The state of insolvency office holder (“IOH”) regulation worldwide is a matter of some concern to the international bodies active in the insolvency field. The European Bank of Reconstruction and Development held a conference on 7 November 2014 to disseminate the findings of a two-year project into the IOH regulatory environment in its client group, of which 27 out of 35 were the subject of an assessment. While the laws of many of these states have been the subject of domestic scrutiny with a view to reforms to insolvency practice frameworks, this assessment was apparently the first time that research had been undertaken into the structure of the IOH profession in many of these jurisdictions. As such, the holistic view enabled as a result of the work contains some interest for those keen on understanding how IOH regulation is performing worldwide, especially in the European Union, of whose members, some 10 were surveyed, most of which were drawn from the 13 countries acceding between 2004-2013 (the exceptions being Malta, Cyprus and the Czech Republic).
The most essential component of the project’s findings was the great diversity in terms of status, qualification and training of insolvency practitioners, and the framework for their registration, supervision and discipline. Nonetheless, some indications of cross-jurisdictional trends in these countries was possible, a notable example being that where a self-regulatory model or state-sponsored regulatory agency was used, there was a strong correlation with performance overall across the criteria being measured. While most states had a licencing regime in place, less performing countries tended to include those where Government directly exercised supervision over the profession or no regulatory framework existed at all. The tension between private and public control was evident in a number of the jurisdictions surveyed.
Overall, while minimum educational standards and professional entrance exams were often prescribed, the project revealed weak performance in areas such as continuing professional development and training needs. Similarly, lacunae also existed at the level of the development of professional associations and of ethical rules. In many places, however, even where regulatory regimes were sufficiently robust, issues with resources tended to restrict active supervision of IOHs to the context of individual proceedings with the effectiveness of such monitoring dependent on the courts’ own supervisory capacity. The role of the courts in the conduct of proceedings was also identified as an issue, particularly in the balance of control and supervision between creditors and the courts. Over-monitoring was stated as potentially a problem where it inhibited IOHs in the performance of their duties. Finally, the structure of the appointments system in cases, as well as remuneration, were felt to be insufficiently encouraging of competition in the market for IOH services. In summary, the terms of the report revealed that there was much to do in relation to improving the environment and framework for practice in almost all of these states.
Some of the issues reflected in the EBRD assessment had been anticipated in work carried out by the professional associations, including INSOL Europe, which as representative of the European insolvency community, has a watching brief on behalf of their membership over matters connected with reforms to insolvency law and practice. Although written in the context of the then anticipated review of the European Insolvency Regulation, INSOL Europe authored a report in April 2010 on the topic of harmonisation, titled: “Harmonisation of Insolvency Law at EU Level”). This report was presented to the European Parliament Committee on Legal Affairs and largely advocated consideration of substantive harmonisation in a number of areas of insolvency law.
The recast European Insolvency Regulation – impact on distressed debt investors
In 2002, the European Insolvency Regulation (EIR) introduced a regime governing the administration of insolvent corporates or individuals which operate in more than one member state of the European Union (EU). A "recast EIR" will apply to insolvency proceedings commenced on or after 26 June 2017.
Why are the EIRs important?
The EIRs ensure recognition, without further formality, of insolvency proceedings throughout the EU (except Denmark) and determine the law applicable to such proceedings. They apply only where the debtor's centre of main interests (COMI) is situated in a member state (other than Denmark) and do not apply to insolvency proceedings on foot in other jurisdictions. The EIRs are only binding on participating member states and so will be of limited practical use where assets are situated outside the EU. The EIRs envisage there being one set of main insolvency proceedings, with the possibility of multiple territorial (or secondary) insolvency proceedings.
London schemes industry set back! Are we about to see an end to aggressive “schemes forum shopping”?
