Intl Legal Guide To Corp Recovery & Insolvency

The International Comparative Legal Guide to:
Corporate Recovery & Insolvency 2009

A practical insight to cross-border Corporate Recovery & Insolvency
Published by Global Legal Group with contributions from:

LEX Alexiou & Kosmopoulos Law Firm Ali Budiardjo, Nugroho, Reksodiputro Anderson Mori & Tomotsune Blake, Cassels & Graydon LLP Bonelli Erede Pappalardo Bredin Prat Cervantes, Aguilar-Alvarez y Sainz, S.C. Clifford Chance CIS Limited Davis Polk & Wardwell De Brauw Blackstone Westbroek Dillon Eustace Dittmar & Indrenius DSK Legal Edward Nathan Sonnenbergs Elvinger, Hoss & Prussen Estudio Uriburu Bosch & Asoc. Ferenczy / Gide Loyrette Nouel Georgiades & Mylonas Gorrissen Federspiel Kierkegaard Grasty Quintana Majlis & Cia. Hengeler Mueller Jadek & Pensa Lee & Ko Lenz & Staehelin Leoni Siqueira Advogados Lydian Mannheimer Swartling Advokatbyr Meitar Liquornik Geva & Leshem Brandwein Ozannes Pachiu & Associates Paul Varul Attorneys-at-Law Schnherr Srvulo & Associados Siemiatkowski & Davies Slaughter and May Ura Menndez White & Case
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The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2009 General Chapters:
1 2 The Valuation Issue and English Schemes of Arrangement- Sarah Paterson, Slaughter and May 1 Valuation in Chapter 11: Overview and Tools for Consensual Resolution - Marshall S. Huebner & Damian S. Schaible, Davis Polk & Wardwell 5
Contributing Editor
Country Question and Answer Chapters:

3 4 5 6 7 8 9 Argentina Austria Belgium Brazil Canada Chile Cyprus Estudio Uriburu Bosch & Asoc.: Fernando Bosch & Rafael Algorta Schnherr: Dr. Wolfgang Hller Lydian: Peter De Ryck & Tom Geudens Leoni Siqueira Advogados: Antonio Carlos Monteiro da Silva Filho & Cristiano Rodrigo Del Debbio Blake, Cassels & Graydon LLP: Susan M. Grundy & Steven J. Weisz Grasty Quintana Majlis & Cia.: Jos Francisco Snchez & Eduardo Marchi 11 14 19 27 32 40
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EDITORIAL
Welcome to the third edition of The International Comparative Legal Guide to: Corporate Recovery & Insolvency. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of corporate recovery and insolvency. It is divided into two main sections: Two general chapters. These are designed to provide readers with a comprehensive overview of key valuation issues affecting corporate recovery and insolvency procedures in England and Wales and the US. Country question and answer chapters. These provide a broad overview of common issues in corporate recovery and insolvency in 40 jurisdictions. All chapters are written by leading insolvency lawyers and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Sarah Paterson of Slaughter and May, for her invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.co.uk.
Alan Falach LL.M Managing Editor Global Legal Group Alan.Falach@glgroup.co.uk
Chapter 1
The Valuation Issue and English Schemes of Arrangement

Slaughter and May
Sarah Paterson
Introduction
Marshall S. Huebner and Damien S. Schaible, in their chapter Valuation in Chapter 11: Overview and Tools for Consensual Restructuring later in this guide, describe how questions of valuation are determined in disputes between senior and junior creditors in the US Chapter 11 process and the dynamic which that produces in negotiations between creditors. As Messrs Huebner and Schaible describe, a framework exists in Chapter 11 for settling disputes about valuation between senior and junior creditors and, ultimately, for the court to determine the right allocation of value as between them in the event that a consensual resolution cannot be reached. By contrast, the differing structure of the English insolvency regime, and the absence of the absolute priority rule which has done so much to drive the development of Chapter 11 in this area, means that England does not have such a framework. Consequently, questions of valuation are far less developed in English jurisprudence in this area. Nonetheless the question of value is essential to any restructuring and several recent cases in the English courts - focusing on the types of complex capital structure which Messrs Huebner and Schaible describe have had, at their heart, disputes over valuation.
identifies with whom it is proposing to make the compromise and it identifies the class or classes of creditors to whom the proposal is to be put. It is important, at this point, that the creditors are correctly divided into the appropriate classes, the classic test for this being set out by the court in Re Hawk Insurance [2001] EWCA Civ 241. In that case, Chadwick LJ stated that a class must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. The court held that when applying this test, one must consider (i) the rights which are to be released or varied under the proposed scheme, and (ii) the new rights (if any) which the proposed scheme gives to those parties whose rights are to be released or varied. When dealing with a scheme for a company with a complex capital structure, the operation of this test usually results in creditors with differing levels of seniority constituting different classes. Senior secured creditors might therefore form one class, senior unsecured lenders another class, and mezzanine or subordinated creditors will form a third class. Once the court has concluded that the scheme classes are properly constituted, meetings are called and the scheme proposals are put to each of the classes of the company's creditors. It is necessary that the proposals are approved by each class by a majority in number representing at least three quarters by value of those present and voting. If the proposals are approved at the meeting or meetings, a further application is made to court to obtain an order sanctioning the compromise or arrangement. At the sanction hearing the court will consider whether the meeting or meetings have been summoned and held in accordance with the principles in Re Hawk and have been approved by the requisite majority. The court will also, to some extent, consider the fairness of the scheme in light of those who did not approve the proposals at the meeting or meetings. The classic and much quoted formulation as to whether a court should sanction a scheme was set out by Plowman J in Re National Bank Ltd [1966] 1 WLR 819: In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with secondly, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. It is a critical point that no cram-down mechanic exists in an English scheme of arrangement. If a class of creditors, properly constituted, does not approve the proposed scheme then the scheme
1. English Schemes of Arrangement

Historically, when it has become necessary to restructure a company's balance sheet, most typically by a debt-for-equity swap in respect of some or all of a company's debt, creditors in English law governed situations have tended to agree the restructuring without resorting to any form of process. However, high voting thresholds in many classes of debt issued in the last cycle, coupled with divergent interests amongst the creditor groups (who may range from banks which bought at par to funds which bought at severely depressed prices) and the sheer complexity of the capital structures have meant that more and more companies have resorted to using a scheme of arrangement in part or in whole to implement a restructuring. A scheme of arrangement is a process by which a compromise or arrangement becomes binding as between a company and its creditors or, possibly, only those classes of its creditors with whom the company chooses to make the compromise or arrangement. We will return to this latter point which has been important in a number of cases. However, first it may make sense to describe the stages of a scheme of arrangement. The first stage is an application to the court under section 895 of the Companies Act 2006 (the Act) for an order that a meeting or meetings of creditors be summoned. At this point, the company
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senior lenders. This left the junior lenders behind in the old rump, their debt claims being worthless. Objections to this structure were raised at the first court hearing (in relation to the constitution of classes) but Mr. Justice Norris held that the purpose of that hearing was only to approve the convening of the class meetings; it was not a forum to address legal challenges or lender discontent. Ultimately, the junior lenders did not choose to mount a challenge at the final sanction hearing. As discussed below, it is difficult to challenge an enforcement sale by an administrator by raising the types of future value argument which Messrs Huebner and Schaible refer to.
will fail and the court has no discretion to approve it at the third stage. This contrasts with the position in the US which Messrs Huebner and Schaible describe where, although the junior creditors may "have their day in court" if they wish to oppose a plan, ultimately once the court has heard arguments as to valuation, it is open to the court to approve the plan notwithstanding their objections. It may be thought, therefore, that it is not possible to use the English scheme of arrangement to impose a scheme on junior creditors.
2. The English Scheme of Arrangement and a Pre-pack

However, as mentioned above, it is not necessary to propose a scheme of arrangement to all classes of a company's creditors. It is therefore possible to develop a restructuring plan that only involves senior classes of creditors, and which combines the English scheme of arrangement with a further sale process in order to strand the junior debt in the rump insolvent company. This sort of structure was first pursued in the case of MyTravel Group plc [2004] EWCA Civ 1734, in which certain junior creditors of the company objected to the equity allocation offered to them as part of a consensual restructuring. The structure adopted in MyTravel was in turn a variation on that used in In re Tea Corporation, Limited [1904] 1 Ch. 12 (save that the Tea Corporation scheme was used to cut out ordinary shareholders, rather than a class of creditors), in which the Court of Appeal held that as the ordinary shareholders had no interest in the assets of the business, their dissent from the scheme was immaterial. Given the difficulty of implementing a consensual restructuring in the face of these objections, in MyTravel the company proposed a scheme of arrangement to its senior creditors but not its subordinated bondholders. Although the structure undertook a number of twists and turns for reasons which it is not necessary to consider here, ultimately MyTravel proposed a scheme pursuant to which, after restructuring the senior debt, the business and assets of MyTravel would be sold to a newly incorporated company owned by its senior lenders leaving its junior lenders behind with effectively worthless claims against the legacy company. The subordinated bondholders challenged this structure at first instance and in the Court of Appeal. The question was ultimately settled by the Court of Appeal holding that it was not necessary to put a scheme of arrangement to every class of a company's creditors. As such, at the initial court hearing the subordinated bondholders could not object to the convening of the class meetings. It may be that they would subsequently have been able to raise challenges to the fairness of the scheme at the sanction hearing or have been able to challenge (as a transaction at an undervalue) the price at which the sale of the business and assets was concluded, but none of this was a relevant issue at the initial stages. In the event, the threat of the implementation of this structure caused the subordinated bondholders to agree to a consensual restructuring (and a much lower equity allocation than they had initially sought) outside a scheme of arrangement, meaning that the scheme did not need to proceed. More recently, McCarthy & Stone (a distressed company the business of which is the development of retirement homes), adopted a very similar restructuring which completed in April 2009. McCarthy & Stone proposed a scheme of arrangement only to its senior debt, leaving its junior creditors to receive nothing. Once that scheme of arrangement had been approved, the company was placed into administration purely for the purposes of selling its business and assets to a newly incorporated company owned by the
3. Valuation Issue
This leads to the heart of the valuation issue. In general terms, MyTravel type schemes imply a value to the company's undertaking, which in turn determines relative equity allocation between creditor groups, by posing administration or liquidation as the alternative to the implementation of the scheme. As such, it is the price which an administrator of a company could realise for its business that is treated as the appropriate benchmark. An administrator of a company, in selling its business and assets, is bound to obtain the best price reasonably obtainable but, unless it is possible to construct an argument that he has the necessary funding and will be preserving value by trading the business for a significant period of time in administration in order to achieve a sale in the future, the focus in challenging an administration sale will be on the market value of the business today rather than the sorts of future going concern or post-restructuring enterprise value to which Messrs Huebner and Schaible refer. In this respect, it is more or less irrelevant that the market for a distressed business is likely to yield a depressed price. This stands in stark contrast to the position in the US, where the going concern value of the business is central and where bankruptcy courts are concerned that market value is flawed because markets tend systematically to undervalue distressed companies simply because they are distressed (Kerry O'Rourke, Survey: Valuation Uncertainty in Chapter 11 Reorganizations, 2005 Colum. Bus. L. Rev. 403, 419 (2005). In the MyTravel case, the judge at first instance did consider the issue of whether the bondholders had an economic interest in the company and concluded that it was nil based largely on a counterfactual of the companys insolvency. However, as mentioned above, the Court of Appeal decision turned on the fact that the company had not chosen to make the bondholders party to the scheme and, as a result, no challenge could arise at the first stage relating to whether the classes were improperly constituted based on the fact that the bondholders were not included within the class. The Court of Appeal noted that the judges remarks on economic value at the first hearing were plainly obiter dicta. And Mr. Justice Norris, in McCarthy & Stone, held that the proper forum for legal challenges to the scheme itself was at the sanction hearing at the third stage. Since the MyTravel decision, the European High Yield Association has been lobbying for support for the view that the US approach ought to be adopted and that there ought to be a place in the English courts for valuation disputes based on going concern value. Their argument is that it is wrong that senior lenders, as a result of an equity allocation based on a depressed price, retain all of the value which may, once the distress passes, be sufficient to repay them many times over whilst junior creditors receive nothing, particularly where the value break is high in the capital structure and the vast majority of the creditors are out of the money. But opponents of this view argue that this outcome is simply the
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There may be costs for pursuing a pre-packaged administration structure which in all but the most distressed cases senior lenders would prefer to avoid and, as a result, they would prefer to give some value to junior creditors rather than pursue this more complicated route. Notwithstanding the fact, therefore, that English law has tended to focus on the enforcement value alternative for creditors rather than future value, the same dynamic of causing the parties to try to agree a consensual restructuring where possible does, to a certain extent, exist.
effect of the capital structure for which the junior creditors contracted. As such, if the ability to enforce has arisen (either because of an event of default, at maturity or because of liquidity concerns), the current market value is the appropriate counterfactual, and it ought to be the senior lenders who are the first to equitise who retain the lion's share of the company. The argument is made that a system based on future going concern value enfranchises those who ought not to be enfranchised.
4. The English Approach and Consensual Restructuring

Given all of this, the reader could be forgiven for assuming that in an English restructuring there is never any need to give any value to junior creditors, unlike the system which Messrs Huebner and Schaible describe based, as it is, on the junior creditors either approving the plan or having their day in court. However, as Messrs Huebner and Schaible ably explain, the issue of a valuation dispute is far from straightforward and lenders will often wish to avoid the valuation question altogether. For this reason, it may very well be better to achieve a consensual resolution rather than litigate over value. And this is where the UK and the US systems do to some extent converge. Although in some cases on a value today basis, it will be absolutely clear that the junior creditors are out of the money, that will not always be a straightforward question. There remains the risk of a challenge at the sanction hearing in the scheme process and, particularly as questions of valuation are not well developed in the English scheme process, there is the potential for litigation uncertainty at this point. Furthermore, there is the risk of a challenge to the administration process. Moreover, a pre-packaged administration itself may result in higher costs and cash leakage.
5. Conclusion
Although the English approach to valuation questions is in many ways fundamentally different from that in the US, based as it has been on the alternatives for the lenders today rather than the future value of the business, in many cases the same dynamic of encouraging a consensual restructuring rather than a more time consuming, complex and potentially costly process does to a certain extent still exist. It would be interesting to undertake a comparative study of the sorts of equity allocation which are offered to junior creditors in the US (against the backdrop of the possibility of a valuation dispute based on future value) as compared with the values given to junior creditors in consensual restructurings in the UK (against the alternative backdrop of a pre-packaged administration sale of the business to a newly incorporated company owned by senior lenders). Perhaps that is something which we can undertake after the current economic downturn has passed.

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Sarah Paterson
Slaughter and May One Bunhill Row London, EC1Y 8YY United Kingdom
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Sarah Paterson specialises in financing, restructuring and insolvency work. She has advised on a wide range of restructurings and insolvencies in recent years, acting for debtors, creditors and insolvency practitioners and on both international and domestic matters.
Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. It has offices in London, Paris, Brussels and Hong Kong, as well as close working relationships with leading independent law firms around the world, which enable it to provide clients with first class and seamless legal advice worldwide. Slaughter and May has extensive experience in international restructurings and insolvencies, frequently involving complex cross-border issues, as well as advising on high profile domestic cases.
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Chapter 2
Valuation in Chapter 11: Overview and Tools for Consensual Resolution

Davis Polk & Wardwell
Marshall S. Huebner
Damian S. Schaible
Introduction
One of the cornerstones of the U.S. Chapter 11 process is the absolute priority rule, which requires that, unless they consent otherwise, junior creditors may not receive any value on account of their claims unless senior creditors are paid in full. The problem is that it can be difficult to determine whether a given class of creditors is paid in full. In cases where the currency of payment is debt or equity in a going-concern, valuation of the business underlies this important determination. But the valuation of a going-concern is based in part on future performance, and determining that value is not an exact science. The bigger and more complicated the business, the more inexact the science. When the parties-in-interest in a U.S. Chapter 11 case cannot agree on a valuation, it is up to the bankruptcy court, relying on the testimony of dueling and contradictory experts hired by the various parties, to determine the debtors value. The valuation of a large company in bankruptcy is a process fraught with uncertainty. Judge D. Michael Lynn of the U.S. Bankruptcy Court for the Northern District of Texas captured the uncertain nature of bankruptcy valuation in his oft-cited opinion in the 2005 Chapter 11 case of Mirant Corporation (Mirant), where he wrote that valuing a company is an exercise in educated guesswork [with] too many variables, [and] too many moving pieces in the calculation of valuefor the court to have great confidence that the result of the process will prove accurate in the future. In re Mirant Corp. (Mirant), 334 B.R. 800, 848 (Bankr. N.D. Tex. 2005). In the current economic climate, valuation in Chapter 11 is even more complicated, and often more critical, than ever before. During the past decade, in part as a result of extraordinarily strong credit markets, many companies became highly leveraged, often through the use of multilayered capital structures. Now, as a result of the global economic downturn, a great number of these companies are, or soon will be, seeking refuge in Chapter 11. There will be an unprecedented number of parties competing for pools of assets that are rapidly shrinking in value. The increasing difficulty and importance of the valuation question, combined with its subjective and imprecise nature, means that extremely protracted and expensive valuation litigation will dominate some - or many - cases in the coming wave of restructurings. Having the tools to understand and hopefully resolve these issues outside of litigation can result in significant efficiency gains. This article discusses some of these tools. Beginning by charting the jurisprudential and legislative basis for valuation and then examining how valuation disputes are commonly resolved by bankruptcy courts, we discuss why consensual resolution of valuation disputes is usually preferable to litigated resolution, and explore how consensual resolution can be
facilitated through an understanding of the differing goals of the various parties-in-interest and a willingness to explore creative solutions to valuation disputes.
I. Why the Valuation Question is Posed: The Absolute Priority Rule

The need to value a debtor in a Chapter 11 proceeding stems from the absolute priority rule, which requires that claims senior in priority be paid in full before those junior receive any value, and that junior claims be paid in full before equity holders receive any value. The rule arose as the result of a series of U.S. Supreme Court decisions in the early 20th century. The most important of these decisions were Northern Pacific Ry. Co. v. Boyd (Boyd), 228 U.S. 482 (1913) and Case v. Los Angeles Lumber Products Co. (Case), 308 U.S. 106 (1939). In Boyd, the U.S. Supreme Court held that a plan of reorganisation could not impair junior creditors unless they had approved the plan or had their day in court. Over time this became known as the fair and equitable principle. However, Boyd left unanswered the question of the circumstances in which a court-approved plan of reorganisation that lacked junior creditor approval was acceptable. This question was taken up and answered by the U.S. Supreme Court in Case. In Case, Justice Douglas, writing for a majority of the Court, held that the fair and equitable principle required that each creditor have its full right of priority against the corporate assets. Case at 122. The principles articulated in Boyd and Case were codified in 1129 of the modern U.S. Bankruptcy Code and serve as the foundation for the absolute priority rule. Once a bankruptcy proceeding is commenced, the absolute priority rule requires that creditors be paid according to their relative priority (meaning their right to payment from the assets of the debtor when there is a conflict with another creditor). Relative priority is governed by the U.S. Bankruptcy Code, which divides creditors into different classes and mandates their treatment. As a basic framework, the U.S. Bankruptcy Code provides that secured creditors are paid first to the extent of their collateral, followed by administrative (post-petition) creditors, certain priority creditors (e.g., certain claims by employees), general unsecured creditors and, finally, equity holders. The absolute priority rule operates like a series of stacked champagne glasses, requiring that the glasses of the senior creditors that are first in line get filled completely before allowing any value to cascade down to the glasses of lower-ranking creditors. Prior to 1978, Chapter X of the old U.S. Bankruptcy Act required the absolute priority rule to be met in every reorganisation. In 1978, the Bankruptcy Act was replaced with the modern Bankruptcy

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Code, and in connection therewith, the U.S. Congress effected a number of important changes to the U.S. bankruptcy system. One of these changes included the absolute priority rule. Congress having determined that the old scheme was too rigid, under the modern Bankruptcy Code, senior classes can accept a plan that provides a return to junior classes even when senior classes are not paid strictly according to the absolute priority rule. Senior classes may have a number of strategic reasons for allowing junior classes to be paid in this manner. For example, junior classes may be comprised of trade creditors or business owners with institutional knowledge necessary to facilitate the debtors postbankruptcy operations. Receiving value in a plan of reorganisation may induce these groups to continue their relationship with the debtor. Alternatively, providing some payout to junior classes can also be an effective means of reaching consensual resolution of a plan of reorganisation, thereby avoiding the need for litigation over enterprise value or over the amount or validity of the senior lenders liens or claims. The absolute priority rule applies today under the Bankruptcy Code in all reorganisations where the different classes of creditors are unable to agree on a plan structure. For instance, the rule comes into play when a class of creditors votes against, or is deemed to have rejected, a proposed plan of reorganisation. A class of creditors is deemed to reject a plan of reorganisation if it receives no value under the plan. It rejects the plan if either 1/2 of the claimants in number or 1/3 in amount of those voting vote against the plan. See 11 U.S.C. 1126(c),(g). In the face of objecting classes of creditors, the debtor can still gain court approval for its proposed plan of reorganisation, so long as at least one class of impaired creditors who are not insiders accepts the plan and certain other tests, including the absolute priority rule, are met with respect to the dissenting classes of creditors. See 11 U.S.C. 1129(b)(2)(B)(ii). The expected return in a plan that complies with the absolute priority rule provides a starting point for creditors in negotiations, because creditors know that if the negotiations go awry, a plan complying with the rule can always be approved and implemented over their objections.
Valuation in Chapter 11
subjective views of the circumstances and the testimony to make a determination based on less than perfect information. Although judges may be predisposed to approach these issues in a certain way, their past behaviour gives no guarantee as to how they will decide valuation questions in the future. The role of a bankruptcy judge in a Chapter 11 case will be discussed further in Section IV.A. Further contributing to the uncertainty of the valuation process is the fact that the experts brought in to opine on value are not neutral and impartial arbiters; rather, they are hired by the goal-oriented parties-in-interest. Some variance in the valuations of different experts would be expected in any event, as different experts may be considering different factors even if using the same valuation method. See e.g., In re American Homepatient, Inc. 298 B.R. 152, 187 (Bankr. M.D. Tenn. 2003), affd, 420 F.3d 559 (6th Cir. 2005) (valuation of property is an inexact science . . . and variance of opinion by two individuals does not establish a mistake in either). However, given that experts are likely to be inclined to arrive at valuations suiting their clients, some of the variance that occurs in certain cases may result from subtle or unsubtle bias. See, e.g., Mirant at 815 ([the expert] has served as an advisor to the debtors since before commencement of these Chapter 11 casesit is reasonable to infer that [the expert] would have some commitment to a strategy (and its factual underpinnings) that he helped devise). To minimise the effect of potential bias, courts will often discredit experts who receive success fees, as this is seen as creating a conflict of interest and giving the expert too much incentive to align their valuation with their clients interests. See, e.g., In re Oneida Ltd., 351 B.R. 79, 92 (Bankr. S.D.N.Y. 2006) ([the] contingent fee, and the circumstances surrounding it, seriously undermine [the experts] credibility). It is thus before a backdrop of uncertainty that creditors and bankruptcy courts must decide how to value debtors. This uncertainty is exacerbated by the fact that there are several approaches to valuation, none of which is universally accepted, and each of which has strengths and weaknesses. Understanding the different approaches to valuation, and why each is imperfect, is an important step in understanding why consensual resolution is often preferable.
II. Valuation Methods

Valuation disputes stem in large part from uncertainty associated with the valuation process. As Judge Lynn put it in Mirant, valuation is at times not much more than crystal ball gazing. Mirant at 848. The bankruptcy court in the 1989 Chapter 11 case of Pullman Construction Industries similarly opined that all valuations of going business value are only educated estimates. In re Pullman Const. Indus., 107 B.R. 909, 932 (Bankr. N.D. Ill. 1989). As one author has described it, there are two primary causes for this uncertainty: actual uncertainty about the value of the debtors business and judicial valuation uncertainty, meaning uncertainty about how the judge will decide to value the business. Kerry O Rourke, Survey: Valuation Uncertainty in Chapter 11 Reorganizations, 2005 Colum. Bus. L. Rev. 403, 414-415 (2005). Actual uncertainty stems from the fact that valuation requires an estimate of a business future prospects and the future is inherently uncertain. Sources of actual uncertainty include imperfect information about the market for a debtors goods or services, the abilities of a debtors management team, and other factors relevant to the debtors business. Id. at 415. Judicial valuation uncertainty stems from the fact that it is the subjective opinion of the bankruptcy judge that will ultimately determine the debtors value. A bankruptcy judge is not making a mathematical calculation of the debtors worth, but rather relies on his or her personal and
A.
Discounted Cash Flow Method
A popular method for valuing a going-concern is the discounted cash flow method (DCF), which involves arriving at a present value estimate of the companys future earnings. See, e.g., Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 526 (1941) (The criterion of earning capacity is the essential one if the enterprise is to be freed from the heavy hand of past errors, miscalculations or disaster, and if the allocation of securities among the various claimants is to be fair and equitable.). Under this method, one estimates the relevant companys future free cash flow and discounts it using a discounting factor such as the weighted average cost of capital, or a modification of that number that takes into account risk, to arrive at a present value. The obvious problem with this method is that predictions as to future earnings are always questionable, as a company could perform substantially better or worse than its projections would indicate. This is particularly true in the case of a reorganised entity that has not yet been tested in its new form or with its new management. Additionally, the discount factor could be inaccurate by failing to take into account certain risk factors or future events, such as inflation. Therefore, two parties, both using DCF to value a company, could produce vastly different results depending on their subjective views of future events.
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B. Comparable Transactions Method
involves a large public company, the process can be incredibly complicated, and accordingly the costs will be high. There is no shortage of examples of protracted valuation litigation in U.S. Chapter 11 cases. See, e.g., In re Nellson Nutraceutical, Inc., No. 06-10072 (CSS), 2007 Bankr. LEXIS 99, *3 (Bankr. D. Del. Jan. 18, 2007) ([t]he court devoted 23 trial days to determine the enterprise value of the [debtor]); Mirant at 809 ([t]he Valuation Hearing . . . continued for 27 days over . . . 11 weeks). Even if a party can get a verdict in its favour, there is always the likelihood that competing parties-in-interest will appeal. This is especially likely when the debtor company is large, and both junior and senior claimants have substantial claims against it. The prospect of a significant recovery that outweighs the direct costs of litigation provides an incentive to keep the parties fighting. Indirect waste results from the fact that while the purported value of the debtor company is being litigated, its actual value is gradually declining as a result of externalities implicit in the bankruptcy process. While the litigation is ongoing, critical suppliers may not want to do business with the debtor because of heightened fears that they will not get paid, customers may be reluctant to purchase its products because of fears that warranties will not be honoured, and essential employees may decide to seek other opportunities because of uncertainty surrounding their jobs. Further, the debtor is also incurring significant costs in the form of professional fees for its lawyers and other advisors as well as having to pay the litigation costs of certain other parties, such as the unsecured creditors committee, as required by 503(b)(3) of the Bankruptcy Code. These factors will contribute to a decline in the real value of the debtor, which is detrimental to all parties-in-interest. While the various claimants are squabbling over the size of the piece of the pie each will get, the debtor often has to remain in Chapter 11, with the entire pie shrinking, thereby leaving less for all involved. This is exactly the scenario that was feared in the 2003 Chapter 11 case of Conseco Corporation (Conseco), where the debtor, a large insurance holding company, faced the prospect of regulatory action if its reorganisation was not completed quickly. In re Conseco Corp., (Conseco) No. 02-49672 (Bankr. N.D. Ill., 2003). This fear prompted the bankruptcy court overseeing the case to mandate a process designed to arrive at a consensual resolution of the valuation dispute that was holding up the debtors reorganisation. Senior creditors ultimately had to share with junior creditors some of the value that might have otherwise been owing to them in order to arrive at a consensual resolution.
A second method used by courts to value a company is the comparable transactions method, which, as the name suggests, uses prices from analogous third-party sale transactions to value the enterprise. This method avoids the problems presented by DCF, because it does not involve predicting the future. However, it is often of limited utility because it can be used only in cases where comparable transactions exist and information about them is available. The comparable transactions approach can also be problematic because no two companies or transactions are ever exactly alike. Even very similar companies may be valued differently because of factors such as goodwill or the value of their trademarks. This is exacerbated in a Chapter 11 situation, as the debtor company will be looked at differently from similar companies sold in non-distressed situations. In some cases, the debtor company itself may have been marketed, and bids for the company could be used to derive its value. In such a case, the court will have to scrutinise the reasons why the proposed transaction did not materialise and whether new factors need to be taken into account, such as additional capital (e.g., exit financing), new management or changes in the market that would make it inappropriate to use the previous valuation. Historically, U.S. courts have not been unanimously enthusiastic about using the market approach to value a bankrupt company. See e.g., In re Penn Central Transp. Co., 596 F.2d 1102, 1115-6 (3d Cir. 1979) (holding that market prices are not an adequate measure of enterprise value in bankruptcy). However, in Bank of America National Trust and Savings Assn v. 203 North LaSalle Street Pship, 526 U.S. 434, 456-7 (1999), the U.S. Supreme Court strongly validated the use of market-based approaches to valuation, at least where there is a competitive bidding process with multiple bidders.
C.
Securities Valuation Method
The value of a debtors securities could provide information about the debtors intrinsic value if such securities have continued to trade in a public market during the debtors bankruptcy. Using this method assumes that the market is liquid and reliable, and is not subject to the risk of market manipulation or irrational behaviour. Even assuming that there is a liquid market for one type of security, such as the debtors stock, does not mean that there will be a market for others, such as the debtors bonds. In a bankruptcy situation it is likely that the relevant securities will be the debtors bonds, debts and other claims on its assets, as they often convert into an ownership stake in the debtor post-reorganisation, while preexisting equity will be rendered worthless. However, the market for claims in a bankruptcy situation is limited because their value is uncertain, which frightens away many potential buyers. In the absence of a public market for all relevant securities, the utility of this valuation method is questionable.
IV. Tools for Reaching Consensual Resolutions to Disputed Valuations

In order to reach a consensual resolution to a disputed valuation, it is important to have an understanding of the different goals and motivations of the various parties-in-interest and to be aware of creative solutions that can facilitate a resolution. It is primarily the tension between the parties-in-interest that makes valuation a difficult process. For example, senior creditors will invariably prefer a lower valuation so that they can claim more of the debtors ownership or assets, and junior creditors will want the opposite. Arriving at a consensual resolution in the face of this tension requires consideration of the goals of the various parties-in-interest as well as the motivations that may drive them toward litigation or consensual resolution. The use of creative solutions, typically involving some method of reducing or eliminating valuation uncertainty, can facilitate a consensual resolution by helping to avoid the valuation question altogether.
III. Why Consensual Resolution of the Valuation Question is Better Than Litigation
Litigation over enterprise valuation is costly and often destructive of value. While an individual claimant may benefit from advancing and prevailing on a claim for a valuation favourable to his or her interests, claimants as a whole always lose out because the litigation creates both direct and indirect waste. Direct waste is created because of court costs, attorneys fees and the costs of discovery and expert testimony. If the valuation

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A. Understanding the Key Parties-In-Interest
Junior creditors that realise they will receive little or nothing in a proposed plan may also be incentivised to threaten litigation. Threatening litigation, or actually litigating, allows junior creditors to exercise leverage against senior creditors as a result of both the direct and indirect waste caused by litigation. Douglas Baird and Donald Bernstein refer to this incentive as an option that has value, because by requesting a valuation hearing the junior creditors can either prompt a settlement from the senior creditors or possibly obtain a judicial valuation that puts them in the money. Douglas G. Baird and Donald S. Bernstein, Enterprise Valuation and the Puzzling Persistence of Relative Priority Outcomes in Corporate Reorganization, Univ. Cal., Berkeley Law and Econ. Spring Workshop 35 (2005). iii. The Debtor-As Represented by Its Management The debtor is the central figure in a U.S. Chapter 11 case. In addition to being the focus of the reorganisation to be effected therein, the debtor uniquely has a fiduciary duty to all parties-ininterest in the case. See Smart World Comm. v. Juno Online Servs. (In re Smart World Tech.), 423 F.3d 166 (2d Cir. 2005). However, the debtor is an entity and as such is represented by its management. A debtors management has an important role in any valuation of the debtor, because it is managements projections as to the companys value and future performance that are the starting points for valuation by the other parties-in-interest. Although the debtor has a fiduciary duty to all parties-in-interest, and should always act fairly and impartially in that regard, in practice this is not always the case. Management may, in certain circumstances, act in a self-interested manner. The current management of a debtor may want to retain their positions and/or secure their legacy and reputation vis--vis the enterprise and as such may be more likely to favour a reorganisation for the debtor rather than a liquidation. Further, management may tend to align with certain parties-ininterest to the detriment of others. For example, in the 1990 Chapter 11 case of National Gypsum Company, which eventually made its way to the Texas Supreme Court, junior creditors alleged that management had intentionally undervalued the debtor by hiding cost savings of $30 to $40 million, so as to benefit senior note holders in exchange for retaining their jobs after the reorganisation. Browning v. Prostok, 165 S.W.3d 336 (Tex. 2005). Putting aside any self-interested inclinations to the contrary, a debtors fiduciary duty to all parties-in-interest should in many cases provide management a strong incentive to reach consensual resolution of valuation disputes whenever possible. Through consensual resolution, management can keep the value of the debtor from declining during a drawn-out litigation. iv. The Judge In a valuation dispute, the judge is the neutral arbiter who reviews the competing proposed valuations put before him or her and makes the ultimate value determination. Judges are assumed by some to be experts in enterprise valuation. However, even if a bankruptcy judge has been through numerous valuation proceedings, he or she will not in most instances be an expert on the debtors industry, nor will he or she be an expert in economic forecasting. The judge will typically rely on the testimony of experts, which as discussed above can be biased in favour of their client. Resolving a valuation dispute, which a judge has a reputational stake in doing correctly, can be an unpleasant experience for a judge who is torn by two seemingly equally persuasive value projections. Further, bankruptcy judges generally favour expedient resolutions that dont result in the costs and time loss of litigation and, frankly, dont continue to encumber their often crushing dockets. Because of these concerns, a judge may well favour - and encourage - a consensual resolution of a valuation dispute, as this will avoid the laborious process of evaluating the arguments of competing
While there are a great many parties-in-interest in a U.S. Chapter 11 case, this section focuses on five of the most important in many valuation disputes: senior creditors, junior creditors, the debtor (as represented by its management), the bankruptcy court judge and the attorneys. i. Senior Creditors Senior creditors are in an advantageous position due to the absolute priority rule, which allows them to insist on being paid in full before any payments are made to junior claimants. The fact that senior creditors are entitled be paid in full before other classes of claimants receive any value provides a strong incentive for them to advocate for a low valuation, which will enable them to obtain a greater percentage of the reorganised debtors equity. A senior creditors position may also provide it with an incentive to seek quick and expedient resolutions to the bankruptcy process that may not fully maximise the debtors value. For example, senior creditors are highly motivated to accept a purchase offer for the debtors business immediately and obtain a full recovery for themselves and little or nothing for junior claimants, as opposed to waiting months or even years to permit a more fulsome sale or reorganisation process that might ultimately result in a higher recovery for junior classes but with substantially increased risk and delay to the senior creditors. One must also bear in mind that a class of senior creditors is usually not monolithic but instead is likely to be made up of members with differing incentives. For instance, an original lender in a senior credit facility or an investor that bought its position at or near par is likely to view a given restructuring very differently from a distressed investor that bought the same debt at 20 cents on the dollar after the borrower began to experience financial problems. A valuation leading to a 30 cents on the dollar recovery may be a disaster for one and a home run for the other. Also, since distressed investors tend to focus heavily on the time value of the money they have invested and are less likely to have institutional relationships with the debtor, they may well be much more focused on a quick process and payout than an original lender that may be looking at their claim as long-term equity in the reorganised borrower. ii. Junior Creditors The incentives of junior creditors are often opposite those of senior creditors. Since junior creditors know that the absolute priority rule will keep them from receiving any value if the senior creditors are not paid in full, junior creditors will insist on a high valuation for the debtor so that they can share in the recovery with senior creditors. Further, because junior creditors often would not be in the money should the company be sold today, they may well seek to postpone the timing of a potential sale or insist on a reorganisation. Just as with senior creditors, junior creditors may have an incentive to insist on their preferred valuation even if such valuations do not ultimately prove accurate. An example of this is seen in the 2003 Chapter 11 case of Exide Technologies, where the unsecured creditors committee proposed a value of $1.4 to $1.6 billion for the debtor, while the debtor itself projected a value of only $950 million. In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003). The court, persuaded by the unsecured creditors committee, authorised a plan that set the debtors enterprise value at $1.5 billion, and allocated a significant amount of shares to the unsecured creditors. Within a year, the value of the reorganised debtors stock had fallen more than 50% from the value implied by the plan, meaning that had the debtor been properly valued, the unsecured creditors would have received nothing.
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experts, the possibility of being wrong in ascertaining the debtors value, and the time and burden of litigation. v. The Attorneys As repeat players in valuation disputes, attorneys are uniquely positioned to know when consensual valuation will be better for their clients than litigation. For example, an attorney representing senior creditors may view the junior creditors chances of prevailing in a valuation dispute (or an attack on fraudulent conveyance or preference grounds) as significant, and therefore push for consensual resolution to avoid the risk to his client. However, the incentives of attorneys in advocating for consensual resolution may be mixed because of the fees to be gained from litigating the dispute. This incentive may be countered by the fact that attorneys also value their professional reputation, and an attorney who is known as an honest broker that doesnt pointlessly litigate will be better perceived among the bar and other restructuring professionals and may therefore garner more clients.
company, each time valuing it slightly more than the amount proposed by the senior creditors, and each time the senior creditors raised their plan estimate of the total value of the company to exceed the bid. In re E-II Holdings Inc., No. 92 B 43614 (CB) (Bankr. S.D.N.Y. 1992) (unpublished memorandum decision). iii. Auction Approach In certain circumstances where the relevant parties-in-interest cannot agree on a value for the debtors business, it may make sense to simply auction off the business. In this approach, the bankruptcy court would approve a set of procedures for conducting the auction and then the business (or significant parts thereof) are simply put up for sale to the highest bidder. Whether or not a sale is ultimately approved and effectuated, the auction process can help to set a value for the estate. An auction was successfully used in the Chapter 11 case of Adelphia Communications Corporation (Adelphia) where junior creditors believed that a plan proposed by management undervalued the debtor for the benefit of senior creditors. The junior creditors obtained court approval for an auction of Adelphias businesses, which ultimately led to Adelphia being sold to a group led by Time Warner Cable and Comcast Corporation for $17.6 billion. In re Adelphia Communications Corp., No. 02-41729 (Bankr. S.D.N.Y. 2002). iv. Convertible Securities Valuation disputes can sometimes be avoided through the use of strategically-designed convertible securities. Such securities, when issued as part of a plan of reorganisation, can be used to allocate value among competing groups of creditors based on the postemergence market value of the reorganised debtor. For instance, senior creditors, believing that the value of a post-emergence entity will be less than their claims, might receive the common stock of the reorganised debtor in their plan of reorganisation. However, junior creditors, believing that the reorganised debtors business will be worth more than the value of the senior creditors claims, might be granted warrants to purchase shares of common stock in the reorganised debtor at a strike price indicating payment in full for the senior creditors. In this way, if the senior creditors are correct, they will receive the full value of the entity; but if the junior creditors are correct, they will realise value over that required to pay in full the senior creditors. See Douglas G. Baird and Donald S. Bernstein, Absolute Priority, Valuation Uncertainty, and the Reorganization Bargain, 115 Yale L.J. 1930, 1964-1965 (2005). A similar approach was successfully utilised in the Conseco case. Senior creditors in that case believed that the reorganised debtor would be worth significantly less than the value of their claims, so they supported a plan of reorganisation that would have provided little value to junior creditors. However, the junior creditors believed that the entity would be worth enough to pay the senior creditors in full and leave them with the equity in the company. Accordingly, a plan was structured such that the junior creditors received the common stock of the reorganised debtor, while the senior creditors received convertible shares. If the company were not able to redeem the convertible stock by paying the senior creditors an amount sufficient to make them whole by a certain date after reorganization, the convertible stock would convert into common shares and effectively displace the junior creditors. Ultimately, the enterprise value of the reorganised Conseco proved to be substantially higher than the value of the senior debt and, as a result, the junior creditors were able to realise significant value even after the senior creditors were paid in full. Conseco, No. 0249672 (Bankr. N.D. Ill. 2003). Different securities, but to similar effect, were designed to resolve valuation disputes in the 2001 Chapter 11 case of La Roche Industries, In re Laroche Indus., Inc., No. 00-1859 (Bankr. D. Del. 2001), and in the 2008 out-of-court restructuring of Tekni-Plex, Inc.
B.
Creative Solutions
Given the diverse and conflicting goals of the various parties-ininterest, it is often easier and more efficient to bypass the valuation question altogether. Doing so, however, often requires a willingness on the part of the key parties-in-interest to explore creative solutions. This section will briefly discuss a few such mechanics from recent cases. i. Volume Weighted Average Price (VWAP) VWAP is a post-confirmation pricing mechanism that avoids the need for valuation litigation by estimating the value of the debtor and assigning equity based on this estimate. In order to utilize the VWAP method, a number of shares of equity in the reorganised debtor are kept in reserve at emergence and not distributed pending the resolution of the VWAP process. To arrive at a valuation, the court then aggregates the value of all shares traded during a specific period and divides by the number of shares traded. The VWAP share price is then multiplied by the total number of shares to arrive at a value for the company. At the conclusion of the VWAP process, certain classes of claimants are trued-up, or given more shares, based on the actual post-confirmation market value of the debtor and whether the debtors initial valuation was an underestimate or overestimate. Under this approach, senior creditors would initially receive the shares not held in reserve. The shares held in reserve are distributed after the VWAP process to senior creditors if the debtors value had been overestimated or to junior creditors if the value had been underestimated. This approach was used successfully in the 2007 Chapter 11 case of Dana Corporation to determine the value of new shares in the reorganised debtor. In re Dana Corp., Inc., No. 06-10354 (Bankr. S.D.N.Y. 2007). ii. Purchase Approach The purchase approach should be advocated by junior creditors who feel that a senior creditor is intentionally undervaluing the debtor. Under this approach, junior claimants are allowed to purchase claims from the senior claimants at the price the senior claimants assert is the true value. If the junior claimants are correct that the debtor is really worth more than asserted by the senior claimants, they end up with the surplus. It also gives the senior claimants an incentive to be more realistic and not undervalue the debtor, because if they do so they will be bought out by the junior creditors at an artificially low price. This approach was attempted in the 1993 Chapter 11 case of E-II Holdings where a group of junior creditors led by financier Carl Icahn asserted that the proposed plan undervalued the company and gave too much value to senior creditors. The junior creditors made a series of bids for the

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Conclusion
The uncertainty created by the valuation process (or other litigation threats) gives junior creditors a valuable option. However, valuation litigation often has negative consequences for all partiesin-interest as a result of its direct and indirect costs. It is often value-maximising for the parties-in-interest to reach a consensual agreement on plan distribution. By doing so, the debtors value is preserved or enhanced, and there is more value left to be shared. In order to help achieve this efficient result, it is essential to consider
the differing goals and perspectives of the various parties-ininterest, and for the key parties-in-interest to be willing to think creatively in fashioning a plan of reorganisation.
Acknowledgment
The authors would like to thank Arvin Abraham and Andrea Gildea for their extensive and invaluable assistance in the preparation of this article.
Marshall S. Huebner
Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 USA
Damian S. Schaible
Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 USA
+1 212 450 4099 +1 212 450 3099 marshall.huebner@dpw.com www.dpw.com
+1 212 450 4580 +1 212 450 3580 damian.schaible@dpw.com www.dpw.com
Marshall Huebner is co-head of the Insolvency and Restructuring Group at Davis Polk. He has played a leading role in many major domestic and international restructurings and bankruptcies, representing both financial institutions and corporations. He has represented agent banks in several of the largest and most complex U.S. DIP financings including Lyondell ($8 Bl), Enron ($1.5 Bl) and Adelphia Communications ($1.5 Bl). Mr. Huebner recently acted as lead bankruptcy and restructuring counsel to Delta Air Lines in one of the largest and most successful restructurings in U.S. history and is currently advising The Star Tribune Company and Frontier Airlines in their Chapter 11 reorganisations. Mr. Huebner also represents the Federal Reserve Bank of New York and the United States Department of the Treasury with respect to their $150 billion in multiple financings and 79.9% equity stake in the American International Group. Other major bankruptcy proceedings and restructurings in which Mr. Huebner had a major role include Citation, Collins & Aikman, Loral, Polaroid, Magellan Health Services, Ntelos and Crown Paper. Mr. Huebner chaired the Courts Subcommittee of the Committee on Bankruptcy and Corporate Reorganization of the New York City Bar Association. He has been a guest lecturer at Yale Law School and Columbia Law School, is on the faculty of the New York University Advanced Bankruptcy Workshop and on the Board of Advisors of the Yale Law School Center for the Study of Corporate Law. He has authored numerous articles and is presently writing Restructuring the Troubled Company, a full-length book to be published by Oxford University Press in 2009. He attended Princeton University (awarded Fulbright and Rotary Scholarships) and Yale Law School (awarded a Ford Foundation Fellowship). Mr. Huebner has repeatedly been recognised as a leader in the field, including being named Dealmaker of the Year by The American Lawyer in 2007 and 2009.
Damian Schaible is a senior associate in the Insolvency and Restructuring Group at Davis Polk. He has worked on a wide range of corporate restructurings and bankruptcies, representing debtors, creditors, agent banks, lenders, asset purchasers and other strategic parties. His experience spans transactional and litigation matters. Mr. Schaible recently served a lead role in Davis Polks representation of Delta Air Lines in one of the largest and most successful restructurings in U.S. history. He is currently serving as one of the lead lawyers in Davis Polks representation of Frontier Airlines in its Chapter 11 restructuring. In addition to insolvency and restructuring work, Mr. Schaible has worked extensively on complex aircraft finance matters, representing owner participants, portfolio purchasers and lessees. He has also worked on a number of general financing matters, representing borrowers, agent banks and creditors. Mr. Schaible attended the College of the Holy Cross and New York University School of Law. He clerked for the Honorable Danny J. Boggs, Chief Judge of the U.S. Court of Appeals, Sixth Circuit. Mr. Schaible is the chair of the Courts Subcommittee of the Committee on Bankruptcy and Corporate Reorganization of the New York City Bar.
DAVIS POLK & WARDWELL is a global law firm based in New York City. For more than 150 years, our lawyers have advised industry-leading companies and global financial institutions on their most challenging legal and business matters. Davis Polk ranks among the worlds preeminent law firms across the entire range of our practice, which spans such areas as insolvency and restructuring, capital markets, mergers and acquisitions, credit, litigation, investment management, executive compensation, intellectual property and tax. The firm has more than 600 lawyers in offices in New York, Menlo Park, CA, Washington, D.C., London, Paris, Frankfurt, Madrid, Hong Kong and Tokyo. Davis Polk has played a prominent role in many high-profile domestic and international restructurings and bankruptcies, representing debtors, agents to the lenders and other significant parties-in-interest. Representative cases include: Delta Air Lines, Lyondell, Lehman, Tribune, Frontier Airlines, Enron, Adelphia Communications, Delphi, Refco, Conseco, Federal-Mogul, Loral, Polaroid, Collins & Aikman, Meridian Automotive, Bethlehem Steel, Dow Corning, Owens Corning, Johns-Manville, LTV, Drexel Burnham Lambert, Crown Paper, U.S. Office Products, Magellan Health Services and Ntelos. For more information go to: www.dpw.com/practice/risk.htm
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Chapter 3
Argentina
Estudio Uriburu Bosch & Asoc.
Fernando Bosch
Rafael Algorta
1 Issues Arising When a Company is in Financial Difficulties

1.1 How does a creditor take security over assets in Argentina?
a company is not able to comply with its obligations (not just a single one) when due and if that situation cannot be modified just by taking managerial measures, then it must seek for protection under the remedies available in the law.
2.3 On what grounds can the company be placed into each procedure?
If the credit was originally unsecured, the creditor could renegotiate with the debtor and seek for some security or directly go to the court to ask for a pledge or encumbrance.
1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack?
The reorganisation process can only be filed by the company. A debtor cannot ask the company to file it. However, debtors have the right to ask for the company to be placed into bankruptcy if they have the credit instruments to do so (unpaid checks, letters of credit, or similar instruments).
2.4 Please describe briefly how the company is placed into each procedure.
All transactions that are not conducted under fair market conditions or that impose on the debtor duties that can deteriorate its conditions are vulnerable to attach. If the transaction is a fair transaction conducted on an arms length basis, despite giving the other party certain securities in case the company fails to pay, are legal and enforceable.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Argentina?
Please see the answer above.

