On Friday 27 January 2017, over 250 Dutch and international insolvency law specialists (lawyers, trustees, judges, policy makers, banks, academics etc.) convened in the Amsterdam Eye Museum for the conference Eyes on Insolvency. The theme was about the recently published proposal for an EC Directive on “preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge” [COM(2016)723]. The directive aims to further develop the internal market by facilitating the pre-insolvency restructuring process of viable businesses in financial distress.
Such preventive restructuring frameworks should enhance the possibility among the creditors of the troubled business to reach agreement on how to overcome the financial difficulty. Apart from generating cash by selling assets to pay the creditors, typical restructuring measures are voluntary ‘haircuts’ or debt-for-equity-swaps. In doing so, the creditors agree to (largely) discharge the debtor from its debt in consideration of an equity stake. Consequently, the creditors agree not to collect their claims (largely or in their entirety) but instead accept the uncertain prospect of future recovery and renewed growth of the business. Through their equity they will participate in the upside.
Because the creditors have to write off part or all of their claims, not all of them are willing (or able) to do so voluntarily. Hence, there will be opposition to the restructuring plan, maybe even only arising from a nuisance value perspective. If there is no ‘all creditors’ consent’ to the restructuring plan, judicial intervention is required to uphold the restructuring attempt if a substantial majority is in favour. Binding opposing creditors to the restructuring plan, is effectively an intrusion in a ‘property right’ of such creditor which is protected by (inter)national law (e.g. Article 1 First Protocol ECHR). This requires court intervention based on statutory law in accordance with Article 6 ECHR. The EC Directive instructs the Member States to design a legal framework within which judicial involvement should be limited, only where it is necessary and proportionate so that rights of affected parties are safeguarded. Consequently, for a restructuring plan to become binding on opposing creditors, it must be confirmed by a court. Because time is of the essence in restructuring a viable business in financial distress, this court must render its decision without undue delay but no later than 30 days after the request for confirmation. As discussed during the conference, most debates will presumably be about valuation issues. This will likely lead to opposing experts (and their reports) who require the courts to understand the underlying financial and economic motives and drivers.
As demonstrated at the conference by the highly experienced judicial panel members from the USA (Timothy Barnes, US Bankruptcy Court Chicago) and UK (Richard Snowden, High Court Chancery Division London), it will be of utmost relevance to prepare the Dutch judiciary for such specialist tasks. This should not be left to all (11) district courts in the Netherlands. Concentration of judicial knowledge, experience and practice is needed and should be conferred on one specialized court or chamber with judges having substantial experience in international commercial insolvency practice.