School of Law

STUDY ON A NEW APPROACH TO BUSINESS FAILURE AND INSOLVENCY

PROFESSORS GERARD MCCORMACK AND ANDREW KEAY

CENTRE FOR BUSINESS LAW AND PRACTICE

SCHOOL OF LAW

UNIVERSITY OF LEEDS

INTRODUCTION – STUDY FOR THE EC ON SUBSTANTIVE INSOLVENCY LAW

•  EC TENDER – UNIVERSITY OF LEEDS TEAM COMMISSIONED BY EUROPEAN COMMISSION TO CARRY OUT STUDY ON SUBSTANTIVE INSOLVENCY LAW APRIL 2015

•  LEEDS TEAM – MCCORMACK, KEAY, BROWN AND DAHLGREEN

•  SOME MODIFICATIONS TO ORIGINAL TENDER SUGGESTED BY EC

•  FINAL DRAFT REPORT SUBMITTED END OF JAN – PRESENTLY WORKING ON SUGGESTED REVISIONS

•  REPORT WILL FEED INTO CAPITAL MARKETS UNION, SINGLE MARKET STRATEGY AND ‘FIRMING UP’ OF EC RECOMMENDATION ON A NEW APPROACH TO BUSINESS FAILURE AND INSOLVENCY

METHODOLOGY

•  DATA WAS SOUGHT FROM REPORTERS IN 30 COUNTRIES – EU PLUS TWO COMPARATOR JURISDICTIONS – US AND NORWAY.

•  THE NATIONAL REPORTERS WERE ASKED TO PREPARE REPORTS WHICH WERE FOUNDED ON QUESTIONS AND ISSUES RAISED IN TWO QUESTIONNAIRES DESIGNED BY THE STUDY TEAM

•  THE REPORTS CONSISTED OF ANSWERS TO THE QUESTIONS AND ISSUES AND SOME OTHER COMMENTARY THAT WAS CONSIDERED RELEVANT.

•  THE QUESTIONNAIRES CONTAINED GUIDELINES PREPARED BY THE LEEDS PROJECT TEAM TO ASSIST REPORTERS IN DRAWING UP THEIR REPORTS AND TO ACHIEVE SOME COMMON ANALYSIS OF THE RELEVANT ISSUES AND A DEGREE OF UNIFORMITY OF APPROACH.

•  THE EUROPEAN COMMISSION HAD A CONSIDERABLE INPUT IN APPROVING THE QUESTIONNAIRES AND GUIDELINES

•  REPORTERS WERE GIVEN 2 MONTHS TO COMPILE REPORTS

•  REPORTS WERE RECEIVED –THE VAST MAJORITY ON TIME

•  MEMBERS OF THE TEAM ENGAGED IN CODING THE MATERIAL IN ORDER TO FACILITATE ANALYSIS (THE TRANSFORMATION OF DATA INTO AN UNDERSTANDABLE FORM)

•  THEN THEY ENGAGED IN ANALYSING THE MATERIAL AS CODED

•  PARTICULAR ATTENTION WAS DEVOTED TO IDENTIFYING KEY ISSUES AND EXPLORING THE DIFFERENT APPROACHES TAKEN IN EACH OF THE MEMBER STATES AND THE COMPARATOR STATES

•  TEAM MEMBERS WORKED ON DESIGNATED PARTS OF THE BRIEF IN ORDER TO MAINTAIN CONSISTENCY.

•  ANOTHER COLLEAGUE WOULD CONSIDER A DRAFT OF MATERIAL THAT WAS WRITTEN TO ENSURE ACCURACY, CONSISTENCY AND THAT ALL ISSUES HAD BEEN COVERED

•  FURTHER INFORMATION OR CLARIFICATION WAS SOUGHT FROM THE MAJORITY OF REPORTERS IN RELATION TO ANSWERS TO QUESTIONS AND OTHER DATA SUBMITTED DURING THE CODING AND ANALYSIS PROCESSES

•  CASE STUDIES AND STATISTICS WERE SOUGHT FROM REPORTERS – OBTAINING THESE WAS DIFFICULT EITHER BECAUSE THERE WERE NONE OR NOT AVAILABLE FOR SOME REASON, E.G. HOLDERS OF DATA WOULD NOT DISCLOSE SAME

