some unregulated entities which are subject to specific laws.
To that end, the competent district court, sitting in commercial matters, must conclude that the three cumulative conditions provided for under the Luxembourg Commercial Code are fulfilled, namely: (1) that the entity is a commercial company with legal personality; (2) that it has ceased to make payments (cessation de paiement); and (3) that its creditworthiness is impaired (ébranlement du crédit).4
Since the first condition requires that the entity has legal personality, investment vehicles set up in the form of mutual funds (fonds communs de placement),5 which are not legal persons but merely pools of assets, are ineligible for insolvency for this reason.6
In the authors’ view, the insolvent compartment of an umbrella structure, which also has no legal personality, cannot be subject to bankruptcy for the reason stated in the preceding paragraphs. Therefore, if the compartment of the regulated vehicles (ie, UCITS, Part II UCIs, SIFs, SICARs and regulated securitisation undertakings) is insolvent, it could not be declared bankrupt by the Luxembourg courts. The same analysis is applicable in respect of compartments of unregulated vehicles (ie, unregulated securitisation undertakings and RAIFs.
In such an instance, the only procedure available for an orderly liquidation of the compartment would be judicial liquidation, which shall be ordered by the Luxembourg courts.
Judicial liquidation (dissolution and liquidation) is decided by the district court, sitting in commercial matters and can affect certain regulated entities (UCITS,
Part II UCIs, SIFs, SICARs and regulated securitisation undertakings,) whose regulatory authorisation has definitively been withdrawn or refused, and RAIFs which have pursued activities contrary to Luxembourg criminal law or seriously breach the law of 23 July 2016 on RAIFs, as amended, or the law of 12 July 2013 on alternative investment fund managers, as amended, or the laws governing commercial companies.
Such liquidation proceedings can be requested by the State Prosecutor, acting on its own initiative, or the Luxembourg financial supervisor (the Commission de Surveillance du Secteur Financier (CSSF)) in respect of regulated vehicles.7
Some legal provisions also expressly allow Luxembourg district courts, sitting in commercial matters, to order the dissolution and liquidation of any compartment of UCITS, Part II UCIs and SIFs, whose regulatory authorisation has finally been refused or withdrawn by the CSSF, such proceedings being initiated by the State Prosecutor or the CSSF.8 In this respect, it is worth noting that the laws governing SICARs, RAIFs and securitisation vehicles do not contain any similar provisions allowing liquidation of a compartment by a court.
Therefore, should any of the aforementioned vehicles and compartments eligible for court-ordered liquidation face insolvency, the CSSF could decide to withdraw the regulatory authorisation and motivate such decision by the fact that these entities or compartments are no longer able to comply with the legal and regulatory requirements applicable to them and that the interests of the investors require such administrative sanction.9
Differences between the bankruptcy and court-ordered liquidation regimes
The legal rules applicable to court-ordered liquidation of regulated investment vehicles and RAIFs provide that the competent court must determine the method of liquidation and when doing so, can decide to apply the rules governing ‘liquidation in bankruptcy’. The choice of such words by the legislator has led to uncertainties as to their exact meaning and the parliamentary documents concerning them do not provide for any satisfactory explanation in that respect.10
Some authors have noted that the legal rules governing the court-ordered winding-up of credit institutions and professionals of the financial sector allow the competent court to apply any or all of the ‘rules governing bankruptcy’11 and were inclined to think that the court-ordered liquidation regime for regulated investment vehicles should be construed as allowing the judge to allow the application of all
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the rules governing bankruptcy, since any other interpretation could lead to inconsistencies between liquidation/winding-up regimes.12
In a recent court decision concerning a high-profile court-ordered liquidation of a Luxembourg UCITS in the wake of the Madoff fraud,13 the Luxembourg Court of Appeal on 14 March 2018 rejected an appeal made by the liquidators against a decision of the Luxembourg District Court of 16 June 2016.14 In that decision, the lower court rejected the request of the liquidator to fix the date on which the UCITS was deemed to have ceased to make payments in accordance with article 442 of the Luxembourg Commercial Code, since that legal provision concerns bankruptcy but falls outside of the scope of the rules governing the ‘liquidation in bankruptcy’. The request of the liquidator was made with a view to subsequently request that the redemption of units made by the UCITS, as from the date of cessation of payments, be declared null and void, pursuant to the relevant clawback provisions set out in the Luxembourg Commercial Code.15
The Court of Appeal refused to rule in favour of the request made by the liquidators. It held that the intent of the legislator was to insert flexible provisions regarding liquidation of UCITS in order to define a liquidation method which would be the most suitable to the specificities of the entity to be liquidated. However, the court concluded that the term ‘liquidation in bankruptcy’ should be interpreted strictly (ie, literally), so that only the rules governing the liquidation aspects of bankruptcy16 should be applied by the court-appointed liquidator(s). By doing so, it rejected the argument of the liquidators whereby they attempted to draw a parallel between the legal rules governing the liquidation of a UCITS and the liquidation of a credit institution (the latter expressly allowing the inclusion of ‘rules governing bankruptcy’ in the definition of the liquidation method).17
Since the wording used in the provisions concerning the liquidation of UCITS and of their compartments are identical in the 2010 Law, the dicta contained in the decision of the Luxembourg Court of Appeal of 14 March 2018 should apply mutatis mutandis and the rules governing bankruptcy other than those concerning the liquidation in bankruptcy should be excluded from the liquidation regime to be defined by the competent court.
Impact of the strict interpretation of the term ‘liquidation in bankruptcy’
The literal interpretation taken by the Court of Appeal restricts the powers that a court-appointed liquidator of a compartment would have otherwise had when it acts as a trustee in bankruptcy during bankruptcy proceedings.
This section aims at briefly describing the main actions that are not available to a court-appointed liquidator.
clawBack actions and actions for avoidance
According to article 442 of the Luxembourg Commercial Code, the court which declares a commercial company bankrupt must fix the date on which such company is deemed to have ceased to make payments (such date being not earlier than six months before the date of the bankruptcy judgment).
The lapse of time between these two dates is defined as the hardening period (période suspecte) and certain acts performed by the bankrupt company within this timeframe must – in respect of payments or other actions deemed suspicious by law such as a payment for a debt which not yet payable – or can – in respect of other payments or acts made to the benefit of a person with the knowledge by such person of the cessation of payment of the bankrupt company – be declared null and void.
actions against the management of the Bankrupt company
If a Luxembourg commercial company is declared bankrupt and upon request of the trustee in bankruptcy, the directors could be subject to, among others: (1) sanctions for having committed negligent bankruptcy and fraudulent bankruptcy, which are criminal offences; (2) the obligation to pay all or part of the company’s debts if they have committed serious and characterised faults having contributed to bankruptcy; and (3) personal bankruptcy, in each case if the applicable conditions are met.
ConclusionTurning to the scenario of an insolvent compartment, which cannot be declared bankrupt, its investors and creditors can be faced with two different situations:• in respect of the compartment of SICARs, RAIFs
and securitisation vehicles, the judicial liquidation regime is not available, and hence, the insolvency of a compartment should be merely governed by the general principles of civil law, which cannot be viewed as a satisfactory procedure to deal with insolvency, as opposed to an orderly liquidation procedure;18 and
• in respect of the compartment of UCITS, Part II UCIs and SIFs, the judicial liquidation regime is available, although the opening of such proceedings is not based on a insolvency test but rather on the existence of certain breaches of law by the compartment, which could triggers the withdrawal of its authorisation by the CSSF, even if insolvency can in itself give rise to legal breaches justifying the withdrawal.
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Finally, based on the aforementioned decision of the Luxembourg Court of Appeal, certain fundamental rules governing bankruptcy proceedings, such as the clawback regime, are not applicable to the judicial liquidation of: (1) UCITS, Part II UCIs, SIFs, SICARs, regulated securitisation vehicles and RAIFs; and (2) compartments of UCITS, Part II UCIs and SIFs.
In the authors’ view, this situation is unsatisfactory as it reflects inconsistent responses that were given over the years and taken by the legislator to address issues presenting similar features. The authors would welcome legislative changes to create a more uniform set of rules. Such new laws would give the opportunity to hold debates on insolvency-related topics such as, the best way to address the insolvency of an investment vehicle or any of its compartments (bankruptcy versus judicial liquidation) or whether certain rules applicable to a bankruptcy, such as the clawback provisions, should be included, even to a certain limited extent, in the regime of judicial liquidation of investment vehicles.
Notes1 Law of 30 March 1988 relating to undertakings for collective
investment, art 111; parliamentary document No 3172/00, p 56.2 Law of 17 July 2000 amending certain provisions of the law of 30
March 1988 relating to collective investment undertakings (the ‘Law of 1988”’), art V). According to the parliamentary documents concerning this law, the segregation between compartments was already existing de facto at that time, since UCIs were often entering into individual agreements with the creditors to ensure that the assets of a given compartment could only meet debts relating to that specific compartment (parliamentary document No 4612/00, p 6).
3 For example, art 71(5) of the law of 13 February 2007 relating to specialised investment funds, as amended (the ‘SIF Law’); art 3(5) of the law of 15 June 2004 on investment companies in risk capital, as amended.
4 Article 437 of the Luxembourg Commercial Code.5 This legal form is available to UCITS, UCIs governed by part II of
the law of 17 December 2010 relating to undertakings for collective investment, as amended (‘Part II UCIs’), specialised investment funds (‘SIFs’), investment companies in risk capital (‘SICARs’) and RAIFs.
6 As a matter of principle, the same comment could be made in respect of special limited partnerships (sociétés en commandite spéciale) which is a type of commercial company with no legal personality. However, some authors have questioned this traditional analysis and believe that bankruptcy should not necessarily be ruled out for this type of company, since it has assets and liabilities which are separated from those of its partners and are available to its creditors (see Katia Panichi, Laurent Schummer and Olivier-Gaston Braud, ‘Les sociétés en commandite luxembourgeoises : des véhicules d’investissement adaptés aux besoins des investisseurs’, in Droit bancaire et financier au Luxembourg, Larcier, Brussels, 2014, vol 3, Nos 74, 75, pp 1599 to 1600).
7 In practice, the CSSF will decide to withdraw the authorisation of the regulated vehicle and will inform the State Prosecutor accordingly. The State Prosecutor will then request the court to declare the judicial liquidation of the investment vehicle.
8 2010 Law, art 143(1), para 2; SIF Law, art 47(1), para 1. It is worth noting that the laws governing SICARs, RAIFs and regulated
Philippe Thiebaud is qualified in Luxembourg as Avocat à la Cour. He specialises in insolvency and corporate and fund litigation matters. He also holds several mandates as bankruptcy trustee and as the judicial liquidator of a regulated investment fund. Laurent Henneresse is dual-qualified both in Luxembourg as Avocat à la Cour and in England and Wales as solicitor (non-practicing). He regularly advises on domestic and cross-border financing deals, debt restructuring and insolvency matters. He also assists banks and financial institutions on regulatory aspects and insolvency proceedings.
securitisation vehicles do not contain any similar provisions allowing liquidation of a compartment by a court.
9 For example, breaches of the statutory principles whereby units of UCITS can be issued at any time or redeemed at the request of a unit holder could be relevant to justify the withdrawal of the authorisation. The CSSF relied on those principles to withdraw the authorisation of the UCITS involved in the court case in the section below.
10 However, the legal provisions on court-ordered liquidation of regulated investment vehicles and RAIF derive from art 203 (currently renumbers as art 1200-1) of the law of 10 August 1915 on commercial companies, as amended (the ‘1915 Law’) which apply to all commercial companies falling within the ambit of that law. The latter provision allows courts, acting at the request of the State Prosecutor, to open judicial liquidation proceedings against companies which were pursuing activities contrary to criminal law or were committing serious breaches to commercial law rules or rules governing commercial companies. Judicial liquidation is of a punitive and deterrent nature and is independent from insolvency proceedings which apply to entities facing financial difficulties (parliamentary document No 2366/00, pp 61 and 102, which relates to the law of 1988).
11 The corresponding provision, which is currently in force is art 129(7) of the law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended.
12 Laurent Fisch, Franz Fayot and M Esteves, ‘La législation sur les insolvabilités dans le secteur financier à l’épreuve des crises’, in Droit bancaire et financier au Luxembourg (see n 6 above), vol 1, pp 659 to 660.
13 Luxembourg Court of Appeal, 14 March 2018, roll Nos 44556 and 44493.
14 Luxembourg District Court (6th Chamber), 6 June 2016, No 602/2016.
15 The liquidators requested that the date of cessation of payments be fixed at 3 August 2008, or in the alternative, 2 October 2008 or 12 December 2008, the net asset value (NAV ) of the UCITS, and hence the redemptions of units, having been suspended on 15 December 2008.
16 Namely arts 455 to 495-1 of the Luxembourg Commercial Code.17 The Luxembourg Court of Appeal referred to the parliamentary
history of the legal provisions on liquidation of credit institutions. According to parliamentary document No 2548, pp 21, 41, although the wording of the applicable provisions is partly inspired by art 203 of the 1915 Law, the rationale between these rules is different, since the liquidation of credit institution purports to prevent bankruptcy, while judicial liquidation sanctions certain irregularities committed by the entity to be liquidated.
18 The risk of insolvency of the compartment of a securisation vehicle should be viewed as theoretical as it is generally structured as bankruptcy remote pursuant to limited recourse, non-seizure of assets and non-petition for bankruptcy contractual arrangements, which are expressly recognised by law.
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Brexit impact on insolvency avoidance actions under Italian law
Giuseppe de FalcoPartner, Ughi e Nunziante, Rome-Milan, Italy
The exit of the United Kingdom from the European Union (‘Brexit’) has direct consequences on clawback actions which might be brought against UK creditors by insolvency practitioners of EU Member States. It also has an impact on those situations where English law comes into play as governing law and a UK entity is the beneficiary of an act, a contract or a payment which is detrimental to all the other creditors. This is particularly true in the ambit of those financial derivatives normally regulated by ISDA agreements subject to UK law as governing law, and which have often been offered by UK entities to Italian clients. Here the author explores the details of these impacts.
When the United Kingdom of Great Britain and Northern Ireland (UK) and the European
Union, as well as the EURATOM, entered into an ‘Agreement on the withdrawal of the UK from EU and Euratom’ (WA) on 18 October 2019, we saw the start of the transitional phase of the relationship between the two entities.
The transitional period (TP), a sort of ‘interim period’, is defined by article 126 of the WA as the period starting from the entry into force of the WA and ending on 31 December 2020.
As a rule, enshrined in the preamble of the WA, EU law will apply during the transition. During this time, the UK will prepare to enter into new international agreements, even in areas reserved to the EU legislation, provided that such new international agreements only come into force after the TP.
According to article 4 of the WA, the provisions contained therein have direct effects on the territory of the UK and of the EU Member States. Therefore, individuals and entities may directly invoke the provisions of the WA as if it were EU legislation.
The WA encompasses all the EU legal framework, including those pieces of legislation dealing with conflicts of law, such as the EU Regulation 593/2008 regarding the law applicable to contractual obligation, and EU Regulation 864/2007 regarding the law applicable to torts (article 66 of the WA).
With regard to matters of jurisdiction and the execution of judicial decisions or cooperation between judicial authorities, article 67 of the WA provides that for any proceeding started before the end of the
transition the following regulations will apply: EU Regulation 1215/2012 on jurisdiction, as well as EU Regulation 2017/1001, (EC) 6/2002, (EC) 2100/94 and (EU) 2016/679 and 96/71/EC on jurisdiction in certain areas of law.
EU Regulation Nos 2201/2003 and 4/2009 on competence will also be applicable.
As to the subject of avoidance actions, article 67 of the WA provides that, in the UK and in EU Member States where the UK is involved, the EU Regulation 2015/848 will apply.
Therefore, provided that the main insolvency proceedings have commenced before 31 December 2020, EU Regulation 2015/848 will apply to insolvency proceedings and to actions brought pursuant to article 6, paragraph 1, of the EU Regulation 2015/848.
Article 6, paragraph 1 of EU Regulation 2015/848 provides that the courts of the Member State where the insolvency proceedings have been opened shall have jurisdiction ‘for any action which derives directly from insolvency proceedings and is closely linked with them, such as avoidance actions’.
For example, in the event that an Italian company is declared bankrupt before 31 December 2020, the Italian official receiver (curatore fallimentare) bringing an avoidance action (revocatoria fallimentare) against a company located in the UK shall apply article 6, paragraph 1, of the EU Regulation 2015/848, and the competent Italian courts shall have jurisdiction over that controversy.
18 Insolvency and Restructuring International Vol 14 No 2 September 2020
Giuseppe de Falco is a partner of Ughi e Nunziante. He has considerable experience in the banking and financial sector, particularly in financial derivatives. Giuseppe also has extensive experience in capital markets transactions, securities law, and more generally, in commercial and company law assisting clients in any related litigation, including bankruptcy proceedings.
Brexit impact on insolvency avoidance actions under Italian law
Based on article 7 of the EU Regulation 2015/848, the law of the state of the opening of the proceedings shall also apply to almost all the aspects of the insolvency proceedings, including ‘the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to the general body of creditors’ (article 7, paragraph 2, (m).
Where insolvency proceedings have been opened in Italy, the Italian courts will have jurisdiction on any controversy regarding avoidance actions and Italian law will apply to avoidance actions brought by the insolvency practitioner against creditors.
However, there is an exception to the above general rule, set out under article 16 of the EU Regulation 2015/848, stating that the law applicable to avoidance actions (for instance, Italian law) shall not apply where ‘the person who benefited from an act detrimental to all the creditors provides proof that: (a) the act is subject to the law of a Member State other than that of the State of the opening of the proceedings; and (b) the law of that Member State does not allow any means of challenging that act in the relevant case’.
As a result of the application of such exception (which mirrors article 13 of the EU Regulation 1346/2000), some decisions have been taken by the Italian courts (Rome Tribunal bankruptcy section, 07/03/2012 in an avoidance action brought by the insolvency practitioner of Alitalia against a Swiss bank) acknowledging the exemption from the avoidance actions of financial derivatives ruled by an International Swaps and Derivatives Association (ISDA) Master Agreement and the related Credit Support Annex, governed by English Law to the extent that the creditor has proved that both: (1) the act is subject to the law of a Member State
other than that of the state of the opening of theproceedings; and
(2) the law of that Member State does not allow anymeans of challenging that act in the relevant case.
It is widely known that financial d erivatives e ntered over the counter are normally subject to English law or to New York law, and that many financial derivatives have been entered by Italian entities with financial counterparties located in UK, or sometimes, in the US.
The requirement under item (1) above can easily be met by pointing out to the outright choice of the English law normally enshrined in the ISDA standard contracts, and the requirement under (2) can be satisfied by providing the court with a legal opinion of an English lawyer certifying that the relevant payment could not be avoided or invalidated through any remedy under English law even though different from an avoidance action.
EU Regulation 848/2015 does not clearly explain the reason why a different governing law shall be regarded as a shield against avoidance actions. The reason may lie
on the fact that the parties to the contract, at least when choosing a specific governing law, rely in good faith on the application of that law in any case. The bankruptcy of one of the parties may surprisingly affect the legal framework of their business arrangement, despite the choice they made. However, on the contrary, it is worth pointing out that the rule is also applied when the parties do not expressly choose a specific law.
As a result of Brexit and of the WA, any insolvency proceedings started after 31 December 2020 in a Member State – and in Italy in particular – any avoidance actions brought against a company or an individual whose seat or habitual residence is in the UK, will no longer benefit from the more lenient English law regime regarding avoidance actions in the bankruptcy context.
According to article 67, paragraph 3(c) of the WA, it is intended that the application of a governing law different from Italian law in order to paralyse an avoidance action, is still possible for UK persons when the insolvency proceedings have started before 31 December 2020, even though the avoidance action has been commenced after the end of the TP.
However, the words which state that it applies ‘where the UK is involved’ shall not be construed to mean that the UK is involved where English law is chosen as a governing law by two or more entities belonging to Member States other than the UK.
For instance, in the event that insolvency proceedings have been commenced in Italy, against an Italian company after the end of the TP, the insolvency practitioner may bring an avoidance action against a French or a German financial entity as beneficiary of a payment which is detrimental to all the other creditors in the context of the relevant insolvency proceedings.
To the extent that the French or German defendant, in this example, may prove that the relevant applicant contract is governed by English law and, according to such law, no remedy (not only an avoidance action) would be available under the applicable law to avoid or cancel the same contract or the payment, English law will apply and the avoidance action will be rejected by the Italian courts.
To sum up, whatever the governing law of the agreement object of the avoidance action, the governing law applicable to avoidance action against a UK entity after the end of the TP, will be Italian law.
Insolvency and Restructuring International Vol 14 No 2 September 2020 19
IntroductionRussia is among the few jurisdictions globally that since early 2020 have had to face not only total business lockdown due to the Covid-19 pandemic restrictions, but also the impact of a dramatic fall in oil prices, causing a significant devaluation of national currency and exchange rate increases. In April 2020, the Russian GDP decreased by almost one-third compared to the same period the previous year.1
This forced the authorities to urgently pass anti-crisis legislation, covering a variety of spheres, starting with social guarantees for its citizens, and extending to writing off taxes and introducing new provisions on the lease of premises for business.
During this period, Russia’s bankruptcy law was supplemented in an expedited legislative process with the provisions governing a so-called ‘bankruptcy moratorium’ (article 9.1) aimed at protecting companies from the sectors significantly affected by the pandemic. Interestingly, this new article has already been amended twice, due to significant legislative flaws and criticism from the business community. For the moment, the number of companies falling under the moratorium exceeds 1.5 million, with the possibility of further extension depending on how the situation develops.2
While it is not feasible to discuss here all the peculiarities of the moratorium regime, the following merits discussion:• companies falling under the moratorium cannot be
declared bankrupt at the application of their creditors;• the debtor’s management or shareholders’ duty
to apply for bankruptcy is suspended unless the moratorium expires;
• enforcement proceedings against debtors falling under the moratorium are suspended; and
Delayed-action bankruptcy in Russia
This article looks at several practical consequences for both debtors and creditors, of the bankruptcy moratorium introduced in Russia in April 2020, as an emergency measure to protect business from the Covid-19 pandemic. The authors offer some practical solutions to minimise the risks and ensure effective debt recovery.
Sergey PetrachkovPartner, ALRUD Law Firm, Moscow
Dmitry KuptsovSenior Associate, ALRUD Law Firm, Moscow
• accrual of financial sanctions (penalties) for non-performance by the debtors under the moratorium of their obligations is also suspended.
It is already clear that after expiry of the moratorium (presumably in early October 2020) a lot of companies, especially those dealing in the service sector, will ultimately face bankruptcy. For these reasons, the practical implications of such a moratorium are of primary interest both for debtors and creditors.
