1 LLM European Private Law
The attractiveness of the UK Reorganization proceedings for
Bulgarian companies
Author: Konstantina Angelova Supervisor: Dr. Titia Bos
St.nr: 11123745 Second reader: Selma de Groot LLM Email:konstantinaangelova@gmail.com
2 Abstract:
This thesis compares the Bulgarian Reorganization procedure to the Reorganization in the UK and explains how the differences between them might lead to forum shopping. The two systems were chosen because there is evidence of Bulgarian companies using the UK Schemes of arrangements to reorganize and avoid insolvency. The research will show what the incentives are behind such a behavior and under which circumstances it is allowed. According to the European Insolvency Regulation (EIR), forum shopping should be avoided, because it leads to legal uncertainty, which is detrimental to the strengthening of the Internal Market. The European Insolvency Regulation seeks to harmonize rules on cross-border insolvency cases, but does not harmonize the substantive law. This is why there are a different practice and legislation in the different Member States for Reorganization and Insolvency. By introducing the concept of debtor’s center of main interests (COMI), EIR attaches the applicable law to the jurisdiction and facilitates forum shopping. By taking advantage of the freedom of establishment companies move their COMI to another EU jurisdiction. Schemes of arrangement is an attractive and flexible proceeding to both UK and foreign companies and it is outside of the scope of EIR. This implies that this proceeding can be applied in situations of insolvency as well as in situations of financial problems without insolvency procedure because it is based on the UK Companies Act 2006 and not on the Insolvency law. According to the Companies Act 2006 to establish jurisdiction and therefore determining the applicable law a “sufficient connection” to the UK is enough. Case law proves that English courts are willing to accept jurisdiction also for foreign companies when there is a good chance of successful outcome and a sufficient connection. The Bulgarian Reorganization procedure is complex and time-consuming, with a lot of court involvement, which makes it often unsuccessful. Some companies, that have the financial capacity, move their COMI to the UK by complying with the criteria of “sufficient connection” and are submitted to the Schemes of arrangement. Uncertainty arises regarding the recognition and enforcement of the Schemes because Schemes based on company law proceedings and outside of the scope of EIR, thus there is no automatic recognition and enforcement in the other Member States of the EU, based on the EIR. Although it is not a standard practice, in some MS courts use Brussels I to justify recognition and enforcement, while other simply turn to their own private international law rules to justify recognition and enforcement of foreign judgments, but when the chance of the company and its creditors to benefit of cross-border proceeding is reasonable, the courts tend to allow recognition and enforcement.
3 Table of contents
Introduction……….…….4
Chapter I 1. Insolvency and Reorganization in Bulgaria………..7
1.1. Filing for Insolvency proceedings………7
1.1.1. Prerequisites for Insolvency proceedings……….……7
1.1.2. Participants in the Insolvency proceedings……….….8
1.1.3. Filing, accepting and contesting claims………..………..……9
1.2. Reorganization of an insolvent debtor………..……10
1.2.1. The reorganization plan – characteristics……….…….11
1.2.2. Prerequisites for opening of Reorganization proceedings…..……….….…….11
1.2.3. Content of the reorganization plan……….……….….….12
1.2.4. Admission and voting of the plan……….…….13
1.2.5. Effect of the reorganization plan……….……….…….15
Chapter II 2. Insolvency and Reorganization in the UK……….…..……17
2.1. Insolvency in the UK……….….…….17
2.2. Reorganization procedures……….19
2.1.1. Company voluntary arrangements (CVA)……….…….….….19
2.1.2. Administration……….…….20
2.1.3. Schemes of arrangements……….…….21
Chapter III 3. Comparison between Bulgarian and UK Reorganizations………...…25
3.1. Prerequisites for starting Reorganization proceedings………...….25
3.3. Court involvement in the Reorganization proceedings and content of the plan….26 3.4. Proposing a plan and voting procedures………..…...27
Chapter IV 4. Forum shopping and Cross- border Schemes ……….….…30
4.1. Forum shopping in the context of the European Insolvency Regulation……..….30
4.2. Cross- border Schemes of arrangements………32
4 Introduction
“In times of crisis, the common wish is to preserve the good times as much as possible often prevails. Companies are no exception. When a larger business is hit by changing markets, its management hopes to see a business survive as much as their employees or local politicians. They wish to see the status quo preserved.”1 This thesis aims to describe and compare the nature of the Reorganization proceedings in Bulgaria and in the UK and explains the reasons why Bulgarian companies might find benefits from using UK reorganization to “preserve the good times”.
The European Insolvency Regulation (EIR) is the instrument of the European Union (EU) that provides the jurisdiction rules, determines applicable law and the recognition and enforcement in cross- border insolvency cases. EIR, however, does not harmonize substantive law and maintains distinctions between the national insolvency laws in the Member States. These distinctions may influence a company based in one Member State to move to another jurisdiction in order to benefit from using a different applicable law. In situations of financial distress, the UK seem to be an appealing choice for some companies from other EU Member States. An interesting example is Vivacom, Bulgarian’s largest telecommunication company, which used Schemes of arrangements to restructure its debt outside of insolvency proceedings to save its business.
Moreover, business misfortunes occasionally leave companies on the verge of default, but this does not mean that the business is not viable. Reorganization offers a way out of Insolvency followed by Liquidation. Reorganization through restructuring proceedings and negotiations often saves the debtor from bankruptcy. This has a positive effect on various stakeholders: the creditors renegotiate the value of their claims, the workers may keep their jobs, and the debtor revives the business and makes it profitable again.
The Member States provide various provisions on Reorganization. For example, Bulgaria has the “Reorganization plan”, and the UK has the Scheme of arrangements. The fact that the European Court of Justice does not allow for restrictions on the freedom of establishment, can lead to forum shopping and circumvention of the national law. Forum shopping in the context of Insolvency and the preamble of EIR means “transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal
1 Madaus 2012, p. 77.
5 position”.2 The jurisdiction and the applicable law are attached to a concept, known as COMI (centre of main interests) of the debtor. The competent court to open proceedings will be in the MS where the debtor has its COMI, under art. 3(1) of EIR.3 There is a rebuttable presumption regarding legal entities that the COMI is the place where the registered office is. In the Eurofood case,4 the ECJ established that this presumption can only be rebutted by objective factors, ascertainable by third parties. Only in this situation will be assumed that the COMI has been shifted and the jurisdiction and applicable law will also shift. Forum shopping is a practice, that EIR seeks to avoid, so does the EIR Recast,5 its successor after June 2017, will be even more strict, adding further rules on COMI shifts.6
Nevertheless, forum shopping does not only have negative effects such as lowering the legal certainty and predictability, but also positive effects. For instance, a Bulgarian company can reorganize in the UK outside of an Insolvency proceedings, which is not an option under Bulgarian national law. For these cross-border situations, the EU adopted the European Insolvency Regulation. Brussels I Regulation and national private international laws supplement EIR on the rules for jurisdiction and enforcement of foreign judgments.
