Master European Private Law
Introducing Pre-Insolvency Procedures in the European Insolvency
Regulation
A search for Common Grounds to Introduce Pre-Insolvency Procedures in the
European Regulatory Field
T.M. Goudzwaard November 2014
Master European Private Law
Introducing Pre-Insolvency Procedures in the European Insolvency
Regulation
A search for Common Grounds to Introduce Pre-Insolvency Procedures in the
European Regulatory Field
T.M. (Mart) Goudzwaard Supervisor: Dr. T.M. Bos
Second reader: S. de Groot LLM November 2014
Content
Chapter 1 Introduction 1
1.1. Topic and research question 1
1.2 Methodology 2
1.3 What are pre-insolvency procedures? 3
1.4 Outline 4
Chapter 2 The European Insolvency Regulation 5
2.1. The scope of the Regulation 5
2.2 The role of the Annex to the Regulation 8
Chapter 3 Pre-Insolvency Procedures 10
3.1 United Kingdom 10
3.2 The Netherlands 16
3.3 Belgium 21
Chapter 4 The Proposal for a new Regulation on Insolvency Proceedings 27
4.1 The European Parliament’s recommendation on insolvency proceedings 27
4.2 The Commission’s proposal for a revised European Insolvency Regulation 28
4.3 The 2013 opinion of the European Economic and Social Committee 31
4.4 The European Parliament’s response to the Proposal of the Commission 32
4.5 The current position of the procedure 33
Chapter 5 Recent developments and their contribution to the regulation of
pre-insolvency procedures 36
5.1 The Member States and the Proposal 36
5.2 How to move on 40
Chapter 6 Conclusion and Recommendations 44
Chapter 1 Introduction
1.1. Topic and research questionIn a time of increasing harmonization of European laws, there are still some areas of law where substantive laws of Member States differ. One of these fields of law is the field of insolvency law. The European Insolvency Regulation (EIR) which was enacted in 2000 appears to be a helpful instrument in harmonizing the insolvency laws of the Member States of the European Union. This Regulation does not provide for a general harmonization of substantive rules,1 it does however regulate the jurisdiction, recognition and enforcement of insolvency proceedings in other Member States.2 In order for the Regulation to be applicable there has to be a cross border dimension, which means that a party going into insolvency needs to have a connection with at least two Member States.3 The connection itself may differ, but it is important to note that there has to be a transnational European Union dimension in the particular case.
In December 2012 the European Commission (EC) filed a proposal for amending the EIR (EC Proposal 2012). One of the proposed amendments is the inclusion of so called ‘pre-insolvency procedures’4 in the EIR, which are more and more accepted in the Member States in recent times.5 In a time where insolvency proceedings are more and more used to try to save as much as possible the insolvent company, it is thought that these proceedings contribute to the effort of making insolvency proceedings efficient and less painful for all involved parties. However the concept of pre-insolvency procedures is not one which can easily be defined as it raises questions concerning which procedures should and which should not be recognized as such procedures. One could ask whether there are certain thresholds that have to be met to qualify as pre-insolvency proceedings or not. The EC Proposal opens the scope to proceedings that do not involve a liquidator but are subjected to control or supervision by a court. The Commissions’ proposal however limits itself to proceedings that are public and thus does not include confidential proceedings.6 This paper will elaborate further on this aspect of the proposal in the upcoming chapters.
1 Wessels 2012, par. 10456. 2 EIR, recital 6.
3
EIR, recital 8.
4 In this thesis the terms pre-insolvency procedures, pre-insolvency proceedings, pre-packs and pre-packaged
deals will be used interchangeably, unless otherwise indicated.
5 Hess/Oberhammer/Pfeiffer 2014, p. 25-26. 6
EC Proposal 2012, p. 5-6.
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As there is no single definition of a pre-insolvency procedure this thesis sets out to answer the following main question:
Does the current Proposal for an amended European Insolvency Regulation contribute to an effective regulation of pre-insolvency procedures?
To answer this main question the following sub questions will be posed:
- What kind of procedures can be classified as pre-insolvency procedures?
- In which ways have different Member States reacted on the urge to reorganize businesses?
- Which elements are incorporated in the current Proposal?
- In which ways will the Proposal contribute to the reinforcements of common grounds in national restructuring procedures and what kind of criteria could be used to assess this development?
1.2 Methodology
As it is important that legislation enacted by the European Union is founded on common principles originating in the legislation of the Member States this research will compare a number of elements of the legal systems of the United Kingdom, the Netherlands, and Belgium in the area of insolvency and the restructuring of companies. This selection is based on the believe that it is necessary to compare both a common law approach and a civil law approach to the issue at hand.
The choice to discuss the Dutch system is founded on two grounds, being that the Netherlands government is currently proposing a legislative change to include pre-insolvency procedures in the legislation, and on the ground that Dutch is the native tongue of the author. The choice for Belgium is comparable with the choice for the Netherlands but for the fact that Belgium has already an extensive law in place concerning restructurings, which will be discussed below. In choosing the UK system two aspects are eminent, first it is a common law system, second there is a pre-insolvency procedure in place which is comparable to the Dutch proposal for law.
Based on this analysis and the analysis of the current proposal for a revised EIR, with a focus on its approach to pre-insolvency procedures, a number of criteria will be provided which are
necessary in order to give an unambiguous definition of pre-insolvency proceedings and should be included in the EIR. It will also be considered whether the mechanism of an Annex containing the allowed proceedings is the optimal way to perform unity in the field of insolvency proceedings without providing substantive insolvency rules on an EU level.
1.3 What are pre-insolvency procedures?
The current EIR does not include more flexible procedures compared with traditional insolvency procedures, which might be beneficial for both the debtor and the creditors and offer a greater possibility for a successful continuation of the business.7 It is however difficult to give a clear cut definition of what pre-insolvency procedures are and to what degree they relate to ‘traditional’ insolvency procedures, which are generally seen as some sort of procedures that lead to the winding up of a company.8 Insolvency related procedures can be seen on a sort of continuum ranging from out-of-court restructuring to formal liquidation procedures, with pre-insolvency procedures having a place between these two forms.9 These procedures could be very loosely described as “quasi-collective proceedings under the supervision of a court or an administrative authority which give a debtor in financial difficulties the opportunity to restructure at a pre-insolvency stage and to avoid the commencement of insolvency proceedings in the traditional sense.”10 However it could be asked when the court involvement should commence, should the court be involved as from the moment of the beginning of the procedure or is court involvement only necessary to ratify a proposal set up by the debtor.
Another important related question is whether it is necessary for a procedure that the legal entity which forms the company ceases to exist or whether a jurisdiction allows also for the possibility to continue with the same legal entity. In the latter case the question is justified whether one could still speak of an insolvency procedure in the strict sense. On the other hand, if one would exclude such procedures there are probably numerous procedures which would fall outside the scope of the Regulation but can nevertheless contribute to the overarching aim of saving businesses. Therefore this paper will initially not restrict itself to a certain pre-defined type of procedures.
