Cms restructuring and insolvency newsletter autumn 2013

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Introduction2

Editorial3

Czech RepublicNew methods of enforcement under New Civil Code in the Czech Republic4

FranceLender-led restructuring of the Saur Group: perspectives on the restructuring of a leveraged buy-out6

HungaryRecent Hungarian court decisions with respect to the piercing of the corporate veil9

The NetherlandsTerritoriality principle v universality principle; the Yukos story continues …10

PortugalSpecial Reorganisation Proceeding: First impressions12

Romania The New Romanian Insolvency Code: To be or not to be …in force14

ScotlandAn examination of the purpose of administration18

SpainSpanish Entrepreneurs’ Act20

Contact details22

Newsletter

CMS Restructuring and Insolvency in Europe Autumn 2013

2 | CMS Restructuring and Insolvency in Europe Newsletter: Autumn 2013

We are pleased to present this autumn 2013 edition of the CMS Restructuring and Insolvency in Europe Newsletter. We aim to give information on topical issues in insolvency and restructuring law in countries in which CMS offices are located.

This edition looks at:

— the introduction of new Czech legislation on pledges which will give creditors increased flexibility regarding enforcement options;

— the lender-led restructuring of the Saur Group, the third largest French water company;

— recent decisions of the Hungarian Court with respect to piercing the corporate veil;

— a recent Dutch case which highlights issues that arose when considering the powers of an insolvency practitioner across multiple jurisdictions;

— the introduction of the new Special Reorganisation Proceeding in Portugal and its effects on promoting the rescue of insolvent companies;

— the new Romanian Insolvency Code, which consolidates and amends many of the existing Romanian insolvency provisions;

— the enactment of the Entrepreneurs’ Act in Spain and the effects of this on Spanish insolvency procedures; and

— a recent Scottish case which considered the delicate balancing act that exists between different stakeholders’ interests in an administration.

CMS is the organisation of independent European law and tax firms of choice for organisations based in, or looking to move into, Europe. CMS provides a deep local understanding of legal, tax and business issues and delivers client-focused services through a joint strategy executed locally across 31 countries with 56 offices in Western and Central Europe and beyond. CMS was established in 1999 and today comprises ten CMS firms, employing over 2,800 lawyers and is headquartered in Frankfurt, Germany.

The CMS Practice Group for Restructuring and Insolvency represents all the restructuring and insolvency departments of the various CMS member firms. The restructuring and insolvency departments of each CMS firm have a long history of association and command strong positions, both in our respective homes and on the international market. Individually we bring a strong track record and extensive experience. Together we have created a formidable force within the world’s market for professional services. The member firms operate under a common identity, CMS, and offer clients consistent and high quality services.

Members of the Practice Group advise on restructuring and insolvency issues affecting businesses across Europe. The group was created in order to meet the growing demand for integrated, multijurisdictional legal services. Restructuring and insolvency issues can be particularly complex and there is such a wide range of different laws and regulations affecting them. The integration of our firms across Europe can simplify these complexities, leaving us to concentrate on the legal issues without being hampered by additional barriers. In consequence we offer coordinated European advice through a single point of contact.

Introduction

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We are pleased to share the autumn 2013 edition of the CMS newsletter with you, giving us the opportunity to review the most recent key topics in the area of restructuring and insolvency in Europe. CMS offices in eight jurisdictions (some of our many CMS offices in Europe) have contributed.

Legislation

Four of the articles in this edition focus on changes to legislation governing insolvency procedures.

In some jurisdictions, such as Romania, this involves codification or amendment of the substantive law as to when a company may petition to enter a formal insolvency process. In other jurisdictions, such as Portugal and Spain, the focus is on providing increased flexibility to a company in order to promote its rescue as a going concern. Our Portuguese colleagues describe the introduction into Portuguese insolvency law of the “Special Reorganisation Proceeding”, which was introduced in response to the difficult economic climate, in order to increase the likelihood that companies in financial difficulties can be rescued as going concerns rather than enter liquidation.

In Spain, the Entrepreneurs’ Act, which came into force in September, has introduced some far-reaching reforms to the Spanish Insolvency Act, most notably reducing the voting threshold required for creditor approval of refinancing agreements between a company and its creditors. These reforms should make such refinancing agreements more favourable for companies and prevent dissenting minority creditors from blocking restructuring plans.

The article from our colleagues in the Czech Republic describes new methods for the enforcement of pledges which have been introduced by the new Czech Civil Code. The main effect of these changes appears to be that parties will have more contractual flexibility to decide how pledges may be enforced in the event of insolvency.

Case law

Three of the articles in this autumn edition describe recent cases that give guidance on the interpretation of provisions in existing legislation.

The article from Hungary summarises the key points from two recently decided cases in the Hungarian courts in relation to ‘piercing the corporate veil’ and whether a major shareholder may assume personal liability for the debts of an insolvent company if their poor or negligent decision-making has resulted in the inability of that company to satisfy its creditors following liquidation.

The article from our Scottish colleagues describe a case which examines the statutory purpose of administration, whilst the Dutch article describes issues that arose in the Yukos case when considering an insolvency practitioner’s right to sell assets located in a different jurisdiction to the company’s country of incorporation.

Restructuring case study

Finally, our colleagues in CMS France describe the lender-led restructuring of a major French water company. This important transaction included a debt for equity swap as a means of reducing

the borrower’s liabilities, a method that to date has been rarely used in France.

We hope that you find the newsletter interesting and informative.

/

Peter Wiltshire

CMS London

E [email protected]

Editorial


The New Civil Code and the Act on Business Corporations both come into effect on 1 January 2014, replacing the current legislation on civil and commercial law. As of this date, the recodification is set to have a significant impact on private law in the Czech Republic. The purpose of the recodification is to reflect recent legal developments and to take account of the evolving needs of the market, in relation to areas such as financing from banks or the enforcement of pledges.

In this article, we focus primarily on the new legislation that may affect creditors’ rights to the enforcement of pledges, particularly in relation to the new, more flexible methods of enforcement.