The aim of this thesis is answering the research question about the attractiveness of the UK Reorganization proceedings for Bulgarian companies: whether they use it and under which circumstances a Bulgarian company can reorganize using the Schemes of arrangements. These two systems were chosen for the following reasons: Bulgaria is a country with a civil law system, Eastern-European country, still “developing”, trying to comply with the European Union law from 2007, when it became a member state. The UK has a common law system, known for the liberal corporate laws, being also an attractive bankruptcy and restructuring venue for foreign companies because of many different reasons, for instance, lack of legal possibilities that are denied in other jurisdictions.7
This thesis is organized into four Chapters. Chapter I focuses on the Bulgarian Insolvency law, prerequisites for filing for Insolvency proceedings and the Bulgarian reorganization plan. Chapter II describes the UK Insolvency prerequisites and Reorganization
2Preamble 4 EIR
3 Bos 2006, p. 49.
4CJEU Case C-341/04 Eurofood IFSC Ltd
5 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings
6 Wessels 2015, p. 3. 7 McCormack 2014, p. 11.
6 proceedings: Company voluntary arrangements (CVA), Scheme of arrangements and Administration. Chapter III compares the differences and similarities in the two legal systems. Chapter IV highlights the benefits of forum shopping in certain situations and explains the attractiveness of the cross-border Schemes of arrangements procedure. The conclusion summarizes briefly all of the findings.
7 Chapter I
1. Insolvency and Reorganization in Bulgaria
This chapter is organized in two parts and explains the dynamics of the Bulgarian Insolvency law in the first one (1.1.) and the Reorganization proceedings in the second one (1.2.).
1.1. Filing for Insolvency proceedings
Part 1.1.1 describes the prerequisites for opening Insolvency proceedings and the meaning of being an insolvent debtor in Bulgaria. In part 1.1.2 the participating parties and their obligations are described. Part 1.1.3 follows the procedure of filing creditors’ claims. These three parts are the necessary steps for the debtor to undertake, regardless of the option of reorganization proceedings. The reorganization, described in paragraph (1.2.) is a part of the Insolvency proceedings, but it is an optional one.
1.1.1. Prerequisites for Insolvency proceedings in Bulgaria
The provisions relevant to the Insolvency proceedings for companies (merchants) in Bulgaria can be found in Part IV of the Commerce Act.8 Bulgaria, as a European Union country since 2007, is trying to catch up with the tendencies and provisions that other Member States provide for their companies and with the European Union legislation.
Insolvency proceedings in Bulgaria are multiphase and complex judicial proceedings supplemented by additional side proceedings- accepting and contesting the claims of creditors, offering, and adoption of reorganization proceedings plan, liquidation proceedings. Insolvency proceedings are characterized by their universality. Once the insolvency proceedings have been opened the creditors cannot individually seize assets from the debtor. Also, there is a shift of the principle “prior temore, potior jure” with other principles aiming collective procedure and equal ranking, namely “pari passu”.
The Insolvency proceedings can develop in three ways: 1) where the continuing of the business can harm the going concern or the asset value of the debtor, the court may declare the debtor insolvent and terminate the business, without giving the option of reorganization; 2) if the value of the company is not endangered- accepting and executing a reorganization plan is possible, which can help the debtor to restore solvency and continue his business; 3) the last
8 option is liquidation and termination of the debtor if no reorganization plan is proposed, adopted or fails.
The leading aim of the proceedings is the fair satisfaction of all accepted creditors’ claims and if the company is still viable – the rescue of the company of the debtor and carry on the business by implementing a reorganization plan.
Filing for Insolvency in Bulgaria presupposes the existence of either illiquidity (cash flow insolvency) or over-indebtedness (balance sheet insolvency). The proceedings are opened with a constitutive decision of the district court of the debtor’s registered seat.9The passive legitimation (that those proceedings can be only opened against commercial debtor) can be found in Art.607, 612 CA. Art. 625 CA regulates the active legitimation (who can file for opening the proceedings) - the debtor himself or its creditor, who holds a claim for due debt. The debtor has an obligation to request before the competent court an opening of Insolvency proceedings in 30 days after he becomes insolvent or excessively indebted.
Cash flow insolvency of the debtor is the most common reason to file for Insolvency proceedings. In this case, the debtor is unable to fulfil an outstanding obligation, arising from a commercial transaction, public obligation, arising from commercial activity or a fiscal obligation to the state. The other legitimate reason for opening Insolvency proceedings is if the merchant is over-indebted, where obligations that are undertaken, although not being due, are overwhelming and cannot be covered by short-term and long-term assets of the company. The starting date of the Insolvency is declared with the first court order along with the opening of the proceedings. To determine the starting date the following conditions should be cumulatively existent: the financial distress should be constant, objective, irreversible, preventing the debtor to pay an outstanding due debt.
1.1.2 Participants in the Insolvency proceedings
This part describes the functions of all parties involved in the Insolvency proceedings. There are four categories of participants in the Insolvency proceedings in Bulgaria. The first and most important one is the Insolvency court, which is the District court of the registered office of the debtor. The court has a dual role in the proceedings – administrative and judicial. The latter allows the judge to give rulings, provide decisions for all arguments that arise during the insolvency proceedings. The administrative function gives powers to the court to consult on expedience of the actions of the other parties, their formation, and decision making.
9 The second category of participants is the trustee. The trustee is a legal or economical educated practitioner, registered in a special list held by the Ministry of Justice. His role and powers are debatable among scholars.10 This topic was not addressed in the latest amendments of the CA, but the common perception is that he is a representative of the debtor (art.658 (1) p.1,7 CA) and he is a procedural substitute of all creditors (art. 649 (1) CA), while he also has the function of an officer of the court, supervising the insolvent debtor’s dealings, exercising control, liquidating and distributing the assets (art. 658 (1) CA, also art.93 (1) Criminal Act). Four different figures are recognized as trustees/administrators in the Insolvency proceedings. A temporary trustee, appointed with the opening of the Insolvency proceedings, a temporary trustee appointed as a security measure, a permanent trustee, and a functional/service trustee. They have a different amount of powers and obligations depending on the stage of the Insolvency proceedings.