An extraordinary coincidence of timing at the excellent R3 Insol Europe International Restructuring Conference in London today. Global Turnaround Editor, John Willcock’s informative market update featured “London’s scheme Industry keeps on rolling” as a keynote topic. He pointed out the recent COMI shift objections in the Codere and Indah Kiat cases to what the court described in Codere as “… an extreme form of forum shopping” and “grabbing someone else’s debt just to get rid of it”. But just two days before reports had emerged that a German court, in ruling on bond holder claims written under Austrian law, whilst rejecting a German insolvency filing, had stated that Scholtz’s COMI was in Germany; this whilst Scholtz’s advisers have been active in migrating certain management functions to UK to establish a UK COMI and sufficient connection to proceed with an English scheme of arrangement to restructure Scholtz’s debt.
Whilst scrutiny of the detail of the judgment is awaited it is interesting that apparently “contrived” aggressive forum shopping is being seriously questioned by courts in both England and Germany. In a further conference session on developments from the European Union the concept of “COMI at the transaction date” was mentioned. Maybe this will appear in a forthcoming directive and further undermine post distress COMI migration. This would certainly be too late to affect the Scholtz restructuring but what is evident is that courts are alert to spurious forms of forum shopping and are taking a more demanding look at the underlying reality.
In the short term, the advisers of Scholtz may have to go back to the drawing board unless they can convince an English Court judge to take a contrary view to his German counterpart. Now that would be interesting!
Will the EU Regulation’s March 2014 recommendation to adopt more flexible pre-insolvency processes affect the UK?
In March 2014 the European Commission published its recommendation on “a new approach to business failure and insolvency” which set out minimum standards for a restructuring framework in each member state. The broad market reaction in the UK was mixed ranging from supportive from those sectors favouring facilitation of consensual restructuring ahead of formal process to “it ain’t broke don’t fix it”, particularly from the insolvency profession. The latter view was the dominant view in the UK Government response of March 2015 which followed a brief industry consultation. It cited the widely held belief that the UK system incorporating Schemes of Arrangement, CVA’s and pre-pack administrations was both flexible and efficient as demonstrated by the general direction of forum shopping to London. There seemed little government appetite for legislation change.
Some interested parties did take a different view, pointing to the gap between consensual restructuring where sufficient liquidity kept creditors at bay whilst solutions were negotiated (sometimes called Consensual Creditors’ Compositions), and any process signalling near insolvent distress to the customer and supplier constituency which damaged goodwill and therefore both value and recovery prospects. There were calls for a properly defined automatic stay, consistent methodology and independence in valuations, and post-petition super priority financing. Some influential parties pointed out the better recoveries for consensual restructuring but also acknowledging that once in formal process, the UK system with decisions undertaken by more commercially minded insolvency practitioners than the generally constrained Courts in continental Europe was fast, more predictable and more efficient than the continental counterparts.
Fast forward 12 months and we now see the EU is “assessing the state of play” to see whether further measures to strengthen the move to facilitate restructurings at an earlier stage and to allow debtors to restructure without recourse to formal procedures are required. A multi-jurisdictional panel has been established from across the spectrum of the restructuring professions. In short, are we going to see an EU Directive which could mandate the UK to close the gap between consensual creditors’ compositions and CVA’s?
Insolvency not only has a serious impact on the debtor, but also on his creditors: the debtor loses the right to freely (within reasonable boundaries) dispose of his assets; the creditors face the risk of never getting their outstanding invoices paid – at least, not in full. This especially affects the ordinary, unsecured and unprivileged/non-preferential creditors.
Creditors may try to mitigate the risk of insolvency of their debtor by improving their position. This may be done, for instance, by having a security right such as a right of pledge or mortgage vested, or by obtaining a personal security, such as a suretyship or a guarantee, from a third party such as a shareholder or parent company. Another way in which a creditor may create a stronger position can occur in a situation concerning the sale of (mostly movable) goods. The seller of such goods may under certain circumstances retain title to the goods.
Nowadays, apart from consumers, more often than not purchasers don’t pay the purchase price for goods purchased at the time of closing the purchase agreement or even at the moment the goods are delivered to them. Transferring title to the goods to the purchaser before the purchase price has been paid is a risk for the seller – not only in the event that the purchaser becomes insolvent, but also outside insolvency. In the event that the purchaser goes into insolvency before having paid the purchase price, the seller is mostly confronted with a liquidator and very strict statutory insolvency laws that may disallow him from exercising his rights, at least temporarily. But even if the purchaser is not in insolvency, the seller is not sure to get paid. The purchaser has gained title to the goods and therefore is their owner, and so it could be that he might sell the goods to a third party – who, in principle, is not obligated to pay the purchase price to the original seller because there is no contractual relationship between them in this regard.