•  THE ANALYSIS WAS UNDERTAKEN IN CONJUNCTION WITH CONSIDERATION OF PREVIOUS STUDIES AND REPORTS DONE BY BODIES SUCH AS INSOL (E.G. COMPARATIVE LEGAL ANALYSIS OF THE MEMBER STATES’ RELEVANT PROVISIONS AND PRACTICE), THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (E.G. INSOLVENCY ASSESSMENTS), THE UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW (E.G. LEGISLATIVE GUIDE ON INSOLVENCY LAW) AND THE WORLD BANK E.G. PRINCIPLES AND GUIDELINES FOR EFFECTIVE INSOLVENCY AND CREDITOR RIGHTS, REPORT ON THE TREATMENT OF THE INSOLVENCY OF NATURAL PERSONS).

•  SOME OF THE MATTERS IDENTIFIED AND ANALYSED: •  SIMILAR OR DIFFERENT APPROACHES IN MEMBER STATES ON

PARTICULAR ISSUES – ADVANTAGE AND DISADVANTAGES; •  INDICATORS OF SUCCESS OF PARTICULAR APPROACHES TO

RELEVANT ISSUES; •  ‘BEST PRACTICES’ IN THE WAY THAT MEMBER STATES HAVE

ADDRESSED ISSUES;

• DIFFICULTIES THAT EXIST OR APPEAR TO EXIST IN THE WAY THAT MEMBER STATES HAVE ADDRESSED ISSUES;

• GAPS THAT MAY EXIST IN THE HANDLING OF SPECIFIC MATTERS IN ANY OR ALL OF THE MEMBER STATES AND THE PROBLEMS OR POTENTIAL RISKS THEY CREATE;

• HOW INSOLVENCY LAW MAY FACILITATE RESPONSIBLE RISK-TAKING BY ENTREPRENEURS;

•  THE REPORT IDENTIFIES POSSIBLE LEGISLATIVE AND REGULATORY RESPONSES AVAILABLE TO THE COMMISSION, HAVING REGARD TO THE PRINCIPLES OF SUBSIDIARITY AND PROPORTIONALITY ALSO UNDERPINNING THE EU TREATIES

•  THE REPORT SETS OUT SOME OF THE ADVANTAGES AND DISADVANTAGES OF PARTICULAR TYPES OF LEGISLATIVE OR REGULATORY ACTION AT EUROPEAN LEVEL TO TACKLE DEFICIENCIES IN THE FRAMEWORKS GOVERNING INSOLVENCY AND CONSUMER OVER-INDEBTEDNESS IN THE MEMBER STATES.

•  CONCLUSIONS WERE SENSITIVE TO THE JURISPRUDENCE OF THE EUROPEAN COURT OF JUSTICE AND THE FACT THAT ACTIONS IN THE COMPARATOR JURISDICTIONS MIGHT NOT BE APPROPRIATE FOR ADOPTION OR ADAPTION IN THE EU.

PRIORITIES

•  RECITAL 22 PREAMBLE RECAST INSOLVENCY REGULATION WIDELY DIFFERING SUBSTANTIVE LAWS IN EU

•  MAY CAUSE CREDITORS TO ASSESS CREDIT RISK BY REFERENCE TO INDIVIDUAL COUNTRIES RATHER THAN ON A EU-WIDE BASIS

•  GERMANY AND THE UK REMOVED PREFERENTIAL STATUS OF TAX CLAIMS IN 1982 AND 2002

•  IN SOME COUNTRIES, EMPLOYEE CLAIMS TREATED AS PRIORITY CLAIMS AND MAY GET PAID FIRST EVEN AHEAD OF SECURED CREDITORS - FRANCE AND, TO A CERTAIN EXTENT, ITALY AND PORTUGAL

WORLD BANK DOING BUSINESS SURVEY

•  WWW.DOINGBUSINESS.ORG – RELATIVELY POOR POSITION OF EU COUNTRIES

•  ROMANIA IS JOINT 7TH WITH POLAND, THE UK, LATVIA AND HUNGARY AT JOINT 19TH

•  FRANCE, NETHERLANDS AND GREECE ONLY RANKED AT EQUAL 79TH

•  BUT MAY BE DOWN PARTLY TO THE WAY THESE RANKINGS ARE COMPOSED – SEE MCCORMACK [2015] INSOLVENCY INTELLIGENCE

•  COLOMBIA AND RWANDA RANK EQUALLY WITH THE US AS JOINT 2ND

•  UNLESS ONE HAS LAWS MODELLED ON THE RELEVANT US PROVISIONS - ARTICLE 9 OF THE US UNIFORM COMMERCIAL CODE - ONE WILL NOT DO VERY WELL IN THE WB RANKINGS