This article address such practical aspects and elaborates on some specific issues that could be important for creditors to effectively enforce their rights, and for debtors to minimise their liability risks.
Duty to apply for bankruptcy – between Scylla and CharybdisThe clear provision of the new legislation is that management and shareholders of debtors falling under the moratorium are not obliged to apply for bankruptcy for the duration. The underlying logic is to give those businesses, disrupted by the pandemic, the possibility to resume normal operations and to recover from the fall in revenues. At the same time, the law does not in any way limit the debtor’s own discretion to apply for bankruptcy.
It is not clear how these provisions will work for situations when an entity showed signs of insufficient assets before introduction of the moratorium, and already faced technical insolvency. There is no guidance in law or court practice on whether the benefits of the moratorium should be applicable to such entities by a formal reading of law, or if it is possible to argue that suspension of the duty does not cover such situations, taking into account that the purpose of
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Delayed-action bankruptcy in Russia
the moratorium is to protect solvent entities facing temporary difficulties. The answer to this question will cause serious implications in real bankruptcy cases.
In practice, management of an entity subject to a moratorium shall not merely rely on the formal interpretation of the law regarding an obligation to apply for bankruptcy, but should carefully double check if the signs of insolvency are actually linked to the pandemic. Such an analysis is a crucial step due to the so-called concept of ‘subsidiary (secondary) liability’, widely applicable in bankruptcy proceedings in Russia. In a nutshell, debtors’ controlling persons (formally or informally) may be held legally liable for the debts of the respective legal entity, if inter alia they failed to apply for bankruptcy when required to do so. This is a cornerstone issue. If a case about failure to apply for bankruptcy is successful, such controlling persons risk facing personal liability for the company’s debts, equal to the amount of the creditors’ claims that emerged when the debtor continued its business while technically insolvent.
It is concerning that this question will be resolved by the courts on case-by-case basis, unless some uniform approach is elaborated, or the Supreme Court of Russia proactively provides explicit guidelines, which is unlikely to happen soon. In this period of such legal uncertainty it is advisable to minimise the risk of personal liability by paying extra attention to compliance with the duty to apply for bankruptcy, and to be ready to reasonably substantiate any such decision.
It is prudent in practice to prove the existence of, or lack of, grounds to apply for bankruptcy and protect management, to obtain expert opinions from reputable consulting companies or private practitioners dealing with analysis of the financial state of an entity and its further operation and solvency. Additionally, in case a decision is taken not to apply for bankruptcy, despite the existence of its certain signs, it is advisable to elaborate and adopt a detailed and economically justified ‘business rescue plan’. In the case of an ultimately negative outcome, these documents could be presented to a judge as evidence confirming the good-faith behaviour of management, and legitimate grounds to believe that the business could be saved, subject to certain conditions being met.
What can be done to proactively secure interests of debtors and creditors?The first thing to remember when considering the instruments for recovery of debts from entities put under moratorium, is that, in practice, the most effective way of debt recovery in Russia is still filing for debtor’s
bankruptcy. The risk of losing a business is usually a strong incentive to pay the outstanding amounts and prevent unnecessary and lengthy litigation, that could trigger even larger expenses and create the risks of personal liability for management and shareholders. Therefore, once the restrictions are lifted, one should be ready to apply for its debtor’s bankruptcy.
To apply for a debtor’s bankruptcy, a creditor must meet some very basic formal criteria, which are: (1) existence of a three-month overdue debt; (2) exceeding RUB 300,000.00; (3) confirmed by the respective judgment of the Russian court or foreign judgment recognised in Russia. Additionally, the status of an applicant provides a creditor with some advantages (of a more practical than legal nature) compared to other creditors, who join an already pending bankruptcy process. However such status also imposes additional duties, such as a duty to provide financing for the bankruptcy procedure.
While the Russian moratorium legislation imposes restrictions on initiation of bankruptcy procedures by creditors, there are no provisions preventing creditors from applying to courts with debt recovery claims. This makes the moratorium period a good opportunity to secure a claim against the Russian debtor and get the respective judgment, which after expiry of the moratorium could be used for ordinary debt recovery process, or for applying for debtor’s bankruptcy.
In support of such a claim, and in order to prevent alienation of the assets, which often happens in anticipation of bankruptcy, a creditor could also apply for interim relief preventing any disposal of the debtor’s assets. If obtained (in Russia, the chance of success varies depending on the region and courts), such interim measures could be the most effective instrument to ensure good chances of actual enforcement of the judgment. It is questionable whether this approach will remain unchanged due to significant risk of freezing by the creditors of all their debtors’ assets, and actual blocking of any business activity, thus facilitating a bankruptcy. For this reason, it is likely that the courts will need to find some balance between the interests of debtors and creditors, however, for the time being no such approach exists.
The aforementioned remedies are obviously favourable for the creditors, and the bankruptcy law also provides (or attempts to provide) some instruments available for the debtors to prevent their immediate bankruptcy after release of the moratorium and respective restrictions.
The first option is to obtain a written consent from a creditor to the terms and conditions of debt settlement procedures proposed by the debtor. If consent is obtained, the respective creditor will be deemed to
Insolvency and Restructuring International Vol 14 No 2 September 2020 21
be in support of the proposed settlement, should the debtor be ultimately declared bankrupt. Unfortunately, this novel approach raises many practical questions due to very poor legislative regulation and no precedents in previous practice of Russian courts, starting from the low or imprecise level of settlement details to the way in which a consent must be expressed.
Currently, the only feasible solution for debtors appears to be preparing some document offering settlement terms and conditions in as much detail as possible, and sending this to all known creditors with a request to explicitly confirm their acceptance. Since such settlement must be approved by the court, it is also crucial to ensure its compliance with the basic settlement principles set out by bankruptcy law, including the requirement of settlement proportionality and non-preference to any creditors.
A further mechanism which aims to support debtors who have complied with the duty to apply for bankruptcy, is raising before the court a motion seeking an order establishing the procedure of debt repayment in installments. This is another novel legislative step, urgently introduced to serve as an emergency restructuring procedure. It is worth noting, however, that bankruptcy procedures in Russia end up with debtor’s liquidation in over 95 per cent of cases, and the rehabilitation procedures envisaged by the existing provisions of bankruptcy law are not working. To address this issue before the pandemic, the government started drafting a brand new chapter of bankruptcy law aimed at enhancing the solvency restoration procedures, which included dozens of articles with very detailed regulation of its various aspects. However, as a result of the legislative rush caused by the necessity to rapidly address the need for new support measures, the authorities had to put on hold further development of this new chapter, and instead adopted very brief guidelines on the aforementioned procedure for debt repayment in installments.
Unfortunately, considerable unclear wording of the law means the new procedure raises more issues than it answers. The general idea is that a company that falls bankrupt after release of the moratorium may apply for a court order by which its debt will be ‘restructured’ on the terms and conditions envisaged by law, with certain possible adjustments. Such terms include a minimum of one year deferred payment in equal installments with the possibility of further prolongation, imposition of certain restrictions on business operations, providing creditors with the rights to access information, etc.
Considering very ambiguous legal regulation, an apparent solution would be seeking some contractual mechanisms to ensure a degree of predictability and security for both parties. As this is not the focus of this
article, only a few examples of these possible options are mentioned. They could include entering into securing transactions with third parties not affected by risks of bankruptcy and moratorium, transfer of debts to such parties, introducing a right of unilateral withdrawal from an agreement in case of moratorium, and the right to keep title over a property before its full payment.
At the same time, one must be very careful when agreeing on specific mechanisms, due to the risks of them being challenged in case of subsequent bankruptcy of the company. For example, set-off transactions involving companies under moratorium are explicitly prohibited by law, or any other preferential transactions could be relatively easily challenged by the bankruptcy receiver of creditors.
How to combat illegal actions aimed at evading debt repaymentIt is clear, however, that in some cases proactive measures to secure a claim may be impossible or too late – for example, bad faith debtors very often undertake various measures aimed at disposal of their assets to affiliated third parties, pledging such assets to such parties to ensure their higher priority in bankruptcy, making preferential payment to favoured creditors, and many others.
Russian bankruptcy law provides several traditional instruments available to creditors to protect their rights, which are clawback action and subsidiary liability of the management. Their implementation will be significantly affected by the moratorium, changing the traditional course of bankruptcy cases.
With a view to protect the interest of creditors, the legislator has significantly extended the so-called ‘periods of suspicion’, being the period of time preceding acceptance of the bankruptcy petition, taken into account when deciding on possibly invalidating a specific transaction. Transactions entered between the parties within these suspicion periods may be challenged, subject to compliance with other elements of the standard of proof. The grounds for challenging traditionally include making preferential transactions (one or six months), transactions at undervalue (one year) and transactions to the detriment of creditors’ proprietary interests (three years).
The periods of suspicion for companies falling under the moratorium now include: (1) the standard period for a kind of transaction; plus (2) the period of moratorium duration; and plus (3) the period between release of the moratorium and acceptance of bankruptcy petition, but no longer than three months.
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Delayed-action bankruptcy in Russia
In a simple example, the period for invalidation of a basic preferential transaction, which in standard situations is only one month, now extends to a maximum of nine months in cases where a company falls under the moratorium.
These extensions only apply to companies declared bankrupt three months after the introduction of the moratorium. Therefore, in order to use the opportunity of suspension periods extension for transactions challenging a creditor shall apply to the court with a bankruptcy petition at the earliest possible date. Since a pre-condition for filing such a petition is existence of a valid judgment confirming the debt, undertaking the proactive steps for its obtaining becomes a real necessity (and sometimes the only possibility) to ensure protection of violated rights.
The extension of suspicion periods does not guarantee the successful outcome of clawback action, which requires proving numerous circumstances, depending on the type of transaction and alleged ground of invalidity. In the majority of cases the most cumbersome aspect to prove is knowledge of the debtor’s counterparty about existence of its bankruptcy signs. A practical solution to ensure a better chance of a successful outcome may include making public announcements about the actual financial state of the debtor (eg, in the newspapers) and sending direct notifications to its counterparts (if known) making them aware of the same. This may not only help fulfil the burden of proof but will also make bad-faith debtors aware that creditors are closely watching their actions.
Extension of the periods also applies for determining the scope of the debtor’s controlling persons for the purpose of their subsidiary liability, working in the same way as for suspicion periods. The concept of subsidiary liability and its development in Russian law deserves a separate analysis. It is enough to say here, that in light of the clear trend of an increase of such cases, management and shareholders of Russian entities must be very careful when making any business decisions that could influence potential debtor’s solvency – especially those related to disposal of the assets and assuming new obligations.
Moreover, it is important to bear in mind, that the outcome of clawback action may significantly influence development of litigation on subsidiary liability of
its controlling persons. For this reason, during the period of moratorium, and for some time afterwards, it is advisable for debtors to abstain from any major transactions, or alternatively to be fully ready to prove their economic rationale and have the respective evidence in hand, should the matter eventually end up in court.
ConclusionA clear conclusion emerging from the considerations discussed here is that recent amendments to Russia’s bankruptcy law on the moratorium introduced earlier this year, raises a variety of practical questions which will be dealt by the courts in the following years or even decades. It is also obvious that the courts will continue following and developing the general goals of Russian bankruptcy law, which are mostly aimed at preventing illegal, or close to illegal schemes and practices, giving creditors flexibility in the way they enforce their rights.
Notes1 See www.rbc.ru/economics/19/05/2020/5ec1a2bb9a79471ed0
de4175.2 An easy service to check if a company falls under moratorium is
available at the official website of the Federal Tax Service of the Russian Federation at https://service.nalog.ru/covid, accessed 21 July 2020.
Sergey Petrachkov is an ALRUD Partner, heading the Dispute Resolution and Restructuring/Insolvency Practices. He has considerable experience in representing clients in complex business and corporate disputes before state courts. He also advises on issues relating to international commercial arbitration and represents clients in arbitration proceedings. Sergey takes part in restructuring matters and insolvency proceedings, including advising and litigation in respect of dissipation of assets, clawback actions and recovery of damages from management and shareholders of the debtor.Dmitry Kuptsov is a Senior Associate at Dispute Resolution and Restructuring/Insolvency Practices in ALRUD Law Firm. He specialises in complex commercial, corporate and administrative disputes in courts of general jurisdiction and state commercial courts, as well as has significant experience in managing complex bankruptcy related projects (including those requiring challenging debtor’s transactions and returning the assets) acting in the interests of major Russian and international clients.
Insolvency and Restructuring International Vol 14 No 2 September 2020 23
Reaction of Russian authorities to the Covid-19 pandemicTo ensure economic stability in case of an emergency situation arising in connection with the Covid-19 pandemic, the Russian state authorities have adopted federal laws introducing amendments in licensing, healthcare, procurement and bankruptcy legislation.
With respect to the bankruptcy legislation, the laws supplemented the Federal Law on Insolvency (Bankruptcy) No 127-FZ (‘bankruptcy law’) dated 26 October 2002, with a new provision (Article 9.1) authorising the Russian government to introduce a moratorium on the initiation of bankruptcy cases (by the creditors) in case of emergencies or a natural disaster.
In accordance with those amendments and Covid-19, the Russian Government also introduced the moratorium on the initiation of bankruptcy cases by creditors with respect to certain debtors (the Resolution of the Government of the Russian Federation No 428 dated 3 April 2020). According to this Resolution the moratorium is introduced with respect to two groups of debtors:• Companies acting in the areas of business recognised
as mainly affected by the pandemic. The list of these areas is stipulated in the Resolution of the Government of the Russian Federation No 434 dated 3 April 2020, including transport, entertainments, sports, cultural events, tourism, hotels, education, health and restaurants.
• Companies which can be described as having ‘strategic meaning’ and included in one of the three governmental lists of such companies.
This moratorium was introduced for the six-month period, effective 6 April to 6 October 2020.
The Supreme Court of the Russian Federation issued its clarifications on application of new amendments in the bankruptcy law in the legislation reviews of separate issues of judicial practice related to the application of legislation and measures to counteract the spread Covid-19: No 1 dated 21 April 2020 and No 2 dated 30 April 2020.
Moratorium on Bankruptcy ProceedingsA moratorium on bankruptcy proceedings is introduced for a period determined by the government. It may be extended if the circumstances that served as the basis for its introduction remain in force. The specific provisions of the moratorium as explained by the Supreme Court are summarised below:• Any applications on the initiation of bankruptcy
proceedings filed by the creditors with the court, as well as those submitted before the date of the moratorium but not considered or resolved by the date of the moratorium, will be returned back to the applicant by the court. Once the moratorium procedure is lifted the creditors must publish a new notification on their intention to initiate the bankruptcy procedure. The creditors have the right
Russia’s pandemic & insolvency regulations
Sergey TreshchevPartner, Squire Patton Boggs, [email protected]
Nikita Beylin Senior associate, Squire Patton Boggs,
Elena MalevichAssociate, Squire Patton Boggs, Moscow
The Covid-19 pandemic and governments’ actions to combat the disease have led to a global economic crisis and Russia is no exception. This crisis directly affected many sectors of the Russian economy and can cause a significant blow to the country's economy. In order to minimise the effects of the economic crisis, the Russian government introduced numerous measures to support businesses. One such measure is the moratorium on bankruptcy of particular companies. This is the first time Russia is using such a measure, which can delay bankruptcy for many Russian companies.
24 Insolvency and Restructuring International Vol 14 No 2 September 2020
to apply for bankruptcy procedure within 15 days after such a publication.
• Creditors are not permitted to levy execution on the pledged property, such as seize property collateral, including through out-of-court procedure.
• Enforcement proceedings relating to the execution against a debtor’s property are suspended with respect to claims arising before the moratorium. Creditors are also deprived of the right to get the execution of the writs through the banks and other credit organisations.
• However, seizure of, and other restrictions on debtors’ property already imposed through enforcement proceedings, are not lifted. The Supreme Court also admits a possibility to get the writ of execution with the court and to establish the restrictions on disposition of debtor’s property within the execution procedure.
• The composition and size of monetary obligations, claims for severance payments and/or salaries under an employment contract and mandatory payments arising before the moratorium and claimed after the court has accepted the application for declaring the debtor bankrupt are determined on the date of introduction of the moratorium. The amount of the respective monetary obligations denominated in foreign currency arising before the moratorium is determined in roubles, at the lowest rate established on the moratorium date, or on the date of bankruptcy proceedings.
• During the moratorium fines and penalties, and other financial sanctions for non-fulfilment or improper fulfilment by a debtor of monetary obligations and obligatory payments for claims arising before the introduction of a moratorium are not charged.
• Meetings of creditors, committees of creditors, former employees of any debtor will be held by the decision of the administrator in absentia.
• The creditor is considered to have voted for an amicable agreement at the meeting of creditors, if during the moratorium period the creditor gives its written consent to the agreement.
• Any person who is subject to a moratorium has the right to refuse the implication of a moratorium procedure by filing the relevant notification in the Unified Federal Register of Bankruptcy Information. After the publication of such a notification, the moratorium does not apply to such a person.
• The moratorium is aimed at protecting debtors who have suffered as a result of respective circumstances, providing them with the opportunity to get out of a difficult situation and return to normal economic activity. In a situation where debtor’s owners take a decision on its liquidation and, thus, it not expected to continue its normal business activity, creditors are not deprived of the right to file an application for declaring the debtor bankrupt.
Additional Regulations1. Cancel governmental inspections The new law also cancels any governmental
inspections for the period 1 April to 31 December 2020 inclusively, for small and medium-sized businesses. In addition, in 2020 the Russian Government will have the right to establish rules for organising and conducting the federal state control (or supervision) proposed by the law.
2. Delay tax audits or customs and prosecutor’s inspections By the governmental acts (the information letter
of the Russian General Prosecutor General dated 26 March 2020, and the Order of the Russian Federal Tax Service dated 20 March 2020, No ED-7-2 1812) from 18 March to 1 May 2020, the federal authorities did not start tax audits or customs and prosecutor’s inspections.
3. Deferred tax payments for some business entities According to the Order of the Government of the
Russian Federation dated 18 March 2020, from 20 March to 1 May 2020, business entities working in tourism, air transportation, physical education, sports, art, culture and cinema were granted ‘tax holidays’, a deferral of payment of taxes and other contributions.
4. Credit organisations to consider restructuring loans The Central Bank of the Russian Federation has
also recommended to the credit organisations to consider the restructuring of loans of small and medium-sized businesses, including deferred repayment of principal and interest, as a priority measure to prevent or resolve overdue debt.
5. Limited access to all courts From 19 March to 10 April 2020, access to all
courts was limited. Only urgent cases, as well as simplified and procedural matters, were considered by the courts. This restriction lead to the postponement of many court hearings, within the terms of Russian bankruptcy cases, thus freezing or sometimes paralysing the process of liquidation of insolvent entities.
Sergey Treshchev is the managing partner of the Squire Patton Boggs Moscow office and head of the International Dispute Resolution Practice in Russia and CIS. Over the past 20 years, Sergey has played a leading role in defending high-level dispute resolution matters in Russia and abroad. Sergey focuses his practice on insolvency (restructuring), arbitration and litigation matters. He has extensive experience representing both lenders and borrowers in various transactions such as loans, securities transfers, mortgages and leases in Russia and abroad. He has also handled matters in securities, currency control and mining regulation. [continued...]
Russia’s pandemic & insolvency regulations
Insolvency and Restructuring International Vol 14 No 2 September 2020 25
Nikita Beylin is a senior associate in the International Dispute Resolution Practice of the Moscow office. As a lawyer focusing on dispute resolution, he has extensive experience in litigation, international arbitration, and amicable dispute resolution and insolvency proceedings.Elena Malevich is an associate in the Moscow office’s International Dispute Resolution Practice. She has represented leading Russian and foreign companies in legal proceedings before Russian commercial courts and courts of a general jurisdiction in various regions and at all levels, in a wide range of matters.
Territoriality is one of the major obstacles to be faced by the recently proposed cross-border insolvency
regime. A territorial approach lays down that assets physically or constructively situated within the sphere of a particular state’s territorial jurisdiction fall within the exclusive province of the insolvency courts and laws of that particular jurisdiction.1 It preserves the interests of the local creditors by seizing the assets on filing of a bankruptcy proceeding with little regard for the interests at stake of the foreign creditors.2 The territorial philosophy of cross-border insolvency has prevailed in the common law system in the United Kingdom in the form of the Gibbs Principle.
The Gibbs Principle was articulated by the English Court of Appeal in Anthony Gibbs and Sons v La Société Industrielle et Commerciale des Métaux in 1890.3 In this case, the defendant was a French trading company
and it had entered into a contract to buy copper from the plaintiff. The defendant became insolvent and was subjected to liquidation under French law. The plaintiff filed a claim in the French liquidation to seek damages for his loss. His claim was denied stating that such a claim was not admissible under the French law. Therefore, the plaintiff instituted proceedings against the defendant in an English court. The defendant’s contention that the liquidation under the French law acted as a discharge of debt was unanimously rejected by the Court. The court held that the contract in this case was governed by the English law and the parties had never agreed to be bound by the French insolvency law. Thus, the defendant was liable to pay damages to the plaintiff as the French liquidation did not amount to a discharge of debt under the English law. Thus, the Gibbs Principle was formulated according to which a
Gibbs principle
Examining India's new cross-border insolvency regime and its potential
challenges
This is the second of two articles. Part one, published in the April 2020 edition of IRI, dealt with the adoption of UNCITRAL Model Law as the framework for India’s proposed cross-border insolvency regime. Part two examines means of solving challenges posed by the Gibbs principle.
Sayak Banerjee and Akash Mukherjee
26 Insolvency and Restructuring International Vol 14 No 2 September 2020
discharge of any debt under a foreign bankruptcy law is a valid discharge therefrom in England if, and only if, it is a discharge under the law applicable to the contract.4 The Gibbs Principle is still adhered to as a fundamental legal norm in England.5
The Gibbs Principle holds significance for Indian cross-border insolvency process as numerous Indian companies have foreign currency denominated debt, however, the documentation is governed by English law.6 This acts as an impediment for the corporate insolvency resolution process of such companies as it allows the creditors governed by the English law to seek relief in English courts, disregarding the Indian insolvency process.
The Gibbs Principle is an outmoded device of cross-border insolvency which militates against the objectives sought to be achieved by the UNCITRAL Model law, and thereby, the proposed cross-border insolvency provisions of India. The undercurrent to the Gibbs case was that it characterised discharge of debts as a contractual issue rather than an insolvency or a bankruptcy issue. This characterisation is inaccurate. A discharge of debt through bankruptcy proceedings is not governed by terms agreed to between the parties but rather by the policy considerations, envisioned by the UNCITRAL Model Law, forming the basis of a bankruptcy discharge.7 A bankruptcy proceeding is conducted not merely to adjudicate upon the rights and liabilities of contractual parties, but to protect the interests of other creditors and to administer the affairs of the debtor in a manner that ensures equality between the creditors according to their degree and priority.8 A bankruptcy proceeding inevitably gives primacy to the interests of the majority of creditors over the minority as it is guided by the philosophy that policy considerations overreach contractual liabilities. Therefore, it can be concluded that post-insolvency treatment of pre-insolvency entitlements cannot be included exclusively within the subject matter of party autonomy, as the concept of party autonomy is overpowered by the principle of collectivity once a corporate debtor is declared insolvent.