2.5 What notifications, meetings and publications are required after the company has been placed into each procedure?
Directors are responsible to manage the company with due care and loyalty. If they dont take the correct measures and, because of that, the situation of the company deteriorates, they could be held liable jointly and severally with the company. To become liable, however, they must be declared responsible by a civil or commercial court in a trial to which they must be a part of, having the chance to exercise their defensive right.
In case of a Prior to Bankruptcy Procedure (Concurso Preventivo), the trustee that is appointed by the court sends a letter to each creditor recognised by the debtor, personally notifying about the situations. Additionally, two public notices are published, one in the Official Gazette and the other in a newspaper from the place where the company has its principal place of business. In case of a Bankruptcy Proceeding, only the public notices are posted.
3 Creditors
3.1 Are unsecured creditors free to enforce their rights in each procedure?
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Argentina?
The main types of formal procedure are: Private Reorganisation Process or Acuerdo Preventivo Extrajudicial (APE); or Prior to Bankruptcy Proceeding (Concurso Preventivo).
2.2 What are the tests for insolvency in Argentina?
All creditors must get their credit recognised by filing a formal request to the trustee appointed by the court. Unsecured creditors will get paid pari passu with other unsecured creditors in the terms and conditions as proposed by the debtor and approved by the creditors (in case of a Concurso Preventivo) and with the result of the liquidation of assets in a Bankruptcy Proceeding. They are not entitled to enforce their rights.
There is no formal requisite. The Bankruptcy law states that when

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3.2 Can secured creditors enforce their security in each procedure?
Argentina
A third party could finish the agreement if he didnt receive the notification of the judges authorisation of continuity, within thirty judicial days from the day the judge declares the Concurso opened. He must notify his decision to the trustee and to the debtor. In case of Bankruptcy Proceedings, all agreements are automatically terminated.
Once they get their credit recognised by the trustee they can enforce payment.
Argentina
3.3
Can creditors set off sums owed by them to the company against amounts owed by the company to them in each procedure?
5 Claims
5.1 Broadly, how do creditors claim amounts owed to them in each procedure?
No, set off and compensations are not allowed by the law.
4 Continuing the Business

4.1 Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders.
In both cases (concurso preventivo and Bankruptcy Proceedings), creditors must seek the recognition of their credits to the trustee. To do so they must file a petition describing the relation and giving summary evidence of its credit.
5.2 What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status?
In the Prior to Bankruptcy Procedures (Concurso Preventivo), the company is managed by the Board and controlled by the shareholders under the surveillance of the trustee and authorisation for certain acts from the judge. In the Bankruptcy Proceeding, the Board and the shareholders lose control over the company and the liquidation process will be held by the trustee, who must seek for the judicial approval.
4.2 How does the company finance these procedures?
All the preferences are stated by law. There are special and general preferences. Special preferences have preferential status. Credits arising from the construction or maintenance of assets have privileges over those assets. Labour credits have privileges over finished goods and machinery that exist in the plant. Taxes for certain goods have preferences over those goods. Credits secured with mortgages, liens or warrants over specific goods have privileges over those goods.
5.3 Are tax liabilities incurred during each procedure?
The Concurso Preventivo must be financed by the company. There are some instrument-like payment plans to pay the service of justice (0.75%, 1.5% or 3% over the liabilities). In the Bankruptcy Proceeding all the costs are paid with a right of preference from the liquidation of the assets.
4.3 What is the effect of each procedure on employees?
Tax liabilities exist only in case of Concurso Preventivo where the company continues its operation.
In case of Concurso Preventivo, as a general principle, the labour agreements are not modified. The collective bargaining agreement applicable to the company could be suspended for 30 days. As part of the proposal of reorganisation the debtor could downsize the company and negotiate reductions of the severance owed to the employees, of no more than 50%, with the labour unions. In case of a Bankruptcy Proceeding, the labour agreements are automatically terminated and the former employees will have a special privilege to be paid from the liquidation process before any other creditor. That being said, if there are creditors with mortgages over assets, those assets are not used to cancel labour credits if the secured creditor has not been paid in total.
4.4 What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure?
6 Ending the Formal Procedure

6.1 Is there a process for cramming down creditors who do not approve proposals put forward in these procedures?
Only in case the company cannot get the payment proposal approved, or if it fails to comply with it once approved, is there a cram down process where any interested party registered in the special register opened by the judge, can make a proposal to the creditors and get it approved by them within the due time that they grant him.
6.2 What happens at the end of each procedure?
In a Concurso Preventivo, the debtor may continue with the fulfillment of the agreements in the course of execution, when reciprocal obligations are pending. To do so the debtor must require a judges authorisation, who must make a decision bearing in mind the previous opinion of the trustee. The continuity of the agreement allows the other party to demand the fulfillment of pending obligations up to the date of the filing of the Prior to Bankruptcy Procedure; if not, the agreement could terminate.
The Concurso Preventivo ends when the creditor complies with the payment proposal, as this is when the creditor recovers full administration power. The Bankruptcy Procedure finishes when all the assets are sold and funds have been distributed among the creditors. If the company has no assets then the judge must send the file to the criminal court to investigate if there was any fraud committed by the administrators.
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7 Alternative Forms of Restructuring
7.1 Is it common to achieve a restructuring outside a formal procedure in Argentina? In what circumstances might this be possible? 7.3
Argentina
Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale effected?
Restructuring outside a formal procedure is a common procedure for big companies with mostly financial debts, where the creditors prefer not to go to court because of the terms that the formal procedures take.
7.2 Is it possible to reorganise a debtor rather than realise its assets and business?
8 International
8.1 What would be the approach in Argentina to recognising a procedure started in another jurisdiction?
There must be enough evidence of the existence of the procedure according to the applicable law for it to be recognised in Argentina.
Yes it is. The concurso preventivo is the procedure, by which one can reorganise the debtor business to avoid liquidation.
Fernando M. Bosch
Estudio Uriburu Bosch & Asoc. Av. Santa Fe 1531, 5th Floor City of Buenos Aires Argentina
Rafael J. Algorta
Estudio Uriburu Bosch & Asoc. Av. Santa Fe 1531, 5th Floor City of Buenos Aires Argentina
+5411 4815 9971 +5411 4815 9971 fbosch@uriburubosch.com www.uriburubosch.com
+5411 4815 9971 +5411 4815 9971 ralgorta@uriburubosch.com www.uriburubosch.com
FERNANDO M. BOSCH is a Co Founder, a Member of the Board of Directors and coordinates the Bankruptcy Department of the Firm. Mr. Bosch concentrates his practice on Bankruptcy Matters and Complex Business Litigation. He is an expert in restructurings. Together with Mr. Jos A. A. Uriburu he has assisted several clients in reorganising their capital and debt structures, outside of bankruptcy, to facilitate bootstrap turnarounds and acquisitions. Prior to founding the Firm, he worked as a Court Clerk the Commercial Court N 12, as a Court Clerk for the Commercial Court of Appeal, and as Judge of Commercial Court N 9 of the City of Buenos Aires.
RAFAEL J. ALGORTA concentrates his practice on Corporate Law, Bankruptcy, and Labor matters. He has an intensive experience in all areas of commercial and labour law litigation, and also corporate acquisitions, including the use of bankruptcy proceedings to purchase assets. Mr. Algorta joined the Firm in 1988 and became a Partner in 1995. As a member of The Entrepreneurship Department of the Firm since 1999, he has been the legal advisor of several Start Ups. He is also the legal advisor of some of the most prestigious Entrepreneurship Centers of Argentina, such as the Entrepreneurship Center of the IAE Business School; CEMA; Live Wire of Argentina (Shell Foundation), and ultimately the Entrepreneurship Center of ITBA (Technological Institute of Buenos Aires), where he is a Co Founder, and has lectured several courses on topics relating to Law for Entrepreneurs. Mr. Algorta received his degree from the El Salvador University School of Law. He has attended a Post graduate course on Business Management at the Berkeley University, California.
Estudio Uriburu Bosch & Asoc.was founded in 1988 by Jos A. A. Uriburu and Fernando M. Bosch, attorneys-at-law, who decided to combine their abilities and capacities after working together for many years. The increase of the clients portfolio encouraged the founders to incorporate new associates in order to adapt the structure of the organisation to the new legal requirements that their clients are faced with on a daily basis. The relationship with our clients is based on the ever growing effective principle of acting preventively in order to avoid disputes that, when they occur, may cause unexpected expenses. Uriburu Bosch & Asoc.s objective is to render a broad and general legal service for ordinary cases, and a more thorough and specialised service especially for those more complex or extraordinary cases. Our aim is to provide personalised attention as well as to give timely and effective answers. The experience of every member of the Firm supports this principle. History does not begin whenever we desire, nor does improvisation guarantee good results.

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Argentina
Yes it is. It is usually held as a private sale where the creditors waived their credits until the sale is completed.
Chapter 4
Austria
Schnherr Rechtsanwlte GmbH
Dr. Wolfgang Hller

1.1 How does a creditor take security over assets in Austria?
period prior to the commencement of bankruptcy proceedings; (ii) (iii) the challenged legal action caused a discrimination of the other creditors (Glubigerbenachteiligung); and the effect of a successful avoidance claim would be to increase the bankrupts estate (Befriedigungstauglichkeit).
Austrian law recognises pledges (Pfandrechte), security transfers (Sicherungsbereignungen) and security assignments (Sicherungszession). In order to establish a legally binding security, certain principles must be respected: As a general rule, Austrian law does not recognise security interests over a fluctuating pool of assets (no floating charge). Any collateral asset must be specified (bestimmt) or at least specifiable (bestimmbar). In order for a security to be valid in addition to an agreement, a public act is required (Publizittsprinzip). In case of real estate, this happens through notification in the public real estate register (Grundbuch). In order to fulfil the publicity requirements for movable objects possession of the asset must be transferred to the creditor/pledgee. The publicity requirements for non-corporal assets are satisfied by either notifying the debtor of the claim (third party) or by annotation in the accounting records of the pledgor. A pledge (Pfandrecht) will only be valid, if the principle of accessoriness (Akzessoriett) - i.e. the dependence on existence of a secured debt - is adhered to. In particular: (i) the pledgee (Pfandnehmer) must be a creditor of the secured obligation; and (ii) upon a (temporary) discharge of the secured obligation the pledge will cease to exist. It should also be noted that only monetary claims (geldwerte Forderungen) may be secured by a pledge (Pfandrecht). Pledges, security transfers and security assignments are possessory security interests. As such, the effective possession by the pledgee/secured party (or its custodian [Besitzmittler]) is a precondition for perfection and maintenance of the respective security interest.
Intentional discrimination (Benachteiligungsabsicht) Transactions concluded in order to discriminate other creditors may be challenged if they were entered into within 10 years preceding the opening of bankruptcy proceedings and such bad intent was known by the beneficiary. This period is shortened to two years if the beneficiary did not have positive knowledge of the discrimination but should have known. For the familia suspecta the burden of proof regarding the knowledge of the discrimination is reversed. The familia suspecta includes relatives and in-laws. In case of a company as debtor it may also include directors and shareholders. Squandering of assets (Vermgensverschleuderung) Transactions may be challenged if the insolvent partys action within the last year preceding the initiation of bankruptcy proceedings was seen as squandering of assets and if such squandering was known or deemed to be known by the solvent party. Dispositions free of charge (Unentgeltliche Verfgungen) Any transactions concluded free of charge or deemed to be free of charge may be challenged if they were made within the last two years before the opening of bankruptcy proceedings. Preferential treatment (Begnstigung) Transactions concluded within the last year preceding the opening of insolvency proceedings but after material insolvency or a motion on the initiation of bankruptcy proceedings or in the last 60 days preceding may be challenged if the transaction was either objectively preferential or was intended to be preferential. A transaction is qualified as objectively preferential if a creditor acquires a security or satisfaction to which he is not entitled at all, or in this form or at this time. A transaction is qualified as intended to be preferential if the beneficiary knew or was deemed to know of the intent of the insolvent party to favour a certain creditor. Knowledge of insolvency (Kenntnis der Zahlungsunfhigkeit) Legal acts (Rechtshandlungen) having taken place within the last six months preceding the opening of bankruptcy proceedings but after material insolvency (or a motion on the initiation of bankruptcy proceedings) by which a creditor acquires security or satisfaction may be challenged if the creditor knows or is deemed to know of the debtors material insolvency.
Transactions may be subject to an avoidance claim by a receiver according to the avoidance rules of the Austrian Bankruptcy Act (Konkursordnung - KO). Condition to an assertion of avoidance rights is that: (i) the challenged legal act took place within a certain suspect
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Transactions (Rechtsgeschfte) of the debtor concluded after the above mentioned point in time may be challenged if such agreements are disadvantageous for other creditors.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Austria?
Austria
Judicial Composition Code (Ausgleichsordnung - AO). Furthermore, Austrian law provides for reorganisation proceedings (Reorganisationsverfahren), which - although not constituting insolvency proceedings - may affect creditors rights. Reorganisation proceedings, which are governed by the Business Reorganisation Act (Unternehmensreorganisationsgesetz - URG), are, however, more of a theoretical interest than of practical relevance. Very few proceedings have been initiated in Austria since the entry into force of the URG.
2.2 What are the tests for insolvency in Austria?
If the company is insolvent, each director is (severally) obliged to file for bankruptcy without culpable delay - within 60 days at the latest. If a director violates his duty to (timely) file for bankruptcy, he is liable towards the creditors for any damages arising out of bankruptcy procrastination. Towards existing creditors (Altglubiger) he is liable for the quota damage, i.e. for the difference between any damage actually occurred and any (minor) damage which would have occurred had the managing director timely filed for bankruptcy. As for the so-called new creditors (Neuglubiger) - i.e. creditors who contracted with the company in statu cridae - the managing director is liable for the negative interest. The creditor must be put in a position as if the relevant transactions had never been concluded with the subsequently insolvent debtor. According to the Austrian Act on Limited Liability Companies (Gesetz ber Gesellschaften mit beschrnkter Haftung - GmbHG) the managing director shall pay damages to the company (represented by the bankruptcy receiver) if he made payments after the point in time when he was obliged to file a bankruptcy petition. From the date the managing director is obliged to file a bankruptcy petition, he may not make further payments, except for payments matching with deliveries, payments to secured creditors up to the amount of the security, payments against adequate consideration or payments which are necessary to prevent the companys immediate collapse (e.g. rental payments, taxes, social security contributions, wages) and which will not reduce the companys assets. The managing directors may also be liable for unpaid taxes and social security contributions owed by the company. There are several criminal offences stated in the Austrian Criminal Code (Strafgesetzbuch - StGB) that might affect directors for acts committed in connection with a bankruptcy. The most important provision regards the grossly negligent encroachment of a creditors interest (Grob fahrlssige Beeintrchtigung von Glubigerinteressen, 159 StGB). This includes effectuating insolvency in a grossly negligent manner. There are provisions for fraudulent interference with creditors claims (Betrgerische Krida, 156 StGB), withholding of social security duties (Vorenthalten von Dienstnehmerbeitrgen zur Sozialversicherung, 153c StGB) and preferential treatment of creditors (Begnstigung eines Glubigers, 158 StGB). Persons convicted of the aforementioned offences may be disqualified from obtaining a business permit (Gewerbeberechtigung).
A company is qualified as insolvent, if it is illiquid (zahlungsunfhig) or over-indebted in terms of insolvency law (insolvenzrechtlich berschuldet). Illiquidity (Zahlungsunfhigkeit) means that the debtor is unable to pay its debts in due time and is not in a position to acquire the necessary funds to satisfy its due liabilities within a reasonable period of time. The examination of illiquidity must refer solely to matured liabilities. A forecast is not required and liabilities maturing in the future can be disregarded. A company is considered to be over-indebted in terms of insolvency law if the companys liabilities exceed its assets and the company has a negative prospect (negative Fortbestehensprognose). For the determination of over-indebtedness, a special over-indebtedness balance sheet (Insolvenzstatus) has to be drawn up. In this overindebtedness balance sheet the companys assets and liabilities have to be evaluated by assuming the liquidation of the company. The liquidation values of the companys assets shall be compared with the companys liabilities. If the over-indebtedness balance sheet based on the liquidation values shows over-indebtedness of the company, it will be the managements responsibility to examine whether such overindebtedness constitutes over-indebtedness in terms of insolvency law (insolvenzrechtliche berschuldung) by drawing up a forecast on the companys continued existence (Fortbestehensprognose). This forecast examines whether the company will be solvent and thus viable in the future.
Bankruptcy proceedings (Konkursverfahren) must be opened by a court whenever it has been established that a company is unable to pay its debts in due time (zahlungsunfhig), or is over-indebted in terms of insolvency law (insolvenzrechtlich berschuldet) (see question 2.2). Judicial composition proceedings (Ausgleichsverfahren) may be opened whenever the prerequisites mentioned for the opening of bankruptcy proceedings are met, but also if the risk of the debtors inability to pay its debts is imminent (drohende Zahlungsunfhigkeit).
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Austria?
Austrian law distinguishes between two types of insolvency proceedings governing the insolvency of companies: bankruptcy proceedings (Konkursverfahren); and judicial composition proceedings (Ausgleichsverfahren). Bankruptcy proceedings are governed by the Austrian Bankruptcy Code (Konkursordnung KO). Judicial composition proceedings are governed by the
The application for the opening of bankruptcy proceedings may be filed with the competent court either by the debtor himself or by a creditor. A creditor applying for the opening of bankruptcy proceedings is required to substantiate that the debtor is insolvent or over-indebted.

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Austria

An application for the opening of judicial composition proceedings can only be filed by the debtor.
Austria
Enforcement Act (Exekutionsordnung - EO) or according to the agreed extrajudicial enforcement of the security.
3.3 Can creditors set off sums owed by them to the company against amounts owed by the company to them in each procedure?
Austria
The court edict which states the opening of the formal proceedings is published online on www.edikte.justiz.gv.at. This edict must contain: the name and address of the debtor; the name and address of the receiver; the date, place and purpose of the first creditor assembly; the request to all creditors to file their claims within a certain deadline (Anmeldungsfrist); the request to all privileged creditors to claim their privilege within this deadline; instructions on the consequences of failure to adhere to this deadline; a possible court order of closing of business; and time and place of the examination hearing (Prfungstagsatzung) and the report hearing (Berichtstagsatzung) in case of the continuation of business. The opening of insolvency proceedings takes effect as of 0:00 hours of the day following publication of the edict in the official insolvency data base (www.edikte.justiz.gv.at). After the opening of insolvency proceedings the examination period begins, purpose of which is to establish the future fate of the debtor. This is decided in the report hearing at the latest. During the examination period creditors shall file their claims with the insolvency court.
According to 19 (1) of the Bankruptcy Code (Konkursordnung KO) claims that can be offset against claims of the debtor at the time of the opening of formal proceedings must not be claimed in the proceedings. The creditor simply declares his intention to offset. In order to avoid abuse, set-off is not permitted if: the creditor became a debtor after the opening of formal procedures; a debtor obtained his claim after the opening of formal procedures; or a debtor obtained his claim within the last six months before the opening of formal procedures and at this point had knowledge, or should have had knowledge, of the insolvency.

With the opening of bankruptcy proceedings the debtor is deprived of his right to dispose of the assets subject to bankruptcy, i.e. the bankrupts estate (Konkursmasse). Together with its decision on the opening of bankruptcy proceedings, the court appoints a receiver (Masseverwalter) and, if it deems this necessary in view of the size of the debtors business, a creditors committee (Glubigerausschuss) to assist the receiver. After the opening of bankruptcy proceedings only the receiver is entitled to act on behalf of the bankrupts estate. In judicial composition proceedings the debtor is not deprived of his ability to dispose of his assets. The court appointed receiver (Ausgleichsverwalter) usually only has a right to veto extraordinary transactions of the debtor. The creditors committee (Glubigerbeirat) has only an advisory function. The director(s) of the debtor is (are) required to support the receiver in his duty to act as the estates attorney. One of the main tasks is to assist the receiver by issuing a list of assets and a balance sheet. The directors are also required to attend the examination hearing.
3 Creditors
Unsecured creditors are entitled to file their claim against the debtor including interest until the opening of the proceedings. They are satisfied only pro rata according to the bankruptcy or composition quota (Konkurs- oder Ausgleichsquote). Once formal proceedings have been opened it is not possible to obtain an executive lien anymore. All execution proceedings against the debtor are suspended (Vollstreckungssperre).
The rights of secured creditors (Absonderungsberechtigte), such as pledgees, remain unaffected by the opening of insolvency proceedings. The rights of the secured creditors may however be affected by the application of the bankruptcy avoidance rules (see question 1.2). Furthermore, executive liens obtained within the last 60 days before formal proceedings were opened expire. Secured creditors are entitled to preferential satisfaction with respect to proceeds gained by the realisation of the relevant assets provided as collateral. They exclude unsecured creditors from satisfaction with respect to these assets. In bankruptcy proceedings it has to be taken into account that the relevant assets still form a part of the bankrupts estate and that they basically have to be administered and realised by the receiver. Only if the creditor himself is holder of the relevant assets, he may either realise the security in accordance with the provisions of the
The costs for the formal procedures are considered preferential claims. They must therefore come from the companys assets. In order to initiate formal proceedings there must at least be sufficient assets to cover the costs of the proceedings. If the competent court denies the opening of formal proceedings due to the lack of sufficient funds, the proceedings may be opened if a creditor is willing to advance the initial costs. Should the business continue, further costs (e.g. wages, rent) must come from operative revenues. It is the receivers responsibility to ensure the financial feasibility of continuing the business.
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Austria
court but usually do so to inform the receiver, the debtor and the court of their collateral. The rights of secured creditors remain unaffected by the opening of insolvency proceedings (for further details see question 3.2).
If only parts of the companys business are shut down, the employees right to resign from the employment contract for good cause as well as the receivers right to terminate the employment contract only applies with respect to those employees that are employed in these parts of the companys business. The same applies, mutatis mutandis, with respect to judicial composition proceedings.
Claims of unsecured creditors in bankruptcy and composition proceedings, which were created before the opening of these proceedings, are called bankruptcy claims (Konkursforderungen) and composition claims (Ausgleichsforderungen). These claims rank pari passu. Taxes, social security contributions, wages and salaries are not, as such, privileged or preferential claims under Austrian insolvency law. Claims which lawfully arose against the debtors estate after the opening of the proceedings, so-called privileged claims (Masseforderungen), or claims which are subject to a real security, so-called preferential claims (Absonderungsrechte), enjoy priority in insolvency proceedings. In essence, privileged claims are, inter alia, the costs of the insolvency proceedings including the receivers fees, court expenses, expenses of the administration and realisation of the assets and claims arising from the continuation of the debtors business.
Claims out of contracts that have been fully performed by the debtors counterparty upon the opening of bankruptcy proceedings but have not been fully performed by the debtor by then have to be converted into monetary claims and are qualified as bankruptcy claims, i.e. that the creditor will only receive a quota payment. With respect to contracts that have not been fully performed by both parties upon institution of bankruptcy proceedings, the bankruptcy receiver may either perform the contract on behalf of the debtor and request the other party to perform its part, or rescind from the contract according to. The contract will remain in force until the receivers decision. Upon an application of the counterparty the bankruptcy court will ask the receiver to make this decision within a certain time, otherwise he will be assumed to have rescinded from the contract. If judicial composition proceedings are instituted, the debtor has the right to rescind from contracts not yet fully performed upon institution of judicial composition proceedings, but his rescission is subject to the composition receivers approval ( 20b AO). The composition receiver shall only approve the debtors rescission, if the performance of the contract could endanger the judicial composition.
The opening of formal procedures does not have an effect on the general tax regime. Insolvent companies are therefore required to continue to pay taxes.

There are two ways to achieve a composition in formal procedures with the option of force the acceptance against the will of a minority. One is through composition proceedings, the other through a compulsory composition during bankruptcy proceedings. Judicial composition proceedings are intended to disburden the debtor of a part of his debts (up to 60%) and to enable the debtor to continue his activities. The debtor has to offer at least a quota of 40% to the unsecured creditors, payable within two years. A qualified majority of creditors must approve the composition plan and the court must confirm it. Qualified majority means that the simple majority of creditors in number present at the composition hearing must vote in favour of the composition plan and that the total sum of these creditors claims must amount to 75% of the claims represented at the composition hearing. If the composition plan is accepted by the creditors, confirmed by the court and fulfilled by the debtor, the latter is released from the rest of his debts. Compulsory composition proceedings (Zwangsausgleichsverfahren) have the same purpose as composition proceedings but are easier to finance than regular composition proceedings since the mandatory minimum quota is 20% only. The procedure is similar to the judicial composition proceedings. The practical relevance of compulsory composition is pretty high regarding corporations and private businesses.
5 Claims
Bankruptcy creditors shall file their claim with the bankruptcy court within the time period set out by the bankruptcy court in the receiving order (usually two to three months). The filed claims will be examined by the receiver and the debtor. At the so called examination hearing (Prfungstagsatzung), which is held at the bankruptcy court, the receiver has to declare whether he acknowledges or contests a filed claim. If the creditors claim is acknowledged, this creditor is entitled to participate in the bankruptcy proceedings, which means that he will finally receive the quota that is paid to the unsecured creditors. If a creditors claim is contested, the creditor has to assert his claim in civil proceedings in order to maintain his right to participate in the bankruptcy proceedings. Secured creditors do not have to file their secured claim with the

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Austria
The opening of bankruptcy proceedings itself does not affect existing employment contracts. Only in case the companys business is shut down by the receiver or shall, in the course of the bankruptcy proceedings, not be continued for an indefinite period, (i) the employees may resign from the employment contract for good cause; and (ii) the receiver may terminate the employment contract.

Austria
8 International
8.1 What would be the approach in Austria to recognising a procedure started in another jurisdiction?
Austria
Formal procedures must be repealed by court order and do not end automatically. Such an order may be enacted if inter alia (i) all assets have been distributed; (ii) it becomes clear during bankruptcy proceedings that there are not sufficient assets to finance the proceedings; or (iii) a compulsory composition has become final and all privileged claims have been settled.
Cross border insolvency proceedings are recognised based on two main sources: The EU Regulation 1346/2000 requires the recognition of all proceedings opened in a fellow member state without a formal recognition procedure from the time that it becomes effective in the State of the opening of the proceedings. The provisions on international insolvency law in the Austrian Bankruptcy Code state that the effects of insolvency proceedings opened in another state and the decisions issued in these proceedings are recognised in Austria if: (i) the debtors centre of main interest is in that other state; and (ii) these insolvency proceedings are comparable to Austrian proceedings, in particular Austrian creditors are treated equal to creditors from the state in which proceedings were opened. Notwithstanding such foreign insolvency proceedings, bankruptcy proceedings may be opened and conducted in Austria with respect to the assets located in Austria. Insolvency proceedings conducted abroad are not recognised in Austria if: (i) bankruptcy or composition proceedings were opened in Austria or preliminary injunctions were ordered; or (ii) the recognition of proceedings would lead to a result which apparently contradicts the fundamental values of the Austrian legal system.

7.1 Is it common to achieve a restructuring outside a formal procedure in Austria? In what circumstances might this be possible?
Extrajudicial restructuring is possible and quite common. There are no specific laws regulating such extrajudicial procedure. However, there are certain requirements that must be met in order to avoid later challenging of the restructuring by other creditors. The most important requirements are the consent and the equal treatment of all creditors. The equal treatment can be mitigated by the information and consent of the other creditors. It is not possible to force a dissenting creditor to agree to restructuring plans outside the formal (judicial) procedures. One should also be aware of the risks for directors involved in negotiating extrajudicial restructuring, as a delay of the request for the opening of formal procedures longer than 60 days may lead to liabilities (see question 1.3).
Dr. Wolfgang Hller

Schnherr Rechtsanwlte GmbH Tuchlauben 17 A-1014 Vienna Austria
As mentioned in question 6.1, it possible to reach a composition under Austrian law. Depending on whether the formal proceeding is a composition proceeding or a bankruptcy proceeding, the minimum quota is 40 or 20 percent. Composition in one of these two proceedings enables a debtor to free himself of up to 60 to 80 percent of his debt if a majority of his creditors approves (for details see question 6.1). If a composition can not be achieved the receiver is obligated to realise the assets of the debtor.
7.3 Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale effected?
+43 1 534 37 281 +43 1 534 37 6281 w.hoeller@schoenherr.at www.schoenherr.at
Austrian insolvency law doesnt provide for an expedited restructuring through a pre-packaged sale.
Wolfgang Hller is a partner of Schnherr and head of the firms Restructuring & Insolvency Group. Wolfgang represents Austrian and international corporates and credit institutions in Austria, advising them on all aspects of insolvency law and creditor protection. The Restructuring & Insolvency Group works closely with Schnherrs M&A teams in all transactions that involve insolvency related risks or concern targets that are close to or already affected by insolvency proceedings. In addition, Wolfgang advises numerous banks on derivatives transactions with Austrian and Central European counterparties and inter alia is Austrian counsel to ISDA on issues of close-out netting.
Schoenherr is an international corporate law firm with a strong base in Central and Eastern Europe. From offices in Belgrade, Bratislava, Bucharest, Budapest, Brussels, Ljubljana, Kyiv, Prague, Sofia, Vienna, Warsaw and Zagreb more than 300 professionals provide legal services to national and international clients in all fields of commercial law.
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Chapter 5
Belgium
Lydian
Peter De Ryck
Tom Geudens

1.1 How does a creditor take security over assets in Belgium?
parties by registration of the Floating Charge with the Register Office and the competent Mortgage Register. Costs: The costs of taking a Floating Charge amount to approximately 0.57% of the secured amount of the Floating Charge. A similar mechanism as described above for a Mortgage is often used as an alternative to limit the costs related to a fully fletched Floating Charge, being a mini Floating Charge combined with a Floating Charge Mandate. The only difference with the combined mechanism as described for a Mortgage is that no notarial formalities have to be complied with in order to create a Floating Charge Mandate. Movable Assets Pledge General: A Movable Assets Pledge is an agreement by which a debtor delivers a movable asset in the possession of its creditor or an agreed third party to secure certain obligations. The pledge can relate to tangible or intangible movable assets, such as commodities, stock, machinery, etc. Dispossession: The key element of a Movable Assets Pledge is that the pledged asset must be delivered into the possession of the pledgee or an agreed third party. A Movable Assets Pledge is only effected and will take rank only as of the moment the pledgor disposes of the asset. A validly created pledge will terminate as soon as the dispossession is discontinued. If the pledged asset is replaced on a regular basis (stock, commodities, etc.), the pledgee risks losing his priority ranking or even being deprived of his security right. Belgian courts have accepted substitution of the pledged asset without affecting the original security if certain conditions are met, such as the more or less immediate and simultaneous replacement of the original pledged assets by assets of the same nature and value. Formalities: A Pledge over Movable Assets is established by the sole delivery of the asset to the pledgee or third party. Costs: No specific costs involved. Enforcement: Court supervised sale. Share Pledge General: the form of the shares and any provisions restricting the pledging of the shares or the transfer of the shares should be identified in the articles of association of the Belgian company or any related (shareholder) agreements. Only Share Pledges over registered shares are dealt with, but it should be noted that special rules apply for Share Pledges over dematerialised shares, such as Euroclear securities. Moreover, since 1 January 2008, Belgium no longer allows the issuing of bearer shares. Shareholders have until 31 December 2013 to request the conversion of their existing bearer shares into registered or dematerialised shares.
1.1.1 By contract Belgian law provides for three different types of consensual security interests: (a) the mortgage; (b) the pledge; and (c) the floating charge. (Note that a reference to a pledge implies reference to a commercial pledge only, and not a civil law pledge.) Mortgage General: A Mortgage is a security right on real property, such as land, buildings, long leaseholds or other real rights on property located in Belgium. A Mortgage entitles the mortgagee to a preference right upon the proceeds of the sale on foreclosure. Formalities: A Mortgage is created by way of a formal deed executed before a Belgian notary public. The Mortgage has to be registered with the Register Office and the competent Mortgage Register in order to be enforceable towards third parties. Costs: The costs of taking a Mortgage can be estimated at 1.5% of the secured amount of the Mortgage. In order to limit the costs in taking a Mortgage, it has become market practice to combine a so-called mini-Mortgage, i.e., a Mortgage registered for a limited secured amount, with the remainder of the secured amount covered under a Mortgage Mandate. The Mortgage Mandate does not create a security as such, but establishes a contractual obligation for the company to allow the creation of a Mortgage if and when the mortgagee wishes to do so (e.g. when financial covenants are not met, in case of a potential event of default, etc.). Parties can of course also opt to create a stand-alone Mortgage Mandate. A Mortgage Mandate has to be enacted in a notarial deed. Enforcement: Court supervised sale. Floating Charge / Pledge over Business General: A Floating Charge confers upon the beneficiary a preferential right on the assets constituting the business of the pledgor. Only companies conducting commercial activities can grant a Floating Charge. Beneficiaries: Only banks and credit institutions that dispose of an administrative authorisation are allowed as beneficiaries of a Floating Charge, being (i) credit institutions established in the EU, (ii) credit institutions acting through a duly licensed EU branch, or (iii) specific entities listed in a Royal Decree. Formalities: A Floating Charge is constituted between parties by means of a private written agreement and enforceable vis--vis third

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Formalities: A Share Pledge has to be registered into the shareholders register of the Belgian company, or has to be notified to or accepted by the Belgian company, which will make the Share Pledge enforceable vis--vis third parties. Costs: No specific costs involved. Enforcement: Out of court sale or appropriation of shares (if provided for). Receivables Pledge Creation: The Receivables Pledge is enforceable vis--vis third parties by the mere execution of the pledge agreement. Formalities: To be enforceable towards the debtor, the Receivables Pledge should be notified to or acknowledged by such debtor. The pledge is enforceable towards other third parties by the mere execution of the agreement. Costs: No specific costs involved. Enforcement: The Receivables Pledge can be enforced by requesting the debtors to pay directly to the pledgee, which may setoff the amounts received towards the outstanding debt. Accounts Pledge Formalities: The pledge has to be notified to or acknowledged by the account bank in order to make it enforceable towards the latter. The pledge is enforceable towards other third parties by the mere execution of the agreement. Costs: No specific costs involved. Enforcement: Out of court appropriation of the credit standing on the balance of the bank account. IP Pledge Pledge over trademarks: A pledge over trademarks is perfected by registration of the pledge in the trademark register of the relevant trademark authority. Pledge over patents: A pledge over patents is perfected by registration of the pledge in the competent patent register. Pledge over copyrights: Although contested or not possible in some cases, a pledge over copyrights is perfected by notification to a third party to whom claims can be laid (e.g. Sabam, domain name authorities, etc.). Costs: No specific costs involved. Enforcement: Court supervised sale. Other priority creating mechanisms Belgian law also contains certain specific mechanisms pursuant to which the creditors claim is protected from the principle of equality of creditors. Parties can contractually agree on such mechanisms, such as: Reservation of title clause: a clause by which a seller reserves the ownership title of movable assets until the price has been fully satisfied by the buyer. The seller remains the legal owner of the assets and, in case the price is not fully satisfied, the seller may re-claim the assets, provided that certain conditions are met. Transfer by way of security: the debtor transfers financial collateral to the creditor as a guarantee to secure the underlying debt. In case the secured debt is not satisfied, the creditor may appropriate the financial collateral. An agreement of transfer by way of security remains enforceable, even in case of insolvency of the debtor. Set-off: see question 3.3. 1.1.2 By operation of law Belgian law further provides for privileges or statutory liens which prioritise the rights of certain creditors. Privileges are preferential rights over certain or all assets of the debtor that are granted to
1.2
Belgium
creditors by operation of law (as opposed to security interests that are created by contract). The privileges are listed in the Belgian Mortgage Law and relate, amongst others, to the privilege of the beneficiary of a pledge over the proceeds of the realised pledged asset, the privilege of the unpaid landlord, the privilege of the unpaid vendor, etc. Privileges exist by operation of law, but it is important to note that parties can mutually agree to waive the application of certain privileges.
In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack?
Belgium
Rule: All transactions entered into with a company in financial difficulties prior to the initiation of any insolvency proceeding remain valid during any such subsequent insolvency procedure. Exception: Apart from certain rules of general application, Belgian bankruptcy law specifically provides that certain transactions entered into with a bankrupt company during the so-called hardening period may be declared unenforceable vis--vis the bankrupt estate. The hardening period is a period of maximum six months prior to the declaration of bankruptcy by the Commercial Court. A hardening period, which is the exception and not the rule, can only be put in place by a court decision when there are clear indications that the company was virtually bankrupt before the date of the court decision declaring the company bankrupt. The actions entered into during the hardening period which can be declared unenforceable against the bankrupt estate are the following: (i) transactions entered into for free or entered into at extremely beneficial terms; (ii) payments other than in money for debts due or payments for debts that are not due; and (iii) security interests provided for debts existing prior to the insolvency date. All other payments for outstanding debts and all acts for valuable consideration that took place during the hardening period can be declared unenforceable by the Commercial Court if the debtors contractor knew of the suspension of payment. Moreover, acts or payments at any time made by the debtor with the intention to cause damage to creditors are unenforceable.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Belgium?
Belgian Company Code: The Belgian Company Code describes various situations which may lead to civil liability of the directors of a Belgian company. As a general rule, directors are liable for any shortcomings in the performance of their duties. The company itself can only invoke such liability. Directors may be further held jointly and severally liable for all damages caused by a breach of the provisions of the Belgian Company Code or the articles of association of the company. Such liability may be invoked by the company and any third party. In case of bankruptcy, the directors may be held personally liable for all or part of the debt of the company which exceeds the asset value, if the directors have committed a serious default that contributed to such bankruptcy. The Belgian Company Code explicitly states that e.g. tax fraud is to be considered as a serious default. Tort liability: The rules of tort liability are applicable to directors, which may lead to payment of damages. Unpaid taxes and social security: Directors of a Belgian company are under certain circumstances liable for unpaid taxes and social security.
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Criminal liability: A director may be held criminally liable for criminal offences committed in the performance of his duties (e.g., misuse of company assets), but may also be held criminally liable for offences committed by the company itself (e.g., environmental or accounting offences). Bankruptcy law also provides a series of criminal offences, which may lead to disqualification of a directors mandate for three to ten years.
2.3
Belgium
On what grounds can the company be placed into each procedure?
Composition The Court can grant a moratorium to any debtor whose continuity is threatened. A company that is, from a theoretical point of view, bankrupt can also be the subject of a moratorium. Bankruptcy The court may declare a debtor bankrupt if the following conditions are met: the debtor is engaged in commercial activities; the debtor has suspended payments to its creditors; and the debtor is no longer creditworthy, so he will continue not to meet his obligations to creditors. Liquidation The general meeting of shareholders can decide on a discretionary basis to start a liquidation procedure. In exceptional circumstances, liquidation can be ordered by the Court.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Belgium?
Belgian law provides three main regulated procedures: 2.1.1 Pre-Insolvency proceedings The Belgian Law on Continuity of Companies (LCC) (in effect as of 1 April 2009) provides that any company can enter into an amicable settlement outside court with some or all of its creditors to redress its financial situation or to reorganise its enterprise (see section 7 below). 2.1.2 Insolvency proceedings Composition The LCC provides for different types of composition: an amicable settlement with two or more creditors; a collective settlement with all creditors resulting in the approval of a reorganisation plan; and the transfer of all or part of the activities of the stressed company to one or more third parties. Bankruptcy If rehabilitation of the company has become impossible, the bankruptcy procedure may take effect. The provisions of the Bankruptcy Law (BL) will apply. 2.1.3 (Solvent) liquidation Solvent liquidation follows the dissolution of the company in order to divide or realise the assets of the company and distribute them amongst its creditors and, possibly, the shareholders.
2.2 What are the tests for insolvency in Belgium?
Composition The debtor that is in financial difficulties can file a petition with the Court to request suspension of his payment obligations in order to implement one of the reorganisation measures as described under question 2.1, para 2.1.2. If the Court decides to open the composition procedure (which takes place within 18 days after the filing of the request), the debtor is granted a suspension of his payment obligations, so that no further execution measures on his movable or immovable assets can be carried out. Under very strict conditions, a composition by way of transfer of the company (in whole or in part) can be initiated by the public prosecutor, a creditor or every potential buyer of the company. Such procedure is possible if (i) the debtor is in a state of bankruptcy without having filed for composition, (ii) the Court rejected the composition request of the debtor or ordered the premature termination of the composition procedure, (iii) the creditors do not agree to the proposed collective reorganisation plan, or (iv) the Court refuses to ratify the reorganisation plan. In such circumstances the debtor can be forced to undergo the transfer of his company. Bankruptcy The debtor must initiate the bankruptcy procedure with the Court within one month after the suspension of payment. The Court decides whether the conditions for bankruptcy are met. A bankruptcy procedure can also be introduced by (i) any creditor, (ii) the temporary administrator of the company, or (iii) the public prosecutor. The party that wishes to introduce the bankruptcy procedure has to prove that the bankruptcy conditions are met. Liquidation The board of directors initiates the liquidation procedure by proposing the dissolution and liquidation of the company to the general meeting of shareholders, based on a special report and a statement of all assets and liabilities of the company, including a report of the companys auditor. The dissolution is decided upon by the general meeting of shareholders. The decision has to be adopted by a majority vote. The shareholders meeting will, at the same time, appoint the liquidators. The company will further exist solely for the purposes
Firstly, the clerk of the Commercial Court (the Court) gathers information which may indicate that companies are faced with serious difficulties. Secondly, the chambers for commercial investigations supervise companies in financial difficulties to preserve the continuity of such companies and to protect and ensure the rights of the creditors. These chambers can evoke the representatives of those companies for a hearing at an early stage of the financial difficulties to assess what measures can be taken. The chambers for commercial investigations can also decide to transfer the case to the public prosecutor if they are of the opinion that the company is in a state of bankruptcy. Finally, The LCC also provides certain other measures: the mediator: the debtor can request the Court to appoint a mediator, who will assist the company in its reorganisation; and the court-appointed proxyholder: interested third parties (such as creditors) can request the Court to appoint a proxyholder in case of apparent and serious shortcomings of the debtor or his representatives which may endanger the continuity of the company.