7 EC Proposal 2012, p. 2. 8 Garcimartín 2011, p. 323. 9 Garcimartín 2011, p.322. 10 EC Report 2012, p. 4. 3
1.4 Outline
Chapter 2 will discuss the scope and functions of the current EIR to give a clear view of the sort of procedures that have to be recognized in the European Union (EU). The following Chapter will assess what kind of national procedures currently are in place which are used in one way or another to restructure a business. It will focus on the possibilities to sell a company out of insolvency and the restructuring of a company without going into liquidation (Chapter 3). This thesis will then dive into the current Proposal for a revised regulation and elaborate on the elements which are necessary according to the Proposal in order to successfully integrate pre-insolvency procedures (Chapter 4). Subsequently the contribution of these different elements will be assessed in order to define the most appealing scope in regulating insolvency related procedures while trying to overcome differences in national procedures (Chapter 5). Finally Chapter 6 will give a conclusion and recommendations for a further discussion on the future of pre-insolvency procedures in the European Union.
Chapter 2 The European Insolvency Regulation
2.1. The scope of the RegulationTo get a correct understanding of the functions and procedures of the current Regulation and its limits, this Chapter will start with an overview of some important functions of the Regulation in which attention will be paid to the kind of procedures that are included in the Regulation. This Chapter will not elaborate on the full function and scope of the Regulation as this would fall outside the scope of this research. It will focus instead on the extend of the regulated procedures. It will be seen that part A of the Annex to the Regulation plays a crucial role in assessing what kind of procedures are eligible for recognition and enforcement within the context of the EIR. This will also reveal the current stance of the EIR towards pre-insolvency procedures.
The EIR aims at improving the efficiency and effectiveness of insolvency proceedings having cross-border effects.11 The EIR tries to establish this by providing for certain procedures to be recognized in other Member States without the possibility to review those procedures by the latter’s Member States’ court. Recital 22 of the EIR provides that the recognition and enforcement of foreign procedures should be based on the concept of ‘mutual trust’ which is at the essence of the Regulation, despite the fact that it is only mentioned sideways.12
Article 1 EIR states that “the Regulation shall apply to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator” and article 2 EIR specifies this by referring to these procedures as only those listed in Annex A of the EIR.13 Article 1(1) gives four elements to qualify as insolvency procedure: (1) the procedure must be collective; (2) the procedure must be based on the ‘insolvency’ of the debtor; (3) the opening of the procedure must entail the divestment of the debtor and (4) the appointment of a liquidator who administers and disposes the debtor’s assets These elements can be seen as elements of traditional insolvency proceedings which do not give the possibility for the debtor to restructure its business.14
11 EIR, recital 8. 12 Pannen 2007, p.15. 13 Pannen 2007, p. 52. 14 Hess/Oberhammer/Pfeiffer 2014, p. 25. 5
It is important to reiterate that the purpose of the Regulation is not to harmonise the substantive laws of the EU, but rather to reform the Member States’ rules of private international law regarding insolvency procedures.15 It provides procedural rules regarding the standards with which a decision has to comply to be recognized in other Member States.16 Without going into details about the difference and delineation between procedural rules and substantive rules, the following definitions can be used. Substantive rules can be seen as “the part of the law that creates, defines, and regulates the rights, duties, and powers of parties”17 while procedural rules are those that “prescribe the steps for having a right or duty judicially enforced.”18
These definitions reveal that it is the content of the rules which defines whether a rule is substantive or procedural. In this context the EIR provides for procedural rules as it regulates the steps that are necessary for enforcing rights, namely the automatic recognition and enforcement of the insolvency procedures regulated under the EIR. As the substantive rules are still made by the Member States these rules still differ, which is why the recognition and enforcement without rules like those in the EIR would be difficult as it would result in imposing foreign law in a Member State’s legal order.
Article 3 EIR gives jurisdiction to open insolvency proceedings to the court where the debtor has its centre of main interests (COMI). While the COMI concept and its limits are heavily discussed throughout Europe,19 its essence for this paper is mainly to indicate that it is the key factor to establish jurisdiction for the courts of a certain Member State. Article 16(1) EIR gives an important effect to the establishment of jurisdiction, namely that “any judgment opening insolvency proceedings […] according to article 3 shall be recognized in all […] Member States.” Article 17(1) states that the recognition has the effect of proceedings being recognized without any further formalities and shall produce the same effect as in the Member State which opened the proceedings.
The recognition and enforceability relates not only to the opening of the proceedings, but also to the course and closure of the proceedings, and to judgements deriving directly from the insolvency proceedings which are closely connected to it (article 25 EIR). The EIR thus
15 Doyle & Keay 2005, p 1225. 16
Bork & Mangano 2012, p. 56.
17 Garner 2004, p. 1470. 18 Garner 2004, p. 1241.
19 See for example: CJEU 2 May 2006, C-341/04 (Eurofood), CJEU 20 October 2011, C-396/09 (Interedil).
Also: Paschalidis 2011, p. 161-195; Wessels 2010, p. 224-229.
6
provides that all decisions relating to insolvency have to be recognized when they have a close connection with the insolvency procedure. 20 This system of recognition and enforcement is essential for the functioning of the EIR. In relation with pre-insolvency procedures the recognition element is of eminent importance as the inclusion of such procedures is aimed at the goal of such procedures being recognized in other Member States without further formalities. As these elements are at the core of the EIR and its scope it is however important that these elements can also be limited.
Article 26 EIR provides for the refusal of recognition and enforcement of judgments only in cases contrary to public policy, in particular when fundamental principles or constitutional rights and liberties of individuals are at stake. As the recognition of judgments from other Member States should be based on mutual trust, the use of refusal grounds should be reduced as much as possible.21
The scope of the EIR is by necessity linked to the scope of the recently revised “Brussels I Regulation” which regulates recognition and enforcement in civil and commercial matters. This latter regulation is applicable in all civil and commercial matters apart from predefined exceptions.22 Article 1(2)(b) Brussels I Regulation gives as one of these exceptions proceedings related to bankruptcy and the winding-up of insolvent companies.
On a first inspection it seems that the exact delineation between the Brussels I Regulation and the EIR is not completely clear as not all procedures ‘relating to bankruptcy’ as required by Brussels I, are listed in the Annex of the EIR. In an effort to resolve this issue the European Court of Justice (ECJ) decided in its Seagon/Deko Marty decision that there is no gap between the application of the EIR and Brussels I and therefore always one of these instruments is applicable.23 The court in the state where the proceedings are opened is also the court which may decide on whether a claim is insolvency related, and therefore capable for recognition under the EIR.24
20 CJEU 12 February 2009, C-339/07 (Seagon/Deko Marty), par. 21. 21
EIR, recital 22.
22 Brussels I Regulation, recital 7; Brussels I Regulation recast recital 10. The recast will enter into force as of 10
January 2015.
23 CJEU 12 February 2009, C-339/07 (Seagon/Deko Marty), par. 19-20. 24
CJEU 12 February 2009, C-339/07 (Seagon/Deko Marty), par. 28.
