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- 2. Memoir submitted for the ICP Master “LilleWarwickSaarbrücken” By Florent Caupin University of Lille2 July 2012 Table of Contents Abstract 2 Acknowledgment 3 Table of contents 4&5 Table of Abbreviations 6 Bibliography 42 Résumé du mémoire 46 Übersetzung 47 2
- 5. Part I. Insolvency Law at the European level A. An Introduction to Insolvency law 1. An overview of state involvement in insolvency 8 2. The Evolution of Corporate Rescue 9 3. The value of rescues in today’s crisis’ context. 10 B. European Insolvency law 1. The EU Regulation on Insolvency Proceedings 11 2. Scope of the Regulation 12 3. The definition of COMI 13 4. Interpretation and application of the Regulation 14 a) The case of Daisytek ISA Limited 15 b)The MG Rover case 17 c) The Eurotunnel case 19 5. Forum shopping under the regulation 20 5
- 6. Part II. Rescue Laws of France, Germany and the United Kingdom A. The Framework of Corporate Rescue in the 3 jurisdictions 1. English Law on corporate rescue 23 a) The scheme of arrangement procedure 24 b) Company Voluntary Arrangements 24 c) Company under Administration 26 2. French Law on corporate rescue 28 a. The 2005 reform 28 b. The role of the court 29 c. The role of the creditors 29 d. The case of Eurotunnel 30 3) German Law on corporate rescue 31 a) The Insolvency Statute (Insolvenzordnung) 31 b) The Act for Further Facilitating the Restructuring of Companies 33 B) Comparative Summary of Rescue Process 34 1) Diagram 1: Comparative summary before the cashshort situation. 35 2) Diagram 2: Comparative summary during cashshort situation 40 3) Diagram 3: Comparative summary with special features 41 6
- 7. Table of Abbreviations Companies Act 2006 (CA 2006) Company Voluntary Arrangements (CVAs) EC Regulation on insolvency Proceedings (The Regulation) Enterprise Act 2002 (EA 2002) European Court of Justice (ECJ) Insolvency Act 1986 (IA 1986) 7
- 9. A. An Introduction to Insolvency Law 1. An overview of state involvement in insolvency Adam Smith (17231790), social philosopher and a pioneer of political economy analyzed selfinterest and profit maximization as key elements of the market economy. Because of the 1 neutral arbiter role of the state, it could only act merely to regulate the excesses of the market as defended by John Stuart Mill (18061873), a British philosopher and political economist, in his theory of the minimal level of state intervention. 2 John Maynard Keynes (18831946), architect of the Bretton Woods Agreement of 1944 creating the international monetary system, had a view that, where fluctuations in the business cycle are severe, the state has to intervene to create public substitutes for deficiencies in private investment caused by the economy contracting. According to him, laissezfaire 3 economics have to be moderated by a state role in leading the economy to function. This view has been counterbalanced by the politics of monetarism, which in essence advocates control by regulation of the money supply, which is the chief determinant of economic activity. This theory predicates a minimalist role for the State in offering merely a supervisory regime, without interventionist rules, giving investors and entrepreneurs the maximum capacity to act. So it is under those approaches that the state has created the conditions in which its participation in regulating insolvency matters is necessary as a support to taking general economic decisions. In former times, the impact of insolvency used to happen at a microeconomic level within local communities. But with the industrial revolution in Europe in the 19th century, its impact has been much more important obliging the state to intervene. Important insolvencies within a country are often items of news, press speculation, public concern and political intervention. Insolvency is firmly said now to form part of “the common experience of organized human society.” 4 1 The Wealth of Nations (1776) 2 Principles of Political Economy (1848) 3 The General Theory of Employment, Interest and Money (1935) 4 I. Fletcher, «Insolvency in Private International Law», Clarendon Press, p.3 9
- 10. 2. The Evolution of Corporate Rescue In the 1960’s, developments were made in the search for alternatives to the pure liquidation of companies and this period was marked by the beginning of cooperation between jurisdictions over the affairs of insolvent companies. The introduction of a “rescue culture” revealed the need for more control by economic entities of their destiny and allowed governments to create effective and efficient legal systems for the management of companies. Belcher sees corporate rescue as a “major intervention necessary to avert eventual failure of the company”. This definition of corporate rescue is however very broad, as it embraces both formal and informal rescue procedures. Belcher argues that the concept of rescue should not be confined to legal rescue, but that it should extend so as to include intervention emanating from the company’s management or other interested stakeholders. 5 In many legal systems like the US, the UK, France or Germany, there are special statutory provisions for corporate rescue. It is therefore possible to rescue a company by using informal or statutory procedures that are not specifically aimed at business rescue, such as liquidation and compromise. . 6 The choice of a rescue strategy is highly dependent on the corporate rescue culture of a country. For instance, in France, the aim of the corporate rescue laws is to promote the use of the preinsolvency institutional framework. In contrast, the United Kingdom and Germany respectively lack an earlyintervention culture and as a result corporate restructuring primarily 5 A Belcher, Corporate Rescue: A Conceptual Approach to Insolvency Law (Sweet & Maxwell, London, 1997).at p. 11. 6 A Belcher, ibid, at p.13 10