The next participant in the Insolvency is the Creditor’s Meeting. This is not a subject of the law, but a group of persons, united by the same quality- being a creditor of the same debtor. The Creditors Meeting has only rights and no obligations, the proceedings depend on their active participation and decision taking. Creditors participate in person or by a representative with an explicit power of attorney. Independently from their rights as participants in the Meeting, creditors also keep their individual rights as creditors. There are four types of meetings of creditors: 1) First creditor’s meeting- held in 30 days after the declaration of insolvency from the court; 2) Ordinary creditor’s meeting- administrative powers coordinating the proceedings by decision taking; 3) Creditor’s meeting for adopting a reorganization plan, confirmed by the court; 4) Closing creditor’s meeting;
Lastly, a further participant can be Creditors Committee. In practice, this institution is rarely used and usually it is not formed at all. It is not a compulsory institution and its role is to facilitate and support the trustee in his activities. In the Committee the participants have a right to remuneration, paid by the creditors, and this is one of the reasons why it is not used.11
1.1.3. Filing, accepting and contesting claims
This part follows the filing and accepting of creditor’s claims, which is the next step in the Insolvency proceedings. After the debtor becomes insolvent or over-indebted he has 30 days to request from the court to open insolvency proceedings. With this decision, the court declares
10 Stefanov, Topchieva, Miteva and Nikolova 2015, p. 75. 11 Ibid 2015, p. 182.
10 the opening of the procedure, the initial date of the insolvency and appoints the temporary trustee. The debtor remains in possession and the trustee supervises his actions. Within three months after the opening of the proceedings, the creditors can file their claims. After this period they do not have the opportunity to collect their receivables neither individually nor in the collective insolvency proceedings. The claim should include all the following requisites: the amount of the claim, the grounds, the securities (if there are any) and proof. The claim is lodged in the Insolvency court, but it is the trustee who decides to accept or reject the claims. There are two additional options to file a claim- supplementary and ex officio/ officially for some preferential claimholders. The trustee forms a list of creditors with accepted claims, which can be contested by parties with legitimate interests (including the debtor) in front of the court. Once the list of creditors is finalized it cannot be contested anymore and represents all the accepted claims that need to be satisfied within the Insolvency proceedings with the available assets of the debtor.
Usually, after the final list of creditors is approved, a plan for the reorganization of the company is proposed. From this point forward the proceedings can go in two directions: reorganization or liquidation. The reorganization is complemented by allowing another type of claim in the proceedings- claims for keeping the assets together. The opening of Insolvency proceedings implies permanent financial difficulties and problematic payments of due debt to creditors. From the economical point of view, these claims help creditors to ensure that the assets cannot be seized individually. From the legal point of view the principle “first come -first served” is substituted by a principle guaranteeing that an appropriate ranking of creditors will be respected. These claims mostly prevent fraudulent behaviour of the debtor and attempts of preferential treatment of certain creditors, transactions at an undervalue, that damage the insolvency estate. These procedures that help to keep the assets together, help to preserve the going concern of the company and allow it to go forward for possible reorganization.
1.2. Reorganization of an insolvent debtor
This second part of Chapter I describes the reorganization proceedings, the single opportunity to rescue a company inside the Bulgarian insolvency proceedings. Part 1.2.1. outlines the characteristics of the reorganization. Part 1.2.2. describes the prerequisites of reorganization, followed by a description of the required content of the plan in part 1.2.3. In part 1.2.4. the voting and accepting of the reorganization plan are explained and the last part 1.2.5. summarizes the effects of a reorganization.
11 A successful reorganization will help the company achieve two positive outcomes: to prevent the debtor from being declared insolvent with the negative circumstances following it and will revive debtor’s ability to carry on his business. The following principles of the reorganization proceedings were developed by Kalaydzhiev: 1) Reorganization should not give the creditors lesser pay-out compared to what would they have had in Liquidation; 2) Reorganization is only a one time opportunity for the debtor; 3) Creditors in the same class should be treated equally; 4) Creditors should not be unjustifiably enriched; 5) Interests of the debtor should be noted; 6) Interests of the workers should be noted;12
1.2.1. The reorganization plan – characteristics
The nature of reorganization proceedings is a controversial topic among academics. Two notions predominate: according to Rozanis, reorganization proceedings and insolvency proceedings are two different procedures and should not be mixed, because their aim differs. According to him, in ongoing Insolvency proceedings, it is hardly possible that the debtor restores solvency and meet his responsibilities by being supervised by a trustee and by executing a reorganization plan.13 To the contrary, Kalaydzhiev holds the opinion that the aim is the same- satisfying the claims of the creditors and the only difference are the means of achieving this.14 Moreover, even though the proceedings are delayed, this is not fatal, because of the short deadlines and the singularity of the opportunity to reorganize. The legal doctrine accepts that the Reorganization is part of the Insolvency proceedings. Main characteristics of the Reorganization proceedings are the relative independence and detachment from the Insolvency, and its electiveness.15
1.2.2. Prerequisites for opening of Reorganization proceedings
When the debtor is declared insolvent with the opening of the Insolvency proceedings proposing Reorganization plan is forbidden. Another situation when the debtor is not allowed to reorganize is when the debtor already adopted a Reorganization plan, but failed to comply with his obligations. The Reorganization plan is a one-time opportunity and after unsuccessful execution or not complying with its provisions, the proceedings go into court-supervised
12 Kalaydzhiev 2006, p. 6-27. 13 Rozanis 1996, p. 128. 14 Kalaydzhiev 2006, p. 13.
12 liquidation. In all other situations, the Reorganization is an optional instrument for an insolvent debtor, who wishes to save his business.
The first time when a reorganization plan can be proposed is with the opening of the Insolvency proceedings. In practice, this is almost impossible because it is too early and there is no list of accepted creditors’ claims, no information about the available assets and their condition, thus not enough information on the question what would be a viable action. Usually, reorganization plans are proposed after the first creditors meeting when the claims have been accepted and ranked.
Actively legitimated to propose a plan are: 1) the debtor (even though he cannot vote he has the fullest information about his company’s condition), 2) the trustee (except the first temporary court-appointed trustee), 3) creditors owning 1/3 of the secured claims and creditors owning 1/3 of the unsecured claims, 4) shareholders owning 1/3 of the capital, 5) unlimitedly liable shareholder and 5) 20% of the employees/ workers. They all have the opportunity to propose one or more plans for the reorganization of the company.16
If there is a proposal of a reorganization plan, the Insolvency proceedings will be put on hold and the debtor cannot be declared insolvent until the plan has been voted. If the plan has been accepted- the Insolvency proceedings are stopped. The legal nature of the plan is discussed in controversy: is it a settlement, agreement or contract?17 These gaps in the legislation and the theory are occasionally interpreted by the Supreme Court in decisions that have normative power. Their aim is to standardize the practice among lower ranking courts. However, in ECJ’s Interdil judgment18 and recently ECJ’s decision in Diageo Brands19 the court states that such practices are against the EU policy.