Methods of enforcement of a pledge

The regulations surrounding pledges, one of the most common types of security vehicle, will see significant changes under the New Civil Code. The new legislation sets out broadly that everything that may be traded can be subject to a pledge (i.e. in addition to the existing pledge of movables, immovables, receivables, trade marks and enterprise). Additionally, the new legislation allows a pledge to be established over an object that does not yet exist (but will come into existence in the future) or on an object that will be transferred to the debtor in the future where the ownership of the object is currently with a third party.

Regarding methods of enforcing a pledge, the current legislation recognises only 2 possible methods, namely sale by public auction and the sale of the pledge by a court. The New Civil Code extends the contractual freedom of the parties allowing them to choose or modify the method of how the pledge will be enforced.

The New Civil Code recognises the following methods which are not recognised in the current legislation:

— The sale of a pledge other than by an auction (in Czech: prodej zástavy z volné ruky mimo dražbu) – this method of enforcement is not recognised under the current legislation. As of 1 January 2014, the creditor and the debtor may agree that the pledge shall be enforced by way of a sale other than by an auction. In such a situation, the creditor is obliged, acting always with a duty of care, to sell the pledge for a price which should correspond to the average price that could be expected for the same or a similar thing sold under comparable conditions. If the pledge is sold for a lower price than could have been expected for the same or a similar thing sold under comparable conditions, the creditor may be held liable for any damage caused to the debtor (i.e. loss of profit). In practice, to avoid such a risk to the creditor, it will be advisable for the creditor to ensure that the sale agreement contains detailed terms and conditions for the sale.

// Czech Republic

New methods of enforcement under New Civil Code in the Czech Republic

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Ranking of pledges

The new legislation also sets out regulations that are applicable in situations where the debtor has more than one creditor (known as ‘plurality of creditors’).

Generally, the rule “first come, first served” still applies. However, where the pledge is registered in the public register, the new legislation allows creditors to modify the ranking of their pledges. This ranking would only affect those creditors that consented to a ranking agreement or creditors whose own ranking is not worsened. The ranking agreement must be agreed in writing. This regulation may be of assistance for the restructuring of loans.

Insured pledge

Another new regulation that will come into effect from 1 January 2014 relates to pledged collateral that is insured.

Where the debtor has defaulted, the creditor will have a new right, enabling them to receive the premium payment in order to satisfy the receivable that he / she has against the debtor. It is important to note that this particular regulation may be expressly excluded in a pledge agreement.

Vacant pledge (in Czech: uvolněná zástava)

This regulation allows the ranking of pledges that are registered in the public register to be amended. If a higher ranking pledge ceases to exist due to the repayment of

— Forfeiture pledge (in Czech: propadná zástava) – this method of enforcement was prohibited under the current legislation. A forfeiture pledge can only be utilised after the receivable of the creditor becomes due, whereby on the debtor’s default, the ownership of the pledge is automatically transferred to the creditor. This method is very efficient although it cannot be used in instances where a debtor is an individual or could be reasonably considered to be a “weaker party”.

— Another new method of enforcement under the new Civil Code allows a creditor to enforce a pledge over an asset on a debtor’s default and then, where that asset is worth more than the debtor’s liabilities, the creditor shall pay the balance of the proceeds to the debtor. A written agreement is required to this effect.

Under the New Civil Code, there are further regulations regarding the enforcement of pledges. For example, the creditor shall be obliged to notify the debtor in writing of the chosen method regarding how a pledge shall be enforced. If the pledge is registered in the public register, the agreed method of the enforcement is also registered.

To summarise, the above-mentioned new methods of enforcement will benefit creditors, enabling faster and more effective enforcement.

the receivable but has not yet been deleted from the public register, the owner of this pledge may agree with another creditor with a lower ranking pledge that the owner of the lower ranking pledge may take the position of the previous, higher ranking pledge. The amount of the pledge replacing the one that previously ranked higher cannot be greater in value.

As outlined above, the new legislation greatly increases the contractual freedom between creditors and debtors by allowing them to freely agree on a method of enforcement and giving them the ability to modify the ranking of a pledge.

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Pavla Křečková

CMS Prague

T +420 2 96798 877

F +420 2 21098 000

E [email protected]

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Magda Němcová

CMS Prague

T +420 2 21098 837

F +420 2 21098 000

E [email protected]


// France

Lender-led restructuring of the Saur Group: perspectives on the restructuring of a leveraged buy-out

On 26 July 2013, the Commercial court of Versailles approved the restructuring agreement of the SAUR Group which had been negotiated with its banks. The agreement provides for a 50% write-off of the total amount of the banks’ claims, in return for giving them ownership of the entire share capital of the Group.

This restructuring is noteworthy due to both the size of the debt and the particular solution that was negotiated; the key aspects are set out below.

The SAUR Group, the third largest French water company after Véolia Environnement and Lyonnaise des Eaux, realised a turnover of EUR 1.7bn in 2012. The group was acquired in 2005 by PAI Partners, a capital investment company, via a first leveraged buy-out (LBO).

In 2007, when the number of LBOs was at its peak, a consortium of Caisse des Dépôts et Consignations, Séché Environment and Axa Investment Manager (then Axa Private Equity), later joined by Cube infrastructure, acquired the SAUR Group from PAI Partners via a new LBO imposing a EUR 1.8bn financial debt on the new holding HIME (which represented 12 times SAUR’s EBITDA).

Following several months of negotiation, a pool of 60 banks and SAUR’s shareholders reached an agreement which resulted in each party having to make significant compromises.

The banks, the most important of which were BNP Paribas, Natixis and The Royal

Bank of Scotland plc, agreed on reducing the debt by up to 50% of the total amount, reducing the total to EUR 900m. In return, they were granted the entire share capital of the SAUR Group which is now held by appropriate investment vehicles. The agreement provides that if there are refinancing difficulties on the debt maturity date in 2019, an additional EUR 150m write-off may be granted by the banks. The agreement should enable the interest burden to be reduced from EUR 90m to EUR 30m. Moreover, a subordinate financing structure with a value of EUR 200m was planned.