- 11. involves the use of formal rescue institutions. 1. The value of rescues in today’s crisis’ context. In 2008, before the crisis became really strong, there were more than 40.000 companies defaulting in France and Germany , and 20.000 in the UK . In 2011, in France there were 7 8 9 almost 60.000 companies defaulting with 93% of them being companies of less than 10 employees (TPE) and 68% being direct liquidations. The main focus of the memoir is 10 European insolvency law and its implementation in the English, French and German legal system. As far as European law is concerned, it should be noted that, although there is no harmonization among insolvency procedures across the European Union, there are nevertheless areas of harmonized law that have an impact on corporate rescue. Accordingly the EC Regulation on Insolvency Proceedings 2000 came to force on 31 May 2002 in order to ensure the effective coordination of insolvency proceedings. The EC 11 Regulation is a conflict of laws measure and, without altering the substantive laws of Member States, enables the initiation and coordination of both main and secondary proceedings. It also enables a judgment opening proceedings in one Member State to be automatically recognized and enforced in another State within the European Union. Part I offers a detailed analysis of the provisions of the EC Regulation and assesses its impact on the domestic laws of Member States. Moreover, it assesses the effectiveness of the provisions of the EC Regulation by way of considering a series of highprofile crossborder insolvency cases, such as Eurotunnel. Finally, it provides an assessment of the impact of the 12 7 INSEE, Bulletin des annonces civiles et commerciales.(http://www.insee.fr) 8 Destatis (www.destatis.de) 9 The Insolvency Service (http://www.bis.gov.uk/insolvency) 10 Le Figaro, « France: Hausse des faillites », 17/01/2012, (http://www.lefigaro.fr) 11 Council Regulation (EC) No.1346/2000 of 29 May 2000, OJ 2000 L160/1. 12 Judgment of the Paris Commercial Court, greffe number No 2006/1903. 11
- 12. Regulation across Member States and identifies its strengths and weaknesses. The three jurisdictions have adopted different approaches towards corporate rescue and this memoir provides a comparative analysis of key rescue proceedings of each jurisdiction and identifies differences and similarities between the three legal systems. Although the recent reforms of the insolvency laws of Member States demonstrate a level of procedural convergence, it is still very early days to actually suggest that steps should be taken, so as to give effect to substantive harmonization. B. European Insolvency Law 1. The EU Regulation on Insolvency Proceedings The aim of the Lisbon Summit of the European Council held on 2324 March 2000 was to develop a strategy in order to enable the European Union to match the growth rate of the United States of America (US)’s economy. Accordingly, there was a need to introduce reforms to corporate rescue laws. The introduction of the Regulation was made in order to ensure the effective coordination of insolvency proceedings. There has been a development of several jurisdictional disputes between Member States soon after the introduction of the EC Regulation. Taking into consideration the negative impact of insolvency on the economy of a Member State, European leaders decided to create a coherent and harmonized framework regulating cross border proceedings. Accordingly, the EC Regulation on Insolvency Proceedings (The ‘Regulation’) came into force on the 31st of May 2002. The Regulation, without altering the substantive provisions of the national insolvency laws, enables the initiation of both main and secondary proceedings and ensures that a judgment which is delivered in one Member State will be automatically recognized and enforced in 12
- 16. parent company must prima facie be dealt with separately, since they each have separate legal personality. This omission of specific provision for dealing with the insolvencies of group companies in a consolidated and coordinated manner was deliberate. a) The case of Daisytek ISA Limited b) The case of MG Rover c) The case of Eurotunnel a. The case of Daisytek ISA Limited One of the landmark cases in relation to the determination of the location of a company’s COMI, where a group of companies is concerned, is Daisytek.In this case an English court placed subsidiaries registered in England, France and Germany in administration, after the parent company in the group had entered Chapter 11 proceedings in the US. DaisytekIsa was the holding company of an American group with a complex structure, in which one company performed head office functions, including negotiating contracts with suppliers and giving guarantees in respect of other group companies. The grant of administration orders in respect of the English companies was uncontroversial, but orders were also made in respect of one French and three German companies. The English High Court held that, on the evidence that most of the administration of the 16 German and the French companies were conducted in England, it therefore had jurisdiction to make administration orders in respect of all four companies as the COMI was in England, 16 DaisytekIsa SAS, High Court of Justice of Leeds, May 16, 2003 16
- 17. according to the Regulation. In particular, the court noted that, in identifying the COMI, consideration should be given to the scale and importance of the company’s interests administered in one location against the scale and importance of the interests administered in another place which could be regarded as its COMI. The court attached great importance to the provisions of Recital 13 and examined where the main creditors such as financiers and trade creditors considered that the main administration was conducted. Unsurprisingly, the outcome in the Daisytek case was not welcomed in France or Germany. The French judge decided that the English administration order had no effect. In particular, 17 it was argued before the French court that the English court ignored the general principle of company law in relation to corporate groups, which establishes, that in the absence of any special factors, each company in the group should be treated as a separate legal entity. The French Court of Appeal noted that the presumption that a company’s registered office was 18 its COMI was rebuttable and that to do so the claimant must give sufficient evidence that the 19 COMI was located elsewhere. According to the facts, the COMI of the French company was in England and thus it rejected the French administrator’s claims of procedural irregularities in French law. 20 In addition, the initiation of “parallel” main proceedings was in contradiction with the provisions of Article 16 of the Regulation, which establishes the basic principle of immediate and automatic recognition of any judgment opening insolvency proceedings under the Regulation and of Article 17, as supported by Recital 22, which implies that the effect of the opening of proceedings in one Member State may not be challenged or further scrutinized in another Member State and is to be recognized without further formalities. The Court of Appeal confirmed that, since the English court was chronologically the first to open main proceedings, it had jurisdiction to determine the location of the French subsidiary’s COMI, and in line with the evidence before it, it agreed that the presumption in Article 3(1) 17 SAS DaisytekIsa, Commercial Court of Pontoise, May 26, 2003 18 SAS DaisytekIsa, Court of Appeal of Versailles, September 4, 2003 19 Article 3 (1) 20 CA de Versailles, 24eme chambre, Arrêt No.12 du Septembre 2003 (R.G. No.03/05038), JOR 17