1.2.3. Content of the reorganization plan
The content of the reorganization plan should envision of two types of actions- legal and economical. The plan should also contain information about the current state of the company and the reason for the financial problems. The plan has mandatory and facultative elements. There are six mandatory elements, from which the first four fall in the legal part of the plan and
16 Art. 697 (1) CA
17 Supreme Court (Commercial chamber)- Decision 945/ 30.12.2003 for case 829/2003 and Supreme Court (Commercial chamber)- Decision 645/ 22.05.2003 for case 2654/2003
18 CJEU Interdil: “European Union law precludes a national court from being bound by a national procedural rule under which that court is bound by the rulings of a higher national court, where it is apparent that the rulings of the higher court are at variance with European Union law, as interpreted by the Court of Justice”
13 the last two fall in the economic part. Some of the mandatory elements of the plan are the terms and the means of the payments to creditors, the amount (usually calculated as a percentage if cannot be repaid in full), the conditions, the guarantees and a comparison to what creditors would receive in Liquidation. The economical elements there include organizational, financial and executive actions. They should also explain how the plan will influence the rights of the workers. The facultative elements could include interception, transfer of assets, selling the whole company as a going concern or a part of the company, but in practice selling the company is being criticized as a viable action for contrasting one of the aims of the Reorganization (saving the corporate debtor).20
1.2.4. Admission and voting of the plan
In order to enter reorganization proceedings, the insolvency court needs to revise the legitimacy of the proposal, the content, and the admissibility. The court will make sure that there will be a call for a meeting of creditors only if all the elements and the terms of the plan are met. If they are not met, the court will give instructions on how to amend the plan and will grant seven days’ time. With the decision to admit the reorganization plan the court provides further information about the next creditors’ meeting: where the voting will take place and the sequence of voting.
For the voting meeting, the court invites the creditors, the trustee and the debtor, the last two without voting rights. It is assumed that reorganization is always in debtor’s benefit and the trustee is representing creditors’ interests.21 Absent creditors are allowed to vote through their representatives with a notarized power of attorney. This leads to some complications, especially when changes of the plan are being discussed in the meeting. The representatives usually have explicit instructions to vote “yes” or “no”. Amendments to the plan are being voted in a different meeting after the representatives have the opportunity to discuss them with the claimholder. This, however, delays the proceedings and it is addressed in a decision of the Supreme Court concluding that power of attorneys should not restrict the creditors’ rights and their representatives powers should be interpreted extensively.22
Keeping in mind that the Reorganization is only possible when the debtor’s company still has value, the plan needs to be voted in the shortest possible time period, before the debtor
20 Stefanov, Topchieva, Miteva, Nikolova 2015, p. 426. 21 Ibid 2015, p. 446.
14 loses his reputation in his respective business field. The right to vote belongs to the creditors with accepted claims or claims that are being contested in outgoing court proceedings.
For the purposes of voting for the reorganization plan, the creditors are divided into 5 classes, divided by similar interests: 1) Creditors holding a security right, 2) Creditors with claims deriving from employment contracts, 3) Creditors with public law claims (of the state and the municipalities such as taxes, customs duties, fees, obligatory social security contributions), 4) Creditors with claim without securities or preference, 5) Creditors, which claim can only be satisfied after every other creditor before them have been paid in full.23 Each class votes separately and has to accept the plan with a simple majority in order for the plan to be approved. Simple majority means more than a half (from the value of the claims). There is no requirement for a quorum in order to hold the meeting and the voting. If there are some proposal for amendments to the plan, they need to be voted separately.
The creditors’ meeting is controlled and supervised by the court. A protocol under the judge’s dictation is made, certifying that the meeting complies with the requirements of the law and the will of the creditors is truthfully stated and reflected. If the plan is accepted the court should issue a decision to approve it, but if some of the requirements or the voting procedure is not met, a decision is not formed, or the plan is not approved, the insolvency proceeding goes forward into liquidation proceedings. Special conditions state that if half of the creditors (not in number but in an amount of claims) vote against the plan, regardless of the class, the plan is not approved and cannot go forward. The court’s decision to accept the plan can be appealed and mandates the court to supervise the lawfulness of the plan.24
The decision of the meeting of creditors is announced in the Commercial registry, after which the interested parties can appeal in seven days. Usually, the appeal is based on the grounds of the legitimacy of the meeting, accepting of claims and voting rights procedure, the acceptance of the plan. The insolvency court is obliged to hear all the appeals and decide in a closed-door hearing. Once the reorganization is approved by creditors, the court has the obligation to administer the process and check the lawfulness of the meeting. If several plans were proposed, the creditor’s meeting should accept only one of the plans and secondary admissibility decision of the court is issued. There are provisions protecting the most harmed creditors, without which the plan cannot go further (e.g. same conditions for payments in the same class of creditors, not receive less than they would have in liquidation). Also, unjust
23 Art.616 (2) CA;
15 enrichment is not allowed. The plan should ensure the interests of the creditors as a whole, the individual rights of the creditors, the rights of the employees and workers and those of the debtor are being addressed properly. After the final version of the plan is accepted the court checks the lawfulness of the plan and issues a decision to allow or reject the execution of the plan.
1.2.5. Effects of the reorganization plan
Adopting a reorganization plan has two main effects. The first one being that it requires obligatory behaviour from the debtor and his creditors. The second important effect is that claims are modified and satisfied according to the plan. The obligatory effect of the plan is restricted only to already accepted claims that became due before the opening of the proceedings. Regarding the new creditors the law permits different payment options because firstly, these new creditors did not agree to the plan and secondly, if they do not get paid they can stop all commercial dealings with the debtor, resulting in negative consequences for the business and the reorganization.
Additionally, an effect of the adoption of a reorganization plan is that the Insolvency proceedings are stopped and the negative outcome of declaring the debtor insolvent can be prevented.25 Moreover, the secondary aim of Insolvency, is also completed by executing reorganization plan: saving the business. The debtor remains in charge of the business dealings, but supervision can be a part of the reorganization plan. Since Insolvency proceedings are terminated, the supervision is not executed by the trustee, but by specialists, appointed by the creditors.
If at some point the reorganization plan loses its suitability and creditor’s interests are threatened, collective proceedings can be reopened. Grounds for re-opening Insolvency procedure can be a failure of the debtor to fulfil his obligations or if he does not cooperate for satisfying the claims of his creditors, therefore harms their interests.