7
Nonetheless, in German Graphics the ECJ ruled that the scope of the EIR should be interpreted narrowly, while maintaining a wider scope for the Brussels I Regulation.25 The ECJ also held that, when an autonomous claim is not based on a national law regarding insolvency proceedings, and can also be initiated outside such proceedings, it cannot be invoked using the EIR.26
2.2 The role of the Annex to the Regulation
Annex A EIR gives a limited list of national procedures that have to be recognized in other Member States. This immediately indicates one of the main points relating to the recognition of foreign insolvency procedures, namely that only those procedures listed in Annex A benefit from the automatic recognition of the EIR (article 16 EIR), while other procedures are excluded. A problem related to this scope is, as the Commission defines it, that this approach can lead to ‘discrepancies between the procedures listed in the Annex and the conditions laid down in article 1 EIR’.27 Such discrepancies can undermine the whole idea of the EIR, which is to provide a framework based on which it should be easy to judge which procedures are recognized in other Member States.
A first question which can be asked is whether a procedure which complies with article 1, but is not listed in the Annex, can be subjected to recognition and enforcement. In 2012 the ECJ decided that ‘[the] Regulation (the EIR) only applies to proceedings listed in that Annex’28 and therefore that it does not matter for that purpose whether a procedure complies with the criteria of article 1 EIR. This implies that it is currently impossible to force the text of the EIR in a way to include pre-insolvency or restructuring procedures.
25
CJEU 10 September 2009, C-292/08 (German Graphics), par. 23-26. The ECJ based its decision on the criteria formulated in its Gourdain/Nadler decision, where it ruled that exceptions on the material scope of the (predecessor) of the Brussels I Regulation must be interpreted autonomous and regarded as “independent concepts which must be interpreted by reference, first, to the objectives and scheme of the convention and, second, to the general principles which stem from the corpus of the national legal systems.” Whether a claim can autonomously be qualified as related to insolvency, must be assessed using the national qualifications of such a claim (CJEU 22 February 1979, C-133/78 (Gourdain/Nadler)).
26 CJEU 10 September 2009, C-292/08, par. 32. The delineation between these two instruments is still not
exactly crystalized by either the ECJ or the European legislator. While this discussion is relevant for the discussion on what exactly constitutes a pre-insolvency procedure, the discussion as such will not be elaborated on, but only mentioned as existing where necessary.
27 EC Report 2012, p. 6. 28
CJEU 8 November 2012, C-461/11 (Ulf Kazimierz Radziejewski), par. 24.
8
One could also turn this question around and ask whether a national procedure listed in the Annex, but not fulfilling the requirements of article 1 is capable of being recognized. According to the ECJ this is possible as ‘once proceedings are listed in Annex A […], they must be regarded as coming within the scope of the Regulation’.29 It is thus the Annex that defines the scope of the EIR, and it is not so much the nature of the proceedings but rather this arbitrary listing that decides whether a proceeding should be recognized in other Member States.
In assessing whether a certain procedure falls within the scope of the EIR one first has to address the Annex of the EIR. Moreover it is important to remember that procedures not listed in the Annex have to be assessed using the Brussels I Regulation. This can create the risk that a procedure which is aimed at restructuring the business in an efficient way has to be recognized via different ways depending solely on the listing in the Annex of the EIR.
29
CJEU 22 November 2012, C-116/11 (Bank Handlowy), par. 33.
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Chapter 3 Pre-Insolvency procedures in practise
There is no single European definition of what should constitute a pre-insolvency procedure and which criteria should be met in order for such a procedure to be recognized in other Member States. As has been elaborated in Chapter 1 various definitions can be used to describe pre-insolvency procedures.
The EC defines pre-insolvency procedures as “quasi-collective proceedings under the supervision of a court or an administrative authority which give a debtor in financial difficulties the opportunity to restructure at a pre-insolvency stage and to avoid the commencement of insolvency proceedings in the traditional sense.”30 This definition is however not expressly mentioned in article 2 of the Proposal, which could indicate that this is just a description of the phenomenon instead of a legal definition. As an introduction it can be said that pre-insolvency procedures are those procedures which, while aimed at restructuring businesses, only become legal restructuring procedures from the moment a court is involved in the process.
Due to this ambiguity it is useful to first address the manners in which different Member States have coped with procedures other than straight forward liquidation procedures. In the next paragraphs a number of procedures will be scrutinized in order to find common grounds on which a rule concerning pre-insolvency rules could be based.
3.1 United Kingdom
The United Kingdom (UK) has no specific legislative provisions which deal with the establishment of a pre-pack, that is a procedure in which a company is sold under the protective rules of an insolvency procedure while arranged before the commencement of actual insolvency. However it could be seen as a process which evolved over time in the UK.31 Traditionally the UK has been regarded as having a creditor-friendly insolvency regime. There was little court involvement and the procedure was aimed at a swift realization of the assets of the debtor but it did not help in restructuring businesses with the aim of
30 EC Report 2012, p. 4. 31
Godfrey 2011, p. 545.
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continuation of the business.32 The last decades however this approach has changed as the continuation of the business was increasingly seen as important for society.33
Without making a comprehensive analysis of UK Insolvency law, there are a few instruments that have to be mentioned to understand the UK’s position on pre-insolvency proceedings. The UK Insolvency Act 1986 (IA) distinguishes four procedures for companies in financial distress: company voluntary arrangements (CVA), administration, receivership, and the winding up of companies.34 With the winding-up of a company the latter is liquidated, the assets are distributed amongst the creditors of the company and the company ceases to exist. The procedure is intended as a collective mechanism for the enforcement of creditors’ rights against the company.35 CVA is composed of a satisfaction of debts agreed by a majority of the creditors of a company.36 Administration can be used as a procedure both for rescuing a company and for selling the company’s assets as it can be designed as a rescue procedure aimed at facilitating the continuation of the company.37 If a company is in administration for the purpose of restructuring, this is usually achieved by means of combining administration with a CVA.38
Part 26 of the Companies Act 2006 (CA) provides a debtor with the possibility to arrange with its creditors a way to restructure his debts or to compromise on the payments of those debts both within and outside insolvency. A scheme of arrangement may be proposed by the debtor, the creditor, the liquidator and the administrator (s. 296 sub 2 CA). However these schemes are complex and as there is no stay on the pursuit by creditors of individual claims these schemes are not used very often in restructuring proceedings by smaller businesses,
32 Manning & Henry 2006, p. 387. 33 Manning & Henry 2006, p. 387-388. 34
UK Insolvency Act 1986, c. 45. See for an elaborate discussion of procedures in the UK: McCormack 2012. Also: Manning & Henry 2006.
35 McCormack 2012, p. 235. 36 Manning & Henry 2006, p. 389. 37
McCormack 2012, p. 235; Manning & Henry 2006, p. 389. Under the old administration procedure creditors had much less influence on the decisions of the administrator and the procedure of the administration. Also creditors lost their remedies against the debtor. However the administration order could be set aside by a court if the debtor failed to fulfil his part of the order. This rescission had the effect of the debtor ceasing to enjoy any protection under the act and is, again exposed to the risk of proceedings constituted by any creditor (Cork Report 1982, p. 45).
38 McCormack 2012, p. 237. In such a combined procedure the CVA is used to accomplish an agreement with
the creditors, while the administration part is used to save essential parts of the company as an administration procedure in principle does not affect the position of creditors, McCormack 2012, p. 239.
