Written by 10:30 am European Union

In brief: liquidation and reorganisation processes in European Union

Types of liquidation and reorganisation processes

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The procedure for, and effects of, a voluntary liquidation vary between member states. For a solvent company, the usual position for member states in the European Union is that the members can put the company into liquidation by resolving to do so through a general meeting. For an insolvent company, the usual position is that the directors must apply to the court to commence the liquidation process and the debtor is required to show that it is unable to pay its debts as they fall due or that its liabilities exceed its assets or both.

While the rules vary between member states according to national law, in certain member states commencing a voluntary liquidation case will cause a moratorium to arise, preventing creditors from starting or continuing any proceedings against the debtor while it is in a process. In other jurisdictions, the debtor will be put under the control of a liquidator or other insolvency office holder. In some jurisdictions, any secured creditors will have an unrestricted right to exercise their security during this process but in others, such rights are restricted or subject to certain conditions, depending on the type of security in question and the particular type of proceeding the debtor is in.

Under Directive (EU) 2019/1023 (the Restructuring Directive), member states shall ensure that debtors accessing preventing restructuring procedures remain totally or at least partially in control of their assets and the day-to-day operation of their business.

Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

Voluntary reorganisations can be classified as ‘insolvency proceedings’ under Regulation (EU) 2015/848 (the Recast Regulation), provided that the particular type of reorganisation is specified in Annex A to the Recast Regulation (eg, the sauvegarde procedure in France is included in Annex A to the Recast Regulation and therefore falls within its ambit). While the relevant requirements vary between member states, the general requirement for the debtor is to show that it is likely to become insolvent in the near future if steps are not taken to restructure its business. Furthermore, the debtor will also be required to show that there is (in general) a real expectation that the business can be rescued or that the attempt to reorganise the company and its affairs will ultimately result in a better outcome for its creditors.

The Dutch and the German pre-insolvency restructuring tools provide for both a process that is included in Annex A of the Recast Regulation (the public version of the restructuring procedure) and thus benefits from automatic recognition among member states, and a version that falls outside the Recast Regulation (the undisclosed version of the restructuring procedure, which is exempt from publication requirements). The public version of the Dutch pre-insolvency tool, the WHOA, was included in Annex A of the Recast Regulation in January 2022.

The Recast Regulation applies to collective proceedings, including interim proceedings, which are based on laws relating to insolvency and in which, for the purpose of rescue, adjustment of debt, reorganisation or liquidation, either the debtor is totally or partially divested of its assets. Also, an insolvency office holder is appointed, the debtor’s assets and affairs are subject to the control or supervision by a court, or a temporary stay of individual enforcement proceedings is granted by a court or by operation of law to allow for negotiations between the debtor and its creditors, provided that these proceedings provide for suitable measures to protect the general body of creditors and are preliminary to one of the proceedings that fall within the scope of the Recast Regulation if no agreement is reached. Each member state determined which procedures fall within the scope of the Recast Regulation.

Voluntary reorganisations do not necessarily have to be implemented through any formal restructuring procedure and therefore there is significant variation in terms of the prerequisites to implementation. Voluntary reorganisation can be implemented as a result of informal negotiations with creditors outside of the usual formal restructuring procedure; such informal arrangements will be governed by the laws of the relevant jurisdiction or the laws and terms of agreements being compromised. In some jurisdictions, however, the formal requirements may be relatively strict.

Under the Restructuring Directive, where there is a likelihood of insolvency, a debtor will need to be given access to a preventive restructuring framework. This will be available on the application of the debtor – although member states may decide to also make this available at the request of creditors and employee representatives subject to the debtor’s agreement. The Restructuring Directive sets out the content of a restructuring plan in article 8. Member states may make a comprehensive checklist available. Only parties that are affected can vote on the adoption of a plan. Member states may exclude shareholders or creditors who are subordinated to unsecured creditors or a related party of the debtor with a conflict of interest from voting on the plan.

The effect of a debtor’s voluntary reorganisation on the debtor itself and its creditors varies between member states. Some potential scenarios include the management remaining free to run the business or an administrator or other insolvency office holder being appointed.

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability and, if so, in what circumstances?

The Restructuring Directive provides that member states must put in place a preventive restructuring framework. It needs to include the availability of a restructuring plan (see article 8 and following of the Restructuring Directive). Under the Restructuring Directive, member states shall ensure that affected parties are treated in separate classes that reflect sufficient commonality of interest based on verifiable criteria to be decided by national law (see article 9(4)). As a minimum, creditors of secured and unsecured claims should be treated in separate classes. Member states can also provide that workers’ claims are treated in a separate class.