- 18. had been displaced. The decision of the Appeal Court was upheld by the Cour de Cassation, the highest appeal court in France, which confirmed that the decision of the English court was effective and confirmed that the courts in France cannot control, challenge or discuss the jurisdiction of the court opening main proceedings, or impose any requirement for compliance with French formalities. 21 Also, in Germany, where parallel main proceedings had been opened as the Amtsgericht Dusseldorf initially refused to recognize the UK proceedings, an approach which was clearly contrary to the Regulation had been taken. This case falls in the scope of the Regulation and it has been argued that the German and the French jurisdictions have failed to respect the mandatory nature of the Regulation and therefore their legal obligation to recognize insolvency proceedings opened in another Member State pursuant to its provisions. The SAS Daisytek ISA was the first French 22 judgment applying the Regulation where the automatic recognition of a foreign insolvency regime was highlighted in respect of a company born under French Company legislation. b. The case of MG Rover 23 MG Rover Group Ltd. was the holding company of sales subsidiaries in eight European countries. On April 2005, MG Rover Group Ltd entered into administration proceedings and, at the same time, its subsidiaries, including the French incorporated Rover France SAS, also petitioned the High Court in Birmingham for administration orders. Consequently, prior to making the administration orders, the English court had to consider 24 21 Cour de cass, Chambre commercial, Arrêt n° 923 du 27 juin 2006 22 I Fletcher, Insolvency in Private International Law (2nd Ed., Oxford, 2005), para. 7.49, at p. 372. 23 MG Rover Espana SA and Other Subsidiaries [2005] EWHC 874 (Ch); [2005] BPIR 1162. 24 MG Rover Group Ltd, High Court of Justice of Birmingham, April 18, 2005 18
- 19. whether it had jurisdiction in respect of the companies in the Group. The court made reference to the earlier Daisytek decision and held that because of the fact that the day to day operations; management of employees; finances and marketing were carried out in England, England was the COMI of SAS Rover France. The French court considered that there was no public policy objection to the opening of the 25 proceedings in England, since the protection of French employees had been addressed by the administrators, who had assured the employees that they would receive the same level of payments as they would have done if secondary proceedings were opened in France. 26 However, only a month later, the Public Prosecutor of the Commercial Court of Nanterre declared that, pursuant to Article 26 of the Regulation, the decision of the English court in relation to the French subsidiary’s affairs was contrary to public policy and would not be recognized in France. The Commercial Court of Nanterre rejected the Public Prosecutor’s argument and the Court 27 of Appeal upheld this decision in indicating that secondary proceedings should only be 28 opened in France if the applicant for such proceedings could demonstrate that they would have a useful purpose. On the facts the opening of secondary proceedings was considered not to be necessary as it would not enhance the protection of local interests or the realization of the company’s assets. In addition, the English administrators, in light of the social concerns of the French courts, have taken a series of additional practical steps, which safeguarded the interests of the French employees. Consequently, pursuant to the provisions of Article 16 of the Regulation, the English administration order was to be automatically recognized in France without a need for 25 SAS Rover France, Commercial Court of Nanterre, May 19, 2005 26 R Parry, Corporate Rescue (Sweet & Maxwell, 2008) at pp. 273274. 27 SAS Rover France, May 19, 2005, Commercial Court of Nanterre. 28 SAS Rover France, Court of Appeal of Nanterre, December 15, 2005 19
- 20. further formalities. 29 The decision in MG Rover is arguably a landmark decision as the French courts demonstrated a radical shift in their approach towards the application of the Regulation, comparing with the Daisytek case, in particular with regard to the issue of determining jurisdiction, and significantly clarified that the exception to Article 3(1) is in fact a very narrow exception and therefore Article 26 cannot lightly be invoked. It demonstrated that finally both English and French courts and practitioners have actively collaborated to find a pragmatic solution in the interests of all parties involved in the Rover insolvency. c. The case of Eurotunnel 30 The Eurotunnel decision is the first application of the Regulation to the safeguard procedure, since its insertion in Annex A of the Regulation by the adoption of the EC Regulation No 694/2005 of 27 April 2006. The Annexes to Regulation list the designations given in the national legislation of the Member States to the proceedings and liquidators to which that 29 R Parry, Corporate Rescue (Sweet & Maxwell, 2008) at pp. 273274. 30 Tribunal de Commerce de Paris of 2 August 2006 20
- 21. Regulation applies. In addition, the Eurotunnel case constitutes the first main decision of the French courts since the decision of the ECJ in Eurofood where it affirmed that the COMI “must be identified by 31 reference to criteria which are both objective and ascertainable by third parties”. However, the ECJ in this case failed to provide guidance as to what those criteria might be. 32 With the Eurotunnel case, this is the first time that the location of the restructuring talks is taken into account for the determination of the COMI. It was held that the COMI of an English, Belgian, German, Dutch and Spanish registered companies was held to be in France on the basis that the strategic and operational management of the group was in France, the financial management of the group was carried out in France by a common council whose members were French citizens, the financial management, and most of the business, employees and assets were in France and debt restructuring negotiations were being carried out in France. 33 The courts have therefore effectively adopted a consolidated approach, however in light of the failure of the ECJ to provide clear guidance there may be scope for continued disputes. Although the benefits of a consolidated approach appear to have been accepted there are remaining matters to be resolved, relating to the coordination of proceedings with group members outside the EU and also the coordination of main and secondary proceedings, where secondary proceedings are opened. 5. Forum shopping under the regulation The case law related to the Regulation demonstrates that the majority of conflicts over 31 ECJ, Eurofood IFSC Ltd, [2005] B.C.C. 1021 (Case C341/04), 2 May 2006 32 I Fletcher, Insolvency in Private International Law, Supplement to the 2nd Edition (Oxford University Press, 2007), at p. 118 33 Judgment of the Paris Commercial Court, greffe number No 2006/1903. 21
