Buildingtrust:enhancing courts’ performancein corporaterestructuring and insolvency

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AssessingCourts' Undertakingof Restructuringand InsolvencyActions: bestpractices, blockagesand ways ofimprovement

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duration

1 January 2017 – 30 April 2019

acuria.eu

fundingeuropean commission

With the financial supportfrom the justice programmeof the european unionGa Nº 723202

EURopEAn CommIssIonDirectorate-General JusticeanD consumersJUsT–2015–JcOO–aG–1

to access the full report contact

acuria@ces.uc.pt

ACURIA project aims toidentify legal and proceduralstrategies, blockages and bestpractices that can be replicatedor prevented in different legaland judicial systems, thereforeenabling courts to provide a moreaccurate and fair response.

the project therefore seeksto support the improvement oflegislation and policies at nationaland eu levels regarding businessrecovery and insolvency, includingissues related to the enforcementof cross-border insolvency rules andof enterprise groups restructuringand insolvency practices.

Project ACURIA also aimsto strengthen the research ateu level and promote cooperationbetween academia, practitionersand economic players toreinforce mutual learning andknowledge dissemination.

project1

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centre for social studies coord. team

Catarina Frade project coordinator

Ana Filipa ConceiçãoCatarina serraConceição GomesJosé manuel Brancopaula FernandoCarolina CarvalhoFernanda JesusRúben Jesus

maastricht university

Gijs van Dijck national coord.

Ruben Hollemans

florence university

niccolò Abriani national coord.

Lorenzo BenedettiIlaria pagniLucilla Galanti

gdansk university

Joanna Kruczalak-Jankowska national coord.

Anna machnikowskamonika masnicka

research team1

portugal

netherlands

italy

poland

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aimandmethod-ology

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The availability of a sounding,efficient insolvency frameworkis a fundamental tool in awell-functioning market economy,one that promotes efficientallocation of goods and services,boosts corporate investmentand productivity, and stimulates job creation. Furthermore, froma European perspective, timelyand effective judicial responsesdo have a positive impacton the overall competitivenessof eu enterprises and onthe consolidation of theinternal market(see european commission, 2018) 1.

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The 2018 EU Justice scoreboardeuroPean commission (2018)luxembourG: Publications office - euroPean unionhttps://ec.europa.eu/info/sites/info/files/justice_scoreboard_2018_en.pdf

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The purpose of the research projectACURIA — Assessing Courts' Undertakingof Restructuring and Insolvency Actions:

best practices, blockages and waysof improvement is to help improve nationaland eU rules, enforcement practices andpublic policies on business restructuringand insolvency by identifying theelements that can promote or obstructcourts’ performance on the matter.

The project relies on content analysisand empirical research on legal, proceduraland institutional aspects of business failureand insolvency, carried out in four eU countries:PortuGal, italy, PolanD, and the netherlanDs.countries were chosen in accordance witha combination of both legal — restructuringand insolvency regimes with dissimilarmaturity and rules – and non-legal factors —different economic, social and politicalconditions, including distinct level ofexposure to the 2008 financial crisis.

Based on data collected from courtcases brought to a close between 2012

and 2016, and from the opinions andperceptions of judicial key players onthe performance of the insolvency legalframework, gathered through interviewsand focus groups, project ACURIA soughtto identify the normative and institutionalbarriers to an effective law enforcementthat overall promotes social andeconomic justice.

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obsta-cles andbestpractices

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The field work carriedout showed that, in general, in all surveyed legal systems,insolvency proceedings arelong and bureaucratic, offera low rate of credit recovery and,overall, do not inspire greatinterest or cooperation fromdebtors and creditors.Restructuring procedures suffer from delayed actionby debtors, which prolongsthe resolution of corporate difficulties and compromisesbusiness continuity.

What’s more, theseprocedures make it difficultto introduce new financing(new money), to fuel thereorganisation of the businessmodel of companiesin crisis.

several barriersanD some coPinG measuresWere founD relateD tothree main toPics

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the shape of the law

Courts' performanCe and the role of judiCial enforCers

strategiC behaviour of Creditors and debtor

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THESHAPEOF THELAW

In every country under study thereare insolvency and pre-insolvencyproceedings available, includingout-of-court restructuring solutions.