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of its liquidation. The appointment of the liquidators needs to be approved by the Court. After all assets and debts have been realised and settled, the liquidation is closed by a final shareholders meeting, approving the liquidation balance.
Belgium
Bankruptcy General: All measures of execution are suspended. Exception: Secured creditors that have a security interest over a specific asset by way of a Belgian right of pledge or mortgage may enforce their rights during the bankruptcy proceeding subject to an initial freeze period of approximately 45 days as of the date of the Court order for the commencement of the bankruptcy procedure during which they are unable to enforce their rights. In addition, the beneficiary of a pledge over financial collateral can enforce its rights notwithstanding the initial freeze period. Liquidation Secured creditors remain fully fletched during the liquidation of the company and can thus exercise all rights relating to their secured position.
Belgium
Composition The composition judgment is published in the Belgian State Gazette. The debtor is obliged by law to notify his creditors individually within fourteen days after the judgment. Bankruptcy The bankruptcy judgment is published in the Belgian State Gazette, as well as in two regional papers. The judgment provides the term for creditors to declare their claims to the receiver and the Court (with a maximum period of thirty days). Liquidation The decision of the general meeting to dissolve and liquidate the company is published in the Belgian State Gazette and the Central data bank for Enterprises.
Composition Set-off during the composition period is permitted under the following conditions: the claim of the creditor is subject to the composition and thus suspended; the debt of the debtor arises during the suspension period; and the claim and debt are connected. Further, the Belgian Financial Collateral Law provides that, in case of insolvency, set-off agreements are enforceable if (i) such agreement was concluded before the composition was initiated, or (ii) such agreement was entered into afterwards, but the creditor proves that he was, at that time, unaware of the existence of the composition. Bankruptcy In case of bankruptcy, set-off agreements are enforceable if the debts are, before the initiation of the bankruptcy procedure, certain, liquid and claimable. The provisions of the Belgian Financial Collateral Law relating to set-off, as described above, equally apply in case of bankruptcy. Liquidation Same rules as under bankruptcy.
3 Creditors
Composition As of the request for composition, all measures of execution are suspended. The suspension applies to all unsecured creditors. Set-off during the judicial reorganisation procedure, however, is possible (see question 3.3). Bankruptcy As of the initiation of the bankruptcy procedure, all measures of execution are suspended for all unsecured creditors. Set-off during the bankruptcy procedure, however, is possible (see question 3.3). Liquidation Preventive and protective measures and measures of execution of unsecured creditors can still be enforced provided that such exercise of rights does not damage the rights of other creditors.

Composition General: All creditors, including the secured creditors, are submitted to the suspension of payment. Exceptions: Secured creditors holding the benefit of a pledge over financial collateral and a pledge over receivables retain all rights to protect and enforce their security interests throughout the moratorium procedure. In addition, an exception is provided for extraordinary creditors in case the moratorium is organised via a collective settlement. Extraordinary creditors are creditors having the benefit of a mortgage, a special privilege and so-called creditor-owners (i.e., a creditor that owns a movable asset which is held by its debtor, e.g., a seller that holds a reservation of title clause).
Composition General: During the composition procedure, the directors and shareholders of the debtor stay in charge of the company. Exceptions: 1. The debtor may request the appointment of a mediator to assist the company during its reorganisation process or, upon the creditors request, the appointment of a court-appointed proxyholder (see question 2.2). In case the debtor or, in exceptional circumstances, the public prosecutor, a creditor or an acquiring company, choose a composition by way of transfer of the company, the directors and shareholders loose control over the company as a direct consequence of the transfer.
2.
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Bankruptcy Once the Court has declared the bankruptcy of the Debtor, the Court appoints a receiver which takes full control over the company in view of collecting outstanding debt, realisation of the assets of the bankrupt estate and distribution of the proceeds to the creditors. Liquidation The decision to dissolve and liquidate by the shareholders meeting of the company, triggers the dissolution of the board of directors. The general meeting of shareholders shall appoint a liquidator, who will take over the mandate of the directors in view of the realisation of the assets and the subsequent liquidation. The appointment of the liquidator has to be approved by the Court.
4.2 How does the company finance these procedures? 4.4
Belgium
What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure?
Composition
Specifics: Penalty clauses such as default interest etc., cannot be enforced during the suspension period. The LCC further provides for a remedy period; i.e., a period of fifteen days (taking effect as of notification of default) during which the debtor in composition may cure a contractual default that occurred prior to the composition. Consequently, the creditor cannot terminate the contract on the basis of such default if and when the debtor under composition fulfils his contractual obligations within the remedy period. Exception: The debtor has the right to no longer execute a contract during the composition, and may consequently deviate from the general rule of continuity of contracts, under the following circumstances: (i) (ii) the debtor notifies the creditor of his intention to no longer carry out his obligations under the contract; and such decision is necessary in order for the debtor to be able to implement a reorganisation plan or to transfer the company.
Composition The costs of composition are borne by the debtor. A Royal Decree will determine the fees of the court-appointed proxyholder. Bankruptcy The costs of bankruptcy (essentially the fees of the receiver) are costs of the bankrupt estate and take rank as privileged debts. The fees of the receiver are determined in a Royal Decree. Liquidation The costs of liquidation are borne by the liquidated estate. If the liquidated estate is not sufficient to pay all debts of the debtor, including the costs related to the liquidation procedure, the shareholders will divide the costs of the procedure pro rata the amount of shares each of them owns.
Bankruptcy General: All ongoing contracts (i.e., the contracts existing before the commencement of the proceedings) continue to exist notwithstanding the initiation of a bankruptcy. It will be up to the receiver to terminate the ongoing contract, in accordance with the terms and conditions of such agreement. The receiver may even choose to continue the business of the debtor, and by consequence not to terminate the contracts, if he receives the authorisation of the Court and the continuation of the company does not cause any prejudice to the creditors. Exceptions: Parties can contractually agree that a bankruptcy constitutes an acceleration event. Intuitu personae contracts (i.e. contracts whereby the identity of the other party constitutes an essential element upon the signing of the contract) are automatically terminated as of the bankruptcy judgment since the debtor is no longer in charge of the company. Parties can however agree on continuing such contracts. Liquidation The liquidation procedure does not terminate the existing contracts. The liquidator decides whether or not the contracts will be terminated. However, intuitu personae contracts can be terminated by the counterparty.
Composition A composition has no effect on employment contracts. Specific provisions apply on employment contracts in case of a composition by way of transfer of the company. In the latter case, the acquiring company takes over all rights and obligations of the debtor, including those arising out of employment contracts. However, the acquiring company is granted two exceptions: the acquiring company may, after negotiations, amend the collective or individual labour agreements in order to maintain the employment level within the company; and the acquiring company may choose which employees it wishes to take over. The choice has to be made based on technical, economical or organisational grounds and may not be inspired by discriminatory motivations. Bankruptcy The opening of a bankruptcy procedure does not terminate the employment contracts as such. The decision of termination is left with the receiver. If the employment contracts are terminated, the employees can make an appeal to a special compensation fund for their outstanding salary and discharge compensation. The employees are also granted a special privilege for the discharge compensation. Liquidation The liquidation of the company implies the winding-up of the company, so that the liquidator shall terminate all employment contracts. The employees can make an appeal to the compensation fund as described above.
5 Claims
Composition The debtor is obliged by law to notify his creditors individually within fourteen days as of the Court approval of the composition request. Bankruptcy The creditors have to complete and file a declaration as to the claims they have on the debtor within a certain period of time described in the bankruptcy judgment.

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General: As a principle, a composition aims to preserve the continuity of a company as a going concern. Hence, the initiation of a composition does not terminate any contracts as such.
Lydian
Liquidation No formal procedure exists for claiming amounts under a liquidation. In practice, the liquidator will track down all creditors in order to list the outstanding creditors claims. Bankruptcy
Belgium
The bankruptcy judgment is effective vis--vis all creditors; they are obliged to undergo all consequences thereof. The most important exceptions to the rule are described in section 3 above. Liquidation All creditors of the debtor will be affected by the liquidation process. Section 3 sets out certain measures which are still open for the creditors during the liquidation process.
Belgium
5.2
What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status?
Composition The ranking of claims is a non issue in case of composition, since the purpose of composition is to achieve the continuity of the company. Bankruptcy In case of bankruptcy, there is a clear and distinct ranking of the claims. 1. Estate debt: Costs and indebtedness incurred by the receiver during the bankruptcy proceedings, the so-called estate debts, have the highest priority over all claims. In addition, if the receiver has contributed to the realisation and enforcement of secured assets, such costs will be paid to the receiver in priority out of the proceeds of the realised assets before distributing the remainder to the secured creditors. 2. Security interests: Creditors that hold the benefit of a security interest have a priority right over the secured asset (whether by means of appropriation of the asset or on the proceeds upon realisation). 3. Privileges: After satisfying the claims of the secured creditors, the creditors having a particular privilege on certain or all assets will be paid out (e.g., tax claims, claims for social security premiums, etc.). Privileges on specific assets take rank before privileges on all assets of the debtor. 4. Pari passu: Once all estate debts and creditors having the benefit of security interests and privileges have been satisfied, the proceeds of the remaining assets will be distributed by the receiver amongst the unsecured creditors who rank pari passu (unless a creditor agreed to be subordinated). Liquidation Same rules as under bankruptcy.
Composition Short procedure: In case the debtor is no longer able to ensure the continuity of the company during a composition, the Court can decide to terminate the composition procedure. Such premature termination has to be requested by the debtor itself, the public prosecutor or a creditor. If the Court orders the premature termination of the composition procedure, the Court may, under certain conditions, declare the debtor bankrupt in the same judgment. The conditions are the following: the conditions for bankruptcy are met; and the creditor or public prosecutor specifically requests the Court to declare the debtor bankrupt. Full procedure: The termination of the procedure will largely depend on the nature of the proposed reorganisation measure(s) under the composition: The conclusion of an amicable agreement with two or more creditors: when the debtor agrees upon an amicable agreement with his creditors, the debtor may request the Court to confirm the agreement. After confirmation of the agreement by the Court, the procedure is closed. The judgment will be published in the Belgian Sate Gazette. Any payments made within the scope of the amicable agreement will not be put aside in case of a later bankruptcy procedure. The conclusion of a collective agreement with all creditors: when the debtor reaches a collective agreement with the creditors, the agreement will have to be approved by the Court. Such Court approval will terminate the composition procedure and will be published in the Belgian Official Gazette. The transfer of the company: the court appointed proxyholder will effect the transfer of part or all of the companys business (with the assistance of a notary public if the assets include real property). As of the completion of the transfers, the proxyholder will request the Court to close the composition procedure. The closing of the procedure also relieves the acquiring company of all responsibilities of the debtor that were not included in the transfer agreement. Bankruptcy Short procedure: A bankruptcy may be terminated by the Court summarily when it is established that the assets of the debtor will not even cover the expenses of the receiver. The judgment ordering the termination will be published in the Belgian State Gazette. As a consequence of that Court decision, the debtor will automatically be dissolved and the creditors will regain their rights to enforce their claims against the debtor. Full procedure: If the assets of the debtor are sufficient to cover the costs of the bankrupt estate, the receiver will start to realise the assets of the debtor and verify the claims of the creditors. Once all claims are verified, the receiver proceeds with the distribution of the proceeds of the bankrupt estate to the respective creditors,
Composition The debtor remains subject to corporate income tax and VAT. Bankruptcy The debtor is exempted from corporate income tax; VAT remains applicable. Liquidation The debtor remains subject to the corporate income tax and VAT.

Composition All creditors are as a rule affected by the suspension of payment under the composition. The most important exceptions to the rule are described in section 3 above.
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taking into account the ranking of creditors (see question 5.2). Termination of the bankruptcy procedure can only be ordered by the Court at the request of the receiver. The receiver will make his request following a final creditors meeting where the final accounts of the bankrupt estate (including the ranking) are presented and discussed, and after the final distribution of the proceeds of the bankrupt estate. The Receiver is responsible for the publication of the final order in the Belgian State Gazette. Publication is only mandatory if the debtor is discharged of the remaining debts as a result of the order. An order where the debtor is not discharged of the remaining debts will cause the immediate dissolution of the debtor. Liquidation Once the liquidators have realised all assets of the debtor and verified all claims, the liquidators will submit the plan of distribution of proceeds to the Court. As of the Court approval, the liquidation procedure is closed by a final general meeting of shareholders. After the closing of the procedure, all remaining assets are distributed amongst the shareholders of the company. It is important to note that a liquidated company can be declared bankrupt up to six months after the closing of the liquidation procedure.
7.2
Belgium
Is it possible to reorganise a debtor rather than realise its assets and business?
Also the formal composition procedure, as described under question 2.1, para 2.1.2, provides the possibility to reorganise a distressed debtor in other manners than by means of the traditional realisation of assets.
Again, parties can agree upon a pre-packaged sale under the amicable agreement outside court within the limits of contract. Also the formal composition procedure can be utilised to expedite a restructuring by means of a pre-packaged sale.
8 International
8.1 What would be the approach in Belgium to recognising a procedure started in another jurisdiction?

7.1 Is it common to achieve a restructuring outside a formal procedure in Belgium? In what circumstances might this be possible?
Since 1 April 2009, the LCC has introduced the amicable settlement to reorganise debt outside of court proceedings to provide a real alternative to the inner court insolvency procedures and reorganisations. Any company can enter into an amicable settlement with some or all of its creditors to address its difficult financial situation or to reorganise its enterprise. The parties to this amicable settlement are free to determine its content but the amicable settlement does not affect the rights of third parties. Under the LCC, the company can file a copy of the amicable settlement with the court registry. By doing so, the terms of the settlement and the transactions concluded under it are protected in case of a later bankruptcy proceeding. The amicable agreement is based on the free will of the debtor to enter into such agreement if and when he wants and with creditors he chooses. The advantages of the amicable agreement outside court are the lack of costs and the discretion that goes with an out of court settlement of debt (since such an amicable agreement is not published in the Belgian State Gazette).
Belgium is subject to the Council Regulation n1346/2000 on insolvency procedures. Consequently, if an insolvency judgment is pronounced by a court in one of the EU Member States, the judgment shall be recognised in Belgium. Moreover, an insolvency judgment ordered by a non EU Member State will be recognised in Belgium pursuant to Belgian International Private Law provisions.

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Belgium
The amicable agreement outside court as described under question 7.1 is based on the free will of the parties involved, meaning that all agreements and measures can be agreed upon within the limits of contract.
Lydian
Belgium
Peter De Ryck
Lydian Tour & Taxis Havenlaan - Avenue du Port 86c b113 1000 Brussels Belgium
Tom Geudens
Lydian Tour & Taxis Havenlaan - Avenue du Port 86c b113 1000 Brussels Belgium
Belgium
+32 2 787 9000 +32 2 787 9099 peter.deryck@lydian.be www.lydian.be
+32 2 787 9000 +32 2 787 9099 tom.geudens@lydian.be www.lydian.be
Peter De Ryck is a Partner in Lydians Corporate & Finance department. Peter graduated in 1996 with a law degree from the University of Brussels (VUB). He then obtained a diploma in European law at the University of Brussels (ULB) and followed postgraduate programmes in company law (KUB) and business administration (EHSAL). His practice focuses on corporate law, M&A and restructurings. He is recommended by numerous legal directories, which qualify him as a man of his word (IFLR) and an excellent attorney (Legal 500).
Tom Geudens is a Counsel in Lydians Corporate & Finance department. Tom graduated in 2000 with a degree in law form the Catholic University of Leuven (KUL) and completed a post academic qualification in corporate law in 2002. Tom specialises in leveraged/acquisition finance, project finance, structured finance and commodity & trade finance. In addition, he has exceptional expertise with regard to capital markets, restructuring and insolvency. Tom Geudens is recommended as very clear in his advice and quick to respond and is consistently singled out by clients who state that they were very impressed - whenever we need local counsel, hes the go to man (Legal 500).
Making the most of the opportunities created by the merger of large Belgian law firms into international networks, Lydian has successfully built a fully-fledged, stand-alone business law firm. Lydian provides its clients (large and medium-sized Belgian and international entities) with prompt assistance and tothe-point advice, both in domestic and cross-border work. The firm delivers the quality and sophistication that can be expected of large international firms, but with a personal touch. Based on the Anglo-Saxon model, Lydian stands out through the efficiency of its service, the pragmatic approach of its lawyers and their true commitment to the task at hand. Thanks to the unfailing devotion of its lawyers, who rank among the best in their field, Lydian has become one of Belgiums leading independent firms in just a few years. Areas of practice Lydian advises on a broad range of Belgian business law matters, including mergers and acquisitions, private equity, merger control, corporate finance, corporate restructuring, commercial matters, IP law, insurance, litigation, collective and individual employment, pensions, real estate, environment, public procurement, administrative law and tax. The firms lawyers have specialist expertise in the fields of banking, corporate restructuring, energy, HRM in the public sector, insurance, intellectual property, IT, life sciences, outsourcing, pensions, ports and logistics, private equity, public contracts and real estate investment.
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Chapter 6
Brazil
Leoni Siqueira Advogados
Antonio Carlos Monteiro da Silva Filho
Cristiano Rodrigo Del Debbio

1.1 How does a creditor take security over assets in Brazil?
convicted of defrauding creditors - or of any other crime set forth in the Bankruptcy Law - also loses his qualification to manage the company or other firms.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Brazil?
A creditor takes security over assets by contracting with the debtor and registering the security in the proper official record. Registration is mandatory for the security to be opposable to third-parties.
In Brazil, transactions entered into with a company in financial difficulty are not generally vulnerable to attack, unless they involve the transfer or charging of assets when the company is already insolvent or becomes insolvent due to the transaction. In this case, if the transaction is entered into: (i) after a third-party has filed a lawsuit to collect payment or claim property rights over the asset, the transaction may be rendered ineffective; or (ii) before a lawsuit has been filed, the third-party may request the Court to annul the transaction if he can prove that the company acted with the sole purpose of defrauding creditors. In case the company is declared bankrupt, certain transactions may be vulnerable to attack whether or not the other party was aware of the companys financial difficulties and whether or not the company intended to defraud creditors. Those situations must be assessed on a case-by-case basis, but in general they involve: (i) sudden and recent charging of assets for debts constituted prior to the financial difficulties or after the decree of bankruptcy; (ii) transfer of establishment or assets without leaving enough resources to settle liabilities; and (iii) any acts performed with the intention of harming creditors or causing loss to the bankrupt state.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Brazil?
Companies in financial difficulties may: (i) settle an out-of-court reorganisation; (ii) claim judicial reorganisation; or (iii) claim bankruptcy. In general, reorganisation may involve any measure suitable to overcome the companys financial difficulties - which will vary according to the company and creditors, its activities and the causes of the financial difficulty - such as, for example, granting of special terms and conditions for the payment of obligations; spin-off, merger, consolidation or transformation of a company; change of control or shared management and sale of assets. Bankruptcy involves the liquidation of the companys goods, assets and productive resources, including intangible assets, to pay its creditors.
2.2 What are the tests for insolvency in Brazil?
A company is generally considered insolvent once its debt exceeds its assets, with no possibility to fulfill its current or future financial commitments. There is no formal test to establish insolvency, which is usually determined on a case-by-case basis by external signs of financial distress such as multiple notices of default or the inability to provide assets for attachment in legal proceedings. Bankruptcy Law establishes the grounds for the decree of bankruptcy (see question 2.3 below), which may be considered an insolvency test for bankruptcy purposes.
Directors are generally not liable for continuing to trade whilst the company is in financial difficulties, as long as they are not acting illegally or with the purpose of defrauding creditors. Brazilian Law establishes criminal liability for directors who commit fraudulent acts that result or may result in a loss to the creditors to obtain an unfair advantage. The penalty is confinement from three to six years and a fine. Even if criminal liability cannot be established (due to its higher burden of proof), directors may still be civilly liable for illegal acts or acts committed to defraud creditors. A director criminally
Reorganisation claims are filed solely by the company, which must demonstrate that reorganisation is essential to overcome its financial difficulties and protect its enterprise, workers and creditors. Bankruptcy claims may have one or more of the following grounds (bankruptcy test): (i) the company unreasonably fails to pay an obligation which exceeds 40 minimum wages; (ii) the company, executed for any liquid amount, fails to pay, deposit or allocate for attachment sufficient assets within the statutory term; (iii) the company liquidates its assets precipitately, or resorts to ruinous or fraudulent means to make payments; (iv) the company performs

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simulated acts or transfer assets with the purpose to delay payment or defraud creditors; (v) the company transfers its establishment without leaving enough resources to settle liabilities; (vi) the company is absent without leaving a qualified representative with sufficient funds to pay his creditors, abandons a place of business or tries to hide from its domicile, the location of its headquarters or principal place of business; and/or (vii) the company fails to perform, within the established term, an obligation assumed in the in-court reorganisation plan.
Brazil
reorganisation plan and vote for its approval or rejection. If the reorganisation plan is approved, all creditors must abide to its terms. The decree of bankruptcy, as mentioned above, suspends all lawsuits against the company. Brazilian Law establishes that, as a general rule, creditors can only enforce their rights through the bankruptcy procedure. Secured creditors have privileged credits and will be paid right after labor debts are solved.
Brazil
A reorganisation claim can only be filed by the company itself. Creditors will be summoned to answer the claim, which they may accept, reject or propose modifications to. After discussion of the reorganisation plan, the Court will either approve the plan or reject it and decree the bankruptcy of the company. A bankruptcy claim may be filed by the company or any creditor. If the bankruptcy test is met, the judge will decree the bankruptcy of the company and initiate proceedings aimed to seize the companys assets, identify and classify its creditors and liquidate the estate.
In the judicial reorganisation procedure, compensation will obey civil law - which allows compensation of credits as long as they are due and of the same nature - and the terms of the approved reorganisation plan. In the bankruptcy procedure, debts of the company falling due by the date of the decree of bankruptcy are offset, as long as they are both due and of the same nature. However, Bankruptcy Law does not allow compensation of credits: (i) transferred after the decree of bankruptcy (except if due to legal succession); or (ii) transferred maliciously or fraudulently, when the companys financial condition was already known by the creditor.

In the out-of-court reorganisation procedure, the company must publish in the official press, and in a major newspaper, a notification to all creditors to submit their objections to the reorganisation plan. The company must also send letters to all of its creditors in Brazil notifying the filing of the reorganisation claim. No meetings are officially required. In the judicial reorganisation and in the bankruptcy procedures, all courts decisions must be published in the official press. Bankruptcy Law requires - both in judicial reorganisation and bankruptcy procedures - at least one meeting of the companys creditors to organise the Creditors Committee (which will monitor the proper development of the procedures). Other meetings may be scheduled whenever creditors need to vote or discuss relevant matters regarding the procedure or the liquidation itself. The company must publish the call to every meeting in at least two major newspapers.
In the judicial reorganisation procedure, directors will continue to manage the company, under the Creditors Committee and with the judicial administrators supervision. For reorganisation purposes, shareholders are considered unsecured creditors of the company and may vote for the approval or rejection of the reorganisation plan together with other unsecured creditors. In the bankruptcy procedure, management of the company is transferred to a judicial administrator. Shareholders become residual creditors of the bankrupt state, and will be paid only after all other classes of creditors receive their credit.
3 Creditors
The judicial reorganisation procedure is generally financed with the companys own resources. The bankruptcy procedure is financed by the bankrupt estate.
The decree that grants judicial reorganisation suspends for 180 days all lawsuits filed against the company. Unsecured creditors will have the right to participate in the discussion of the reorganisation plan and vote for its approval or rejection. The decree of bankruptcy also suspends lawsuits filed against the company. Brazilian Law establishes that, as a general rule, creditors can only enforce their rights through the bankruptcy procedure. Unsecured creditors do not have privilege under the bankruptcy procedure and will receive their credit only when every other creditor of the company is paid in full.
In the judicial reorganisation procedure, employees may be kept or terminated, or have their hours of work or payment reduced, according to the approved reorganisation plan. In the bankruptcy procedure, employees are terminated and their credit - up to the amount of 150 minimum wages - becomes privileged credit against the company. The exceeding amount is treated as unsecured credit.
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As mentioned above, in the judicial reorganisation procedure, all lawsuits against the company will be suspended for 180 days. Secured creditors will have the right to participate in the discussion of the
In the out-of-court and judicial reorganisation procedures, contracts generally remain in force, although some of their conditions may be affected by the approved reorganisation plan. Exceptionally, the
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reorganisation plan may provide for the termination of a contract. In the bankruptcy procedure, the judicial administrator may terminate all contracts. Exceptionally, some contracts may be kept: (i) if their execution reduces or avoids further debt of the company or (ii) if they help preserve the value of the bankrupt estate. The other party of the terminated contract will have the right to indemnification, which will be classified as unsecured credit against the bankrupt state.
Brazil
judicial reorganisation will be able the elevate one step the preferential status of his unsecured past credit, up to the limit of the credit granted during the judicial reorganisation, in the event the bankruptcy is later decreed. This was the alternative found by the legislator to stimulate the concession of credit to a company under judicial reorganisation, because, otherwise, the attempt to try to recover a company in financial difficulties would be almost unreachable. In bankruptcy cases, article 83 defines the preference status of creditors, on the following order: (1st) Labour credits up to the limit of 150 minimum wages (the balance will be considered as general unsecured credit) and indemnifications due to labour accidents with no limitation; (2nd) Secured credits, up to the fair market value of security (the balance will be considered as general unsecured credit); (3rd) Tax liabilities (excluding penalties); (4th) creditors with special privilege, as defined on the Brazilian legislation; (5th) creditors with general privilege, as defined on the Brazilian legislation; (6th) general unsecured creditors; (7th) credits derived from penalties, including tax penalties; and (8th) subordinated credits, such as, but not limited to, amounts due to shareholders or administrators with no employment bond.
5 Claims
When a judicial reorganisation is filed or when a bankruptcy is decreed, a debtor is required to present to Court a list containing the names and addresses of all creditors, the amounts due to each of them and the nature of such credits. Such list will be published on the official gazette, and creditors will then have 15 days to file their credit qualifications - if their credit was not listed by the debtor, or to make correction requests - if they find discrepancies between the amount listed by the debtor and the amount effectively due. On both cases, the claim will be addressed to the judicial trustee, who will be in charge of analysing the documents and, eventually, make the necessary amendments on the List of Creditors. If the creditor does not make the credit qualification or the correction request within the 15-day term, he will still be able to file his claim, but his credit will be classified as a latecomer credit, and he will lose some important rights, such as the right to vote on creditors assemblies. Once the judicial trustee has received and analysed all credit qualifications and correction requests - but no later than 45 days from the date of the first publication - another list of creditors will be published on the official gazette, contemplating all the qualifications and corrections accepted by him. After the publication of such amended list of creditors, any interested party, including the debtor himself or his shareholders, will have 15 days to present impugnation against it. Such impugnation may claim inclusion, exclusion, reclassification or corrections of credits, and will be addressed to the Judge, who will decide after receiving a legal opinion from the judicial trustee.
On a judicial reorganisation, tax liabilities are not only excluded from the procedure, but also the debtor has to prove the absence of tax debts to have his reorganisation plan approved by the Judge (Article 6, 7th paragraph and article 57). This restriction seems to be in contradiction with the spirit of the Corporate Recovery Law, since it is hard to imagine a company with financial difficulties in Brazil - a country known for its extremely high tax rates - being able to timely pay its tax liabilities. For this reason, there are precedents exempting the debtor from presenting Tax Clearance Certificates, but this discussion is far from being over. On bankruptcy cases, tax debts (excluding tax penalties) will be located on the third position on the preferential status order, as mentioned on question 5.2 above. In addition, tax liabilities related to tax triggering events that occurred after the bankruptcy is decreed will have preferential status over all other credits.

On a judicial reorganisation, article 54 of Federal Law 11.101/05 determines that the reorganisation plan can not propose a term longer than one year for the payment of labor credits or indemnification due to labor accidents. In addition, it provides that the reorganisation plan can not propose a term longer than 30 days for the payment of labor credits up to the limit of five minimum wages related to the three months prior to the filling of the judicial reorganisation. Also, the law gives special protection to certain secured transactions involving the fiduciary assignment of properties or credit rights, by stating that such credit is not affected by a judicial reorganisation. However, the greatest innovation of the Federal Law 11.101/05 was provided on article 67. Such provision establishes that credits related to obligations contracted after the filing of the judicial reorganisation have preferential status over all the credits incurred on the procedure, in the event bankruptcy is later decreed. In addition, unsecured creditors affected by the judicial reorganisation that keep granting credit to the company after the filing of the
To answer this question we must make a prior explanation on how the process of approval of the reorganisation plan proposed by the debtor takes place. After the proposal is presented, any creditor is entitled to make objections, in accordance with article 55. If at least one objection is made, the Judge will then call a creditors general assembly to discuss such proposal. On the creditors general assembly, creditors will be divided into three categories, as follows: (i) category 1: labour and labour accidents creditor; (ii) category 2: secured creditors, with voting rights proportional to their respective credits, up to the limit of the value of the asset securing the credit; and (iii) category 3: the remaining creditors. The procedure to approve the plan is provided on article 45, which establishes that it must be approved by all categories, in accordance to the following rules: (i) categories 2 and 3: The plan must be approved by creditors holding more than 50% of the total credits of each category, and, cumulatively, must be approved by more than 50% of the individual vote of each creditor in each category that have attended the assembly, regardless the amount of the credits; and (ii) category 1:

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The plan must be approved by more than 50% of the individual vote of each creditor that has attended the assembly, regardless of the amount of the credits. In the event the plan is not approved under article 45, there is still an alternative for its approval. Article 58 states that the Judge may approve the plan rejected under article 45, if, on that very same assembly, all of the following conditions were met: (i) it has been approved by creditors holding more than 50% of the total amount due by the debtor, regardless of the categories; (ii) it has been rejected by no more than one category under article 45; and (iii) if, on the category that rejected the plan, 1/3 of the creditors have approved it, and the plan treats such category of creditors in an isonomic manner. However, this alternative form of approval is quite nebulous, because article 58 does not bind the Judge, and the law does not provide objective criteria to guide the Judge on such decision. This issue has brought several discussions, and is far from being solved. We understand, however, that if the conditions set forth on article 58 are all met, and if there is sufficient proof of the economical viability of the company, the principle that grounds the Corporate Recovery Law, which is the protection of a viable company, must prevail, and the approval will be imperative.
Brazil
settlements, because Brazilian Labour Law, due to its protective nature, provides that such settlements are always subject to court revision in favour of the employees. There are alternatives to reduce risks, such as having the Unions representatives intervening on the agreement, but even in those cases, the risk is not completely surpassed.
Brazil
There are no legal restrictions on the manner in which the reorganisation plan will be proposed. Article 50 of Federal Law 11.101/05 gives a non-restrictive list of means of reorganisation, such as the concession of longer payment terms and special payment conditions, corporate restructuring, control change, concession voting of rights to creditors, lease of the business, salaries reduction, shared administration, and many others. As long as the proposal is duly approved under articles 45 or 58, any means of reorganisation is, in theory, acceptable. In bankruptcy cases there are no alternatives other than the realisation of the assets, since this is the only objective of such procedure. However, when bankruptcy is required by any creditor, the debtor has the alternative to require the conversion of the procedure into a formal judicial reorganisation. This will be the debtors last opportunity to reorganise the company and prevent bankruptcy.
On a judicial reorganisation, if the plan proposed by the debtor is not approved, bankruptcy will be decreed. If, on the other hand, the plan is duly approved, the judicial reorganisation will survive until all obligations are met or after two years from the date the plan was approved, whichever comes first. If, after such two-year period there are still pending obligations, the judicial reorganisation will still be concluded, but such obligations will survive and will entitle the creditor to adopt any legal measure to enforce them on the proper jurisdiction. On bankruptcy cases, after the assets are realised and payments are made (in whole or in part), the Judge will terminate the bankruptcy process. In addition, the obligations of the debtor will be considered extinct if at least one of the following events occur: (i) credits are paid in full; (ii) after realising the assets, more than 50% of the unsecured creditors are paid; and (iii) a five-year term is reached for bankruptcies with no crimes committed or 10-year term in bankruptcies for in which crimes have been committed.
On judicial reorganisation it is possible to achieve an expedite restructuring by means of a pre-packaged sale. Under article 60, the pre-packaged sale can involve either the whole business or specific units or branches, and the acquirer will not be responsible for the payment of any liabilities of the debtor (including tax liabilities), unless any relation between the acquirer and the debtor is detected. On bankruptcy cases it is also possible to realise the assets through a pre-packaged sale, as long as such option provides a better sale price than the isolated sale of the assets.

7.1 Is it common to achieve a restructuring outside a formal procedure in Brazil? In what circumstances might this be possible?
8 International
8.1 What would be the approach in Brazil to recognising a procedure started in another jurisdiction?
It is quite common the achievement of a restructuring outside a formal procedure in Brazil. Besides the regular restructuring steps (such as cost reduction and closing down unprofitable branches), renegotiations with major creditors are becoming more and more common, especially in this crisis scenario, that seems to have brought creditors to a more friendly spirit to renegotiate. Due to its contractual nature, out-of-court settlements have no legal requirement to be entered into, besides, obviously, the free will of the parties involved. For this reason, it is more likely to achieve a successful result, since it can be implemented by the debtor before the crisis actually arrives, while in a formal procedure, especially a formal judicial reorganisation, the effective arrival of the crisis situation is a legal requirement. Debtor may have trouble including labour credits on out-of-court
The approach in Brazil to recognising a procedure started in another jurisdiction will depend on the purpose of such recognition request. If the purpose is to extend to the Brazilian branches the effects of a judicial reorganisation or a decree of bankruptcy initiated in a foreign country, such attempt will not be successful, since Brazilian law protects the Brazilian units by considering them, for judicial reorganisation or bankruptcy purposes, as independent units, subject to the Brazilian jurisdiction. If, however, the purpose of such request is, for example, to repossess an asset located in Brazil, held by a third party, the approach would be similar to the recognition of any foreign decision in Brazil. The foreign court order - which must not be contrary to Brazilian public order - will first be addressed to the Brazilian Supreme Court, for homologation, and after being homologated, the case will be addressed to the proper jurisdiction to be enforced.
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Acknowledgment
The authors earnestly thank senior lawyer Leandro Rinaldi, whose sound knowledge of the Brazilian Bankruptcy Law provided an invaluable contribution to the writing of this article.
Brazil
Antonio Carlos Monteiro da Silva Filho

Leoni Siqueira Advogados Rua Olimpadas, 66, 2. floor - Vila Olmpia So Paulo - SP Brazil
Cristiano Rodrigo Del Debbio

Leoni Siqueira Advogados Rua Olimpadas, 66, 2. floor - Vila Olmpia So Paulo - SP Brazil
+55 11 3638 7074 +55 11 3077 3900 antonio.monteiro@lsa.com.br www.lsa.com.br
+55 11 3638 7086 +55 11 3077 3900 cristiano.debbio@lsa.com.br www.lsa.com.br
He earned Bachelor of Law (1993) and Masters in Civil Procedure (1998) degrees from the So Paulo University. Antonio Monteiro has significant expertise in commercial litigation and arbitration in Brazil and overseas. Former partner of Grau, Forgioni and Monteiro da Silva Advogados and of Lilla, Huck, Otranto, Camargo e Munhoz Advogados, both in So Paulo. Recently, Antonio Monteiro has been active in insurance claims, class actions and in the defense of health management organisations. He also acted as an expert witness in Brazilian law in arbitrations and court proceedings in New York and Chicago. He published various articles on civil procedure and arbitration. Focus: civil and commercial litigation and arbitration. Languages: English and French.
Cristiano Del Debbio earned a Bachelor of Law degree from the Catholic University of Sao Paulo (1999), a Masters in Civil Procedure degree from the University of Sao Paulo (2005) and a Masters of Laws degree from the University of Chicago (2007). He has been active in commercial and antitrust litigation. Focus: civil and commercial litigation and arbitration. Languages: English.
Leoni Siqueira Advogados was established in 2004, in Rio de Janeiro, and currently operates offices also in So Paulo and Brasilia, comprising Brazils most important business centers. The law firm is especially active in Corporate Law, Corporate Finance, Capital Markets, Antitrust and Regulation, Tax Law and Litigation. In the past years, Leoni Siqueira Advogados has been involved in several important projects and transactions, advising and assisting clients to structure activities and investments for a broad range of subjects, from infra-structure investment transactions to complex civil litigation. The firms experience includes substantial legal advice on the transportation, telecommunications, oil and gas, energy, media and petrochemical industries. The firm rapidly obtained wide recognition and has contributed to the success of several mergers, acquisitions and corporate reorganisations, as well as to some of the most significant corporate disputes and antitrust cases in Brazil.