Principle of collectivityThe Gibbs Principle also disregards one of the fundamental features of insolvency law – the principle of collectivity. The principle of collectivity gives recognition to the ‘common pool problem’ which arises when multiple individuals have rights over the same finite fund of resources.9 Insolvency law takes all the claims against the insolvent debtor and forms a collectivised entity by transforming multiple relationships between creditors and debtors into a
unified whole for administering the proceeds from the debtor’s assets in a fair and orderly manner.10 Therefore, the principle of collectivity also strengthens the argument that party autonomy is secondary to broader policy imperatives under insolvency law.
A leash on good forum shoppingThe Gibbs Principle also acts as a hindrance to good forum shopping. Forum shopping is a practice where the debtor or creditor moves their assets to a jurisdiction which could provide them with an advantageous scheme of jurisdiction which is not available anywhere else.11 Forum shopping is undesirable where the debtor seeks to move their centre of main interest (COMI) in order to take advantage of a bankruptcy regime to evade their liabilities.12 However, in cases where the creditors provide their express approval to allow the winding up or restructuring to take place in a particular jurisdiction governed by a particular set of rules, this approval should be recognised and respected.13 Such cases represent the vision of the creditors on how the enterprise value of a failing company can be maximised through rehabilitative schemes of arrangement.14 This definitely represents the ultimate aim of insolvency law and is termed as ‘good forum shopping’. The courts in the UK have been driven by this philosophy in several cases recognising that good forum shopping in consultation with creditors is lawful and should be allowed.15
However, the Gibbs Principle poses a challenge to good forum shopping as a court acting under its principle would not recognise a discharge of debt flowing from foreign insolvency proceedings if the debt is governed by English law. This defeats the concept of good forum shopping as the companies in distress would not be able to take recourse to restructuring arrangements in a preferred jurisdiction. Yet the courts have allowed companies taking advantage of a scheme of arrangement under English law, through forum shopping, with the approval of the creditors for maximisation of value.16 This depicts a major inconsistency in English jurisprudence with regard to foreign insolvency proceedings.
A lesson from SingaporeIn recent years, Singapore has risen as a vanguard for application of modern universalism while adjudicating upon cross-border insolvency disputes as part of its commitment to become a hub for cross-border insolvency resolution. The Singaporean jurisprudence on the viability of enforcement of the Gibbs Principle could chart the course for the Indian approach to
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Insolvency and Restructuring International Vol 14 No 2 September 2020 27
overcome the tether of the Gibbs Principle. In Global Distressed Alpha Fund I Ltd v PT Bakrie Investindo,17 where the claimant sought to enforce a UK judgment, with regard to a claim which was governed by English law, under section 3(1) of the Reciprocal Enforcement of Commonwealth Judgments Act (RECJA). Section 3(1) of RECJA requires the Singapore High Court to register and subsequently enforce a judgment of a superior court in the UK if it deems fit that it is just and convenient to enforce the judgment in Singapore. It was observed that the principle of universalism and the doctrine of international comity should be considered under section 3(1) of the RECJA. Although in this case the Singapore High Court decided not to enter into the merits of the case, the observation had sparked the argument that enforcement of English judgments which are founded on the Gibbs Principle would lead to indirect enforcement of the Gibbs Principle in other jurisdictions even if such jurisdictions do not consider it good law.18
The aforementioned inconsistency was put to rest by the judgment in the case of Re Pacific Andes Resources Development Ltd19(hereinafter ‘Pacific Andes’). In this case, a number of companies filed applications for moratoria on proceedings instituted against them by their creditors in Singapore and in other jurisdictions. The said proceedings were instituted on the basis that the companies intended to enter into schemes of arrangement in Singapore. The creditors contended that the Singapore High Court could not adjudicate upon the instant dispute as the debt owed by the companies was governed by the Hong Kong law and any discharge of such debt would be invalidated by the Gibbs Principle. The Court ruled that if a party is subject to insolvency proceedings in a foreign jurisdiction with which it has a sufficient nexus based on ties of business or existence of assets, then it should be standard that such a possibility must enter into the parties’ reasonable expectations while entering into a contractual obligation which is governed by English law or Hong Kong law.20 Therefore, in such a case the debt governed by a foreign law was legitimately compromised by a scheme of arrangement in Singapore.
Comity requirements and the limitation of public policyComity refers to the recognition given to legislative, judicial and executive acts of a foreign nation by a country in its own territory with due regard to both international duty and convenience and to the rights of its citizens or other persons who are protected by its laws.21 It does not pertain to an absolute obligation,
neither to a matter of mere goodwill or courtesy among each other.22 Therefore, it is evident that comity does not lead to unqualified recognition of foreign pronouncements as it gives sufficient consideration to the rights of citizens who are under the protection of the domestic law. For instance, in the United States, the court declined to order a turnover property to a Canadian trustee as per the Canadian law by maintaining that the American creditors would be accorded lesser priority under the Canadian law which would be inconsistent with the well-defined and consistent policies of the US.23 The UNCITRAL Model Law on cross-border insolvency also recognises this exception under Article 6, which stipulates that a court is not bound to recognise or enforce a foreign pronouncement if it would be manifestly contrary to the public policy of the state.24 The public policy exception has also been granted a place in the recent UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments.25
In India, a foreign arbitral award is considered unenforceable, due to being contrary to its public policy, if such enforcement is against: (i) the fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality.26 Therefore, it can be derived that an act of an administrative authority which is arbitrary, unfair or biased shall be against the public policy of India as it is termed as a constitutional anathema.27 The doctrine of legitimate expectation is a basic tenet of the rule of law and assures uniformity and certainty in decision making. It refers to the expectation of a benefit, relief or remedy that may usually flow from a promise or established practice based on regular, consistent and predictable conduct of the adjudicating authority.28 The doctrine requires due consideration to be given to the legitimate expectations of an individual to ensure non-arbitrariness which is an indispensable part of rule of law.29 It is applicable to the National Company Law Tribunal (NCLT) and National Company Appellate Law Tribunal (NCLAT), which are administrative bodies carrying out the decision-making or adjudicatory functions of the administration.30
A resolution plan approved by the NCLT is stated to be binding on all of the creditors of the insolvent company. However, the creditors who are governed by English law are free to approach the English courts to seek relief for the entire amount of their claim under the Gibbs Principle.31 Such a practice disregards the resolution plan of the NCLT, compromises the interests of the other creditors and militates against the principle of collectivity. Therefore, in order to overcome the Gibbs Principle, the Indian courts can seek recourse to the doctrine of legitimate expectation which was defined in the Pacific Andes case according to which
28 Insolvency and Restructuring International Vol 14 No 2 September 2020
the creditors governed by English law documentation must reasonably expect the possibility of becoming a party to the insolvency proceedings against the debtor company. Enforcing a foreign judgment would, thereby, result in an arbitrary, unfair and biased outcome giving an advantage to one set of creditors against others. Such an outcome would be in breach of the public policy considerations envisaged while formulating the effect of insolvency law in India. Therefore, the adjudicating authority in India would be within its rights to decline enforcement of such a foreign judgment, rendering the Gibbs Principle ineffective in India.
Conclusion Internationally, bankruptcy laws have developed a symmetrical relationship between the debtor, creditor and the society. While interpreting the terms ‘COMI’ and ‘establishment’ and determining the standard of proof for rebutting the debtor’s registered office presumption, by reconciling domestic court decisions with that of Model Law, it can be done. To prevent forum shopping, it is important to determine the correct date for both COMI and establishment.
The main concern, currently, however, is how and where to strike a balance in parallel debt recovery such that the comity principle is grasped in its true essence. The Jet Airways case has to a certain extent brought this balance by allowing the foreign trustees to be treated at par with resolution professionals of India, by allowing them entry into the Committee of Creditors.32 Moreover, recently, the US Bankruptcy Court for the District of Delaware recognised the case of SEL Manufacturing Company Limited33 pending before NCLT, and Chandigarh Bench as well, as foreign main proceeding within the meaning of section 1502(4).34 This is a welcome change adopted by a country to adopt foreign main proceedings while upholding creditors’ interests, on account of rising non-performing assets.
Finally, the norms under international comity and public policy requirement can be utilised to overcome the test presented by the Gibbs Principle to the new cross-border insolvency regime proposed in India. Triumph over this archaic territorial rule would showcase India’s commitment to establish a universal insolvency resolution system which would, further, push India higher up the pecking order of the Ease of Doing Business Index.
The cross-border insolvency mechanism would entice substantial foreign investment in the Indian economy as it would finally provide them with a forum to settle their claims based on universal norms, not laced with the red-tapism of the Indian restructuring system and multiplicity of suits. Thus, the new cross-border
Notes1 Michèle Olivier & André Boraine, ‘Some aspects of international law in
South African cross-border insolvency law’ (2005) 38 The Comparative and International Law Journal of Southern Africa 373, 374.
2 Lisa Perkins, ‘A defense of pure universalism in cross-border corporate insolvencies’ (2000) 32 NYUJ INT’L & POL 787.
3 Anthony Gibbs and Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.
4 A V Dicey, J H C Morris and Lawrence Collins, Dicey, Morris and Collins on the Conflict of laws (15th edn, Sweet & Maxwell 2006) 996.
5 Bakshiyeva v Sverbank of Russia [2018] EWCA Civ 2802.6 Dhanajay Kumar, ‘Indian Insolvency Regime without Cross-border
Recognition – A Task Half Done?’, India Corporate Law (16 May 2017) at https://corporate.cyrilamarchandblogs.com/2017/05/indian-insolvency-regime-without-cross-border-recognition-task-half-done/#more-2079 accessed 21 July 2019.
7 Kannan Ramesh, ‘The Gibbs Principle: A Tether on the feet of Good Forum Shopping’ (2017) 29 SAcLJ 42.
8 Re Bulong Nickel Pty [2002] WASC 226. 9 Ian F Fletcher, Insolvency in Private International Law (2nd edn, OUP 2005).10 Ibid.11 See n 7 above.12 Ibid.13 Ibid.14 Professor Payne, ‘Cross-border Schemes of Arrangement and Forum
Shopping’, (2013) 14 Eur Business Organisation L Rev 563.15 Re Codere Finance (UK) Ltd [2015] EWHC 3778 (Ch); Sea Assets Ltd
v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001] EWCA Civ 1696; Re Apcoa Parking Holding Gmbh [2014] EWHC 3849 (Ch).
16 Look Chan Ho, Cross-Border Insolvency Principles and Practice (1st edn, Sweet & Maxwell 2016).
17 Global Distressed Alpha Fund I Ltd v PT Bakrie Investindo [2013] 2 SLR 228 at [42].
18 See n 7 above.19 Re Pacific Andes Resources Development Ltd [2016] SGHC 210.20 Ibid 3.21 Hilton v Guyot 159 US 113 (1895).22 Ibid. 23 Overseas Inns SAPA v US 911 F 2d 1146 (5th Cir 1990).24 ‘UNCITRAL Model Law on Recognition and Enforcement of
Insolvency-Related Judgments’ (UNCITRAL, 2 July 2018) at www.uncitral.org/pdf/english/texts/insolven/Interim_MLIJ.pdf accessed 21 July 2019.
25 Ibid.26 Renusagar Power Plant v General Electric Co AIR 1994 SC 860.27 Rajendra Singh v State of UP through Chief Secretary, Allahabad High Court
2017 (6) ALJ 482.28 Ram Pravesh Singh v State of Bihar 2006 (8) SCJ 721.29 Food Corporation of India v M/s Kamdhenu Cattle Feed Industries (1993)
1 SCC 71.30 I P Massey, Administrative Law (9th edn, Eastern Book Company 2012).31 See n 6 above.32 Jet Airways (India) Ltd (Offshore Regional Hub) v State Bank of India &
Another, Company Appeal (AT) (Insolvency) No 707 of 2019.33 SEL Manufacturing Co Ltd and SEL Manufacturing Bankruptcy Court DC
Delaware 1:2019-bk-10988 (deb).34 Title 11-Bankruptcy, 2011, USC, s 1502(4).
insolvency law brings with it a plethora of possibilities which could boost India’s credit market substantially, thereby, fulfilling the objective for introducing the Insolvency and Bankruptcy Code in India.
The authors, Akash Mukherjee and Sayak Banerjee, are third year students at the National Law University, Jodhpur. They take an active interest in corporate and commercial legislation, particularly developments in insolvency and bankruptcy law.
Gibbs principle: examining India's new cross-border insolvency regime and its potential challenges
Insolvency and Restructuring International Vol 14 No 2 September 2020 29
The ‘Dutch scheme’ is commonly used to refer to a new insolvency tool under Dutch law, expected
to come into force in the summer of 2020. Its formal name is ‘Act on the Confirmation of an Extrajudicial Restructuring Plan’; it is also referred to as CERP or WHOA after its Dutch acronym (Wet Homologatie Onderhands Akkoord). CERP will become part of the Dutch Bankruptcy Act and will enable a debtor to offer a plan to its creditors outside of formal insolvency proceedings. It includes provisions that go beyond simply facilitating a haircut and is therefore expected to be deployed not just in purely financial restructurings, but also in operational restructurings. It is available to debtors who have their centre of main interest (COMI) in the Netherlands but can also be used in an international context.
The essence of the Dutch scheme is that a debtor can offer a plan to their creditors, which will be binding on all creditors affected by the plan, provided the required majority votes in favour, and the court confirms the plan. The new rules are designed to have the greatest possible flexibility and include the possibility of dividing creditors into classes. The process can be public or private (meaning confidential), and the debtor may choose to include some or all their creditors in the plan, while rights of shareholders and other capital providers may also be affected. The main limitation lies in employment agreements, which cannot be affected by the plan, meaning that, if there is a need to scale down the workforce, the usual termination and severance provisions will apply.
A debtor can start the process by filing a statement with the court in which they state their intentions to start preparation of a plan to be offered to creditors.
The debtor must choose between the public or the private process. A debtor with their COMI in the Netherlands can choose either. A debtor whose COMI lies outside of the Netherlands, but within the European Union, can only choose the public variety if they have an establishment in the Netherlands, or the private variety if there is enough connection with the Netherlands. Whether a sufficient connection with the Netherlands exists depends on the circumstances of the case. Assets located in the Netherlands will provide enough connection, but a sufficient connection is also assumed if a large part of the debts affected by the plan arise from agreements governed by Dutch law. Such a sufficient connection would also allow a debtor with its COMI outside the EU to initiate the process, either the public or the private variety.
The main difference between public and private processes is that in the latter case there is no public filing and all court hearings take place behind closed doors. Furthermore, a Dutch scheme in a public process falls within the scope of the European Insolvency Regulation,1 meaning that if the debtor has their COMI within the EU, all court decisions will be automatically recognised throughout the EU Member States.2
The process can also be initiated by one or more creditors, shareholders or the mandatory employees’ representation of the debtor. This requires an application to appoint a Restructuring Expert filed with the court. The applicant must choose whether they want the process to be public or private; the same criteria as described above apply. If the court grants the application (and it must do so in any event if it is supported by the majority of the creditors), then the Restructuring Expert will be the one preparing the
The Dutch scheme – a new European restructuring tool
Barbara Rumora-ScheltemaPartner, NautaDutilh Amsterdam
The Dutch scheme is a new and flexible restructuring tool expected to come into force in the Netherlands in the summer of 2020. Here the author gives a brief description of the new scheme and how it can be used by and for debtors in financial distress, both in cross-border situations, as well as international or purely national situations.
30 Insolvency and Restructuring International Vol 14 No 2 September 2020
The Dutch scheme – a new European restructuring tool
plan and offering it to the creditors. If a Restructuring Expert is appointed, the debtor will be obliged to provide all information necessary for the preparations of the plan. For small and medium-sized businesses, a Restructuring Expert can only offer a plan with the consent of the management of the debtor. However, if the director(s) of the debtor refuses to cooperate, the court can set aside such refusal.
The Dutch scheme includes several provisions intended to facilitate the preparation of and negotiations about the plan. For example, the debtor (or the Restructuring Expert) may ask the court to order a moratorium during which third parties cannot act against the debtor or against assets in the debtor’s possession, except with court approval. Such a moratorium will last four months and can, in a public process, be extended once by a further four months. The debtor can also ask the court for permission to perform certain legal acts deemed necessary to continue to trade, pending preparation of the plan. If granted, the court’s permission serves as protection against a future clawback if the plan proves unsuccessful and the debtor would end up in insolvency proceedings.
Another feature of the Dutch scheme is that the debtor (or the Restructuring Expert, if appointed) can request the counterparty to agree to a modification or termination of any agreement. If the counterparty does not agree, the agreement can be terminated subject to confirmation of the plan. The debtor will have to pay damages resulting from the premature termination, but those damages can be affected under the plan. A reasonable notice period, which will not exceed three months, shall be ordered by the court. This provision aims to enhance the viability of the debtor in the long run, for example by bringing conditions under a lease agreement more in line with changed market conditions.
Apart from these specific measures, the Dutch scheme also allows the court to order any measure that may be required to safeguard the interests of the creditors or shareholders. An example could be the appointment of an observer, who could overlook the process to ensure that the interests of the creditors are not harmed. Other examples include an order to the debtor to periodically provide updates about the plan’s progress to the court and to the creditors, or an order setting a deadline within which a vote must be taken on the plan. Some Dutch legal scholars have compared this provision to section 105(a) of the United States Bankruptcy Code. Note that an order under this CERP provision could potentially set aside statutory rules relating to the preparation of the plan, if the court found such an order necessary to safeguard the position of the creditors (or shareholders) in the case at hand.
There are no rules dictating the content of the plan, which may include a haircut, a debt-for-equity swap, an extended payment schedule, or a combination of the above. The sky is the limit. However, as will be discussed in the context of the confirmation criteria, there are certain minimum requirements, particularly concerning small creditors, which must be observed. There are also requirements relating to the way the creditors must be informed of the plan and the voting process. Those requirements aim to ensure a fair process, allowing the creditors to have the information and the time to carefully consider whether to support the plan. If the debtor would enter into the process with a fully prepared plan, and has secured the necessary support from the required majority of creditors, then the minimum period within which the process could be finalised, including confirmation by the court, would be about one month.
The plan may affect all or some creditors and/or shareholders. A plan could address financial creditors only, leaving trade creditors’ claims unaffected. Creditors must be divided into separate classes if their positions differ. Such differences could exist both in the rights they would have if the debtor was liquidated in bankruptcy, as well as in their treatment under the plan (‘in and out’). Creditors that have a different statutory ranking must be in separate classes. In addition, small creditors must be in one or more separate classes if they receive less than 20 per cent of the amount of their claim under the plan. Further, if the amount of the claim of a secured creditor exceeds the liquidation value of the collateral then they must be placed into two separate classes: one higher ranking class for the amount that is secured by the collateral and one lower ranking class for the remainder. Except for these general rules, the debtor (or the Restructuring Expert, if applicable) can differentiate as much or as little as they believe conducive to the success of the plan.
A plan can be voted on only once. If the plan is rejected by the creditors or does not pass the threshold of court approval, the debtor is barred from offering a new plan for the next three years. This rule aims to ensure the debtor offers the best possible deal to his creditors and does not keep anything up his sleeve. One of the steps a debtor may consider taking is to ask the court before the plan is voted on, to give guidance on specifics under the plan. For example, the court can be asked whether the information given by the debtor in the plan is sufficient; whether the assumptions and valuations are acceptable; for which amount a specific creditor must be admitted to vote; whether the class composition is in accordance with the rules, or if there could be any reasons to refuse confirmation of the plan. Before taking its decision, the court would give
Insolvency and Restructuring International Vol 14 No 2 September 2020 31
all parties potentially affected the opportunity to be heard. Any party given the opportunity to provide a view, will be bound by the court’s decision – regardless of whether they have taken the opportunity offered. This possibility allows for greater deal certainty and will be especially useful – and strongly recommended – in complex situations with a large number of creditors and/or classes.
Voting on the plan takes place by class. A class is deemed to approve the plan if creditors representing at least two-thirds of the value of the claims in that class vote in favour. There is no head count, and no-shows are not considered, when assessing whether the class has approved the plan. If one class of in-the-money creditors has approved the plan, then the debtor (or the Restructuring Expert, if applicable) can ask the court to approve the plan, thereby rendering it binding on all creditors/shareholders who are affected.
The court will set a date for a confirmation hearing and will invite all parties to the plan to attend the hearing and to present their views. The court must refuse confirmation if the plan or the voting process do not comply with the procedural rules, including the rules pertaining to the required information or class composition. In addition, there are two situations where the court can refuse confirmation if a creditor invokes certain specific refusal grounds.
First, any creditor or shareholder who has voted against the plan can ask the court to refuse confirmation if it is summarily shown that they would be in a better position if the debtor were liquidated in a bankruptcy (‘best interest of creditors’ test). This is not a mandatory refusal ground: the court has discretion whether or not to refuse confirmation in this case. Relevant considerations will include the difference between the payment under the plan and the expected payment in case of a bankruptcy, the number and type of creditors that have approved the plan, and the consequences of a confirmation of the plan versus a bankruptcy for employees of the debtor.
Second, a creditor or shareholder who is a member of a class that has rejected the plan, and who has voted against the plan, can invoke a number of other refusal grounds which, if shown, must lead the court to withhold confirmation of the plan. These other refusal grounds are:
• small creditors get less than 20 per cent (in cash or rights) of their claim, unless there is an important reason not to do so;
• a lower ranking class receives a distribution under the plan before a higher ranking class is paid in full, unless there is a reasonable ground to do so, and the interest of the relevant class is not harmed (‘absolute priority rule with a Dutch twist’);
• creditors who are not secured financial creditors do not have the possibility to opt for an amount in cash equal to what they would receive in a bankruptcy; or
• secured financial creditors receive shares (or similar instruments) but do not have the possibility to opt for a different kind of distribution.
A creditor can only invoke one of the aforementioned refusal grounds if they have informed the debtor (or the Restructuring Expert, as the case may be) of their objections in a timely way.
If the court confirms the plan it will be binding for the debtor, as well as for all the creditors eligible to vote. As there is no appeal possibility, the plan will, in principle, be effective immediately after the court’s confirmation.
