Trans Europe Experts 16 mars 2018 - PowerPoint Presentation

1. Trans Europe Experts16 mars 2018Denis PHILIPPEAvocat à Paris et BruxellesProfesseur à l’Université catholique de LouvainChargé de cours à l’Université de Paris Ouestdphilippe@philippelaw.euRescue of Business in Insolvency Law

2. IntroductionProf. em. Bob Wessels (Leiden Law School)Prof. Stephan Madaus (Martin Luther University Halle-Wittenberg)2

3. ELI ProjectBusiness Rescue in Insolvency LawQ1/2014 – Q3/2017 Aim: to design a set of norms and requirements that will enable the further development of coherent and functional rules for business rescue in the EU3

4. Business Rescue Project Organisation2 Reporters25 National Correspondents (NCs)Advisory Committee of 10 (AC)Members Consultative Committee (MCC), some 30Glossary of terms and expressions commonly used in restructuring and insolvency law.115 recommendations explained on more than 375 pages.Chair: prof. Tatjana Josipović (Uni of Zagreb)businessrescue@europeanlawinstitute.eu4

5. Headings Questionnaire (for NCs) / 10 ChaptersGovernance and Supervision of a rescue in court and out-of-courtConditions for out-of-court workouts, conditions for opening of such ‘proceedings’, conditions for opening formal pre-insolvency and insolvency proceedingsRole of a court, a supervisory judge or other state agencyStatus, powers and supervision of insolvency practitioners; duties and liabilities of directorsHow are unsuccessful rescue attempts in pre-/insolvency procedures terminated or converted into other procedures?Financing a rescue, including critical vendors and other pressures on liquidity; the stayExecutory contracts, including leases, IP-licensing contracts; termination and modification of contracts; transfer of contractsRanking of creditor claims; governance role of creditorsLabour, benefit and pension issues5

6. Headings Questionnaire (for NCs) / 10 Chapters6. Avoidance powers, including safe harbour for failed rescue efforts in a later bankruptcy, and avoidance powers in pre-insolvency procedures and out-of-court workouts7. Sales of substantially all of the debtor’s assets on a going-concern basis8. Rescue plan issues: procedure and structure; distributional issues9. Multiple enterprise/corporate group issues10. Special arrangements for small and medium-sized enterprises (SMEs) including natural persons (but not consumers)6

7. Project Outcomes: 2 ReportsInventory report on national insolvency laws, in particular rescue-related tools, including empirical evidence and the underlying policy choices from 13 selected MSs. It also includes an Inventory report on international recommendations from standard-setting organisations (UNCITRAL; World Bank; Nordic-Baltic Recommendation on Insolvency Law re 10 topics of Questionnaire Rescue of Business Law in Insolvency Law Report, with 370+ pages containing (i) our methodology, (ii) a presentation comparative overviews on these 10 legal topics, and (iii) explaining existing rules and our views and considerations, based on transparent and reasoned policy choices and comprising a catalogue of identified good & best practices which support and facilitate the rescue of business while striking a fair balance with creditors’ interests and other recognized interests – 115 Recommendations7

8. Solution: so called ‘Dutch pre-pack’Relaunching 243 of the 380 childcare centers, retaining almost 2 500 employees out of a total of some 3 600, and continuing the service at all the centers from July 2014Smallsteps BV established to take over the 243 centersDeal signed on day 1 of insolvency proceedings on Estro between administrator and Smallsteps transferring (only) 250 centers; later (re)hiring 2600 employees8

9. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Case:Estro Groep BV was the largest childcare company in the Netherlands.It had almost 380 childcare centres throughout the territory of the Netherlands and employed approximately 3 600 workers With inability to pay approaching, Estro looks for new finance or other ways to rescue the business in 20149

10. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:Article 3 of Directive 2001/23/EC (Transfer Directive):‘The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.’Article 5 of Directive 2001/23/EC (Transfer Directive):‘Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).’10

11. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem: What are insolvency proceedings?Article 1 of (recast) European Insolvency Regulation:‘Public collective proceedings’‘Based on laws relating to insolvency’‘Purpose of rescue, adjustment of debt, reorganisation or liquidation’‘debtor is totally or partially divested of its assets and an insolvency practitioner is appointed’‘assets and affairs of a debtor are subject to control or supervision by a court’‘temporary stay of individual enforcement proceedings’11

12. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:Article 3 of Directive 2001/23/EC (Transfer Directive):‘The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.’Article 5 of Directive 2001/23/EC (Transfer Directive):‘Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).’12

13. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:What is a ‘liquidation of the assets of the transferor’?ECJ: ‘a procedure aimed at ensuring the continuation of the undertaking in question does not satisfy that requirement’13

14. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:What is a liquidation? (1) Piecemeal liquidation14Insolvent companyundertakingPurchaserCreditors

15. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:What is a liquidation? (2) Going concern sale15Insolvent companyundertakingPurchaserCreditorsundertaking

16. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:What is a liquidation? (3) Restructuring/Reorganisation16Insolvent companyundertakingInvestorsCreditorsSolvent company

17. Fundamentals of a Business RescueECJ (Third Chamber) in Smallsteps BV (22 June 2017, C-126/16)Problem:What is a liquidation of the assets of the transferor?ECJ: ‘a procedure aimed at ensuring the continuation of the undertaking in question does not satisfy that requirement’WRONGLY ARGUED! Continuation of the undertaking is a common feature of an insolvency liquidation of the assets of the (insolvent) transferorSuch proceedings (only) discontinue the business activity of the debtor/transferorOnly in a restructuring, the debtor remains in business17

18. Business Rescue Project – ResultsElaborate and discuss two key results:1. Designing a restructuring and insolvency framework2. Role of the court18

19. (1) Restructuring and Insolvency FrameworkContractual Debt RestructuringPro:Flexibility InformalitySpeed Low costs Con:Consensualism  Consent of all relevant creditors requiredHold-outs of some creditors may be rational or strategic19

20. (1) Restructuring and Insolvency FrameworkKey features addressing rational “hold-outs”Time:Early warning mechanisms in company law, debt contracts or accounting standards better renegotiation /prevention groupTrust:Codes of Conduct for repeat playersStandstill and confidentiality agreementsDisclosure and communication standards for negotiations (“milestones”)Availability of mediators or supervisors ( France)Incentives:“Fresh money privilege” in insolvency and tax law safe harbour20

21. (1) Restructuring and Insolvency FrameworkKey features addressing strategic “hold-outs”Majority rule:Trust in the opinion of a vast majority of equally impaired creditors (and shareholders) that a negotiated workout agreement is required and fairCourt involvement:Protecting a “good faith” veto (is the minority being discriminated against?)Stopping a minority creditor from jeopardizing the process (stay of enforcement and termination rights)21

22. (1) Restructuring and Insolvency FrameworkHow to involve courts?Insolvency proceedings:Plan option with majority rule in uniform insolvency proceedingsInsolvency-like proceedings:Plan option in proceedings with all additional tools of an insolvency process (stay etc.)Workout support proceedings:Plan option with majority rule in minimally invasive (non-insolvency) procedures22

23. (1) Restructuring and Insolvency FrameworkOur recommendations (1.21-1.34)Introducing a harmonized “workout support” framework for financed debtorsSupporting workout negotiations (Code of Conduct; incentivising legal environment, procedure)Allowing for “hybrid proceedings” (and, thus, for a “dual track strategy”) in workout support proceedingsAllowing for an individual stay of enforcement actions (in enforcement law) onlyRespecting existing “pre-insolvency proceedings” frameworks ( prepack)Strengthening the insolvency framework for insolvent debtorsStressing the importance of efficient liquidation procedures (including a going-concern sale)Supporting separate, debtor-oriented restructuring procedures23

24. (1) Restructuring and Insolvency FrameworkOur recommendations (1.21-1.34)24Workout support procedureWorkout negotiationsInsolvencyInsolvency Proceedings (Liquidation)Reorganisation Proceedings

25. (2) Role of the CourtsThe role has changed!From supervising a liquidation process …Appointing and supervising the insolvency practitionerDeciding on objections of partiesSimilar to enforcement law proceduresMore judicial officers involved than judges… to supervising the rescue of a running businessOften less involved in appointing the insolvency practitionerDeciding on objections of parties now includes assessment of business models and financial structures  also in liquidations (‘pre-packs’)Similar to company law proceduresRequires direct involvement of judges25