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Chapter 7
Canada
Blake, Cassels & Graydon LLP
Susan M. Grundy
Steven J. Weisz

1.1 How does a creditor take security over assets in Canada?
Transactions between the debtor and affiliated or related parties are subject to particular scrutiny. A trustee in bankruptcy (a trustee), who is appointed upon the bankruptcy of a debtor, is empowered to review pre-bankruptcy transactions entered into by the debtor within certain statutorilyprescribed time periods with a view, generally, to attacking transactions which: (i) (ii) were entered into with the intent of preferring one creditor over other creditors (preferences); or were made for inadequate consideration and had the effect of reducing the assets available to creditors (settlements or reviewable transactions).
In all provinces of Canada other than the civil law province of Quebec, a creditor can take security over personal property by obtaining a security interest in collateral pursuant to a written security agreement. The security agreement may be in any form that in substance creates a security interest in personal property, including a debenture, conditional sale, title retention, pledge agreement or lease. The creditor must also perfect its security interest by filing a financing statement pursuant to the relevant provincial personal property security legislation, or, for certain types of personal property collateral, by taking possession of the collateral. In Quebec, security may be taken over personal property through a movable hypothec with delivery (also called a pledge) and through a movable hypothec without delivery. A movable hypothec without delivery must be in writing and must be registered in the Register of Personal and Movable Real Rights. A movable hypothec with delivery is a possessory right that does not have to be in writing, although it is customary for commercial hypothecs with delivery to be in written form. In all provinces other than Quebec, security can be taken over real property by taking a mortgage which creates a charge on land and which the debtor can redeem on payment of the debt secured by the mortgage. In Quebec, the charging document is called a deed of hypothec. In all provinces, the mortgage or deed of hypothec must be registered against title to the land under the relevant provincial land registration system. In addition, Canadian chartered banks can take security under the federal Bank Act over inventory of specified classes of borrowers, certain production related equipment of farmers and fishermen, and over hydrocarbons and mineral rights.
A trustee also has a remedy against the directors or shareholders of a bankrupt corporation where, within one year of the bankruptcy and while insolvent, the corporation paid a dividend or redeemed shares. Under certain circumstances, a creditor of the bankrupt can obtain a court order to bring an action on the same grounds in the place of the trustee. Where it can be established that the consideration paid was fair and reasonable, not conspicuously less than fair market value, and not made with the intent to prefer one creditor over the other, the impugned transaction will almost always survive any challenge. Outside of a bankruptcy, a creditor can bring an action under relevant provincial statutes against a debtor where a debtor transfers property with the intent to defeat, hinder or defraud creditors (fraudulent conveyances) or where a creditor was preferred over another (assignments and preferences). In addition, a creditor or a shareholder has recourse to an oppression remedy under most Canada corporations statutes where, amongst other things, the business or affairs of a corporation have been carried on or conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of, amongst other persons, a creditor or shareholder of such corporation. Finally, under amendments to Canadian bankruptcy legislation that have been passed but are not yet in force (the Proposed Amendments), a general remedy is created to permit a trustee or a creditor in a bankruptcy or a restructuring to attack transfers at undervalue.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Canada?
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A key inquiry in any insolvency is whether the assets available to creditors have been reduced or prejudiced by the activities of the debtor or others. There are a number of potential remedies, some under the federal Bankruptcy and Insolvency Act (BIA) and others under provincial law or under corporate statutes. These remedies are not mutually exclusive, and it is not unusual for creditors or a trustee in bankruptcy to attack a transaction on a number of grounds at the same time.
Trading while insolvent is not specifically a criminal offence in Canada. However, directors of a corporation in financial difficulty are often concerned about the potential personal civil liability they may have to creditors. The decisions directors are faced with when
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a corporation is in financial difficulty often involve difficult judgment calls, and creditors are increasingly looking to directors as a source of recovery in insolvency. As a result, it has become common for directors to obtain independent legal advice on the issues they are dealing with and, if the debtors financial position deteriorates to the point that there is no reasonable prospect that the obligations the corporation is incurring from continued operations can ever be paid, the directors are usually advised to consider having the corporation file formal insolvency proceedings or cease carrying on business. There are a number of provincial and federal statutes that impose personal liability on directors of corporations. The most common potential areas of director liability are: 1. 2. 3. 4. 5. employee wages and vacation pay and, in some provinces, severance and termination pay; unpaid taxes and source deductions; non-compliance with environmental legislation; unpaid pension contributions; and liabilities under corporation statutes, which impose obligations on the directors of the corporation in the performance of their duties as directors and expose directors to potential liability under the oppression remedy.
Canada
in most cases a secured creditor must make a demand for payment and provide a statutory 10-day notice of its intention to enforce its security against the assets of the debtor. Depending on the circumstances, a secured creditor may be required to provide additional notice under common law requirements that a secured creditor provide reasonable notice of any defaults or demand for payment prior to taking steps to enforce security provided to it by the debtor. Receivership The appointment of a receiver, who is empowered only to realise on specific security, or a receiver and manager, who has authority to carry on the business of the debtor, can be accomplished privately pursuant to a right in a security agreement, or by court order under the circumstances discussed below. A receiver or receiver and manager (a receiver) is typically an accounting firm which provides insolvency and receivership services. (a) Court-Appointed Receiver Once the requisite notice periods (described above) have lapsed (or in exceptional circumstances where there is a possibility that the value of a debtors assets will erode) a secured creditor is entitled to apply to the court for the appointment of a receiver. A courtappointed receiver is an officer of the court and derives its powers solely from the courts order and takes its directions and instructions from the court and not the creditor who appointed it. The court has the power to appoint receivers through statutes in most provincial jurisdictions other than Quebec when it is just and convenient, and under the federal BIA an interim receiver can be appointed where the statutory notice of intention to enforce security is about to be sent or has been sent to take possession of and exercise control over all or part of all of the debtors property and business and take such other actions as the court considers advisable. In most cases, a secured creditor will apply for a joint appointment of a receiver/interim receiver under the applicable provincial statute and the federal BIA. (b) Privately-Appointed Receiver A receiver can be privately appointed by a secured creditor pursuant to a contractual right in a security agreement. A privately-appointed receivers rights are dependent on the rights granted by the debtor in the security agreement. A privately-appointed receiver takes its instructions from the secured creditor who appoints it. In these circumstances, the privately appointed receiver can take possession and dispose of the debtors assets without court intervention so long as the debtor does not object to the exercise of the rights under the security and the steps taken to take possession of the debtors assets. Winding-up Insolvent banks, insurance companies, trust or loan companies and specified trading companies can be liquidated under the Winding-up and Restructuring Act. This procedure is not commonly used and is not discussed further in this chapter. Restructuring Canada has two formal procedures for the restructuring of the liabilities of an insolvent business under court supervision, both of which involve the debtor proposing a compromise to its creditors of the debtors pre-filing liabilities. They are: (i) a proposal under the BIA; and (ii) a plan of arrangement under the CCAA (a CCAA restructuring). (a) Proposal The BIA permits debtors to file restructuring plans or proposals to their secured and unsecured creditors. The process is relatively rigid and codified under the BIA. A Debtor obtains a stay of proceeding by filing a proposal or notice of intention to make a proposal. Where a notice of intention to make a proposal has been
The directors of insolvent companies may defend these claims on the basis of their due diligence or proper performance of their duties as directors. However no such due diligence defences are available if employees are not paid wages, vacation pay, or, in some provinces, severance and termination pay. The failure of a corporation to comply with these statutory obligations may result in quasi-criminal proceedings against the corporation and against directors and/or officers who acquiesce in the breach of the statutory obligation.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Canada?
The formal procedures available in Canada are: (1) liquidation through (a) bankruptcy, (b) receivership, or (c) winding-up; and (2) restructuring through (a) proceedings under the federal Companies Creditors Arrangement Act (CCAA) or (b) a proposal under the federal Bankruptcy and Insolvency Act (BIA). Bankruptcy Bankruptcy is a legal process governed by the BIA for the liquidation of a debtors assets. Bankruptcy proceedings may be brought against any corporation, wherever incorporated, that has an office or assets or carries on business in Canada, except banks, insurance companies, trust or loan companies and railways. A debtor can become bankrupt voluntarily by making an assignment in bankruptcy, or involuntarily by the granting of a bankruptcy order by the court on the application of one or more of the debtors creditors or as the result of a failed restructuring under the BIA. An involuntary bankruptcy can only be commenced by unsecured creditors, as the rights of secured creditors are not affected by a bankruptcy. Where it is shown to be necessary for the protection of the estate of the debtor, concurrent with an application for a bankruptcy order, a creditor may apply to have an interim receiver appointed to take immediate possession of the property of the debtor for the purposes of preserving and safeguarding the assets pending the hearing of the application for a bankruptcy order. Pre Conditions (Demand) Before exercising its rights under security provided to it by a debtor,

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filed, the debtor will automatically obtain a 30-day stay which can be extended by court order (a maximum 45-day extension is granted per request with total of six months from initial filing, prior to being required to file proposal or be deemed bankrupt). The terms of a proposal must meet certain statutory requirements to pay certain prior creditors such as the government for withholding tax obligations. A trustee under the proposal is also appointed to oversee the process and assist the debtor in preparing and administering the proposal. To be successful, a proposal requires approval by a double majority of the creditors of each class: a majority in number and 2/3 in value. Once creditors have approved a proposal, the debtor must obtain approval of the proposal by the court on the basis that the proposal is made in good faith and that the terms are reasonable and calculated to benefit the general body of creditors. Other than seeking extensions of the stay and approval of a proposal, most of the steps in this proceeding occur out of court. Consequently, the costs are generally lower and the time period to restructure is shorter than in a CCAA restructuring. (b) CCAA Restructuring Large companies can also seek protection from their creditors by bringing an application under the CCAA. Creditors in certain circumstances can also bring an application under the CCAA against a debtor. The CCAA is a short statute which only provides a framework for the process. Court orders and the common law precedents set out the terms and many of the principles by which the rights and obligations of a debtor and its creditors are modified or structured in the process. A stay of proceedings will be imposed and creditors generally will not be able to take any action against the debtor in respect of prefiling indebtedness. A court-appointed monitor is appointed to oversee the process, report to the court and assist the debtor in formulating, presenting and administering a claims process and plan of arrangement or compromise to the various classes of creditors. A plan of arrangement or compromise must be passed by the creditors on the same double majority standard as a proposal, and the court must approve or sanction the plan by reviewing the plan to determine whether it is fair, reasonable and equitable.
2.2 What are the tests for insolvency in Canada? 2.3
Canada
Bankruptcy (a) Bankruptcy Assignment A debtor can make a voluntary assignment in bankruptcy if it is insolvent and has an office, assets or carries on business in Canada. (b) Application for Bankruptcy Order Where a creditor has filed an application for an involuntary bankruptcy order, the petitioning creditor(s) must prove that the debts owing to the applicant creditor(s) amount to at least Cdn. $1,000 and that the debtor has committed an act of bankruptcy within the six months immediately preceding the filing of the application. The most common act of bankruptcy relied upon is that the debtor has ceased to meet its liabilities generally as they become due. Restructuring Proposal Under the BIA, a proposal may be made or notice of intention to make a proposal may be filed by an insolvent person, by a bankrupt, or by a receiver, liquidator or trustee in bankruptcy of an insolvent person. CCAA A CCAA restructuring can be commenced by a debtor which is insolvent and has outstanding debt of at least Cdn. $5,000,000 or, in the case of a joint filing by several affiliated debtors, where the applicants collectively have outstanding debt of at least Cdn. $5,000,000. Receivership A receiver may be appointed privately by a secured creditor pursuant to the terms of a security agreement following default under the obligations secured by the security. A receiver may be appointed by court order if the court is satisfied that it is just and equitable to do so. An interim receiver under the BIA may be appointed by application to the court if it is shown to be necessary for the protection of the estate of a debtor or, where applicable, the interests of a secured creditor or one or more creditors or of the creditors generally at any time after the filing of an application for a bankruptcy order and before a court is satisfied that a notice of intention to enforce security or where a notice of intention to file a proposal or a proposal has been filed.
Canada
In order to make an assignment in bankruptcy, obtain a bankruptcy order, or to seek protection under the proposal provisions of the BIA, a debtor must be insolvent. The general test for insolvency in a bankruptcy or proposal proceeding is if the debtor: (i) (ii) (iii) is unable to meet its obligations generally as they become due; has ceased paying current obligations in the ordinary course of business as they generally become due; or the aggregate of whose property is not, on a fair valuation, sufficient or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all obligations due and accruing due.
Bankruptcy A voluntary assignment is filed by the corporation with the official receiver, who reports to the Superintendent of Bankruptcy (the Superintendent), the government administrator of bankruptcies. A creditor may bring an application for a bankruptcy order in the applicable provincial court. In addition, if a debtor files a notice of intention to make a proposal and does not file a proposal or obtain extensions of the stay of proceedings in the requisite time periods then it will be deemed bankrupt as of the date of the initial filing. In addition, if a proposal is not approved by the creditors or the court, then there will be a deemed bankruptcy as of the date of the initial filing. Proposal A debtor can initiate a proposal by lodging a written proposal setting out its terms with a trustee or by filing a notice of intention to make a proposal with the official receiver in the debtors locality, setting out certain particulars.
A corporation must be insolvent to file under the CCAA, but there is no definition of insolvency under the CCAA. A debtor company that is insolvent under either of the tests outlined above is insolvent for purposes of the CCAA. A court may also determine that a company is insolvent if at the date of filing there is a reasonably foreseeable expectation that there is a looming liquidity condition or crisis that would result in the debtor running out of cash to pay its debts as they generally become due in the future, without the benefit of the stay and ancillary protection provided in a CCAA restructuring.
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3 Creditors
3.1
Canada
Receivership A receiver may be appointed privately by a secured creditor pursuant to the terms of a security agreement and an appointment letter, or by application for a court order in the applicable provincial court where the corporation has its head office or chief place of business. CCAA Restructuring In order to commence a CCAA restructuring, the debtor (or in some circumstances, creditors) can make an application requesting that the court make an order that grants the debtor protection from its creditors for a period of time sufficient to allow it to formulate a plan of arrangement or compromise that it can present to its creditors for approval. The proceedings are commenced in the applicable provincial court where the head office or chief place of business is located. If there is no place of business in Canada, then they may be commenced where any assets are situated.
Are unsecured creditors free to enforce their rights in each procedure?
Unsecured creditors are stayed from enforcing their rights in all procedures except a private receivership.
Secured creditors are typically stayed from enforcing their security in a restructuring or court receivership. Statutory stays apply in proposal proceedings and by court order under the CCAA and in courtsupervised receivership proceedings. While not subject to the stay in bankruptcy proceedings, secured creditors are typically required to prove their secured claim prior to enforcing their security. Private receivership is a contractual remedy and no stay applies. A creditor in all proceedings may seek to lift the stay by application to the court for a declaration that the stay is no longer effective against it. Orders lifting the stay are uncommon. Under s. 69.4 of the BIA, the court may grant a creditors application to lift the stay if the court is satisfied that the creditor is likely to be materially prejudiced by the continued operation of the stay or that it is equitable on other grounds to make such a declaration. Under the CCAA there is no statutory test for lifting the stay and the court will balance the interests of the affected parties in determining whether the CCAA proceedings should be terminated and a receiver appointed at the insistence of a secured creditor.
Bankruptcy (i) Assignment Once appointed, the trustee is required to give notice of the bankruptcy to all known creditors of the bankrupt, to convene meetings of the creditors of the bankrupt and to report periodically on the progress of its administration of the bankrupt estate. (ii) Bankruptcy Application An applicant creditor must notify the debtor at least 10 days before the hearing of the bankruptcy application. Proposal Within 21 days after the filing of a proposal, the proposal trustee must send certain prescribed information to all known creditors of the debtor, including a copy of the proposal, a statement of the debtors assets and liabilities and the date and time for a creditors meeting to consider the proposal. The proposal trustee is required to prepare a report to the creditors, which sets out the debtors liabilities, the realisable value of the debtors assets, and certain other matters. Receivership Within 10 days of its appointment, a receiver must report its appointment to the Superintendent. After the initial notice, a receiver continues to have ongoing obligations to provide notice to any additional creditor of the debtor it becomes aware of during the receivership and to file reports with the Superintendent on its activities. CCAA Restructuring In a CCAA restructuring, the monitor, an official appointed by the initial court order to assist and oversee the debtor in the restructuring and report to the Court, must send a copy of the initial order to every known creditor of the debtor company with a claim of more than $250 within 10 days. A typical initial order will include a comeback clause which allows creditors and other interested persons to return to court if they wish to seek to amend or vary the terms of the initial order. Subsequent court orders will address the claims process. Following the filing of a plan, creditors will be notified of the time and place of the meeting of creditors to vote on a proposed plan of arrangement.
A creditors right of set-off that exists outside of an insolvency proceeding is statutorily preserved within a proceeding, subject to certain limitations. To the extent that a right of set-off depends on mutuality (or reciprocal obligations of debtor and creditor), the control taken of property by a trustee or by a receiver can destroy such mutuality. Generally a creditor is not permitted to set-off prefiling obligations/receivables against post-filing obligations/ receivables in BIA proposals or court-appointed receivership proceedings.

In a bankruptcy or receivership, the companys assets or business are controlled by a trustee and a receiver, respectively. The directors and officers and shareholders continue to control a company in a CCAA or proposal proceeding. A monitor is appointed to monitor the business and financial affairs of the company in a CCAA restructuring but does not control the company. A trustee is appointed in a proposal proceeding for similar monitoring purposes. It is the duty of the directors to continue to act in the best interest of the company throughout the restructuring process. In addition, directors and shareholders, to the extent they are controlling the company through a shareholder agreement, should ensure that cashflows are sufficient to pay post-

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filing obligations in a restructuring. Corporate legislation provides for arrangements to be made with shareholders of a debtor company and these proceedings can be merged with CCAA or proposal proceedings. Existing shareholders cannot expect to maintain a financial interest and participate in the debtors restructuring where creditors claims are not paid in full, although in some cases shareholders receive some benefit from a restructuring if it is appropriate in the circumstances.
Canada
involved, receivers are reluctant to operate going concern businesses due to potential successor employer claims that could be made or brought against the receiver. The Employee Super-Priority will continue to apply.
Canada
Bankruptcy Bankruptcy proceedings generally have the effect of giving rise to a termination of contracts with the debtor as typically the debtor will cease to operate and its assets will be liquidated. Most contracts will provide that they can be terminated on bankruptcy and if there is no concurrent court-appointed receivership which would stay any termination by the counterparty then they will be terminated. CCAA Restructuring Creditors are generally prohibited from terminating contracts with a debtor as a result of any prefiling breach or the actual filing under the CCAA. Debtors, under the supervision of the court, may terminate contracts as part of its restructuring, giving rise to a claim for unsecured damages by the counterparty. Proposal Similar to CCAA restructuring. Receivership Unless assumed by a receiver, a receiver will not be liable for contracts of a debtor. The Receiver can be given the power to cause the company to terminate contracts by court order. Under the Proposed Amendments, the right to disclaim a contract in a CCAA case or in a proposal under the BIA have been modified. Before disclaiming the contract, the debtor must obtain the approval of the monitor or the proposal trustee, as applicable, or the approval of the court and must demonstrate that the disclaimer enhances the prospects of a viable proposal or arrangement being made, and is unlikely to cause significant financial hardship to the counterparty. The debtor does not have the right to disclaim certain types of contracts: an eligible financial contract (forward commodity contracts), a collective agreement, lease of real property, or a financing agreement where the debtor is the borrower.
Financing will generally come from cash flow generated from the operations of the business. In a CCAA restructuring or a proposal proceeding, the debtor, with court approval, may obtain debtor-inpossession financing (DIP financing) to finance the costs of the proceeding, the day-to-day operating costs of the company and the professional costs of its advisers if cash flow is insufficient. A court-appointed receiver may be granted the power to borrow funds by the use of receivers certificates which are granted a court ordered priority charge over the assets of the debtor. DIP financing and receivers certificates will typically be secured by a superpriority charge on the debtors assets, in priority to secured creditors. However, the cooperation of the secured creditors to these arrangements will be important as these interests cannot generally be prejudiced or primed without their consent, although the courts are sympathetic to the debtors attempts to save businesses and jobs at least in the short term and will try to balance the relative prejudice between secured creditors and the debtor, employees or other stakeholders. The BIA and CCAA do not contain any statutory provisions allowing DIP financing. The concept and practice has developed through the common law. Under the Proposed Amendments, the procedure for obtaining DIP financing will be codified and actual notice to secured creditors who might be affected by a priority charge for DIP financing will be required.
Bankruptcy In a bankruptcy proceeding, employees are deemed to be terminated. There will be a super-priority charge (ranking ahead of most other claims) over the proceeds of current assets for arrears of wages and vacation pay in the amount of $2,000 for each employee over the inventory and receivables of the debtor (the Employee Super-Priority). Employees will be preferred creditors for any additional claims (ranking ahead of unsecured claims, but behind secured claims). There will also be a super-priority charge over all the assets of the bankrupt with respect to certain pension obligations. Proposal and CCAA Restructuring The employer/employees relationship continues in a proposal and CCAA restructuring except that employees can be terminated such that they will have claims in the restructuring. Collective agreements continue to be effective in restructuring proceedings. In order for a proposal to be accepted by the court, provision is required to be made for the payment of employees back wages and certain other amounts. The employee Super-Priority will also apply in respect of these proceedings. Receivership In a receivership where the business is operated as a going-concern, employees are typically terminated at the outset and re-hired as necessary on a term and task basis. However, if there is a union
5 Claims
Bankruptcy/Proposal In a bankruptcy or proposal, creditors are required to file a proof of claim according to the statutory procedure. The trustee in bankruptcy or trustee under the proposal will review and accept or disallow the claim. If disallowed, then the creditor must appeal to the court within 30 days. A proof of claim must be filed prior to any meeting of creditors to permit a creditor to vote at the meeting or prior to any distribution of assets to ensure the creditor receives a distribution. CCAA Restructuring/Court Receivership In a CCAA restructuring or court receivership, the claims process and procedure for filing a proof of claim will be determined by court order. The court order typically follows the statutory procedure for a bankruptcy but the time periods may be different. In addition, there will be a claims bar date by which all claims must
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be filed or be extinguished. The claims bar order will also typically provide for a form of substituted service on creditors by publication of a notice in national newspapers on specified dates or for a specific number of times.
Canada
To be approved, a CCAA restructuring must be passed by a double majority in each class of creditors: a majority of the total number of creditors in the class and 66 2/3% of the total value of claims in the class. The same double majority requirement applies in a BIA proposal.
Priorities of claims in Canada are affected by provincial and federal legislation, creating four categories of claimants: (1) priority claims; (2) secured claims; (3) preferred claims (such as employees for unpaid wages and landlords for arrears and accelerated rent); and (4) unsecured claims. Priority Claims A deemed trust claim by the federal Canada Revenue Agency (CRA) for employee withholding taxes has a super priority over almost all of the claims against the debtor. Priority claims created by federal and provincial statute for, amongst other things, obligations owed to tax collection authorities and arrears of employee vacation pay and pension contributions, may rank in priority to secured creditors (typically as a deemed trust or lien over secured interests in inventory and receivables) outside of bankruptcy or a BIA restructuring. However, within a bankruptcy or BIA restructuring, such priority claims rank beneath those of secured creditors. In a CCAA restructuring, it is unsettled whether these claims continue to have priority over secured creditors during the proceeding. Super-priority charges or liens can be created by court order in receiverships and CCAA restructurings in respect of administrative charges including professional fees, DIP or receivership borrowings and for claims against directors. Trade suppliers have a limited remedy for the return of goods supplied within 30 days of delivery of a demand following a bankruptcy or receivership. A priority charge is created in bankruptcy and receiverships for claims for certain unpaid wages and pension obligations of the debtor over cash, cash equivalents, inventory and receivables of a debtor and related proceeds.
6.2
What happens at the end of each procedure?
Bankruptcy Bankruptcies are ended by the trustee in bankruptcy applying for its discharge. Companies can only be discharged if all claims of creditors have been paid in full, which rarely if ever happens. The trustee must give notice to the Superintendent, the bankrupt and every creditor who has proved its claim of the date fixed for the hearing before the court. The trustee provides a statement of receipt and disbursements, and dividend sheet, which must be approved by the Inspectors and the Superintendent. A court order discharging the trustee will be obtained after certain notice periods elapse and the court confirms that all documentation, fees and actions by trustee are approved. Proposal Following creditor and court approval of proposal, all pre-filing debts are compromised in accordance with terms of proposal following fulfilment and implementation of terms of proposal. The procedure for discharge of the trustee under a proposal is similar to a trustee in bankruptcy. CCAA Restructuring Following creditor and court approval or sanctioning of the plan of arrangement or compromise, all prefiling debts are compromised in accordance with terms of the plan following fulfilment and implementation of the terms of the plan. Procedures for the monitor to be discharged are similar to a proposal trustee, except reporting requirements may be more extensive and the court may be more involved due to the complexity of the matter. Receivership A company rarely exits receivership, as either the business or parts of it are sold as a going concern or liquidated or both. The receiver applies for a discharge order at the end of the engagement once all assets and claims are dealt with, which entails approval by the court of its actions and the fees and expenses incurred in the receivership.
Tax liabilities can be incurred if a company or business continues to operate in the normal course or expenses are incurred by a trustee or receiver. Tax liabilities can also arise as a result of asset sales. In restructurings, tax losses of a company will be reduced as a result of debt forgiveness arising from a compromise of claims against the debtor. A debtors post filing obligations to tax authorities are not affected in a restructuring.

7.1 Is it common to achieve a restructuring outside a formal procedure in Canada? In what circumstances might this be possible?

Yes. Before commencing formal proceedings a debtor almost always has attempted some form of informal reorganisation or private compromise with its creditors and other key stakeholders. A debtor may be able to negotiate a restructuring of its obligations by private agreement with its creditors, such as a standstill or forbearance agreement with a principal creditor that allows the debtors business to continue operations while the creditor agrees to forbear from exercising its rights. The success of an informal process is dependent on the debtors
There is no cramdown procedure in Canada. To become effective, a CCAA restructuring must be approved by each class of affected creditors. The courts have been mindful of the negotiating leverage that this requirement can provide to small creditor classes and have been reluctant to divide creditor classes so finely that it would be impossible to get a plan approved.

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In certain circumstances, creditors may object to the manner in which their rights are affected in a restructuring or receivership, especially in respect of a sale of assets where a creditor may only have recourse to the proceeds.

8 International
8.1
Canada
ability to obtain the agreement of all creditors affected by the private compromise. There is no procedure to bind dissenting minorities, and the debtor remains vulnerable to action by creditors who are not willing to participate. As a result, this type of informal compromise is most often implemented by debtors with a limited number of creditor claims that have to be renegotiated. Informal workouts work best when there are few key stakeholders because of the logistical difficulty of dealing with the varied and numerous demands and interests of a large number of key stakeholders. An informal restructuring may also involve an exchange of all or parts of debts for equity.
What would be the approach in Canada to recognising a procedure started in another jurisdiction?
Canada
Both the BIA and the CCAA expressly provide for the recognition of foreign insolvency proceedings in Canada. Under the Proposed Amendments, the UNCITRAL Model Law on Cross Border Insolvencies will be adopted in Canada, with modifications. BIA Courts will assist foreign trustees in obtaining possession of assets based on the principles of comity. However, the Canadian courts maintain the discretion to determine the legality, propriety or rightfulness of their exercise of comity. Part XIII of the BIA also deals with international insolvencies which provides for the recognition of foreign bankruptcy proceedings and foreign representatives that are similar to a trustee, liquidator or receiver. The filing of a certified or exemplified foreign order declaring the insolvency of the debtor is accepted as proof of the debtors insolvency and of the foreign representatives appointment in respect of the debtor. The foreign representative may then use these determinations to obtain a bankruptcy order including a stay of proceedings in Canada (which may be limited to the assets in Canada) and the appointment of an interim receiver. CCAA Similar to the BIA, courts may make such orders and grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in a co-ordination of proceedings under the CCAA with any foreign proceeding. The court is not restricted from applying such legal or equitable rules governing the recognition of foreign insolvency orders and assistance to foreign representatives as are not inconsistent with the provisions of the CCAA. The court is not required to make any order that is not in compliance with the laws (including public policy) of Canada or to enforce any order made by a foreign court.
The formal reorganisation of an insolvent debtor can be effected through a restructuring under the CCAA or a proposal under the BIA.
Outside of a formal court process, the sale of the assets of an insolvent debtor may be subject to attack under both the BIA and a variety of provincial statutes (see question 1.2). Many of these provisions are aimed at protecting creditors, if the transaction occurred at a price that was under value in the view of the court. In addition, the Ontario Bulk Sales Act provides that a company cannot sell all its assets out of the ordinary course without making certain provisions for its creditors and non-compliance may render the transaction voidable by creditors of the debtor. It may be possible to present a pre-packaged sale in the context of any of the insolvency processes. Which process is chosen will depend on a variety of factors, although the end result may not be a restructuring but a sale of assets or all or part of the business of the debtor. The court will typically order that certain marketing processes be undertaken in a CCAA or receivership process. If a pre-packaged sale is presented to the court, the court will likely require evidence that a marketing process similar to that which it would normally approve has been conducted before it will approve of such a sale or that there are factors which require a quick sale to maximise value or save jobs.
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Canada
Susan M. Grundy
Blake, Cassels & Graydon LLP 199 Bay Street, Suite 2800 Toronto, Ontario, M5L 1A9 Canada
Steven J. Weisz
Blake, Cassels & Graydon LLP 199 Bay Street, Suite 2800 Toronto, Ontario, M5L 1A9 Canada
Susan is a senior partner in the Firms Restructuring & Insolvency Group. Her practice emphasises the commercial aspects of insolvency, including work-outs, debt restructuring, mergers and acquisitions transactions involving businesses in financial difficulty, bankruptcy and security enforcement. She has extensive experience in insolvency proceedings of all kinds in domestic and cross-border cases on behalf of both debtors and creditors, and she regularly provides advice on insolvency issues in structuring transactions. Susan has also been listed as a leading restructuring lawyer in numerous publications, including The Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada, Best Lawyers in Canada, Chambers Global: The Worlds Leading Lawyers for Business, and PLC Cross-border Restructuring & Insolvency Handbook. She is rated by Lexpert magazine as one of the top 25 women business lawyers in Canada. She is the author of The Insolvency Laws of Canada (2006). Susan is a fellow of the Insolvency Institute of Canada and a director of the Canadian Association of Insolvency and Restructuring Professionals. Admitted: Ontario, 1980.
Steven has been a partner in the Firms Restructuring & Insolvency Group since 1997 and is Practice Group Co-ordinator. Steven has represented debtors, financial institutions, receivers, trustees, pension administrators, suppliers and other creditors and stakeholders in major insolvency and restructuring proceedings, including significant cross-border matters. He has extensive experience in a variety of litigation matters relating to insolvency, bankruptcy, commercial fraud and priority disputes, including disputes arising from equipment and inventory financing. Steven is a past president of the Turnaround Management Association (TMA) Toronto chapter. He has been an international director since 2002, and is currently a member of the executive committee, and the vicepresident, international relations of TMA based in Chicago. Steven has been recognised as a leading lawyer in IFLR1000: The Guide to the Worlds Leading Financial Law Firms - 2008 Edition, PLC Which Lawyer? Yearbook 2008 and in PLC Cross-border Restructuring and Insolvency Handbook 2007/08.
Blake, Cassels & Graydon LLP (Blakes) is one of Canadas leading business law firms providing guidance and expertise in virtually every area of Canadian business law across Canada, with more than 500 lawyers in offices in Montral, Ottawa, Toronto, Calgary, Vancouver, New York, Chicago, London and Beijing. Blakes Restructuring & Insolvency Group is one of Canadas largest and most experienced and is ranked highly in industry rating services such as The Canadian Legal Lexpert Directory and Chambers Global: The Worlds Leading Lawyers for Business. Blakes restructuring and insolvency lawyers have had significant roles in almost every major domestic and international insolvency case in Canada in the last several years. Blakes has extensive experience in advising lender syndicates, secured and unsecured creditors, debtor-in-possession (DIP) lenders, debtors and other parties affected by business insolvency issues. We regularly act as independent counsel for accounting firms serving as monitors in reorganisation cases, as receivers or as trustees in bankruptcy. We have also represented purchasers in a number of complex acquisitions from insolvent estates.

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+1 416 863 2572 +1 416 863 2653 susan.grundy@blakes.com www.blakes.com
+1 416 863 2616 +1 416 863 2653 steven.weisz@blakes.com www.blakes.com
Chapter 8
Chile
Grasty Quintana Majlis & Cia.
Jos Francisco Snchez
Eduardo Marchi

1.1 How does a creditor take security over assets in Chile?
time at which the acts of disposition have taken place, and several thresholds exist, i.e. state of financial difficulties, cessation of payments, bankruptcy declaration. It is also relevant to determine whether the debtors business is of a commercial or noncommercial nature. Firstly, creditors are not affected by any gratuitous acts that the debtor may have entered into as of 10 days prior to the date upon which the debtor ceases any payments and until the date of the bankruptcy declaration. If the act of disposition is in favour of certain relatives, the term is extended to 120 days prior to the date of cessation of payments. Secondly, creditors may also take legal action to request the annulment of other acts of disposition or contracts executed by the debtor prior to the terms indicated hereinabove when the debtor has entered into them in bad faith and has prejudiced the rights of creditors. In the case of gratuitous acts, it is necessary to prove that the debtor has acted in bad faith. Regarding onerous acts, in addition to proving the debtors bad faith, one must prove the acquirers bad faith. In both cases the losses that were caused by said act must be evidenced. For these purposes, it is deemed that the act was carried out in bad faith when the parties are aware of the debtors financial difficulties or the bad state of its business. Thirdly, in the case of debtors in mining, industrial, agricultural or commercial businesses, creditors are not affected by certain acts or contracts that the debtor may have entered into as of 10 days prior to the date upon which the debtor ceases any payments and until the date of the bankruptcy declaration, such as: (i) advance payment of obligations; (ii) payment of obligations made in a manner different to the terms of the relevant title; and, (iii) mortgages and pledges provided to secure pre-existing obligations. In addition, any other payments, acts or contracts of onerous nature executed between the date upon which the debtor ceases any payments and until the date of the bankruptcy declaration, are deprived of any legal effect upon creditors, i.e. are attributable to the mass of assets, when the third party that received said payments or contracted with the debtor knew that that the debtor had ceased in the payment of any obligations. Subsequent to the date of the bankruptcy declaration, the debtor surrenders the administration of its assets to the Syndicate and any acts or contracts entered into by the debtor would be of no legal force or effect.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Chile?
In Chile, creditors may receive security to ensure payment of their credits by way of various forms of guarantees contemplated by Chilean law, which may be personal or real depending upon whether the credit is guaranteed by the patrimony of another person or with a determined good or asset. The most common personal guarantees are: (i) the suretyship, by virtue of which a third party is obligated to respond to anothers obligation in the event that the principal debtor does not pay the obligation; (ii) the joint and several guarantee, in which case the liability for default is enforceable against all of the debtors as a group or against any one of them as an individual at the choice of the enforcing creditor; and, (iii) the penalty clause, by virtue of which the debtor or a third party is subjected to a penalty or fine that consists of giving or doing something (usually in the form of liquidated damages) in favour of the creditor in the event of nonfulfilment of the contracted obligation. For their part, real guarantees are constituted in respect of a determined good or real estate, whether owned by the debtor or a third party, and empower the creditor to pursue the good or asset, dispose of it and obtain payment with the proceeds of the sale with preference to the other creditors. The guarantee will be a pledge when the asset over which it is constituted is a moveable good. There are various types of pledge according to the nature of the asset or good. Goods that may be pledged vary from vehicles, machinery and equipment, to inventory, goods in process, chattels, accounts payable, shares, notes and commercial documents, among others. On the other hand, the guarantee will be a mortgage when security is constituted in respect of real estate, mining concessions, water rights and vessels (to name the most relevant). In general, real guarantees are registered in special registries. The aforementioned is notwithstanding the existence of other real and personal guarantees of lesser application.
Chilean legislation contemplates several actions that have the object of restoring the debtors patrimony with assets that have been disposed of. To this end, the situation varies depending upon the
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Generally, directors are jointly and severally liable for the
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compensation of any damages that may arise from their actions or resolutions of the Board of Directors and they will incur civil liability when they have executed, authorised, approved or concurred to actions or decisions contrary to the interests of the company, shareholders and third parties, unless they have expressly stated their opposition in the Board meeting where said resolutions are made. The Board of Directors of a company that has ceased payments of its obligations, or has been declared bankrupt, has the duty to summon the shareholders to inform them of the situation. Furthermore, debtors in the mining, industrial, agricultural or commercial sector must request the declaration of their own bankruptcy when they have ceased in the payment of any commercial obligations. Directors are liable for lack of compliance thereof. Directors may be held criminally liable when negligent or fraudulent acts, as defined in the Bankruptcy Law, cause the bankruptcy of a company. If convicted for such actions, directors are also disqualified and unable to perform such role in any corporations.
Chile
Notwithstanding, certain objective causes permit creditors to request the bankruptcy of the debtor, and as may be seen hereinbelow, each case conveys the notion or evidence of a potential or actual state of insolvency.
Any debtor in the mining, industrial, agricultural or commercial sector must request the declaration of its own bankruptcy within 15 days of the date upon which it has ceased in the payment of a commercial obligation. A debtor may be declared bankrupt at the request of creditors: (i) when it has ceased in the payment of a commercial obligation that is stated in an executive title; (ii) when there exist three or more executive titles against the debtor and at least two enforcement proceedings have been initiated, and said debtor has not presented assets sufficient to pay that owed, plus costs, within the fourth day of notification of the executive papers; and, (iii) when the debtor absconds from the territory or goes into hiding without having named an administrator of its assets with faculties to fulfil its obligations. In the case of sections (i) and (ii) of the preceding paragraph, a creditor may request that the debtor present proposals for a preventative judicial agreement. This type of arrangement may also be proposed by the debtor, at its own initiative, at any time prior to the bankruptcy declaration. The debtor may also request that the competent Court appoint an expert who will evaluate its financial, accounting and economic situation. The expert may either submit to the creditors a proposal for a preventive judicial agreement, or if it deems fit, request the Court to declare the debtors bankruptcy. Subsequent to the bankruptcy declaration, the adjudged bankrupt or any creditor may propose a simply judicial agreement to terminate the state of bankruptcy.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Chile?
The principal procedures are: a) Assignment of Assets: this consists of the voluntary abandonment made by the debtor of its assets in favour of the creditors when as a consequence of inevitable accidents it cannot pay its debts. However, this is of rare application in Chile. Judicial Agreements, which may consist of: (i) preventative judicial agreements, whereby the debtor proposes an arrangement to its creditors prior to the bankruptcy declaration. Chilean law also foresees the possibility that creditors that meet certain requirements may obligate the debtor to present a proposal for preventative judicial agreement prior to the bankruptcy declaration; and, (ii) upon the bankruptcy declaration, the adjudged bankrupt or any creditor may propose a judicial agreement to terminate the bankruptcy. This is known as the Simply Judicial Agreement. Bankruptcy: this is a procedure strictly regulated by law where the debtor is placed under the authority of a Receiver or Syndicate who will manage the debtors business. All the assets of the debtor will be involved in this procedure for the payment of all obligations, according to the preferences recognised by the law.
What are the tests for insolvency in Chile?
b)
c)
In the case of bankruptcy, the debtor itself or its creditors must petition bankruptcy before the competent Court. Upon examination of the circumstances, the Court will issue a resolution declaring the state of bankruptcy and appoint a Syndicate to assume the management of affairs of the adjudged bankrupt. Regarding preventive judicial agreements, the debtor must present before the competent Court proposals for an arrangement with its creditors, which will be communicated to all creditors. The Court will appoint a Syndicate to evaluate the financial situation of the debtor and present a report to the creditors. If approved with the required quorum, the debtor will be ordered to abide by the terms of the agreement. If the preventive judicial agreement is rejected, the debtor will be declared in a state of bankruptcy. If requested by qualified creditors, the Court shall force the debtor to propose a preventative judicial agreement to the Court. If such proposal is presented by the debtor, its approval will be subject to the same procedure indicated above. If no such proposal is received within a certain period, the debtor will fall into bankruptcy. If an expert is appointed as indicated hereinabove, the approval of the preventive judicial agreement or bankruptcy declaration of the debtor, as the case may be, will occur in the same manner as explained. With respect to simply judicial agreements, it is enough that the debtor or any creditor proposes the same to the Court and that it is subsequently approved with the required quorum.
2.2
In Chile, our legislation does not contain a specific definition for the concept of insolvency. It is generally construed by authors to be a complex business situation where the liabilities of a person or entity are greater than its assets. It is not a requirement to prove the state of insolvency for an individual or company to obtain the declaration of its bankruptcy. Chilean legislation assigns important effects to the fact that a person ceases in the payment of civil or commercial obligations. This is an objective situation that triggers the need for certain debtors to request the declaration of their own bankruptcy and will also have an effect upon certain acts or contracts of disposition of assets, as explained hereinabove.

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Chile
not be satisfied in full from the proceeds of the sale of other assets of the debtor, the secured creditors who have foreclosed on their collateral may be required to deposit a portion or all of the proceeds obtained therefrom to cover the existing deficiency or to otherwise secure payment thereof in full.
a) Bankruptcy: After a petition for bankruptcy by the creditor is presented, the debtor will be served notice and the Court will pronounce on the application petitioned. The debtor may pay the debts that have been invoked to request the bankruptcy and avoid the bankruptcy. If bankruptcy is declared, a notification via the Official Gazette will be made and all creditors will be summoned to present the documents evidencing their credits. The Syndicate appointed will present a report and thereon, the creditors will attend regular or extraordinary meetings as required to decide on the method of payment of the credits, either by way of continuance of total or partial business of the debtor, sale of the ongoing business or auction of the debtors goods and assets. b) Judicial Agreements: If a preventative judicial agreement or simply judicial agreement is presented, the proposal shall be notified to all creditors by means of a publication in the Official Gazette. All creditors are thereby summoned to a general meeting at which time they shall vote on the agreement, either accepting it or rejecting the terms thereof.
Chile
Generally, to prevent a diversion from the mass of assets, the bankruptcy declaration impedes all set-off related to reciprocal obligations between creditor and debtor, except for reciprocal obligations derived from the same contract among the parties. During the payment proceedings credits that have been accepted before the Courts may be set-off, with the understanding that the system of priority claims is not adversely affected. In the case of judicial agreements, set-off will be allowed as foreseen in the terms of the proposed arrangement.

3 Creditors
Unsecured creditors shall be summoned to the bankruptcy and creditors agreement proceedings, where they are free to vote and exercise their rights, provided, however, that they will be subject to all decisions adopted with the required quorum. If a judicial agreement is approved with the necessary majority, unsecured creditors shall abide by the terms thereof, even if they have voted against it. Unsecured creditors will be paid according to the regulations in force and subject to priority of credits.
In the event of bankruptcy, the Syndicate assumes the administration of the assets of the adjudged bankrupt, replacing that person who had possession or control of said assets. Therefore, the directors and shareholders are deprived of taking any decisions related to the management of the company affairs and assets. In the case of judicial agreements the company continues to be managed by its shareholders, directors and officers, but will operate in accordance with that established in the agreement, that is to say, the debtor continues to be in control of its business; however, its actions are limited in accordance with the terms of the agreement. The arrangement plan may foresee, and usually creditors request, that an intervener be appointed to oversee how the business is conducted and report to the creditors.
Generally, secured creditors are not obligated to participate in judicial or extra-judicial agreements, and are not bound by the terms of such arrangements unless they are willing to concur or have applied to participate in said proceedings. As regards bankruptcy, they may pursue the enforcement of their security via procedures distinct from a bankruptcy proceeding, but would be barred from foreclosing: (i) if it is decided that the debtor in bankruptcy should continue carrying on business, a secured creditor which voted for the continuation of the business would be barred from foreclosing on the assets securing its credit if they are contemplated in the business continuation; (ii) if it is decided that all or a portion of the assets of the debtor in bankruptcy shall be sold as an economic unit and such unit encompasses assets covered by a mortgage, pledge or another security interest, a secured creditor cannot separately foreclose thereon; instead, it would have a first priority claim against the proceeds of the sale of the assets concerned; and, (iii) if a proposal for judicial agreement is presented with a certain majority, secured creditors would be barred from foreclosing for a certain period of time. Also, secured creditors are generally free to apply the proceeds raised upon the foreclosure of their mortgages, pledges or other security interest to the amounts owed and secured thereby. In certain cases, however, whenever it appears that claims for preferred credits with statutory priorities under Chilean law would
Bankruptcy expenses are paid primarily with a certain amount of money that the petitioner of the bankruptcy must deliver at the time of the bankruptcy petition. Once that money has been consumed, all expenses shall be paid with the proceeds of the sale of assets or continuation of business, as the case may be, and to that extent, are granted with preference set forth in the law. In the case of judicial agreements, the expenses shall be assumed by the debtor as part of the agreement that it must fulfil, unless agreed otherwise in the arrangement plan.
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In case of bankruptcy, if the business of the company ceases, employment agreements are terminated and all amounts owed to employees including remuneration, severance payments, compensation in lieu of notice, holiday pay, and other pursuant to the law, enjoy preference for their payment. If it is agreed that the debtor in bankruptcy should continue carrying on business, the employees shall continue to be remunerated with the proceeds of the business.
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In the case of a judicial agreement, if it provides for the continuation of the business, employees will continue to exercise their functions and shall be remunerated as per usual. Otherwise, if the business is to cease, employees will be entitled to all statutory payments with the same preference applicable in the case of bankruptcy.
Chile
apply as pertains the payment of income tax and value added tax, if applicable to the business.