A restructuring plan is adopted by affected parties if a majority in the amount of the claims or interests in each class votes in favour of the plan. Member states may stipulate that a majority in number of affected parties must also approve the plan in each class. Member states may provide for the majority required in each class, but this must not be higher than 75 per cent (see article 9(6)). Member states can also provide that a formal vote on the adoption of the plan can be replaced by an agreement with the requisite majority. Member states shall ensure that a restructuring plan that affects the claims or interests of dissenting affected parties or provides for new financing or involves the loss of more than 25 per cent of the workforce are approved by a court. The court may approve such a plan if the plan has been adopted by the requisite majority of creditors in each class; creditors with sufficient commonality of interests in the same class are treated equally; the plan satisfies the ‘best interest of creditors test’; and, where there is new financing, this is necessary to implement the restructuring plan and does not unfairly prejudice the interests of creditors. The best interests of creditors test is a test that is satisfied if no dissenting creditor would be worse off under a restructuring plan than they would be if the normal liquidation ranking under national law was applied, either in a liquidation or in the event of the next best alternative scenario if the plan was not confirmed. Courts will be able to refuse to confirm a plan if it does not have a reasonable prospect of preventing the insolvency or ensuring the viability of the plan. Importantly, the Restructuring Directive provides for cross-class cram down. Where a plan is not approved by affected parties in each class as otherwise required it may still be approved by a court if:

  • it satisfies the best interest of creditors test; and
  • the plan has been approved by a majority of the voting classes (if at least one of those classes is a secured or senior class), or failing that, the plan has been approved by at least one of the voting classes who are not out of the money.

 

Member states may stipulate that more than one affected class of creditors who are not out of money must approve the plan before the court can confirm a cross-class cram down. If a plan has been confirmed by the court, it is binding upon all affected parties.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

The requirements for, and effects of, the involuntary liquidation process vary between member states. Generally, for a creditor to make a successful application for the involuntary liquidation of a debtor, the creditor is required to demonstrate that the debtor is unable to pay its debts as they fall due or that the debtor’s liabilities exceed its assets.

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

While the position varies between member states, the general position is that a creditor cannot instigate an involuntary reorganisation (as opposed to an involuntary liquidation) of the debtor. In Germany, however, a creditors’ meeting may instruct the insolvency office holder to produce a reorganisation plan.

The effects of the commencement of an involuntary reorganisation vary between member states.

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

The procedural elements will be dictated by the law of the jurisdiction where proceedings are commenced. Practically speaking, a large proportion of reorganisations are implemented as a result of informal negotiations with key creditors outside of a formal restructuring framework and therefore the parties to the discussions and the particular circumstances of the debtor and creditor base dynamic will dictate the timetable. However, in some jurisdictions, a formal procedure for an expedited reorganisation exists (eg, France). In the Netherlands, a statutory foundation is being prepared to codify the practice that has been applied by some practitioners and courts (albeit with no statutory basis) to pre-package bankruptcies through the appointment of a silent administrator before the formal insolvency to ensure that any plan to either restructure (parts of) the business or to prepare for a formal filing, or any combination thereof, is acceptable to the silent administrator and the court. Decisions by the Court of Justice of the European Union regarding the position of employees in a transfer of undertaking (FNV v Smallsteps BV (Case C-126/16) and FNV v Heiploeg (Case C-237/20)), however, have caused delay in the treatment of the legislative proposal.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

This is more a practical than a legal question. In general, any proposed reorganisation will fail if the requisite support of the different creditor or stakeholder classes is not obtained. In some jurisdictions, the court may be willing to grant an interim stay on creditor actions to allow a reorganisation to be implemented.

The rules will vary between jurisdictions, but the effects on the debtor if the reorganisation plan is not approved can be wide-ranging, including an agreement from key creditors to a temporary relaxation of the debtor’s obligations, or the debtor entering into liquidation or another form of insolvency process.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

In general, there are procedures for the liquidation or dissolution of a corporation outside of the insolvency process, particularly where the company’s constitutional documents or by-laws provide for this. Some possible scenarios include the company expiring at the end of a fixed duration or being wound up after achieving the purpose for which it was established or where it can no longer achieve the purpose for which it was established.

There are some provisions of EU law in specific contexts that would be relevant (eg, cross-border mergers), but these are not of general application.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

In nearly all jurisdictions, liquidation proceedings will end with a court hearing or meeting or creditor decision process at which the final accounts of the company will be approved.

Reorganisation procedures usually come to an end either when the dividends agreed to under the plan have been distributed or if the debtor goes into liquidation having been unable to comply with the terms of the plan.

On request from the liquidator in the main proceedings, a court in another member states must stay secondary proceedings unless the request is of manifestly no interest to creditors in the main proceedings.

The Recast Regulation formally recognises the concept of ‘synthetic secondary proceedings’ and sets out the right of an office holder in main proceedings to give an undertaking to recognise priority and distribution rights that local creditors would have had if secondary proceedings had been opened (see article 36). Any such undertaking requires the approval of local creditors and must comply with any requirements as to form and approval requirements in the member state presiding over the main proceedings. Once given, such an undertaking is binding on the estate, and local creditors are entitled to apply to the courts to ensure compliance with the undertaking.

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