Needless to say, it is essential for the seller to protect his rights as best he can and as early as he can. The concept of retention of title in itself is complicated enough in one jurisdiction, but becomes increasingly so in times of growing globalisation, where foreign jurisdictions come into play. It is not customary any more that a manufacturer purchases the supplies he needs only in the nearest city or even in his own country. On the contrary, with the use of the internet the quality and price of goods for sale can instantly be checked and compared all over the globe. And the ordering process is completed by a mouse click. In that situation it is even more important that the supplier knows what his rights are when he ships his goods to another country, possibly even another continent.
In words published in a practitioner journal just over three years ago, this author was of the view that: “It is difficult to see member states agreeing to proposals from the European institutions for substantive rapprochement of their internal [insolvency] laws unless there were overwhelming economic benefits for them to do so.” (“European Insolvency Laws: Convergence or Harmonisation?”, Eurofenix, Spring 2012, p21). Though not in itself intended as a prediction, these cautious words have nonetheless turned out to be quite far from the direction in which views on harmonisation have now apparently travelled.
The first salvo was in fact fired long before the above thoughts were published. An INSOL Europe Report of April 2010, authored by a practitioner body of some repute and entitled Harmonisation of Insolvency Law at EU Level, was written with a view to the eventual review of the European Insolvency Regulation (EIR), which would take place from 2012 onwards. It was presented to the European Parliament Committee on Legal Affairs and advocated consideration of substantive harmonisation in a number of areas, including the opening criteria for proceedings, stays of creditor action, procedural management rules, ranking and priority rules, the filing and verification of claims, responsibility for any rescue plan, the scope and extent of a debtor’s estate, avoidance actions, contract termination or continuation, directors’ liability, post-commencement financing availability and insolvency practice qualifications. While many of these areas were procedurally focused, as befitted a review of the way in which the EIR could better function, the report seemed to suggest that the time had come to consider ways in which insolvency law across Europe could go beyond mere convergence and reach the stage at which harmonisation becomes feasible.
Echoes of the 2010 report in fact found their way into a response by the European Parliament in 2011, entitled Report with Recommendations to the Commission on Insolvency Proceedings in the context of EU Company Law (document A7-0355/2011), which acknowledged the difficulty of creating a “body of substantive insolvency law at EU level” but postulated the desirability of “worthwhile” harmonisation in a number of discrete areas, chiefly to avoid the adverse consequences of disparities in national laws that might favour so-called ‘forum shopping’. These areas included the opening criteria for proceedings, the filing of claims, avoidance actions, insolvency practice qualifications and common aspects for restructuring plans. Again, although quite modest, this report can be taken to represent a change of thinking on the part of the European institutions – which, apart from a brief dalliance with harmonisation in the first drafts of what was to become the European Bankruptcy Convention 1995 (and a direct model for the EIR), had always shied away in practice from anything beyond promoting the idea of eventual convergence in good practice.
The energies of the European Commission were directed from 2012 onwards to the reform of the EIR itself, although this process did not conclude till the Recast EIR emerged in May 2015. However, even during this process, attention was given to whether it was desirable to proceed to what was described as an “approximation of laws” in discrete areas, some of which replicated items on earlier lists. In the 2012 Communication from the Commission etc. on a New European Approach to Business Failure and Insolvency (document COM(2012) 742 Final), the context articulated is not the ideal of harmonisation or the avoidance of disparity, but the need to eliminate legal uncertainty and an “unfriendly business environment”, deemed to constitute obstacles to cross-border investment. In fact, rejecting some of the rationale of earlier proposals, the communication suggests that the type or focus of legal systems per se do not determine entrepreneurial success or the possibility of rescue, but instead the availability of specific tools that favour early warning of distress and promote the efficiency of procedures. In language reminiscent of the (final) report in connection with Best Project on Restructuring, Bankruptcy and a Fresh Start in 2003, the European Commission advocates concentration on improving “second chances” by introducing fast-track procedures for honest debtors, aligning and shortening discharge periods and, for small and medium enterprises (SMEs) in particular, improving prevention, access to out-of-court settlements and debt recovery generally.
