European Commission’s Recommendation of 12 March 2014 on a ...€¦ · Recommendation of 12 March...

NVRII Workshop 4 June 2014

European Commission’s Recommendation of 12 March

2014 on a new approach to business failure and insolvency.

Welcome by Professor Wessels

The Commission Recommendation of 12 March 2014 on a new

approach to business failure and insolvency

NACIIL Workshop Amsterdam, 4 June 2014

Process

• Dec. 2012 Commission Communication • July – Oct. 2013 Public consultation • Sept. – Nov. 2013 Expert Group on Insolvency • Sept. 2013 – Jan. 2014 INSOL Study • Impact Assessment

Aims of the Recommendation

• - encouraging Member States to put in place frameworks with the aim of strengthening the rescue culture in the Union,

• - providing clarity on the main elements of these frameworks, and

• - helping those Member States which are contemplating or already undertaking reforms in this area

The Recommendation addresses two critical stages:

• The first stage is prevention – what procedures are in place in the Member States to help ailing firms restructure their business and return to profitable growth.

• The second stage is second chance – what is the framework for honest entrepreneurs once bankrupt to start a new and potentially more successful venture.

A. Preventive restructuring procedures

• Enterprises do not have the same opportunities to deal with their financial difficulties everywhere in the Union

• - all Member States must have in place restructuring procedures

• - these procedures must be efficient, fast and low cost –> 7 main elements to ensure that these requirements are met

1. The time the procedure can take place

• Debtors have the possibility of restructuring before they become insolvent

• - the later a business initiates restructuring proceedings, the higher the costs of restructuring and the lower the management powers and success rate

2. The position of the debtor

• Debtors should be left in principle in control of the day-to-day operation of their business

• - incentive to restructure early • - least disruption to the operation of the business • - insolvency is not yet actual

3. Stay of individual enforcement actions

• Debtor should be able to request a court the suspension of individual enforcement actions

• - need to address the hold-out problem • - against any type of creditor • - safeguards to protect creditors:

• duration of the stay • possibility to have the stay lifted

4. Adoption of restructuring plans

• By creditors representing the majority stipulated under national law

• Necessary to involve those creditors likely to be affected by the plan

• Formal voting should not be absolutely necessary, but when foreseen in national law, creditors should whenever possible be allowed to vote by distance means of communication

5. Encouraging new financing

• Exempt new financing from avoidance actions

• Exempt providers of such new financing from civil and criminal liability, where it exists

• No protection should be granted where fraud was established.

6. Encouraging out-of-court negotiations

• The likelihood of achieving the goals of insolvency is inversely related to court power (WB)

• Court involvement is required when the rights of dissenting creditors are affected (at the stage of the stay of individual enforcement actions, or at the stage of validating a restructuring plan which affects such creditors)

• Other steps do not need to take place in court, e.g. voting, crediotors' meetings

7. Plan confirmation by a court

• Courts must check that: • - plans were adopted by the required majority

and that creditors were notified; • - dissenting creditors do not lose more as a result

of the plan than in the alternative scenario (piecemeal sale, or sale as a going concern, if that was indeed an option)

• Courts should be able to reject plans which are clearly unable to ensure the survival and viability of the business

B. Second chance

• For entrepreneurs, i.e. individuals … • … post-bankruptcy • Distinguish between procedures which end with

the liquidation of the entrepreneur's assets and those which involve a repayment plan

• - discharge is a maximum of 3 years in both situations, but the starting point is different

Exemptions

• - to discourage dishonest entrepreneurs from thinking they can benefit from a quick discharge,

• - to safeguard the livelihood of the debtor and his family,

• - to encourage adherence to repayment plans

Next steps

• Member States are invited to implement the Recommendation by 12 March 2015

• The Commission will review the implementation and the need for further measures by September 2015

Thank you!