11
unless they are combined with an administration procedure.39 Such restructuring schemes can be approved by the court if 75% of the creditors vote in favour of the plan (s. 899 CA).
A third important enactment is Part 10 of the Enterprise Act 2002 (EA) which aims at reducing the involvement of the court in the initiation of insolvency processes.40 Since the introduction of the Enterprise Act the number of pre-packaged procedures used in administration procedures increased significantly.
Paragraph 248 EA lays down new provisions which replace provisions in the Insolvency Act 1986 concerning the administration procedure. It thereby introduces a schedule B1 (further IAB1) to the Insolvency Act. This schedule elaborates on the procedure of administration and its requirements. Under this schedule an administrator can be appointed either by the court (IAB1, par. 10), by a floating charge holder (IAB1, par. 14) or by the company or its directors (IAB1, par. 22). In case of a court order the court has to be satisfied that the company is or is likely to become unable to pay its debts and that the administration order is reasonably likely to achieve the purpose of saving the company (IAB1, par. 11). A floating charge holder may appoint an administrator when his claim under the floating charge becomes enforceable (IAB1, par. 16).
The objectives of the administration procedure are either rescuing the company as a going concern; achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration; or securing the objective of realising property in order to make a distribution to one or more secured or preferential creditors (IAB1, par. 3). For that purpose the administration proceeding normally obliges the administrator to assess the business opportunities of a company. This is followed by the presentation of a report to the creditors on which the creditors can vote on a meeting (IAB1, par. 46-58).
The administrator can make his assessment in relative ease as the commencement of an administration procedure activates a moratorium in which creditors are put on hold. This moratorium starts at the moment of application to the court (IAB1, par. 44). So while there is a possibility to commence pre-insolvency procedures in the UK, consequences like a moratorium only start at the moment when the court recognizes the procedure.
39 McCormack 2012, p, 236. 40
According to HHJ David Cooke in: Re Kayley Vending Ltd. [2009] BCC 578, [2009] EWHC 904 (Ch), par. 3.
12
For our purposes the most important possibility to appoint an administrator is the one given to the company itself which is regulated in paragraphs 22-34 IAB1. These paragraphs provide for the possibility to appoint an administrator as long as there is not yet an earlier moratorium in place (par. 24 IAB1); a petition for the winding up of the company (par. 25 IAB1); or an administrative receiver in office (par. 26 IAB1). As it will often be unclear to the outside world when the company appointed administrator starts with his assessment of the company this can lead to the creation of a situations in which creditors and the court are not as informed as they should. This was also recognized by Lord Hoffman, in the discussion on the new administration regime when the Enterprise Act was under scrutiny of Parliament, who stated:
“What this amendment does, however, is to put the whole matter, even as to the future, into the hands of the opinion of the administrator. The amendment therefore precludes interested parties from coming to the court and saying, ‘Let us examine this matter rationally. It appears that the administrator is going about it the wrong way. It would be better, to achieve the statutory objectives, if it were done differently’. The court would then be able to asses that matter.”41
While it is still possible for the administration procedure to be recognized by the court, the procedure by which the company appoints the administrator has the disadvantage that both creditors and the court cannot influence the procedure from the beginning.
Due to the fact that there is no specific legislation on pre-insolvency procedures it is up to practise to offer guidelines on the treatment of pre-packaged insolvencies.42 A preliminary note should be that insolvency practitioners in the UK, whether administrators or liquidators are normally accountants and not lawyers as is the case in other countries.43
The Institute of Chartered Accountants in England and Wales (ICAEW) has come up with numerous statements about insolvency practise (SIP’s). In its 16th SIP statement ICAEW gives recommendations about pre-packaged sales in administration procedures.44 These guidance notes reiterate several important notions which could also be extracted from the general system of UK insolvency law, namely the duty to act in the best interests of the creditors, and a duty to disclose information to the creditors on the first possible occasion. To
41
United Kingdom, House of Lords Hansard, Debates, 21 October 2002, Vol. 639, part. 190, WA column 1103.
42 McCormack 2012, p. 240. 43 McCormack 2012, p. 261. 44 http://www.icaew.com/~/media/Files/Technical/Insolvency/regulations-and-standards/sips/england/sip-16-e-and-w-pre-packaged-sales-in-administrations.pdf. 13
achieve this, insolvency practitioners have to maintain a detailed record of their reasoning concerning the decisions to come to a pre-pack, they have to take into account the possible liability of directors for fraudulent or wrongful trading under sections 213 and 214 Insolvency Act 1986, and they have to provide unsecured creditors, whom normally are not involved in establishing the pre-packaged sale, a detailed explanation and justification of the process that lead to the pre-packaged sale.45
These rules were first formulated in the decision Re Kayley Vending Ltd.46 In this decision Judge Cooke gives some explanation on dealing with pre-packs in the insolvency context. The decision starts by giving a summary of the SIP guidance’s which were introduced above. It goes on by stating the advantages of a pre-pack and focuses on the speed of the procedure and the fact that often value is retained in the company.47 However it also recognizes the disadvantages, of which the most important are that the best price may not be achieved, credit may be incurred inappropriately before the commencement of the official proceedings, creditors have no ex ante possibility to influence transactions, and as the deal is already made, creditors have insufficient information to investigate and challenge pre-packed decisions.48 Judge Cooke then continues with the sort of information that should at least be provided to the creditors. Despite the fact that the rules on administration proceedings do not provide for a requirement to share any information in relation to the purpose of the opening of the proceedings, it is common for the applicant to provide information as to why it is thought that an administration proceeding will lead to a better result than liquidation. It is therefore essential that this information contains the estimated outcome of the procedure and the value that is likely to be achieved under the pre-packed proposal.49 The most important requirement for this information however is that it is “sufficient but not excessive, appropriately selected and fairly presented” and does not only contains favourable information.50
In the UK there are thus possibilities to construct a sale of a business in such a way as to avoid liquidation, but at the same time losing unsecured debts without a possibility for these unsecured creditors to object in advance to a proposed reorganization plan.51 Despite the fact that there are guidelines to ensure sufficient information being available for these creditors,
45 Kayley Vending Ltd. [2009] BCC 578, [2009] EWHC 904 (Ch), par. 4. 46 Kayley Vending Ltd. [2009] BCC 578, [2009] EWHC 904 (Ch). 47
Kayley Vending Ltd., par. 6.
48 Kayley Vending Ltd., par. 11. 49 Kayley Vending Ltd., par. 21. 50 Kayley Vending Ltd., par. 22. 51
McCormack 2012, p. 240-241.
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there seems to be a lack of clear rules and guidelines which specifically state which information should be available and when it should be made available.
In Re Kayley Vending it was held that the creditors should get “sufficient” information for a pre-pack to be approved by a court, but this is a vague notion which does not express when this information should be available, the way in which it should be made available and in which manners it can be used by creditors in objecting to a deal in which they did not take part initially.