Rhys Llewellyn coauthored the UK chapter in Globe Law and Business's title on Licences and Insolvency. He is a corporate partner at Harbottle & Lewis LLP.
A licensor’s insolvency can have a serious impact on a licensee which relies on the use of the licensor’s IP rights to carry on its business. However, insolvency risks are often overlooked in the rush to put licences in place at the start of a new commercial relationship. This article highlights some of the issues that licensees should consider when acquiring rights to use IP rights in the context of the insolvency regime in England and Wales.
The main insolvency procedures available to English and Welsh companies are administration and liquidation. An insolvency practitioner will be appointed as an administrator or liquidator (as appropriate) of the insolvent company and will usually look to sell the company’s assets to raise funds to pay creditors. With the emergence of more technology businesses, IP rights are increasingly among the most valuable assets that companies possess and administrators and liquidators have wide-reaching powers to deal with them.
GLB: Why are you interested in the theme of restructuring?
Wessels: In the second part of my professional career of some 40 years, I have written, taught and advised on insolvency - Dutch insolvency, but more specifically European and international insolvency. For a few years now, there have been trends in Europe towards the closer harmonisation of national insolvency laws. In March 2014 the European Commission presented its Recommendation on a New Approach to Business Failure and Insolvency. The objective is to shift the focus away from liquidation towards encouraging viable businesses to restructure at an early stage to prevent insolvency.
GLB: Can you tell a bit more about this recommendation?
Wessels: It is a non-binding instrument which contains 36 individual recommendations. The European Commission wants to give viable enterprises the opportunity to restructure and stay in business. The chosen method is to reform the national insolvency legislation of EU member states with the aim of helping viable firms to continue in business and safeguarding jobs, while simultaneously improving the situation of creditors, which will be able to recover a higher proportion of their investment than if the debtor went into formal insolvency proceedings.
This summer, all eyes are on the Privy Council and its much-anticipated decision in Re Saad and Singularis, an appeal from Bermuda. It is likely to close a chapter in the debate on the permissible extent of judicial cooperation at common law that was opened by Cambridge Gas case in 2006. At the time, Cambridge Gas looked like being only the latest in a long line of decisions dating back to the 1700s in cases such as Solomons v Ross (1764), in which the judges explored how assistance was to be forthcoming in the situation of a foreign proceeding involving a debtor with links to this jurisdiction.
From simple beginnings (first seen in the law of bankruptcy), recognising the existence of foreign proceedings and the office holder’s title and capacity to act on behalf of the estate, increasingly complex forms of assistance have been developed. These have included staying or discharging local proceedings, restraining creditors from pursuing recovery actions, and requiring debtors and third parties to be examined and produce documents. Often, these developments have also rested on principled approaches to comity, including theories of unity and universality espoused by the judges.
As such, the judges have long believed that there should ideally be a single efficient insolvency procedure, and in this light have also permitted the remittance of funds to overseas proceedings for distribution and given effect to a foreign reconstruction scheme approved by creditors. Assistance developed by the judges was supplemented at an early stage by specific cooperation provisions within the law enabling courts to address requests for assistance directly to each other. The first of these was Section 220 of the Bankruptcy Act 1849, whose most recent legislative descendant is now Section 426 of the Insolvency Act 1986.
In their transition to dealing with corporate entities, the judges were able to apply the types of assistance first seen in bankruptcy, but also to develop the novel concept of ‘ancillary’ assistance through opening ‘light-touch’ liquidation procedures to deal with issues that could not simply be solved by the making of the above orders. These procedures were carefully governed, usually by reference to the need to protect creditors, but also to avoid coming into conflict with the ‘main’ procedure occurring elsewhere.