Domestic rules follow closely theeU political and legal trends and recentreforms, notably the eUrOpeaN cOmmissiON

recOmmeNDaTiON 2014/135/eU of 12 march 2014,on business failure and insolvency,the reGUlaTiON (eU) 2015/848 of 20 may 2015,on cross-border insolvencies and theDirecTive (eU) 2019/1023 of the eUrOpeaN

parliameNT and of the cOUNcil of 20 June 2019on preventive restructuring frameworks,on discharge of debt and disqualifications,and on measures to increase the efficiencyof procedures concerning restructuring,insolvency and discharge of debt.

although insolvency law is not overlycriticized and the option for specialized courtsis positively highlighted, some remarks wereyet done regarding the legal framework andthe organisation of the judicial system.

among them, it is worth mentioning(a) the instability of the legal framework,(b) the discontinuities between insolvencylaw and other legal areas, such as labourlaw, tax law or social security law,(c) the bureaucratic load of the insolvencyprocedure, namely for smaller companiesand cases with little or no assets (d) the excessive rotation of judgesand their overload.

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cOurTS’PErFOr-mAncEAnd THErOLE OFjudiciALEnFOrc-ErS

Courts’ performance maybe assessed in three complementarydimensions: procedural slowness,technological equipment (digitaljustice) and availability of specializedhuman resources.

Time is a crucial factor in recoveryand insolvency procedures. earlydetection of a business crisis allowsfor a carefully prepared restructuringplan that makes continued businessactivity viable. liquidation withina reasonable time lapse preventsdeterioration of the estate, reducesthe procedural costs and expensesand assists with quicker and hopefullygreater compensation for creditors.But the fluidity established in theprocedural law, namely in insolvencyproceedings, is almost never translatedinto practice and the legal timeframesrarely correspond to the actualtimings of the cases.

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The introduction of electronic platformsin the field of justice has altered work methods,models of communication and expectations.They are considered an example of best practiceregarding the judicial system as a whole.However, the configuration of these electronicplatforms does not yet wholly respond tothe requirements of current restructuringand insolvency case management. severalreasons are pointed out: courts’ platformsare not designed specifically for insolvencycases; are not user-friendly; have limitedcapacity to process large amounts of data;provide limited or no access to certaininterested parties; or lack interoperabilitywith other relevant platforms like taxor register databases.

The judge, together with the insolvencypractitioner, are the main enforcersof insolvency law. Their specialisation,as well as their experience and education,are of the utmost importance, since theyaffect their interplay and, therefore, theoverall outcome of the procedure.

constraints on the training and experienceof judges produce undesirable effects onprocedural protocol, specifically with regardsto control of the insolvency practitioners’performance. Judges are not always at libertyto provide adequate supervision and controlover the proceedings, nor do the conditionsallow it, as they are largely dependent onthe information provided and the decisionstaken by insolvency practitioners.

The insolvency practitioner is at the coreof the liquidation proceedings, where his orher main task is to manage and liquidate thedebtor’s assets, under the court’s supervision.Besides their skills and expertise, theprofessional organisation at their disposalis relevant to their professional recognitionand appointment. The appointment of theinsolvency practitioner is a critical aspect. From systems based on randomisationto systems based on judge selection,with or without room for suggestions fromcreditors and debtor, each system presentadvantages and limitations.

The research carried out suggests that acombined model — a general random systemof appointment that includes a failsafemeasure that allows the court to nominatea particular insolvency practitioner best suited to a particular case — is a moreappropriate solution.

courts’ performance does not solelydepend on the specialisation of its judges,the competency of its insolvency practitionersor the sophistication and sounding operationof its technological platforms. it requires,as the empirical research demonstrates,court clerks in sufficient numbersand with adequate training. it also requiresspecialised technical consultancy (v.g.in economics, management or accountability)capable of providing judges withan adequate decision-making supportin procedures.