- 22. jurisdiction are related to the problematic interpretation of Article 3 of the Regulation and particularly the vague definition of the COMI. This problem of interpretation has led to the socalled “forum shopping” of companies which become relevant in cases that deal with insolvency of company groups like Daisytek, MG Rover or Eurotunnel. Recital 4 of the Regulation defines forum shopping as the phenomenon that debtors “transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favorable legal position”. Also it states that “It is necessary for the proper functioning of the internal market to avoid [...] forum shopping.” As under the Regulation both the forum and the applicable law depend on the COMI, a successful forum shopping in the context of insolvency law will depend upon the debtor’s ability to move this very COMI from one into another jurisdiction. The European legislature has long been trying to regulate the possibility of forum shopping and at several occasions it attempted to harmonize the insolvency law itself. There has been 34 a growing tendency in recent years of various companies trying to move their COMI from one jurisdiction to another so as to profit from the insolvency law that would be more suitable for their purposes. 35 For example, Schefenacker AG was a German incorporated group in financial trouble that tried to move parts of its operational structure to the UK in order to take advantage of English insolvency procedures and, importantly, the ability to push through a debtforequity swap using English insolvency provisions. In order to avoid liquidation through the English 36 company voluntary arrangement (CVA), Schefenacker had to move its COMI to England in order to profit from English insolvency law. The previously German company ended up as an English limited company and the restructuring process has been a success. As we will see in the Part II of the memoir concerning Germany, a reform of the 1st of March 2012 was made in order to avoid this escape of companies. This example illustrates the importance to explain the specificities of the insolvency law of 34 PJ Omar, European Insolvency Law, Ashgate, Aldershot, 2004, at p.4986. 35 W.G Ringe, Forum Shopping under the EU Insolvency Regulation, Paper No 33/2008, University of Oxford Legal Research Paper Series, August 2008, at p.5. 36 W.G Ringe, ibid at p.6. 22
- 25. A. The Framework of Corporate Rescue in the 3 countries 1. English Law on Corporate Rescue The United Kingdom’s insolvency law has traditionally been regarded as “creditor friendly” because of the strong priority given to the protection of creditors’ interests. In the 1980s, the informal rescue procedures lacked protection for the company and to solve this problem, the British government appointed the Cork Committee to review and make 38 recommendations to both corporate and personal insolvency laws. The Cork report encouraged the continuation and disposal of a debtor’s business as a going concern and 39 proposed the introduction of a new procedure to assist companies having financial difficulties by the appointment of an administrator. This resulted in the administration order procedure regulated by Part II of the Insolvency Act 1986 (IA86). However the statistics for the period 19962002 showed that liquidation were still used in the vast majority of cases (an average of 15000 liquidations for 2000 administrations per year) 40 and the administration order procedure was criticized for being slow and expensive and particularly unsuitable for mediumsized companies. The Enterprise Act 2002 was introduced in order to encourage a more collective approach towards corporate rescue, whereby all the interests in the company would be considered. 38 Report of the Review Committee on Insolvency Law and Practice, (Cmnd. 8558, 1982) (‘Cork Report’). 39 Par. 1980 (2) 40 R. Parry, K. Gromek, Corporate Rescue, An overview of recent developments from selected countries in Europe, Kluwer Law International, 2004, at p. 148. 25
- 26. There are now three main statutory rescue options available to companies that may be insolvent: a. The scheme of arrangement procedure The scheme of arrangement procedure provided a rescue procedure apart from the 41 liquidation before company voluntary agreements (CVAs) and administration became available. It enables a solvent or insolvent company to suspend payment of outstanding liabilities to creditors in order to financially reorganize and restructure its debt. The advantage is that this procedure can take place at quite an early stage. The court has an important role in this procedure and can hold a meeting of creditors or members , may sanction the compromise or arrangement or facilitate the reconstruction or 42 43 amalgamation. However, this procedure has been criticized because it was too expensive 44 and it had a complex voting structure and the Cork Committee proposed thus the introduction of other corporate rescue procedures, namely the company voluntary agreements and administration. b. Company Voluntary Arrangement The CVA, introduced by the IA 1986, is a “debtor in possession” process and is designed to facilitate the rehabilitation of enterprises with financial difficulties. A “debtor in possession” is a specific and unusual situation where a debtor is authorized by court to keep the usage of certain assets which have been previously secured by “secured creditors”. 41 Part 26 of the Companies Act 2006 (formerly found in section 425 of the Companies Act 1985) 42 Section 896, Part 26, Companies Act 2006 43 Section 899 44 Section 900 26