The Dutch scheme will be a viable alternative to existing international restructuring tools. It promises to be a highly flexible instrument, allowing for made-to-measure restructuring for debtors great and small. It is expected that the mere possibility of a Dutch scheme will help convince creditors with ‘hold-out’ positions to refrain from blocking otherwise viable debtors to get out of financial distress.
Barbara Rumora-Scheltema is a member of the restructuring and insolvency team of NautaDutilh in Amsterdam. She has been involved in numerous high-profile cross-border restructurings and insolvencies, including Yukos, PaperlinX, McGregor, Lehman Brothers, Lebara, Airopack, Estro, Forever 21 and Eurocommerce. A member of INSOL Europe and of the Dutch Association of Insolvency Lawyers (Insolad), between 2012–2017, she was the European Regional Director on the International Board of IWIRC, the International Women’s Insolvency and Restructuring Confederation.
Notes1 Regulation (EU) 2015/848 of the European Parliament and of the
Council of 20 May 2015 on insolvency proceedings (recast).2 The European Insolvency Regulation does not apply to Denmark,
and thus the COMI rules and automatic recognition apply to all of the EU Member States except Denmark.
32 Insolvency and Restructuring International Vol 14 No 2 September 2020
French insolvency rules reformed in the light of Covid-19 pandemic: are they going too far?
IntroductionThe Covid-19 outbreak has far-reaching consequences beyond the spread of the virus itself and became a great threat to the global economy and financial markets. Certain economic sectors are deeply affected in the medium and long term by the crisis.
This is the reason supporting companies encountering slowdown in growth or financial difficulties has quickly also become a major challenge to the French Government, in both social and legal terms.
In such peculiar circumstances, the French Government was very reactive and quickly launched a wide range of extraordinary support measures, helping companies to deal with the most urgent issues, such as, among others:• payment extensions of social contributions and
direct taxes, direct tax write-offs decided on a case-by-case basis;
• grants of €3,500 to €6,500 for small businesses, self-employed and micro-enterprises through a €7bn solidarity fund;
• state-guaranteed credit facilities up to €300bn;• moratorium on utilities and rental payments for
distressed SMEs;• maintaining employment in businesses through a
simplified and strengthened state cover for partial activity (chômage partiel); and
• recognition by the state of Covid-19 as a case of force majeure for public procurement.
In this context, France considered that its insolvency law should be readjusted with the aim of preventing and limiting enterprise failures.
The purpose of Ordinance n°2020-431 of 27 March 2020 was to adjust the formalism of insolvency proceedings which may be opened during the
lockdown period, and to adapt the various legal time limits applicable to companies within the framework of pre-insolvency proceedings and insolvency proceedings. For example, the assessment of the insolvency test1 was frozen as at 12 March 2020, one week before the lockdown period, until 23 August 2020. During that time, the debtor had no duty to file for insolvency proceedings2 and no third party could require the opening of insolvency proceedings against its debtor. The aim of the French Government was to push debtors to file for pre-insolvency proceedings, like mandat ad hoc or conciliation where the debtor can, under the supervision of an insolvency practitioner, restructure its major debts ‘out of court’ and in a confidential frame. During the lockdown period, commercial courts which are competent for insolvency and pre-insolvency proceedings, held the hearings via videoconferences at the judges’ homes, as the courts were closed. Filings were accepted electronically.
The Ordinance n°2020-431, dated 27 March 2020, has been subsequently completed and amended by a second Ordinance n°2020-596, dated 20 May 2020, which was intended to lead to a significant strengthening in the efficiency of insolvency proceedings and to speeding them up to enable courts to cope with the volume of anticipated cases.
Although the extraordinary measures introduced by the Ordinances are temporary, they impact some central aspects and foundations of French insolvency law.
Do the lockdown stakes of Covid-19’s economic impacts justify the ‘deconstruction’ of France’s substantive insolvency law in particular in the light of the forthcoming transposition into national law of the EU Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks?3
French insolvency rules reformed in the light of Covid-19 pandemic: are they going too far?
Anja Droege GagnierPartner, BMH Avocats, Paris
Amélie DorstSenior Associate, BMH Avocats, Paris
Insolvency and Restructuring International Vol 14 No 2 September 2020 33
Increase of the court’s power in pre-insolvency proceedings to the disadvantage of creditorsUnder French insolvency law, a debtor has the choice between two pre-insolvency proceedings, that is, mandat ad hoc proceedings and conciliation proceedings, which do not trigger an automatic stay of payments,4 both of which are for the purposes of reaching a consensual solution with the main creditors aiming at a rescheduling of debts. Management remains in full control throughout these proceedings.
Like mandat ad hoc proceedings, conciliation proceedings are confidential, but are also available to cash flow insolvent debtors provided such cash flow insolvency has not lasted for more than 45 days.5
The initial term of the conciliator’s mission is determined by the court, within a four-month limit (which can be extended for an additional month6).
Only the debtor may file for the opening of conciliation proceedings and can propose a conciliator among the insolvency practitioners, in practice, often an insolvency administrator. The conciliator’s fees are freely determined between him and the debtor, however, under court control.
The conciliator organises negotiation meetings with the debtor and its main creditors chosen by the debtor. The other creditors will neither be informed nor affected by the proceedings.
The French social, tax and public administrations may grant write-offs of the relevant debts as well as payment grace periods.7
The settlement agreement executed by the parties under the supervision of the conciliator is only binding upon the parties thereto. It can either be acknowledged by the court (confidential) or approved by a formal judgment, the so-called ‘homologation’ (which is public). The advantage of court homologation is to confer legal comfort to the debt rescheduling – for example, new-money privilege8 for lenders injecting fresh money, or certainty about the ‘cessation of payment’ date in case of the opening of subsequent insolvency proceedings.
If an agreement is not reached between the debtor and the participating creditors at the term of conciliation proceedings – and provided that the debtor does not file for so-called accelerated safeguard proceedings (sauvegarde accélérée)9 – the conciliator will draft a report and file it to the court, explaining the failure of the conciliation. The court will submit such report to the Public Prosecutor10 who could request the opening of insolvency proceedings.
According to the new measures,11 for all pending and future conciliation proceedings opened prior
to 31 December 2020, should a creditor expressly or implicitly refuse the debtor’s demand to postpone the due date of its claim within the timeframe set by the conciliator, the debtor can request at court the issuance of an order: (1) suspending any legal action or enforcement proceedings initiated by this creditor; or (2) rescheduling said claim. No late payment interests or penalties will then be due. Such measures shall remain effective for the duration of the conciliation proceedings.
Furthermore, the debtor may also request at court, in a simplified way, payment grace periods up to two years, before any notification or legal action is launched by the creditor.12
There is no doubt that these new measures expand the powers of the courts and imply a higher risk for creditors within conciliation proceedings.
While imposing a stay towards the main creditor or several creditors, such new court powers may be equivalent in practice to a general stay which is normally only triggered by court-controlled proceedings which are public: that is, safeguard, reorganisation and liquidation proceedings.
Moreover, conciliation proceedings are deemed consensual where a solution could not be forced but must be agreed among the debtor and willing creditors. The new possibility of imposing a stay of payments and actions creates an additional disruption of the balance between the debtor and its creditor(s) at the disadvantage of the latter.
A sale bid can now be presented by the manager of the debtor in insolvencyUntil the new measures, neither the debtor,13 in respect of any of its assets, nor the de jure or de facto managers of debtor companies, nor the relatives of the managers, nor the current or ex-controllers14 appointed in the proceedings, were permitted to participate in a sale bid at court with respect to the business or the assets of the debtor.15 However, as an exception, the court, on request of the debtor or, more likely, the insolvency administrator, may authorise, the business sale to one of these persons,16 if the latter offers the most beneficial job-savings alternative plan.
Such legal provision was justified by the fact that it would be found immoral that a manager could repossess his company, after the discharge of all its liabilities, often for a very low price, by depriving the creditors from their proceeds and claims.
As from the Ordinance n° 2020-596 dated 20 May 2020, on request of the debtor himself, a sale plan of assets can be endorsed to the benefit of managers of
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French insolvency rules reformed in the light of Covid-19 pandemic: are they going too far?
debtor companies, provided that the proposed sale bid ensures the preservation of jobs.
As a minimum protection, the Ordinance set forth that the Public Prosecutor must be present at the relevant debates during the hearing and the opinion of the controller(s) is required, without, however, being binding. In practice, the courts do not follow systematically the suggestion made by the Public Prosecutor.
It is well known that the preservation of jobs is the main aim of French insolvency law. However, such theoretical consideration – although honourable – does not take into account economical constraints, that is, the right size in number of employees with respect to the business. A third-party bidder should calculate in a more objective way the right adjustment in terms of numbers of employees fitting with the business to be taken over. In practice, one can see a general downsizing of jobs in the frame of a third-party sale bid compared to the number of employees working in the business contemplated.
Therefore, under this new regulation, the sale of the business to the manager who was not able to rescue it in the past, should not necessarily lead to a long-term rescue of the business and the jobs, unless such manager has the right level of objectivity.
However, a slight fraud suspicion may remain on the table: from a moral perspective, why should a manager who obviously failed, be allowed to take over the business for a symbolic purchase price while leaving the creditors behind and despite the fact that he failed in the past? Is the Covid-19 pandemic a sufficient excuse to open the door for fraud? Furthermore, we know that in practice it is exceedingly difficult (if not impossible) to prove the existence of fraud, in particular at the moment of a sale plan which takes place early in the process.
Third party bidders are all equally able to preserve jobs!
State guaranteed loans – nice to have but…Like most of the European jurisdictions, France put in place various financial measures to avoid a liquidity crisis. In addition to solidarity funds, the most important measure is the set-up of state-guaranteed loans (prêts garantis par l’Etat (PGE)).
The French State set aside a fund of €300bn as guarantee for loans to French corporates to be granted by commercial banks – often the house bank – before the end of 2020.
In France, the total state-guaranteed loans stand above those guaranteed by other European countries. Until mid-May 2020, loans of a total amount of €100bn were lent and they are expected to reach €120bn by September.
Due to European Union law, the state guarantee is limited to 90 per cent of the loan amount – leaving the remainder of ten per cent at the lender’s risk and for which no guarantee can be requested. Obviously, this leads the banks to analyse, at least at a minimum, the creditworthiness of the borrower and, of course, can end up in refusals – what is, in the authors’ opinion, a sane market regulation.
The French Government included, surprisingly, into the list of candidates to state-guaranteed loans, corporates which are already insolvent since 1 January 2020. ‘Insolvent’ in this context means either under safeguard, reorganisation or …liquidation proceedings!
In practice, if DIP financing is useful, now secured by a post-money privilege (privilège de sauvegarde ou de redressement),17 the ratio of it at a very late stage of the proceedings (ie, at the ultimate moment of pure asset disposals), is not understandable. Moreover, the fact that these loans benefit from the state guarantee (up to 90 per cent of the loan) is, from a macroeconomic point of view, not reasonable nor justified. It is true that the practice should correct this legislator’s mistake, as the credit applications should not get credit committee approval.
Moreover, not to forget, the easy money of a state-guaranteed loan remains a loan. And the problem is the loan term. The cash loan must be reimbursed within five years, with however one year off at the start (most repayments will only start in 2022). One must note that the borrower can request a loan amount up to 25 per cent of the 2019 turnover – which is a lot – for a tiny interest rate.18 Obviously, a huge cash amount might be loaded up first time. However, having done so, and given the short term of five years for serving the debt, the corporate must, during the five years, realise a free cash flow of five per cent of its annual turnover.
Such amount should be a huge challenge for most of the French SMEs which might face new financial difficulties in a later stage. Only a strong equity could help, which is not the case for the majority of the French SMEs, which are largely undercapitalised.
A series of a later defaults cannot be the interest of the state either.
Therefore, the easiest way should be the prorogation of the term of such loans, that is, to ten years, like in Germany, which would divide the debt pressure by two. In such a case, it might be fair to raise the current low interest rate a little.
ConclusionsDo the economic impacts as a result of the Covid-19 pandemic justify the ‘deconstruction’ of France’s substantive insolvency law, in particular in the light of
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the forthcoming transposition into national law of the EU Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks?
The measures amending French insolvency law in the context of the Covid-19 pandemic provide more protection to the insolvent debtor than is already the case under current French insolvency law. These measures stand in opposition to the provisions and the spirit of the EU Directive, ie, the strengthening of creditors’ rights. Therefore, we hope that such measures are temporary as linked to the Covid-19 pandemic, as announced by the French government.
Notes1 The insolvency test in French insolvency law is a purely cash flow test. 2 Unless the debtor could not pay wages, in which case the debtor was
supposed to file nevertheless for insolvency proceedings in order to get wages paid by the state guaranteed wages system (AGS).
3 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
4 Although no automatic stay is triggered with the opening of the mandat ad hoc or the conciliation proceedings, it is common practice that the participating creditors stand still and refrain from any enforcement act in order not to jeopardise the negotiations.
5 Freezing of the cash flow insolvency status to 12 March 2020 until 23 August 2020. As from 24 August 2020, companies that are still in a state of ‘cessation of payments’ will have to file for insolvency proceedings within 45 days.
6 Since the Ordinance n°2020-431 dated 27 March 2020 and the Ordinance n°2020-596 dated 20 May 2020, the maximum duration is extended for an additional five months (ie, a total of ten months). This applies for conciliation proceedings pending on 29 March 2020 but also to conciliation proceedings opened between 29 March 2020 and 23 August 2020.
7 Articles L. 611-7 and L. 626-6 Code de Commerce. A prior formal notice sent by the creditor to the debtor is necessary prior to the filing of such request to the relevant authority.
8 Benefiting of a preferential ranking in the insolvency estate for repayment.
9 Which requires special conditions (Art L.628-1 to 628-8 Code de Commerce) and is interesting in the presence of a minor dissenting creditor being able to hinder the reaching of an agreement.
10 The Public Prosecutor is present during insolvency proceedings and plays a supervision role.
11 Since the Ordinance n°2020-596 dated 20 May 2020 (art 2)12 A prior formal notification or a legal action introduced by the creditor
was, before the Ordinance dated 20 May 2020, a prerequisite to such court request.
13 Including the shareholders of the debtor.
Amélie Dorst is a member of the Corporate/Restructuring Group of BMH Avocats in Paris.She specialises in international transactions (cross border M&A, distressed M&A, corporate finance) and in corporate restructurings and reorganisations. Her experience includes advising banks, funds, insolvency practitioners and companies in relation to a wide range of transactions, including financial restructurings, cross-border acquisition finance, general bank lending.Anja Droege Gagnier is head of the M&A Corporate/Restructuring Group of the law firm BMH Avocats in Paris. Anja has gained broad experience for more than 25 years in international transactions and in corporate restructurings and reorganizations (out-of-court and formal insolvency proceedings) in various industries, ie, real estate, banking, insurance, printing, steel, aeronautic, automotive, nuclear, petrol/oil refinery business, co-generation energy, chemical products, transports and infrastructure projects, medical instruments, life science, biotech and luxury goods. She has developed a wide French, German and international client base comprising corporations, financial institutions, stakeholders and insolvency practitioners. In particular, Anja assists banks and financial institutions in complex finance scenarios in France (structured finance – infrastructure deals) and accompanies them in debt restructuring negotiation rounds, often in the frame of pre-insolvency proceedings. Anja has a particular focus on cross-border insolvency scenarios, in EU countries, Switzerland or the United States. Anja is Senior Vice Chair of the Insolvency Section of the International Bar Association (IBA).
14 The so-called ‘controllers’ are creditors appointed by the court upon their request. They have a limited control function in insolvency proceedings as for various actions (eg, disposal of debtor’s assets), their opinion is required.
15 Prohibition of art L. 642-3 Code de Commerce.16 Except controllers.17 The Ordinance n°2020-596 dated 20 May 2020 (art 5) introduced
a ‘post-money’ privilege applicable to cash contributions carried out during the observation period or for the purpose of the implementation of a safeguard or reorganisation plan. These claims benefit from a preferential ranking, ie, after wage super priority claims, legal costs, new money granted during the conciliation proceedings and wage claims of the AGS. The ‘post-money’ privilege may extend to all third-party post-money financings but exclude shareholders capitalisation funding. The ‘post-money’ priority claims are applicable to safeguard or reorganisation proceedings opened on or after 22 May 2020 and will apply until the implementation into French law of EU Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks (and no later than 17 July 2021).
18 Close to 0 per cent for the first year, the interest rate will be determined afterwards directly with the lender according to the market conditions at the date of the rescheduling, and according to the chosen term (within five years).
36 Insolvency and Restructuring International Vol 14 No 2 September 2020
Recent changes in directors’ liability under Belgian law
Bart De MoorPartner, Strelia, Brussels
Sofie OnderbekeAssociate, Strelia, Brussels
This article aims to provide an overview of recent changes in Belgian company and insolvency laws with regard to the provisions on directors’ liability. The focus is on the new provision on wrongful trading in Belgian insolvency law and the differences with the English law concept of wrongful trading.
Recent changes in directors’ liability under Belgian law
IntroductionAs businesses are conducted increasingly in internationalised contexts, directors of financially distressed companies should be aware of the liabilities they could face in cross-border situations. In the recent Kornhaas decision of the Court of Justice of the European Union (CJEU), the court qualified a German statutory provision on directors’ liability as falling under insolvency law and not company law.1 As a consequence, and pursuant to the European Insolvency Regulation, companies in bankruptcy and that have their centre of main interests (COMI) in a certain Member State will be subject to that Member State’s rules on directors’ liability. Directors of a company that is incorporated in Germany or the UK (during the current leaving-the-EU transition period) but that has its COMI in Belgium can be held liable, for example, under Belgian laws on directors’ liability. This article sheds a light on the recent Belgian company law and insolvency law reform and the changes it has made to directors’ liability.
New evolution of directors’ liability under Belgian law The new Belgian Code on Companies and Associations (BCCA) entered into force on 1 May 2019 and repeals the existing Belgian Companies Code. While adopting the BCCA, the legislators decided to move certain grounds for directors’ liability previously found in the Belgian Companies Code to the Belgian insolvency legislation. Doing so makes Belgian law aligned with the aforementioned CJEU decision in Kornhaas in which the court characterised Germany’s statutory rules
requiring reimbursement of payments that a director had made after insolvency – but before the opening of the insolvency proceedings – as rules governed by insolvency law.
Because of this change in the statutory provisions, the grounds for directors’ liability can be found in both the law governing companies (the BCCA) and the law governing insolvency (Book XX of the Belgian Code of Economic Law). The grounds for directors’ liability under the Code of Economic Law can be invoked only if a company becomes bankrupt. They concern a directors’ liability for obvious gross negligence (kennelijk grove fout or une faute grave et caractérisée), wrongful trading, and non-payment of social security contributions. The grounds under the BCCA can be relied upon whilst the company is still in continuity or in bankruptcy. They concern the directors’ liability for breach of management duties and violation of the BCCA or the company’s articles of association.
Some changes in directors’ liability highlightedIn this section, we will first highlight several noteworthy changes in Belgian legislation concerning directors’ liability before we elaborate how the provisions on wrongful trading are implemented in Belgian insolvency law.
First, the BCCA now holds shadow directors and de facto directors (which are both qualified as feitelijke bestuurders or administrateurs de fait under Belgian law) liable also for all acts falling under a director’s liability, and not only for acts of obvious gross negligence, which was stipulated in the Belgian Companies Code.
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Belgian case law qualifies a de facto director as a legal or natural person who is involved – without any legal or contractual basis – in the company’s management. A company’s shareholder (whether it is controlling shareholder or not) should be cautious about involving itself in the running of the company as a court could qualify that shareholder as a de facto or shadow director, thus holding it liable as a director.
Second, the BCCA has now set a limitation or cap on the amount of a directors’ liability. In claims against the company and third-party claims, the liability is capped at a maximum amount based on the company’s turnover and balance sheet total. The Belgian legislators’ purpose in setting this cap is to minimise the difference between the unlimited liability of a company’s governing body and the limited liability of managers who are protected either by their employee status or by their self-employed status as they perform their acts and services through a limited liability company. This cap also aims to make the directors’ liability more insurable. However, it is suggested in Belgian legal doctrine that the cap on directors’ liability can lead to the danger of a moral hazard: directors can insure their liability up to the cap and they cannot be held liable for any sums exceeding the cap. Nevertheless, it should be noted that this cap does not apply to all cases of directors’ liability. Directors can still be held liable without any limitation if they are found guilty of repeated negligence, gross negligence (zware fout or faute grave), intentional fraud, intent to cause harm, or defaulting on their social security and tax obligations.
Third, the BCCA now provides explicitly for a positive formulation of a director’s task. It stipulates that each member of a company’s governing body or an executive director must undertake towards the company to perform properly the task assigned to him or her. Previously, this obligation was inferred from the rules governing directors’ liability. Although this amendment does not actually entail major changes, it can be argued that when a court assesses the facts of the alleged directors’ liability, it will examine the negligence within the overall performance of his or her tasks instead of as an isolated act.
Further, the Belgian legislators made wrongful trading an explicit legal ground for directors’ liability.
Wrongful trading anchored in Belgian insolvency law Since 1 May 2018, a new rule on wrongful trading is in force in Belgium. It states that directors of a company in bankruptcy can be sued – and be held liable – for wrongful trading if they have unreasonably continued to run loss-making business activities at a time when bankruptcy is inevitable.
However, this new rule is not that new, because the Belgian legislators have basically codified existing case law. In the past, directors have been held liable for wrongful trading on grounds of tort (onrechtmatige daad or faute) or obvious gross negligence, which is a specific ground for directors’ liability if a company has become bankrupt. Whereas the claim value in an action based on tort is limited to the amount of harm or loss suffered by the plaintiff, the claim value in an action based on obvious gross negligence can amount to the total or partial value of the debt of the enterprise, up to the amount of the deficit.
Under the new provision on wrongful trading (Article XX.227 of the Belgian Code of Economic Law), directors can be held liable for continuing to run the enterprise or its activities if they knew or ought to have known – prior to the state of bankruptcy – that there was no reasonable prospect of maintaining the enterprise or its activities and avoiding bankruptcy, and if they, from that moment on, failed to act as a normally prudent and careful director would have acted in the same circumstances. An action on grounds of wrongful trading may be brought only by the insolvency practitioner (curator or curateur). Although individual creditors are not allowed to invoke the new provision on wrongful trading, they can still bring an action on grounds of tort or obvious gross negligence to hold directors liable for continuing the loss-making business activities.
In the past, directors have been held liable on grounds of tort or obvious gross negligence for continuing loss-making business activities. Such act is often accompanied by other erroneous acts, such as failure to keep adequate accounting records, failure to file annual financial statements, failure to take specific remedial measures, keeping the company artificially ‘alive’ while contravening all rules of effective management, etc. Whereas the plaintiff in an action on grounds of tort or obvious gross negligence will have to demonstrate the causal link between the fault and the damage or between the obvious gross negligence and the bankruptcy, respectively, the plaintiff does not need to prove the causal link in an action on grounds wrongful trading. Liability is found if the insolvency practitioner proves that the conditions for wrongful trading are fulfilled.