• [email protected]

International Law Firm | Amsterdam · Brussels · London · Luxembourg · New York · Rotterdam

Amsterdam, June 4, 2014 Robert van Galen

NACIIL Workshop on the European Commission’s Recommendation of 12 March 2014


Insol Europe Study Mechanisms to improve the chances of rescuing failing enterprises - Pre-insolvency proceedings

* Advantage of early stage

- Debtor in possession proceedings * Debtor control, no loose canon

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Insol Europe Study - Lists of questions were sent to contributors from all Member

States

- The contributors provided information on the procedures in their own Member States (type of procedures, effectiveness)

- Steering committee * compiled the answers * tried to draw conclusions from the experiences with procedures in

the Member States * made recommendations

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Rescue of companies Three basic scenarios: (i) Out-of-court settlement (ii) Rescue plan adopted by creditors (iii) Sale of the business to a new entity Statistics may be confusing. Rescue figures often cover only scenario (ii). Furthermore rescue may take place in full proceedings

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Rescue of companies Further reasons why statistics may not be very meaningful - Only a small percentage of the companies may be saved, but

those cases are nevertheless meaningful from a macro-economic perspective

- The size of the companies entering proceedings varies widely. The Dutch Lehman bankruptcy rendered more proceeds than all other insolvency cases opened in the Netherlands over a number of years

- Rescue is not always the best option

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Pre insolvency proceedings Difficulty distinguishing between pre insolvency procedures and full insolvency procedures - Insolvency test does not work well (different criteria and

different interpretations) - Therefore we used as a criterion whether there is an

insolvency test We did not include in our study out-of-court settlements which do not require the opening of proceedings or any court involvement. They are a matter of contract law or corporate law rather than insolvency law.

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Pre insolvency proceedings Pre-insolvency proceedings are proceedings which are opened because the debtor is in financial difficulties but without prior insolvency test. They involve the applicability of special rules of insolvency law. Two types: - Confidential proceedings - Public pre-insolvency proceedings

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Confidential proceedings Example: France Mandat ad hoc (1500/a)

* Court appoints nominee * Confidentiality * No coercion

Conciliation (900/a) * Court appoints mediator * Confidentiality * Court may order stay or spreading out of payments (2 yrs) * New money has preference

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Confidential proceedings Example: Germany Protective shield procedure under sec. 270b InsO

* Supervision by preliminary trustee * Possible suspension of enforcement measures * Possibility to grant priority status to new money * Aimed at drawing up an insolvency plan which can be voted upon in

full proceedings

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Public pre insolvency proceedings (i) Assessing the requirements for opening full proceedings

(ii) Means to reach an agreement with the creditors (with

possible cram-down) N.B. liquidation test

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Debtor in possession proceedings (in report not used for confidential proceedings) - Proceedings in which the debtor is not divested of his assets

but administers his assets under supervision by a court or a court appointed supervisor * Avoid bankruptcy (pre-insolvency proceedings or lighter regime) * Facilitate restructuring by keeping control

- Use and success vary widely

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Debtor in possession proceedings - Different degrees of limitations on actions by the debtor

* disposal of assets (supervision) * limitations during implementation of plan

- no disposal of assets outside the plan - supervision by court or supervisor of correct implementation - limitation of powers of debtor or approval of transactions by the court - creditor influence

- May be an expensive solution. Supervisor or court supervision

entails costs

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Recommendations Confidential proceedings - Confidential proceedings may reduce the risk that the continuation of

the business is threatened if the value is decreased as a result of the insolvency stigma;

- The possibility of a stay or standstill of creditors made aware of the proceedings and the possibility of advanced ranking of new debt improves the chance of success. Such stay may also have to apply with respect to co-debtors;

- Also the possibility to have a rescue plan that is voted on by selected creditors and which can be crammed down on the minority of dissenters may provide an important tool;

- Further useful tools are the possibility to provide priority status to new financing and protection against avoidance actions of transactions which have been concluded with the consent of a court appointed supervisor or the court itself.