The principal banks also agreed not to dispose of their interests during a 5 year period following the date of their equity investment, in order to maintain a certain degree of financial stability.

This arrangement could be the first step towards the implementation of lender-led restructuring, particularly in the case of an ailing LBO.

As for the lender, it seems that the decision to proceed to an equity swap would only occur in limited circumstances, where (i) an immediate termination of the loan by the lender would lead to an insufficient recovery of his claim and where (ii) an amend to extend agreement would not allow the borrower to foresee a sufficiently profitable activity. If this situation occurs, it might be necessary to resort to a new restructuring of the short term or medium term debt.

The lenders would like to benefit both from potential dividends and from any capital gains arising on the sale of its equity participation (whether by reference to the face value of the converted claims or by reference to the amounts that may be collected in the case of termination of the credit agreement).

However, with the lender-led restructuring comes some uncertainty regarding how the company will be run and the nature of the role of the lender in this governance. To benefit from a successful lender-led restructuring, a bank will have to behave as a pure shareholder, a role which is considerably different from the one it usually adopts as a lender. There may be a concern that the lender’s only interest is to collect its claims as a creditor, without paying attention to defending the company’s long term interests.

In practice, a mechanism may be envisaged whereby a company is created that is governed in a similar way to those listed on the Stock Exchange. In such a scenario, the banks would have appointment committees, which would themselves appoint independent committees. Now that lender-led restructuring is an option for French banks, the signs are that the banks are willing to accept representation at the companies’ assembly and that they will behave like true shareholders.

As for a borrower, even a partial debt write-off may enable it to return to profitability. The decrease in liabilities resulting from an equity swap will reduce a borrower’s interest burden and will therefore increase the company’s cash-flow. Its debt to equity ratio will be restored and even strengthened. This new situation may also attract potential buyers of the remaining debt or enable a capital increase by investors.

The equity swap, whilst still unusual in France, appears to be a new effective solution for restructuring the debt of ailing companies. Nevertheless, it may be feared that by this phenomenon, banks may act differently compared to the way they would normally act for promoting their core businesses, by giving priority to financial results and interfering with management decisions to the detriment of the restructured companies.

The restructuring of the SAUR Group marks a major turning point in the restructuring of LBO’s in France. It opens the way for lender-led restructuring, a concept that was previously disfavoured by French banks.

/

Carole Dessus

CMS Lyon

T +33 4 7895 4799

F +33 4 7895 5830

E [email protected]

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Rules on the piercing of the corporate veil have recently become a hot topic in Hungary. Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings does not set out the law definitively in order to be able to answer many questions which come up in practice. Recent court decisions on this topic are therefore expected to give guidance, even though such case law is not binding under Hungarian law.

Under Hungarian law, a shareholder’s liability in a limited liability company is usually limited to their capital contribution. The corporate ‘veil’ can only be pierced, making the shareholder personally liable for the company’s debts, in special circumstances. One such circumstance occurs in liquidation proceedings where a creditor can satisfy the court that the shareholder has pursued a ‘permanently disadvantageous business policy’ prior to liquidation.

Until now, the courts have only interpreted a ‘permanently disadvantageous business policy’ as occurring when the shareholder knowingly and permanently jeopardises repayment of the company’s debts by a series of loss-making decisions that led to the liquidation of the company.

The Supreme Court has ruled that a ‘permanently disadvantageous business policy’ also includes a controlling shareholder’s passive failure to take necessary measures to combat the company’s long-term loss-making. The court’s ruling effectively means that the failure to intervene when a company is

at risk of becoming insolvent may expose the shareholder to the risk of personal liability for the company’s debts on a subsequent liquidation.

In another decision, the Supreme Court concluded that the controlling shareholder’s liability for damages is not a contractual liability. Accordingly, losses that may be attributed to the omissions or failure of the controlling shareholders to act according to the appropriate standards may trigger liability for such shareholders. As noted above, the court first has to establish the ‘permanently disadvantageous business policy’ which prevents the relevant company from satisfying its creditors.

Nevertheless, the Supreme Court emphasises that the above piercing of corporate veil rules will not apply if the aim of the business policy is to improve the company’s economic situation and increase the company’s assets. If such an attempt fails, the controlling shareholder may be exempted if the business policy itself was not detrimental but such shareholder was not able to implement it as it was originally envisaged.

The Supreme Court also stated that it is beyond the scope of the court’s powers of examination whether the controlling shareholder has diligently examined the agreement to which the company has become a party and whether this agreement has increased the debts of the company.

Those shareholders who no longer have shares in the company may be held liable, but only for those damages which occur

as a result of their own permanently disadvantageous business policy whilst they held the shares. Therefore, the business policy of each controlling shareholder is examined separately, i.e. joint and several liability cannot be established.

A claim in respect of a shareholder’s liability is subject to the statute of limitation of claims which is five years in Hungary.

/

Szabina Soptei

CMS Budapest

T +36 1 48349 26

F +36 1 48348 01

E [email protected]

// Hungary

Recent Hungarian court decisions with respect to the piercing of the corporate veil


// The Netherlands

Territoriality principle v universality principle; the Yukos story continues …

IntroductionIn previous CMS Newsletters, much attention has been given to the European Insolvency Regulation (“EIR”) and to the differences between the legal systems throughout Europe. The EIR provides the solution to a lot of cross-border insolvency issues. But what are the legal consequences of a bankruptcy outside Europe? The Dutch Bankruptcy Act does not contain any provisions regarding such proceedings.

Recently, the Dutch Supreme Court passed a significant judgment in the Yukos case in relation to the recognition of foreign (outside EU) insolvency proceedings and the authority of a foreign bankruptcy trustee. The judgment gives guiding principles for such a situation that are not provided for by statute.

Dutch Supreme Court September 13th 2013, LJN: BZ5668 (Promneftstroy c.s. / Verweerders)

For many years, the bankruptcy of the Russian company Yukos Oil has caused difficulties for various judicial authorities. The bankruptcy of Yukos Oil (effective 1 August 2006) has already provided numerous cases and is likely to result in many more in the future.