6.1
In the event of a bankruptcy declaration, the Syndicate administrates the assets of the adjudged debtor, including contracts with the company. Generally, the bankruptcy declaration in itself is not a legal cause for termination of agreements. Therefore, the Syndicate will define the termination or continuation of said contracts taking into account the objective of the bankruptcy procedure and the best interests of the creditors. The same will occur with judicial agreements, where the debtor shall in accordance with that indicated in the agreement, continue, amend or otherwise terminate the contracts in force. Notwithstanding, it is common that contracts may contain clauses regarding termination in case of bankruptcy, reorganisation, moratorium and insolvency, in which case, such provisions shall prevail.
If it is proposed in a bankruptcy proceeding to continue the debtors business, either partially or fully, to obtain the quorum required by the law, the creditors that are in favour of such motion may exclude the dissident creditors by paying their credits or securing their payment as determined by law. In the event of judicial agreements, to achieve the quorum required for its approval, a creditor may exclude another from the vote by delivering a bank cheque to said creditor for the sum owed calculated in accordance with the law.
5 Claims
If a judicial agreement is fulfilled, the creditors are paid according to that agreed and according to the type of credit. For its part, the debtor may continue with its activities without owing any amount to the creditors that accepted the agreement and the bankruptcy procedure is withdrawn, notwithstanding the rights of the creditors that did not participate in the agreement. If the judicial agreement is not fulfilled, the debtor is declared bankrupt by the Court. The bankruptcy proceeding may be temporally suspended or terminated, depending on whether all creditors have been paid. In special cases, creditors may be able to re-open the bankruptcy proceeding. The creditors that have not been reimbursed may always continue individually against the adjudged bankrupt so that they may be paid to their satisfaction. For its part, the debtor may be freed from the bankruptcy in the event of paying all debt or upon termination of the proceeding when it has not acted in a culpable or fraudulent manner, a condition that will permit it to be freed from all the conditions that were imposed in its condition as adjudged bankrupt.
Upon the bankruptcy declaration, all creditors will be summoned to present the documents evidencing their credits. Subsequently the judge will establish which credits are accepted, their amounts and manner in which credits shall be paid will depend upon the preferences or privileges and upon the mass of assets available. In the case of judicial agreements, all credits will be acknowledged by the Syndicate in its report to the Court, prior to the approval of the arrangement plan. The creditors or the debtor will establish the mode as to how the credits will be paid depending upon the assets and flows of funds that exist. If the debtor breaches the agreement, any creditor may request its termination and the debtor will be placed in bankruptcy.

7.1 Is it common to achieve a restructuring outside a formal procedure in Chile? In what circumstances might this be possible?
The Chilean Civil Code regulates in a detailed manner the priority of claims for all credits, regardless of the procedure that may be used. All claims are ranked as follows: (i) claims with statutory priority such as bankruptcy proceeding expenses, employee remuneration, taxes, amounts owed to pension funds, etc.; (2) statutory preferences, such as attachment of goods transported for payment of transportation fees, or the preference that the pledgor has to be paid with the proceeds of the sale of the pledged asset; (3) mortgages, and if there are several mortgages, the priority among them is by the date of registration; (4) other general claims; and, lastly, (5) unsecured creditors.
Is it not common to achieve a restructuring outside a formal procedure in Chile. Usually corporate recovery is achieved in accordance with the procedures established in the law, either by way of judicial creditors agreements or, most recently as a result of legal reforms, with the mediation of experts that propose the basis for an arrangement and facilitate the approval thereof. Notwithstanding the aforementioned, it is possible to reach extrajudicial agreement pertaining to the payment of obligations or the management of the debtors assets, but said agreements are solely mandatory upon the creditors who have agreed upon the terms and conditions thereof. All other creditors are entitled to execute their rights and pursue legal actions in the ordinary manner, without being bound by the terms of extra-judicial agreements.
No special tax liabilities are incurred. General regulations would
It is feasible to reorganise a debtor by entering into a preventative

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Chile
Is there a process for cramming down creditors who do not approve proposals put forward in these procedures?

8 International
8.1
Chile
judicial agreement as described in question 2.1 above.

What would be the approach in Chile to recognising a procedure started in another jurisdiction?
Chile
The alternative of a pre-packaged sale, insofar as the term refers to an arrangement under which the sale of all or part of a companys business or assets is negotiated with a purchaser prior to the appointment of a Syndicate, and the Syndicate effects the sale immediately on, or shortly after, its appointment, does not exist in Chile, since any sale of the company immediately upon the Syndicates appointment would be deemed prejudicial to the interests of the creditors. In Chile, we have the figure of declaracin de unidad economica (declaration of economic unit), meaning that a Syndicate may propose to a creditors meeting that all the assets of a company be sold, without dismantling the company, in order to obtain a higher value for them to the benefit of the creditors.
In Chile, the guiding principle over this matter is that the bankruptcy of a Chilean entity must be pursued before Chilean Courts and according to the laws of this jurisdiction. As a matter of Chilean law, property located in Chile is subject exclusively to the jurisdiction of Chilean Courts, notwithstanding that foreign awards may be enforced in Chile by the Supreme Court through the Exequator procedure, by virtue of which creditors may seize assets situated in Chile from a person who has been adjudged bankrupt abroad.
Jos Francisco Snchez

Grasty Quintana Majlis & Ca. Magdalena 140, 20th floor Las Condes, Santiago Chile
Eduardo Marchi
Grasty Quintana Majlis & Ca. Magdalena 140, 20th floor Las Condes, Santiago Chile
+56 2 499 0408 +56 2 499 0460 fsanchez@grasty.cl www.gqmc.cl
+56 2 499 0408 +56 2 499 0460 emarchi@grasty.cl www.gqmc.cl
Jos Francisco Snchez is the managing partner of Grasty Quintana Majlis & Ca. He has corporate advisory expertise in all aspects of business, including M&A, corporate structuring and financing, joint ventures, foreign investment, corporate bankruptcy and insolvency procedures and other trade practice issues. Languages: English and Spanish. Education: LLB, University of Chile Law School, 1988 Professional Activities: Member of Rocky Mountain Mineral Law Foundation and the Chilean Bar Association.
Eduardo Marchi is a senior associate in Grasty Quintana Majlis & Cia.s litigation and dispute resolution department. His practice focuses on corporate restructuring, bankruptcy and civil litigation. Eduardo completed a LL.B. at the University of Chile in 1998.
Grasty Quintana Majlis & Ca. is a versatile law firm. With over 20 years experience in the Chilean market, we have developed and maintained a strong corporate practice and litigation team. Each of our practice areas is highly regarded. Through a select group of lawyers, we offer a high quality service to clients in a personalised, proactive and efficient manner. We are a diverse team that is in continuous contact with different actors in the national market. Our vision and analysis of the issues goes beyond the strictly legal, becoming strategic partners to our clients in the projects they develop.
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Chapter 9
Cyprus
Georgiades & Mylonas, Advocates & Legal Consultants
1.1 How does a creditor take security over assets in Cyprus?
Yiannos G. Georgiades
Rebecca E. Howarth
immediately after the creation of the charge the company was solvent, be invalid, except to the extent of any cash paid to the company at the time of or subsequent to the creation of and in consideration for the charge. Introduction of Fraudulent Trading: Further to the above situations, Section 311 of the Companies Law, Cap 113 introduced the concept of fraudulent trading into the insolvency proceedings in Cyprus. If a liquidator can prove that fraudulent trading has occurred the court may find the person responsible, for example the director or other such officer of the company, personally liable for the debt incurred. Transactions at an undervalue: Any transactions which can be proven to have been carried out at an undervalue, with the intention of putting the assets in a position that makes them unavailable or unreachable to the companies creditors will be classed as transactions carried out with the intention to defraud the creditors and they are then vulnerable to being declared null and void by the court. Transactions which fall under the Fraudulent Transfers Avoidance Law: Under the Fraudulent Transfers Avoidance Law, Cap 62 Section 3, every pledge, mortgage, gift, sale or other transfer or disposal of a movable or immovable property made by any person with the intent to hinder or delay his creditors or any of them in recovering their debts from him will be deemed to be fraudulent and will be invalid against such creditors. In this situation, the property or asset purported to be transferred or dealt with in another manner but for the same reason may be seized and sold to satisfy any judgment debt due from the person who made the pledge, mortgage, gift, sale or other attempted or actual transfer or disposal. This was shown in the case of Adamou v Kitchiou (1978) 1 JSC 12 and Lymperopoulou v Christodoulou and Others (1957) 22 CLR 184. A transaction which falls into the category of a fraudulent transfer avoidance is one of the ways in which a party can proceed against company directors, taking them to Court under the Common Law Principles and where the Court may lift or pierce the so-called Corporate Veil to protect the partys interests.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Cyprus?
A bona fide creditor may attempt to take one of the following actions to enable them to take security over assets in Cyprus: 1) Mortgage - the property under mortgage is transferred into the creditors ownership with a right of redemption in the case of default, the property will be worth a similar amount to or equal to the amount of the mortgage. Pledge - gives the lender the right to sell the asset but doesnt give ownership of the asset. Charge over immovable property - a fixed charge gives legal rights as security without any actual transfer of ownership. Impose a floating charge on any immovable property - a floating charge floats over all of the assets of the debtor, in the event of a default the floating charge crystallises and becomes a fixed charge over the asset. A lien - gives the right to the debtor to possess the assets until the debtor pays its debts but does not give the right to the creditor to sell the asset.
2) 3) 4)
5)
1.2
Duty of the Directors of the Company: The Directors of the company have a duty to the company to act in the best interests of the company and its beneficiaries, not only when the company is in financial difficulties but from the moment that they are appointed as directors until the time that they resign. Cyprus Companies Law Caps 113: Section 301 of the Companies Law, Cap 113 states that any conveyance, mortgage, delivery of goods, payment, execution, or other act relating to property made or done by or against a company, within six months before the commencement of its winding up will, in the event of the company being wound up, be deemed as fraudulent preference of its creditors and be invalid accordingly. The Court will look at the dominant or real intention and not at the result in order to determine whether or not fraudulent preference has occurred. Section 303 of the Companies Law, Cap 113 states that where a company is being wound up, a floating charge on the undertaking or property of the company created within 12 months of the commencement of the winding up shall, unless it is proved that
The concept of fraudulent trading was introduced into insolvency proceedings in Cyprus by Section 311 of the Companies Law, Cap 113, creating a civil liability for persons who can be shown to be

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abusing the status of limited liability and it also created a criminal offence. The provision allows an action to be taken against persons who are knowingly parties to the carrying on of the business, but if the person cannot be shown to have been a knowing party, then they will not be liable. Although the provision can apply to directors, and often does, it is not limited to directors only and can be brought against other parties who knowingly take part in the carrying on of the business. As discussed above, a Director may face personal liability in the event that it can be shown that they have continued to trade with the intent to defraud the companys creditors, Sections 307-311 of the Companies Law cover the situations where a company officer may be liable. These offences can carry a conviction; under Section 307 (m) (n) (o), the term of imprisonment for which can be up to five years and in the case of all other offences, it shall not exceed two years. The Companies Law states it shall be a good defence to some of the possible charges if the accused director can prove that he had no intent to defraud. For some of the other offences, he must prove that he had no intent to conceal the state of affairs of the company or to defeat the law (Section 307 (1)).
Cyprus
faces. It will be a decision for the directors to make as to whether this option would be suitable under the circumstances. This is the most flexible and informal option available to a company. The Process of being Under Management: Under Section 250 (1) Caps Law, where in any proceedings the official receiver becomes the liquidator of a company, whether provisionally or otherwise, he has the power , if he is satisfied that the nature of the business of the company or the interests of the creditors require the appointment of a special manager of the business of the company, other than himself, to make an application to the Court. The application by the official receiver shall be supported by a report by the Official Receiver, which shall be placed in the file of the proceedings. The report shall either state the amount of the remuneration which, in the official receivers opinion, the special manager ought to be allowed or that the Official Receivers opinion is that it is desirable that the determination of such remuneration should be deferred, Rule 50 (1) of The Companies (Winding-Up) Rules 1949. The Court, upon receiving such an application, may appoint a special manager of the business to act during such a time as the Court may direct, with such powers as the Court believes necessary. The special manager will give security and account in a manner as directed by the Court and shall receive remuneration in a manner that the Court sees fit.
2.2 What are the tests for insolvency in Cyprus?
Cyprus
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Cyprus?
A company in financial difficulties in Cyprus may find itself facing one of several different formal procedures which are provided for under the Cyprus Law. According to the Cyprus Companies Law, Cap 113, Section 203, there are two main methods of winding up a company, these being: a) b) compulsory winding up order which is made by the Courts; or voluntary winding up which can be instigated either by the members of the company or the creditors of the company.
The test for insolvency in Cyprus is based on the companys ability to pay its debts. If the company is unable to pay its debts, then it is likely to go into insolvency through one of the procedures discussed below and become a formally insolvent company. The Cyprus Companies Law, Cap 113, Section 212 stipulates the situations where a company will be considered under Cyprus law as being unable to pay its debts. These are as follows: a) The company owes more than 855 Euros to a creditor. The creditor may claim the debt by sending a formal letter to the registered office of the company and the company then has 21 days in which to send the creditor his money. If the company does not send the creditor his money, then the creditor may apply to the Court requesting that the Court issue a liquidation order against the company. If execution or any other process issued with regard to a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part. The court will consider the companys debts/liabilities, both those that it presently has and those which it is likely to have in the future. If it is proven that the company is unable to pay its debts, the company will be officially considered incapable of paying its debts and will officially enter the procedure of insolvency.
Winding up by the court: In this situation, the court may issue a liquidation order for the company. This may result from the presentation of a petition by a creditor, the company itself, the Official Receiver or the Attorney General. The Court will examine the petition for liquidation and if it believes that the company is unable to pay its debts (this test is discussed in detail below), it will then issue a liquidation order. Voluntarily winding up: In this situation, the directors make a decision that the company has no future and agree that that the company should be wound up and therefore proceed to terminate the companys existence. For this to happen, a special or an extraordinary resolution will be passed by the company in a general meeting, unless the articles of association for the company provide for another procedure, stating that the company is unable to continue business due to its liabilities (Cyprus Companies Law). This is governed by Section 261, Cap 113. Re-organisation Plan: A third option that a company in financial difficulties may decide to take is that of a reorganisation plan. Such a plan may involve the merger of two companies or it may involve the incorporation of a totally new company. This action is taken in order to improve the future possibilities of the company and to resolve the financial difficulties. Once the directors have approved the measures, a petition to the court will be made for the approval of the plan and usually, an order will be issued to that effect. This method of restructuring a company is not always suitable and will depend upon the severity of the financial difficulties that the company
b)
c)
2.3
Winding up by the Court: The court will issue an order to wind up a company in the following situations: a) b) c) A special resolution is made resolving that the company be wound up by the court. The company is unable to pay its debts (Cyprus Companies, Section 212, Cap. 113). The court believes that it is just and equitable to wind up the company (Cyprus Companies Law, Cap. 113, Section 211, as amended by Law 2 (1) of 2000). The company does not commence business within one year
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d)
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3 Creditors
3.1
Cyprus
of its incorporation or suspends its business for a year without giving notice of this intention or submitting a plan for the business to be restored. Voluntary winding up: This is a very common action taken by companies that may be encountering difficulties. It occurs because the directors decide that the company has no future and agree that it is in the best interests of the company for it to be wound up. A resolution will be passed stating that the company is unable to continue conducting its business due to its liabilities and that it has been decided that it is best to wind the company up, Cyprus Companies Law, Cap. 113, Section 261. The company should give notice of the passing of the resolution in the Official Gazette for the Republic of Cyprus within 14 days of the passing of the said resolution. Re-organisation Plan: A reorganisation of the company will also begin with a meeting of the company, a resolution being passed and a petition being sent to the court requesting that the relevant order be issued. This must occur before the reorganisation can take place.
The Companies Law, Cap. 113, Section 300, as amended by Law 198/86 and Law 19/1990, lays down the order for the distribution of the assets of a company in a compulsory winding up or administration. Under the above section, unsecured creditors are ranked below the costs of winding up, preferential debts and charges secured by a floating charge. An unsecured creditor has the lowest priority in the rank of priorities for settlements. They will only be satisfied once secured creditors have been satisfied and can only be satisfied if any surplus credit or assets remain. Accordingly, unsecured creditors have no real freedom to enforce their rights under liquidation and must therefore wait until the liquidator has made all other distributions before they will receive anything towards the repayment of the debts owed to them. However, unsecured creditors are entitled to repossess assets which are not owned by the company, for example goods which may be the subject of a retention of title clause. A further point to make would be that an unsecured creditor who had been awarded a judgment before the liquidation proceedings were commenced is able to have the judgment served to the liquidator who must then execute the judgment and ensure it is enforced like any other civil judgment. In this sense, an unsecured creditor therefore becomes a secured creditor.
This is discussed in the above answers to avoid repetition.

Winding up by the Court: The court will serve a liquidation order to the company and inform the Registrar and the Official Receiver that the company is in the process of being wound up. The company also has a duty, for every invoice, order for goods or business letter that it issues or that is issued by or on behalf of the company or a liquidator of the company, or by a receiver or manager of the property of the company, to include a statement informing the receiver that the company is being wound up. Failure to do so may incur a fine, Section 317 (1) and (2) Caps Law. Voluntarily winding up: If it takes place due to the members of the company, a declaration must be given to the Registrar by the directors five weeks before the general meeting of the company. During the meeting, a resolution will take place in which it will be resolved that the company should be wound up and that an administrator should be appointed. If it takes place due to the companys creditors, a meeting of the creditors will take place on the same day as the general meeting of the company. A notice of the creditors meeting must be published in the Official Gazette of the Republic of Cyprus and in two newspapers in the town where the companys registered office is situated. The same provisions apply regarding Section 317 (1) and (2) Caps Law to a voluntary winding up. Re-organisation Plan: With regard to the reorganisation of the company, a relevant decision will be made at a general meeting and a resolution passed based on the decision. A petition will need to be sent to court requesting that the relevant order be issued. Further provisions will depend upon what decision the company makes, for example the procedures with a merger will be very different from the disolution of an old company and the incorporation of a new company. Legal advice should be sought depending on the outcome of the meeting.
The general rule is that secured creditors may enforce their security in a situation where the company is to be liquidated. The extent to which secured creditors can enforce their security is dependent upon the value of their security in the first place. The question will be: Does the value of the security cover the debt which is owed to the creditor? If so, then they will be fully satisfied and any remaining balance will be credited to the assets of the company and will be used by the administrator to satisfy any other liabilities that the company has. If, however, the security does not cover the full amount of the debt, then they will join the ranks of the unsecured creditors and have the remaining amount of the debt settled to the extent possible in such a way.
The procedure of setting off sums owed by the companys creditors against amounts owed by the company to the creditors is regulated in Cyprus by Sections 198-200 Caps Law 113. Section 198 enables the creditors to achieve a set off with the company disregarding the fact that the company may be or is under the process of liquidation. The company, creditor or the administrator or shareholders may make an application to the court with the intention of convening a meeting for the class of creditors that would be participating in the set off. During the meeting, if of the creditors present accept the proposal for the set off, the court will give its approval of the set off taking place. If approval is

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Cyprus
The same principles apply to liquidation procedures and winding up as well as to reorganisation procedures.

given, the proposal is binding on the company and all of the creditors in the said class. Section 199 explains the procedures relating to the notices which must be given of the meeting and gives information regarding compromises with the companys creditors and members. Under Section 246 (3) Caps Law, when all creditors have been paid in full, any money which is due on any account whatsoever to a contributory, (contributories are defined by Section 205 Caps Law as every person liable to contribute to the assets of a company in the event of its being wound up) from the company may be allowed to be given to him by way of a set off against any subsequent call.
4.4
Cyprus
Cyprus
Contracts entered into by a company that goes into liquidation are not necessary terminated merely as a result of the company entering into the procedure. The liquidator has the right to cancel unilaterally an onerous contract in order to fulfil his duties and ensure that the liquidation of the company goes ahead, which he has been appointed to arrange. A company which is entering into a reorganisation plan or restructuring does not necessarily directly have any impact on contracts that company has already entered into. The directors of the company should ultimately take these pre-existing contracts into consideration when discussing and planning for the re-organisation.

5 Claims
In a situation where a liquidator has been appointed, they take the control of the company. The ultimate aim is the completion of the task for which he has been appointed. In this situation, the directors are no longer in control of the company for the majority of matters. The shareholders are in the same situation as the directors and have no exercise of their control powers over the company. All the powers of control are taken over by the liquidator. If, however, the company decides to create a reorganisation plan in order to attempt to solve the companys financial issues, the directors remain in control of the company. The shareholders rights are also unaffected as no third party has been appointed to handle the situation that, for example, a liquidator, administrator or a receiver would control.
In the case of a company reorganisation, the creditors will claim their debts in the way that is prescribed in the reorganisation agreement/order. There is no way to state definitively how this will occur, as each case will be different. In a case whereby a liquidator is appointed, the creditors will send the company a formal claim in order to prove their debts. The creditors must send the liquidator proof of their claims. It is the liquidators job to consider each of these and decide which claims: a) b) c) he will accept; he will reject; and he is in a position to ask for more information about and evidence of if he believes that he needs further information before he will be in a position to decide whether or not to accept or reject the claim. If a claim is rejected, the liquidator must give the reasons to the creditor in writing why he has rejected the claim. If the creditor is dissatisfied with the liquidators decision, he may apply to the court to request that the court consider the situation with regard to why the liquidator did not accept the proof of his claim and ask them to reconsider his claim.
In a situation whereby liquidation is taking place, the costs of the liquidation process are covered by the liquidation of the assets of the company and are paid out as the first priority in the hierarchy of creditors, as set out in the Cyprus Companies Law, Cap 113, Section 300, as amended by Law 198/86 and Law 19/1990. If a company decides to undergo a process of reorganisation or restructuring, it will find funds from lenders or current support networks to fund any plans and procedures agreed upon. The funding of such measures will most likely be one of the factors that are taken into consideration when the companys directors are making a decision as to whether such a measure would be suitable.
4.3 What is the effect of each procedure on employees? 5.2
The Companies Law, Cap 113, Section 300, as amended by Law 198/86 and Law 19/1990, lays down the order for the distribution of the assets of a company in a compulsory (court) winding up. In a compulsory winding up, the order is as follows: 1) Costs of the winding up - this covers the costs of getting the assets, the petition and drawing up the statements of affairs as well as the liquidators remuneration and the Inspection Committees expenses. Preferential debts - these debts are ranked equally so if the companys property is not sufficient to make full payments for each, they will have to be paid proportionally. Charges secured by a floating charge. Unsecured ordinary creditors. Any deferred debts.
When a company goes through the process of winding up, the companys employees are automatically dismissed, though the liquidator can re-employ some of the staff to assist in the business, but this will only be the case until the winding up is fully completed. The purpose of their re-employment is to assist the liquidator in finalising the duties that he has been appointed to complete, Companies Law, Cap 113, Sections 219-221 and 264265. In the case of a reorganisation, the effect on the employees is difficult to determine and legal advice should be sought with regard to the effects in each individual situation.
2)
3) 4) 5)
Lastly, any remaining surplus will be distributed among the members in proportions based on their rights under the articles.
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If the company has decided to enter into a voluntary arrangement or a reorganisation plan, the creditors will be paid according to the terms that have been agreed upon. The rights of secured and preferential creditors remain and will not rank lower than those of the companys unsecured creditors.
Cyprus
The main point to note here is that the company will not be liable to pay tax for entering into each procedure; however, the company will be liable to pay tax on any profits which are gained whilst the company is involved in any of the procedures. The area of tax in such proceedings is too detailed and complex for a full and sufficient discussion here, however, the Establishment and Recovery Tax Law, L4/78 as amended governs in part this topic here in Cyprus. In particular Section 8 of the Law states that the receiver is liable to arrange the tax liabilities of the company during each of the procedures and should advise the company accordingly of the relevant taxes and amounts due as an expense of the liquidation. Under Section 183 of the Companies (Winding up) Rules, 1949, every solicitor, manager, accountant, auctioneer, broker or other person employed by an official receiver or liquidator in a winding up by the Court shall, at the official receivers or liquidators request, deliver his bill of costs or charges to the official receiver or liquidator for the purpose of taxation. Due to the depth and complexity of this area, we advise that all companies undergoing such procedures seek professional advice, in particular regarding their potential tax liabilities.
Voluntary winding up: The liquidator will send what is known as the final account and return to the Registrar. After this, a period of three months will follow and after this period, after the registration of the final account and return, the company will be considered to be dissolved unless the court, by way of an application by the liquidators or another interested party, orders the deferment of the dissolution date. Re-organisation plan: If the directors of the company decide to reorganise or restructure the company, the outcome will be dependent upon the particular decisions that have been taken. It may be that the result is that two companies merge or that they undertake a joint venture. The desired outcome of such procedures will ultimately be that the financial difficulties that the company was facing are solved or at the very least, that a plan is implemented which sets out a time frame for various steps to be taken to begin working on the financial difficulties.

7.1 Is it common to achieve a restructuring outside a formal procedure in Cyprus? In what circumstances might this be possible?

The process of cramming down is a term that is used in Bankruptcy Law where individuals are concerned and in Insolvency Law where companies are being considered when referring to the courts enforcement of a procedure, for example, a reorganisation plan, despite objections which may be raised by some of the companys creditors. We can therefore say that the process of cramming down creditors is only really relevant in voluntary arrangements and where a reconstruction/re-organisation plan is being implemented, the reasons for this being that the approval of these arrangements depends on majority voting. During these procedures, the dissenting minority are obliged to accept the arrangement which has been voted for by the majority and dissenting creditors are bound by the vote as if they had indeed agreed to the terms themselves. It should, however, be borne in mind that the minority are often protected by principles that are intended, through the Companies Law, to protect the minoritys interests. Therefore, it must be appreciated that the scope of these procedures can be limited by such minority protections. It is always advisable for the parties to seek legal advice in such circumstances.
It may be possible to avoid liquidation if the company is still in a position to be able to pay its debts. There are various ways in which a companys members can be advised regarding restructuring in order to avoid a formal procedure for liquidation/winding up. One such way to enter into a restructuring plan is to appoint a Receiver Manager. Any creditor of a company can request that a Receiver Manager be appointed. The appointment of a Receiver Manager is an alternative to the formal winding up procedures and is governed by the Companies Law, Cap 113 Part VI. It is also possible for the company and all of its creditors to enter into an unofficial restructuring agreement, which involves all of the creditors of the company and the members meeting and discussing and coming to an agreement on a solution. In recent years, it has become noticeable that more attempts are being made to move away from formal insolvency proceedings and preference is being shown for corporate recovery via the restructuring of the companys finances by means of negotiations between the company that is in difficulty and its creditors. We believe that there are numerous reasons for the shift in preference. However, it can be said that one of the main reasons may be the inflexibility of formal proceedings. A restructuring is not a statutory remedy and therefore gives an amount of flexibility, however, it does have some limitations. For example, there are no statutory mechanisms in such a restructure which will compel a dissenting creditor to participate. This may then lead to a formal procedure being initiated.
Winding up by the Court: If the Court has ordered liquidation, the liquidator, once he has completed the winding up, will request that a meeting be held for

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all of the creditors so that he can produce his report on the winding up. The attendants at the meeting will consider the report and its contents and whether or not it should be released. After the meeting, the liquidator must notify the court and the Registrar that the meeting did in fact take place and also what the outcome was. The Registrar will register the notice once he receives it and at the end of a three-month period after the registration, the company will be officially dissolved.

Cyprus
8 International
8.1 What would be the approach in Cyprus to recognising a procedure started in another jurisdiction?
Cyprus
A full review of the ways in which alternative forms of restructuring and re-organisation can occur are outside the scope of this general introduction. However, it is possible to reorganise a debtor in a strategic manner rather than realise its assets and business. Such a solution requires in-depth legal advice due to the potential legal complexities involved.
7.3 Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale affected?
In answering this question, it is highly relevant to note that Cyprus is a Member of the EU. If the procedure were started in another Member State, it would be recognised in Cyprus from the time that the judgment is effective in the issuing Member State, the reason for this being that all judgments issued in one EU Member State must be recognisable in other Member States without any formality. This is noted in European Regulation 1346/2000, which governs such matters in all Member States. It is also worth noting that Cyprus is party to several bilateral agreements for the reciprocal enforcement of judgments. If, on the other hand, the judgment is given in a non-Member State, the judgment can only be recognised through a process of validation, which can be obtained through an application being made to the Cyprus court.
Please see the answer above.
Yiannos G. Georgiades
Georgiades & Mylonas 2, Ayios Pavlos & Kadmos Street Wisdom Tower, 3rd Floor, P .O.Box 24144 1701 Nicosia Cyprus
Rebecca E. Howarth
Georgiades & Mylonas 2, Ayios Pavlos & Kadmos Street Wisdom Tower, 3rd Floor, P .O.Box 24144 1701 Nicosia Cyprus
+357 22 819292 +357 22 778444

yiannos.georgiades@gmadvocates.com
www.gmadvocates.com
Mr Yiannos G. Georgiades was born in Nicosia, Cyprus in 1965. He was educated at Ealing College of Higher Education (LLB Hons) 1989, Inns of Court School of Law, Honourable Society of Grays Inn, London (Barrister-at-Law) 1990. After his graduation, he gained hands- on experience working at a City of London solicitors firm prior to moving to Cyprus. In 1995, he also worked as visiting attorney at Corboy & Demetrio in Chicago and at Baker & Hostetler in Washington, DC in the United States. He founded the law firm Yiannos G. Georgiades & Co in 1992, which in 2006 merged with another firm to become Georgiades & Mylonas Advocates & Legal Consultants with Yiannos Georgiades as the Managing Partner; he has also recently established a Londonbased solicitors practice in the UK. Specialisation: Corporate and commercial law, international trade, private international law, international tax planning, EU Law, medical negligence, personal injury, intellectual property, maritime law, litigation. Languages: Greek and English.
+357 22 819292 +357 22 778444 rebecca.howarth@gmadvocates.com www.gmadvocates.com
Miss Rebecca E. Howarth was born in Manchester, United Kingdom in 1985. She was educated at Keele University (LLB Hons) 2006, BBP Professional Education Manchester 2007. During her studies, she gained experience via working at several local general practice firms. After her graduation and practice course, she moved to Cyprus in 2007, where she began working at Georgiades & Mylonas Advocates & Legal Consultants, focusing mainly on corporate and commercial law. She continues to develop her knowledge through continued professional development courses and is currently undertaking her masters through a UK University. Specialisation: Business law, corporate and commercial law, EU law, international trade, intellectual property, property and real estate law. Languages: English.
Managing Partner: Mr Yiannos G. Georgiades Senior Partner: Mr Anastasios Z. Mylonas Legal and Administration Enquiries: Miss Rebecca E. Howarth Other Offices: Larnaca, London, UK The firm was established in 1992 by Yiannos G. Georgiades. As of January 1, 2006, Yiannos G. Georgiades & Co. merged with the law firm of Anastasios Z. Mylonas, the result being the formation of Georgiades & Mylonas, Advocates & Legal Consultants. The Firm has recently established a solicitors firm in London, in the UK. Over the last 16 years, the firm has grown and developed and now offers the diverse professional skills of qualified lawyers, legal consultants and legal assistants. These skills and attributes combine together to provide flexible and viable solutions to meet the needs and requirements of its clients both in Cyprus and worldwide. The firms associates speak a number of different languages, all of whom speak English. Most also speak Greek and another language covered is Russian so the firm therefore has the capacity to work with clients from abroad comfortably and confidently, ensuring that the clients language requirements can be met.
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Chapter 10
Czech Republic
White & Case
Ale Zdek
Petr Kuhn

1.1 How does a creditor take security over assets in the Czech Republic?
financial collateral, the entity must exceed two of the following criteria: (i) assets over CZK 600,000,000 (approx. EUR 20,000,000); (ii) net turnover exceeding CZK 1,200,000,000 (approx. EUR 40,000,000); and (iii) net equity exceeding CZK 60,000,000 (approx. EUR 2,000,000).
Czech law distinguishes between the creation and perfection of security. While security over assets is created when a security agreement is concluded, for the perfection of security, it usually involves either registration in the respective registry and/or the hand-over of the secured assets. The fundamental types of security instruments include (i) mortgages over a real estate, (ii) pledges of movable assets and other kinds of assets, such as receivables, a functioning business in its entirety, securities or intellectual property rights, and (iii) security transfers of rights. A mortgage over real estate is perfected by means of its registration in the Cadastral Register. Regional Cadastral Offices review both the content and form of the mortgage agreement before deciding whether to register it. The date of registration is decisive in terms of priority of satisfaction; the earlier in time, the higher the priority. The pledge of movable assets is perfected upon the transfer of possession of the property to the pledgee or a third party custodian. A pledge of movable assets may also be perfected by virtue of the registration of the pledge in the Register of Pledges, subject to the pledge agreement being concluded in the form of a notarial deed. A contractual pledge over a business operating as a going concern requires the execution of a pledge agreement in the form of a notarial deed. The pledge is perfected upon its registration in the Register of Pledges. The pledge of receivables is not effective until the debtor is notified in writing by the pledgor, or until the pledgee proves the existence of the pledge to the debtor. If the underlying agreement concerning the pledged receivables restricts the assignment or pledge of such receivable, the consent of the respective debtor is required for the pledge of the account receivable. The pledge of securities in book-entry form is perfected upon registration in the Securities Center. In the case of a certificated security, the pledgor must also endorse the pledge on the reverse side of the security certificate. The pledge is perfected upon the transfer of the possession of the certificated security to the pledgee or a third party custodian. Furthermore, financial claims may be secured by so-called financial collateral. Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements has been implemented in the Czech Republic. To qualify for the regime of
As a general rule, any action taken by a debtor may be declared ineffective towards creditors by an insolvency court, if it were to prejudice the creditors rights. The grounds for opposing a legal act arise in the event that: (a) a transaction is effected without respective consideration, i.e. a transaction where the usual consideration in a similar transaction is significantly higher; (b) a transaction results in preferential treatment, i.e. premature repayment of the obligations of only some creditors, etc.; or (c) a transaction aims to deprive the creditors of certain benefits, provided that the debtor intended to do so and that the counterparty to the transaction had or should have had knowledge of this intention. The types of transactions under Points (a) and (b) are vulnerable to attack if (i) they were undertaken during the one-year period prior to the commencement of insolvency proceedings, or a three-year period if the transaction was made for the benefit of a person affiliated with the debtor, or (ii) they were undertaken by the debtor when insolvent, or consisted of a legal act resulting in the debtors insolvency. In respect of the transactions listed under Point (c) above, a five-year period applies. The insolvency trustee may commence proceedings against persons who benefited from such transactions within a year from the declaration of insolvency. Individual creditors are not allowed to commence such proceedings, but the creditors committee may commit the insolvency trustee to do so. Furthermore, as of the commencement of insolvency proceedings, the debtor, among other things, is not allowed to: (a) execute or enforce any security instrument which would be covered by his assets; or (b) dispose of his assets by means of which the composition, utilisation or determination thereof might be substantially altered, or by which their value might be diminished to more than a negligible degree, excluding exempt transactions, such as transactions pursued in the ordinary course of business or to avert impending damage. Transactions contravening the above restrictions are deemed to be ineffective vis--vis creditors.

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1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in the Czech Republic?
Czech Republic
a) b) to have multiple creditors; and the sum of its liabilities exceeds the value of its assets (the further management of such assets, or the further operation of its business, is taken into account).
Czech Republic
Directors (members of the board of directors in a joint stock company or executives in a limited liability company) are obliged to commence insolvency proceedings with the respective court without undue delay when they learn of the insolvency, or should have learned of the insolvency had they exercised due care. If directors fail to comply with the above obligation, they are liable for any loss suffered by the creditors. It is presumed that the loss is equal to the portion of the claims that were duly registered and were not satisfied in the insolvency proceedings. A director may be exculpated if he proves that the breach of duty to file the insolvency petition had no impact on the amount intended for satisfaction of the claim lodged by the creditors in the insolvency proceeding, or that the duty was not fulfilled due to facts that had occurred independently of his will and that could not have been averted, even if he had exerted his best efforts. A grave violation of a directors duties may amount to a criminal offence punishable by imprisonment.
An amendment to the insolvency law has been approved by the Government and is being discussed in the Parliament. The amendment would allow companies not to file for the insolvency if they do not meet the balance sheet test but else their liquidity suffices.
Liquidation bankruptcy is the default procedure for business companies, which do not qualify for reorganisation procedures or on which the creditors voted that liquidation bankruptcy procedures should apply. Debtors in the process of liquidation, securities traders or commodities traders automatically do not qualify for reorganisation proceedings. Furthermore, unless the debtor applies for a prepackaged reorganisation (pre-approved reorganisation plan by the majority of secured and unsecured creditors), the debtor only qualifies for reorganisation procedures if its total revenues in the last accounting period preceding the insolvency petition reached a minimum of CZK 100,000,000, or it employs more than 100 employees.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in the Czech Republic?
The Insolvency Act provides for two types of proceedings, which are liquidation-bankruptcy proceedings and reorganization proceedings. Liquidation bankruptcy (konkurs) predominantly aims to sell-off the property of the debtor and distribute the proceeds of the sale to creditors. Liquidation bankruptcy ultimately ends with the liquidation of the insolvent company. Reorganisation (reorganizace) is a new form of insolvency proceedings in which the debtor or creditors prepare, the creditors approve and the insolvency court confirms a reorganisation plan, pursuant to which the debtor is restructured and the creditors claims are satisfied.
2.2 What are the tests for insolvency in the Czech Republic?
Insolvency proceedings are technically divided into two phases. In the first phase, the insolvency court decides whether the debtor is insolvent or whether the debtor is under an imminent threat of insolvency. In the second phase, the insolvency court decides whether liquidation bankruptcy or reorganisation procedures should apply. If insolvency is declared and the debtor does not qualify for reorganisation, the insolvency court automatically decides on the liquidation bankruptcy of the debtor. If the debtor files a duly pre-approved reorganisation plan with the insolvency court, the insolvency court allows the reorganisation, unless other formal requirements have not been satisfied. In the case of large companies (see the revenue and employee thresholds in question 2.3 hereof), which apply for reorganisation and do not have a pre-approved reorganisation plan, the insolvency courts call the creditors meeting, which may vote on whether liquidation bankruptcy or reorganisation procedures should apply. If a sufficient number of creditors vote for liquidation bankruptcy, the insolvency court is, in principle, bound by the vote and decides on liquidation bankruptcy.
Insolvency is tested by means of balance sheet and liquidity tests. If the debtor passes either of them, it is deemed to be insolvent. The liquidity test requires the debtor: a) b) c) to have multiple creditors; to have due and payable monetary debts, which are overdue for more than 30 days; and to be unable to satisfy such debts.
For the purposes of the liquidity test, the debtor is deemed unable to satisfy its monetary obligations if the debtor: a) b) c) has suspended payments under a substantial portion of its payment obligations; is in default in the payment of the same for more than 3 months past the due date; it is impossible to satisfy certain due and payable obligations of the debtor by the enforcement of a decision or by execution; or the debtor failed to submit a list of assets and liabilities required by the insolvency court.
In general, all formal notices made in insolvency proceedings are published in an electronic online Insolvency Register. This includes notices on the commencement of proceedings, the appointment of the insolvency trustee, the decision of the insolvency court on liquidation bankruptcy or reorganisation, and the dates of court hearings and creditors meetings, etc. In order to ascertain the creditors opinions during the insolvency proceedings and to perform various rights of the creditors in the bankruptcy proceedings, the meetings of the creditors are convened.
d)
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The balance sheet test requires the debtor:
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In principle, all creditors who duly lodged their claims, which were not contested by the insolvency trustee, may vote at the creditors meetings. The insolvency court may decide on a vote exemption for contested creditors. Creditors meeting are, among other things, allowed (i) to elect and revoke members of the creditors committee (the unsecured creditors elect half of the members, while the other half is elected by the secured creditors), (ii) to replace the insolvency trustee, and (iii) to decide on the method of insolvency proceedings (i.e. liquidation bankruptcy or reorganisation). The creditors meetings may be convened by the insolvency trustee, by the insolvency court, by the creditors committee or by creditors whose voting rights represent more than 10% of all voting rights. Liquidation Bankruptcy Proceedings As discussed above, creditors are notified of the commencement of liquidation bankruptcy proceedings through the Insolvency Register. Creditors may decide at the creditors meeting whether the debtors assets should be sold by the insolvency trustee per partes or as a going concern. The trustee is bound by the creditors decision. During liquidation bankruptcy, the insolvency trustee regularly reports to the insolvency court and the creditors committee on the status of the sale of the debtors assets. Creditors may instruct the insolvency trustee to prepare a special report on the status of the sale. At the end of the liquidation bankruptcy proceedings, the insolvency trustee prepares a so-called Final Report, in which he summarises what the proceeds of the sale are and how they are to be distributed among creditors. The Final Report is reviewed by the insolvency court and is published. Creditors are allowed to comment on the Final Report, and their comments are heard by the insolvency court. Reorganisation Proceedings As discussed above, creditors are notified of the commencement of reorganisation proceedings through the Insolvency Register, and in certain cases are allowed to vote to terminate the reorganisation. The creditors committee actively participates in the operation of the debtors business by approving transactions that have a substantial impact on operations. For those purposes, the committee is to be provided with the necessary information. Prior to the date of the creditors meeting at which the reorganisation plan is to be voted on, the creditors receive a copy of the reorganisation plan and a written disclosure statement approved by the insolvency court as containing adequate information.
Czech Republic
Unsecured creditors also control whether the debtor should be reorganised or liquidated, since when the creditors vote, they are divided into classes of secured and unsecured creditors. A majority of both classes (by the nominal value of the claims) or a 90% majority of all creditors (by the nominal value of the claims) is required.
As discussed in question 1.2 hereof, as of filing the insolvency petition, an automatic stay applies to the execution and enforcement of any security instrument in both proceedings, i.e. liquidation bankruptcy and reorganisation proceedings. The value of the assets that were provided as security may be set by an independent expert, upon which the secured creditors are assumed to be secured only up to the amount set by the expert in the valuation. This procedure mainly affects voting at the creditors meetings, the allocation of proceeds from the sale of debtors assets by way of a sale as a going concern in liquidation bankruptcy proceedings, and interest payments. The expert valuation has no effect on the allocation of proceeds from the sale of the debtors assets by way of per partes sale in liquidation bankruptcy proceedings. Liquidation Bankruptcy Proceedings The insolvency trustee administers the debtors assets that were provided as security to the secured creditors and arrange for their sale. The insolvency trustee is, in principle, bound by the instructions of the secured creditors in respect of the manner of the administration and sale of the secured assets. The secured creditors are entitled to all proceeds of the sale of the respective secured assets after the deduction of up to 5% as the cost for the organisation of the sale, and up to 4% as the cost for the administration of the assets. The secured creditors and the insolvency trustee may agree on the payment of any costs over the caps of 5% and 4%. Reorganisation Proceedings For the purposes of reorganisation proceedings, the secured creditors are assumed to be secured only up the amount set by the expert in the valuation of the debtors assets, while the remaining portion of their claim is treated as an unsecured claim. The secured creditor is entitled to receive an interest payment that accrued on the secured portion of his claim after the declaration of insolvency in amount of the agreed pre-insolvency interest rate (excluding default interest). The interest is payable monthly as of the date of the expert valuation. The reorganisation plan may alter the rights of the secured creditors (i.e. reduce the claim, satisfy the claim in installments or by the issuance of securities, allocate to them a different security, etc.).
3 Creditors
As of filing the insolvency petition, the debtor loses the capacity to be sued by third parties. All claims against the debtor must be submitted to and registered by the insolvency court. Unsecured creditors: a) b) in liquidation bankruptcy proceedings are paid out from the proceeds of the sale of the estate; and in reorganisation proceedings receive the amounts set forth in the reorganisation plan. The reorganisation plan may alter the rights of the unsecured creditors (i.e. reduce the claim, satisfy the claim in installments or by the issuance of securities, etc.).
Prior to the declaration of insolvency, set-offs may be pursued free of any insolvency constraints. After the declaration of insolvency, set-offs are also permitted, but are subject to constraints and requirements, such as: (a) a creditor is not allowed to set-off claims that have been acquired through an ineffective legal act (see question 1.2 hereof) or claims, which the creditor acquired with the knowledge of the debtors insolvency;
In general, unsecured creditors have the right to control half of the members of the creditors committee in both proceedings.