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Recommendations - Public pre-insolvency proceedings

* Public pre-insolvency proceedings may be cost saving because they do not require an insolvency test.

- Debtor in possession proceedings

* Debtor in possession proceedings tend to be attractive to debtors and this may be a reason why they are inclined to open them at an earlier time than they would open proceedings in which they are not in control

* Successful debtor in possession proceedings require the appointment of an experienced CRO or court involvement at a much higher degree involving specialized judges. Such court involvement may not be easily achievable in all Member States

* Although such data are difficult to compare there is an impression that DIP proceedings in the United States are very expensive

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Coffee/tea Break

Thanks to

EU Commission Recommendation on a new approach to business failure and insolvency

• Commentary by Lucas Kortmann - RESOR N.V.

• Aim of recommendation: not to change EIR but to focus on harmonisation of national laws

• Level playing field = greater confidence, improve access to credit and investment

• ‘to ensure access to insolvency frameworks’ to enable to restructure ‘preventing insolvency’

• Restructuring saves jobs and improves the economy.

Commentary will focus on: - Functionality of certain recommendations

- Need for (more) substantial harmonisation of certain

recommendations

Functionality

- Preventive restructuring only when likelihood of insolvency: how to determine, how to recognise?

- Effectiveness of DIP without supervision/mediator

- Moratorium vs. ‘pre-insolvency’? - Position of directors in the pre-insolvency phase

Substantial harmonisation

• How to identify classes (no mention of ‘out of the money’ creditors/shareholders)

• Harmonise majority % for voting?

• Fresh money: Avoidance-proof: need for actual harmonisation of avoidance rules

Timing

- Implementation by MS in 12 months

- Assessment by EU Commission in 18 months,

i.e. November 2015…

Corporate rescue frameworks

A.M. (Ilona) Wolffram-van Doorn

4 June 2014

European Commision's Recommendation on a new approach to business failure and insolvency

Reform of insolvency law in the Netherlands

Practical approach – regular consultations with practitioners in order to find “practical solutions” for “real problems” A program consisting of three pillars: 1. Preventing fraud 2. Modernization of insolvency proceedings 3. Enhancing reorganization possibilities

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The corporate rescue framework under the Commission’s recommendation

Objective: “[...] to ensure that viable enterprises in financial difficulties [...] have access to [...] insolvency frameworks which enable them to restructure at an early stage with a view to preventing their insolvency, and therefore maximise the total value to creditors, employees, owners and the economy as a whole.”

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The corporate rescue framework under the Commission’s recommendation

Preconditions:

The restructuring framework should be: - accessible in an early stage, - flexible and - cost-effective. It should include safeguards against misuse and “fraud on the minority”.

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Introducing a Dutch “scheme of arrangement”

Objective:

Preventing insolvency by allowing companies the possibility of solving financial problems through a settlement between the company, its creditors and/or shareholders.

When approved by the court such a settlement will be binding upon creditors or shareholders who unreasonably obstruct the restructuring of the debts while the vast majority of creditors or shareholders are supportive.

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Startingpoints for the legislative proposal? - To avoid insolvencies debtors should be stimulated in finding

solutions for there financial problems in an early stage.

- The procedure should be flexible, cost-efficient and available for big companies and SME’s.

- The initiative for the restructuring of the debts should remain with the company (debtor in possesion).

- Interests of the parties concerned should be safguarded.

Misuse should be prevented as much as possible. 48


Content of the future legislation

Procedural rules on: - Who has the initiative in proposing a restructuring plan

and the accompanying scheme of arrangement? - What could be the content of a restructuring plan and

the accompanying scheme of arrangement? - How and when should other creditors and/or

shareholders be involved?

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Content of the future legislation

Procedural rules on: - Who could ask the court for its approval of the scheme

of arrangement, when should this be possible and how could this be done?

- When should the court be allowed to approve a settlement? How and under which conditions should the court provide such an approval?

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Response & Discussion

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Drinks

Thanks to

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