In the judgment of September 13, the question for the court was whether the Russian Trustee in Bankruptcy of Yukos Oil was authorised to sell and transfer shares in a Dutch private limited company, Yukos Finance B.V., to another company, Promneftstroy.

The Dutch Court of Appeal ruled that, due to provisions of Dutch private international law, the Russian Trustee in Bankruptcy was not authorised to sell and transfer the shares. It referred to the territoriality

principle (see below) and ruled that “the foreign trustee’s exercise of authority cannot go so far that it includes the right to liquidate assets located in the Netherlands (…) in order to pay the proceeds to the creditors in the Russian bankruptcy”. The Supreme Court overruled the Court of Appeal stating that the Russian Trustee in Bankruptcy is able to sell and transfer the shares when this is allowed by Russian insolvency law (the ‘lex concursus’). An exception to this rule (only) has to be made when Dutch public policy is violated when the foreign trustee exercises its rights.

The Supreme Court reiterated a set of rules that it compiled in a Supreme Court ruling in 20081. These rules may be broadly summarised as follows:

— the liquidation proceedings ordered in Russia do not include assets in the Netherlands. Creditors can therefore continue to seek recourse against assets in the Netherlands;

— the legal effects connected to the liquidation proceedings in Russia cannot be invoked in the Netherlands when this results in the situation that unpaid creditors can no longer have recourse against assets in the Netherlands; and

— the territoriality principle is not an obstacle for the operation of (other) consequences of the Russian insolvency proceedings.

This set of rules means that the foreign bankruptcy trustee can manage, sell or otherwise dispose of assets in the Netherlands when this is allowed under the lex concursus; the law of the country where the debtor has been declared bankrupt. The Russian Trustee in Bankruptcy could sell the Dutch assets provided that prior security interests made by individual creditors are respected.

Territoriality principle and universality principle

The Supreme Court based its ruling on the abovementioned explanation of the ‘territoriality principle’. When strictly applied, the territoriality principle means that a bankruptcy from a country with which the Netherlands has no insolvency treaty (such as the EIR) does not include any assets in the Netherlands and cannot be invoked insofar as this would negatively affect the position of creditors.

Contrary to the territoriality principle is the universality principle which means that a foreign bankruptcy trustee can exercise all of his powers in the Netherlands without the requirement of a recognition procedure.

Traditionally, the territoriality principle takes precedence under Dutch law. Although the given set of rules is, according to the Supreme Court, based on the territoriality principle, it could be argued that the Supreme Court has now chosen an intermediate form between the territoriality principle and the universality principle, or at least tends to give more authority to the foreign bankruptcy trustee with regard to assets located in the Netherlands; a decision which may have far-reaching consequences.

Public policy

When a decision by a foreign court violates Dutch public policy, the effects of the proceedings are not recognised in the Netherlands. However, a foreign bankruptcy trustee can exercise his powers until an interested party challenges the lawfulness of the decision. The trustee is not required to obtain a court decision that the bankruptcy order is lawful under Dutch law. The interested party carries the

burden of proof regarding the (possible) violation of Dutch public policy.

One important question remains unanswered in the present case. Since the Court of Appeal did not discuss the ‘public policy defence’ that was brought forward at first instance, the Supreme Court could not give a ruling on this point either so the Supreme Court referred the matter to the Court of Appeal for a decision. If the Court of Appeal rules that the Russian bankruptcy order in this case violates Dutch public policy, there will be no recognition according to Dutch law and the Russian Trustee in Bankruptcy cannot exercise any rights regarding assets in the Netherlands.

As significant as this current ruling may be, the actual outcome is subject to the ruling regarding public policy that is yet to come. The Yukos story continues …

1) High Court 19 December 2008, NJ 2009 / 456 (Yukos Finance) with reference to High Court 2 June 1967, NJ 1968 / 16 (Hiret / Chiotakis); High Court 31 May 1996, NJ 1998 / 108 (De Vleeschmeesters) and High Court 24 October 1997, NJ 1999 / 316 (Gustafsen / Mosk).

Jan Willem Bouman

CMS Utrecht

T + 31 30 2121 285

F + 31 30 2121 227

E [email protected]

/

Loes Veelers

CMS Utrecht

T +31 30 2121 286

F +31 30 2121 227

E [email protected]


In Portugal, bankruptcy and reorganisation proceedings are both governed by the same code: the Insolvency and Corporate Restructuring Code (hereinafter the “ICRC”), approved by Decree-law number 53 / 2004 of 18 March 2004. According to the ICRC, recognised creditors choose between (i) the liquidation of the insolvent’s estate or (ii) the company’s restructuring via the approval of an insolvency plan.

Pursuant to statistics on insolvency proceedings provided by the Portuguese General Directorate of Justice Policies, in the third and fourth quarters of 2011, the number of insolvency proceedings increased by 441.8% and 395.8% respectively, in comparison with the same period of 2007. In the first quarter of 2012 there was also an increase of 451.7%

in the number of insolvency proceedings relative to the same period of 2007.

In order to respond to this difficult economic climate, law number 16 / 2012 of 20 April 2012 amended the ICRC and introduced the “Special Reorganisation Proceeding” (hereinafter “SRP”), for debtors who are in financial difficulties or for whom insolvency is imminent.

This proceeding introduces the possibility of an agreement between the majority of creditors with the purpose of working towards the company’s recovery and has, as a major advantage, the moratorium, as filing for an SRP suspends all claims pending against the debtor (which are completely extinguished when an agreement is reached, approved and confirmed by the court) and prevents the filing of new debt collection claims.

// Portugal

Special Reorganisation Proceeding: First impressions

000

1000

2000

3000

4000

5000

6000

Number of Insolvency proceedings

2007 2008 2009 2010 2011 2012 2013

FiledEndedPending

Number of Insolvency proceedings

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In the second quarter of 2013, 413 SRPs were filed, with the average length of such proceedings being 147.9 days. Of the 413 SRPs filed, 42.9% of these ended in an agreement being reached amongst the creditors, with the remaining 57.1% ending for other reasons; in most cases, in formal insolvency proceedings.