Actively legitimated to file a claim for reopening of Insolvency are the supervisor of the reorganization, the creditors with 15% of the amount of claims and the public claim holders (e.g. the state). The proceedings will be held between the debtor and the claimant and it will have competitive nature in front of a new district court because the previous Insolvency court ceased its work with the acceptance of the reorganization. If the court establishes proof and
25 Consequences of being declared insolvent/ bankrupt can be prohibition of managing a company, being part of a board, restricted licensing; different member states deal with this issue differently;
16 accepts the grounds for reopening of Insolvency proceedings, the decision will have an immediate effect (collective procedure for the satisfaction of claims is restored). The recourse for the debtor is to appeal the decision and if he is successful, the effect of this decision will be retrospective.
As I mentioned in part 1.1. Reorganization is only one of the directions that Insolvency proceedings can undertake. In Bulgaria, the reorganization proceedings are only successful for small and medium enterprises that do not have many creditors.26 Usually, Insolvency proceedings end up with the other two options declaring Insolvency of the debtor with the decision to open the proceedings or Liquidation.27According to the academics Trayan Lyalev, Boris Landzhev and their collective in the book “Commercial law” mass of Insolvency proceedings lead to crisis in Bulgarian economy.28
26 Stefanov, Topchieva, Miteva, Nikolova 2015, p. 395.
27 Landzhev, Lyalev, Bobatinov, Karanikolov, Sukareva, Nedelcheva, Popov, Rachev 2005, p. 570. 28 Ibid 2005, p. 394.
17 Chapter II
2. Insolvency and Reorganization in the UK
The first paragraph (2.1.) of this chapter is describing the Insolvency proceedings and liquidation under the UK law. The second paragraph (2.2.) focuses on reorganization proceedings in the UK and is divided into three sections explaining the Company voluntary arrangements (2.2.1.), Administration (2.2.2.) and Scheme of arrangements (2.2.3.).
2.1. Insolvency in the UK
In the UK the legislation applicable to insolvency proceedings is the Insolvency Act 1986, which is amended from time to time, also supplemented by the Insolvency Rules (1986) and the Scheme of arrangements in The Companies Act 2006.
“Insolvent” debtor under UK law does not have a definition in the legislation, but the accepted concept is that the company is “unable to pay its debts”. According to Richard Fergusson, a company is insolvent on two occasions: 1) balance sheet insolvency: the value of assets is less than the amount of its liabilities or 2) cash flow insolvency: the company is unable to pay its debts as they fall due.29
According to the Report of the Review Committee on Insolvency Law and Practice (1982) also known as the Cork Report the modern aim of the proceedings should be “instrument in the process of debt recovery and constitute in many cases, the sanction of last resort for the enforcement of obligations”, in other words not so much a sanction as much as an attempt at a rescue for a company in difficult situation.30
In the UK, a company can be wound up with Members (shareholders) voluntary liquidation (MVL); Creditors voluntary liquidation (CVL) or winding up order by the court.31 MVL is a procedure, where the directors can give a sworn declaration, that the company is solvent, also there is a special resolution voted by the shareholders with a required majority of 75%. A liquidator is appointed by the shareholders and he is leading the procedure.
CVL is when the company is insolvent or the directors cannot make a sworn declaration of solvency. Special resolution by 75% (by the value of shares) of the shareholders again is
29 Fergusson 2009, p. 201-205.
30 UK Essays. November 2013. The Rescue Culture. [online]. Available from: http://www.lawteacher.net/free-law-essays/finance-law/the-rescue-culture.php?cref=1 [Accessed 26 July 2016].
18 voted for the CVL. After this, within fourteen days, the creditors vote in a creditors meeting. A liquidator is appointed by the creditors and he is in charge of the proceedings.
The involuntary winding up by court order is when a creditor applies for a court order to place the debtor who is unable to pay its debts, in involuntary liquidation. Once the court order is issued, the directors’ powers cease and actions cannot be made without the court's permission. A liquidator is in charge of the proceedings and has the duty to investigate the company’s affairs and make a report for the creditors. His duties also involve investigating what is the cause for the failure of the company and to set aside transactions at an undervalue32 and preferences,33 to realize assets and distribute the revenues.
UK insolvency law does not explicitly put a duty for a company to file for insolvency proceedings if it becomes insolvent or experiences cash flow problems. The director has a duty to take all possible steps to minimize potential losses for creditors and if the liquidator finds that the director has not complied with his obligations, he can submit a claim against him. If the director has known or if he should have known that his actions will make the company insolvent and he continues the wrongful trading he can be also liable. In the involuntary liquidation all dealings after the court order, which are not approved by the court, are void, in order to keep the going concern of the company and save the assets.
In a compulsory liquidation, there is an automatic moratorium on claim enforcement. This, however, does not apply to secured creditors that have a claim on a specific asset. In a MVL and a CVL, there is no such moratorium on claim enforcement, but there is a way to stop the proceedings if the liquidator or a creditor applies for a court order.
In a compulsory liquidation, the employment contracts will be terminated automatically and in MVL or CVL they are not automatically terminated, but it is likely to happen. Claims for unfair dismissal from employees will rank as ordinary unsecured claims.
In liquidation proceedings, the distributions to creditors are made according to ranking if there are sufficient funds by the administrator. To fully wind up the company the liquidator sends final accounts to the creditors showing how the liquidation will be concluded, a creditors meeting is held and one copy of the report is sent to the Registrar of Companies (in voluntary liquidations).
32 Section 238 Insolvency Act 1986 30 Section 239 Insolvency Act 1986
19 In compulsory liquidation, when the liquidator is the official receiver, he sends a report to the creditors and notifies the Registrar of Companies. After three months in both cases, the company is dissolved. If the company does not have enough for distributions this will happen earlier if no further investigation is needed.
2.2. Reorganization procedures
This second part of Chapter II is explaining the three options for reorganization under UK law and their advantages and disadvantages. The UK law provides very flexible options for reorganizing the company. There are three types of reorganization proceedings available in English law: Company voluntary arrangements, Schemes of arrangements and Administration. The reorganization is usually a mixture of organizational, commercial and legal measures applied to save the debtor’s business. If reorganization can take place at an earlier stage there is a greater chance of success.34
2.2.1. Company voluntary arrangements (CVA)
CVA is an agreement between company’s shareholders and the unsecured creditors of the company, which usually involves delayed payments or restructuring of the capital. CVA can be binding for secured or preferred creditors only if they explicitly agree. The people who can propose a CVA are the director or the liquidator/ administrator. The legislation is in the Insolvency Act 1986 and follows the Insolvency rules and aims to rescue the company of its financial difficulties. There is no pre- condition for the company to be insolvent to start a CVA proceeding. Creditors and shareholders cannot propose CVA, even though they are the ones that vote on the proposal.