The increasing number of these kind of procedures also raises questions about the role of the administrator in this process. When an administrator does not act prudently in his role of protecting the interests of all the creditors of a company, the risk can occur that the result is not optimal for all but merely optimal for specific creditors.52 This could be worrisome as the pre-pack plan does not require approval by the totality of creditors53 and there is no court involvement until the plan has to be put into effect.54 The involvement of creditors is therefore very limited, especially as it are normally the secured creditors who are involved in the discussion with the administrator to reach a resolution,55 while uninformed and unsecured creditors have no possibility to influence these decisions.
It can thus be concluded that there is no specific regulation of pre-insolvency procedures in the UK. The instrument of administration however provides for the possibility for companies to restructure and to save a business in distress. The device of the pre-pack as pre-insolvency scheme seems to fit well in this picture. However as discussed above the legal practise in the UK is still struggling to identify the ideal way to cope with this device as there are no clear conditions with which a pre-pack has to comply.56
Nevertheless it is clear that in the UK the emphasis lies at the amount of and time when outside creditors (mostly unsecured creditors who are not involved in making the plan) receive information about the plan. This information has to be fair, appropriate and must not sketch a too rosy picture of the outcome of the plan.
52 Finch 2006, p. 577. 53 Walton 2009, p. 87. 54 Walton 2009, p. 92. 55 Finch 2009, p. 453. 56 McCormack 2012, p. 240. 15
As the pre-insolvency procedure in the UK is commenced without court involvement there should be ways for creditors to object to these decisions, but currently creditors in the UK do not have these tools which results from the lack of regulation in this field.
3.2 The Netherlands
Dutch insolvency law knows three sets of formal procedures in insolvency which are regulated in the Insolvency Act (Faillissementswet, FW):57 insolvency (faillissement), articles 1-213kk FW; suspension of payments (surseance van betaling) articles 214-283 FW; and debt reorganization for natural persons (schuldsanering natuurlijke personen) articles 284-362 FW, which all deal with different situations around insolvency.58
In applying for insolvency in the Netherlands, natural persons, including those having a business, can opt for a debt reorganization which entails an arrangement for a debtor who is a natural person to write down parts of his debts in order to start over again with a clean sheet.59 In the insolvency proceeding the purpose is to liquidate the assets of the bankrupt estate by a general seizure of the assets of the debtor and a subsequent sale for the benefit of the creditors.60 If applied to a company, the legal form of the company disappears in this process. Therefore both of these procedures are generally not suitable for the reorganization of companies. A suspension of payments provides for a way to reorganize and continue a viable business but due to its structure it is often used as a first step towards insolvency proceedings aiming at liquidation, mainly because a suspension of payment does not affect secured creditors.61
Another problem with the effectiveness of the suspension of payments procedure is that the rights of employees are being protected and a party who wants to buy the valuable parts of the company cannot easily dispose of those employees, while this is possible in insolvency proceedings.62 Therefore practitioners are currently applying a combination of the insolvency procedure with a pre-pack solution. The advantage for a company to go into insolvency instead of debt restructuring is that rights of employees with regard to the transfer of a
57 Wet op het faillissement en de surseance van betaling, van 30 september 1893, stb 140.
58 For an introduction in Dutch insolvency law in English see: De Ranitz & Kortmann, 2006, also: Faber &
Vermunt, 2012.
59 FW, Title III. However, companies are excluded from using this procedure. 60 De Ranitz & Kortmann, 2006, p. 342-343.
61 Faber & Vermunt, 2012, p. 427-428. 62
Faber & Vermunt, 2012, p. 459-461.
16
company are not applicable (art. 7:666 Dutch Civil Code (DCC)). So while in a formal insolvency proceeding the company can neglect the rights of employees, particularly in relation to the ending of the labour agreement, in a restructuring procedure these rights have to be respected.
The Dutch legal system does not yet recognize a procedure in which a company can appoint an administrator without making this public and thus not informing its creditors. There is of course the possibility of an out-of-court composition plan, but this requires the consent of all the creditors and can be seen as a new agreement between the debtor and its creditors.63 Like in other countries the discussion about a regulation on pre-insolvency procedures intensified due to its increased use in practise. Companies often compose a plan with their own lawyer, followed by a suspension of payments in which they collaborate with the appointed administrator to quickly sell the business and retain the value of the company.64
The advocates of allowing a pre-pack concentrate mainly on the fact that such a procedure is value increasing and employment conserving. Opponents however stress that it is questionable whether there is indeed an increase in value for the creditors as the procedure is secret and the court is only involved at the latest possible moment. Another disadvantage that is often stressed is the position of employees. As discussed, art. 7:666 DCC provides for the possibility to dispose of employees in case a company goes into insolvency proceedings. When combined with a pre-pack, such a proceeding can be detrimental to the employees as the company can continue its business after the sale and at the same time dispose itself of unnecessary employees.
A recent example of this discussion concerning the rights of employees concerned the bankruptcy of the shrimp processing company Heiploeg on 28-01-2014. 65 After the administrators (curatoren) where appointed by the court before the opening of the procedure the provisional administrators performed a pre-pack sale of the business. However currently the Trade Unions have commenced legal proceedings on the grounds that the sale of Heiploeg was actually a reorganization and transfer of the corporation as mentioned in article 7:662 DCC, and therefore it was impermissible to lay of the employees without following the
63 De Ranitz & Kortmann, 2006, p. 341-342.
64 Tideman 2013, p. 190-191, also for a more general discussion of pre-packs (in Dutch). Also: Cools 2013. 65 Insolvency Heiploeg, publication number 8.nne.14.26.F.1300.1.14, publication date: 29-01-2014, insolvency
declaration date: 28-01-2014.
17
normal dismissal procedures.66 While there has been no ruling on this application yet it indicates an important disadvantage of pre-packaged insolvency procedures, namely that they can easily be used in a fraudulent way to dispose of employees without regard for the relevant labour law provisions regulated in Title 9 Book 7 DCC while the company is not yet insolvent. In the Heiploeg decision the District court Groningen anticipated on the proposed introduction of the pre-pack in Dutch law. However this is not to say that all courts anticipate in this way, as there are also courts which simply do not recognize pre-insolvency procedures as they are not yet regulated by law.67 The question remains what the role of the judge should be, abstaining a legal basis for the pre-pack. Currently the role of the judge is mainly indicating the person who will be appointed as curator in case a company files for insolvency on request of the debtor.68
As lower courts diverge in their opinion about allowing pre-packaged insolvency deals this leads to legal uncertainty for the debtor. It depends totally on the presiding judge whether a request for a pre-packaged insolvency deal will be allowed. Next to legal uncertainty this could also lead to ‘forum-shopping’, in the moving of companies headquarters to another district to apply for a pre-pack procedure with a more benevolent judge.69 Finally, due to a lack of regulation it is not clear what role the creditors play in this construction and by which mechanisms their rights are protected at the pre-insolvency stage.
In 2013 the government inserted a regulation on pre-insolvency procedures in a proposal for law (Voorontwerp Wet Continuïteit Ondernemingen I (IAP)). This proposal is part of a larger reform of Dutch corporate and insolvency law, aimed at facilitating businesses in distress. The proposal aims at providing for more time to find a solution for companies in financial distress, organizing an efficient process of selling the business, and providing for a possible breathing space to work out a decent plan.70 The proposal has a number of core elements:
- It contains rules that provide the opportunity for the debtor to request for a provisional administrator and the conditions the court has to use before approving the request.