If the majority of creditors agree on the company’s recovery plan, the plan is submitted to the court for ratification and becomes binding on all creditors, whether or not they participated in the negotiations.

The first statistics released on SRPs, also issued by the Portuguese General Directorate of Justice Policies, reported that 360 SRPs were filed in the first quarter of 2013. The average length of such proceedings was 129.7 days. Of the 360 SRPs filed, 49.1% of these ended in an agreement being reached amongst the creditors, with the remaining 50.9% ending for other reasons, which led in most cases to formal insolvency proceedings.

SRPs - first quarter of 2013

623

EndedPending

Filed

163

360

50.9%

Ended by other motivesEnded by agreement

49.1%

SRPs - second quarter of 2013

777

EndedPending

Filed

252

413

57.1%


42.9%



623

EndedPending

Filed

163

360

50.9%


49.1%


777

EndedPending

Filed

252

413

57.1%


42.9%


insolvency proceedings, rather than as a genuine attempt to rescue the company (notwithstanding the fact that in some cases the company is in fact in a real insolvency situation).

Unfortunately, such misuse of the SRP procedure has led to a considerable number of creditors adopting a prejudiced perspective of the use of these proceedings. Many creditors distrust the intentions and outcomes of an SRP and therefore refuse to seriously negotiate an agreement.

Notwithstanding these concerns, almost half of the companies that have filed SRP requests to date have reached agreements with their creditors, allowing them to continue to conduct their business, which is clearly a positive outcome for those companies.

In any case, and since the SRP is an insolvency procedure that has only recently been introduced, it is not possible to conclude definitively on the merits of this procedure for the effective recovery of the companies that have used it, since the recovery plans that have been approved therein are still in the implementation period. In a few years time we will be able to ascertain if the majority of these companies are still operating and are financially stable, or if the SRP represents primarily a method for delaying the ultimate insolvency of these companies.

/

Henrique Peyssonneau Nunes

CMS Lisbon

T +351 21 09581 01

F +351 21 09581 55

E [email protected]

The aforementioned data shows that the number of SRPs is increasing and also that the number of proceedings that end without an agreement being reached between the creditors and the debtor is decreasing.

As highlighted above, an SRP enables the suspension of all pending judicial claims and prevents creditors from filing any new claims. Some debtors therefore take advantage of the protection provided by the moratorium and are using the SRP as a way of delaying the onset of formal


// Romania

The New Romanian Insolvency Code: To be or not to be …in force

a brief description of those key provisions is provided below.

Insolvency Requirements

Any person with an unpaid debt of RON 40,000 or more (equivalent to approximately EUR 9,000), which is due and payable by a Romanian company, may petition for a declaration of insolvency of that company. The court will declare the company insolvent if it finds (broadly) that the company is not able to:

(i) pay its debts, which are currently due, from its currently available funds; or

(ii) pay its debts, which are forecasted to become due, from its forecasted available funds.

Non-payment of a debt due in excess of RON 40,000 for a period of 60 days or more is presumed by the court to be evidence of insolvency. However, this presumption can be rebutted, for example if the company (or a creditor in the case of a debtor’s petition) successfully argues that the debt is disputed or if it proves that it can pay the due debt with available funds. The Code introduces an identical requirement for the debtor company filing a petition for a declaration of its own insolvency (i.e. a debt of RON 40,000 due and payable, outstanding for more than 60 days). The introduction of this requirement for the petitioning debtor is aimed at preventing an abuse of process by debtors who seek to avoid payment of their creditors by petitioning for insolvency.

The Romanian Government has adopted, by means of Government Emergency Ordinance No. 91, a new piece of insolvency legislation called the Romanian Insolvency Code (the “Code”). The Code consolidates and amends most of the existing insolvency provisions in Romanian legislation relating to companies, groups of companies, credit institutions, insurance and reinsurance companies, as well as those concerning cross-border insolvency proceedings. The Code entered into force on October 25 2013 and also applies to ongoing insolvency proceedings.

However, after being in force for just five days, the Romanian Constitutional Court has already declared the Code to be unconstitutional, thereby reviving the previous Romanian regulations on insolvency.

The two main criticisms brought by the Court relate to the following:

— the retroactive effects of the Code on ongoing insolvency procedures; and

— the urgent procedure used by the Government to unnecessarily enact the Code without Parliamentary approval.

The draft Code was developed by a number of selected professionals as part of a project financed by the World Bank. However, some of the important provisions of the draft Code were amended by the Government during the ordinance approval process. These amendments, which have the effect of prioritising the recovery of State receivables, have been one of the main sources of contention from the Code’s various critics.

Since it is likely that the main provisions of the Code will be maintained in any new draft proposed for Parliamentary approval,

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The preliminary creditors’ list establishes all debts in RON as at the date of the list, with outstanding amounts in a foreign currency converted into RON by reference to the exchange rate of the National Bank of Romania (applicable on the date on which the insolvency procedure was commenced). The list is not updated for currency movements, so foreign currency creditors bear the risk of currency fluctuations.

The Final Creditors’ List

Creditors often challenge the Official Receiver’s determination of their own position on the list and the relative positions of other creditors. These challenges can only be resolved in court. The “observation period” is therefore extended until a final list of creditors has been established. This can be a protracted process, lasting for months or even years (depending on the number of challenges and their complexity). Once established, the final list of creditors can only be changed in very specific circumstances.

Judicial Reorganisation

No later than 30 days (or up to 60 days with judicial approval) after publication of the final creditors’ list (even if subject to appeal), one or more qualifying persons may propose a reorganisation plan. Such qualifying persons are the company, the Official Receiver or one or more creditors holding 20% or more of the total (listed) claims.

A proposed reorganisation plan must be capable of being implemented within a timeframe of no longer than one year (reduced from three years under the previous regulation). The duration of the plan may be subsequently extended by a maximum of one additional year.

new practitioner) and appointed by the syndic judge.

The Observation Period

The period between (i) the commencement of the insolvency procedure and (ii) the determination by the court of whether the company goes into liquidation or into judicial reorganisation is referred to as the “observation period”. Two key activities which take place within this period are (i) the establishment of the list of creditors; and (ii) the preparation of any reorganisation plan.