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(b) (c) a claim must be registered prior to the set-off; and a creditor must pay to the estate any sum which exceeds the creditors claim qualifying for the set-off.
Czech Republic
behalf of the debtor in terms of employment relationships pass to the insolvency trustee. In reorganisation proceedings, those rights are exercised by the debtor in possession, unless the insolvency court imposes restrictions on the debtors in possession rights (for further information about the debtors in possession rights, see question 4.1 hereof).
Czech Republic
The above set-off principles apply in liquidation bankruptcy proceedings, as well as in reorganisation proceedings.

Liquidation Bankruptcy Proceedings The regulation of liquidation bankruptcy proceedings allows for a number of alterations of agreements concluded by the debtor prior to the declaration of the liquidation. Below is a summary of only certain of them. In principle, if the contract between the debtor and another party is not fully discharged as of the declaration of liquidation bankruptcy by neither the debtor or the other party, the insolvency trustee may either fulfill the agreement for the benefit of the debtor and demand that the other party fulfill the agreement as well, or may withdraw from the agreement. If the debtor entered into a contract on lending a particular item of his property, the insolvency trustee is entitled to request that the item be returned even before the lapse of the agreed period. The insolvency trustee is entitled to rescind a lease contract or sublease contract to which the debtor is a party; the notice period shall not exceed 3 months. On the other hand, if such a contract has been concluded by the debtor as a lessee or sub-lessee, the contract cannot be terminated or withdrawn from by the other party on the grounds of the debtor defaulting on the payment prior to the ruling on insolvency or due to the deterioration of the debtors financial situation. Reorgansation Proceedings The regulation of liquidation bankruptcy proceedings does not allow the debtor in possession or the insolvency trustee to unilaterally alter or terminate contracts. Therefore, for reorganisation proceedings, pre-insolvency standards apply with regard to the alteration and termination of contracts.
Liquidation Bankruptcy Proceedings As of the date of the court decision on the commencement of liquidation bankruptcy proceedings, the debtor is not allowed to dispose of the assets of the estate. Only the insolvency trustee has control over the estate and exercises all the rights pertaining to the debtors assets. The insolvency trustee is supervised by the creditors committee. Reorganisation Proceedings In reorganisation, the debtor remains in control of the business as debtor in possession, unless the insolvency court imposes restrictions on the debtors in possession rights. The insolvency court may restrict the debtors in possession rights typically in cases of mismanagement or fraud. The creditors committee approves transactions of the debtor in possession that have a substantial impact on operations. Shareholders general meetings are suspended and the rights thereof may be performed by the insolvency trustee. In principle, the directors of the debtor may only be superseded by a joint decision of the shareholders and the creditors committee.
Liquidation Bankruptcy Proceedings In general, the company finances the costs of the proceedings out of its remaining assets. In theory, the insolvency trustee may enter into new loan agreements, but in practice this would be realistic only if there were a chance to sell the debtors business as a going concern. The insolvency court may order the person that initiated insolvency proceedings to pay an advance for the costs. Reorganisation Proceedings The debtor in possession may conclude loan agreements, which would provide fresh financing, with the approval of the Creditors Committee. Those transactions automatically have superpriority, i.e. a lien on encumbered property that is equal to existing liens, and a high priority over other unsecured creditors. The original secured creditors have the right of first refusal to provide super-prioritised financing. Securities issued under a confirmed reorganisation plan (for further information about the confirmation of the plan, see question 6.1 hereof) are exempt from the securities law regulations on public offerings.
5 Claims
The statutory procedure for how creditors can claim those amounts owed to them is, in principle, the same in each proceeding, i.e. in liquidation bankruptcy proceedings and reorganisation proceedings. Each creditor must register its claim in a due and timely manner by virtue of a statement of claims. The same holds true with respect to contingent, as well as secured, debts. The statement of claims must be submitted to the insolvency court by way of a prescribed form that has been filled in within the period of time set forth by the court in the decision on the declaration of insolvency. The failure to meet the deadline cannot be remedied. Late registrations are disregarded by the insolvency court, and those claims are not satisfied in the insolvency proceedings. The claims must be stated in Czech Crowns, and the statement of claims must be accompanied by relevant documents proving its legality. The insolvency trustee examines the claim submissions, drafts a list of claims, and contests disputable claims at the court review hearing. The debtor may also contest creditors claims. Creditors are not
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In general, liabilities of the debtor as an employer towards its employees have the status of priority claims (for further information on preferential claims, see question 5.2 hereof). Furthermore, some restrictions provided for by labour laws either do not apply or are loosened. In liquidation bankruptcy proceedings, all rights to act on
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allowed to contest claims of other creditors. Contested claims are litigated before the insolvency court. If it comes out that the real amount of a registered claim is less than 50% of the amount submitted by the creditor, all such registered claim is disregarded for the purposes of the insolvency proceedings. The insolvency court may order the creditor who submitted such claim to pay in favor of the property of the estate the amount by which the registered claim exceeded the amount actually ascertained.
Czech Republic
Real Estate Transfer Tax The real estate transfer tax liability is shifted from the seller to the buyer. Unlike in normal situations, the buyer holds the real estate transfer tax liability (at the rate of 3% of the price for real estate achieved in a public auction or in a separate sale). Where the real estate is sold by the seller in the reorganisation proceedings, there is an exemption from the real estate transfer tax applied on transfers of real estate to creditors or a newly incorporated company, in which creditors have shares. Certain real estate transfer tax exemptions can be preserved in reorganisation proceedings, even if conditions for such exemptions are not fulfilled. Regime of Tax Liabilities Tax liabilities arising since the effective day of the resolution on insolvency until the end of the insolvency proceedings are considered as tax liabilities against assets subject to the insolvency proceedings. Tax liabilities that arose before the effective day of the resolution on insolvency are considered as tax liabilities with the entitlement to be satisfied from a pledge or other tax liabilities. Tax overpayments arising since the effective day of the resolution on insolvency cannot be offset against tax underpayments that arose in tax periods before this day. Tax underpayments claimed in the insolvency proceedings are not penalised, and tax execution cannot be carried out. Tax and Accounting Compliance A taxpayer is obliged to file corporate income tax and VAT returns: as of the day on which the resolution on insolvency takes effect for the (part of) taxable period preceding that day; as of the day of the transfer of the entitlement to dispose of the assets subject to the insolvency proceedings from the insolvency trustee to the taxpayer and vice versa (for corporate income tax purposes only) for the (part of) taxable period ending on this day; and as of the day on which the insolvency proceedings end for the (part of) taxable period ending on this day. Otherwise, the tax period for VAT purposes in insolvency proceedings is always a calendar month. A company is obliged to close its accounting books and prepare the financial statements as of the day: preceding the day on which the resolution on insolvency or the resolution on a change of the reorganisation proceedings into bankruptcy proceedings takes effect; when the cancellation of bankruptcy proceedings takes effect; preceding the day on which the approval of the reorganisation plan takes effect; and when the fulfillment of the reorganisation plan takes effect. Unless the creditors committee decides otherwise, the financial statements do not have to be audited (i) in the course of the bankruptcy proceedings (for 36 months starting on the day following the day on which the bankruptcy proceedings take effect) and (ii) as of the day preceding the day on which the approval of the reorganisation plan takes effect. Furthermore, the financial statements do not have to be audited if the bankruptcy proceedings are cancelled due to a lack of debtors assets. A company is obliged to prepare an opening balance sheet on the following day.
The ranking of claims is in principle the same in each proceeding, i.e. in liquidation bankruptcy proceedings and reorganisation proceedings. Secured debts are satisfied from the proceeds of the sale of the debtors assets that operated as the respective security (for further information on secured claims, see question 3.2 hereof). The remaining debts are satisfied depending on their priority. Preferential claims are satisfied first, followed by any remaining unsecured claims, and finally by subordinated debts. Preferential claims include various administrative costs, taxes, fees, customs duties, social insurance, contributions to the state employment policy and public health insurance payments, claims of creditors stemming from agreements entered into by the debtor in possession or the insolvency trustee, claims of the debtors employees stemming from their labour law relationship with the debtor, provided such claims arose in the last 3 years preceding the ruling on insolvency, or after the ruling on insolvency, claims stemming from statutory alimony, etc. If the proceeds from the liquidation of the property of the estate do not suffice to satisfy all preferential claims, the remuneration and out-of-pocket expenses of the insolvency trustee shall be paid first, followed by preferential creditors claims (including debtor in possession financing), then the costs of the maintenance and management of the property of the estate, and then creditors claims in respect of child support under the law. Other preferential claims are satisfied pro rata. Remaining unsecured claims are satisfied pro rata. Subordinated debts are satisfied according to the status and level of the subordination.
Generally, during each procedure, the tax regime for companies remains the same as if no insolvency proceedings were being conducted, with the below mentioned exceptions. Corporate Income Tax In reorganisation proceedings, income from the write-off of payables is exempt for the debtor, and any expense from the writeoff of receivables is tax deductible for the creditor. In reorganisation proceedings, all income earned in the period in which the resolution on reorganisation proceedings was taken, and in the subsequent period (if the reorganisation proceedings were not terminated in this subsequent period) is exempt. Unlike in normal situations, the taxpayer in insolvency proceedings is not obliged to increase its tax base by the value of outstanding payables due more than 36 months ago.

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6.1
confirmation of the plan operates as a discharge. When all obligations or all substantial obligations of the debtor are satisfied, the insolvency court declares the reorganisation proceedings terminated. The reorganisation proceedings may, however, also be terminated and the proceedings converted into liquidation bankruptcy proceedings if, among others: a) b) c) the insolvency court does not confirm the plan and the period for the submission of other plans has expired; the debtor does not pay the interest on the secured portion of its debts; or the debtor after the confirmation of the plan does not meet a substantial portion of its obligations.
Liquidation Bankruptcy Proceedings There is no process of cramming down creditors in liquidation bankruptcy proceedings. Reorganisation proceedings In reorganisation proceedings, the creditors vote on the reorganisation plan. For those purposes, the reorganisation plan divides claims into classes. Each class of creditor accepts the plan when more than half in number and those holding more than half of the amount of allowed claims approve the plan. The classes of shareholders accept the plan when more than half in number and those holding more than two-thirds of the amount of the allowed claims approve the plan. It is possible for more than one plan to be filed and accepted, although only one plan may be confirmed by the insolvency court. Standards for the confirmation by the insolvency court vary if the plan is accepted by every class or by less than every class. If the plan is accepted by every class of creditor, the insolvency court confirms the plan if: a) b) c) the plan complies with the insolvency and other applicable laws; the plan is proposed in good faith; each holder of a claim receives an amount under the plan that is not less than the amount that such holder would receive if the debtor were liquidated in liquidation bankruptcy proceedings; and all preferential claims are to be paid without undue delay after the effective date of the plan.

7.1 Is it common to achieve a restructuring outside a formal procedure in the Czech Republic? In what circumstances might this be possible?
Private workouts used to represent a significant alternative to per partes sales for companies in financial distress, since the old insolvency laws did not allow for effective court supervised reorganisation proceedings. In the past, a few large companies were successfully restructured. As in other jurisdictions, the greater the value of a going concern as compared to the liquidation value of the business, the involvement of experienced creditors and reasonable prospects for the sale of the business increase the chances of a successful restructuring.
d)
If the plan is accepted by less than every class of creditor, the insolvency court confirms the plan if the confirmation requirements applicable for the plan accepted by every class are satisfied and: a) b) c) d) the plan was accepted by at least one of the unimpaired class of creditors; the plan is fair and equitable; the plan does not unfairly discriminate; or the confirmation of the plan is not likely to be followed by the insolvency of the debtor.
Subject to conditions mentioned in question 2.3 above, a debtor may be reorganised. Large companies may be reorganised regardless when the reorganisation plan is negotiated. For small and medium businesses, the prepackaged reorganisation (approved by majority of secured and unsecured creditors in advance) is only way how to avoid liquidation bankruptcy.
6.2
Liquidation Bankruptcy Proceedings The court decides on the termination of liquidation bankruptcy proceedings upon a request of the trustee, once all proceeds from the sell-off of the debtors assets are distributed in accordance with the Final Report. The decision of the court is published in the Insolvency Register. After the termination of the liquidation bankruptcy proceedings, the debtor-business company is liquidated and deregistered from the Commercial Register. Reorganisation Proceedings After confirmation of the reorganisation plan by the insolvency court (see question 6.1 hereof), the debtors performance obligations are governed by the terms of the plan. The terms of the plan also commit the debtors creditors and shareholders. The
A debtor may pre-negotiate a reorganisation plan with his creditors and pursue the prepackaged reorganisation. If the reorganisation plan is approved by all creditors classes in advance, the insolvency law allows for shortened proceedings.
8 International
8.1 What would be the approach in the Czech Republic to recognising a procedure started in another jurisdiction?
The EC Regulation on Insolvency Proceedings applies in the Czech Republic.
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Ale Zdek
White & Case Na Prkope 8 Prague 1, 110 00 Czech Republic
Petr Kuhn
White & Case Na Prkope 8 Prague 1, 110 00 Czech Republic
+420 255 771 293 +420 255 771 122 azidek@whitecase.com www.whitecase.com
+420 255 771 236 +420 255 771 122 pkuhn@whitecase.com www.whitecase.com
Ale Zdeks practice involves mergers and acquisitions, reorganisations, namely energy and telecommunication industry focus, private equity, international tax, and general Czech corporate and personal tax consultancy. Among other things, Mr. Zdek has advised on the tax aspects of financial transactions involving primary issues of securities, inter-company financing structures with international, in particular Dutch, aspects, structuring, and licensing within international groups of companies. Mr. Zdek has been providing tax advisory services to clients in the Czech Republic as well as abroad for more than 10 years. Prior to working in White & Case Mr. Zdek worked in Arthur Andersen. Mr. Zdek is a member of the Chamber of Tax Advisors, Czech Republic as well as of the Corporate Tax Committee within the International Fiscal Association in Czech Republic.
Petr Kuhn is a Czech advocate who specialises in restructuring, securities, and mergers & acquisitions. Since joining White & Case in 1997, he has been involved in many significant transactions in the above-mentioned areas that have been handled by the Prague and London offices of White & Case. As a member of the Insolvency Law Committee of the Czech Ministry of Justice, Mr. Kuhn was responsible for creating the concept and drafting the part of the insolvency law related to business restructuring. In the past, he took an active part in drafting amendments to the Czech Commercial Code, Securities Act, and Capital Markets Act.
White & Case LLP is a leading global law firm with 34 offices in 23 countries in America, Europe, Asia and Africa. Our clients value the breadth and depth of our US, English and local law capabilities and rely on us for their complex crossborder commercial and financial transactions and for international arbitration and litigation. As a recognized leader in complex cross-border insolvencies and workouts in the Czech Republic, our financial restructuring and insolvency group has been involved in many of the largest cases in the Czech Republic representing clients in all aspects of restructurings, workouts and insolvency matters, in a wide range of industries. In April 2009 White & Case was named the Eastern European Law Firm of the Year Acquisition Finance Magazine. International Financial Law Review named the Prague office if White & Case the Czech Law Firm of the Year 2009 in March.

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Chapter 11
Denmark
Gorrissen Federspiel Kierkegaard
Lars Grngaard

1.1 How does a creditor take security over assets in Denmark?
However, as regards transactions carried out with connected persons, the limitation period is six or 24 months. For avoidance under the subjective rule, in principle no time limit applies.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Denmark?
Security over assets can be obtained by agreement between the creditor and the debtor. Protection from third party claims calls for an act of perfection to be performed depending upon the nature of the asset involved. Security granted over real and personal property, including motor vehicles, must be recorded in the official registry system. Security in debts is achieved by notification to the debtor. In certain instances, perfection may be accomplished by taking possession of the asset. It is also possible to grant a floating charge in the form of a company charge providing security over the various assets owned by a company from time to time, including inventories. Moreover, a floating charge can be granted in the form of a receivables charge providing security in amounts owed to the company. Protection against third party claims is obtained by recording in the registry.
The Danish Companies Acts contain provisions concerning the liability of the board of directors and management in companies that operate a business in financial difficulties. These rules are founded on the ordinary principles of Danish law governing liability for damages. A management board that intently or negligently causes financial injury to a company or its creditors may incur liability for damages. The management incurs liability if it continues to operate a business at a time where it should be evident that the companys operations cannot possibly be continued without losses being suffered by the creditors. The management is usually allowed certain latitude to test various reorganisation solutions in its attempt to reconstruct a company. If a criminal offence is committed, the management may as a part of the punishment be disqualified from carrying on business activities requiring particular public authorisation or approval. Also, the members of the management board may be disqualified from acting as members of the management board or the board of directors of a company.
Most rules governing avoidance are laid down in the Danish Bankruptcy Act. During bankruptcy proceedings, transactions may be avoided if they impair the creditors general position or result in some creditors obtaining a more favourable priority ranking to the detriment of other creditors. Most rules governing avoidance are objective in that transactions may be avoided regardless of whether the debtor was insolvent and regardless of whether the creditors may have had any knowledge thereof. However, also a subjective rule governing avoidance exists to the effect that transactions may be avoided if the debtor at the time of the transaction was or became insolvent, and the favoured creditor had knowledge of both the debtors insolvency and the fraudulent preference. The offering of gifts, payment of unreasonably high amounts for work and extraordinary repayments of debts as well as provision of security without a new credit being granted may be avoided for objective reasons. The transfer of assets that fraudulently gives preference to a creditor to the detriment of the other creditors or that in general results in the other creditors position being impaired is subjectively avoidable. The ordinary limitation period for avoidance is three months.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Denmark?
Bankruptcy is the main instrument within the insolvency proceedings system in Denmark. The debtors assets are liquidated and the proceeds distributed to the creditors pursuant to a priority ranking of claims. In connection with bankruptcy, an estate is established by order of the Bankruptcy Court. The Court also appoints a trustee that acts as management and gains full right of disposal of the company. The suspension of payments scheme is aimed at supporting attempts to avoid bankruptcy in favour of debt arrangements. A notice of suspension of payments is a solution that may be used in order to obtain a result which offers better prospects for both the
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debtor and his creditors. The suspension of payments scheme does not, as such, involve administration of the debtors estate. However, a supervisor is appointed by the Bankruptcy Court. The Bankruptcy Act sets out particular rules governing compulsory composition arrangements with the companys creditors. Compulsory compositions schemes are relatively rarely applied and will not be described in further detail in this article.
2.2 What are the tests for insolvency in Denmark?
Denmark
inserts an advertisement announcing the bankruptcy in the Danish Official Gazette that is available on the internet. Three weeks after the bankruptcy order has been pronounced, the trustee must distribute a preliminary statement of the estates assets and liabilities to the creditors. The preliminary statement must be followed - as soon as possible and not later than four months after the issue of the bankruptcy order - by a balance sheet and a report describing the most important reasons for the bankruptcy, information on accounting figures and on the latest annual accounts presented as well as a review of any differences between the latest accounts and the balance sheet of the estate in bankruptcy. Meetings for the scrutiny of claims filed will be held by the trustee. If possible, a meeting for the scrutiny of claims should be held within four weeks from the expiry of the four-week period during which the creditors were invited to file their claims. Subsequently, the trustee must present semi-annual accounts on the state of affairs of the estate. The Bankruptcy Court can convene a creditors meeting if deemed necessary. Once the administration of the bankrupt estate has been concluded, the trustee prepares the final accounts and a proposal for dividend. When a company has applied for suspension of payments, the Bankruptcy Court immediately appoints a supervisor. Within one week of his appointment, the supervisor will send a letter to all known creditors announcing the suspension of payments. The letter must be accompanied by the debtors latest annual accounts. The letter must also contain information on the debtors most important assets and liabilities, a list of creditors, information on the debtors bookkeeping as well as a statement of the reasons and purpose of the suspension of payments. A notice of suspension of payments will not be published in the Official Gazette. However, all known creditors will be notified of the situation. A meeting with the creditors must be held within three weeks from receipt of the notice of suspension of payments. At the creditors meeting, the Bankruptcy Court decides whether to sustain the suspension of payments scheme. The creditors must be informed of transactions of particular substance contemplated by the company with the supervisors approval, for instance sale of the companys business activities. The period of suspension of payments is three months. The Bankruptcy Court may upon request from the company extend the suspension of payments with up to three months at a time. The creditors must be informed of such extensions. The period of suspension of payments can last one year at the most. The Bankruptcy Court submits a notice of bankruptcy and suspension of payments to the Danish Commerce and Companies Agency and to other public authorities. Therefore, in public registers accessible from the internet the company will be recorded as a company in bankruptcy or suspension of payments. Moreover, during both bankruptcy and suspension of payments the company must in all written material add the words in bankruptcy or in suspension of payments, respectively, to its name so as to signal to outsiders the companys situation.
A debtor is regarded as insolvent if he is unable to meet his obligations as they fall due for payment, unless the inability to pay must be considered to be of a temporary nature. The final decision must be based on an assessment of the debtors liquidity. The fact that a companys liabilities exceed its assets is not necessarily of importance.
Bankruptcy is the creditors final resort to collect outstanding amounts. A petition for bankruptcy can therefore be presented by any creditor in a company. Moreover, the company itself may file for bankruptcy. In order for the Court to pronounce a bankruptcy order, the debtor must be insolvent. If a debtor finds himself unable to meet his obligations, he can file for suspensions of payments. The suspension of payments must have a purpose, e.g., to agree on a voluntary arrangement or a compulsory composition with the creditors or to sell the companys activities and subsequently liquidate the company through the formal bankruptcy procedure.
Bankruptcy proceedings are initiated by the creditors or the companys filing of a petition for a bankruptcy order to be issued against the company. The debtors petition for bankruptcy must contain a statement of its assets and liabilities as well as a list of creditors. The Bankruptcy Court decides whether to commence bankruptcy proceedings. The debtor must be insolvent. Suspension of payments proceedings are commenced by the companys submission of an application to the Bankruptcy Court. The application must set out the debtors proposal for the appointment of a supervisor. The company is presumed to be insolvent; however, the Bankruptcy Court conducts no investigations with a view to verifying if this is actually the case.
Immediately after pronouncing the bankruptcy order, the Bankruptcy Court appoints a trustee and inserts an announcement in the Danish Official Gazette. The trustee appointed immediately sends a letter to the companys creditors informing them of the situation and encouraging them to file a claim with the estate within four weeks. The Bankruptcy Court may at its own initiative or upon request from a creditor or the trustee decide to convene a creditors meeting with the purpose of electing another trustee or a creditors committee. After pronouncing a bankruptcy order, the Bankruptcy Court
3 Creditors
During a period of suspension of payments or following the issue of a bankruptcy order, unsecured creditors cannot levy execution

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on the companys assets with a view to satisfying their claims. This applies to all claims, irrespective of whether they have arisen before or during the relevant procedure.
Denmark
board of directors and the management board retain their usual duties and responsibilities for the management of the company. As the company must be assumed to be insolvent, the managements aim in the continued business must be to safeguard the creditors interests. The Bankruptcy Court appoints a supervisor to supervise the transactions of the company and the management. The management is not entitled to carry out material transactions without the approval of the supervisor.
Denmark
During bankruptcy, it is in principle possible for mortgagees and other secured creditors with a non-avoidable mortgage to enforce their security interest. If the claims are ordinary mortgage claims, realisation of the mortgaged assets cannot be effected without the contribution of the estate in bankruptcy. However, if the estate has not within six months after the issue of the bankruptcy order submitted a petition of a forced sale, any mortgagee with an overdue claim may request that the estate effects a forced sale without undue delay. Moreover, as regards secured claims, e.g., a pledge or the like, the secured claim can be realised directly without the bankrupt estates cooperation. During suspension of payments, it is the general rule that mortgagees must enforce their secured right following the normal procedure. However, this general rule only applies to mortgage claims that would not be vulnerable to avoidance in bankruptcy. If deemed necessary in the light of the object of the suspension of payments, the Bankruptcy Court may decide that no execution shall be levied or satisfaction sought based on such mortgage claims at the request of the debtor and the supervisor. In such case, the company must pay on a current basis any instalments due in respect of the secured claims.
Costs defrayed in connection with a bankruptcy, such as the trustees fee, are paid from unencumbered cash and proceeds of assets sales. Under a suspension of payments, the company may use unencumbered cash and proceeds for normal corporate activities and additional costs defrayed in connection with suspension of payments. Loans against security in the companys assets may be raised in this respect. It is possible for the company to get a loan from the Danish Employees Guarantee Fund of up to net DKK 55,000 per employee specifically for the payment of wages and salaries.
The issue of a bankruptcy order or notice of suspension of payments has fundamentally no impact on the employees employment with the company that will continue. During bankruptcy, the trustee decides immediately after the issue of a bankruptcy order whether the employment agreements entered with the companys employees will be affirmed by the bankrupt estate. If the bankrupt estate affirms an employment agreement, the estate will be bound by the terms of the agreement, including the provisions concerning notice, etc. However, particular provisions allow a bankrupt estate to adjust very long periods of notice to the ordinary period of notice. If the bankrupt estate decides not to affirm an employment agreement, the employee is entitled to cancel the employment. During a period of suspension of payments, the management and the supervisor will have to consider whether to dismiss the companys employees or some of the employees if deemed expedient as a part of a reconstruction or in connection with the sale of the company to a third party. Employees whose wages are paid in arrears are entitled to demand that the company provides security for the first remuneration due from time to time.
Claims incurred prior to the bankruptcy or the suspension of payments may be set off against claims also incurred prior to the bankruptcy or the suspension of payments. Similarly, claims incurred after the bankruptcy or the suspension of payments may be set off against claims also incurred after the bankruptcy or the suspension of payments. In contrast, a creditor cannot set off claims incurred prior to the companys bankruptcy or suspension of payments against the companys claims incurred after the bankruptcy or the suspension of payments has been declared. However, there is access to effect set-off against connected claims The Bankruptcy Act contains provisions restricting the access to set off claims, e.g., where one of the companys debtors acquires a counterclaim at a time where the bankruptcy was imminent. Equally, set-off is not possible in instances where a corresponding payment would be voidable.

When a bankruptcy order is issued, the debtor loses the right to dispose of its assets. Once bankruptcy proceedings have been commenced, the trustee appointed is in charge of the company and takes over the duties hitherto performed by the board of directors and the management. The shareholders have no influence on the company as their claim is of no value. During the period of suspension of payments, the shareholders, the
A bankrupt estate is entitled to decide whether to affirm or reject executory contracts. In the event that the estate decides to reject an agreement, the other party to the contract may cancel the contract and file a claim for consideration or damages as an ordinary unsecured claim in the estate in bankruptcy. If the estate decides to affirm an agreement, the estate will be bound by its terms, and claims filed by the other party in respect of the agreement rank as pre-preferential claims in the bankrupt estate. If the debtor has entered contracts of a continuing nature with particularly long notice periods, both the estate and the other contracting party may cancel the agreement with ordinary or reasonable notice.
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During the period of suspension of payments, the rights and obligations arising out of agreements entered prior to the suspension of payments continue to apply to the company. Often the parties with whom the company has entered contracts may be in a position to demand that security be provided by the company for current payments.
Denmark
authorities will determine to what extent a positive income is subject to tax. Often bankrupt companies will have suffered significant losses during the years preceding the bankruptcy, and they therefore rarely have a positive income. Commonly, the tax authorities will decide that the estate is not to be liable to tax.
5 Claims 6 Ending the Formal Procedure

5.1 Broadly, how do creditors claim amounts owed to them in each procedure? 6.1 Is there a process for cramming down creditors who do not approve proposals put forward in these procedures?
During bankruptcy proceedings, claims held by creditors must be filed with the trustee, and the creditor must provide documentation substantiating the claim. In connection with the issue of a bankruptcy order, the Bankruptcy Court inserts an advertisement in the Danish Official Gazette encouraging the creditors to file their claims with the trustee within a period of three months. However, this does not prevent a creditor from subsequently filing a claim. The creditors need not file their claims during the period of suspension of payments. In order to obtain a satisfactory foundation for carrying through a potential reconstruction of the company, it is usual practice that the creditors are encouraged to file their claims.
In bankruptcy cases, creditor approval is not required for transactions carried out by the trustee. The trustee has a free hand to wind up the companys activities in the best possible way. In a suspension of payments case, the companys management will continue. The supervisor appointed by the Bankruptcy Court must approve all material transactions. As regards transactions of particular substance, for instance sale of the companys business activities, the supervisor must also obtain creditor approval. Creditor approval is governed by special rules providing among other things that transactions of particular substance can be effected only if a majority of the creditors votes in the affirmative. The creditors are granted voting rights in proportion to the size of their claim.
The ranking of claims is governed by the Danish Bankruptcy Act. The so-called pre-preferential claims, i.e., claims arisen during or in connection with the administration of the bankrupt company, will be met before all other claims according to an order of priority. Next, the secondary pre-preferential claims concerning costs incurred in an attempt to restructure the company and obligations undertaken with the approval of the supervisor during suspension of payments will be met. After that, all employee claims and connected tax claims, etc. will be met as preferential claims. After the employee claims, certain suppliers claims will also be met as preferential claims, i.e., suppliers claims for duties on dutiable goods that must be settled by the supplier regardless of the fact that the buyer is a bankrupt company. After the preferential claims listed above, all other claims are met in equal proportions, i.e., the so-called unsecured claims. Claims secured by mortgage or in other ways will be fully covered to the extent that the security provided suffices. After the unsecured claims, deferred claims such as interest on unsecured claims will be satisfied in an order of priority. Only in rare cases will deferred claims be met. There may be different aims for suspending a companys payments. One purpose may be to obtain a voluntary or compulsory arrangement with the companys creditors. In such cases, claims will be satisfied in accordance with the specific terms governing the arrangement. In other instances, the object will be to salvage the company and sell it to a third party, whereupon the company on its own initiative will be declared bankrupt. In such case, the creditors will be met in pursuance of the bankruptcy rules.
Bankruptcy proceedings are normally concluded by the trustee preparing a statement of affairs with accounts for the bankruptcy and proposal for distribution to the creditors. Once the statement of affairs has been approved and the creditors have received dividend of their claims, a request will be made to the Danish Commerce and Companies Agency and other registers to strike off the company. The suspension of payments period runs for three months and may be extended, however, not for more than one year from the commencement of this procedure. If the reorganisation efforts carried out during the suspension of payments period are successful, the suspension of payments regime will be discontinued, and the company will continue to carry on its activities outside the framework of this procedure. However, if the reorganisation efforts are not successful, or if the companys activities are sold to a third party, bankruptcy proceedings will usually replace the suspension of payments regime.

7.1 Is it common to achieve a restructuring outside a formal procedure in Denmark? In what circumstances might this be possible?
Companies in bankruptcy are taxed according to the Danish Bankruptcy Tax Act. The taxable income is computed in compliance with the ordinary tax rules. However, the tax
Danish law allows ample opportunities for companies to restructure within the formal framework, in particular companies in bankruptcy or suspension of payments. Thus, the scope of restructuring efforts outside the framework of the formal procedures is limited, mainly because informal restructuring may involve significant risks to both the management and to advisors. Informal restructuring may be opted for in connection with a socalled quiet suspension of payments that may be chosen because

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During suspension of payments, the company is subject to the ordinary tax rules.

8 International
8.1
Denmark
an ordinary suspension of payments usually results in significant costs being incurred as well as publicity on the companys financial difficulties.
What would be the approach in Denmark to recognising a procedure started in another jurisdiction?
Denmark
It is possible to carry out a reorganisation without selling the debtors assets and activities. This can, for instance, be effected by entering into an agreement involving debt for equity swaps and the dilution of existing shareholders along with further injection of funds.
The EU Bankruptcy Regulation that came into effect on 31 May 2002 has not been implemented in Denmark. Moreover, Denmark has not imported the rules in UNCITRAL Model Law on CrossBorder Insolvency. Consequently, the ordinary national Danish rules will apply to international insolvency. In principle, bankruptcy proceedings initiated in another jurisdiction will not exclude a creditor from levying execution on the debtors assets in Denmark. This also applies to another countrys insolvency procedures similar to the Danish suspension of payments regime. Also, provided that the Danish rules on venue are met, there should be nothing preventing the implementation of independent bankruptcy proceedings over a debtors assets in Denmark, regardless of whether bankruptcy proceedings were initiated in another jurisdiction. As regards the Nordic countries, i.e., Denmark, Norway, Sweden, Finland and Iceland, Denmark has acceded the Nordic Bankruptcy Convention that is only applied in rare cases. According to the convention, a bankruptcy opened in one Nordic country comprises all assets and liabilities belonging to the debtor in the other Nordic countries.
The sale of a distressed business outside the framework of the formal procedures always involves a risk that creditors unable to obtain coverage may seek to set aside the sale. In order to avoid this, the following procedure may be followed: (1) without suspending payments or in other ways involving the public, negotiations are conducted with a potential buyer concerning the sale of a distressed business; (2) the company submits a bankruptcy petition; and (3) the trustee approves on behalf of the creditors the sale of the company that will then be effected. In this way, a pre-packaged sale is combined with a relatively fast formal procedure.
Lars Grngaard
Gorrissen Federspiel Kierkegaard Silkeborgvej 2 DK-8000 Aarhus C Denmark
+45 8620 7500 +45 8620 7599 lg@gfklaw.dk www.gfklaw.dk
Lars Grngaard is a partner at Gorrissen Federspiel Kierkegaard and head of the firms insolvency group. He acts as administrator of estates in bankruptcy and supervisor of companies in suspension of payments. He is a member of the International Bar Association. He is a 1984 graduate of University of Aarhus. Lars Grngaard was admitted to the Danish Bar in 1987 and to the Danish Supreme Court in 1992.
Gorrissen Federspiel Kierkegaard is among the leading Danish law firms with strong international relations. We represent major Danish and foreign businesses and financial institutions. Our aim is to provide advice at the highest professional and ethical level, tailored to the clients individual situation and requirements. We are accessible whenever our clients need our assistance. Our practice areas cover all branches of Danish and EU commercial law. We maintain close relations with leading lawyers worldwide and, at short notice, are able to provide our clients with the professional assistance wherever they need it. We are a fully integrated law firm that works internationally. We have offices in Copenhagen and Aarhus. More than half of our 320 employees are lawyers who possess both broad educations and exactly the competencies relevant to our clients.
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Chapter 12
England & Wales

Slaughter and May
Sarah Paterson
Thomas Vickers

1.1 How does a creditor take security over assets in England and Wales?
Under English law, there are four types of consensual security: the pledge; the contractual lien; the mortgage; and the charge. Pledge The pledge involves the creditor taking actual or constructive delivery or possession of the debtors assets as security until the loan is repaid. A creditor has a number of implied rights in respect of pledged assets, the most important of which is the right to sell the assets to meet a defaulted obligation. As the pledge depends on possession, only assets that can be possessed can be pledged. The consequence of this is that only goods and documentary intangibles are susceptible to the pledge. A documentary intangible is a document which entitles its holder to ownership of the asset which the document represents; a good example of this is a negotiable security, such as a bearer bond. Contractual Lien A lien is the right to retain possession of another persons property until that other person performs a specific obligation. A lien is therefore similar to a pledge; however, the fundamental difference between the two is that, with a contractual lien, the goods in question are initially deposited with the creditor not for the purposes of security, but for some other purpose (such as custody or repair). Mortgage A mortgage involves the transfer of ownership of an asset by way of security for a debt, on the condition that ownership will be transferred back to the debtor on discharge of the debt. A mortgage does not require the delivery of possession (unlike a pledge or lien) and therefore any kind of asset, tangible or intangible, is capable of being mortgaged. Charge A charge, in contrast to a mortgage, does not involve the transfer of ownership of an asset. It is simply the appropriation of an asset or class of assets to the satisfaction of a debt. A charge creates an encumbrance or weight which hangs on the asset and travels with it into the hands of all third parties (except for certain good faith purchasers). A charge can be either fixed or floating. Under a fixed charge an asset which is ascertained and definite (or capable of being ascertained and defined) is appropriated to the satisfaction of a debt immediately or upon the borrower acquiring an interest in it. A floating charge, on the other hand, constitutes a deferred
appropriation in respect of a class of assets, including future assets, where the assets constituting the class would by their nature be changing from time to time (a good example of such a class would be the inventory of a retailer) and where, until an event occurs which causes the floating charge to crystallise, the borrower is free to dispose of and add to the assets comprised in the class in the ordinary course of business. When the floating charge crystallises, it fastens on the assets then comprised in the class, effectively becoming a fixed charge. The borrower is then unable to deal in the assets comprised in the class.
If a company enters into certain types of transaction within specified periods before its insolvency, it is possible that the liquidator or administrator (for details of which, see below at question 2.1) may be able to challenge them. Transactions at an Undervalue A transaction is at an undervalue if a company makes a gift to a person or enters into a transaction on terms where the company receives no consideration or one which has a value which is significantly less than the value of the consideration provided by the company. One defence is that the transaction is entered into in good faith for the purpose of carrying on the companys business and that there are reasonable grounds for believing that it will benefit the company. To be vulnerable, a transaction at an undervalue must have been entered into during the period of two years before the commencement of winding up or the commencement of administration and the company must have been insolvent on a cash flow or balance sheet test (for details of which, see below at question 2.2) at the time it entered into the transaction or became insolvent by entering into it. There is a presumption of insolvency if the parties to the transaction are connected, for instance if it is an intra-group transaction or a transaction with a director. Transactions Defrauding Creditors The same undervalue definition applies in respect of transactions defrauding creditors, although there is no time limit between the transaction being effected and the onset of insolvency for the transaction to be attacked. However, the transaction must have been entered into for the purpose of putting the assets beyond the reach of a claimant or of otherwise prejudicing the interests of the claimant. Preferences A preference is given if the company does anything or allows anything to be done which has the effect of putting that person in a

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position which, if the company were to go into insolvent liquidation, would be better than the position he would have been in if the thing had not been done. The repayment of an unsecured debt by a customer to its bank could be within this wide definition. The company must have been influenced in deciding to give the preference by a desire to produce the preferential effect, in order for the preferential transaction to be vulnerable. There is a presumption of such influence if the parties are connected. The period before the commencement of the winding up or the appointment of an administrator during which such transactions must have been entered into for them to be vulnerable is six months for a preference to a non-connected person and two years to a connected person. Further, for the transaction to be upset, the company must have been insolvent on a cash flow or balance sheet test at the time of the transaction or as a result of entering into the transaction. If a transaction is established as being at an undervalue or a preference, the court has very wide powers to put the parties back into the position they were in before the transaction was entered into. Floating Charges A floating charge may be invalid if it is created within two years of the commencement of the winding up or the appointment of an administrator if the parties are connected or one year if they are not. There is a defence that the company was solvent when the charge was created (on a balance sheet and cash flow test) and did not become insolvent as a consequence of the transaction, but this solvency test will not apply if the parties are connected. The charge will, however, be valid to the extent of the value of so much of the consideration for the charge as consists of money paid or goods or services supplied to the company at the same time as or after and in consideration of the creation of the charge, together with interest, if any, payable under the relevant agreement.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in England and Wales?
England & Wales

company, or been guilty of misfeasance or breach of a fiduciary or other duty in relation to the company, a court may on an application by the official receiver, liquidator or a creditor compel him to: a) b) repay, restore or account for the money or property of the company with interest; or contribute such sum to the companys assets by way of compensation in respect of the misfeasance or breach of fiduciary duty or other duty as the court thinks just.
England & Wales
Breaches of duty which could be relevant here would include a directors involvement in the company granting a preference or entering into a transaction at an undervalue (which are explained above at question 1.2). Fraudulent Trading A court, on application by a liquidator in a winding up, can order that any person who was knowingly a party to carrying on the business of a company with intent to defraud creditors or any other person, or for any fraudulent purpose, be liable to make such contribution (if any) to the companys assets as the court thinks proper. Liability may attach to persons who are not directors of the company but have been involved in the fraud, for example a company which assisted the insolvent company in perpetrating the fraud. Fraudulent trading is also a criminal offence carrying with it the threat of imprisonment, a fine or both. Such an offence may apply whether or not the company has been, or is in the course of being, wound up. Fraudulent trading can arise when directors of a company allow it to incur credit when they know there is no good reason for thinking that funds will be available to repay the relevant debt when it becomes due or shortly thereafter. Wrongful Trading A court, on application by a liquidator in a winding up, can order that a director of a company which has gone into insolvent liquidation is liable to make such contribution (if any) to the companys assets as the court thinks proper if: a) before the commencement of the winding up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and thereafter the director failed to take every step with a view to minimising the potential loss to the companys creditors which he ought to have taken.
Whilst a company is trading solvently, the Companies Act 2006 provides that the primary duty of the directors is to act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. However, this duty is subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company. Whilst a company is clearly solvent there is no duty to consider creditors interests. By contrast, when a company is clearly insolvent, directors must consider creditors interests before those of shareholders. Between these two points there is a grey area, and it is unclear precisely at what point, and to what extent, the directors duty to promote the success of the company for the benefit of its members is displaced by a duty to act in the interests of creditors. Numerous duties are placed upon directors in these situations. A breach of these duties can lead to personal liability and possible disqualification from being able to act as a director or being involved in the management of the company for a specified period. Common Law and Statutory Duties The common law duty of a director when a company is insolvent or of doubtful solvency is to act in the interests of creditors, with a view to minimising the loss to the creditors of the company. Under the Insolvency Act 1986, if in the course of a winding up anyone who has been involved with the promotion, formation or management of the company is found to have misapplied, retained or become accountable for any money or other property of the
b)
The standard required as to what a director ought to know, the conclusions he ought to reach and the steps he ought to take is the standard of what would be known, reached or taken by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the director in relation to the company and with the general knowledge, skill and experience that the director has. Disqualification Apart from personal liability, where a director engages in fraudulent or wrongful trading or has been found guilty of other misconduct in connection with a company and is held to be unfit by the court, he may be disqualified by court order for a period of between two and fifteen years from acting as a director or from having any involvement in the promotion, formation or management of any company.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in England and Wales?
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When a company is in financial difficulties there are five formal procedures which may apply:
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a) b) c) d) e) a company voluntary arrangement (CVA) may be entered into between the company and its creditors; a scheme of arrangement may be effected; an administrator may be appointed; an administrative receiver or receiver may be appointed; or the company may go into liquidation (otherwise known as winding up). There are two types of liquidation: compulsory and voluntary. In general terms, a compulsory liquidation applies to insolvent companies, and a voluntary liquidation applies to solvent companies.
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appointment of an administrative receiver except in limited circumstances. Where a charge is entered into on or after 15 September 2003 it will only be possible to appoint an administrative receiver where the company granting the charge falls into an exception to the prohibition. The exceptions cover, amongst others, capital markets transactions (such as securitisations), companies which trade on the financial markets, and companies involved in public-private partnership and utilities projects. Floating charges entered into before 15 September 2003 are not subject to the prohibition. It may still be possible for a secured creditor to appoint a receiver under a fixed charge. Such a receiver has limited powers in respect of the property over which he is appointed and pays the proceeds of the property to the holder of the fixed charge. Liquidation Compulsory Liquidation A compulsory winding up order is made by the court. The grounds on which a court can make a winding up order include the company being unable to pay its debts and where the court believes it is just and equitable that the company be wound up. For the purposes of liquidation, the company is unable to pay its debts if it fails either of the cash flow or the balance sheet tests. In addition, a company is deemed to be unable to pay its debts if: (a) a creditor who is owed over 750 has served the company with a written demand for payment and the company has for three weeks either not paid the sum, not secured the sum, or not compounded the sum to the reasonable satisfaction of the creditor; or (b) if an order of the court requiring the company to pay a certain sum to a creditor is not satisfied. Voluntary Liquidation There are two types of voluntary winding up: a members winding up and a creditors winding up. A members voluntary winding up is a liquidation which is under the control of the companys shareholders (also known as its members), and is only possible where the directors are able to make a declaration that all the liabilities of the company will be met within a period not exceeding twelve months. If the directors cannot make this declaration, then it will be a creditors winding up, and control of the liquidation will pass to the creditors.
In general terms voluntary arrangements and schemes of arrangement are potential tools used in a reorganisation or rescheduling of debt. Receivership and liquidation are likely to signal an acknowledgement that the company itself has no future and all that can be sought is the maximisation of the proceeds of the sale of its assets or business. This may enable a purchaser to acquire at least part of its business as a going concern, thereby preserving the underlying business and employment. By contrast to receivership and liquidation, one of the purposes of the administration regime is to act as a rescue mechanism in respect of those companies which are capable of rescue.
2.2 What are the tests for insolvency in England and Wales?
English law does not use insolvency as a defined term. The relevant test is inability to pay debts. Therefore, for the purposes of English law, a company is insolvent if it is unable to pay its debts. English law does not have a single definition of inability to pay debts. The two principal tests are known as the cash flow and the balance sheet tests. The cash flow test applies if a company is unable to pay its debts as they fall due. The balance sheet test is satisfied if the value of the companys assets is less than the amount of its liabilities, taking into account its prospective and contingent liabilities.
Company Voluntary Arrangement / Scheme of Arrangement There are no formal requirements that a company has to satisfy in order to be placed in either of these procedures. There is therefore no requirement that the company in question is unable to pay its debts before it can utilise either procedure. Administration A holder (QFCH) of a qualifying floating charge (QFC) (which is defined as being a floating charge over the whole or substantially the whole of the companys property) is able to make an appointment of an administrator either in or out of court (for details of which, see below) at any time when an event has occurred which would allow him to enforce his charge (this will typically be some default under the loan agreement). This right of appointment may well arise when the company is not even insolvent. In all other circumstances in which an administrator is appointed, it is necessary to show that the company is or is likely to become unable to pay its debts. Administrative Receiver / Receiver An administrative receiver is a manager of the whole or substantially the whole of a companys property. The administrative receiver can only be appointed by a QFCH. The debenture creating the floating charge will typically set out the grounds upon which an administrative receiver can be appointed. The Enterprise Act 2002 introduced a prohibition on the
Company Voluntary Arrangement The directors (or, if the company is in administration or liquidation, the administrator or liquidator) may propose to the shareholders and unsecured creditors a composition in satisfaction of the companys debts or a scheme of arrangement of its affairs. A person authorised to act as the nominee, currently a licensed insolvency practitioner (a professional with insolvency experience, normally an accountant), reports to the court as to whether, in his opinion, the proposal should be put to shareholders and creditors. If he believes the proposal should be put, meetings of shareholders and creditors are called to approve the proposal. Approval requires a simple majority at the shareholders meeting and a majority in excess of three-quarters (by value) at the creditors meeting (subject to the exclusion of secured creditors and certain other limitations concerning, for example, creditors who are connected with the company). A proposal, once approved, may be challenged on the grounds that there was some material irregularity in connection with the holding of the meetings, or that it unfairly prejudices the interests of any creditor.