66 http://www.faillissementsdossier.nl/images/nieuws/FNVCNVHeiploegdagvaarding.pdf. 67
See for example: Rechtbank. Maastricht, 176602/FT-EA 12.172, 28-11-2012.
68 Rechtbank Maastricht, 28-11-2012, 176602/FT-EA 12.172, LJN BY4595, JOR 2013/63, nt. J.J. van Hees,
par. 6.
69 Rechtbank Maastricht, 28-11-2012, 176602/FT-EA 12.172, LJN BY4595, JOR 2013/63, nt. J.J. van Hees,
par. 5. See also the recent insolvency of Estro, in which Estro, which had its statutory seat in Amersfoort (falling under the district court Midden-Nederland, moved its seat to Amsterdam to request for a pre-packaged
insolvency at the Amsterdam district court. See:
http://www.faillissementsdossier.nl/nl/faillissement/923007/estro-groep-b-v.aspx.
70
Voorontwerp Wetsvoorstel MvTp. 2.
18
- The court considers the request behind closed doors.
- The court will grant the request in case it can summarily be proved by the debtor that there are facts and circumstances from which it can be concluded that the debtor will be unable to pay his debts.
- To avoid abuse the debtor has to prove or make plausible that the procedure will be in the best interests of the totality of creditors, or that there are public interests at stake which will benefit from the continuation of the company.
- The debtor stays in control of his business. The provisional administrator is not responsible for the actions of the debtor during the provisional appointment.
- The provisional administrator has to file a final report which will become public when insolvency or suspension of payment is requested.71
These elements indicate important conditions which have to be fulfilled before the court can grant legal effect to the pre-packaged insolvency procedure. However the objectiveness of these criteria, as proposed, can be questioned. It is true that the debtor is normally the party who is best informed about the financial position of the company. This could lead to a scenario in which the debtor plays with his financial records to avoid a liquidation procedure and try to convince the court that his creditors are better off when the debtor in fact only tries to diminish his debts. Of course this is a possibility with other procedures as well and it can be coped with by fraudulent law provisions, but the secrecy of the procedure may exacerbate this problem.
Under the proposal the pre-insolvency procedure can be invoked before the opening of a formal insolvency procedure and before a suspension of payments procedure.72 The procedure thus will not always lead to a liquidation of all assets but has to provide for a solution in which the business can be restructured efficiently.73
A problem which has to be addressed is that the debtor retains control over his business but at the same time may fear that legal actions will be annulled at the moment of insolvency. To address this problem article 365 section 2 sub a IAP states that the debtor can request the provisional administrator to indicate whether he thinks any legal act will stand in insolvency. The exact consequences of this indication however, are not clear. It can rightly be asked whether in case the provisional administrator gives this indication it will be binding on the
71 Voorontwerp Wetsvoorstel MvT p. 2-3. 72 Voorontwerp Wetsvoorstel MvT p. 1. 73 Voorontwerp Wetsvoorstel MvT p. 17. 19
final administrator or whether the latter still has the possibility to avoid such acts.74 A follow-up question in such cases could be whether the debtor, who conducted an act in good faith, is liable for the action or not.75
This uncertainty exists as under Dutch law there is a legal instrument to set aside fraudulent transfers (the actio pauliana).76 The actio pauliana can be used by the insolvency administrator to challenge legal acts of the debtor which are detrimental to one or more creditors.77 Therefore it is crucial for a debtor to know the consequences of his actions when trying to arrange a pre-packaged sale. The IAP does not specifically refers to the rights of creditors, which makes their position still unclear. They can use general tort law and insolvency law to enforce their claims, but have no explicit right to get involved in the pre-pack procedure when the provisional administrator does not grant them that right.78
As the procedure under the proposal commences with a request by the debtor to the court,79 the court can also supervise the process. This will be done by a member of the deciding court, who will be appointed as provisional supervisory judge (beoogd rechter commissaris).80 This provisional supervisory judge can, according to article 367 section 2 IAP, also give his view about the actions in 365 section 2 IAP, which as we have seen concern the admissibility of legal acts. However the IAP does not mention whether this view is binding and therefore does not solve the legal uncertainty that can arise concerning acts of the debtor. As long as this legal uncertainty will persist it could incentivise debtors not to opt for a pre-pack procedure as a possible liability claim for a fraudulent act could be more detrimental for the director or shareholder than beneficial for the company.
Another feature of the proposal is that it does not contain any specific requirements as to the content of either the initial request of the debtor or about the exact content of the report of the provisional administrator. Instead of providing a list of requirements the proposal suffices with a statement that it is up to case law to define further criteria as to the contents of these
74 The proposal indicates that this will be the case in general but it is not expressly clear about its extend,
Wetsvoorstel MvT, p. 22.
75 Insolad 2014, p. 5.
76 Article 42 FW for voluntary legal acts; article 47 FW for mandatory legal acts.
77 Van der Weijden 2012, p. 247. In his dissertation Van der Weijden elaborates extensively on the function of
the actio pauliana (in Dutch, with English summary).
78 In general creditors of corporations in the Netherlands can claim damages based on article 6:162 DCC in
combination with the Beklamel judgment (HR 6-10-1989, NJ 1990/286 (Beklamel)).
79 Wetsvoorstel art. 363. 80
Wetsvoorstel art. 367.
20
reports.81 This could be troublesome in regard to legal certainty, as both the debtor and the provisional administrator are not able to know in advance whether their application will pass the test which the court applies.
The proposal to insert pre-insolvency procedures in the Insolvency Act already contains a number of important indications of the tasks and obligations of the involved parties. For example it is of eminent importance that both the debtor and the provisional administrator provide information about their activities to the court and eventually to the creditors. The content of this information however is not yet determined and can therefore still cause for ambiguities in applying these proposed provisions. Especially the role of the creditors and their possible remedies in case of detrimental acts are not extensively regulated by this proposal, while they should certainly have some influence in the realization of any pre-packaged deal.
While it is possible in The Netherlands to arrange a pre-pack via a pre-insolvency procedure, the practise reveals that while the concept is used, there are no clear guidelines about how to use these procedures. This is mainly because different courts have different views on the topic. While some courts already anticipate on the possibilities a new law might provide, other courts apply a more legalistic view by not allowing pre-insolvency procedures as these procedures are not yet regulated by law. Albeit it can certainly be welcomed that courts anticipate on new proposals of law, this should not be done too extremely as sometimes proposals of law can, even at a final moment, be abandoned.
3.3 Belgium
One of the first interesting aspects of Belgium insolvency law is that the Insolvency Act only applies to traders (handelaren) according to article 2 Faillissementswet 1997 (BFW). The BFW knows one procedure, het faillissement (bankruptcy), which commences with a request by the debtor; one or several creditors; the public attorney; or at the request of a provisional administrator (article 6 BFW). The bankruptcy procedure is aimed at liquidating the assets of the debtor and therefore not suitable for any form of reorganization. Until 1997 non-commercially active persons had no access to insolvency proceedings.82 The Act of 5 July
81 Wetsvoorstel MvT p. 13. 82
Derix & Fransis 2012, p. 43.