During this period, the Official Receiver may also exercise powers to set aside contracts (for example preferential contracts or transactions at an undervalue). Although the Official Receiver was previously entitled to set aside contracts during the entire observation period, the Code provides that this may only be done within three months of the commencement of the insolvency procedure.

The Preliminary Creditors’ List

Within a period established by the Official Receiver (which must be no later than 45 days from the commencement of the insolvency procedure), the creditors of the company must submit to court the amounts of their claims and the extent of any security interests. Within a further period of up to 20 days (again established by the Official Receiver), the Official Receiver must draw up a ‘preliminary list of creditors’, which establishes (i) the pro rata entitlement of creditors to distributions; and (ii) the voting power of creditors (who are divided into categories for the purpose of judicial reorganisation approval).

Commencement and Challenges

In the case of commencing the insolvency procedure following an insolvency petition filed by a debtor, creditors will be notified of the commencement by the appointed interim receiver. Within ten days of receiving such notification, creditors may file an opposition against the decision to commence insolvency proceedings by arguing that the debtor is not in fact insolvent. The hearing of an opposition must take place within five days of its filing and all creditors have filed an opposition against the decision will be subpoenaed. If the judge approves the opposition, the decision will be revoked and the debtor must resume normal trading.

If an insolvency petition is filed by a creditor, the petition will be communicated to the debtor. The debtor may challenge the insolvency petition within ten days of receiving it.

In Romania, a decision of the syndic judge may be challenged at the Court of Appeal within seven days of its publication. However, in the case of a decision to commence insolvency proceedings, an appeal will not have the effect of postponing the start of the insolvency procedure.

The Official Receiver

After commencement of the insolvency procedure, the court appoints an Interim Receiver to administer the assets and affairs of the company until the date of the first creditors’ assembly. It is up to the syndic judge (in his discretion) to select the Interim Receiver from the offers submitted by licensed insolvency practitioners to the court. The Official Receiver is proposed by the first creditors’ assembly (which may confirm the interim receiver or propose a


with security over the debtor’s accounts to ask the Official Receiver to enforce that security. Upon such request, the Official Receiver will transfer the owed amount from the available funds in the secured accounts to the creditor within five days.

ConclusionThe significant reduction of the maximum period allowed for a reorganisation plan, together with the possibility to enforce against the assets of the debtor for new receivables (generated within the procedure and applicable mainly to new claims from the fiscal authorities) has resulted in various practitioners arguing that the Insolvency Code may in fact be considered to be a “Bankruptcy Code”.

/

Horia Draghici

CMS Bucharest

T +40 21 4073 834

F +40 21 4073 900

E [email protected]

/

Andrei Cristescu

CMS Bucharest

T + 40 21 4073 840

F + 40 21 4073 900

E [email protected]

Liquidation

Even if a reorganisation plan attracts the right number of votes, it still must be approved by a judge. If the requisite number of votes or judicial approval are not obtained, or if no reorganisation plan is proposed by a qualifying person, then the company will go into liquidation and the judge will appoint a provisional liquidator.

A Romanian company may also directly enter liquidation in certain specific circumstances, including in the case of a debtor petitioning for insolvency without stating an intention of reorganisation.

Provisional Measures

The Code also introduces the possibility for creditors who file an insolvency petition against a debtor to seek interim remedies, even before the insolvency petition is heard, in order to prevent the sale of assets by the debtor.

Enforcement against a debtor during insolvency

Whilst generally enforcement actions against a debtor will be stayed as an effect of the commencement of insolvency proceedings, the Code contains new provisions allowing creditors to seek enforcement of their claims arising during the insolvency proceedings and which have been due for more than 90 days.

The Code also provides an exception from the general moratorium for mortgages over accounts. This entitles secured creditors

The plan may require certain categories of debts (for example, unsecured creditors, but could potentially also include secured creditors) to be released or reduced, in which case such a category is known as a “disadvantaged category”. Otherwise, the plan must ensure that all creditors in each of the categories are paid out in full.

Approval of the Reorganisation Plan

A reorganisation plan will only be approved by the court if it attracts the required number of votes. The creditors’ list divides the company’s creditors into a maximum of five categories:

(i) secured creditors;

(ii) the State and other public institutions;

(iii) unsecured creditors which are key to the company’s business;

(iv) other unsecured creditors; and

(v) employees.

The voting mechanism provided generally requires that the majority of the creditors’ categories approve the reorganisation. However, the Code introduces the condition that, in all cases, regardless of the category voting threshold attained, creditors approving the reorganisation plan must hold at least 50% of the total (listed) claims. Moreover, both according to previous legislation and to the Code, if the reorganisation plan includes a “disadvantaged category”, as mentioned above, then at least one of those categories must approve the reorganisation plan.


— joint administrators were appointed to the company by the directors;

— the company owned properties which it sought to develop. The company also owned (and rented out) retail premises and a hotel;

— the secured lender (holding a first ranking floating charge and standard securities over the properties) was owed GBP 7.8m as at the date of administration;

— there was an ongoing dispute with a creditor (a construction company) regarding sums owed for building works undertaken for the company. The creditor valued the claim at circa GBP 400,000 but following a draft expert report, the administrators’ estimate was GBP 20,000;

— the purpose of the administration at the outset was purpose (c) (realising property in order to make a distribution to one or more secured or preferential creditors);

— a property sale generated GBP 7.8m for the administration and bank debt was reduced to GBP 157,000;

— the remaining properties held were valued at approx GBP 2,285,000; and

— the unsecured creditors (aside from the disputed creditor) totalled approximately GBP 127,000.

Issues arising

The progress reports issued during the administration indicated that creditors may be paid in full until the administrators’ report was issued prior to the court

In 2002, the Enterprise Act introduced a new administration regime in the form of Schedule B1 to the Insolvency Act 1986 (the “Act”). The Enterprise Act aimed to promote a rescue culture and the wording of the new Schedule B1 of the Act, and particularly the formulation of ‘objectives’ for the administrator, was subject to extensive Parliamentary debate at the time. These objectives are at the core of the administration regime in the UK and were recently examined by the Outer House of the Scottish Court of Session in an application by the joint administrators of Station Properties Limited (in administration) (reported at [2013]CSOH 120).