- 28. being relieved of most of its preCVA debts and having been able to trade uninterrupted throughout the CVA process. c. Company under Administration When a company goes into administration, an administrator takes over management and control of the company. The administrator is appointed to manage the affairs, business and 46 property of the company. There are three ways in which an administrator can be appointed. 47 The directors of the company can elect to put the company into administration and appoint an administrator by filing notice with the court. The fact that this can be done without obtaining 48 an order of court constitutes a major amendment to the original provisions regulating administration in the IA86. The court itself can order the appointment of an administrator. 49 The holder of a qualifying floating charge (who is usually a secured lender) can also appoint an administrator by notice to the court. 50 In the case of an application for an administration order, the applicant must state that he believes the company to be, or likely to become unable to pay its debts. A company is 51 deemed to be unable to pay its debts if it fails to pay or secure a debt of at least £750 within three weeks after delivery of a written demand at its registered offices, or if execution on a judgment in favor of a creditor of the company is returned unsatisfied or if is proved to the 46 Report on the First Six Months’ Operation of Statement of Insolvency Practice 16, (http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/policychange/sip16-final.pdf) 47 Par. 1(2)(b) of Schedule B1 to the IA 86, inserted by the Enterprise Act 2002. 48 Par. 22 49 Par. 10 50 Par. 14 51 Par. 11(a) and 27(2) 28
- 29. satisfaction of the court that the company is unable to pay its debts as they fall due.52 A company is also deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, also referred to as balancesheet deficiency. 53 An administrator's primary obligation is to rescue the company as a going concern or, if that 54 is not possible, to achieve a return for the creditors that would be better than they would have obtained if the company were wound up with its assets sold off piecemeal. If the administrator thinks either that it is not reasonably practicable to rescue the company as a going concern or that the second objective of administration would achieve a better result for the company’s creditors as a whole, he may perform his functions with that second to achieve a better result for the company’s creditors than would be likely if the company were wound up without first being in administration. 55 This provision firmly places the interests of creditors first, even before those of employees or shareholders who would benefit more from a rescue of the company itself, in that a rescue of the corporate entity need not be pursued if it would be to the detriment of the creditors. The number of administrations, including both courts appointed and out of court administrations, showed a sharp increase from 2003 after the Enterprise Act 2002 came into force on 15 September 2003. 56 Clearly, the boost to the corporate rescue culture was by virtually abolishing the floating charge holder friendly administrative receiverships. Such receiverships remain in some exceptional cases and in the circumstances where the floating charge was created prior to 15 September 2003. At the practical level, the receiverships in such cases may still be used as a quick and efficient way to realize debts in the case where the secured lender is under secured and there is no property available for a 52 Section 123(1) IA86 53 Section 123(2) IA86 54 Par. 3 (1)(a) 55 Par. 3(1) and 3(3)(a) and (b) 56 http://www.insolvencydirect.bis.gov.uk 29
- 30. distribution among the other creditors. In summary, it could be argued that the United Kingdom has in place an effective insolvency law regime, which enables the restructuring of distressed but viable companies. It is noteworthy that beyond the administration procedure, which is the primary weapon towards corporate rescue, there is an array of additional mechanisms, such as the CVA and Schemes of Arrangement which are designed to successfully effect a corporate reorganization. 2. French Law on corporate rescue To compare with the UK, where the interests of creditors enjoy more protection, the corporate rescue system in France favors the safeguarding of the jobs of employees. A significant 57 feature of the French legislation is that it is specifically designed to urge directors to become aware of their companies’ financial difficulties at an early stage and consequently to take steps so as to recover their position. 58 a. The 2005 Reform 57 R Parry, K Gromek, Corporate Rescue in Europe: An overview of Recent Developments from Selected Countries in Europe, (Kluwer Law International, 2004) at p. 1. 58 M Campana, “A Critical Evaluation of the Development and Reform of the Corporate Rescue Procedures in France” in K Gromek Broc and R Parry, Corporate Rescue in Europe: An overview of Recent Developments from Selected Countries in Europe, (Kluwer Law International, 2004) at p. 34. 30
- 31. Under the influence of the Chapter 11 of the US Code, and in particular the Chapter 11 concepts of amicable settlement and the proactive involvement of creditors in any ongoing settlement regime, France has introduced the 2005 Law which is designed to improve the 59 efficiency of preinsolvency institutions, the proper supervision of rescue plans and the simplification of liquidation procedures. 60 Following the 2005 reform, there are now three preinsolvency institutions, the newly introduced safeguardpreservation procedure (‘sauvegarde’), the conciliation procedure (‘conciliation’) and the ad hoc mandate (‘mandat ad hoc’), which are designed to complement the two insolvency institutions, namely, administration (‘redressement judiciaire’) and liquidation (‘liquidation judiciaire’). The reform is aimed at promoting the idea of intervention at an early stage, while leaving the company’s holder managing it. b. The role of the court The safeguard procedure is implemented by a court judgment at the request of the debtor. 61 The court will appoint an administrator (“administrateur judiciaire”) who is required to supervise or assist the debtor in the performance of some or all management operations. 62 The judgment also triggers an automatic moratorium (“periode d’observation”) under the protection of which the debtor is permitted to propose a recovery plan. 63 A limited role is attributed to the courts during safeguard proceedings, by preventing them for removing the company’s directors, unless the Public Prosecutor makes a request to this end in order to encourage companies to seek the protection of the court at an early stage when facing 59 Loi n°2005845, 26 July 2005, 60 P Omar, “French Insolvency Law: The 2004 Project and Reform Perspectives” (2005) 2(2) Int. Corp. Rescue 6577 at p. 67. 61 Article 6213 62 Article 23 Law of 2005, amending Article 6221, Commercial Code 63 Article 12, amending Article L 6201 of the Commercial Code 31