Inspired by the English law concept of wrongful trading Even though the new provision on wrongful trading in Belgian law was inspired by the English law concept of wrongful trading (which is found under section 214 of the Insolvency Act), there are some differences.
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Recent changes in directors’ liability under Belgian law
For instance, England’s Insolvency Act places a burden of proof on the director. The director must show that he or she took every step with the intention of minimising any loss that the company’s creditors could possibly incur. This condition is not required under Belgian law though, as the burden of proof rests entirely on the insolvency practitioner.
Furthermore, England’s Insolvency Act requires that the company be in a state of insolvent liquidation or be undergoing insolvent administration. The situation arises when the company’s assets are insufficient to pay its debts, other liabilities, and the expenses from the winding up or administration (also called the ‘balance sheet test’).2 Nonetheless, an action on grounds of wrongful trading under Belgian law will only be available from when the company enters in a state of bankruptcy. This situation is when the company has stopped paying its debts when they fall due (cessation of payment, staking van betaling or cassation de paiement) and it has lost its creditworthiness (geschokt krediet or credit ébranlé) so that it can no longer obtain credit from creditors or other parties. The cessation of payment corresponds to the ‘cash flow test’ under the English Insolvency Act. Meeting the cash flow test is not a condition for insolvent liquidation or administration, however.
In addition, and following from the above, the English insolvency practitioner (bankrupt estate’s administrator) can sue on grounds of wrongful trading in the UK if it concerns a company that has entered insolvent administration (which is similar to the Belgian law concept of judicial reorganisation, gerechtelijke reorganisatie or procédure de réorganisation judiciaire) and not only when the company is in a state of bankruptcy, which is the case under Belgian law.
It should also be borne in mind that the Belgian legal rule on wrongful trading was inspired by the common law system concept, so it might not be sufficiently adapted to the specificities of the Belgian civil law system.
ConclusionWhile it remains to be seen if more actions on grounds of wrongful trading will be brought by the invoking of the new provision in the Belgian Code of Economic Law, it should be remembered that the current Belgian laws can now hold various types of persons liable as directors, even though they might not generally be thought of as directors – and not only liable for obvious gross negligence. Nonetheless, the implementation of the cap may have a limiting effect on the intensification of directors’ liability and might even lead to moral hazard. Even so, directors are still fully accountable for their repeated negligence or gross negligence.
Notes1 Case C-594/14 Simona Kornhaas v Thomas Dithmar als Insolvenzverwalter
über das Vermögen der Kornhaas Montage und Dienstleistung Ltd [2015].2 Kristin Van Zwieten, Goode on Principles of Corporate Insolvency Law
(Sweet & Maxwell, London, 2018), 158 and 767.
Bart De Moor is a partner at Belgian law firm Strelia where Sofie Onderbeke is an associate. Both practice corporate restructuring and insolvency and dispute resolution in general. Bart De Moor acts as office holder appointed by the court and they act as advisers to clients. He is Co-Chair of the IBA Insolvency Section’s Reorganisation and Workouts Subcommittee.
Insolvency and Restructuring International Vol 14 No 2 September 2020 39
OverviewOn 26 June 2020, the Corporate Insolvency and Governance Act (the ‘Act’) came into force following an accelerated parliamentary process. The Act contains temporary measures that are designed to enable businesses which have been adversely affected by the coronavirus outbreak to continue trading and have the best possible chance of resuming as normal as lockdown restrictions and social distancing measures are eased. In addition, the Act introduces certain longer-term changes which build on government proposals consulted on and announced in 2018 and will have a wider-ranging structural impact on UK insolvency law.
We summarise the key provisions of the Act below and, in respect of the permanent reforms, explore the implications for companies and directors.
Temporary measures in response to Covid-19In March 2020, the government announced a series of temporary measures that would grant companies facing Covid-19-related liquidity issues the time, flexibility and ‘breathing space’ to continue operations by preventing creditors from enforcing debts during that period. The Act enshrines in law these previously announced measures and gives scope to extend the measures for a limited period if necessary. The government has subsequently extended some of these temporary measures beyond their original period of application (which expired on 30 September 2020), pursuant to regulations which came into force on 29 September 2020. Other measures have been discontinued following the initial period of application.
Wrongful trading
Under section 214 of the Insolvency Act 1986 (‘IA 1986’), the court may declare a company director personally liable to pay compensation if the company has gone into insolvent liquidation and, at some time before, the director knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation and did not take every step to minimise the potential losses to the company’s creditors.
The Act provides that the court is directed to ‘assume that the person [director] is not responsible for any worsening of the financial position of the company or its creditors’ that occured between 1 March 2020 and 30 September 2020 (the 'Original Period'). This measure is designed to provide comfort to directors that they were not required to file for insolvency prematurely in order to avoid liability under section 214 of the Act during the Original Period. Directors’ general fiduciary duties were, however, not affected, and other offences which can lead to personal liability for directors under IA 1986 remained unchanged in order to ensure that directors acted responsibly, and with the protection of creditors’ interests at the forefront of their decisions notwithstanding the suspension of liability for wrongful trading. The temporary relaxation of wrongful trading provisions expired on 30 September 2020 and was not extended by the government. However, the measure will still be relevant where a company has entered administration following the end of the Original Period and a wrongful trading claim is being considered against a particular director for their actions during the Original Period. In such circumstances, such a director would still benefit from the protection afforded by this measure.
The Corporate Insolvency and Governance Act 2020: permanent
reforms and temporary protectionsPaul Keddie
Senior counsel, Macfarlanes, [email protected]
Liam PrestonSolicitor, Macfarlanes, London
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Winding-up petitions/statutory demands
Creditors regularly use statutory demands and winding-up petitions as a form of debt recovery action against debtor companies in the UK.
The Act prohibits the filing of winding-up petitions on or after 27 April 2020 until 31 December 2020 against companies which are subject to a statutory demand served between 1 March 2020 and 31 December 2020. (following the government's extension of the measure beyond the end of the Original Period) Further, it provides that any creditor intending to present a winding-up petition before 31 December 2020 will be required to set out ‘reasonable grounds’ to establish, to the court’s satisfaction, that either: (1) the debtor company’s inability to pay its debts is not related to Covid-19; or (2) the company’s insolvency would have occurred regardless of the financial impact of Covid-19. Even in such circumstances, the Act includes further restrictions which would limit the court’s jurisdiction to issue a winding-up order. As with the suspension of liability for wrongful trading, the Act retains flexibility for these measures to be extended.
Meetings and company filings
Temporary provisions have also been introduced which are designed to alleviate the pressure on companies in respect of their corporate governance. As a result of lockdown restrictions, company meetings have not been possible in most cases and otherwise routine filings have been problematic. These measures include the following:• until 31 December 2020 (following the government's
extension of the measure beyond the end of the Original Period), company meetings may be held by electronic means or any other means without a need for physical attendance in one place;
• in relation to companies that were required to hold an annual general meeting between 26 March 2020 and 30 September 2020 (subject to extension), companies were permitted to delay the meeting until 30 September 2020 (the government did not extend this measure beyond the end of the Original Period); and
• public companies with an accounting reference date between 25 March 2020 and 30 September 2020 are permitted to file their accounts on the earlier of: (1) 30 September 2020; and (2) the final day of the period of 12 months immediately following the end of their relevant accounting reference date. The government introduced further regulations on 26 June 2020 which automatically extend the accounts filing deadline by three months in respect of UK
companies with a filing deadline which falls between 27 June 2020 and 5 April 2021.
Permanent reforms to UK insolvency lawThe Act also implements new, permanent restructuring procedures which supplement (rather than replace) the existing procedures which are available under English law. These changes build on government proposals which were consulted on and announced in 2018 and are expected to have a significant impact on UK insolvency law. The reforms include a free-standing moratorium to protect companies in difficulty and the creation of a new restructuring plan procedure.
Free-standing moratorium
summary of change
Companies are now able to obtain a free-standing moratorium to prevent creditors from initiating enforcement action and allow the company to continue to trade under the control of the existing board of directors without entering into a formal insolvency procedure.
The moratorium is available in circumstances where: (1) a company is, or is likely to become, unable to pay its debts; and (2) an appointed insolvency practitioner (the ‘Monitor’) provides a statement which affirms that, in their view, it is likely that the moratorium would result in the rescue of the company as a going concern. However, any company that is party to a ‘capital market arrangement’ (essentially that the company has issued listed bonds/loan notes in an amount greater than £10m which are guaranteed or secured) will not be eligible for the moratorium.
It is intended that the process to obtain the moratorium will be relatively streamlined – companies will in many cases be able to initiate the moratorium by simply filing documents with the court which state that the conditions set out above are fulfilled. Following filing, the moratorium will come into effect immediately and be in force for an initial period of 20 business days. Directors will have the authority to extend the initial moratorium for a further 20 business days without creditor consent and, subject to the fulfilment of certain conditions, this period can be further extended to last for a period of up to one year with the consent of prescribed thresholds of creditors.
The moratorium applies to both secured and unsecured creditors, and while in force:• no insolvency proceedings can be commenced
against the company;
The Corporate Insolvency and Governance Act 2020: permanent reforms and temporary protections
Insolvency and Restructuring International Vol 14 No 2 September 2020 41
• except with the court’s permission, creditors will be unable to enforce security over the company’s assets (with a notable exception in respect of financial collateral arrangements such as share security or charges over deposits), landlords will not be able to exercise any forfeiture rights and it will not be possible for a floating charge to be crystallised; and
• it will not be possible for creditors to initiate proceedings in respect of certain debts that fall due before (‘Pre-Moratorium Debts’) or during (‘Moratorium Debts’) the moratorium, for which the company will receive a ‘payment holiday’. There are, however, several excepted types of payment which will remain payable and are described in further detail below.
While the existing directors will retain control of the company during the moratorium (the mechanism has been compared to Chapter 11 proceedings in the United States), one of the measure’s key features is the role of the Monitor, whose role is designed to protect creditors’ interests. In addition to the Monitor’s statement on the company’s eligibility for the moratorium, its consent will be required for certain transactions (including granting of new security, asset disposals and payment of certain Pre-Moratorium Debts) and it will have broad powers to request information from the company’s directors.
points to consider
In respect of the eligibility criteria for obtaining the moratorium, the exclusion of companies which are parties to capital market arrangements may have the potentially unintended consequence of excluding a number of companies from using the moratorium on the basis that they have relatively small amounts of bond or loan note financing in place. This will be of particular concern to businesses in the hospitality and retail sectors (which have suffered tremendous financial distress following the imposition of lockdown restrictions and social distancing), many of which have such financing arrangements in place and will be ineligible for the moratorium.
Various categories of payment are excluded from the definition of Pre-Moratorium Debts and Moratorium Debts which qualify for a payment holiday during the moratorium. These include:• debts and liabilities arising under ‘a contract of
other instrument involving financial services’ – this captures lending and interest (both secured and unsecured) and bond/note issuances which are not ‘capital market arrangements’ of the sort that would make the issuer ineligible for a moratorium in the
first place;• wages and redundancy payments;• goods and services supplied during the moratorium;• rent payable for a period falling during the
moratorium; and• the Monitor’s fees and expenses incurred from the
commencement of the moratorium.The company in question will not have a payment holiday in respect of such liabilities, and creditors will be entitled to apply to the court for repayment. Further, the Act provides that such debts must be repaid for the company to be granted an extension beyond the initial 20-day period. The question therefore arises as to whether, in practice, the moratorium grants sufficient flexibility for struggling companies to continue trading without the threat of enforcement by creditors.
The Act places particular emphasis on the Monitor’s role. While the moratorium is intended to facilitate the existing directors’ continued trading of the business, the Monitor is required to exercise a significant degree of judgment throughout the process, including their initial statement on a company’s eligibility. This introduces a degree of subjectivity into the procedure, and it may not always be straightforward for the Monitor to give the statement when considering the inherent uncertainty and unpredictability of restructuring businesses during a (potentially only 20 business days) moratorium period.
New restructuring plan
summary of change
The Act introduces a new procedure which enables companies in financial distress to enter into a restructuring plan with their creditors. While the process will largely mirror the existing English regime on schemes of arrangement, there will be increased scope to impose the restructuring plan on classes of dissenting stakeholders (known as ‘cross-class cram-down’), which aims to address limitations on the ability of companies to cram-down dissenting classes of creditors by using a scheme of arrangement.
To be eligible for the restructuring plan, a company must have encountered, or be likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. In addition, similar to schemes of arrangement, non-UK companies are able to use the plan if they have a ‘sufficient connection’ to the UK (rather than having their centre of main interest in the jurisdiction), raising the prospect of the plan’s use in international restructurings. An eligible company will be able to
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propose a restructuring plan with any of its creditors and/or members in order to ‘eliminate, reduce or prevent, or mitigate the effect of’ its financial difficulties. The plan can be initiated in conjunction with the moratorium described above in order to restrain enforcement action against the company while the plan is proposed and negotiated.
The company, any creditor or shareholder may apply to the court to convene meetings to vote on a plan; although it is anticipated that in most cases the company will make the application. The procedural steps for the plan are very similar to schemes of arrangement and will require that:• the company wil l prepare proposals for a
restructuring plan and designation of the classes into which creditors and shareholders are placed to vote on the plan before applying to court to convene a hearing;
• the court will then hold a convening hearing at which it may convene meetings to vote on the plan;
• creditors and shareholders vote on the plan; followed by• a final sanction hearing, at which the court will
sanction the plan if it is satisfied that it is fair to do so.However:• the court may exclude all members of a particular
class from voting on the plan if it is satisfied that ‘none of the members of that class has a genuine economic interest in the company’. This therefore provides a statutory basis upon which the plan can be used to cram down ‘out of the money’ creditors;
• unlike a scheme, there is no requirement for a majority by number of each class to approve the plan, the intention being to prevent low-value creditors from derailing the proposal’s progress;
• in relation to debts that were covered by a moratorium ending less than 12 weeks previously, the court may not sanction the plan if creditors with a Moratorium Debt or Pre-Moratorium Debt (which is not subject to a payment holiday) are affected by the plan and have not agreed to it; and
• perhaps most significantly, the court will be empowered to sanction the restructuring plan despite it not reaching the required threshold of approval by 75 per cent or more by value of members/creditors in each class. This is a marked departure from a scheme, whereby each class must vote in favour in order for the scheme to be approved. However, the court may only make such an order if satisfied that: (1) none of the members in a dissenting class would be ‘worse off’ than they would be in the most likely alternative scenario if the plan was not sanctioned (the ‘Alternative’); and (2) at least one class ‘who would receive a payment or have a genuine economic interest in the company’ in the event of
the Alternative has voted in favour of the plan by the required 75 per cent majority. In most cases, the Alternative will be administration or liquidation of the company.
points to consider
The reform is commendable for its broad and flexible eligibility criteria, which should be relatively straightforward to satisfy – the Act’s provisions do not dictate the components of a restructuring plan and it could be used to facilitate a wide range of restructurings.
However, while the process is innovative, the court is required to exercise a significant amount of discretion in respect of various aspects of the process which is untypical of other UK insolvency procedures. In practice, it is possible that a company may consider other avenues to achieve its aims without engaging in a potentially time-consuming and court-reliant procedure. Notwithstanding, the ‘cross-class cram-down’ mechanism provides a significant incentive to companies looking to restructure without the risk of having their plans derailed by low-value creditors.
As to the ‘cross-class cram-down’ provisions’ application in practice, the court’s interpretation of the Alternative in each case will be crucial. The court will likely be invited to consider different counterfactual scenarios before concluding on the most likely and making a determination based on valuation evidence provided for the chosen Alternative. While this mechanism advocates a flexible approach to the terms of a restructuring plan, it again highlights the central role played by the courts, which will ultimately be asked to make a determination on the merits of the plan and its fairness to creditors. It may also mean that the final ‘sanction’ hearing for the plan becomes, in certain cases, drawn-out and contentious as creditors attend the process in order to challenge or scrutinise the court’s decision and assessment of the Alternative.
‘Ipso facto’ clauses and supplies
summary of change
The Act prohibits the use of ‘ipso facto’ clauses, which enable a supplier of goods or services to terminate their contracts with a company or accelerate repayments upon such company entering into a formal insolvency process (including the moratorium and new restructuring plan described above). The measure also prevents suppliers from ceasing their provision of supplies to the company in question and is intended to prevent suppliers from making the repayment of pre-insolvency debts a
The Corporate Insolvency and Governance Act 2020: permanent reforms and temporary protections
Insolvency and Restructuring International Vol 14 No 2 September 2020 43
condition of continued supply, which builds upon the UK’s existing regime on the protection of ‘essential supplies’ to insolvent companies which is currently limited to utility, communications and IT suppliers.
When first consulted on this aspect of the reforms in 2018, industry leaders expressed concerns that suppliers would suffer as a result of restrictions on their ability to terminate contracts or continue to provide services where there is a reduced likelihood of payment, particularly in circumstances where the supplier itself is facing financial difficulty. The Act provides protections to address these issues, including: (1) provision for the court to terminate contracts where the ‘continuation of the contract would cause the supplier hardship’; and (2) temporary Covid-19-related exemptions for ‘small suppliers’ until 30 March 2021.
points to consider
The measures do not define ‘supplier’ or ‘supplies’, leaving it open to interpretation as to exactly which counterparties to insolvent companies are prevented from relying on ipso facto clauses. In addition, suppliers which are otherwise deemed to be subject to the provisions will not be prevented from relying on other termination clauses in their contracts with insolvent companies, unless the relevant ground for termination arose prior to the insolvency event in question. It may be the case that suppliers seek to include additional termination rights (such as a right to terminate upon notice) in supply contracts to circumvent the prohibition as a result,
The prohibition includes a broad carve-out in respect of financial services contracts and where either the supplier or company is a person involved in financial services. Lenders, for example, will be permitted to refuse to make further loan advances following an insolvency event of default under a facility agreement. While a positive development for finance providers, the wide-ranging nature of the exemption casts some doubt as to whether the prohibition will be effective in enabling attempts to save struggling businesses.
ConclusionThe Act sends positive signals to directors under immense pressure due to the Covid-19 outbreak and the permanent reforms to UK insolvency law provide additional tools for struggling companies to attempt a rescue of their businesses.
Companies will welcome the time and flexibility granted by the reforms to propose and implement a restructuring proposal of their making. The restructuring plan’s broad eligibility criteria will also enable qualifying overseas companies to utilise the procedure as a part of their wider cross-border restructuring strategy, consolidating the UK’s position as a global leader for insolvency and restructuring solutions.
Paul KeddieSenior counsel, Restructuring and insolvency
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 the co-author of the Insolvency and Restructuring Manual, 3rd Edition, published by Bloomsbury Professional Ltd, 2018 and the 'Directors and Insolvency: Dangers and Duties' and 'England' chapters of The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2019.Email: [email protected]
Liam PrestonTitle: Solicitor, Finance
Liam advises across a range of restructuring and debt finance matters.He has worked on a number of corporate restructurings and acquisitions of businesses facing insolvency issues, acting for clients including entities under financial stress and secured creditors of companies in difficulty.Email: [email protected]
44 Insolvency and Restructuring International Vol 14 No 2 September 2020
Debt buybacks in the distressed contextA debt buyback transaction generally involves the acquisition by a sponsor or a debtor of the latter’s debt in the secondary market (through a private negotiation with selected lenders/bondholders or in the open market, including tender offers in some instances), usually incited by the discount that such debt (corporate loans or bonds) is being sold at.
However, an attractive price may not be the only goal behind these transactions. Among the wide variety of reasons why debtors use this tool to de-leverage, we can find better economic conditions vis-à-vis voluntary prepayments, decreasing financial costs, securing that certain financial covenants are complied with, or avoiding excess cash flow to fall under cash-sweep prepayment provisions.
Furthermore, debt buybacks can be a path for debtors to address the situation of financial distress and reduce polarisation and fragmentation of their capital structure, as well as a mechanism for a sponsor (if contractually allowed to do so) to gain leverage in a pre-restructuring scenario by building a negative control or blocking position in the capital structure.
When facing discussions regarding how to structure a particular restructuring, debtors and sponsors are increasingly considering debt buybacks among the different available options to be implemented. The aim of this article is to provide a legal overview of the key issues that from a Spanish law perspective should be considered when analysing buybacks.
Legal regime
General rules
Debt buybacks are not specifically regulated under Spanish law. Pursuant to the Spanish Civil Code,1 the purchase by a debtor of its own debt automatically cancels/extinguishes the payment obligation (confusion or identity between debtor and creditor). Hence, debt buybacks will normally be allowed to the extent
it is authorised in the underlying documentation and subject to the terms and conditions set forth therein.
While no special rules apply in relation to loans – its cancellation upon repurchase by the debtor or treatment after acquisition by the sponsor will depend on the law to which the loan is subject – the Spanish Companies Act2 does provide some relevant rules in relation to foreign-law governed bonds.
Spanish law will apply to the legal capacity, competent body and conditions of the ‘foreign’ bond issuance, but the relevant law governing such bond will determine the rights of the bondholders vis-à-vis the issuer, the ways to set up collective organisation, reimbursement and repayment regime of the obligations, as well as the right to convert into equity in convertible obligations (within the boundaries of the applicable Spanish corporate rules), which is particularly relevant since recent trends indicate that bonds issued by companies incorporated in Spain are shifting to foreign laws and jurisdictions (among which Ireland, United Kingdom, Luxembourg or the United States – and particularly, New York – are the most common destinations).
In relation to ‘local law’ bonds, the Spanish Companies Act also sets forth that the acquisition by Spanish companies of their Spanish law bonds will imply the cancellation of the debt.
Insolvency law treatment – equitable subordination of specially related persons
The most relevant feature of debt buybacks in Spain comes to light within insolvency. While in principle the acquisition of its own debt by a debtor should not raise legal concerns outside of the applicable contractual framework (tax considerations aside which will not be analysed in this article), the acquisition of debt by the borrower’s sponsor raises instead more issues from a Spanish insolvency perspective.
As a general rule, the Spanish Insolvency Act3 sets forth that claims held by specially related parties (persona especialmente relacionada) to the debtor within an
Debt buybacks in Spain: restructuring and insolvency considerationsIgnacio Buil AldanaPartner, Cuatrecasas, London
Guillermo Ruiz MedranoAssociate, Cuatrecasas, New York
Debt buybacks in Spain: restructuring and insolvency considerations
Insolvency and Restructuring International Vol 14 No 2 September 2020 45
insolvency proceeding shall be equitably subordinated. A specially related party will be connected persons or insiders which hold directly or indirectly:• 10 per cent of the share capital of debtors with
unlisted securities;• 5 per cent of those with listed securities; and• include, among others, companies within the
same corporate group and common partners or shareholders of those companies meeting the referred thresholds.