Both shareholders and creditors have to agree with the proposal of a CVA. The necessary majority at the shareholders meeting is more than 50 % in value of shares of the company’s shareholders present or by proxy and voting. On the creditors meeting, the proposal must receive 75% in value of claims of company’s present or by proxy and voting in the meeting, to be approved. Votes are calculated according to the amount of the creditor’s debt as on the date of the meeting. If the decisions of the creditor’s and shareholders’ meetings do not match, the decision of the creditors will prevail.
CVA allows a company to make an arrangement with the creditors for partial or full satisfaction of debt. The director will remain in charge but a nominee/supervisor is appointed
20 to form an opinion if the proposal will be suiting for the company. He will write a report, summon the meetings and if the proposal is approved, he will supervise the execution. Usually, there is no automatic moratorium during CVA, except in the case of a small company. In that situation there may be a moratorium for 28 days, provided that the small company meets the special criteria.35
For large companies, it is only possible if CVA is combined with an administration.
CVA proceeds in the following way (excluding the small company’s moratorium): Director or administrator/liquidator proposes a CVA and submits it/them to the nominee (an insolvency practitioner). The nominee will assess the proposal/s and will report to the court if meetings of creditors and shareholders should be called. If the proposal is approved by the court, the nominee will give notice to creditors and shareholders and call the meetings for voting.36 If CVA is approved by the demanded majorities, the nominee must report to the court. The CVA can be contested by creditors or shareholders, entitled to vote in the meetings, within 28 days after the approval, on the grounds of fairness or irregularities in the meetings. If there are no contests the nominee becomes a supervisor of the implementation of the CVA and its execution. The last step for the supervisor is to report this implementation to the creditors and shareholders. CVA is a flexible procedure, which provides an opportunity for minimal disruption of business since directors are left in charge and the supervisor only administers the arrangements between the parties. Another appealing quality of the CVA is that there is few court involvement, which makes it an easy and cheap option to implement when the company is in a difficult situation. CVA is also preferred in small businesses because it can provide a breathing space with the optional moratorium or combined with an administration. CVA is also binding to dissenting unsecured creditors, once the compromise is reached. Still being part of the EU, the UK is bound by European Insolvency Regulation and the CVA is recognized across all EU jurisdictions. Disadvantages can be the lack of moratorium and the lack of binding of secured and preferential creditors. This, however, can be an advantage, where this is the reason why the company chose to use exactly the CVA. If successful, the CVA allows the company to get back in good shape quickly and cheaply.
2.2.2. Administration
35 It is possible for some small companies to benefit from a 28-day moratorium if they meet at least two of the following requirements, being: a turnover less than £6.5m; balance sheet assets less than £3.26m; and less than 50 employees.
21 An administration is an alternative procedure to insolvent liquidation, where the insolvent debtor is allowed to continue trading under the protection of moratorium of debt enforcement. This is designed to give the company a breathing space and reorganize, often combined with CVA or Scheme of arrangements. Administration can last up to 12 months or on occasion it can be extended, after a court approval. An administrator is appointed and he acts for the benefit of creditor’s interests. The purpose of the administration is first and most important to preserve the company as a going concern. If it is not reasonable, the purpose is to achieve the best possible result for creditors as a whole or to sell properties to make distributions to secured or preferred creditors. Also, “pre-pack” administration is possible where the whole or part of the company is sold to a bidder by entering private negotiations, before going into administration. The pre-pack is used in situations where it represents the best value for the creditors to sell the company as a going concern and preserves the jobs of the employees. The administration is terminated after the 12 month period has passed or if there are no assets left in the company and the procedure is changed to CVL and winding up.
A company can go under administration if the directors prepare the necessary documents and apply in court or if a creditor or director files a petition to the court. The assigned insolvency practitioner (administrator) is preparing reports for the creditors and the creditors can approve or reject the proposals. They also appoint a creditor’s committee, which has supervisory functions.
The administrator has a powerful function during the administration. The director’s powers are ceased and the administrator is in charge. He is dealing with dismissal and hiring employees, entering into contracts with purchasers on behalf of the company. One of the advantages of the administrations is the obligation of the administrator to act in the interest of the creditors as a whole. The administrator has the power to investigate and if necessary to nullify transactions at an undervalue and preferences, entered into during the suspect period. The disadvantage of administration is that it can be more expensive because it is a lengthy process, requiring court involvement.
2.2.3. Schemes of arrangements
The third option for reorganization is the Scheme of arrangements procedure. It is an important and powerful tool that offers a variety of arrangements and compromises between
22 the shareholders and creditors of the company.37 The proceeding is used to restructure debt in the company and to change control, using flexible and creative mechanisms in a wide variety of circumstances. Schemes are often applied in addition to other mechanisms such as pre-pack administration or liquidation, but sometimes it can be the only way for the company to achieve its purpose.38 The legislation provisions for the Scheme of arrangements can be found in the Companies Act 2006 and it is not an insolvency proceeding. The definition of a Scheme is “a compromise arrangement between a company and its creditors, or any class of them, or its members (shareholders), or any class of them”.39 The definition itself shows that the Schemes provide various options for different occasions and there are no mandatory elements.
To start the proceedings, one of the company’s creditors, shareholders, a liquidator/ administrator applies for a court sanction. In the first court hearing the court decides whether the Scheme is appropriate for the company and whether the classes are correctly constituted. In Schemes of arrangements creditors and shareholders form different classes, based on similar interests. Each class votes separately. If the Scheme is found promising and the classes are constituted correctly, the court orders meetings of each class. To have a successful Scheme the voting in each class has to reach the required majority: at least 75 % by value and 50% in number or creditors/ shareholders voting in person or by proxy. Creditors and shareholders that were included in the voting class are also bound by the Scheme even if they were not present, received no notice or voted against the proposal. Schemes also bind secured and preferred creditors, which is one of the differences with the CVA. After the meetings and the voting a second court sanction is made, after which the Scheme must be put in practice and binds all creditors. They can challenge it in court on the grounds of either improperly constituted classes, the unfairness of the proposed Scheme or lack of sufficient information. The court will be supportive of a restructuring Scheme if there is a reasonable prospect of success.40
An advantage of the Schemes of arrangements is their flexibility. It is possible to use Schemes on many occasions, one of them being to restructure the company’s capital or debt. Another advantage is that Schemes of arrangement provide a final and binding solution to all participants. Minorities that vote against the Scheme or do not vote are also bound by the Schemes. Secured and preferential creditors do not have the advantages, which they have in the
37 Payne 2014, p. 383.
38 Payne 2014, p. 384.
39 Part 26 of the Companies Act 2006
23 CVA to be left out of the arrangements. The binding ability of the Schemes is proved to be very useful when dealing with dissenting creditors, who sometimes can prevent reorganization. To protect these minority’s rights the court holds two hearings and checks for the fairness of the proposal.