POSSIBLE REFORM CONSIDERATIONS

•  WHETHER A MINIMUM SET OF EU RULES ON THE RANKING OF CLAIMS IN THE EVENT OF INSOLVENCY MIGHT IMPACT FAVOURABLY ON THE AVAILABILITY AND COST OF CREDIT IN SOME OR ALL EU MEMBER STATES

•  WHETHER CLAIMS BY UNPAID EMPLOYEES SHOULD BE GIVEN ANY SPECIAL STATUS AT EU LEVEL-

•  WHETHER THE FINANCIAL POSITION OF EMPLOYEES MIGHT BE MORE APPROPRIATELY PROTECTED BY ENHANCING THE PROTECTIONS AVAILABLE UNDER EMPLOYMENT LAW DIRECTIVES

•  WHETHER THE PROTECTIONS SHOULD BE EXTENDED TO SELF- EMPLOYED PERSONS AND HOW MIGHT SELF-EMPLOYED PERSONS BE DEFINED FOR THIS PURPOSE

PRIORITY OF ‘NEW’ MONEYS

•  WHETHER SPECIAL RULES ARE APPROPRIATE GIVING ‘NEW MONEY’ ADVANCED DURING RESTRUCTURING PROCEEDINGS PRIORITY OVER OTHER CREDITORS

•  CONCERN THAT NEW MONEYS SHOULD BE PROTECTED FROM LATER AVOIDANCE ACTIONS

•  WHETHER PROTECTION GO FURTHER

•  WB RANKINGS - HIGHEST MARK IS AWARDED WHERE NEW FINANCING MERELY RECEIVES PRIORITY OVER ORDINARY, UNSECURED CREDITORS

•  S 364 US BANKRUPTCY CODE GOES FURTHER AND ALLOWS PRIMING OF ‘SECURED CREDIT’ IN RESTRICTED CIRCUMSTANCES AS APPARENTLY DOES FINNISH LAW

INTRODUCTION – AVOIDANCE PROVISIONS

• NATURE OF AVOIDANCE PROVISIONS IN INSOLVENCY

• RATIONALE/POLICY •  ENSURE EQUALITY AMONGST CREDITORS (SUBJECT TO THE

STATUTORY REGIME)

•  PREVENT DISMEMBERMENT OF THE INSOLVENT’S ESTATE

•  DETERRENCE

POSITION UNDER THE EC REGULATION ON INSOLVENCY PROCEEDINGS

•  ARTICLE 4 - THE LEX CONCURSUS WILL APPLY TO ADMINISTERING THE AFFAIRS OF THE INSOLVENT

•  ARTICLE 4(2)(M)- IF THE LAW OF THE MEMBER STATE WHERE PROCEEDINGS WERE OPENED PERMITS A TRANSACTION ENTERED INTO PRIOR TO THE OPENING OF INSOLVENCY PROCEEDINGS THAT IS DETRIMENTAL TO ALL THE CREDITORS TO BE AVOIDED THE IP CAN APPLY TO THE COURTS OF THAT MEMBER STATE FOR AN ORDER OF AVOIDANCE

•  ARTICLE 13 PROVIDES A POSSIBLE A DEFENCE TO AVOIDANCE ACTION

ARTICLE 13

•  “ARTICLE 4(2)(M) SHALL NOT APPLY WHERE THE PERSON WHO BENEFITED FROM AN ACT DETRIMENTAL TO ALL THE CREDITORS PROVIDES PROOF THAT:

•  THE SAID ACT IS SUBJECT TO THE LAW OF A MEMBER STATE OTHER THAN THAT OF THE STATE OF THE OPENING OF PROCEEDINGS, AND

•  THAT LAW DOES NOT ALLOW ANY MEANS OF CHALLENGING THAT ACT IN THE RELEVANT CASE.”