21
1998 however changed this, 83 by providing natural persons for a ‘collectieve
schuldenregeling’, a collective debt arrangement.84
Since the modernization of Belgium insolvency law in 1997 the law provides for a tool to restructure companies in financial distress in order to preserve their activities and economic value as a going concern. The new regulation provides the court with the possibility to temporarily subordinate the interests of its creditors for the debtors’ own interest under supervision of a court appointed supervisor.85
After ten years it appeared however that the reorganizations under this act where not satisfactory. Therefore, in 2009, the Belgium government enacted the Business Continuity Act (“Wet betreffende de continuïteit van de Ondernemingen” (WCO)), which provides for a framework to provide companies with the possibility to arrange an agreement with their creditors.86 The act is aimed at restructuring businesses. The WCO was reformed again in 2013 to restrain its scope regarding the viability of companies and to prevent abuse. Due to these recent reviews the WCO can therefore be seen as a very recent instrument concerning restructuring.
As a preliminary solution article 8 WCO gives the opportunity to a company in distress to request the court to start an investigation (handelsonderzoek) which can at an early stage detect problems and provide possible ways to restructure the business. The court can inform the debtor about the situation and propose certain actions to be taken if it concludes that the debtor is heading towards insolvency (article 10 WCO). The debtor himself can also request to the court to appoint a mediator (ondernemingsbemiddelaar) to assist and simplify the reorganization of the company. Such a request is free of forms and therefore the debtor has a lot of freedom in deciding this process (article 13 WCO).
In case the debtor himself is negligible in securing the continuity of the company, creditors and other stakeholders (except for the debtor himself) can request the court to appoint a judicial trustee (gerechtsmandataris) and appoint him the tasks which the court thinks necessary (article 14 WCO). The tasks of both the mediator and the judicial trustee however diverge. The mediator, who can only be appointed by the debtor, is installed to assist the debtor in negotiating with his creditors and can be equipped to give advice about the
83 Derix & Fransis 2012, p. 43.
84 Belgium Gerechtelijk Wetboek, Title 4. 85 Derix & Fransis 2012, p. 42-43. 86
Derix & Fransis 2012, p. 43.
22
realization of a recovery plan. Its role can be described as reconciling the debtor and the creditors. The mediator has a wide range of discretion in fulfilling his tasks, but can at the same time be easily set aside by the parties (article 13 WCO).
The appointment of a judicial trustee can be requested by every interested party, but the initiating party already needs to have a plan which can preserve the continuation of the company. While he/she is not a liquidator he/she can be responsible for the transfer of the business and for the negotiations on behalf of the company to reschedule the debts of the company. As the judicial trustee is not a liquidator he/she may not replace the debtor as decision maker (article 14 WCO).
The reform of 2013 provides for a judicial reorganization in which the continuation of the business is the main goal, and for a possibility to reach an amicable agreement between the debtor and his creditors. Article 15 WCO provides the debtor with the possibility to arrange with his creditors an amicable agreement (minnelijk akkoord) with the aim of restructuring the debts of the company in order to make the company healthy again. Therefore such an amicable agreement has to be agreed by the debtor and at least 2 creditors; has to expressly provide for the aim of reorganization; has to be filed at the court; and has to be registered. The procedure has the advantage of not being public unless the debtor agreed to publication (article 15, par 3 WCO). In the request filed with the court clerk the debtor can also request the appointment of a judicial trustee (gerechtsmandataris, article 27 WCO) to help him with the reorganization of the business (article 43 WCO). The only major problem with an amicable settlement is that it only binds the parties to it, as it can be seen as a contract, which is subject to general contract law. However in case the amicable settlement fails and an administrator is appointed, the latter cannot set aside transactions if the debtor complied with the abovementioned criteria of article 15 WCO.87
Article 16 WCO defines the aim of the law as providing for the continuity of the undertaking and gives the responsible judge a large discretion in ruling on the application for a judicial reorganization. Article 17 WCO continues with a detailed list of elements necessary to open a judicial reorganization procedure. Amongst these are the reasons for the request and the grounds of the threat for the continuity of the company; a direction for the goals of the procedure; the two latest annual accounts; a balance sheet not older than 3 months drafted by an external accountant; a complete list of all the company’s creditors, including the amount of
87
Derix & Fransis 2012, p. 45.
23
their claims and the rank of these claims; and the actions which the debtor wants to take to restore profitability and solvability (article 17 WCO). This list of requirements indicates that there are specific thresholds that have to be met before a debtor can open a reorganization procedure.
The procedure can be opened when the continuity of the company, immediately or in the future, is threatened, and the request of article 17 WCO is submitted (article 23, par. 1), however it can also be opened when a company is already insolvent (article 23, par. 3). It therefore depends heavily on the intention of the debtor himself when to file for a reorganization procedure, which gives room for postponing the request till the moment a rescue plan is already in place and the debtor can convince the court that this deal is the best possible solution.
The decision to commence a reorganization procedure has the effect that creditors are no longer capable of enforcing their claims and are also unable to file for insolvency (article 30 WCO), or to seize assets (article 31 WCO), which is a logical consequence to prevent individual creditors from undermining the basis of the procedure. It is however important to note that this stay also applies to secured creditors,88 who are in other legal systems able to enforce their claims at any time even outside official procedures.89
Creditors who do not agree with the composition of the reorganization plan can challenge the plan at the court (article 46 WCO), which can be done till the court decides on the reorganization plan.90 The debtor has the possibility to request for the appointment of a judicial trustee to assist in implementing the plan (article 27 WCO). It is however the company itself who remains responsible for the execution of the plan. The reorganization plan has to describe all rights of all persons who have any rights related to the debts of the company (article 48 WCO) and the proposed payments and their reductions (article 49 WCO). It must be aligned with the rescuing of the company and may, in case of differentiated treatment of creditors, not be disproportional to specific creditors.91
The reorganization procedure can also lead to the transfer of a part or the whole of the company, but this is not necessary (article 51 WCO) and can be done only by judicial order
88 Derix & Fransis 2012, p. 72. 89
See for example art. 57 Dutch Insolvency Act which states that secured creditors can exercise their rights as if there were no insolvency.
90 Commercial Court Dendermonde, 24 May 2012, AR01439/2012, Tijdschrift voor Belgisch Handelsrecht
2013/1, p. 59.
91
Supreme Court, 13 March 2014, C.13.0468.n/7, Tijdschrift voor Belgisch Handelsrecht 2014/5, p. 531.
24
on request of the debtor, both before and during the procedure (article 59 WCO). In case of a transfer the appointment of a judicial trustee, who will organize and realize the transfer, is mandatory (article 60 WCO). The judicial trustee arranges the transfer against the highest possible price (article 62 WCO),92 while observing the rights of the creditors.93 This creates a possibility for the judicial trustee to sell the business to its owners in case the latter can provide a reasonable price, which does not disadvantages the creditors of the company.