The special relationship of the debtor and the acquirer based on holding the relevant equity must exist at the time the claim is acquired.
The effects of being considered a specially related party consist of the following:(1) subordination of the relevant claim which will
rank below all other claims of the estate: (i) administrative expenses – which benefit from a cash flow privilege over the claims; (ii) privileged claims – which in turn are divided into special privileged (secured) claims and (unsecured) general privilege claims; and (iii) ordinary claims;
(2) cancellation of any in rem or personal guarantees securing the claim; and
(3) disenfranchised (ie, stripped from voting rights) in an homologation4 scenario or in relation to composition agreements (convenio de acreedores) within a full-blown insolvency (concurso) (in both cases different effects could be extended over the subordinated claim).
Hence, the main concern that a debt buyback transaction faces is the subordination risk. While in other jurisdictions (such as US law) subordination is equitable and depends on the existence of wrongful conduct in the form of illegality, breach of fiduciary duties, fraud, undercapitalisation, or the exercise by the lender of an unreasonable level of control by the debtor; in Spain the character of specially related person (objective determination based on the creditor holding a percentage of the debtor’s equity) will prompt the subordination of the claim.5 As discussed, such subordination risk implies the downgrade of the claim, losing any guarantees or securities it may benefit from and no voting rights within homologation or concurso.
Therefore, while being a mechanism to implicitly de-leverage a capital structure, it is not useful for the sponsor to gain leverage within a negotiation process, as it will have no voting rights and will see its claim subordinated. Moreover, the sponsor’s position therefore will also become illiquid as it will be difficult to sell it in the market to third parties given that subordination of a claim held by a specially related person ‘flows’ with the claim itself (ie, a claim
transferred to a non-specially related person would still suffer from subordination within the two years prior to the insolvency declaration of the borrower6).
Thus, sponsors will need to try to mitigate such subordination risk by, for example, refinancing the outstanding debt (not at par) and attempt to benefit from the better treatment that the temporary Covid-19 measures explained below offer; or exploring alternatives involving an EquityCo/DebtCo structure where the vehicle acquiring the debt is not considered a specially related person. Nevertheless, in general, Spanish law does not seem to favour any of these mechanisms.
Covid-19 new money relief: limited protection to sponsor debt buybacks and interpretative uncertaintiesAmong the different legal measures passed by the Spanish Government in order to tackle the economic consequences the Covid-19 pandemic has brought along, Royal Decree-law 16/20207 has ‘enhanced’ the position of certain specially related persons and facilitated financing by these parties.
In relation to insolvency proceedings filed within two years following the formal declaration of state of alarm (estado de alarma) in Spain (dated 14 March 2020), both: (i) new money granted by specially related persons after the state of alarm declaration; and (ii) those claims into which specially related persons have subrogated following payment of ordinary or privileged claims after the state of alarm declaration, will be considered ordinary claims (and hence will not be subordinated).
From the authors’ perspective, this measure is insufficient as it makes little sense that if a sponsor is willing to get more ‘skin in the game’ and injects money in a company, which eventually turns out to be viable for over two years but then becomes insolvent, that new money claim will be subordinated; while conversely the money injected in the company which initiates an insolvency proceeding within, for example, one year, will be considered an ordinary claim. The logical consequence is that creditors will be forced to grant financings with maturities set below two years, which is far from ideal and could put the viability of companies at risk especially in these uncertain times when it is unclear how long it will take for the economy to recover from the negative impact of the Covid-19 crisis and the lockdown that has resulted from it.
Regarding the latter scenario (subrogation), the rule seems to be referring to the claims which arise as a consequence of the enforcement of a personal guarantee by its beneficiary, which leads to a new claim
46 Insolvency and Restructuring International Vol 14 No 2 September 2020
arising from the guarantor vis-à-vis the original debtor. While the courts still have to interpret this new rule and case law will need to be closely monitored, the Spanish legal market seems to agree on its limited scope, within which debt buy-backs would not be included, and would therefore remain as subordinated if held by specially related persons in insolvency scenarios.
In the authors’ view, debt buy-backs should have been included in the exceptions to the specially related persons’ subordination set out in Royal Decree-law 16/2020, as debt buy-backs are one of the natural mechanisms to address the situation of the debtor’s financial distress to secure the viability of the company and allow for its implicit de-leverage. The role of the shareholder-lender must be reconsidered under Spanish law, as companies are being deprived from a source of financing which may turn out to be essential in distressed situations (more so if it is taken into account that the Spanish new money privilege regime is not ideal in the first place).
Contractual limitationsBesides the statutory framework, contractual limitations may apply in the form of, among others: events of default (eg, a debt buy-back could give rise to an acceleration right of the lender); holding restrictions (eg, a threshold regarding the amount of debt to be held by the sponsor or the debt); assignability limitations (eg, transfers may need to be conducted through a Dutch auction process); or restricted payments/investment covenants.
Hence, one of the keys to performing a debt buy-back transaction is carrying out a thorough analysis of the underlying debt instruments in order to ascertain whether the envisaged acquisition is contractually possible from multiple standpoints (pre-requisites like notifications, amount sought, ratios compliance, etc).
ConclusionWhen performing a debt buy-back in a Spanish situation (essentially, when the debtor is a company incorporated under Spanish law, whether the relevant loan or bond is governed by a foreign law or not) attention should be paid to the contractual framework
and in particular to the legal limitations, covenants and restraints to which such a transaction could be subject.
While a self-debt buy-back acquisition should, in principle, give rise to no difficulties from the legal standpoint (a tax analysis of the particular transaction sought should nevertheless be carried out), sponsors should keep an eye on the subordination risk, seeking expert legal advice and exploring alternative structures in order to avoid subordination and the negative effects that can result from it.
Notes1 Real Decreto de 24 de julio de 1889 por el que se publica el Código
Civil.2 Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba
el texto refundido de la Ley de Sociedades de Capital.3 Ley 22/2003, de 9 de julio, Concursal. An amendment to the Spanish
Insolvency Act (Real Decreto Legislativo 1/2020, de 5 de mayo, por el que se aprueba el texto refundido de la Ley Concursal) will enter into force in the coming months (1 September 2020), repealing most of the Act currently in force (but not the Covid-19 relief measures). Such amendment does not include new rules which could alter the subject hereby analysed.
4 Homologación, occasionally referred to as the ‘Spanish scheme of arrangement’, consists of a court sanction of a workout negotiated out of court by a borrower and its lenders, with the purpose of restructuring the borrower’s financial debt.
5 There is still no settled case law on the subordination of a claim acquired by a specially related person to the debtor in the secondary market (ie, a claim that is born ‘untainted’ – originally held by a third party – and is later acquired by a connected party). We understand that the arguments to sustain the non-subordination of such a claim would be weak.
6 The amendment to the Spanish Insolvency Act referred to in n 3 above specifically clarifies that no voting rights will be granted in homologation to the acquirer of a claim from a specially related person.
7 Real Decreto-ley 16/2020, de 28 de abril, de medidas procesales y organizativas para hacer frente al COVID-19 en el ámbito de la Administración de Justicia.
Debt buybacks in Spain: restructuring and insolvency considerations
Ignacio Buil is a partner at Cuatrecasas, Head of the London office and a member of the Finance Practice. He has extensive experience in financing and debt-restructuring transactions (in and out of court) and in negotiating financing and refinancing agreements involving a wide range of capital structures, including refinancing LBOs, as well as in project, real estate and corporate finance. He has been recommended by several directories and has also published several articles in Spanish and international law business journals. He is qualified to practice in Madrid and New York.Guillermo Ruiz is an associate at Cuatrecasas’ New York office. He has also been based in the London, Madrid and Barcelona offices. He is an LLM graduate (NYU – class of 2019), qualified to practice in Madrid and is pending admission from the NY Bar.
Insolvency and Restructuring International Vol 14 No 2 September 2020 47
IntroductionClarity, as regards payouts to creditors, remains the fulcrum of success of any insolvency regime globally. One of the critical considerations which determines the payouts for financial creditors is the ranking and priority which a secured creditor enjoys. The ranking of a secured financial creditor vis-à-vis an unsecured financial creditor and the ranking of secured financial creditors amongst themselves determines the quantum of payouts for secured creditors in an insolvency or a liquidation scenario.
Under the Indian insolvency regime, the distinction between a secured and unsecured creditor stands categorically recognised by the Honourable Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta and Others1 (the ‘Essar Insolvency Case’). This is in the context of priority in distribution of resolution proceeds under the comparatively new insolvency regime brought up by the advent of the Insolvency and Bankruptcy Code 2016 (the ‘Code’). However, the distinction between secured creditors holding first charge and second charge or exclusive charge and pari passu charge has not yet been clearly fleshed out and remains an area where creditors in an insolvency regime are still taking differing views on distribution of proceeds.
The Honourable Supreme Court in the Essar Insolvency Case, also opined that financial creditors, holding security interests are secured creditors. It was further said that their security interests must be protected to ensure that they do not enforce their security in separate legal proceedings, but instead are incentivised to ensure successful turnaround of the corporate debtor within the framework of the Code. Separate classes of financial creditors can be divided into different classes and not one uniform class, so that there may be a real equality at the stage of distribution of resolution proceeds amongst financial creditors,
that in essence will be equality among equals. Before the Essar Insolvency Case, the definition of ‘financial creditor’ and ‘financial debt’ under section 5(7)2 and (8)3 of the Code was interpreted erroneously to hold that all financial creditors constitute a single unified class and there cannot be any distinction based on the security interest held by a creditor, let alone the distinction based on nature of the security interest held by secured creditors.
We have seen the development of this jurisprudence under the current insolvency regime in India through various judgments passed by the Honourable Supreme Court and Indian insolvency tribunals, ie, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). However, the issue of inter-se priority amongst secured financial creditors still remains an area of discussion leading to judicial dichotomy on the subject. This article addresses this issue and discusses how different ranking charge holders are a ‘class within a class’ and therefore their quantum of payouts in any resolution should be worked out based on the charge each secured financial creditor holds. This, in the authors’ view, would be the approach leading to rightly ‘balancing the interest of all stakeholders’, which is a key objective of the Code.
Relevant provisions of the Code The priority rights of a secured financial creditor under section 53 of the Code should be considered and cannot be ignored for determining the rights of a secured financial creditor in a corporate insolvency resolution process (CIRP). The Indian Government, through an amendment brought by the Insolvency & Bankruptcy Code (Amendment) Act 2019 (the ‘Amendment’), amended the Code to include the prescription of payment of minimum liquidation value
Inter-se priority amongst secured creditors under the insolvency regime
in India: striking the right balanceAvikshit Moral
Partner, Juris Corp, [email protected]
Ashish Mukhi Principal Associate, Juris Corp, Mumbai
Kamlendra Pratap Singh Associate, Juris Corp, [email protected]
48 Insolvency and Restructuring International Vol 14 No 2 September 2020
to a financial creditor who has not voted in favour of a resolution plan. The Code was further amended to include a provision (section 30(4)) which states that while determining the feasibility and viability of the resolution plan, the manner of distribution of resolution proceeds to financial creditors will take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53 of the Code, including the priority and value of the security interest of a secured creditor.
It is therefore evident that the Code incorporates the principle of honouring priority and value of security amongst creditors (especially financial creditors) while determining payouts to them.
Problematic judicial interpretation The NCLAT, in a matter involving the CIRP of Jyoti Structures Ltd, rejected the claim of a sole secured charge holder that it is entitled to the liquidation value equivalent to its value of security. The NCLAT, relying on the principle that ‘all secured creditors are to be treated equally’, upheld pro-rata payments to all secured creditors made in the CIRP. The Supreme Court refused to intervene with the decision of the NCLAT. Notably, this judgment was passed prior to the Amendment.
However, the Honourable Supreme Court in Essar Insolvency Case (above), clarified the distinction between a secured and unsecured creditor. The Supreme Court also recognised that there can be a class within a class, that is, different classes of secured financial creditors, however, it did not dwell into the issue of inter-se priority amongst secured creditors.
National Company Law Tribunals (NCLT) leading the way In 2018, NCLT, Kolkata Bench in State Bank of India v M/s Adhunik Alloys & Power Ltd 4 held that the creation of classes amongst financial creditors is a well-known phenomenon under the law and unsecured financial creditors cannot be equated with financial creditors who hold security interests. It was further held that classification of financial creditors considering their security interest cannot be held illegal.
The NCLT, Ahmedabad Bench in Technology Development Board v Mr Anil Goel and Others5 held that the ranking of secured creditors would be maintained during distribution of liquidation proceeds. NCLT was examining a plea of ‘equal treatment’ of a second charge holder in distribution of proceeds from the sale of liquidation estate.
The NCLT rejected the plea and stated that the provisions relating to priority in ranking under the Code are premised on parity and proportionality. The idea of proportionality is only as far as claims of ‘similarly ranked’ creditors are concerned. While explaining the concept of first charge and second charge the NCLT observed that a second charge holder has a subsequent charge over the remainder of the assets of the company, which remains after settling the claims of first charge holder and therefore the charges are sequential and not proportional.
Recently, the NCLT, Ahmedabad Bench in SKE Projects Pvt Limited v Jaihind Projects Limited6 passed a similar order. In this case, the NCLT recognised the right of Axis Bank Limited, a dissenting financial creditor, to be paid liquidation value on account of holding an exclusive charge over an asset of the corporate debtor.
The NCLT stated that a plain reading of section 30 of the Code makes it clear that Axis Bank should be paid minimum liquidation value keeping in view the sole charge (and not pro-rata payment along with all secured creditors).
Cardinal principle on treatment of security interests under Indian lawThe Code cannot be intended or construed as intending to override established principles of the law of mortgages and, in any event, there is no apparent or actual inconsistency between the said laws and the provisions of the Code. The Honourable Supreme Court in ICICI Bank Ltd v Sidco Leathers Ltd and Others7 has held that:
‘Section 529-A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read thereinto things, which the Parliament did not comprehend. If the Parliament while amending the provisions of the Companies Act intended to take away such a valuable right of the first charge holder, we see no reason why it could not have stated so explicitly.’
Although section 53 of the Code provides for the respective rights of the secured creditors vis-à-vis unsecured creditors, it does not envisage respective rights amongst the secured creditors, and for that purpose, we need to be guided by the Transfer of Property Act 1882, more particularly, section 48, which stipulates that the claim of the first charge holder shall prevail over the claim of the second charge holder. Even under the Report of the Insolvency Law Committee,8 it was noted that inter-creditor agreements should be respected under the CIRP.
Inter-se priority amongst secured creditors under the insolvency regime in India: striking the right balance
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ConclusionThe principle that ‘similarly situated creditors should be treated similarly’ has been accepted by the courts to be the cardinal principle while dealing with rights of the creditors, amongst themselves. The authors are also of the view that this principle forms the bedrock for inter-se treatment of creditors which hold pari passu charges. However, since the inception of the Code, various orders have applied this principle differently when dealing with the question of treatment of different classes of secured creditors.
In the authors’ view, the correct approach is to honour the ‘pre-insolvency entitlements’ of secured financial creditors during an insolvency resolution, giving due regard to ranking and value of security of each of the secured financial creditors. This approach, would pass the muster of law, specifically on the touchstone of the principles on which the Code is based. This approach will further bring about the right balance in insolvencies where secured financial creditors holding different priority charges are involved. The interest of such secured financial creditors being safeguarded in the manner that their quantum of payouts under the corporate insolvency resolution process would get protected at least to the extent of the ‘security interest’ held by it. This would further ensure that (secured) financial creditors, who are tasked with responsibility of finalising and approving resolution plans of a corporate debtor, are incentivised to vote in favour of resolution of a corporate debtor, thereby meeting the foremost objectives of the Code of promoting resolution, maximising the value of the assets of the corporate debtor and balancing the interest of all stakeholders involved.
The Honourable Supreme Court through the Essar Insolvency Case (above) very clearly established the principles of equitable treatment of similarly placed creditors and the same principle was also included in section 30(4) of the Code by the Amendment. However, the Essar Insolvency Case did not flesh out the distinction of different levels of secured creditors leaving some scope of further clarity. Orders passed by the NCLT, Ahmedabad, upholding the sanctity of inter-se priority among secured creditors is an encouraging sign and hopefully the NCLAT and the Honourable Supreme Court upholds the validity of such reasoned orders
establishing the importance of the pre-insolvency bargains done by the different secured creditors while extending the loans to the entities. Even in the absence of any further definitive finding by any court or tribunal, the authors believe that there is enough jurisprudence established to argue and have the right and priority of a senior charge holder or a sole charge holder upheld under Indian insolvency laws.
Avikshit Moral is a Partner at Juris Corp and has more than ten years of extensive experience in the corporate law space. He heads the real estate and corporate commercial practices at Juris Corp. He has extensive experience in the fields of corporate restructuring, joint ventures, structured transactions involving various laws, conveyancing, redevelopment and corporate commercial laws.Ashish Mukhi is a Principal Associate at Juris Corp. He has been involved in handling matters on varied issues in various forums in Delhi. He has been involved in matters relating to debt restructuring, strategic debt restructuring and corporate insolvency resolution processes. Ashish advices on pre-litigation strategy for stressed and non-performing assets and insolvency related issues.Kamlendra Pratap Singh is an Associate at Juris Corp. He has been involved in matters relating to commercial and banking disputes and advisory aspects including pre-litigation strategy for stressed and non-performing assets and insolvency related issues. He has also been involved in handling matters on varied issues in various forums in Delhi.
Notes1 2019 SCC OnLine SC 1478.2 ‘Financial creditor’ means any person to whom a financial debt is owed
and includes a person to whom such debt has been legally assigned or transferred.
3 ’Financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes: (i) money borrowed against the payment of interest; (ii)any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (iii) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (iv) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (v) receivables sold or discounted other than any receivables sold on non-recourse.
4 CA (IB) Nos 1086 & 1092/KB/2018 in CP (IB) No 387/KB/2017.5 IA No 514 of 2019 in CP (IB) No 04 of 2017.6 IA No 593 of 2019 in CP (IB) 172 of 2018.7 [2006] 67 SCL 383 (SC).8 March 2018, Ministry of Corporate Affairs, Government of India.
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The Argentine scenario Although relieved by the agreement reached with private creditors in August this year, the weight of the remaining Argentinian debt in default with the International Monetary Fund and other international credit organisations (more than US$ 71bn) has aroused a deep concern in local companies about its impact on their own debt issues particularly those denominated in foreign currency and governed by foreign law.
In addition, the progressive devaluation of the Argentine peso, the high levels of inflation, the increasing exchange rate restrictions, the strong tax pressure and the growth of labour costs, together with the severe impact of the Covid-19 pandemic in the vast majority of national industries due to the drastic fall of their incomes, has caused, or will cause, a serious financial stress in most of the economic sectors (oil, real estate, retail, energy, etc), meaning that many Argentine companies have started, or are planning to start soon, the restructuring of their debts.
Beyond those special proceedings applicable to certain entities (such as financial institutions and insurance companies), debt restructuring under Argentine law may be conducted in three different ways, namely: private negotiations, out-of-court proceedings (Acuerdo Preventivo Extrajudicial (APE)) or reorganisation proceedings (concurso preventivo – similar to Chapter 11 of the United States Bankruptcy law), being bankruptcy excluded since it is not oriented to reorganise the liabilities of the debtor but to pay them through the sale of assets which entails the cessation of the debtor’s business.
Given that a significant part of the Argentine stock of corporate debt is held by foreign creditors, while there are numerous foreign shareholders of local companies experiencing the financial stress situation described above, it is useful to review the main aspects of such mechanisms in order to evaluate the possible debt re-profiling scenarios that could appear in the near future.
This article describes the most relevant features of each modality in order to show their main differences.
Private restructuringThis has been the mechanism preferred by most of the largest Argentine companies since the crisis of 2001 to date since it implies a private negotiation between debtors and creditors without any judicial intervention.
Private restructuring is generally carried out before default or immediately afterwards since at that moment is more likely for companies to obtain significant delays, capital withdrawals or interest reductions. On the contrary, when their financial situation begins to improve, or the sector of the economy to which they belong starts to rebound, therefore making a foreseeable immediate improvement in their situation, concessions to be made by companies are greater due to the current or potential increase of their payment capacity.
As creditors who refuse to take part in the negotiations (known as ‘holdouts’) preserve their rights to bring legal actions against the debtor, including the right to petition for bankruptcy, for this alternative to be effective, the portion of debt to be restructured must be substantial enough to allow the debtor to finance payment or to continue litigating against holdouts.
If the debt consists of bonds or other securities placed on the capital market, the debtor can choose to modify its terms and conditions or to swap them. According to the indenture or, failing that, the applicable law, amendment may require unanimity or approval of a high majority of bondholders. As it can be difficult to reach these majorities, debtors usually resort to the debt swap. Even though debt swap is used when the indenture includes collective action clauses. Otherwise, companies prefer the APE, although certain entities such as banks and financial entities cannot access it or the concurso preventivo so that debt swap becomes the only instrument to restructure their capital market debt. Bonds swaps may contain a request for modification of the old bonds (consent solicitation), in order to make them less attractive and thus encouraging the swap by eliminating, for example, certain covenants or guarantees of old bonds. The proposal of debt swap may also be combined with the repurchase of a portion of
Corporate debt restructuring under Argentine law
Martín Torres GirottiPartner, Bomchil, Buenos Aires, Argentina
Corporate debt restructuring under Argentine law
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the old bonds at a fixed price, or through an auction whereby bondholders offer the price at which they are willing to sell their bonds to the issuer with a minimum and a maximum price.
If the restructuring is bank debt, a steering committee is usually formed, not to formally represent the creditors, but rather to order them internally in order to align their interests so as to make the negotiation with the debtor more efficient. The steering committee is generally responsible for coordinating the exchange of information between the parties, carrying out the due diligence, conducting negotiations, etc.
Once the committee is formed, it is customary to sign a detailed term sheet regarding the due diligence, the negotiation and the potential agreement as well as a standstill or forbearance agreement whereby creditors undertake not to pursue their individual claims for a certain period of time or under certain conditions, so that the negotiation can proceed without frights, pressures or surprises.
Besides the steering committee, the debtor and their respective legal and financial advisors, it is usual to see the intervention of an independent auditor appointed by mutual agreement who collaborates in the due diligence process to establish the current and future financial situation of the issuer in order to determine the terms of a sustainable re-profiling agreement of debt.
If the negotiations move forward successfully, a definitive restructuring agreement is signed so that the new debt profile is sustainable within the framework of the various possible scenarios of economic-financial evolution of the debtor. Although the restructuring alternatives agreed by debtors and creditors may be infinite, in general, they consist of capital reductions and interest forgiveness, not so in the capitalisation of debt or the delivery of equity.