“Schemes of arrangement have not always been valued. As recently as ten years ago, it was common for them to be regarded as of marginal value as a debt restructuring tool. Conventional wisdom had it that schemes were complex, cumbersome and expensive, and rarely used in practice.”41 A disadvantage of Scheme of arrangements can be the requirement to divide shareholders and creditors into classes because they are divided into classes of those whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’.42 During a Scheme of arrangements, there is no moratorium, unless combined with an administration. This combination with an administration, however, might be costly and time- consuming.
Foreign companies that are capable of being wound up in the UK are entitled into a Scheme of arrangements, which according to UK law means that if there is “sufficient connection” to England and Wales the company can benefit from the Schemes of arrangements. This makes them appealing to foreign companies as well.
On the one hand, Schemes of arrangements are not insolvency proceedings, which makes them on the one hand preferred method of reorganization of solvent companies. Their flexibility is appealing to a lot of local and foreign companies. On the other hand, Schemes, unlike the CVA, are outside of the scope of the European Insolvency Regulation, and are not recognized automatically across the Member States in cross-border cases.43 Another issue is the jurisdiction, recognition, and enforcement. The English court should find a “sufficient connection” to the UK to accept jurisdiction to open a Schemes of arrangement proceedings for a foreign company with its center of main interests (COMI) and according to UK case law, this sufficient connection should be understood broadly.44 This gives foreign companies the ability to reorganize under English law.
Schemes of arrangement can be used by solvent and insolvent companies, there is no threshold of distress that needs to be reached as a pre- requisite. There is no requirement to appoint an administrator and the manager can stay in control of the company. This will make
41 Payne 2013, p. 567.
42 Art. 899 (1) Companies Act 2006 43EIR Annex A, United Kingdom 44 Re DTEK Finance BV {2015}
24 them more willing to use Schemes instead of CVA. Scheme of arrangements fits into the modern mantra “Rescue, Recovery, Renewal” of the Association of Business Recovery Professionals.45The rescue culture is defined as a “willingness to assist companies, whenever possible, to overcome what may be temporary financial difficulties so as to avoid liquidation and to continue trading”.46The possible early entry and the consensual approach without a moratorium in restructuring are fundamental for some companies to initiate these proceedings.
45 Tribe 2009, p. 1.
25 Chapter III
3. Comparison between Bulgarian and UK Reorganizations
The Schemes of arrangements are based on a company law measure and not listed in Annex A of the European Insolvency Regulation. This means that the rules on jurisdiction, recognition and enforcement of foreign judgments do not follow the presumptions for COMI shifts that apply for EIR proceedings.47 By means of comparison, this chapter will reveal the differences and similarities between the Bulgarian reorganization procedure and the UK Schemes of arrangements reorganization procedure. This comparison will give more insight on the incentives why Bulgarian and other foreign companies, for example, Re NEF Telecom Co BV [2012] EWHC 2483 (Ch) engage in forum shopping.48 Part 3.1. compares the prerequisites for entering the proceedings. Part 3.2. compares and explains the court involvement and the content requirements and part 3.3. compares how the reorganization proceedings are proposed and voted in both jurisdictions.
3.1. Prerequisites for starting Reorganization proceedings
For the Bulgarian reorganization, there is a prerequisite for the debtor to file for Insolvency in 30 days after becoming either insolvent or over-indebted. The company is already in distress and filing for Insolvency alarms the business partners, which can be to the detriment of the company, if they start treating the dealings differently and engage in a protective behaviour. Only within insolvency proceedings, the debtor has an opportunity to reorganize. In the UK there is no obligation for the debtor to file for insolvency when he becomes insolvent.
47 Szydlo 2009, p. 748. “In case of cross-border insolvencies in the EU the basis for determining international jurisdiction is formed by Article 3 of the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings. Namely, Article 3(1) provides that the courts of the Member State within the territory of which the centre of a debtor’s main interests (COMI) is situated shall have jurisdiction to open insolvency proceedings (i.e. international jurisdiction within the above meaning). In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary. It has to be emphasized that apart from the fact that international jurisdiction as specified above applies only in case of transnational (cross-border) insolvencies (and is not applicable in the event of insolvencies that are confined to one single Member State), there is another requirement, namely that the abovementioned COMI has to be located within the territory of the Community (and not outside of the Community), since only then the Regulation could be applied. Consequently, in some cases the Regulation (together with its Article 3) will be applied in relation to companies that have their registered office outside the Community (and are incorporated under the laws of third countries), provided that their COMI is situated within the territory of one of the Member States”
48 Re NEF Telecom Co BV [2012] EWHC 2483 (Ch); This judgment provides another example of a situation where foreign borrowers with English law governed finance documents have opted to use a scheme of arrangement to restructure their debts.
26 To reorganize in the UK using the Scheme of Arrangements proceedings there is no prerequisite for the debtor to be insolvent. It is an option for both solvent and insolvent companies and if the debtor feels that the company will become distressed and might benefit from reorganization, he can propose a Scheme under the rules of the Companies Act 2006. Bulgarian companies have an incentive to engage in forum shopping and benefit from applying a different law, because this option is not available under Bulgarian law.
3.2. Court involvement in the Reorganization proceedings and content of the plan
Bulgarian reorganization procedure is part of the Insolvency proceedings. This means that the court is involved until the reorganization plan is approved and the Insolvency procedure is finalized by the acceptance of a reorganization plan. The proposal and the acceptance of the plan need to be approved by the court and it can be contested by creditors if they feel they are been treated unfairly. This sometimes makes the procedure longer and more expensive, because the court will open a side procedure and schedule a hearing with the interested parties. The court also has the responsibility to propose amendments to the proposal if it does not comply with the law requirements. This delays the procedure with additional seven days during which the plan is being amended. Even after the plan has been accepted, the reorganization plan can be contested by a creditor. There is another hearing and the decision of the court can go two ways: if the plan is fair the court approves it once more and gives an order to the creditor and the debtor to oblige, but this still delays the proceedings. If the court finds that the creditor is treated unfairly he issues a decision to disapprove of the plan. All this court involvement protects the creditors from unfair treatment, but also makes the procedure longer and more expensive. Another issue related to the court involvement in the procedure is that the court invites only the trustee and the debtor to the creditors meeting. The creditors should monitor by themselves the Commercial Registry to see when the decision of the court is published and see all arrangements for the meetings there. Occasionally, not all creditors track the information and not all of them are sophisticated enough to do it by themselves. This can result in creditors being absent from the Creditor’s Meeting.