26. (2) Role of the CourtsConclusions (Our recommendations 1.03-1.06)IntegrityCourts handle big restructuring and insolvency casesIndependence, and stakeholders trust in the independence, of judges is essentialQualificationA court / a judge has to fulfil a set of five criteria: a general understanding of business management (so as not to assume managerial tasks), understanding what it needs to effectively enforce the rights of both secured and unsecured creditors outside of insolvency proceedings, preferably, be a specialists in commercial matters, be impartial and independent, and, were practical, have specialized insolvency expertise. 26

27. (2) Role of the CourtsConclusions (Our recommendations 1.03-1.06)SpecialisationSpecialised courts or chambers should handle restructuring and insolvency casesFurther specialised subsection for hearing rescue and cross-border-cases TrainingQualified judges must continue learning (new laws, new business practices etc.)Member States must allow and finance educationMandatory minimum terms for judges on the benchCareful with rotation of judgeIndependence vs. knowledge27

28. Conclusions - Future StepsLegislative footprintsIn many (Western) European countries several common tendencies in the approach to rescue:Early recourse – Sometimes there is an earlier moment of starting a rescue process; the debtor must encounter problems that he can not solve, which is earlier than the traditional moment that the debtor can not pay its financial obligations when they are due. Debtor in possession – The board is not (fully) replaced by the insolvency administrator; in certain proceedings the board stays in control of the business (under supervision of an IP)Stay – In these countries one finds a moratorium or a stay either automatic or at request, covering all or limited number of creditors, sometimes extendable ( before insolvency proceedings)28

29. Conclusions - Future Steps (Cont’d)Protecting fresh money – Special provisions to protect fresh money available for the company while trying to work itself out of its misery, e.g. protection from avoidance rules or grant special status in subsequent insolvency proceedings ( France)Debt for equity swap – Possibilities of a debt for equity swap, i.e. the conversion of a creditors claim into shares in the capital of the companyReorg. plans with certain majorities for adoption of a plan, plan confirmation by court, and mechanism to bind disapproving creditors (‘cram-down’)29

30. Recent stepsNew roles – Enterprise mediator BelgiumCorporate groups – Consolidate revalidation proceedings of members of one group (at request or court ex officio) Portugal/France/EU regulationMSMEs – PortugalProtecting new finance – CroatiaReform under construction: England, Germany (groups), NL, Italy, Luxemburg30

31. Paradigm shift in European national insolvency lawsIn short: aim of insolvency legislation/regulation has shifted: from being rather exclusively to protect the creditors’ private law interests, to being deployed for rehabilitation of the debtor and the continuity of its business (increased group of interested stakeholders), from viewing insolvency as a terminal proceeding for business ending in liquidation, to the recognition of insolvency proceedings as a gateway to potential business rescue (‘instrumentalisation’ of insolvency law), 31

32. Paradigm shift in European national insolvency laws (Cont’d)from insolvency being seen as a personal ‘sin’ (morale failure), to have developed to insolvency seen as a business risk (economic failure) (enhancement of a rescue culture), from a formal legal procedural approach to an openness for flexible and pragmatic choices: ‘deformalisation’, sometimes ‘contractualisation’ of insolvency, including a pushing back of the role of courts, changing role of actors: involvement of courts, insolvency mediation, growing emphasis on integrity/professionality of IPs and courts. All leading to the development of a distinct body of business rescue and insolvency law32

33. Future stepsCommunication by ELI Practitioners organisationsEurope INSOL Europe; national IP associationsBeyond Europe UNCITRAL, ABI, IIIJoint publications in some 5 law reviews and 3 blogs www.bobwessels.nlwww.stephanmadaus.de; http://ssrn.com/author=2068145www.law.ox.ac.uk/business-law-blogELI Business Rescue Recommendations as European export product33

34. Questions?34

35. www.europeanlawinstitute.eubusinessrescue@europeanlawinstitute.euwww.tri-leiden.eu/projects/businessrescue35