Statutory provisions

Para 3(1) to Schedule B1 of the Act, provides that the administrator of a company must perform his functions with the objective of:

— “rescuing the company as a going concern, or

— achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or

— realising property in order to make a distribution to one or more secured or preferential creditors.”

The objective to be pursued by the administrator is set out in the proposals document which is circulated to, and agreed with, the creditors at the outset of the administration.

Background to the case

The facts of the case are as follows:

// Scotland

An examination of the purpose of administration

19

Schedule B1 of the Act, no application is required under paragraph 79.

— Paragraph 54 of schedule B1 of the Act provides that where proposals have been agreed with creditors and the administrator seeks to make a substantial revision to those proposals, a creditors meeting must be summoned to approve the revision. The fact that the dissenting creditor may be outvoted at the meeting does not mean that the provisions can be bypassed. Should a creditor act unreasonably, the administrators could apply to Court for approval of the revised proposals.

Conclusion

This case highlights the balancing act between stakeholders’ interests in an administration and demonstrates an emphasis on creditors’ rights. The administrators made an assessment of the company’s financial position and its future viability and identified a course of action that may ultimately have been in the best interests of the creditor body. Despite this, the Court was prepared to scrutinise the situation and protect the position of a minority dissenting creditor.

/

Jennifer Antonelli

CMS Edinburgh

T +44 131 220 8557

F +44 131 220 7670

E [email protected]

— Whether in light of the change in objective (from realising property in order to make a distribution to one or more secured or preferential creditors to rescuing the company as a going concern) the administrators are required to have their proposals revised in accordance with paragraph 54 of Schedule B1 of the Act.

The decision

The judge addressed each of the directions in turn and commented as follows:

— The administrator makes a judgment about whether the company can continue to trade in the future which is basically an assessment of cash flow solvency. A company can be treated as a going concern if it has continued financial support even if it is balance sheet insolvent. There is no set formula for this and it should be a prudent assessment of the prospects of a company trading successfully. If the disputed creditor were to be awarded a sum in six figures, there would be a serious question as to the company’s ability to pay its debts as they fell due unless funding were to be made available. The disputed claim is a material consideration for the administrators in assessing cash flow solvency and whether the company is capable of being rescued as a going concern. Therefore, the administrators should ask the creditor’s solicitors for their best estimate of the claim value and then take further legal advice before determining that the company has been rescued as a going concern.

— Where an administrator exercises his power to bring the administration to an end under paragraph 80 of

application which indicated that they intended to bring the administration to an end on the basis that the company had been offered funding sufficient to meet creditors’ claims. Effectively the administrators were seeking to change objectives, establish that the company had been rescued as a going concern (objective (a)) and close the administration before agreeing the disputed creditor’s claim.

The creditor whose claim was in dispute objected to the proposal to bring the administration to an end, arguing that the administrators should adjudicate on their claim prior to doing so.

The creditor did not have sufficient voting power to prevent the administrators from bringing the administration to an end. The Joint administrators made an application to Court for directions in relation to their power to do so where the purpose had been achieved.

Directions sought

— Whether the administrators can determine that the purpose has been sufficiently achieved and that the company will, on exit from administration, be able to pay its debts in full which become due within 12 months of that date. Further, that they can reach this view irrespective of whether a creditor claim is established that would render the company unable to pay its debts as they fall due.

— Whether the administrators are under a duty to apply to court under paragraph 79 of schedule B1 of the Act for an order that their appointment ceases to have effect.


Introduction

The long awaited Entrepreneurs’ Act (Ley 14 / 2013, de apoyo a los emprendedores y su internacionalización) was published on 28 September 2013 in the Official State Bulletin and came into force the following day. In addition to multidisciplinary regulation which is relevant to entrepreneurs, albeit remotely, the new Act introduces some far-reaching reforms to the Spanish Insolvency Act, however it fails to reach the depth desired on some issues.

Clarifications needed regarding the judicial approval The new wording of point 1 of the fourth additional provision is the most noteworthy, not only because it touches upon the judicial approval (“homologación”) of the refinancing agreements and finally takes a position regarding the need for a double majority, but also because it represents a missed opportunity to clear up some other controversial issues, which practical experience has been flagging up since the judicial approval of refinancing agreements in Spanish legislation aimed at emulating the English scheme of arrangement. There are welcome changes clarifying the requirements under article 71.6 for the judicial approval of a refinancing agreement. This type of agreement now needs only to be executed by means of a notarial deed. A report by an independent expert is also required. A drastically reduced majority of

55% of the financial institution’s creditors is now required for approval, making it clear that a judicially approved refinancing agreement will not necessarily have protection against claw-back actions. The reduction in the percentage of bank creditors required to be party to a refinancing in order for it to bind all creditors should make refinancing agreements more favourable and promote the positive outcomes of restructuring processes previously hampered by the opposition of minority creditors. However, this reduction alone does not stop restructuring processes from being affected by the gaps and inconsistencies of the fourth additional provision, which have not been solved. There are still very basic uncertainties and vastly underdeveloped issues, such as what should be understood by the stay of payment in a refinancing and what part of its effects will be imposed on dissenting financial institutions. Exactly how judicial approval affects those with security interests beyond potential enforcement processes, or what criteria should be used to decide when a disproportionate effort has been made to allow some creditors to escape the effects of judicial approval, are also issues that need to be clarified.

The out of court payment agreement The main change in the Act as regards restructuring is concentrated in the introduction of the new Title X in the Spanish Insolvency Act. Although the new provision is of limited scope, it presents

some interesting new aspects in addition to creating confusion, as usual in this area. The principal aspects of the so-called out of court payment agreement governed by Title X can be summarised as follows:

— it consists of an out of court debt negotiation process for insolvent small business owners (natural persons with liabilities below EUR 5m and legal persons with less than fifty creditors and assets and liabilities below EUR 5m); and

— it is incompatible with the negotiation of a refinancing agreement or an application for insolvency.