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Scheme of Arrangement A company (or an administrator or liquidator) or any creditor or shareholder of a company may petition the court to summon a meeting of creditors or shareholders to agree to a compromise or arrangement between the company and its creditors or shareholders. If a simple majority in number of those voting and a three-quarters majority in value is obtained at any meeting, and if the court sanctions the compromise or arrangement, the compromise or arrangement will be binding on the company and the creditors or the shareholders. To secure approval of a scheme, each separate class of creditors must vote in favour. Administration An administrator may be appointed either by application to the court or by filing papers with the court documenting an out of court appointment. An appointment out of court may be made by a QFCH, the company or its directors. An application to court to appoint an administrator may be made by the company, its directors or any creditor. The grounds upon which a company can be placed in administration are described in question 2.3 above. In all cases, an insolvency practitioners opinion that the purpose of administration is capable of being achieved must be provided. All administrations share the same purpose which is set out as a cascade of objectives. The first objective is the rescue of the company as a going concern. Only if this is not reasonably practicable or there would be a better result for the creditors as a whole does the second objective apply. The second objective is to achieve a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration. Only if the second objective is not reasonably practicable does the third objective of realising the companys property for the benefit of one or more secured or preferential creditors apply. Where an administrative receiver is in office, the appointment of an administrator must be made by an application to the court. The court will only make an appointment where the appointor of the administrative receiver consents or where the court thinks that the security under which the administrative receiver was appointed is liable to be released or discharged as a preference or a transaction at an undervalue or that the floating charge is avoidable for want of new consideration at the time of its creation. Where a secured creditor retains the right to appoint an administrative receiver he may use this right to block the appointment of an administrator by appointing an administrative receiver prior to the appointment of an administrator. A person appointing an administrator must give notice to any person who may be entitled to appoint an administrative receiver or administrator as the holder of a qualifying floating charge. During the notice period, a secured creditor who retains the right to appoint an administrative receiver may do so or may instead substitute his choice of insolvency practitioner as administrator. A QFCH who does not have the power to appoint an administrative receiver may substitute his choice of insolvency practitioner as administrator even though he cannot block the appointment of an administrator. Administrative Receiver There is no formal appointment procedure for an administrative receiver. When the grounds upon which a receiver may be appointed arise, then the creditor may elect to make an appointment. Liquidation Compulsory Liquidation As described above, a company enters into compulsory liquidation through an order made by the court. Proceedings are started by a petition that may be presented by any creditor, the company, the
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directors or any contributory. Receivers and administrators are also able to present petitions. If the court is satisfied that the grounds are satisfied, then it will make a winding up order. The Official Receiver (a civil servant in the Insolvency Service) then automatically assumes the role of the liquidator until another liquidator is appointed. Voluntary Liquidation Voluntary liquidation (whether creditors or members) is initiated by the companys members passing a resolution (requiring a threequarters majority vote) which must either state that they are in favour of a voluntary liquidation (in the case of a members winding up), or that the company cannot, by reason of its liabilities, continue its business and that it is advisable to wind it up (in the case of a creditors winding up). Either type of resolution has the effect of starting a voluntary liquidation at the date it is passed. In a members voluntary liquidation, the shareholders appoint the liquidator, while in a creditors voluntary liquidation, the creditors appoint. It may happen that, during the course of a members voluntary winding up, the liquidator forms the opinion that the company will be unable to pay its debts in full together with any interest. If so, the liquidation is converted from a members winding up to a creditors winding up.
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Company Voluntary Arrangement The chairman must prepare a report of the creditors meeting for the court, which must be filed within four days of the meeting being held. Notice of the result of the meeting must be given to all those who were sent notice of the meeting immediately after the report is filed in court. Notice must also be sent to the registrar of companies (a governmental body controlling the incorporation and administration of companies operating in England and Wales which maintains a register of companies available for public inspection), but only if the decision was one to approve the voluntary arrangement. Scheme of Arrangement Once a court order is made approving the scheme, it is drawn up and an original, together with an official copy, is obtained by the company. The official copy is then delivered to the registrar of companies for registration and it is that filing process which makes the scheme effective and binding. Administration As soon as reasonably practicable after his appointment, the administrator must obtain details of the companys creditors and must notify the company and all of its creditors of his or her appointment. The appointment must also be advertised in the London Gazette (which is the official newspaper of record in England and Wales) and in a newspaper. The administrator must also send a notice of his appointment to the registrar of companies. Following the appointment of the administrator, the directors are required to provide him with a statement of the companys affairs, enabling the administrator to assess the current position of the company. The administrator must send a statement of his proposals to all creditors and members of the company within eight weeks of his appointment, and also file a copy of the proposals with the registrar of companies. An invitation to an initial creditors meeting, to be held as soon as reasonably practicable, will be included with the copy of the administrators proposals sent to each creditor. At the initial creditors meeting, the administrator presents his
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proposals and the creditors vote. The creditors can accept the proposals with or without modifications by way of a majority in value of claims. If the creditors reject the administrators proposals, the administrator must report to court and seek directions. Further creditors meetings are required if the administrator revises his proposals or if 10% of the creditors (in value) demand it. Otherwise, the administrator will implement the approved proposals. Administrative Receivership On appointment, the administrative receiver must immediately send notice of his appointment to the company, and to all known creditors within 28 days. The notice should be advertised in the London Gazette and in a local newspaper and every invoice, order for goods or business letter issued must also contain a statement that a receiver has been appointed. Following the appointment of the administrative receiver, the directors (together with any others involved in the company if required by the administrative receiver) are required to prepare a statement of affairs of the company and give this to the administrative receiver. Within three months of his appointment the administrative receiver is required to send a report to the registrar of companies and to creditors, together with a summary of the directors statement and the receivers comments on it. The administrative receiver must then call a meeting of the unsecured creditors to consider his report. Liquidation Compulsory Liquidation In a compulsory liquidation, the Official Receiver is required to advertise the liquidation in the London Gazette and a local newspaper. He must also notify the Registrar of Companies and the company itself. From this point on, it is a requirement that all company papers state that the company is in liquidation. Within twelve weeks of the winding up order being made, the Official Receiver must decide whether to call a meeting of the creditors and contributories to appoint a licensed insolvency practitioner to act as liquidator. If he decides not to call meetings, he must give notice of his decision before the end of the twelveweek period to the court and the companys creditors and contributories. If he decides that meetings should be called, those meetings must be held not more than four months from the date of the winding up order, and 21 days notice must be given to all creditors and contributories. Notice must be given by advertisement in a local newspaper and the London Gazette. In addition, he must call a meeting if requested at any time by one quarter in value of the companys creditors. Members Voluntary Liquidation The directors statutory declaration of solvency and the special resolution to wind up the company must be filed with the registrar of companies within 15 days of the resolution being passed. In addition, within 14 days of his appointment, the liquidator must publish a notice of his appointment in the Gazette along with the resolution to appoint him and register notice of his appointment with the registrar of companies in the prescribed form. If the liquidation continues for more than one year, the liquidator must call a general meeting at the end of the first year and each successive year to keep the shareholders informed. A final meeting of the members is held prior to dissolution (at which point the companys formal existence is terminated) where the liquidator lays before the shareholders an account of how the liquidation was conducted. This meeting is called by advertisement in the London Gazette one month before the meeting. Within one week of this final meeting, the liquidator is required to send a copy
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of this account to the registrar of companies, and must file a final return with the registrar of companies with respect to the holding of the final meeting and its date. Creditors Voluntary Liquidation A meeting of the creditors must be held within 14 days of the general meeting passing the resolution to wind up the company. At least seven days notice of the creditors meeting must be given to the creditors by post, and a notice advertising the creditors meeting must be placed in the London Gazette and at least two local newspapers. Before the meeting is held, creditors are entitled to inspect a list of names and addresses of the companys creditors. The directors must produce a full statement of the companys affairs, which has to be presented at the creditors meeting. The statement should include details of the companys assets, debts and liabilities, the names and addresses of the companys creditors and details of the security held by them. The details of the appointment, the shareholders resolution putting the company into liquidation, and the statement of affairs must be filed with the registrar of companies. The shareholders resolution must also be published in the London Gazette. Similarly to a members winding up, if the course of the liquidation takes more than one year, the liquidator must call a meeting of the shareholders and a meeting of the creditors at the end of the first year and each successive year to keep the shareholders and creditors informed. The final meeting of a creditors voluntary liquidation follows the same requirements and procedures as for a members voluntary liquidation.
3 Creditors
Company Voluntary Arrangement If a CVA is approved, it binds all creditors who would have been entitled to vote, whether or not they had notice of the creditors meeting. The arrangement can be challenged, however, if it unfairly prejudices the interests of a creditor or shareholder of the company or there has been a material irregularity at or in relation to the meetings. Since January 2003, there has been provision for a moratorium on legal processes, including the enforcement of security, of between one and three months for an eligible company contemplating a voluntary arrangement. This is known as the small company voluntary arrangement moratorium. Eligibility for the moratorium is principally determined with reference to the definition of a small company under the Companies Act 2006. A company will fall within the definition of being a small company if it satisfies two or more of the following requirements:
Turnover Balance Sheet Total Number of Employees Not more than 6.5 million Not more than 3.26 million Not more than 50
A special purpose vehicle in a securitisation or other financial structure may fall within the definition of small company. However, the statute contains exclusions from eligibility for companies involved in certain financial transactions. Scheme of Arrangement If a scheme of arrangement is sanctioned by the court, it may alter

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the rights of shareholders and creditors of the company, and may do so even if certain shareholders and creditors have not themselves voted in favour. As explained above, the voting procedure on a scheme of arrangement requires each class of creditors to be given a separate vote. If any one class of creditors fails to vote in favour of the scheme, then the scheme will fail. However, as there is no moratorium available with this procedure, there is nothing to prevent creditors taking enforcement action against the company up until the point at which the scheme of arrangement is sanctioned. Administration Once an application to court to appoint an administrator has been lodged, or notice of intention to make an appointment out of court has been given, an interim moratorium automatically arises. No steps may be taken to enforce security or repossess goods subject to a hire purchase agreement, no landlord may exercise a right of forfeiture and no legal process may be commenced or continued without the consent of the administrator or leave of the court. If an administrator is appointed, this moratorium continues (unless the administrator or the court agrees otherwise). Administrative Receivership Unlike in an administration, the appointment of an administrative receiver does not create an automatic moratorium. This means that creditors may begin or continue legal actions against the company, including petitioning for its liquidation, whilst the company is in administrative receivership. An important consequence of this is that landlords may be able to exercise their rights to forfeit the lease of the companys premises. Liquidation The main function of a liquidator is to collect in and distribute the assets of the company. The liquidator must distribute the assets amongst the companys creditors in accordance with a strict hierarchy of priorities (for further details of which see below at question 5.2). Unsecured creditors occupy the lowest position in the hierarchy, ranking only above the shareholders of the company. Accordingly, unsecured creditors have no freedom to enforce their rights under a liquidation, and are compelled to wait until the liquidator is in a position to make a distribution before receiving anything. However, unsecured creditors are entitled to repossess assets which are not actually owned by the company, such as goods subject to a retention of title clause.
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of the creditors, and to rank as an unsecured creditor in respect of the debt owed to him.
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A consideration of the application of insolvency set-off is not relevant in the context of administrative receiverships, company voluntary arrangements and schemes of arrangement as insolvency law makes no special provisions in respect of the application of setoff in these circumstances. Liquidation Under the Insolvency Rules, mandatory set-off applies in circumstances in which before a company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation. In such circumstances, the sums due from one party are set-off against the sums due from the other party. Only the balance, if any, is provable in the liquidation or, as the case may be, payable to the liquidator. However, sums due from the company to another party shall not be included in the account if that party had notice at the time that they became due that: (i) a meeting of creditors had been summoned; (ii) a petition for the winding up of the company was pending; (iii) an application for an administration order was pending; or (iv) any person had given notice of intention to appoint an administrator. In this context, a sum is due if it is payable at present or in the future, the obligation by which it is payable is certain or contingent or its amount is fixed or liquidated (or is capable of being ascertained by fixed rules or as a matter of opinion). Administration In the event of an administration there are restrictions on the mandatory application of set-off. Only on the giving of notice of intention to distribute by an administrator will insolvency set-off in respect of administration apply. Prior to the giving of such notice by the administrator, normal rights of set-off can still be exercised. Once notice of an intention to distribute has been given by the administrator, the Insolvency Rules provide that, at the date of the notice, an account must be taken of what is due from each party to the other in respect of their mutual dealings, and the sums due from one party must be set off against the sums due from the other on a similar basis as on a liquidation. This does not affect debts that have already been validly set off before the notice was given.
In respect of schemes of arrangement, administration and administrative receivership, please refer to the answer to question 3.1. Company Voluntary Arrangement An important limitation on the CVA mechanism is that a CVA may not affect the right of a secured creditor of the company to enforce his security, except with their consent. Liquidation In a liquidation, secured creditors have several options in respect of their security. The first option is to enforce their security. If the value of the security exceeds the value of the debt which they are owed, then they will make a full recovery, and the balance will form part of the assets of the company to be distributed by the liquidator. If the value of the security is less than the value of the debt, then the secured creditor will recover the value of the security, and will rank as an unsecured creditor for the balance of the sum owed to him. The second option is for the secured creditor to value his security, and allow the liquidator to realise it for him. The final option is for the secured creditor to surrender his security for the general benefit

Company Voluntary Arrangement If a proposal for a CVA is approved, it is normally implemented under the supervision of the nominee referred to above, who now becomes known as the supervisor. The supervisors role is to implement the arrangement. What this will entail will depend on what arrangement has, in fact, been approved. Whether or not the supervisor will hold the assets subject to the arrangement will, again, depend ultimately on the terms of the arrangement itself. Once the arrangement is approved, the directors of the company are obliged to do everything possible to put the relevant assets of the company into the hands of the
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supervisor. The directors do, however, otherwise remain in position. Similarly, unless the approved arrangement actually involves some alteration of the rights of shareholders (such as a debt-for-equity swap) then rights of the shareholders of the company are not otherwise affected by a CVA. Scheme of Arrangement A defining feature of a scheme of arrangement is the fact that the incumbent management remains in control of the company, and no reliance is placed upon an independent insolvency practitioner. Consequently, the directors of the company remain in control throughout. A scheme of arrangement does not, of necessity, affect the rights of a shareholder. It will only do so to the extent that their rights are modified in fact by the scheme itself. Administration Upon appointment, the administrator manages the affairs, business and property of the company as its agent. The directors powers and duties of management cease, although the administrator may leave some or all powers with the directors if he so chooses. The power of the shareholders to control the company also ceases. The administrator is endowed with wide-ranging powers. These have the effect of allowing him to, firstly, secure control of the companys assets, secondly, prepare proposals for the approval of the creditors, and, thirdly, carry out those proposals. Administrative Receivership An administrative receiver is a manager of the whole (or substantially the whole) of the companys property. Accordingly, the company is under the control of the administrative receiver. His primary duty is owed to the secured lender who appointed him to seek repayment of the secured debt. As an administrative receiver is the manager of the companys property, his appointment leads to the suspension of the directors powers of management. The powers and rights of the companys shareholders are generally also suspended. Liquidation On a winding up, the liquidator is conferred with wide-ranging powers in order to allow him to collect in and distribute the assets of the company. The appointment of a liquidator, whether on a compulsory or voluntary liquidation, leads to the termination of the powers of the directors. The rights of the shareholders, for all intents and purposes, also lapse.
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company as a going concern, there is no automatic termination of employment contracts on appointment. Administrators do, though, have the power to dismiss employees if their employment contracts are inconsistent with the administrator running the business. If employees are dismissed, this may give rise to an employment claim against the company. The onset of administration does not therefore necessarily affect employees, unless their contracts are terminated or where the business of the company is sold. In the latter case, the operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply to protect the position of the employees. It should be noted that the interpretation of TUPE is not straightforward, and some difficult issues in relation to its precise scope remain to be resolved. Administrators are not personally responsible for liabilities arising under employment contracts. However, if employment contracts of existing employees have been adopted by the administrator, then certain liabilities (principally salary - including holiday pay, sick pay and pension contributions) which arise under such contracts during the administration are payable in priority to payment of the administrators fees and expenses and any floating charge security. An administrator will have adopted a contract of employment if he continues to employ staff and pay them in accordance with their previous contracts for 14 days after his appointment. If the administrator sells the business of the company, then TUPE may apply. If TUPE does apply, then the most important effect of this is that the purchaser of the business must take on the employees of the business on the same terms as they were previously employed; however, certain changes can be made to the contracts of employment of the effected employees if those changes are made with the intention of safeguarding employment by ensuring the survival of the business. These variations must be agreed with an employee representative. Administrative Receivership The position of employees in an administrative receivership is generally the same as for an administration. Liquidation On a compulsory liquidation and a creditors voluntary liquidation, the service contracts of employees are automatically terminated, and employment claims may arise against the company as a result. By contrast, the commencement of a members voluntary liquidation does not automatically terminate the service contracts of employees. It may therefore be open to the liquidator to carry on the business of the company until he can sell some or all of its undertaking. If this does occur, then TUPE may apply, although the effects of its application might differ from those on an administration.
A full review of the ways in which the procedures are financed is outside the scope of a general introduction. In general, to the extent officeholders require further funding they will typically look to the companys existing lenders to provide it.
Company Voluntary Arrangement / Scheme of Arrangement Company Voluntary Arrangement / Scheme of Arrangement When a CVA is approved, or a scheme of arrangement is sanctioned, there is no direct impact upon the employees of the company. It may well be that the consequence of the implementation of an arrangement may have an effect upon the companys employees; however, this effect would be a consequence of the terms of the arrangement itself. Administration Since the main function of an administrator is to rescue the The effects of a CVA or a scheme of arrangement depend entirely upon its terms. The default position is that neither procedure automatically interferes with the contracts of the company. Administration Entering into administration does not have any automatic effect on company contracts, which continue in effect. The administrator is given no power (unlike a liquidator) to disclaim onerous contracts. The administration moratorium does not prevent counterparties cancelling contracts with the company. It is a typical term of many

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contracts that the contract in question may be terminated upon the company entering into an insolvency procedure, such as administration. The administrator therefore may need to negotiate with the key suppliers and customers of the company if he wishes to enable the company to continue trading. There is, however, a critical exception to the general principle: the moratorium prevents landlords from forfeiting company leases. Administrative Receivership The treatment of company contracts during an administrative receivership is broadly similar to their treatment under an administration. The position is thus that the appointment of an administrative receiver does not terminate or affect company contracts, unless provided for in the contract itself. Liquidation The onset of liquidation itself does not automatically terminate company contracts (although liquidation may be a ground for termination under the terms of certain contracts). However, unlike in administration and administrative receivership, the liquidator is given the power to unilaterally terminate onerous contracts in order to facilitate the winding up the affairs of the company. This power is known as the right to disclaim onerous property. If the disclaimer is available, the effect of it is to terminate the contract as at the date of the disclaimer, so that the respective rights and obligations of the company and its counterparty are fixed as at that date. The disclaimer therefore allows the company to avoid incurring future liabilities; however, it has no effect on liabilities that have already been accrued. If the counterparty suffers loss as a result of a disclaimer, it may claim for such loss in the winding up. This loss will be calculated under the normal principles used to assess loss for breach of contract.
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There is no method by which creditors, other than the secured creditor, can claim amounts owed to them in an administrative receivership. If the general body of creditors are to be paid, then it will not be through administrative receivership. Their claims will either be met by the company itself, if the company does emerge with a viable business after the receiver has repaid the appointing secured creditor, or (and more likely) in a liquidation. Liquidation A creditor wishing to claim in a liquidation must prove his debt. To do so, the creditor must submit a formal claim to the liquidator, which is known as a proof of debt. The liquidator is obliged to send forms of proof to every creditor of the company who is known to him. Creditors are entitled to submit proofs in respect of any type of claim, whether it is present or future, certain or contingent, or whether it is liquidated or unascertained. The liquidator must then examine every proof he receives, and either admit it, reject it in writing (giving his reasons in writing to the person concerned), or require further information. As regards debts that are contingent or of an uncertain value, the liquidator should estimate a value - which may subsequently be revised as further information comes to light. Creditors unhappy with a liquidators decision may apply to court for a review of the decision. It is only claims which have been proved which are entitled to participate in any payment (which is technically known as a dividend) made by the liquidator.
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5 Claims
Company Voluntary Arrangement / Scheme of Arrangement Where a distribution is made pursuant to a CVA or scheme of arrangement, the terms on which it will be made will be governed by the arrangement itself, which the creditors will have voted on and approved by the requisite majorities. Accordingly, there is no general rule which applies to the ranking of claims in these procedures. It is important to note that a CVA cannot affect the rights of secured creditors or preferential creditors. Administration On an administration, the order of priorities is broadly as follows: a) b) c) d) e) the administrators costs and expenses of realising fixed charge assets; fixed charge holders (to the extent of their security); the obligations incurred under new contracts and the pay of employees whose contracts have been adopted; the general expenses and costs of administration; preferential creditors (preferential debts now relate almost exclusively to employees rights, including accrued pay and pension rights); floating charge holders (subject to the prescribed part provision, which is explained in more detail below); unsecured creditors; and shareholders.
Company Voluntary Arrangement / Scheme of Arrangement The operation of these procedures depends upon their actual terms. Accordingly, the mechanism by which creditors seek payment of sums owed to them will vary according to the terms of each arrangement. Administration The Enterprise Act 2002 introduced provisions giving an administrator power to make distributions. He may distribute to secured and preferential creditors subject to the normal rules of priority and may make a distribution to unsecured creditors with court sanction. The process for proving for a debt is similar to that described in respect of liquidation below. An administrator also has a general power to make payments to unsecured creditors where such a payment is necessary or incidental to the performance of his functions. This means that an unsecured creditor who is critical to the administration may be able to press for payment of preadministration debts as a condition of further supply. Administrative Receivership As described above, the principal duty of the administrative receiver is to secure the repayment of the debt owed by the company to the secured creditor who appointed him. This is combined with a limited duty of care to the company, together with a statutory duty to preferential creditors (who are defined in more detail below at question 5.2). The receiver does not owe any separate duty to the general body of unsecured creditors.
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The prescribed part provision was introduced by the Enterprise Act 2002, and was intended to ensure a fairer distribution of the assets of an insolvent company for the benefit of its unsecured creditors. Under the old regime, floating charge holders were paid in full before any sums were payable to the unsecured creditors. Now, the administrator is obliged to set aside a certain amount of money from the net property of the company to pay unsecured creditors. Net property is defined as all the property of the company remaining
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Administrative Receivership As described in question 5.1, an administrative receiver takes possession of the secured assets with a view to realising their value and applying it to pay the amounts due to the secured creditor which appointed him. Creditors with fixed charges and preferential debts will be paid in priority to creditors with floating charge security. Liquidation The order of priorities on liquidation is broadly the same as for an administration.
The two procedures best suited to achieving a cram down are company voluntary arrangements and schemes of arrangement. This is because approval of the terms of these arrangements depends on majority voting, the outcome of which binds dissenting creditors as if they had indeed agreed to the terms. However, it should be appreciated that the scope of these procedures to achieve a true cram down may be limited by minority protections.
Company Voluntary Arrangement Once the terms of a CVA have been completed successfully, a company reverts to its former status, and control returns to its directors and shareholders. It is possible (and this occurs frequently in practice) that the arrangement may fail. If so, it is likely that the company may enter into another procedure, such as liquidation. Scheme of Arrangement Once a scheme is approved, it is implemented under the supervision of the companys directors. Once the implementation is completed, the company reverts to its former status. Administration There are numerous potential exit procedures for an administration. They range from the administration ending (and the company returning to the control of its directors) if the administrator considers that its purpose has been achieved, to the company moving into winding up if the administrator considers that that will be the most appropriate method to distribute the companys assets. Provision is also made for the administrator to dissolve the company, thereby bringing its existence to an end, if he thinks that the company has no assets to distribute. Liquidation Following the final meeting of creditors, the company is automatically dissolved three months later.
Company Voluntary Arrangement The entry of a company into a voluntary arrangement does not, of itself, affect the corporation tax liabilities of the company (save to the extent that previously accrued tax liabilities are compromised by the arrangement itself). Tax arising on disposals of assets, or on income earned during the course of the arrangement, will be a liability of the company in the normal way. On the release of a debt, whether a trade debt or a borrowing, a company debtor will normally be taxed on the amount released. It is an attractive feature of the CVA regime that the release of a debt pursuant to such an arrangement does not give rise to a receipt for tax purposes. Scheme of Arrangement The tax treatment of a company entering into a scheme of arrangement is fundamentally the same as on a CVA. Administrative Receivership The appointment of an administrative receiver does not, of itself, affect the liability of a company to tax, which continues to be computed on the same basis as before unless and until the company ceases to trade. In general terms, the administrative receiver is not liable to pay tax on profits made by the company after his appointment, whether arising via trading income or on the disposal of assets. In relation to chargeable gains arising on such a disposal of assets, tax legislation expressly treats the receiver as a nominee of the company. Administration A company entering into administration continues to be subject to tax on profits which arise during the procedure. Whilst the liability for tax arising during the administration remains with the company, it is the administrator who must account for any such tax as an expense of the administration. To ensure that the extent of this liability is clear, the legislation now requires a company to commence a new accounting period for tax purposes upon the onset of administration. Liquidation Similar principles apply here: a company entering into winding up remains subject to tax on profits arising during the procedure; the liquidator is responsible for payment of any such tax which is due, as an expense of the liquidation; and the commencement of liquidation causes the companys current tax accounting period to end and a new one to begin.

7.1 Is it common to achieve a restructuring outside a formal procedure in England and Wales? In what circumstances might this be possible?
Restructuring in England and Wales can be achieved by adopting one or a combination of non-formal processes in order to avoid the need to realise a companys assets. In recent years, lenders have become less hasty in pursuing formal insolvency routes by appointing an administrator, administrative receiver or liquidator to realise a debtors business, recognising that they may increase their debt recovery if the debtors business is reorganised rather than realised. Furthermore, formal insolvency proceedings may preclude debtorin-possession restructuring. US based holders of UK corporate bonds are increasingly expecting restructuring outcomes which are similar to those achieved by a debtor-in-possession procedure under Chapter 11 of the US Bankruptcy Code, typically involving debt for equity swaps and the dilution of existing shareholdings along with a further injection of funds. As a restructuring is a non-statutory

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after the payment of fixed charge liabilities, preferential debts and the administrators costs of realising assets. The prescribed part is then calculated as being 50% of the first 10,000 in value of net property, and 20% of net property thereafter, up to a maximum of 600,000. Floating charge holders whose charges were created before 15 September, 2003 are not subject to the prescribed part provisions.
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Slaughter and May

remedy, however, it is subject to certain limitations: no moratorium (i.e., a temporary respite for the company from legal processes) will arise other than by agreement between the creditors and there is no statutory mechanism by which to compel a dissenting creditor to participate in the restructuring. A number of variables will affect the ability of a company to negotiate a restructuring, the most important of which will be (i) the viability of the underlying business of the company (including its ability to generate cash to service its debt), (ii) the terms of its finance documents (including their event of default provisions and thresholds for lenders consent) and, (iii) the identity of the lenders (and in particular whether they are the companys relationship banks, or a number of distressed-debt investors). If a deal for a restructuring (such as a debt-for-equity swap) can be reached, then it may be implemented contractually. However, if the relevant finance documents impose a very high consent threshold (for instance, requiring 90 or 100 per cent of lenders to agree to such a transaction), then the company may propose a scheme of arrangement or CVA to compel minority creditors to participate.
England & Wales

valuation exercise for a pre-pack may be done by means of a marketing exercise. However, this is often avoided for the reason that it advertises that the company is in financial difficulty, which can be very destabilising. Accordingly, the valuation is often done on a desk-top basis, in which the value of the business is assessed by use of a number of techniques (such as valuing its discounted cash flows or looking at the sale price of comparable businesses that have been sold). The prospective purchaser may be an unconnected third party, or may be a new company (Newco) which is specially incorporated and capitalised so it may purchase the companys assets. Newco may be owned either by the companys existing lenders (if they are seeking to convert their holding of the companys debt into ownership of the companys business) or may be owned by the existing owners or directors of the company. Where the company has granted security over its assets, the consent of the creditors with the benefit of such security may also be required in order to sell those assets. Once a purchaser is found, the company is placed into administration through the appointment of an administrator (either by court application or through an out of court appointment). Immediately after the appointment, the administrator will execute the business sale agreement, and the sale will complete on the same day. The proceeds of sale are then distributed to the companys creditors in accordance with normal principles. Pre-packs are not specifically provided for by English insolvency legislation, but the Insolvency Service issued a Statement of Practice in January 2009 (SIP 16) which contains guidance on best practice for administrators involved in a pre-pack. SIP 16 aims to improve the level of disclosure provided by the administrator to the companys creditors so that their interests may be better protected. A revised Insolvency Code of Ethics was also issued in January 2009 and includes additional professional guidance for administrators in the context of a pre-pack.
England & Wales
A debt for equity swap is one of the most common methods of reorganising a struggling company. It involves the companys lenders converting the debt owed to them into one or more classes of the debtors share capital. This conversion is often undertaken in conjunction with other recapitalisation strategies by the company, such as issuing further shares or attracting a strategic investor. There is no prescribed format for a debt for equity swap and details of the rights and restrictions attached to the lenders shares will depend on a large number of variables. Nonetheless, it is common for the shares issued to the lenders to be a mixture of ordinary shares, and preference shares which will rank ahead in priority over the companys ordinary shareholders. However, as outlined in question 7.1, whether a debt for equity swap is possible will depend on the terms of the finance documents and the level of consent required from lenders. In circumstances where the requisite proportion of lenders do not agree to a debt for equity swap, a CVA or scheme or arrangement may be necessary to implement the transaction.
8 International
8.1 What would be the approach in England and Wales to recognising a procedure started in another jurisdiction?
There are four mains sources of cross-border insolvency law in England and Wales: the EC Regulation on Insolvency Proceedings (the EC Regulation), the UNCITRAL Model Law on CrossBorder Insolvency (the Model Law), the Insolvency Act 1986 and case law. The EC Regulation Proceedings opened in an EU Member State under the EC Regulation must be recognised without any formality in all member states, including England and Wales, from the time the judgment opening the proceedings becomes effective in the member state in which the proceedings are opened. The Model Law The Cross-Border Insolvency Regulations 2006 (the Regulations) enacted the Model Law into the law of England and Wales on 4 April 2006. The Regulations provide for the recognition of a foreign proceeding commenced in any foreign country whether or not that foreign country has enacted a version of the Model Law. Insolvency Act 1986 (the Act) Section 426 of the Act provides for co-operation between jurisdictions within the United Kingdom and also co-operation between the United Kingdom and other designated jurisdictions, which mainly includes Commonwealth countries. Where Section 426 of the Act applies, it provides an alternative
In a pre-packaged sale (pre-pack), a company is put into administration and then immediately sold pursuant to a sale agreement which was arranged before the administrator was appointed. Pre-packs are intended to salvage a companys business where the company is insolvent but its business is viable. The companys directors, assisted by an insolvency practitioner and, on occasion, an investment bank, first prepare a detailed assessment of the company, its financial condition and the marketplace. The aim of this exercise is to assist with valuation: insolvency practitioners who are involved in pre-packs are typically highly concerned to ensure that the valuation placed on the business that is sold is equivalent to the business market value. This is because, unlike the course of a typical administration, creditors are not given the opportunity to vote upon and approve a pre-packaged sale. Given this, the administrator is vulnerable to claims that he failed to achieve the best value possible for all the companys creditors. The
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means of relief and assistance to the Model Law. It is likely that the countries or territories that have the benefit of Section 426 of the Act will continue to use it until there is sufficient certainty about the operation of the recognition proceedings under the Regulations and where it confers greater advantages than the Regulations. Case law
England & Wales
Sarah Paterson
Thomas Vickers
+44 20 7090 3154 +44 20 7090 5000

sarah.paterson@slaughterandmay.com
+44 20 7090 5311 +44 20 7090 5000

thomas.vickers@slaughterandmay.com
Sarah Paterson specialises in financing, restructuring and insolvency work. She has advised on a wide range of restructurings and insolvencies in recent years, acting for debtors, creditors and insolvency practitioners and on both international and domestic matters.
Thomas Vickers is an associate in the financing group of Slaughter and May, and has advised on a number of restructurings and insolvencies.
Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. It has offices in London, Paris, Brussels and Hong Kong, as well as close working relationships with leading independent law firms around the world, which enable it to provide clients with first class and seamless legal advice worldwide. Slaughter and May has extensive experience in international restructurings and insolvencies, frequently involving complex cross-border issues, as well as advising on high profile domestic cases.

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In circumstances where the EC Regulation, the Model Law and Section 426 of the Act are not applicable, recognition of foreign proceedings by the English courts will depend on common law principles developed by the courts. The English courts have an inherent jurisdiction to co-operate with foreign insolvency representatives and recognise foreign proceedings.
Chapter 13
Estonia
Paul Varul Attorneys-at-Law
Paul Varul
Helmut Pikmets

1.1 How does a creditor take security over assets in Estonia?
which may entail problems regarding possible other pledges and the claims of other creditors. Pledge of rights A proprietary right may be the object of a pledge if it is transferable. Under the pledge of rights it is possible to pledge claims, share certificates and other rights. As a general rule, the regulation of a possessory pledge applies to the pledge. According to the Estonian law, the financial collateral is also regarded as a pledge of rights. Mortgage An immovable may be encumbered with a mortgage such that the person for whose benefit the mortgage is established (mortgagee) has the right to satisfaction of a claim secured by the mortgage out of the pledged immovable. It can be said that a mortgage is the most important pledge, as it is widely used in commercial practice to secure claims. Mortgages are entered into the Land Register. Without the Land Registry entry a mortgage will not be set. A Land Registry entry shall set out the mortgagee and the monetary amount of the mortgage (sum of mortgage). The data in the Land Registry is public. A mortgage secures a claim, the unpaid interest on the claim within three years before the sale of the immovable by compulsory auction or declaration of bankruptcy, the fine for delay and expenses for the collection of the debt, the insurance premiums paid by the mortgagee on behalf of the owner of the immovable, and other collateral claims. If a claim secured by a mortgage is not performed, the mortgagee has the right to demand compulsory execution. The claims are satisfied from the money received from the compulsory execution of the immovable according to the ranking of the mortgages. A claim of a subsequent ranking secured by a mortgage is satisfied after satisfaction of the claim of the preceding ranking secured by a mortgage.
Under Estonian law an asset may be encumbered with a pledge (right of security) such that the person for whose benefit the pledge is established has the right to satisfaction of the claim secured by the pledge out of the pledged property. A pledge is security over movables or real security (mortgage). Under Estonian law security over movables is divided into possessory pledge, registered security over movables, commercial pledge and pledge of rights (see below). Proprietary rights may also be pledged. A claim secured by a pledge shall be preferred to all other claims with respect to the pledged property. Satisfaction of a claim of a pledgee is effected by the sale of the pledged asset. Possessory pledge A movable may be encumbered with a pledge such that the pledged asset is transferred into the possession of the pledgee and the establishment of a possessory pledge is agreed upon. An asset may also be encumbered by a pledge so that the asset is transferred to a third person and the pledgee obtains indirect possession of the pledged asset. It is important to note that a possessory pledge extinguishes at the termination of the secured claim. Registered security over movables A patent, trade mark, industrial design, utility model, variety, layout-design of an integrated circuit, motor vehicle or aircraft which is entered in a public register regulated by law may be encumbered with a registered security over movables. The person in whose benefit the registered security over movables is established has the right to satisfaction of the claim secured by the pledge out of the pledged object. Registered security over movables can be regarded as an analogue to mortgage in regard to movables, although the same level of guarantee as with a mortgage is not reached. A registered security over movables does not presume the existence of a claim to be secured. Commercial pledge A commercial pledge (floating charge) can be viewed as a subdivision of the registered security over movables. A commercial pledge is created with the making of an entry into the Commercial Pledge registry. A commercial pledge encumbers all the movable property belonging to a company or a sole proprietor. A commercial pledge does not encumber money, bonds, shares, intellectual property and also movables that have been encumbered with a possessory pledge. The main problem with the commercial pledge is that, as a general pledge, it is not outwardly viewable,
The Bankruptcy Act gives a legal basis for recovery of transactions. This regulation makes transactions entered into whilst the company is in financial difficulties vulnerable to recovery risk. In recovery, the court shall, on the bases provided in law, revoke transactions which were concluded by the debtor before the declaration of bankruptcy and which damage the interests of the creditors. The Bankruptcy Act differentiates between general and specific grounds of recovery. Applying the general bases, the court will
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declare all transactions executed from the initiation of the bankruptcy proceeding up to the declaration of bankruptcy null and void, as well as transactions executed before the initiation of the bankruptcy proceeding: (i) within one year, provided that the other party of the transaction knew or should have known that the transaction would damage the creditors interests; (ii) within three years, provided that the debtor knowingly damaged the creditors interests and the other party of the transaction knew or should have known that the debtor thereby damaged the creditors interests; or (iii) within five years, provided that the debtor knowingly damaged the creditors interests with the transaction and the other party of the transaction was a person connected with the debtor who knew or should have known thereof. The purpose of specific bases of recovery is to provide rules that are explicit and easier to apply for more typical cases when the recovery is justified. Unlike the general basis, the specific bases are greatly based on proving objective circumstances, and not as much on the existence and proving of subjective bad faith of the parties of the transaction. Furthermore, in the case of specific bases, the terms limiting the period of contesting the transactions made after the initiation of the bankruptcy proceeding are, in general, significantly shorter. The application of specific bases is justified under the following circumstances: (i) (ii) (iii) (iv) the debtor has granted property or sold it so cheaply that the transaction has the character of a gift; the debtor has performed financial obligations, preferring certain creditors to others; the debtor has placed certain creditors in a more favourable situation than others, providing securities at a later point; or the debtor has divided joint property in a way that damages the creditors interests.
Estonia
perform the obligation to submit a petition is punishable by a pecuniary punishment or up to one years imprisonment. Additionally it should be noted that the causing of insolvency is also criminalised.
2.1
What are the main types of formal procedures available for companies in financial difficulties in Estonia?
According to Estonian law, there are two main types of formal procedures available for companies in financial difficulties. Depending on the financial state of the company it may want to submit a reorganisation application according to the Reorganisation Act, or it may be under the obligation to submit a bankruptcy petition. It must be noted that, in Estonia, reorganisation of a company is possible outside bankruptcy proceedings if the company is not yet insolvent, but is likely to become insolvent in the future. Reorganisation is also available during bankruptcy proceedings after a company has been declared bankrupt, but this reorganisation is conducted according to the Bankruptcy Act.
2.2 What are the tests for insolvency in Estonia?
A debtor is insolvent if the debtor is unable to satisfy the claims of the creditors and such inability, due to the debtors financial situation, is not temporary. A company is also insolvent in case the assets are insufficient for covering the obligations thereof and, due to the debtors financial situation, such insufficiency is not temporary. Either the debtor or the creditor may file a bankruptcy petition. The main matter verified by a court upon hearing a bankruptcy petition is insolvency. Upon finishing the hearing the court basically has three options. Firstly, the court may dismiss the bankruptcy petition if the debtor is solvent, and then the bankruptcy proceeding is terminated. Secondly, the court may terminate the bankruptcy proceeding by abatement. This means that the debtor is indeed insolvent, but the situation of the debtor is so bad that their assets are insufficient for covering the costs of the bankruptcy proceeding, and there are no possibilities to recover or reclaim property. As a third option the court may declare bankruptcy by making a corresponding judgment; if the debtor is insolvent and there are no grounds for terminating the bankruptcy proceeding by abatement.
A precondition for recovery (both on general and specific bases) is the identification of damage to the creditors interests.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Estonia?
According to Estonian law a permanently insolvent legal person cannot exist. Therefore the General Part of the Civil Code Act and the Commercial Code stipulate that if a legal person is clearly permanently insolvent, the members of a management board (executive directors) shall submit a bankruptcy petition. If the directors of a company fail to fulfil this obligation and the company continues to trade while insolvent, both civil and criminal liability may follow. The Commercial Code specifies the obligation of the management board to submit a bankruptcy petition if the company is insolvent and the insolvency is not temporary. The regulation of the Commercial Code obliges the directors to promptly, but not later than within twenty days after the date on which the insolvency became evident, submit the bankruptcy petition of the company to a court. After insolvency has become evident, the directors shall no longer make payments on behalf of the company, except in the case where making the payments in the situation of insolvency conforms to the due diligence requirements. The directors shall jointly compensate the private limited company any payments made by the private limited company after the insolvency of the company became evident which, under the circumstances in question, were not made with due diligence. Criminal regulated company company liability for the offences relating to bankruptcy is in the Penal Code. As seen above, the directors of a are obliged to submit a bankruptcy petition when the is insolvent. The Penal Code stipulates that failure to
Reorganisation proceedings Rehabilitation under the Rehabilitation Act presupposes that a company is not yet insolvent in the meaning of the Bankruptcy Act, e.g. the companys inability to satisfy its creditors is not permanent but the likelihood for future insolvency is real. Also the company must need rehabilitation and there is the potential of sustainable operation of the company in the future. Bankruptcy proceedings For starting bankruptcy proceedings a company must be unable to satisfy the claims of the creditors and such inability, due to the companys financial situation is not temporary. In case of a debtors petition, the bankruptcy proceeding may also be initiated if insolvency is likely to occur in the future.