Creditors can vote on the reorganization plan (article 54 WCO) and subsequently the court can recognize the plan (article 55 WCO), in which case it will become binding on all the recognized creditors (article 56 WCO).94 The refusal of the plan will only occur in cases in which formalities laid down in the WCO are not complied with. The judge does not have the authority to scrutinize the plan on its substance, but may only test the plan against the provisions of the WCO and against public order.95 Any creditor who does not agree with the reorganization plan, if it is not implemented correctly by the debtor, or when he proves that he will incur damages through the implementation of the plan, can request the repeal of the plan with the court (article 58 WCO).
Another opportunity for a creditor who does not agree with actions of the judicial trustee, is to request the court to replace the judicial trustee, which every stakeholder can do (article 71, par. 3). This provision assists a creditor in securing his rights under a plan and can lead to the failure of the plan. Articles 72 and 73 WCO finally provide with consequences for the debtor in case of inequitable conduct, which can lead to either imprisonment or a fine for the debtor in case of non-compliance with the provisions of the WCO.
On a closer inspection these requirements are quite logical and can even be seen as essential for a coherent approach of reorganizations. The requirement to deliver to the court financial statements audited by an external accountant provides the court with essential and objective information on which it can base its own opinion about whether it thinks the business is indeed still viable and worth saving. Besides these data it is necessary for a speedy decision that the court can already start with a plan that is delivered by the debtor in which the latter
92
President Commercial Court Brugge, Oostende, 13 December 2013, B/13/00107, C/12/00013 and 20130021,
Tijdschrift voor Belgisch Handelsrecht 2014/3, p. 317.
93 Court of Appeal Antwerpen, 8 November 2012, 2012/AR/1947, Tijdschrift voor Belgisch Handelsrecht
2013/1, p. 60.
94
The plan will be approved if 50% of the creditors, representing 50% of the outstanding debts vote in favour of the plan. Only creditors who are present at the meeting will be recognized as eligible for any distributions (article 54, s. 3 WCO).
95 Court of Appeal Gent, 25 November 2013, 2013/AR/1971, Tijdschrift voor Belgisch Handelsrecht 2014/3, p.
316.
25
indicates what is essential for the business to succeed and the procedure by which the debtor wants to establish the plan. It makes quite a difference whether a company is threatened by insolvency because of temporal or more structural problems.
Moreover the real importance lies in the fact that the debtor already needs to have a plan at the moment he addresses the court. Therefore he can already at an early stage steer the process in a way which is advantageous for the company and could help in the restructuring of the company.
The Belgium procedure is the first procedure in this comparison which on a factual basis allows a pre-insolvency procedure and at the same time provides a legal framework for its implementation. However this also immediately indicates a problem in the case of cross-border activity. While the Belgium collective reorganization procedure is implemented in the Annex of the EIR,96 the amicable settlement is not and it might not always be evident to foreign courts which of these procedures is followed in Belgium, especially after recognition of the procedure by the Belgium court. The procedure does provide for a number of relevant factors which could be useful in assessing whether a pre-insolvency procedure offers sufficient protection for creditors against abuse by the debtor. These factors could be taken into consideration as a yardstick to measure whether a procedure should be recognized in other countries according to the EIR proposal.
96
Implemented by: Council Implementing Regulation 2011.
26
Chapter 4 The Proposal for a new Regulation on Insolvency Proceedings
This Chapter will discuss the most important parts of the emerging Proposal for a revised EIR and the actors who played a role in this process. It will not elaborate on the deliberations of the Council as these documents are not freely available. The proposal for a revised EIR originates from the EIR itself and was announced in its Action Plan implementing the Stockholm Programme.97 Article 46 EIR obliges the Commission to present before the 1th of June 2012, and every five years thereafter, a report on the application of the Regulation, if needed accompanied by a proposal for amendments. While the proposal constitutes a more comprehensive revision of the EIR, this Chapter will focus on the effects on pre-insolvency procedures and related issues.
4.1 The European Parliament’s Recommendation on Insolvency Proceedings
In 2011 the European Parliament (EP) agreed on a Report of its committee on legal affairs to the Commission with Recommendations on Insolvency Proceedings in the context of EU company law.98 In this report the EP indicates, amongst others, that insolvency law should be a tool for rescuing companies, while remaining beneficial for the debtor, the creditors and the employees. It is therefore important to assess whether a company is only temporarily insolvent or whether the company is insolvent on a structural basis.99
In order to assess these issues the EP “considers that the scope of the EIR should be broadened to include insolvency proceedings in which the debtor remains in possession or where a preliminary liquidator has been appointed.”100 The EP urges for the harmonisation of aspects of the establishment, effects and contents of restructuring plans as an alternative to complying with different statutory rules.
However any plan should contain rules and relevant information both about the debtor and about the benefits for the creditors. Finally any plan must have a specific approval procedure and must contain rules about the effects of the plan on the creditors.101 These observations from the EP indicate that a revised EIR should be aimed at restructuring and ‘saving’
97 EC Action Plan 2010, p. 26. 98 EP Report 2011. 99 EP Report 2011, p. 4. 100 EP Report 2011, p. 11. 101 EP Report 2011, p. 10-11. 27
companies. While the EP recognizes that pre-packs can be used for this aim, it iterates that restructuring should be seen as a more overarching aim and the way in which this is achieved is only of secondary importance.
4.2 The Commission’s proposal for a revised European Insolvency Regulation
For the purpose articulated in article 46 EIR the Commission launched a public consultation on the future of European Insolvency Law from 30 March to 21 June 2012.102 This consultation provided the possibility for any interested party to comment on the EIR in order to give the Commission an idea of the most important deficits of the EIR. One of the outcomes of this consultation was that views regarding the lack of coverage of pre-insolvency procedures are basically balanced, with about 43% of the respondents finding this lack problematic, and about 42% who did not. It was also concluded that ‘a significant majority’ of 59% of the respondents were in favour of the EIR covering pre-insolvency procedures.103 The EC Impact Assessment 2012 revealed as one of the key problems of the EIR that there were “obstacles to the rescue of companies and to the free movement of entrepreneurs and debt-discharged persons.”104 Problems arise especially in a cross-border context. While a national court can coerce national creditors to agree with a reorganization plan, this is in principle not possible for foreign creditors and their individual enforcement rights in that other country. This can lead to the disadvantage by which foreign creditors, aware of their enforceable rights, are less willing to engage in a restructuring plan which will reduce the possibility of a successful restructuring. 105 Therefore, according to the Commission, reorganizations are both beneficial for the company, in maximizing asset value, lower costs and encouragement of entrepreneurship, as for the creditors, who will face lower costs and will receive higher recovery rates on their claims.106
Implementation of reorganization procedures can further address the issue that some Member States already included such proceedings in Annex A EIR, while these procedures do not fulfil the criteria mentioned in article 1 EIR.107 It follows that the EC aims at both securing
102 http://ec.europa.eu/justice/newsroom/civil/opinion/120326_en.htm. 103
EC Impact Assessment 2012, Annex 2, p. 51.
104 EC Impact Assessment 2012, p. 10. 105 EC Impact Assessment 2012, p. 12. 106 EC Impact Assessment 2012, p. 11-12. 107 EC Impact Assessment 2012, p. 13. 28