Consequences of the opening of proceedings

— Once the application is filed, the debtor is forbidden from applying for credit or a loan, and must return its credit cards and abstain from using electronic payment systems;

— Within a three month period starting from the date of the corresponding notice to the competent court, a debtor is not obliged to apply for insolvency and its creditors may not do so either;

— likewise, during this same period the creditors shall neither bring nor continue enforcement action against debtor’s property or record seizures, except for those holding a security interest, who are not compulsorily

// Spain

Refinancing Agreements and Out of Court Payment Agreements under the Spanish Entrepreneurs’ Act

21

subject to the out of court payment agreement. In any case, third party guarantees may be enforced;

— furthermore, the creditors shall abstain from performing any act leading to an improvement in their situation in respect of the debtor;

— the insolvency mediator shall call the debtor and all the creditors who could be subject to the potential agreement to a meeting in order to discuss and approve a repayment schedule for the outstanding credits. This excludes public institutions. The participation of creditors with a security interest is also voluntary;

— the repayment schedule may include the transfer of property for payment of debt, debt relief of up to 25% and / or stays of payment of up to three years;

— all potentially affected creditors must attend the meeting or give their prior approval or refusal within ten days of receipt of the notice. If they do not, their credits shall be subordinated in the event of secondary insolvency proceedings; and

— a 60% majority is necessary to approve the agreement (75% if payment via the transfer of property is included, together with the approval of the creditors holding security interests over it).

Effects of the agreement

— No creditor affected by the agreement may bring or continue enforcement action against the debtor for debts existing before the opening of the procedure. Any seizures will be cancelled.

— The alternatives for creditors with security interests excluded from the agreement to pursue the rest of the debtor’s assets, are not clearly regulated.

— Creditors shall retain the right to actions against those jointly and severally liable as well as against the guarantors of the debtor, in a similar way to their rights under section 135.1 of the Spanish Insolvency Act within the scope of the arrangement of creditors, but not limited to the dissenting or unaffected creditors.

— The proceedings fail when a majority of the creditors resolve to vote against them prior to the meeting, when an agreement is not reached or if it is challenged or annulled, or when the mediator later certifies that the agreement has been breached. This will give rise to the opening of the secondary insolvency proceedings, which may also be applied for by the insolvency mediator.

Key characteristics of the secondary insolvency proceedings

— Unless just cause is given, the administrator of the secondary insolvency proceedings shall be the insolvency mediator.

— A term of two years to identify the acts that can be unwound is given as of the date of the debtor requesting the appointment of the insolvency mediator. There is thus a scenario in which, assuming a maximum stay of payment of three years, the claw-back period could reach five years or more.

— Finally, the rule introduces a sort of “fresh start” opportunity into the Spanish procedural system. Thus, a fortuitous insolvency would conclude with debt remission (not applicable for public institutional debts), provided that the creditors against the estate have been paid and all privileged creditors have been satisfied (also foreseen outside of the secondary insolvency proceedings if at least 25% of the ordinary creditors have been paid).

/

Abraham Nájera

CMS Madrid

T +34 91 4519 296

F +34 91 3993 070

E [email protected]


AustriaCMS ViennaGünther HanslikT +43 1 40443 3550F +43 1 40443 93550E [email protected]

BelgiumCMS BrusselsJean-François GoffinT +32 2 74369 21F +32 2 74369 01E [email protected]

BulgariaCMS Sofia Teodora IvanovaT +359 2 92199 10F +359 2 92199 19E [email protected]

CroatiaCMS ZagrebGregor FamiraT +385 1 4825 600F +385 1 4825 601E [email protected]

Czech RepublicCMS PraguePavla KřečkováT +420 2 96798 877F +420 2 21098 000E [email protected]

FranceCMS ParisDaniel CartonT +33 1 4738 5651F +33 1 4738 5555E [email protected] CMS LyonCarole DessusT +33 4 7895 4799F +33 4 7261 8427E [email protected]

GermanyCMS CologneRolf LeithausT +49 221 7716 234F +49 221 7716 335F [email protected]

CMS MunichAlexander BallmannT +49 89 23807 204 F +49 89 23807 40704 E [email protected]

CMS StuttgartDr Alexandra Schluck-AmendT +49 711 9764 279 F +49 711 9764 96279F [email protected]

HungaryCMS BudapestErika PappT +36 1 48348 00F +36 1 48348 01E [email protected]

ItalyCMS RomePaolo BonolisT +39 06 4781 51F +39 06 4837 55E [email protected]

The NetherlandsCMS UtrechtJan Willem BoumanT +31 30 2121 285F +31 30 2121 227E [email protected]

PolandCMS WarsawMałgorzata ChruściakT +48 22 520 5555F +48 22 520 5556E [email protected]

Portugal CMS LisbonCristina RogadoT +351 21 09581 37 F +351 21 09581 55 E [email protected]

RomaniaCMS BucharestHoria DraghiciT +40 21 4073 834F +40 21 4073 900E [email protected]

Contact details

RussiaCMS, RussiaKaren YoungT +7 495 786 3080F +7 495 786 4001E [email protected]

SlovakiaCMS BratislavaIan ParkerT +421 2 5443 3490F +421 2 3233 3443E [email protected]

SpainCMS MadridJuan Ignacio Fernández AguadoT +34 91 4519 300F +34 91 4426 070E [email protected]

SwitzerlandCMS ZurichPhilipp DickenmannT +41 44 2851 111F +41 44 2851 122E [email protected]

UkraineCMS KyivDaniel BilakT +380 44 39137 01F +380 44 39133 88E [email protected]

United KingdomCMS EdinburghJennifer AntonelliT +44 131 220 8557 F +44 131 220 7670 E [email protected]

CMS LondonPeter WiltshireT +44 20 7367 2896F +44 20 7367 2000E [email protected]

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Cms restructuring and insolvency newsletter autumn 2013

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Transcript of Cms restructuring and insolvency newsletter autumn 2013