Once the reorganization plan is in progress but the company is not fully complying with it or cannot achieve the agreed goals, 15% of the creditors can file a claim for re- opening of Insolvency proceedings and liquidation. If Insolvency proceeding has been reopened there is no opportunity for a second reorganization plan.
The content of the reorganization plan in Bulgaria has six mandatory elements. They are laid down in the legislation and cannot be circumvented, otherwise, the court will not
27 approve the proposal of the plan. A calculated payout in Liquidation scenario should be involved in the reorganization plan in order for the creditors to be able to compare and assess to what they will receive in Reorganization. This is not necessary for the Schemes of arrangements proceedings. Since there is no fixed content of the plan, there is no need to calculate and compare how much a creditor would get in Liquidation proceedings. The court will rule on the second sanction about the fairness of the plan as a whole and not compare the payouts as a condition.
In the UK, Schemes of arrangements are also being approved and supervised by the court, but only on two occasions. The procedure is different, but still imposes taxes and makes the process cumbersome and expensive. The difference, however, comes from the fact that in Bulgaria the debtor is already in distress and he does not have another option if he wants to reorganize his company. In the UK, the debtor can apply for Schemes of arrangements when he is still solvent or otherwise, he can combine with administration proceedings and benefit from a moratorium.
In regards to the content of the Schemes, there is no required actions or mandatory elements. A Scheme is “a compromise arrangement between a company and its creditors, or any class of them, or its members (shareholders), or any class of them”.49 This compromise depends only on the interests of the parties involved and the aims that they want to achieve with the plan. This flexibility makes the Schemes of arrangement appealing to companies. However, the statutory framework also requires an explanatory statement to be drafted and sent to creditors. The aim of the statement is to draw creditors’ attention to particular aspects of the Scheme that are likely to have a bearing on their voting, and to explain how the scheme works.50
3.3. Proposing a plan and voting procedures
In Bulgaria, the debtor, the trustee, 1/3 of the creditors (with accepted claims), shareholders holding 1/3 of the capital, unlimitedly liable partner (in specific cases) and 20% of the employees in the company have the right to propose a reorganization plan.51 Some restrictions apply to this right, for instance: creditors that are also shareholders in the company, even if they hold a claim that is more than 1/3 of the accepted claims, creditors that hold a claim
49Art. 895 (1), part 26, Companies Act 2006
50www.practicallaw.com/about/financialservices ; Michelle Kierce, Helen Martin, Adriana Cotter and Nigel Montgomery; Sidley Austin LLP
28 from gratuitous deals (such as donation). Furthermore, a plan cannot be proposed if the debtor is declared insolvent with the opening of the procedure because the continuing of the proceeding will hurt the creditors as a whole. In practice, a lot of the listed parties that can propose a plan do not possess the necessary skills and information to make a good proposal and the court will have to suggest amendments, which delays the procedure.
In the UK’s Scheme of arrangements, the persons that can apply for a court order to sanction a Scheme are the company, a creditor or a shareholder (member), also a liquidator or an administrator, depending on the situation of the company.52
Both jurisdictions divide the creditors into classes based on similar interests and then conduct the voting in the creditor’s meetings in separate classes. In Bulgaria, there are 5 classes of creditors, which is considered as a measure for equal treatment of creditors of the same class.53 There is no requirement for a quorum for the meeting to be legitimate. In order to accept the reorganization plan, every class of creditors has to accept the plan by a simple majority (from the amount of claims) within the class, not only by the creditor’s that are present and voting. There is a special provision stating that if 50% of all creditors (in amount of claims), regardless of their class, had voted against the plan, the plan cannot be adopted. This, however, excludes creditors who did not vote at all, just the ones that voted against the plan. Moreover, the law imposes few other conditions, before the court can approve the plan. All the creditors of the class are put on an equal footing, unless the harmed creditors gave their explicit consent in writing. No creditor receives more than he is owed under his accepted claim. At least one of the creditor classes, which have approved it, shall receive partial payment, in the event that the plan envisages partial payment. Another problem that can arise, is the proxy voting. Issues arising from representation and power of attorney are not clear and have not been addressed properly in the recent amendments of the CA.
Schemes of arrangements need 50% in number and from them 75% in value of each class of creditors to approve and vote in favour of the scheme of arrangement for it to be approved. The statutory majorities have to be reached in each class of creditors. If these majorities are accomplished the court can sanction the Scheme. Only if all classes had voted to approve the Scheme the court will approve it, because the Schemes bind the dissenting minority creditors that voted against the proposal. Their only recourse is the second sanction of the court, where they can appeal on the grounds of unfair treatment. The binding power of this proceeding
52 Art. 899 Companies Act 2006
29 is appealing to companies, because the majority can bind the minority, regardless of the type of the creditor- secured or unsecured. Once a Scheme has been approved the creditors and the shareholders (members) it is final and it can only be set aside in a case where it was obtained by fraud.54 In comparison to Bulgarian reorganization, the majorities required under UK law to approve a reorganization (Schemes) seem more protective of minority shareholders: first by headcount- 50% in person and second by 75% of the value of claims.
54 Payne 2013, p. 566.
30 Chapter IV
4. Forum shopping and Cross- border Schemes
This last chapter is divided into two parts. The first part (4.1.) explains the concept of forum shopping in the context of the EIR and the differences between “good” and “bad” forum shopping. The second part (4.2.) explains under which circumstances a Bulgarian company will be in a position to apply for the Schemes of arrangements on behalf of a reorganization procedure.
4.1. Forum shopping in the context of EIR
Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (EIR) does not unify the insolvency law of the Member States but provides a harmonized set of rules for international insolvency procedures by means of conflict of law rules.55 The EIR uses the COMI (centre of debtor’s main interests) concept to determine jurisdiction: the judge of the country who has the power to open an insolvency procedure is the judge is the judge where the COMI of the debtor is situated. According to preamble 13 of the EIR “the "centre of main interests" should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is, therefore, ascertainable by third parties“. Article 3 (1) of the EIR prescribes a rebuttable presumption in case of a company “the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.” Article 4 (EIR) attaches the applicable law to the jurisdiction, namely the “State of opening proceedings”.56
The differences in the substantive national Insolvency laws may be an incentive for companies to migrate from one Member State to another to seek more favourable legal position, especially when some opportunities are lacking in the home jurisdiction. According to the EIR, forum shopping is “transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position” 57 and it should be avoided, because the legal uncertainty that arises threatens the proper functioning of the internal market.
Sometimes, as last resort measure, a debtor can shift his COMI in order to make use of a different law. Only by shifting its COMI from one MS to another, a company can successfully
55 Ringe 2008, p. 614. 56 Art. 4 EIR