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STrATE-gic bEHAv-iOur OFcrEdi-TOrSAnddEbTOr

The main common feature amongall the surveyed jurisdictions is a lackof incentives for greater involvementof stakeholders in the proceedings.

all national legal regimes emphasize theneed for early action from debtors in order tomaximize the outcomes of the procedures;guarantee that companies are able to overcomedifficulties; assure that winding up providesfor creditors to be reimbursed, and to companypartners and managers to sort out the problem.They also encourage the effective participationof creditors in restructuring and insolvencyprocedures, thereby turning them into keydecision-makers in the future of the companyand supervisors of the insolvency process itself.

empirical research shows a verydifferent picture: debtors take too long to turnto the available legal mechanisms; creditorsact according to their individual interests(which are oftentimes contradictory amongthemselves), and do not commit themselvesinto the legal process, mainly when suchprocess becomes time-consuming and thereis a low probability of reimbursement.in most cases, the restructuring andinsolvency procedures do not offer enoughincentives for either creditors or debtorsto invest time and financial resourcesin their own participation. The mainreason identified during the field workfor the apathy of creditors and debtorsis the low expectations they have onthe outcome of the procedures.

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Waysofimprove-ment

from all the obstacles andshortcomings identified duringfield work analysis, one commonthread has emerged: the needfor investment in bUIldIng tRUst

in judicial and extra-judicialproceedings related to corporaterestructuring and insolvency.

this trust can be furtherenhanced by strengtheningfive key areas deemed to haveoptimization potential:

a) TImELInEss

b) pREDICTABILITy and LEGAL CERTAInTy

c) HAsTE and EFFICIEnCy

d) pARTICIpATIon

e) TRAnspAREnCy

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haste

trust

timeliness

transparency

participation

predictability

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preDicTaBiliTy aNDleGal cerTaiNTy

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stabilising laws so as to create abody of established interpretationsof case law;

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enhancing a legislative harmonisationamong the different dimensions ofthe law that interfere in insolvencyproceedings;

3.

Providing specialized trainingnot only in insolvency law, but inrelated areas, such as economicsciences or accounting, so that judgescan identify and interpret moreaccurately the issues that needto be addressed.

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Stabilizing judges’ allocationto courts, in order to maximizetheir expertise.

TimeliNess

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Predicting ex ante structures tofollow up and support businessdevelopment, so that the necessarysupport is given to the deploymentof sounding business plans;

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creating and developing earlywarning devices, to allow forthe early detection of structuralproblems or cyclical fluctuationsin business activities. fosteringincentives for their timely use;

3.

establishing more demandingconditions for the use of restructuringprocesses, as a key-element in thecreation of trust among creditorsregarding the debtor's efforts.

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parTicipaTiON

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making available forms tailoredto creditors and debtors wholack professional structures, thussimplifying their interaction withthe process. these forms will alsofacilitate the work of insolvencypractitioners and judges;

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implementing technological toolsthat allow for creditors meetings tobe held at a distance, and therebypreventing costly trips to the court.

TraNspareNcy

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Using clear language whencommunicating with stakeholders;

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Disclosing information at thedecisive stages of the process,such as the sale of assets, throughtransparent methods (v.g. publicizedvirtual auctions that can increasethe number of potential bidders).

HasTe aNDeFFicieNcy

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using new informationtechnologies to streamlinethe communication betweenall parties involved in the judicialprocess and to eliminaterepetitive tasks.

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fostering interoperability among relevant informationsystems and ensuring that allinsolvency practitioners have easyaccess to all public asset databases,therefore providing for a properidentification of company assetsand, consequently, for the increaseof creditors’ reimbursement.

3.

Regulating and supervisingthe activities of insolvencypractitioners, both internally(by the judge) and externally(by a supervisory body).

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Assessing Courts'Undertaking of Restructuringand Insolvency Actions:best practices, blockagesand ways of improvement

acuria.euacuria@ces.uc.pt

ces — Centre for Social Studiesuniversity of coimbra

colégio da GraçaRua da Sofia • 136 – 1383000 – 389 coimbraportugalT.: +351 239 855 570

DEsIGn pedro Góis / goisdesign

acuria©07.2019

This booklet can be circulated only for non-profit purposes. if cited or quoted, reference should be made to the full name of the booklet’scoordinators, the title, the research project, the year and the publisher.