•  THIS ARTICLE IS ABLE TO STYMIE AVOIDANCE BECAUSE OTHER MEMBER STATES MIGHT HAVE DIFFERENT AVOIDANCE RULES OR OTHER RULES WHICH PREVENTS AVOIDANCE, E.G. LUTZ V BAUERLE C-557/13, [2015] EUECJ C-557/13

DIVERGENCE

• 28 COUNTRIES

•  THERE ARE DIFFERENT KINDS OF PRE-INSOLVENCY TRANSACTIONS THAT CAN BE AVOIDED

• ALL MEMBER STATES HAVE RULES FOR THE AVOIDANCE OF PREFERENCES AND TRANSACTIONS AT AN UNDERVALUE/GIFTS

• MOST HAVE PROVISIONS FOR THE AVOIDANCE OF TRANSACTIONS INTENDED TO DEFRAUD CREDITORS (MANY HAVE THESE IN ADDITION TO ACTIO PAULIANA) AND FOR THE INVALIDATION OF SECURITY

• BUT WHILE THERE ARE A NUMBER OF SIMILARITIES ACROSS THE EU THERE ARE MANY DIFFERENT CONDITIONS PRESCRIBED, SUCH AS :

• PRESUMPTIONS • THE SUSPECT PERIOD • CONNECTED PERSONS • SUBJECTIVE OR OBJECTIVE TESTS

OPTIONS

•  THE EIR COULD BE AMENDED SO THAT THE AVOIDANCE RULES OF THE LEX CONCURSUS APPLY EXCLUSIVELY

•  TO INCLUDE IN THE TERMS OF ARTICLE 13 THAT THE AVOIDANCE RULES OF BOTH THE PLACE WHERE PROCEEDINGS WERE OPENED AND THE PLACE WHERE THE TRANSACTION WAS EFFECTED WOULD APPLY

•  THE AVOIDANCE RULES OF THE LEX CAUSAE ARE TO APPLY

•  THE INTRODUCTION OF A RULE THAT THE AVOIDANCE PROVISIONS OF THE LAW THAT IS THE MOST CLOSELY CONNECTED TO THE FACTS OF THE CLAIM ARE TO APPLY

• THE EC ISSUES A DIRECTIVE WHICH REQUIRES ALL MEMBER STATES TO HAVE CERTAIN MINIMUM STANDARDS SO THAT AVOIDANCE REGIMES REACH A CERTAIN LEVEL

• THE RULES ON AVOIDANCE ARE HARMONISED SO THAT THERE IS ONE SET OF RULES APPLYING ACROSS THE EU AND CONTAINED IN A REGULATION (PROBABLY THE EIR).

HARMONISATION

•  AVOIDANCE PROVISIONS APT FOR HARMONISATION AND THAT HARMONISATION IN RELATION TO THIS AREA WAS DESIRABLE AND ACHIEVABLE (INSOL EUROPE, “HARMONISATION OF INSOLVENCY LAW AT EU LEVEL” PE 419.633, APRIL 2010 ).

•  IT WAS NOT THE VIEW OF SEVERAL BODIES, SUCH AS THE INSOLVENCY LAWYERS’ ASSOCIATION. IN ITS RESPONSE TO THE EC’S CONSULTATION ON REVISION OF THE EIR THE ASSOCIATION QUESTIONED THE WISDOM OF THIS MOVE (WWW.ILAUK.ORG/DOCS/ILA/ILA_RESPONSE_INSOLVENCY_REGULATION_COPY.PDF)

•  EUROPEAN PARLIAMENT IN A RESOLUTION OF 15 NOVEMBER 2011 RESOLVED THAT THERE SHOULD BE HARMONISATION AND IT FOCUSED ON SPECIFIC TYPES OF ACTS THAT ARE DETRIMENTAL TO CREDITORS.

•  CLEARLY THERE ARE ADVANTAGES AND DRAWBACKS WITH HARMONISATION OF THIS AREA OF INSOLVENCY

•  PERHAPS THE LEADING BENEFITS WOULD BE CERTAINTY, REDUCTION OF CONFLICTS AND FAIRNESS

•  “THE DIFFICULTY IS THAT ANY TOTAL HARMONISATION THAT IS ATTEMPTED WILL NEED TO BALANCE THE CONFLICTING MATTERS OF PREDICTABILITY, PERCEIVED FAIRNESS AND MAXIMISATION OF ASSET RECOVERY” (G. MCCORMACK, “CONFLICTS, AVOIDANCE AND INTERNATIONAL INSOLVENCY 20 YEARS ON : A TRIPLE COCKTAIL” [2013] JBL 141 AT 143)