In a 2012 study, University of Heidelberg professor Andreas Pieckenbrock compared insolvency laws of England, Italy, France, Belgium, Germany and Austria. He concluded that there are five common tendencies in these rescue proceedings:
- Early recourse – Sometimes there is an earlier moment at which the rescue process is started, for instance in the French Sauvegarde: when a debtor has encountered problems that he cannot solve, which is earlier than the traditional moment when the debtor cannot pay his 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, what we call ‘debtor-in-possession’;
- Stay – In these countries one finds a moratorium or a stay which is either automatic like in the Sauvegarde, or upon request (for instance the concordato preventivo or réorganisation judiciare);
- Protecting fresh money – There are special provisions to protect fresh money made available to the company whilst it is trying to work itself out of its misery;
- Debt for equity swap – The possibility of a debt for equity swap, i.e. the conversion of a creditor’s claim into shares in the capital of the company.
- Binding disapproving creditors – Generally, as Pieckenbrock explains, such a rescue is based on the principle of a composition or an arrangement concluded between the insolvent debtor and his creditors. Such a rescue plan is binding for those creditors who voted in favour of the plan, but is also binding upon a (given percentage) of a dissenting minority of creditors (sometimes referred to as ‘cram-down’) or a watering down (‘bail-in’) for altgesellschafter (ie. existing shareholders).
In a study by INSOL Europe on a new approach to business failure and insolvency, published in April 2014, the report authors (University of Milan professor Stefania Bariatti and Robert van Galen) studied 28 EU Member States. It is interesting to note that generally professor Piekenbrock’s characteristics are available in new or renewed recovery proceedings in nearly all member states.
On 12 March 2014 it issued a Recommendation on a new approach to business failure and insolvency. The Recommendation has 20 recitals and 36 recommendations. It seeks to reach these goals by encouraging Member States to put in place ‘… a framework that enables the efficient restructuring of viable enterprises in financial difficulty and give honest entrepreneurs a second chance’. The Recommendation provides for ‘minimum standards’ on ‘preventative restructuring frameworks’ to be implemented in all Member States. Through promoting adherence to these standards throughout the Union, the Commission’s hopes are threefold:
- for national insolvency systems - to improve the existing means for resolving distress in viable enterprises and encourage coherence in initiatives or reviews of ‘corporate rescue framework’ in all Member States,
- for businesses - to improve access to credit, encourage investment and to smoothen ‘… the adjustment for over-indebted firms, minimising the economic and social costs involved in their deleveraging process’, and
- for creditors - to improve mechanisms for resolving financial distress efficiently, with reduced delays and costs and limited court formalities (‘… to where they are necessary and proportionate in order to safeguard the interests of creditors and other interested parties likely to be affected’).
The Recommendation’s proposals are generally focused on those themes prof. Pieckenbrock has addressed.
Within twelve months (i.e. before April 2015), EU Member States are invited to implement the Recommendation’s ‘principles’. The expected endgame is that eighteen months after adoption of the Recommendation (so in October 2015) the Commission will assess the state of play, based on the yearly reports of the Member States, to evaluate whether further measures are necessary to strengthen the European approach. The Recommendation, formally, reflects a soft approach. It invites Member States to take or continue action. Substantially it only presents a ‘minimum standard’, allowing Member States to add specific conditions and components in order to allow the preventive restructuring framework to operate within the legal context and economic environment of its national market. It is the bare minimum, as there is no clear principle stating that the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) by a certain reference date. Nor is there a principle stating that the debtor should provide and allow relevant creditors and/or their professional advisers reasonable and timely access to all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors. A solid, comparative analysis during 2015 will be necessary to assess whether other binding measures are appropriate to reach the Commission’s policy goals. If the new Commission, under the leadership of Mr. Juncker, maintains this policy (which I would endorse), we will hear from the Commission, as in many states the process of legislating will most likely take many years. However legislation in Germany, Spain and France, and proposals being made in the Netherlands, are of a similar nature to the content of the Recommendation (an extended version of this blog, including footnotes, will appear on my blog, see www.bobwessels.nl.)