- 32. financial difficulties. During the first year of the application of the safeguard procedure, the 64 directors preferred thus to resort to conciliation proceedings, where the outcome of a case is not solely dependent upon the judge hearing the case. 65 c. The role of the creditors The new regime affords a greater protection to creditors, who are involved in preinsolvency proceedings. Notably, the safeguard procedure is seeking to strike a balance of preserving an ailing business while satisfying the creditors. It is stated that a financial creditors’ committee and a principal suppliers’ committee will be set up and that their role is to approve the rescue proposals submitted by the debtor, assisted, it being the case, by the administrator.66 Similarly to conciliation, in safeguard proceedings, creditors who, in order to support the continued operation of a distressed company, have injected new funds into it, are conferred a superpriority by the Law of 2005. This could be seen as a reward for creditors who promote 67 corporate rescue at a pre insolvency stage. However, it is argued that the safeguard procedure will primarily affect larger businesses and will have a limited effect of smaller companies. d. The case of Eurotunnel As mentioned in Part I.B)c), the Eurotunnel case constituted the first main decision of the French courts on the application of the Regulation. It revealed certain defects of the safeguard procedure, which leaded to the reforms of 2008 in order to make the safeguard procedure 68 more attractive , which according to statistics has had a very limited use since its 69 70 introduction in 2005 (Only 500 procedures in 2006 and 506 in 2007). 64 Article 6264, Commercial Code 65 P Omar, note 58 above at p.142 66 Article 6201 Commercial Code 67 Article L. 61112 of the Commercial Code. 68 which came in force on 15th February 2009 69 The French Ordonnance of December 18, 2008 on the reform of the law for businesses in difficulty, amending the law of July 26, 2005, which was published in the Journal Officiel of December 19, 2008. 70 M MonsèriéBon and C SaintAlaryHouin, La loi des sauvegarde des enterprises: nécessité et interêt d'une réforme annoncée (Recueil Dalloz, 2008), at p. 941 32
- 33. This problem of attractiveness is explained by insufficient knowledge of safeguard and conciliation proceedings amongst directors of companies who encounter difficulties. In the opinion of the then President of the Republic, it was necessary to “Americanise” French law even further with respect to anticipating company difficulties. In a short televised speech on 6 September2007 to the Commercial Court in Paris, he stated: “At the time of voting in the 2005 law, it seems to me that we were in error when we celebrated having adapted into French law only a part of America’s Chapter 11 proceedings. Indeed, it had been decided that business leaders would need to comply with a number of conditions to qualify for access to safeguard proceedings. The result was predictable: as it turned out, this half innovation is not even half used.” By means of the reforms of 2008, the role of directors has been significantly enhanced, as it is now possible for the debtor to nominate an administrator for appointment by the court. 71 To conclude, it should be noted that the recently introduced reforms in France and the United Kingdom bring the two systems closer to each other. 3. German Law on corporate rescue In contrast to the US, the UK and France, it is considered that German insolvency laws do not provide sufficient scope for distressed companies to restructure their businesses. As we explained in the Part I of the memoir dealing with forum shopping, with the example of Schefenacker AG, this criticism largely stems from the central role that the courts play in any restructuring process. The process of extensive reform to the insolvency law started in West Germany in 1978 with the appointment of a commission of insolvency experts to make recommendation on a fundamental reform of the insolvency law (Kommission für Insolvenzrecht). The 72 71 Article 14 of the Ordonnance. 72 P.R Wood, Principles of International Insolvency, 2nd edition, Sweet and Maxwell, 2007, at p.67. 33
- 34. recommendations of the commission had been heavily influenced by the reorganization procedure under Chapter 11 of the American Bankruptcy Code. 73 a. The Insolvency Statute (Insolvenzordnung) In 1999 the Insolvency Statute (InsO) has replaced the Bankruptcy Act (Konkursordnung) 74 and the Settlement Act (Vergleichsordnung) in the West German States and the Total Execution Act (Gesamtvollstreckungsordnung) in the East German States. The InsO differed in several ways from the US Code, especially with its rule of debtorinpossession that in most cases allows the debtor to remain in control of and continue to operate the business and also the priority and independence that reorganization in terms of Chapter 11 enjoys. 75 The objective of the insolvency proceedings is the satisfaction of the debtor’s creditors either by the liquidation of the debtor’s assets and distribution of the proceeds, or by way of an arrangement contained in an insolvency plan intended to keep the enterprise going. The 76 general term “insolvency proceedings” is used for all procedures under the Code rather than specific terminology distinguishing between the liquidation and rescue procedures as found in many other systems like France or the UK. Also the purpose of the proceedings is expressly stated to be the satisfaction of creditors’ claims, irrespective of whether this happens by way of liquidation or reorganization. Insolvency proceedings must be commenced by way of an application to the insolvency court made by the debtor or his creditors. Any creditor may apply if he has a legal interest in 77 commencing insolvency proceedings and is able to provide prima facie proof of both his claim and the necessary grounds for initiating the proceedings. 78 Another basic change of the InsO is that the secured creditors now take part in the insolvency 73 Title 11 of the US Bankruptcy Code 74 Insolvenzordnung of 05/10/1994 (BGBI IS 2866) which came into force on 01/01/1999 75 E Ehlers, German Statutory Corporate Rescue Proceedings, in K Gromek Broc and R Parry, Corporate Rescue in Europe: An overview of Recent Developments from Selected Countries in Europe, (Kluwer Law International, 2004) at p. 80 76 §§ 1 pp. InsO 77 §§ 13(1) pp. InsO 78 §§ 14(1) pp. InsO 34