The agreement is only binding for the contracting parties without projecting effects to third parties. Therefore, it requires a high majority, close to unanimity of creditors, in order to reduce to a minimum the number of holdouts whose credits in the original terms must be attended and thereby to minimise the risks of seizures or bankruptcy requests.
The APEThe APE consists of a private restructuring agreement that is negotiated out of court and that is submitted to judicial approval once approved by a double majority represented by more than half of the unsecured creditors (majority of people) who represent at least two-thirds of the unsecured liability (majority of capital). Therefore, the court only intervenes to verify the existence of said majorities, the compliance with formalities and
eventually to determine whether the agreement (whose content is freely established by debtors and creditors) is abusive, discriminatory or fraudulent as well as to assess any contest filed by non-consenting creditors, which may be made on very limited grounds.
The APE can be implemented as a direct procedure or combined with a private debt swap offer in such a way that those who accept the swap agree to the APE and, once the latter is approved, the swap becomes mandatory for all other creditors including those who did not accept the proposal.
Different from concurso preventivo, which includes all creditors whatever their nature (ie, financial, commercial, labour, tax, etc), the APE generally includes only financial creditors and eventually commercial creditors, although nothing prevents from including all the creditors which nevertheless makes negotiations and possibilities of reaching an agreement more difficult.
As in the case of private restructuring, the debtor keeps full administration of his assets since a receiver is not appointed. However, the main advantage of APE vis-à-vis private restructuring is that once approved, the agreement produces the same effects as an agreement reached in a concurso preventivo; that is, it suspends all legal action relying on credits existing before filing for approval and the terms of restructuring approved by the court applies to all credits existing before the approval, even those that did not participate in the negotiation or voted. If the agreement is not approved, it remains fully valid between the executing parties unless otherwise agreed.
In comparison with concurso preventivo, APE presents the following advantages:• It is not necessary for the debtor to be insolvent, but it
is enough for him to go through general economic or financial difficulties. Consequently, it is a procedure that can be implemented before the default of payments, which generates greater possibilities of success than once insolvency is declared.
• The process is shorter, more agile and simple. It is also cheaper since: (i) there is no receiver collecting fees: (ii) the attorneys’ fees are set upon the tasks actually performed (which are less than in a concurso preventivo) and not on the value of assets or liabilities involved; and (iii) the court tax is also lower.
• It is more discreet and less damaging to the reputation of the debtor since the concurso preventivo usually leaves the stigma of insolvency which often affects the possibility of recovering the credit and reintegrating normally into businesses.
• If the approval of the APE is denied, the debtor is not declared bankrupt and nor does the cramdown process start but he is still entitled to file for concurso preventivo.
• There is no receiver or creditors’ committees to control the debtor during the process.
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On the contrar y, APE presents the following disadvantages vis-à-vis the concurso preventivo:• As negotiations with creditors are carried out without
judicial intervention, holdouts can seize assets or bring legal actions to put pressure on negotiations or to collect their credits in better conditions than the rest. To avoid this, debtors usually request judicial precautionary measures aimed at protecting the negotiations in progress, proving the existence of high majorities that allow anticipating that the necessary majorities for the approval will be obtained if negotiations are allowed to continue without this type of pressure.
• Interest of credits existing prior to filing the request for the APE approval are not suspended without prejudice to what is agreed with creditors for the case of approval (for example, that such interest will be paid in full or in part, or that they will not be paid).
• Although information and documentation to be filed along with the request for approval is more limited than that which must be filed in a concurso preventivo, it has to be more accurate and complete since there is no receiver to control it.
• Different from the concurso preventivo, the sole approval of the APE does not produce the novation of the existing credits unless an express clause is included in that sense.
According to several precedents from the New York courts, an APE approved in Argentina is enforceable under the US bankruptcy law.
The concurso preventivoDifferent from private restructuring and APE, concurso preventivo is a more complex, expensive and long-lasting proceeding that is held entirely before the court, which has a deeper intervention throughout the process with the assistance of a receiver.
The debtor must be insolvent and the process is directed to allow it to continue its business after restructuring.
Filing for concurso preventivo requires fulfilling many more requirements than APE while the information and documentation to be submitted is also higher.
Creditors must evidence their credits before the receiver within the deadline set forth by the court in the opening resolution which also: (i) orders a general injunction forbidding the debtor from disposing of any of his assets; (ii) orders the registration of the reorganisation proceedings in the relevant public registry; and (iii) appoints a temporary creditors committee formed by the three largest unsecured creditors.
A creditor whose claim is payable outside of Argentina must demonstrate the existence of reciprocity rules with the country where the credit is payable, meaning that
the bankruptcy law of the place of payment does not discriminate against creditors holding claims payable in Argentina if such creditors file a proof of claim in the foreign insolvency proceeding.
The debtor keeps management of its business with specific prohibitions and restrictions and under the supervision of the receiver and the creditors committee. Consequently, he must obtain court approval – with prior notice to the receiver and the creditors committee – prior to engaging in activities which are deemed to exceed the ordinary course of business as well as certain material transactions.
Commencement of the reorganisation proceeding prevents claims and bankruptcy requests from unsecured creditors existing prior to the petition. It also stops the accrual of interest on unsecured debts post-petition.
The admissibility of each creditor to the proceeding is decided by the court upon the non-binding advice of the receiver. Rejection of credits may be reviewed through ancillary proceedings.
Based on the court resolution regarding the admissibility of credits, the debtor is entitled to submit a proposal to classify creditors so that different restructuring proposals can be made to each category.
The restructuring proposal must be filed by the debtor within a legal deadline. Likewise, approvals to the proposal must be submitted within the time period set forth by the law (which may be extended by the court) under penalty of bankruptcy or cramdown as it may correspond.
Different proposals may be negotiated with the categories in which the creditors have been divided. The debtor can choose from a wide range of options to include in the restructuring plan which involves any solution that can be legally implemented such as discount, refinancing of debts, or a combination of both; the restructuring of the debtor’s business structure, among others. The majorities required are the same as those mentioned for APE and they must be gathered in each category of creditors to whom a restructuring proposal was made.
If the majorities are reached, the court can approve or reject the agreement. If the proposal is approved by the court, the restructuring plan becomes automatically effective and the reorganisation proceeding ends without the creditor being declared bankrupt. On the contrary, if the proposal is not approved, the concurso preventivo terminates and the debtor will be declared bankrupt unless a cramdown procedure is authorised.
The restructuring agreement approved by the court becomes enforceable against all unsecured creditors existing prior to filing and their credits are novated so that the original cause of them is definitely extinguished and substituted by the terms of the agreement, even if the debtor fails to comply and is made bankrupt.
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Concurso preventivo ends once the measures proposed by the debtor to ensure the fulfilling of the restructuring plan are complied with. The injunction restricting the debtor’s disposition of assets will remain until all obligations stemming from the agreement are met except where the creditors expressly agree otherwise, or the agreement regulates this matter differently.
Concurso preventivo as an instrument for debt restructuring allows the debtor:• to reduce his liabilities as a consequence of the
approved agreement;• to reduce liabilities as a consequence of not having
admitted certain credits by the court;• to reduce interests;• to extinguish credits existing prior to filing for
concurso preventivo that are not claimed within two years after said filing; and
• to refinance tax debts through payment facilities and lower interest plans than usual.
As explained above, many of these effects can be also reached through the APE in a shorter time and lower cost proceeding.
Bills to amend the Argentine bankruptcy lawAs a consequence of the Covid-19 pandemic and the aggravation of the serious pre-existing economic conditions that it generated, numerous Bills to amend the Argentine bankruptcy law have been presented to the National Congress both in relation to the APE and the concurso preventivo.
In general, those bills foresee:• special out-of-court regimes for debt restructuring of
individuals and small companies made simpler and faster than the APE with the assistance and direction of a negotiator;
• extension of deadlines to obtain creditors’ consent with restructuring proposals and to comply with approved agreements;
• lifting of the prohibitions to re-file for concurso preventivo before the deadlines provided by law;
• special public financing to debtors in the restructuring process;
• temporary suspension of bankruptcy requests and pending executions;
• possibility of renegotiating approved but defaulted restructuring agreements.
At the time of writing in August 2020, none of these proposals had made significant progress and are still under review of the National Congress. However, on 31 July 2020, the House of Deputies passed the Act on the Promotion of the Economic Activity in
the framework of the Public Sanitary Emergency Coronavirus Covid-19 – Emergency for Bankruptcy and Reorganisation Proceedings, which proposes certain transitory amendments to the current bankruptcy law as a temporary relief while the above-mentioned Bills are considered in depth.
In substance, the Act:1. Declares the emergency, until 31 March 2021, of:
(i) all persons (legal and individuals) currently being subject of reorganisation proceedings and APEs; and (ii) all persons filing for reorganisation proceedings or regarding whom a bankruptcy liquidation order is requested, in both cases, as from the enactment date until the date mentioned before.
2. Until 31 March 2021, and regarding the above mentioned persons, it establishes:(a) The suspension of the terms of the exclusivity
period, ordering the courts to set new dates. In the reorganisations proceedings filed as from the enactment of the law, the legal period to obtain the agreement of creditors to the reorganisation plan (which is currently of 90 days with the option to be extended for 30 more days) shall be of 180 days with the option to be extended for 60 more days.
(b) The automatic suspension as from the enactment of the law of:(i) Execution proceedings of any kind
of guarantee of financial obligations, including the execution of guarantees against guarantors, co-debtors, and other liable parties. This stay shall be applicable to guarantors and third parties obligors even if they have not filed for reorganisation proceedings.
(ii) All court and out-of-court auctions, including mortgages, all type of pledges and the ones set forth in the Leasing Law No 25,248.
(iii) The statute of limitation term of credits and their execution against guarantors, co-debtors and other liable parties.
(iv) The bankruptcy liquidation requests, except those filed against human persons who do not develop economic or business activities. However, in this case, judges shall adopt measures conducive to the rehabilitation of such debtors and the protection of their dignity and their family group.
(v) The term to comply with the obligations emerging from court or out-of-court reorganisation approved plans is
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extended for one year as from the original due date. The outstanding unpaid instalments arising from such plans shall be payable as from the end of the emergency situation (1 April 2021).
(vi) New attachments on bank accounts of the persons mentioned in item 1 are forbidden, except for labour or maintenance credits. This prohibition aims at protecting the assets of a company in reorganisation regarding unpaid post-filing obligations.
3. Finally, it is established a reduction of the court tax fee to be paid in case of court confirmation of a reorganisation plan corresponding to such proceedings reached by the declaration of emergency. Such fee shall be calculated taking as a basis the total amount of the approved reorganisation plan, with its haircuts, without computing the secured creditors, unless they are included in the plan.
The bill has been sent to the Senate for its consideration.
ConclusionsArgentine law sets forth multiple debt-restructuring mechanisms.
The choice of any of them will depend on the particular circumstances of each case and will be transcendental not only for the subsistence of companies but also for their employees, suppliers, creditors and clients, since the magnitude of the Argentine crisis involves not only the individual interest of each debtor and creditor but the interest of the national economy as a whole.
Therefore, in the current serious circumstances it is desirable that the mechanisms currently in force, or any others that may be implemented in the future, allow debtors and creditors to agree on the solution to the fulfilment of their commitments in order to recreate the confidence that is needed for investors to return to Argentina in benefit of the local business economy.
Board of directors’ duties of care and loyalty Under Swiss law, the board of directors can delegate the management of the company. However, certain non-transferable and inalienable duties always remain with the board of directors, in particular, the strategic and financial overall management of the company.
The board of directors performs its duties in a standard leadership cycle by planning the strategy and giving management the necessary directives, by monitoring and controlling the management and, if necessar y, inter vening and adjusting the organisation and strategy. Under normal circumstances, meetings held at regular intervals
Duties of a Swiss subsidiary’s directors on the verge of a Covid-19 induced
insolvencyBenedict F Christ
Partner, VISCHER, Zurich, [email protected]
The global lockdowns in the wake of the coronavirus pandemic have caused turnovers to crash and plunged the world economy into an unprecedented crisis. If a Swiss company’s board of directors fails to respond adequately to this crisis, its members risk becoming liable. The situation for the members of the board of a Swiss subsidiary is even trickier as they walk a tightrope if the interests of the Swiss subsidiary do not coincide with those of the group. This article discusses the ten most important questions regarding the conflicts between the interests of a Swiss subsidiary and the group under the threat of insolvency following the Covid-19 pandemic.
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(for instance, four times per year) are sufficient to properly perform these duties.
For a vast majority of companies, the corona crisis is trashing all planning. In industries subject to the mandatory shut down (such as in the retail sector, the travel industry or the catering industry) business has collapsed. Even in industries without shut down, loss of customer orders or interruption of supply chains slow business massively. It is unclear what lasting impact the crisis will have on businesses.
In view of these challenges, the board of directors must radically adapt its leadership cycle. They must get information more frequently and board meetings must be held on an impromptu basis and be followed up by meetings at shorter intervals. All members of the board of directors must be available at short notice. The board’s chairperson should initiate this acceleration of the leadership cycle. However, if the chairperson fails to act, each member of the board of directors is well advised to be proactive and request the chairperson to provide all available information and to promptly convene a meeting.
Issues on which a Swiss company’s board of directors should focus during the corona crisisIn the corona crisis, the company’s liquidity should be the board’s primary focus as most companies are suffering a slump in turnover while costs remain. In view of the massive cash drain, many companies will be on the verge of insolvency within a short time unless countermeasures are taken. Thus, the board of directors must regularly review the management’s liquidity planning and evaluate and decide if the measures taken to control the cash drain are appropriate.
The most effective measures are often reduced working hours and emergency loans. Others include contract adjustments, lease reductions, tax reliefs or mass dismissals. The board of directors should carefully examine all possible measures and ensure that those selected are promptly implemented. If the management seems overstrained or is not up to the task, the board must take action itself, for instance, by having the chairperson or another board member assume an active role in the management.
Considerations regarding over-indebtedness and restructuring measuresIn the event of an imminent over-indebtedness, the board of directors must act immediately, lest the directors become personally liable. A company is over-indebted if the company’s assets, neither as
a going concern nor at liquidation values, cover the company’s liabilities. If there is a threat of over-indebtedness, the board must have an audited interim balance sheet prepared. If this shows that the company is, in fact, over-indebted, the board of directors must file for bankruptcy or take restructuring measures.
So far, the corona crisis has mainly resulted in liquidity problems for Swiss companies, though, it is likely that balance sheet problems and over-indebtedness will follow, triggering the board of directors’ obligation to take restructuring measures.
In such cases, the board of directors must act nimbly and vigorously. Various options must be examined in short time, negotiations must be conducted with a multitude of parties and the solution selected has to be implemented quickly. This will be a tremendously challenging and stressful time for the board of directors. In order to mitigate this, depending on the financial situation of the company, it is advisable to evaluate possible scenarios and restructuring measures as part of a contingency plan well in advance.
Possible consequences of a breach of directors’ duties under Swiss lawThe members of the board of directors could become liable for damages in the event of a breach of their duties. The board members and all persons involved in the company’s management are liable for any loss or damage arising from any intentional or negligent breach of their duties. Breaches of certain directors’ duties could even result in criminal prosecution.
In particular, the board of directors may be held liable if it fails to make decisions, shows a lack of commitment or in case of conflicts of interest. Even if a decision of the board subsequently proves to be wrong, if such decision has been taken as part of a proper decision-making process, based on adequate information and such decision seemed reasonable at the time, a Swiss court will not hold the board liable for breach of directors’ duties.
Group dilemma and interests that a Swiss subsidiary’s board must safeguardMany companies in Switzerland are part of a group. As subsidiaries, they belong to a larger whole and sometimes heavily depend on other (often foreign) group companies; often they could hardly function without support from the group.
Unlike other jurisdictions, Switzerland does not have specific rules governing groups of companies.
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Under Swiss law, each company is considered an independent, standalone entity. Thus, in principle, a Swiss subsidiary’s board of directors must exclusively act in the best interests of such Swiss subsidiary, without taking into account the interests of the group or other group companies. This cannot be changed by way of agreement. Therefore, board members of a Swiss subsidiary are often in a latent dilemma. The dilemma is particularly acute when a board member simultaneously holds a leadership position in the Swiss subsidiary and another group company, or if a Swiss subsidiary is subject to strict guidelines and instructions from the parent company.
In normal times (for instance, before the corona crisis), the group dilemma is usually negligible for the Swiss subsidiary’s board because the interests of the subsidiary and the group are aligned and, the group would typically support the subsidiary if financial difficulties arose.
Dealing with the group dilemma in the Covid-19 crisisThe board of a Swiss company must always act in the best interests of the company. This applies equally to all the Swiss subsidiaries of a group and is of particular importance if the Swiss subsidiary or other group companies are on the brink of illiquidity or over-indebtedness. In this situation, the interests of the individual group companies may diverge. In particular, the grant of loans to the parent company or affiliates as well as participating in a cash pool becomes tricky for a Swiss subsidiary (see below). Nevertheless, according to a recent Swissair judgment of the Swiss Federal Supreme Court, a Swiss subsidiary’s board of directors may, under certain circumstances, also take into account the interests of the group if this is also beneficial to the Swiss subsidiary.
When weighing up the interests involved, the board of directors is walking a tightrope. It is therefore advisable for the board to seek professional advice.
Conditions under which a subsidiary can grant loans to other group companies There are generally no restrictions on loans from a Swiss subsidiary to a parent company or the parent’s affiliates (so-called up- or cross-stream loans) if they are granted at arm’s length. Up- or cross-stream loans which are not at arm’s length must be limited to the amount of the subsidiary’s freely distributable equity reserves.
As a rule of thumb, an up- or cross-stream loan meets the arm’s length test if a third party (eg, a bank) would
also grant the loan on the same terms. The main criteria for the at arm’s length test are the borrower’s credit rating and whether any securities are granted, but the loan amount, the loan’s term and the termination rights are also of importance.
In a landmark decision in the context of the Swissair bankruptcy, the Federal Supreme Court indicated in an obiter dictum that it is questionable whether unsecured up- or cross-stream loans can ever actually be at arm’s length. In another more recent Swissair-related decision, however, the Supreme Court revisited this point and stated that, depending on the circumstances, unsecured loans could be at arm’s length if the borrower has a good credit rating.
In the current Covid-19 situation, the borrower’s credit must be reviewed regularly. If the borrower’s credit deteriorates, up- or cross-stream loans should only be granted if they are secured or if they are limited to the amount of the subsidiary’s freely distributable equity reserves. With regard to existing unsecured up- or cross-stream loans, the subsidiary should consider whether to exercise any rights under the respective loan agreements, such as adjustments or early termination.
Participation by a Swiss subsidiary in a cash pool In a typical cash pool arrangement, all group companies participate in an arrangement under which all cash will be transferred from the group companies on a regular (often daily) basis to a master account operated by one group company, the cash pool leader. Similar to a current account, each group company has a credit (or debit) balance with the cash pool leader which changes daily. Having a credit balance is basically the same for a group company as granting a loan to the cash pool leader, and therefore the same due diligence requirements and considerations apply to cash pools as to other loans. If the requirements for loans are met (see above), participation in the cash pool is permitted.
Because the amount lent under a cash pool arrangement fluctuates constantly, the solvency of the cash pool leader must be monitored on an ongoing basis, especially during a crisis such as currently with Covid-19. If repayment appears at risk, the Swiss subsidiary’s board must act and, as a rule, refrain from granting further up- or cross-stream loans under the cash pool arrangement. However, the appropriate actions must be determined on a case-by-case basis. For instance, the Swiss Federal Supreme Court in a Swissair decision held that the Swissair board did not breach its duties when remaining in the cash pool despite the group’s rapidly deteriorating creditworthiness. This
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is because Swissair was highly dependent on services from other group companies, termination of which would have been even more detrimental to Swissair than remaining in the cash pool.
Use of Covid-19 credits for payments to group companiesSwiss companies facing liquidity shortages due to the corona crisis can obtain a Covid-19 credit. These Covid-19 credits are intended to infuse liquidity into the operational business in Switzerland.
Once a company has obtained a Covid-19 credit, any up- or cross-stream payments within the group are sensitive. With a few exceptions, the granting of intra-group loans is not permissible; intra-group loans to foreign companies are completely excluded. Accordingly, participating in a cash pool during the term of a Covid-19 credit is hardly possible and any other payments made by a Swiss subsidiary to other group companies, especially foreign ones, must be carefully examined.
Reliance on the parent company’s support Under Swiss law, a parent company is nothing more than a normal shareholder of its subsidiaries. Therefore, apart from its obligation to make an initial capital contribution, the parent company of a Swiss subsidiary has no legal obligations towards that subsidiary; in particular, the parent company has no duty to make additional contributions to or finance the Swiss subsidiary.
In practice, there is often an implicit ‘group guarantee’ in favour of the affiliates. However, such an implicit guarantee is not legally enforceable. For the Swiss subsidiary’s board to rely on the group’s support, it must obtain legally binding commitments (eg, a financing commitment or a subordination agreement) from the group and such commitments should come from companies with sufficient credit. Only where such legally binding commitments are in place can a Swiss subsidiary’s board avoid filing for bankruptcy in the event of over-indebtedness. Nevertheless, under the Swiss Covid-19 insolvency regulation, the Swiss subsidiary’s board does not need to notify the court if the company was not over-indebted at the end of 2019 and there is a prospect that the over-indebtedness can be remedied by the end of 2020.
Benedict F Christ is a partner with VISCHER, a leading Swiss full-service business law firm. He is based in Zurich, Switzerland. Ben is a versed lawyer advising domestic and international clients across a broad spectrum of complex national and cross-border transactions as well as corporate and general business matters including distressed M&A and restructuring transactions.
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Main bankruptcy measures introduced in response to Spain’s Covid-19 state
of alarmBosco de Gispert
Partner, GrupoGispert, Barcelona, [email protected]
Many regulations have recently been published with the aim of trying to reduce the foreseeable negative effects that the State of Alarm declared in Spain, and the associated paralysis of a large part of Spain’s economy. The potential increase of insolvency proceedings as a result of the difficulty that many companies will face is obvious. Here the author will examine the legislative changes adopted by the Spanish in a bid to remedy the effects of this shutdown of activity and forced closure of businesses.
Main bankruptcy measures introduced in response to Spain’s Covid-19 state of alarm
IntroductionIn Spain, as elsewhere, it is clear that the forced closure of businesses in certain sectors will lead to enormous economic losses for many companies.
The legislator has sought to adopt particular measures in the field of insolvency law in order to remedy these effects as far as possible. The recently published consolidated text of the Bankruptcy Law has also substantially modified the insolvency provisions, and are analysed elsewhere.