- 35. proceedings. They join the meeting of creditors and are entitled to vote. Finally the InsO for 79 the first time contains proceedings by which a debtor if he is a natural person can receive a discharge (Restschuldbefreiung). 80 Insolvency proceedings can only be opened if a request is filed at the first instance court (Amtsgericht) which is competent for the debtor's place of residence respectively if he is a businessman for the debtor's place of business and if an insolvency reason is necessary. 81 To decide on the opening of the insolvency proceedings, the court requires an insolvency reason. The first reason is the illiquidity (Zahlungsunfähigkeit) , like the inability of the 82 company to pay the due obligations, which is the most usual ground on which insolvency may be initiated. The second is the overindebtedness (Überschuldung) which requires that the 83 assets of the debtor do not cover his obligations, however it is only an insolvency reason for legal entities and not for natural persons. Another insolvency reason was introduced, the imminent illiquidity . By this means the 84 opening of the proceedings was intended to be placed on an earlier date when more assets of the debtor are on hand and a rehabilitation or reorganization of his enterprise may be of more success. This development is the Code’s first acknowledgment of the business rescue aspect of insolvency proceedings, in that it is intended to come to the assistance of a debtor at an early stage when a rescue or restructuring of his business has a better chance of succeeding. Under the previous legislation most insolvency proceedings were instituted far too late when there were almost no assets left. It is said that the InsO adopted the American model without taking into account the differences between European and American culture and practices, particularly the German belief that the American system is too debtor friendly. 85 79 M. Veder, CrossBorder Insolvency Proceedings and Security Rights, Kluwer Legal Publishers, 2004, at p.31. 80 §§ 286 pp. InsO 81 §§ 16 pp. InsO 82 § 17 InsO 83 § 19 InsO 84 § 18 InsO 85 K Kamlah, German Insolvency Act, (1996) American Bankruptcy Law Journal at p. 422423. 35
- 36. b. The Act for Further Facilitating the Restructuring of Companies. With the Act for Further Facilitating the Restructuring of Companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen), which came into force on the first of March 2012, a number of amendments have been made to the German Insolvency Code in order to enhance the attractiveness of Germany as a destination for financial restructurings. The key changes of this reform are that creditors will obtain a greater influence over the identity of the preliminary insolvency administrator; certain corporate formalities which formerly required shareholder approval are now able to be incorporated into an insolvency plan thus eliminating the need for shareholder approval; certain risks for lenders where they participate in debtequity swaps are being mitigated through the amended legislation; special appeals by shareholders to challenge an insolvency plan are going to be made harder; debtors will find it easier to obtain ‘debtor in possession’ status; and a new procedure – the ‘Protected Reorganization’ – will be available which will allow debtors to obtain protections from their creditors where debtors are facing impending illiquidity or balance sheet insolvency. 86 B. Comparative Summary of Rescue Process 86 White & Case LLP, The new German laws governing the restructuring of companies, 03/05/2012 (http://www.jdsupra.com) 36
- 38. Normally, in case of non-payment, secured creditors have the legal right to take repossession of the secured assets. In all 3 countries, INSL tends to freeze such right of repossession over a limited period of time in order to give some breathing room to the debtor who has initiated a reorganization restructuring process. However, each country has maintained , in case of liquidation, a priority of secured creditors versus the unsecured creditors. Operators no 2 : Unsecured Creditors: Unsecured creditors usually make up for the largest share of all creditors. In the UK and in Germany (since 2012) they hold more rights than in France. The UK has a tradition of being very protective for creditors, while Germany recently adjusted its own legislation effective on March 1st 2012.The new german law gives more designation power to creditors (secured & unsecured) who may propose to the court a specific administrator of their own choice.(see detailed german presentation for more info).The 38
- 39. purpose of all 3 INSL is to improve the recovery rate of all creditors from a straight liquidation scenario. New German law gives even appeal right to creditors in the specific case where a reorganization plan would prove to trigger a deteriorated level of repayment to them in comparison with a straight liquidation scenario. Operators no 3 : Priority creditors& Others (see Operators on spots 4,5,6 on diagram) Secured Creditors Unsecured Creditors They are defined by national laws and usually are made up of payments due to employees (4) tax authorities (especially VAT) and social security/national insurance as well as pension funds (6)These creditors enjoy in each of the 3 countries a privileged/priority status in term of repayments, either before or within a liquidation process. It can be noted that social security creditors (especially in France) may hold a significant share of all claims (depending on the type of business and the related labor content) and that their position will be key to the viability of a restructuration. They are not yet considering an entry into debt to equity swaps (Spot H on diagram) although it would make sense for labor intensive businesses.Priority Creditors Operators no 7 & 8 : Bankers and their Bank lines Banks are important actors in the solvability process of companies as well their restructuring. More pressure against them through INSL would translate in two negative reactions on companies: Namely, more expensive credit lines and lower level of availability of lines. Such reactions resulting into worsened credit environment for businesses (especially small ones)triggering 39
- 40. more insolvencies. Operator no 9 : Shareholders They may look as the loosing players in the process, depending whether the company has reached the point of negative net worth and whether the company holds certain rights and certain assets currently undervalued in the net worth computation. In all 3 countries, they also have a right for appeal against court judgments but will need to support their case by material facts. When the company enjoys a residual Net Worth, they will be forced into a debt to equity swap resulting into a reduction of their own share position.Such reduced position being still a better choice than straight liquidation where ,usually, nothing is left for shareholders. Operator no 10 : Management In Place When a company falls into a cash short position, it remains to understand the reasons for such desperate situation : is this the results of mismanagement or the results of accidental circumstances (default of a large client, sudden change of market direction, FX Change etc ) .Management in place has the advantage of a detailed knowledge of the company’s history and its built-in functionalities. A sudden and complete change of management may prove to be counterproductive in a resurrection/salvation process, provided that a revival Plan makes sense. In all 3 countries, Management may take the initiative of the pre-insolvency process where all (or principal) creditors are informed of a projected cash shortage implying a voluntary extension of credit terms on installments due in the near future. In France, management may choose a custodian (designed as “mandataire ad hoc”) among a list of Court approved “administrators” whose function will be simply to coordinate and formalize the extension of credit terms on a confidential basis. This initiative having the advantage of freezing all recovery claims in order to build a sustainable recovery plan which may need (or not) a formal approval from the court. In Germany, Creditors will be reunited within a creditors committeeand will have the possibility to design a specific professionals (unanimously or not) who will be confirmed (or not) by the court. Another option, for management in Germany being the DIP (Debtor In Possession) inspired from US chapter 11 . Operator no 11. The “future”Cash Short Company All 3 countries make a distinction between 3 phases of the rescue/insolvency cycle: 40
- 41. Phase 1 : Cash Short company, not yet illiquid, with possible Out of Court settlement Phase 2 : Illiquid Company ( and Negative Net Worth or quasi negative) subject to Court Phase 3 : To be liquidated through a receiver designated by a Court. The company has a number of Creditorswhich have a given claim on the company as of a given date and as reported in the company accounts (credit balance).In addition, the company hold a number of claim on Debtors as well as ownership on Assets ,tangibles or intangibles, short term or long/medium term Assets. Company Assets Analysis (items 12 to 16) This diagram shows a classification of assets in 5 groups. Such assets will need specific protection for at least 2 reasons in case of shortage of liquidity : To help in the possible rescue of the company and ,if such rescue were impossible or were to fail, to optimize the realization (sale for cash) of such assets, all this for the good sake of all parties. Items no 12: Assets-Intangibles:These kind of assets are intangible that is non-material (you can’t touch them) but they are often decisive for the company’s operations. They include Computer softwares, licences, leaseholds (eg on stores), patents, trade-marks, designs etc .The launch of an insolvency process in all 3 countries will protect the company from cancellation/repossession clauses who could come from creditors, whether secured or unsecured (Suppliers, Franchizers , Inventors, authors, designers etc).Over a given limited period of time all legal actions will be placed on hold (3 to 4 months) until either a restructured repayment plan and/or a full rescue plan is defined and approved by all parties. Items no 13 : Assets-Tangibles-Long term:This group of assets may include simple types of assets (Buildings, Trucks, Cars, Machinery) some of which may be sold “off the shelf”, as well as more complex assets such as full or partial ownership in affiliated or subsidiary companies. Selling shares of affiliates may help in the downsizing of the company 41
- 42. operations, hence raising fresh money and refocusing management attention to the core activity of the company. To do so, negociations needs to take place in a stabilized legal environment. Hence the different forms of suspensions imposed to possible legal actions from creditors in all 3 countries. Items no 14 : Assets-T-Short Term/Non-Receivables : Inventory items may be sold more efficiently(price) only if the company remains in operation. This is again the reason why all 3 legislations have defined a number of temporary “shields” against seizure by creditors. Items no 15 : Assets-Tangibles-Receivables:The debtor company obviously hold claims (receivables) on its clients. being still a “going concern” make the collection of such receivables much easier and faster. Clients will not have the chance to challenge the value of their debts since the company management is still in place as well as its sales representatives. Items no 16 : Assets–Tangibles-cash and cashable items:Obviously the fact that payments to creditors will be suspended will trigger a piling up of cash in the company ‘s bank accounts after the reimbursement of all outstanding debits on the Bank statements of account (to the benefit of said bank).This will be very helpful to the company’s rescue to the point that certain managements could have the temptation of using rescue package as a way to optimize the operations of their own company. Legislators of each of the 3 countries have taken notice and have inserted certain protections against any abuses. Conclusion on diagram no1; When a company becomes cash short, it is obvious that pitfalls ,obstacles, constraints problems and threats will be quite similar in any countries. Hence, the similarities between the legislation of 3 countries. However a number of discrepancies exists between the legal positions of similar third parties in the 3 countries, especially on taxes and social employees issues. For instance, the rescue packages appears to be more expensive in France that in 42
- 43. Germany and even more so in the UK. Diagram no2 The 7 yellow zones are inserted to reflect the rescue process. It starts with the creditors committee (A) under different formats throughout the 3 countries. There are 2 basic paths, either the Out of Court path (B) or the Court path(C). The rescue may be organized either with the “old management” or with a new “approved” management with the supervision of the administrator designed by the court. 43
- 44. 44
- 45. Diagram no3 In this diagram no3 we have inserted the 3 green special features used to improve a rescue package. Namely, the Debt to equity Swaps, the DIP Debtor in possession and for Germany ,the usage of a Temporay Custodian(under ESUG) (in lieu of administrator) 45
- 46. The full rescue of a cash short company may use new techniques, often imported from the US chapter 11.The new German ESUG regulation, effective on March 1 2012, seems to be the most advanced in term of standardization of acceptable solutions, especially on the Debtor in Possession (DIP) solutions where the debtor maintain the usage of goods and machinery for a given period of time, despite all the securities or liens already in place. Other concept include the very old (19th century) difference between floating chargesand fixed charges in the English legislation as well as the new debt to equity swapoptions (H). As we can see , many things have changed to improve the chance of effective rescue of companies inside the 3 major economies of the European union. 46