Here we will look in detail at four main areas regulated by Royal Decree 16/2020 of 28 April 2020:• deferral of the obligation to file for bankruptcy;• effects on approved agreements;• effects on approved refinancing plans;• improvement of the condition of people especially
related to the bankrupt in certain situations.
Obligation to submit a petition for bankruptcyThe general rule obliges any company to file for bankruptcy within two months from the time it knew, or should have known, of its insolvency (article 5 of the Bankruptcy Law). Non-compliance with this obligation could have serious consequences for a company’s directors, which could even lead to the bankruptcy being considered at fault due to a delay in its presentation, and to the directors being sentenced to
pay all or part of the bankruptcy deficit (the difference between the company’s assets and liabilities).
This obligation is postponed until 31 December 2020, without the debtor being obliged to file for bankruptcy until that date, even though the insolvency situation had continued prior to that date. The aim is to provide the debtor with a framework to improve their situation and avoid a flood of insolvencies of companies that are currently unable to meet their obligations on a regular basis.
At the same time, it is expected that necessary insolvency proceedings will not be admitted until that same date and that, if a necessary and voluntary insolvency proceeding is filed later, the voluntary insolvency proceeding will be processed in a preferential manner.
In other words, the deadline for debtors to be able to file for bankruptcy is extended and they are protected from possible necessary bankruptcy proceedings until 31 December 2020 with the aim, as the author understands it, that they can try to reverse their situation within a longer period than the two months granted by law.
Effects on agreementsAnother situation that could foreseeably occur is a massive breach of agreements approved in previous insolvency proceedings between debtors and their creditors. The current crisis could mean that many companies that have already gone through insolvency
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proceedings will not be able to make the payments stipulated in the agreements with creditors, which would initially lead them to liquidation.
In order to avoid this situation, the regulation foresees two situations for companies that have approved an agreement in the two years prior to the State of Alarm:• The possibility for the company to request a
modification of the agreement until 14 March 2021. This involves trying to renegotiate agreements that will not be able to be fulfilled as a result of the Covid-19 crisis and entails the suppression of the debtor’s obligation to request liquidation in the event of non-compliance with the agreement.
• The inadmissibility of applications for liquidation due to failure to comply with the agreement within the previous period.
In other words, once again, an attempt to provide incentives to companies that would normally be obliged to file for liquidation, giving them a period of one year to recover and, if necessary, renegotiate with their creditors any modifications to the agreement.
Effects on refinancing agreementsSomething similar occurs with the refinancing agreements a debtor may have reached with their creditors in a pre-bankruptcy situation. In other words, the debtor who sees that they are in an insolvency situation may choose to initiate negotiations with their creditors to avoid bankruptcy and, if a refinancing agreement is reached, such an agreement may be approved by the court.
Again, the aim is to prevent the debtor’s failure to comply with such agreements from leading to a possible liquidation situation, which is why the rule provides for the following:• during a one-year period the court can be notified of
the beginning of negotiations with the creditors to try to modify the refinancing agreement and avoid its breach; and
• the company that has approved a refinancing agreement is shielded during a six-month period from possible declarations of default by creditors who have not collected the corresponding fee. After this period, the company is given a further three months to negotiate with its creditors before admitting requests for a declaration of non-compliance.
As in the previous cases, the legislator’s aim is simply to give debtors extra time to stabilise their situation and to adopt measures to avoid bankruptcy, and to reverse the crisis caused by Covid-19.
Situation of the credits of ‘specially related persons’In insolvency proceedings, as a general rule, the credits of the so-called ‘specially related persons’ are considered as subordinated credits. For practical purposes, this means that such claims are not collected until all other claims have been paid, which makes them virtually uncollectible.
These specially related persons, direct relatives of the entrepreneur, partners, administrators, group companies, etc, are often the only ones willing to finance the company, especially in small businesses, where banks often require guarantees that the company simply cannot provide.
The approved regulations encourage the support of these people to companies in crisis. In light of the clear obstacles to such financing, including in the case of bankruptcy, that their contributions are unrecoverable, two measures have been adopted: • In the event of failure to comply with the approved or
amended agreement within two years of the declaration of the State of Alarm, claims arising from cash income from loans, including those which according to the law, have the status of specially related persons, will be considered as claims against the masses.
• In insolvency proceedings declared within two years of the declaration of the State of Alarm, claims deriving from cash income from loans, credits or other businesses of a similar nature, granted to the debtor by specially related persons, shall be considered as ordinary claims.
In other words, the situation of credits derived from cash income from persons especially related to the bankrupt is improved in order to encourage these contributions and avoid the lack of support from these persons causing the company’s insolvency.
ConclusionIn short, this set of measures aims to avoid the flood of bankruptcies that economic analysts predict and, at the very least, to defer them over time. The measures will also give companies some margin to recover from this very serious situation.
Bosco de Gispert is one of the partners of the Insolvency and Restructuring department of Grupo Gispert, based in Barcelona and Madrid. He has been listed as recommended lawyer by Chambers and Partners from 2016 to 2019 and the department is also recommended by Legal 500 and Best Lawyers. He has experience in insolvency procedures advising debtors and also acting as a receiver. He has also defended directors of companies from responsibilities arising from bankruptcy files and has experience in litigation and arbitration.
60 Insolvency and Restructuring International Vol 14 No 2 September 2020
Insolvency of crowdfunding
In recent times, physical crowds are frowned upon, lest it spark the inadvertent transmission of the
deadly Covid-19 virus across social groups. However, it is precisely in times like these that the true value of the crowd has emerged. This is because the disproportionate effect of state-wide Covid-19 self-isolation policies on businesses is stark.1 Businesses that can go online, such as legal services, continue to thrive. However, businesses that require physical presence such as restaurants and retail shops are devastated.
This author has personally seen his sister-in-law’s bakery experience a precipitous 95 per cent drop in sales since the start of February 2020. If not for the Singapore government’s unprecedented SGD 60bn intervention in the economy2 and the rapid implementation of the Covid-19 (Temporary Measures) Act 2020, which has provided temporary relief for the fulfilling of contractual obligations,3 many Singaporean small and medium enterprises (SMEs) would likely become insolvent by mid-2020.
In view of the disproportionate impact to the economy, the author posits that crowdfunding will emerge as another pillar of support for businesses undergoing severe financial strain. As certain individuals work from home and continue to generate an income, they are in a position to support businesses who are unable to do the same. For example, this author was subscriber number one to his sister-in-law’s bread subscription scheme: ordering one loaf of bread and four pastries every two weeks for SGD 50 a month. As word of the availability of the bread subscription scheme spread across social media, people from across Singapore began signing up. In just over a week after launching, her bakery had enough subscriptions to cover its costs. This is a timely example of crowdfunding playing a powerful and effective role in today’s Covid-19 crisis.
However, not all businesses will survive the Covid-19 crisis. When crowdfunded businesses go insolvent, is there anything that the funders can do to recover their invested funds? Are they resigned to the fact that they
are last-in-priority as an unsecured creditor? Does the fact that the crowdfunded entity resides in a different country from the funder raise insurmountable difficulties in cross-border recovery?
This article seeks to explore the following three issues: • Is there is any legal recourse available to investors who
are seeking recovery from insolvent crowdfunded businesses?
• Is third-party financing available for class-action asset recovery actions brought by the liquidators of insolvent crowdfunded businesses?
• Can Singapore be used as a nodal jurisdiction for the liquidators of insolvent crowdfunded businesses’ asset recovery actions across Australasia?
The short answers to the questions above are: yes, yes, and yes.
Brief overview of crowdfunding Crowdfunding typically involves the raising of small amounts of funds from a large number of people, usually via the internet or social media.4 The matching of investors and investees is conducted directly on established crowdfunding platforms.
There are two main types of crowdfunding models: • rewards-based crowdfunding, where the platform
matches investors with companies/people who are launching projects/new products (such as 3D printers) in return for certain perks on pledged amounts. Such platforms include Kickstarter, Indiegogo and Moolah Sense; and
• lending-based crowdfunding, where the platform matches investors with corporates in return for an interest on the loan or where the investor purchases a debenture or bond, to be paid a specified interest rate during the term of the loan (‘debt-based crowdfunding’) or where the investor purchases equity issued by the company, to be paid a dividend on the shares (‘equity-based crowdfunding’). Such platforms include Lending Club, Beehive, and Fundnel.
Insolvency of crowdfundingDanny Quah
Providence Law Asia, [email protected]
INSOLVENCY SECTION SCHOLARSHIP
Insolvency and Restructuring International Vol 14 No 2 September 2020 61
Excluding the outliers, recent statistics show that crowdfunders’ non-performing loans are generally lower than banks (1.3 per cent versus 4.6 per cent in 2018).5 As such, the global community has not considered it a pressing need to develop an internationally agreed regulatory approach to crowdfunding.6
Further, due to the small size of the crowdfunding market globally, crowdfunding does not pose systemic risk to the global financial system. The risks posed by crowdfunding mainly affects investors themselves. Hence, most regulators have adopted a light-touch approach in regulating crowdfunding activities. For example, the Monetary Authority of Singapore has merely provided in the Securities and Futures Act (Cap 289) that securities-based crowdfunding platforms only need to maintain a base capital requirement of SGD 50,000 and minimum operational risk requirement of SGD 50,000. Other than this, there are no other statutory reporting or operational obligations for crowdfunding platforms.
Legal recourse available to crowdfunders In light of the light-touch regulation applied to crowdfunding platforms, investors are largely on their own when the businesses that they invest in become insolvent.
In Singapore, as is the case across most of the Commonwealth, debt-based crowdfunders are treated as unsecured creditors and they rank pari passu with all other unsecured creditors of the insolvent company. Equity-based crowdfunders have an even lower priority as they rank after the unsecured creditors. They may even have to contribute unpaid capital on their shares if the shares are not fully paid-up.
As a result, given the small amount of money that most investors contribute to a crowdfunded entity, there is little incentive for any single crowdfunder to fund any recovery action as the fruits of such action (if any) will be shared pro rata among all the other unsecured creditors. In other words, the benefits will be unlikely to be commensurate with the risk and expense of funding any recovery action.
Hence, there is a tremendous financial barrier for a single crowdfunder to even consider commencing recovery action in the absence of any consumer protection regulation.
Third-party funding of recovery actions There is, however, strength in crowds. In Singapore, it is possible for crowdfunders to band together to fund a liquidator’s recovery action. Over the last five years, the Singapore courts have approved at least three litigation funding agreements in the insolvency context.
In Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd [2018] SGHC 210, the Singapore High Court was asked to consider an application by a liquidator under Section 273(3) of the Companies Act (Cap 50) to sell and assign certain properties and things in action of the insolvent company to a recovery vehicle funded by a third-party litigation funder. The funding agreement in question involved the third-party funder making an initial contribution of SGD 50,000 (to pay the liquidator’s and lawyer’s fees), and the third-party funder paying 40 per cent of the first US$10m that the liquidator recovered to the company, and 50 per cent of any further sums recovered (less costs and expenses incurred for the recovery process).
In construing the relevant provisions of the Companies Act, Justice Aedit Abdullah found that a liquidator was statutorily empowered to assign a company’s causes of actions because they formed part of its property. The only requirement is that the assignment must specifically identity the subject-matter of the assignment. From a policy perspective, Abdullah J made it clear that such third-party litigation funding should be encouraged to allow insolvent companies to pursue meritorious claims for the benefit of creditors.
Similarly, in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597, the Singapore High Court was asked to consider an application by a liquidator to approve a litigation funding arrangement. The funding agreement in question involved the shareholders of the company funding 50 per cent of the costs of the company’s litigation for the first SGD 300,000 and 100 per cent of any excess. Any recovery would be first paid towards the amounts that the company funded, followed by the amounts the shareholders funded, and any surplus thereafter would go back to the company.
Judicial Commissioner Chua Lee Ming (as he was then) held that Section 272(2) of the Companies Act permits the sale of the fruits of a cause of action that belongs to the company. Such an assignment will not be struck down as savouring of maintenance if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit. Chua JC further observed that the purity of justice would be protected as the liquidators had full control of the legal proceedings and the funders could only influence the choice of solicitors and on any settlement or discontinuance of any claim. There is a public interest in liquidators being able to satisfactorily carry out the duties which the statutory scheme confers on them.
Most recently, in Re Fan Kow Hin [2019] 3 SLR 861, Abdullah J of the Singapore High Court added that the same principles that apply in the case of an insolvent company similarly apply to an individual bankrupt. As such, Abdullah J approved a third-party funding
62 Insolvency and Restructuring International Vol 14 No 2 September 2020
Insolvency of crowdfunding
arrangement that gave the trustees in bankruptcy sufficient funding to pursue litigation against the bankrupt’s debtors.
In light of the above, this author recommends that crowdfunders consider engaging the services of a third-party litigation funder to first fund a liquidator’s investigation into the insolvent company’s/bankrupt’s financial affairs and assets. If there is any basis to commence asset recovery efforts or litigation, then further commercial discussions can be had with the third-party funder to provide additional funding. Crowdfunding platforms are well placed to consolidate such class-action efforts and would do well to provide such support to its users where possible.
Multijurisdictional asset recovery actionsOne additional layer of difficulty that crowdfunders may face in seeking to take out recovery action is the fact that they not be in an ‘insolvency-friendly’ jurisdiction and/or may not be familiar with the insolvency regime of the jurisdiction where the insolvent entity is located in. Furthermore, it may not be readily apparent where the assets of the insolvent entity (if any) may be located.
Thankfully, there is increasing global effort to harmonise and universalise the divergent insolvency regimes across the world. While a universally ratified international insolvency treaty may still be an impossibility today, the international insolvency community has devised a practical mechanism to: • facilitate greater cooperation between courts;• promote greater legal certainty;• improve the fairness and efficiency of the
administration of cross-border insolvencies;• protect and maximise the value of the debtor’s estate;
and• advance successful rehabilitations to preserve
economic value.7 UNCITRAL has come up with a Model Law on Cross-Border Insolvency (‘Model Law’) to provide ‘a framework for cooperation between jurisdictions’ to ‘facilitate and promote a uniform approach towards cross-border insolvency’. Its lynchpin is the recognition of foreign insolvency proceedings and the grant of appropriate relief, depending on whether the foreign proceedings is classified as main or non-main proceedings.8
The increasing global acceptance of international soft laws like the Model Law has given creditors (and debtors) an opportunity to ‘forum-shop’. Forum-shopping, in its non-pejorative sense, simply entails a creditor making a strategic decision to select a forum that offers it the best tactical advantage and outcome for its case.9
Forum-shopping, in the insolvency context, is not new. By way of example, in 2008, Vinashin, a
Vietnamese state-owned enterprise which at its peak was the world’s fifth largest shipbuilder, fell into financial difficulty and defaulted on the payment of loan facilities totalling US$600m. It sought to restructure its debts not in Vietnam, but in England through a scheme of arrangement. Even though Vinashin had no assets in England, the English High Court held that the matter bore a ‘sufficient connection’ with England as the loans to be restructured were governed by English law. Thus, the English High Court held that it had jurisdiction to call for a meeting of creditors and to sanction the scheme (which was successfully implemented).10
Another example is the case of Garuda, the Indonesian national carrier. During the height of its troubles resulting from the 1997 Asian financial crisis, Garuda elected to restructure in England and Singapore rather than in Indonesia. While Indonesian law allowed companies a moratorium against legal proceedings while they proposed a composition plan, the company would be declared bankrupt if the plan was not approved. This, and the advantages afforded by the scheme of arrangement regime in England and Singapore, led Garuda to forum-shop outside Indonesia.11
That said, given the heterogeneity of insolvency regimes across the world, very different results could ensue depending on where proceedings are undertaken. As such, creditors may elect to commence insolvency proceedings in certain ‘nodal jurisdictions’, using these as a base from which to coordinate multijurisdictional asset recovery efforts. This would allow creditors to extract maximum value by coordinating cross-border efforts. Singapore is one such nodal jurisdiction.
The use of Singapore as a nodal jurisdiction for Australasian-wide asset recovery actions Assuming that the jurisdictional requirements are met, liquidators commencing litigation in the Singapore courts have a number of options available to them. In addition to straightforward debt recovery actions, liquidators can also consider taking out unfair preference actions under Section 99(2) of the Bankruptcy Act (Cap 20) read with Section 239(1) of the Companies Act12 or against the directors of the insolvent company for breach of fiduciary duties/duties of skill and care.13
If the liquidator succeeds in his claim and obtains a money judgment in the Singapore courts, he can then seek recognition and enforcement of the Singapore judgment in certain other Australasian jurisdictions.
According to a survey done by the Asian Business Law Institute,14 Singapore money judgments are
Insolvency and Restructuring International Vol 14 No 2 September 2020 63
relatively valuable. Singapore money judgments can be registered and enforced (subject to the usual applications to set aside) under the domestic legal regimes of the following Australasian countries: Australia,15 Brunei,16 India,17 Malaysia18 and Myanmar.19 Singapore money judgments can also be recognised via bilateral judicial assistance regimes based on the concept of reciprocity in the following countries: China,20 Japan,21 the Philippines,22 South Korea23 and Vietnam.24
Only the following countries do not appear to permit the recognition and enforcement of Singapore money judgments without the commencement of local proceedings: Cambodia,25 Indonesia,26 Laos27
and Thailand.28 While it may still be some time away, this author is
encouraged by the efforts of the global community to harmonise the rules on recognition and enforcement of foreign judgments. Efforts such as the Judgments Project by the Hague Conference on Private International Law, the Hague Convention of 30 June 2005 on Choice of Court Agreements, Model Law on Recognition and Enforcement of Insolvency-Related Judgments and Asian Principles of Private International Law29 are commendable and will only be beneficial for creditors seeking recovery across multiple jurisdictions.
Conclusion In conclusion, this author believes that insolvency of crowdfunding does not necessarily result in a dead-end for crowdfunders’ recovery efforts. There are steps that can be taken to recover assets across multiple jurisdictions. All that is required is the collective will of crowdfunders (and third-party funders), and a wise commercial decision in choosing where to take out asset recovery proceedings.
Notes1 Commentary: ‘ COVID-19 self-isolation is punishing the poor in
Indonesia’ : www.channelnewsasia.com/news/commentary/covid-19-coronavirus-indonesia- poor-gig-work-gojek-self-isolate-12567552, accessed 10 April 2020.
2 ‘ Singapore sets aside S$60 billion for fight against coronavirus’ : DPM Heng: www.straitstimes.com/singapore/singapore-sets-aside-60-billion-for-fight-against-virus-dpm-heng accessed 10 April 2020.
3 ‘ The Impact of the Covid-19 (Temporary Measures) Act on Commercial Litigation and Insolvency Matters’ www.providencelawasia.com/1481-2 accessed 10 April 2020.
4 Tan Swee Liang, Tok Yoke Wang and Thitipat Chansriniyon, Financing Singapore’s SMEs and the crowdfunding industry in Singapore, 6.
5 Ibid, 9.6 Ibid, 22.7 Chief Justice Sundaresh Menon’s Keynote Address at the 18th
Annual Conference of the International Insolvency Institute 2018, ‘The future of cross-border insolvency: some thoughts on a framework fit for a flattening world ’, 4.
8 Ibid, 13. 9 Ibid, 16.10 Ibid, 17.11 Ibid, 18. 12 See for example, CCM Industrial Pte Ltd (in liquidation) v Chan Pui
Yee [2016] SGHC 231, Living the Link Pte Ltd (in creditors’ voluntary liquidation) and others v Tan Lay Tin Tina and others [2016] SGHC 67, Encus International Pte Ltd (in compulsory liquidation) v Tenacious Investment Pte Ltd and others [2016] SGHC 50 and Chee Yoh Chuang and Another (as Liquidators of Progen Engineering Pte Ltd (in liquidation) v Progen Holdings Ltd [2010] SGCA 31.
13 See for example, Parakou Investment Holdings Pte Ltd and another v Parakou Shipping Pte Ltd (in liquidation) and other appeals [2018] SGCA 3 and Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and others [2004] 1 SLR(R) 434.
14 Adeline Chong, ‘Recognition and enforcement of foreign judgments in Asia’.15 Ibid,7.16 Ibid, 20.17 Ibid, 70.18 Ibid, 124.19 Ibid, 138.20 Ibid, 50.21 Ibid, 113.22 Ibid, 152.23 Ibid, 196.24 Ibid, 217.25 Ibid, 38.26 Ibid, 91, 102.27 Ibid, 118.28 Ibid, 210. 29 Ibid, 1, 2.
64 Insolvency and Restructuring International Vol 14 No 2 September 2020
The IBA Delegation provided technical support to the UNCITRAL Secretariat during several informal
consultations held by video link instead of the regular Spring 2020 plenary session of Working Group V (Insolvency Law).
Working Group V is completing legislative recommendations for special treatment of insolvency of micro and small enterprises (MSE). This project was mandated by the Commission in 2013 and grew out of recognition that the insolvency rules generally applicable to mid-sized and large business enterprises do not well serve very small businesses, which are important to the economic life of many countries throughout the world. Concurrently, the Commission asked Working Group I to focus on recommendations to reduce legal obstacles faced by micro and small businesses throughout their life cycles, especially in developing countries. The efforts of both Working Group I and V in this area were tasked with promoting achievement of the UN’s sustainable development goals.
Since then, the IBA Insolvency Section has been contributing to these MSE Insolvency deliberations at the World Bank and UNCITRAL, which have focused on mechanisms to bring micro and small business debtors into a formal insolvency system which provides
UNCITRAL finalising micro and small business insolvency legislative guide
Gregor BaerUNCITRAL Liaison Officer
for rehabilitation with a prompt discharge of debts and a reasonable plan for payment of creditors. This year, our Insolvency Section UNCITRAL Delegation has been actively discussing drafts and providing comments to Working Group V as it attempts to finalise recommendations on MSE Insolvency for consideration by the Commission.
An issue drawing considerable current attention in WGV is the need to soften, in the context of MSE Insolvency, the recommendations of the UNCITRAL Legislative Guide on obligations of owners and managers when the debtor is approaching insolvency. This comes at a time when many countries that were proponents of UNCITRAL’s tough recommendations on this subject are themselves loosening or suspending their own national ‘trading whilst insolvent’ liability rules. The IBA Delegation continues to support those national delegations and development-focused NGOs who suggest a non-punitive rehabilitation of MSE debtors and their owners, with the aim of promptly restoring their economic productivity.1
Note1 The Insolvency Section Delegation to WGV includes Gregor Baer,
Chris Besant, Alexander Klauser, Constantinos Klissouras, Lewis Kruger and Richard Minor.
UNCITRAL finalising micro and small business insolvency legislative guide
REPORT
Insolvency and Restructuring InternationalGuidelines for contributors
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Guidelines for contributors
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