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2 Formal Procedures

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During the bankruptcy proceedings there are at least two meetings of creditors - the general meeting of creditors and the meeting for defence of claims.
Reorganisation proceedings Only private legal persons have the right to submit the rehabilitation petition to the court. The proprietor submitting a rehabilitation petition shall substantiate the likelihood of future insolvency, the companys need for rehabilitation and the potential of sustainable operation of the company in the future. When the proprietor has reliably indicated the compliance to the abovementioned conditions in the petition, the court will initiate a rehabilitation proceeding, issuing a corresponding ruling. Bankruptcy proceedings Either the debtor or the creditor may file a bankruptcy petition. Under Estonian law, a bankruptcy petition, after it has arrived in court, goes through so-called formal verification where the court verifies that there are no formal grounds (for example incorrect jurisdiction etc.) to refuse the bankruptcy petition. If there are no hindrances, a court will separately decide whether to commence a proceeding or not. Attention must be paid here to different verification procedures carried out by a court with regard to the debtors bankruptcy petition and the creditors bankruptcy petition. While the debtors bankruptcy petition is only formally verified, the verification of the creditors bankruptcy petition is more thorough. For example the court verifies that the creditors claim is not entirely secured by a pledge or that the creditors claim complies with the minimum amounts set forth by law. If any of the circumstances stipulated in the Bankruptcy Act exist (listed in section 15 of the act), a court will not commence the bankruptcy proceeding. This should help to minimise the hearing of unreasonable bankruptcy cases. If the companys insolvency is verified after the commencement of a bankruptcy proceeding and there are no grounds for abatement, the court will declare bankruptcy with a corresponding judgment.
3 Creditors
Estonia
Reorganisation proceedings The unsecured creditors rights and specific terms for enforcing these rights are governed by the reorganisation plan, which the creditors will have voted on and approved by the requisite majorities. Bankruptcy proceedings The main function of the trustee is to collect and distribute the assets of the company. The liquidator must distribute the assets among the creditors in accordance with a strict hierarchy of priorities (for further detail see question 5.2). Accordingly, unsecured creditors have no freedom to enforce their rights in bankruptcy proceedings and are compelled to wait until the trustee is in the position to make a distribution.
Reorganisation proceedings The secured creditors rights and specific terms for enforcing the rights are governed by the reorganisation plan, which the creditors will have voted on and approved by the requisite majorities. Bankruptcy proceedings The bankruptcy act does not allow the secured creditor to enforce their security directly, but it stipulates special regulation for the sale encumbered with a pledge. Accordingly, if an object included in the bankruptcy estate is encumbered with a right of security or any other real right which grants to a creditor the right to demand the forced sale of the encumbered object, the trustee shall sell the encumbered object within three months or, if the encumbered object is an immovable, within four months as of the time when the trustee was entitled to commence the sale of the bankruptcy estate. Also, approved claims secured by pledge and submitted within the specified term have the first priority in claims satisfaction.
Reorganisation proceedings A reorganisation adviser shall promptly notify the creditors of commencement of reorganisation proceedings and the amount of the claims that they have against the undertaking according to the list of debts. The creditors may hold a meeting for accepting a reorganisation plan, but it is not compulsory as the law provides an opportunity to accept a reorganisation plan without holding a meeting. Bankruptcy proceedings If bankruptcy is declared, a court shall immediately publish a notice concerning a bankruptcy order in the official publication Ametlikud Teadaanded (bankruptcy notice). The notice shall be repeated if necessary. A trustee shall give written notice of the bankruptcy order and the time and place of the first general meeting of creditors to all creditors known to him or her. If the trustee is aware of any persons who have obligations to the debtor, the trustee shall send a notice concerning declaration of the bankruptcy of the debtor also to such persons. If the total number of the creditors exceeds one hundred, it is sufficient to publish the bankruptcy notice. Creditors who, pursuant to the land register, ship register, commercial pledge register or the Estonian Central Register of Securities, may have financial claims against the debtor, and other known creditors holding rights of security with regard to the debtors assets shall be notified by the trustee by a written notice.
Reorganisation proceedings The Reorganisation Act does not limit the right of a creditor to setoff a claim against the company. Bankruptcy proceedings The Estonian Bankruptcy Act allows set-off of claims in bankruptcy proceedings. If a claim of a creditor could be set-off against a claim of the debtor before the declaration of bankruptcy, the creditors defended claim can also be set-off after the declaration of bankruptcy. Set-off of a claim acquired through assignment is also allowed. It is important to note that a claim acquired through assignment can be set-off in a bankruptcy proceeding only if the assignment of the claim and written notification of the debtor thereof have not taken place later than three months prior to the declaration of bankruptcy. A claim acquired through assignment
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cannot be set-off if the claim against the debtor was assigned within the last three years before the initiation of the bankruptcy proceeding and the debtor was insolvent at that time and the person who acquired the claim knew or should have known thereof at the time of the assignment.
Estonia
Reorganisation Act in itself does not give the company special grounds to terminate contracts. Only the calculation of a fine for delay or a contractual penalty which increases in time on claims against the undertaking is suspended until approval of a reorganisation plan. The general rule is that the declaration of bankruptcy itself does not automatically terminate contracts (although it may be a ground for termination under the terms of certain contracts). A trustee has the right to perform an unperformed obligation arising from a contract entered into by the debtor and require the other party to perform the obligations thereof, or abandon performance of an obligation arising from a contract entered into by the debtor, unless otherwise provided by law. The trustee shall not abandon performance of an obligation arising from a contract entered into by the debtor if a preliminary notation entered in the land register secures the obligation.

Reorganisation proceedings Control over the company shall remain with the directors. The appointed reorganisation adviser shall advise and assist the undertaking in the course of reorganisation proceedings and to verify the lawfulness of the claims of the creditors and the purposefulness of the transactions of the undertaking. Bankruptcy proceedings By declaration of bankruptcy the right to administer the debtors assets and the right to be a participant in court proceedings on behalf of the debtor with regard to a dispute relating to the bankruptcy estate or the assets which may be included in the bankruptcy estate is transferred to the trustee. A trustee is the debtors legal representative in bankruptcy proceedings and enters into transactions relating to the bankruptcy estate, performs other acts on behalf of the debtor, and represents the debtor in court in disputes relating to the bankruptcy estate.
5 Claims
Reorganisation proceedings The possibilities for the creditors to claim amounts owed to them in reorganisation proceedings depend on the terms of the reorganisation plan. Bankruptcy proceedings According to the Bankruptcy Act, claims existing at the time of the declaration of bankruptcy are accepted for filing in a bankruptcy proceeding. Upon the declaration of bankruptcy all claims against the debtor become collectable. Creditors are obliged to notify the trustee of all their claims against the debtor, arising before the declaration of bankruptcy. The trustee shall be notified of the claim by submitting a written petition (proof of claim) to the trustee. When the claims have been submitted to the trustee, the next step will be the defence of the claims. The defence of the claims is performed at the meeting for defence of claims where they will be examined in the order of their filing. A claim, its priority and the right of security to guarantee the claim are regarded as approved if neither the trustee nor any creditor contests it at the meeting, or if a creditor or trustee, who has filed an objection, waives the objection at the meeting. Should a creditors claim be disapproved, the creditor is entitled to file an action for approval of the claim to a civil court.
Reorganisation proceedings Upon commencement of reorganisation proceedings, a court shall designate a term during which an undertaking must pay the initial remuneration of the reorganisation adviser and the amount of money specified by the court into court in order to cover the initial expenses. If the undertaking fails to pay the amount, the court shall terminate the reorganisation proceedings. Bankruptcy proceedings Bankruptcy proceedings are financed from the bankruptcy estate, which is comprised of the assets of the debtor.
Reorganisation proceedings A reorganisation plan shall, inter alia, set out also the impact on the employees of the enterprise. It must be noted that a reorganisation plan shall not transform a claim, which has arisen on the basis of an employment contract. Bankruptcy proceedings After the bankruptcy is declared, the employment contracts are usually terminated. The state guarantees employees gross earnings for up to three months through the Unemployment Insurance Fund.
Reorganisation proceedings In reorganisation proceedings the claims of the creditors are governed by the reorganisation plan, which the creditors will have voted on and approved by the requisite majorities. It must be noted that a reorganisation plan shall not transform a claim which has arisen on the basis of an employment contract. Bankruptcy proceedings When the payments related to the bankruptcy proceeding have been made, the creditors claims are satisfied according to the following priorities: 1) approved claims secured by pledge and submitted in time;
Reorganisation proceedings The commencement of a reorganisation procedure under the

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Bankruptcy proceedings

2) 3) other approved claims submitted in time; and approved claims not submitted in time.
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commencement of reorganisation proceedings retroactively cease to exist. The right of claim of a creditor whose claim is transformed by a reorganisation plan shall be restored against an undertaking in the initial amount. In such case, all that the creditor has already received in the course of implementation of the reorganisation plan shall be taken into account. Bankruptcy proceedings At the end of bankruptcy proceedings the claims of the creditors are satisfied in the amount allowed by the bankruptcy estate and the debtor, who is a legal person, is usually terminated.
Estonia
Deriving from the above, an approved claim secured by a pledge is the only priority claim in Estonia. The claims of the next priority are satisfied after satisfaction of the preceding priority. Should the bankruptcy estate prove insufficient for satisfying all claims of one priority, the claims of the same priority are satisfied in proportion with the amounts of the claims.
Reorganisation proceedings The entry of a company into reorganisation proceedings does not, in itself, affect the tax liabilities of a company. In reorganisation proceedings the tax claims can be transformed so that the term for the performance of obligations is extended or it is fulfilled in instalments. It is not clear if a tax claim can be reduced in the reorganisation proceedings. Bankruptcy proceedings The entry of a company into bankruptcy proceedings does not, in itself, affect the tax liabilities of a company.

7.1 Is it common to achieve a restructuring outside a formal procedure in Estonia? In what circumstances might this be possible?

Restructuring outside a formal procedure in Estonia would mean that a company and its creditors reach an agreement outside formal procedures set out in the Reorganisation Act and Bankruptcy Act. It can be concluded that restructuring of a company outside these procedures is not common. Certain mergers and acquisitions of companies may carry some aspects of restructuring but these mergers and acquisitions are not initiated with that intent.
The best possibilities for a cram down exist in the reorganisation proceedings carried out under the Reorganisation Act. This is because approval of the terms of reorganisation of a company depends on majority voting, the outcome of which binds disserting creditors as if they had indeed agreed to the terms. It should be noted that a cram down may be limited by minority protection.
Reorganisation of a debtor is possible under the Reorganisation Act and also during bankruptcy proceedings under the Bankruptcy Act.
Reorganisation proceedings After the reorganisation plan is approved by the creditors and the court, the legal consequences prescribed therein apply to an undertaking and a person whose rights are affected by the reorganisation plan. After the expiry of the term for the implementation of a reorganisation plan, a creditor may invoke a claim transformed by the reorganisation plan only to the extent which is agreed in the reorganisation plan and has not been fulfilled according to the reorganisation plan. After the reorganisation is complete, the company reverts to its former status. Upon revocation of a reorganisation plan, the consequences of the
Estonian law does not contain specific regulation for pre-packaged sale but one must consider possible civil and criminal liability if a pre-package sale is executed unlawfully.
8 International
8.1 What would be the approach in Estonia to recognising a procedure started in another jurisdiction?
A procedure started in another jurisdiction will be recognised in Estonia in accordance with the Council regulation (EC) No 1346/2000 (OJ L 160 30/60/2000 P. 1-18).
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Estonia
Paul Varul
Paul Varul Attorneys-at-Law Ahtri 6A 10151 Tallinn Estonia
Helmut Pikmets
Paul Varul Attorneys-at-Law Ahtri 6A 10151 Tallinn Estonia
Paul Varul specialises in contract, commercial and bankruptcy law. He was the chairman of the main committee of the Estonian Civil Code from 1992 to 2002. Paul Varul was the Minister of Justice of the Republic of Estonia from 1995 to 1999. Since 1992 he has been a professor at the Faculty of Law in University of Tartu. He is co-author of numerous draft Acts (Law of Property Act, Law of Obligations Act, Bankruptcy Act, the Commercial Code etc.) and co-writer of the Law of Obligations Act Commented editions. As an internationally renowned insolvency expert, Mr Varul has been elected as a member of the International Insolvency Institute and is a member of INSOL-Europe and its Academic Forum. Paul Varul has been working as a member of the Study Group on the European Civil Code since 2003.
Helmut Pikmets joined Paul Varul Attorneys-at-Law in 1994. He specialises in tax and rehabilitation law. He has published numerous articles and held lectures on the topics. Mr Pikmets was the liquidator of Tartu Kommertspank, the first commercial bank established in the Soviet Union, which can be considered the beginning of his career in insolvency practice. Since then he has been the bankruptcy trustee and advisor in some of the most substantial bankruptcy cases in the Estonian court practice. For instance the bankruptcy proceeding of a commercial bank Eesti Maapank is so far the most complex case in Estonian legal practice, involving nearly 4,000 different execution-, bankruptcy-, liquidation- and criminal proceedings. Helmut Pikmets has also taken part in reorganising numerous insolvent companies enabling the owners to overcome economic difficulties and continue with the activities without the company being liquidated.
Paul Varul Attorneys-At-Law was founded in 1994 and has become one of the leading full service commercial law firms in Estonia. The firm is well known for its strong dispute resolution practice and is increasingly active in transactional work. While being an independent law firm we have well-established bilateral relations with premium law firms in the Scandinavian and Baltic regions. The firm has an outstanding insolvency and restructuring practice, particularly in the financial sector. Our attorneys represent clients in claiming debts and conduct reorganisation, liquidation and bankruptcy proceedings. We also advise clients in insolvency related criminal proceedings, including matters involving the criminal liability of a board member or offences committed against creditors.

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+372 6264 300 +372 6264 306 paul.varul@varul.ee www.varul.ee
+372 6264 300 +372 6264 306 helmut.pikmets@varul.ee www.varul.ee
Chapter 14
Finland
Dittmar & Indrenius
Mika J. Lehtimki
Juha-Pekka Mutanen

1.1 How does a creditor take security over assets in Finland?
Payment with inventory, movable or fixed assets may be considered common if such payment has been agreed on when concluding the initial agreement. A payment is usually regarded considerable if it exceeds 15% of the assets of the bankruptcy estate. Payments that are made in due course of business or based on long-term practice are considered common and not voidable. The avoidance rules applicable to payments apply also to set-off. Set-off may be avoided only if setoff would not have been available in bankruptcy. Security interests Granting of security interests may be avoided, if the perfection of the security has not taken place without undue delay after having agreed on the security, or the parties had not agreed on security when the debt was incurred. A security is not considered as having been granted on an old debt if the company is refinanced and granting the security is a precondition for the new financing. General grounds for avoidance A transaction may be avoided under the general preference rule if the transaction: (i) inappropriately prefers a creditor; (ii) results in transfer of property outside the reach of the creditors; or (iii) increases debts at the expense of the other creditors. This rule may not be invoked unless the debtor was insolvent at the time of the transaction or became insolvent due to the transaction. The rule may apply also if the transaction is based on pressure by a creditor. However, normal credit collection measures do not, as such, mean that the transaction would be voidable. The party seeking avoidance will have to show the recipient was either aware or should have been aware of the insolvency and inappropriateness of the transaction.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Finland?
Finnish law recognises three forms of security interests: pledge; business mortgage; and real estate mortgage. All forms of consensual security require entering into a pledge/security agreement and perfection of the security interest. Perfection of a pledge of receivables and bank accounts is carried out by notice to the debtor or the bank. Pledge of movable assets is perfected by transfer of possession of the pledged asset to the secured creditor or an independent third party. Pledge of dematerialised securities is perfected by registration of the pledge on a respective book-entry account. Pledges of certain intellectual property rights are perfected by notifying the registration authority. Real estate mortgage and business mortgage are registered in the Land Register or Business Mortgage Register. After that the relevant registry delivers the mortgage deeds or promissory notes either to the owner or to the secured creditor. The perfection requires delivery of the mortgage deed or the promissory note to the secured lender.
The most common grounds for avoidance of transactions concern: (i) uncommon, premature and considerable payments of debt; (ii) granting of security interests; or (iii) the general preference rule. The suspect period for the general preference rule is five years for transactions concluded with parties not affiliated with the insolvent. There is no time limit for avoiding transactions with affiliated parties. The suspect period for any other ground for avoidance is two years for transactions concluded with parties affiliated with the insolvent and three months for everyone else. An artificial transaction may be recharacterised under Finnish law if the right of a third party is based on a financial arrangement the form of which does not correspond to the facts and the intention has been to avoid debt execution proceedings or to keep assets outside the reach of the creditors. Payments A payment is considered having been made with uncommon consideration if the consideration is something else than money.
The civil liability of the companys directors is regulated by the Finnish Companies Act and depends on whether the claimant is a creditor, the company or the insolvency estate. Liability of the directors based on any other ground than breach of the Companies Act may arise (e.g. if continuance of trading falls under criminal law provisions), but this is considered exceptional under the case law. Civil liability The directors owe a statutory duty of care to the company. They may also be held liable to the company, shareholders and any other party for breach of any other provision of the Companies Act or the Articles of Association. For this purpose, insolvency estate is
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equated with the company. Liability in connection with continuing to trade while the company is in financial difficulties has often arisen based on breach of the duty of care or failure to file for insolvency. Damages liability cannot often be avoided when the company enters into credit transactions when its ability to make the repayments can be seriously doubted or, when there is no commercial rationale to continue the financing. Furthermore, omissions to take actions when the grounds of insolvency are apparent, increases the monetary liability of the directors. Liability for trading in financial difficulties is alleviated by the business judgement rule and if the directors decisions are based on careful evaluation of the alternatives and diligent review of the situation. Although shareholders meeting can resolve to release the directors from liability for the past financial year, such a decision does not bind the insolvency estate if the administrator sues the directors within two years of the relevant actions or negligence. Criminal liability The mere continuance of trading without any alternate motives of fraud, deception, unlawful distribution of corporate assets or accounting related offences should not result in criminal law liability. Disqualification A director or a shadow director may be disqualified to act as a director and to operate a business if he/she has materially breached the companys statutory obligations or committed a criminal offence in the companys business. Disqualification may last between three and seven years. e. Reorganisation A company can be placed into reorganisation if: A.
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at least two creditors, unaffiliated with the debtor, representing at least one fifth of the debts file a joint application with the debtor or notify the court that they will support the debtors application; the debtor is threatening to become insolvent (it is required that the procedure is necessary to secure the applicants considerable financial interest); or the debtor is insolvent and none of the restrictions below apply: a. b. c. d. the procedure would only have a temporary effect; the debtors assets are insufficient to cover the costs of the procedure; the debtor will be unable to service its debts incurred after commencement of the procedure; there are valid grounds to assume that the purpose of the application is to invalidate creditors rights or there is no possibility for adoption of the restructuring plan; or the accounts of the debtor are substantially deficient or false.
B.
C.
A reorganisation application will generally have to be dismissed if the debtor is suspected having committed or been sentenced for certain types of debtors criminal offences or the debtor is subject to a disqualification order.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Finland?
Bankruptcy Either the debtor company or its creditors can apply for commencement of bankruptcy. A company is declared bankrupt by an order of the court. If the creditor applies for the bankruptcy, the debtor is notified of the application and it will have a possibility to give a written statement by the date set by the bankruptcy court. Other creditors are not heard. If the debtor applies for its own bankruptcy, there is no hearing of the creditors. Reorganisation Either the debtor company or its creditors can apply for commencement of reorganisation. A reorganisation proceeding commences by an order of the court. If the debtor and its creditors file a joint application, no hearing of the other creditors is normally needed. If the debtor files the application, the court will notify all known creditors of the company and they will be entitled to give written statements concerning the application. If a creditor files the application, the debtor will always be entitled to be heard. The court may, and should in most cases, give the other creditors a possibility to be heard in the matter.
There are two main types of formal insolvency procedures in Finland, corporate bankruptcy (bankruptcy) and corporate restructuring (restructuring). In practice, debt execution procedure is also a very common way of enforcing a debt, but, as it is not a collective insolvency procedure, it is not discussed here.
2.2 What are the tests for insolvency in Finland?
The general test for insolvency in both statutory procedures is whether the company is unable to pay its debts as they fall due otherwise than on a temporary basis. In bankruptcy, the company may also be insolvent if its assets are insufficient to cover its indebtedness.
Bankruptcy A company can be declared bankrupt if it is insolvent (see question 2.2). It is assumed that a company is insolvent if: (i) the debtor has stopped making its payments; (ii) the debtors assets have, during the last six months, been subject to an unsuccessful debt execution; or (iii) the debtor has not paid the creditors clear and matured receivable within one week from having received a payment notice from the creditor. If a creditor is adequately protected by a security interest or a guarantee, the debtor cannot be declared bankrupt based on an application of such a creditor. Bankruptcy The court will post a statement of the commencement of the bankruptcy in the Official Gazette. The administrator posts notices in newspapers and informs the authorities. The administrator prepares the inventory of the estate and the debtor statement within two months and sets a date for lodgement of proof. Information concerning the proving of claims is published in the Official Gazette and notified to the debtor and the creditors. First call to the creditors meeting is sent at least two weeks before the final lodgement date for proof of claims.

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Reorganisation The court will post a statement of the commencement of the reorganisation in the Official Gazette. The administrator posts notices in newspapers and usually informs also the authorities. The administrator prepares a proposal for a reorganisation plan within four months. During this time the administrator is in contact with the creditors. The administrator notifies the creditors after the reorganisation proposal has been submitted to the court of their right to give written statements about the plan. Reorganisation
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The same set-off rules apply in reorganisation as in bankruptcy. However, as debts do not mature automatically, a receivable may not be due and payable at the commencement of reorganisation. In this case, the creditor can withhold the prospective set-off amount corresponding to the debtors receivable until the debt becomes due and payable.

3 Creditors
Bankruptcy Unsecured creditors are not free to enforce their rights whether in bankruptcy or in reorganisation. The collective procedure sets the framework for payment of claims and enforcement of rights. There are certain exceptions for minor claims and, notably, set-off.
The debtor loses the control of the assets upon commencement of the bankruptcy. The creditors ultimately control the bankruptcy estate except when a particular matter falls under the administrators statutory obligations. In practice, the administrator controls the day-to-day management of the estate. The administrators and the creditors replace the directors and shareholders in the management of the company. Reorganisations The debtor usually retains the control of its assets even after the commencement of reorganisation. In practice, the debtor is able to continue in the ordinary course of business. Therefore, the directors or the shareholders are not replaced in the companys management, but their actions are restricted to a substantial degree to facilitate preparation of the reorganisation plan.
Bankruptcy Secured creditors are generally free to enforce their rights in bankruptcy. However, as a general rule, the bankruptcy estate is entitled to sell assets used as security: A. B. with the consent of the secured creditor; or based on a court order if the estate has received a bid for the assets and the creditor cannot show that another type of a sale would result in a higher price.
Reorganisation Reorganisations result, among other things, in a freeze on enforcement of security interests. A court may grant an exception from the enforcement freeze if the assets are not required from the perspective of the reorganisation. In some cases, a court may grant to a new money provider similar or priority right to a security interest held by a secured creditor if that is necessary for obtaining financing during the procedure and does not significantly increase the risk of the existing secured lenders.
Bankruptcy The costs of the administrator are paid from the assets of the bankruptcy estate as are other costs incurred during bankruptcy. If the bankruptcy is cancelled, the debtor is liable for these costs. In some cases, a creditor may have to carry such costs if commencement or cancellation of the bankruptcy results from the creditors omissions or incorrect information. Debts incurred after commencement of the bankruptcy will have to be paid as they mature. Reorganisation The costs of the administrator are paid by the debtor. Cost and compensation of the participants of the creditors committee are paid by the relevant group of creditors. A party that wishes to present its own reorganisation plan must prepare the plan at its own cost. The parties bear their own costs incurred in participating in the procedure. Debts incurred during reorganisation procedure are not subject to the restructuring plan and they will have to be paid as they mature. These debts have priority if the company is declared bankrupt following the reorganisation.
Bankruptcy Finnish law is favourable to insolvency set-off. Although set-off is not automatic or mandatory, all types of cross-claims (e.g. conditional, uncertain and prospective) may be set-off. However, in case of uncertain and contingent claims, the liquidator is entitled to value the claims to their likely financial value. Certain types of claims, such as certain barred debts and debts subordinated to all other debts, cannot be used for set-off. Furthermore, receivables acquired less than three months before the date of the bankruptcy application cannot be used for set-off against such debts that the creditor had to the debtor at the time of acquiring the debt. The time limitation does not apply if the creditor had reasonable grounds to suspect that the debtor was insolvent at the time of acquisition of the receivable. Importantly, e.g. a bank cannot setoff its receivable against monies standing on the debtors bank account. There are also other rather complex set-off restrictions.
Bankruptcy Bankruptcy does not automatically affect the employees of the insolvent company. However, the liquidator may terminate the employment contracts without normal restrictions on termination due to the bankruptcy situation. The termination period is 14 days.
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Reorganisation Reorganisation does not automatically affect the employees of the insolvent company. Effects on the employment arrangements will have to be included in the reorganisation plan. Termination before adoption of the reorganisation plan differs from termination during the operation of the reorganisation plan. In the first case, termination can be carried out if it is required to avoid bankruptcy and the work has actually reduced. In the latter case, the termination can be carried out if it is required by the measures included in the reorganisation plan. Termination cannot be carried out if the employer is able to offer other work to the employee. The maximum termination period is two months.
4.4 What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure? 5.2
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Bankruptcy In summary, the priorities in a bankruptcy are: 1. 2. 3. claims of the pledgees and mortgagees (paid from the security assets); certain debts incurred by the business during a restructuring preceding the bankruptcy; creditors secured by business mortgage (50% of the enforcement proceeds is distributed to the mortgagee and the remainder is divided between unsecured creditors); unsecured creditors, such as trade creditors and tax authorities; and creditors who have pre-agreed to subordination of their claims to all other debts and certain other last priority creditors.
4. 5.
Bankruptcy Bankruptcy does not, as such, affect the continuance of the debtors contracts. If the debtor has not fulfilled its contractual obligations before commencement of the bankruptcy, the other party must inquire whether the bankruptcy estate will commit itself to the contract. If the estate commits to the agreement and gives an acceptable security for the fulfilment of its obligations, the agreement cannot be terminated even if there is a bankruptcy termination clause. If the bankruptcy estate does not commit itself to the contract and repudiates it, the resulting claim (e.g. damages) is considered a provable claim in bankruptcy. Bankruptcy estate can terminate all of the companys contracts. Reorganisation Reorganisation has, as such, no effect on the continuance of contracts. There are two main exceptions to this rule. First, a lease or a credit-lease agreement where the debtor is the lessee may be terminated by the debtor to end two months after the notice of the termination. Secondly, the debtor company is, in practice, able to end contracts that can be regarded as unusual from the perspective of the debtors business. In such cases, the administrator must on request of the other party state whether or not the debtor will fulfil its part of the contract. If the answer is no, the other party has the right to terminate the contract. However, it is common that reorganisation is mentioned in commercial agreements as a ground for termination. There is no restriction under Finnish law for using such a provision.
Bankruptcy expenses are deducted before payment of the above claims. Restructuring An essential part of any restructuring is a reorganisation plan, which sets forth, e.g. changes to the terms and conditions of the reorganisation debts, such as reductions of the amount of capital. A notable exception to this is the restriction to cut the amount of capital of secured loans. The priority of creditors follows the rules that would be applied between solvent parties. This means, among other things, that subordinated creditors are subordinated also for the purposes of the plan. The creditors belonging to various creditor groups will have to be treated on a pari passu-basis. Interest accruing to other debts than secured debts is statutorily subordinated. Creditors holding only minor claims may be paid before other creditors. Furthermore, a credit received from the debtor companys own pension fund can be wholly repaid in the reorganisation plan.
Both a bankruptcy estate and a company subject to restructuring are subject to the same corporate tax rules as solvent companies.

5 Claims
Bankruptcy Any creditors decision requires a majority of votes in the creditors meeting. The amount of votes that a creditor has is the monetary amount of his claim. Naturally, no decision can be made to circumvent the statutory distribution regime or other mandatory insolvency rules. Reorganisation Unless the creditors are unanimous on the contents and the approval of the reorganisation plan, the creditors will vote in different creditor groups (secured creditors, creditors with business mortgage, general creditors, etc.). Approval of the reorganisation plan requires majority approval (number of creditors and amount of claims) in each group. There are certain statutory exceptions to this rule.
Bankruptcy A creditor must prove its receivable by submitting to the administrator a relatively straight-forward document concerning its claim. The administrator sets the deadline for proving the debts. Reorganisation A creditor is not obliged to prove its claim in reorganisation. The debts are taken into consideration by the administrator without any need to prove the debts. However, if a particular claim is not included in the estate inventory, a creditor is obligated to notify the administrator of its claim within a time period set by the court.

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Reorganisation of debtors can also be carried out through a privately arranged restructuring. However, creditors cannot take control of the company merely based on an extensive security package. In order to make sure the creditors have control of the management of the debtor, an equity participation in the debtor is often required.
Bankruptcy After the obligations, receivables and other matters of the bankruptcy estate have been settled, and the assets have been converted into cash, the administrator prepares a final settlement of accounts, which is approved by the creditors meeting. Bankruptcy ends upon the approval of the creditors meeting. After that, the administrator notifies the Register of the Ministry of Justice of the approval. Reorganisation The approval of the reorganisation plan marks the end of the official reorganisation procedure. After that time the parties will follow the reorganisation plan. Fulfilment of the plan is usually supervised by a specifically appointed supervisor. The operational period of the plan may last for years.
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Pre-packaged sale is possible but not often used in restructuring. The sale plan should be included in the restructuring plan and approved by the court. Although Finnish reorganisations have concentrated on debt restructuring, there are no legal restrictions to effect various operational and structural reforms through the plan.

7.1 Is it common to achieve a restructuring outside a formal procedure in Finland? In what circumstances might this be possible?
8 International
8.1 What would be the approach in Finland to recognising a procedure started in another jurisdiction?
There is no established manner for carrying out restructuring outside the formal procedures. The only statutory method for binding hold-out creditors is through restructuring. Privately arranged restructurings are possible, but because private arrangements with the creditors cannot bind non-acceding creditors, successful restructuring requires in practice ca. 80-90% of creditor approval to prepay or control the hold-out creditors. Finnish law is rather favourable in terms of facilitating privately arranged restructurings - the management liability can be controlled, debt conversions are relatively easy to carry out, divestments and creditor control can be arranged through contractual arrangements and lender liability risk is not too high.
EU Member States Proceedings opened in an EU Member State under the EC Regulation on Insolvency Proceedings are recognised without any formality in Finland (as of the judgment opening the proceedings becoming effective in the relevant Member State). Other countries If the centre of the main interests of the debtor is not in an EU member state, Finnish courts have jurisdiction if the debtor has business premises in Finland or holds such assets in Finland that it can be deemed appropriate to have a Finnish bankruptcy procedure. In practice, recognising a procedure started in another jurisdiction depends on the courts discretion and international comity. However, the Finnish courts have no jurisdiction if the debtor has been declared bankrupt in Iceland, Norway or Denmark and the debtor is domiciled in these countries. Although there are no statutory rules concerning recognition in relation to restructuring, the above rules should apply by analogy also in restructuring procedures.
Reorganisation of the debtor is not possible in bankruptcy but in reorganisation such arrangements can be carried out as a part of the reorganisation plan.
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Mika J. Lehtimki
Dittmar & Indrenius Pohjoisesplanadi 25 A FI-00100 Helsinki Finland
Juha-Pekka Mutanen
Dittmar & Indrenius Pohjoisesplanadi 25 A FI-00100 Helsinki Finland
Mr. Lehtimki is a senior attorney in the firms Finance & Capital Markets practice. His work focuses on corporate finance and capital market transactions, structured finance, corporate recovery procedures and mergers and acquisitions. He is also experienced in cross-border transactions and has written about financial law both in Finland and in the UK.
Mr. Mutanen is a partner of the firm and heads the firms Finance & Capital Markets practice area. He advises banks, insurance companies, financial institutions, investment banks, private equity and venture capital houses in various finance and capital market transactions including restructuring issues. He also advises corporations in a range of financial law issues, including general corporate finance, acquisition finance and structured transactions such as securitisation and project finance. He has written and spoken widely on various financial and corporate law topics.
Dittmar & Indrenius, established in 1899, is an independent Finnish law firm focused on the quality of its services and the satisfaction of its clients. Dittmar & Indrenius aims at providing the best legal services in complicated transactions and complex dispute resolution in its jurisdiction. We also strive to be the best long-term law firm partner for demanding corporate clients in Finland.

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+358 9 6817 0152 +358 9 6524 06 mika.lehtimaki@dittmar.fi www.dittmar.fi
+358 9 6817 0112 +358 9 6524 06 juha-pekka.mutanen@dittmar.fi www.dittmar.fi
Chapter 15
France
Bredin Prat
Tim Portwood
Nicolas Laurent

1.1 How does a creditor take security over assets in France?
an order prohibiting the director from managing any company for a maximum period of five years; or a judgment requiring the director to make up all or part of the debtors liabilities, if it is evidenced that such director abusively continued to trade in his personal interest although trading could only lead to the cessation of payments of the company.
In France, a creditor may take security in two ways: by agreement with the debtor, and, with respect to certain security interests, registering the interest with the clerk of the commercial court where the debtors headquarters is located; or without the agreement of the debtor, following court authorisation. Where bankruptcy proceedings are opened, securities over assets obtained by a creditor during the suspect period can be cancelled by the Court (see question 1.2).
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in France?
In addition to the less formal procedures of mandat ad hoc and conciliation (see question 7.1 below), there are three types of court supervised procedures for companies in financial difficulties: Safeguard Procedure (procdure de sauvegarde). Recovery (redressement judiciaire). Liquidation (liquidation judiciaire). The Safeguard Procedure and Recovery are both designed to provide for the continuation of the business, maintaining employment and settling of debts. Liquidation is intended to put an end to the business activity of the company and to sell the legal estate and effects of the debtor.
2.2 What are the tests for insolvency in France?
Certain transactions entered into during the suspect period (a period extending backward in time from the judgment opening the bankruptcy case to the court-determined date on which the debtor was in cessation of payments (insolvent), but in no event more than 18 months prior to the judgment) may be avoided. Avoidable transactions include: certain transactions or acts for which the debtor receives less than the value of the item parted with, including: property transfers where no consideration is provided; contracts where the consideration provided by the debtor unfairly exceeds the value of the consideration received; payment of debts that are not due; payments outside of the ordinary course of business; providing security for antecedent debts, etc.; and payments of overdue debts and other transfers for consideration with a creditor who was aware of the debtors cessation of payments at the time of the transaction.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in France?
Cessation of payments (tat de cessation des paiements), which triggers Recovery or Liquidation, is a state in which the company is unable to satisfy its current liabilities as soon as they become due with its available assets.
The Safeguard Procedure is available to any company that is not in a state of cessation of payments, but which is, or anticipates, suffering difficulties which it is not able to overcome, and which are likely to lead to cessation of payments. Recovery is only available for companies that are in a cessation of payments but for which recovery is not obviously impossible. Liquidation is available for companies that are in a situation of cessation of payments and for which recovery is clearly impossible.
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A director who is aware of the debtors cessation of payments must file a formal declaration to that effect with the clerk of the commercial court having jurisdiction over the debtor. If such a declaration is not made within 45 days of the debtors cessation of payments, the director may be subject to two types of sanctions:
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France
secured creditors may also request the judicial award of the pledged asset or claim the proceeds realised from the sale of the pledged asset. In the latter case, the creditor is, however, subordinated to those creditors whose claims rank senior, which will be paid in priority from the proceeds of the sale.
Liquidation can be opened directly or upon conversion of a failed Recovery.

With the exception of secured creditors, who in principle are personally informed of the opening of a bankruptcy procedure against their debtor, there is no particular notification to creditors regarding the opening of a bankruptcy proceeding, other than the publication of the opening judgment in a legal publication and the mention of such judgment in the debtors corporate register.
Two reciprocal debts that arose prior to the judgment opening the bankruptcy proceedings are considered to offset each other by right when all conditions for legal offsetting were met prior to the judgment (both debts were certain, liquid and due prior to the opening judgment). A debt arising prior to the opening judgment and a debt arising subsequent to that judgment cannot, in principle, offset each other. As an exception, offsetting is permitted when the debts are connected, i.e., arise from the same legal relationship, provided that the creditor has validly declared the existence of the prior claim in the proceedings. As regards claims arising from the operation of the business during the course of the bankruptcy proceeding, the principle is that such debts must be paid when they become due. Therefore, when both reciprocal debts arise subsequent to the opening judgment, the unpaid creditor is entitled to offset.
3 Creditors
Following the opening judgment in any of the three courtsupervised procedures, there is a stay prohibiting the payment of any claims that arose prior to the judgment. Payments made in breach of this stay may be nullified and both the creditor and the debtor may be subject to criminal sanctions. In the case of the Safeguard Procedure, this stay also benefits guarantors of the debtor, where the guarantor is an individual; the proceedings against such individual guarantors are suspended until the judgment concluding the proceeding (i.e., the judgment approving the recovery plan or the sale plan, or a judgment approving the liquidation). There are two exceptions under which unsecured creditors whose claims arose prior to the opening judgment may be paid: prior claims relating to salaries are paid immediately from available monies or, in the absence of funds, by the Assurance Garantie des Salaires (AGS), within ten days from the judgment opening the bankruptcy proceeding; or according to case law, set off payments may be authorised in some circumstances (see question 3.3).

In the Safeguard Procedure and in most Recovery proceedings, the company continues to be managed by its legal representatives. However, in the Safeguard Procedure, the bankruptcy trustee (administrateur) may be empowered to supervise management, or to provide assistance with respect to all or part of the debtors business. In addition, in Recovery, the trustee is at a minimum entrusted with assisting the debtor in the management of all or part of its business. Alternatively, the trustee may be entrusted with the sole management of all or part of the business. In liquidation, the trustee alone manages the debtors business but the corporate bodies (i.e., the board of directors, etc.) stay in place. In each of the above cases, shareholders may continue to exercise their rights through shareholders meetings (e.g., capital increase). In Recovery, the court may, however, impose restrictions on the ability of de jure and de facto managers of the company (including majority shareholders) to sell their equity interests. In Liquidation and in Recovery, when the trustee alone manages the business, the information provided to shareholders may be limited to the minimum disclosures required in advance of a shareholders meeting.
Those creditors which hold a security interest and whose claim arose prior to the opening judgment are also subject to the rule staying the payment of prior claims. However: the court-appointed judge in charge of monitoring bankruptcy proceedings (juge commissaire) has the power to authorise the debtor to pay prior creditors which hold a pledge or an asset necessary to the business, in order to be able to withdraw such asset; the same applies to sellers who have reserved title with respect to goods that have not been fully paid; debtors which hold a guarantee and the assets of which are sold within the observation period are entitled to provisional payment; and
The funding of the observation period (the period following the opening judgment through the final judgment) is ensured by the stay of all claims that arose prior to the opening judgment. Those claims are not paid until the decision of the tribunal is adopted, and are paid out based on the remaining available funds according to a prioritisation scheme.

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The Safeguard Procedure can only be opened at the request of the debtor, while Recovery and Liquidation can be opened at the request of the debtor, by writ of summons of a creditor, upon request of the public prosecutor or upon the sole initiative of the relevant court.
3.3
Bredin Prat
With respect to claims arising subsequent to the opening judgment, it is the duty and responsibility of the trustee (administrateur) to ensure that he holds funds in an amount sufficient to make the payments as due. Should the company be unable to pay, it is the trustees duty to terminate the contract. Thus, any sums lent by a bank within the observation period are to be paid in priority to claims arising prior to the opening judgment. The expenses and fees of the administrators, liquidator and bankruptcy court are also paid on a priority basis.
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wants ongoing contracts to be continued, the trustee must make sure that he has sufficient cash to pay those amounts as they come due. If an invoice is not paid when due, the contract will be immediately terminated, and the unpaid amount will be granted a payment priority over those amounts due prior to the opening of bankruptcy proceedings. In addition, the trustees professional liability may be engaged in the event the company is unable to fulfil its obligations. This provides a significant incentive for the trustee to carefully review the debtors cash flow forecasts before continuing ongoing contracts.
France
5 Claims
Amounts due to salaried employees under their employment contracts are paid out as follows: Amounts corresponding to sums due to employees prior to the judgment opening the bankruptcy proceedings are paid by the trustee within 10 days of such judgment or, if the debtor does not have sufficient funds, then from the first proceeds received by the debtor. Additionally, if funds are sufficient, an amount equal to one month of unpaid salary is to be paid to the employees. Subsequent to the opening judgment, such amounts are paid as they become due. Should they remain unpaid, they benefit from a guarantee from the AGS (Assurance Garantie des Salaires, a government fund) in the Safeguard Procedure as well as in Recovery. When the AGS acts in lieu of the company, it becomes subrogated to the rights of the salaried employees and is paid in priority at the end of the bankruptcy proceedings. When unavoidable, layoffs are performed: in the Safeguard Procedure in compliance with general layoff procedures; and/or in compliance with a simplified procedure which departs from general layoff procedures in a Recovery or Liquidation. Additionally in Liquidation, layoffs must take place within 15 days from the judgment ordering the Liquidation. Severance payments are guaranteed by the AGS in each of these cases, provided that layoffs take place within the observation period in the Safeguard Procedure and Recovery and within 15 days of the judgment in a Liquidation.
Creditors whose claims antedate the opening judgment are obliged to declare their claim within two months of the publication of the judgment (four months for creditors domiciled abroad). Such declaration of claim must be made in writing and sent via a registered letter with acknowledgment of receipt to the creditors representative (mandataire judiciaire) in case of Recovery and to the Liquidator in case of Liquidation. Creditors whose claims are subsequent to the opening judgment are exempt from the obligation to declare their claims and must be paid at maturity. In the event of total assignment or transfer of the company, or where such claims are not paid at maturity following a continuation plan, they benefit from a payment privilege (see question 5.2).
Creditor Priority in a Safeguard Procedure and in Recovery

Debts that arose prior to the judgment opening the proceedings
Creditor Priority in Liquidation Procedure
Super Priority of Employees amounts due to employees as remuneration, or with respect to paid absences. Court expenses, administrators and attorneys fees, and certain other expenses (frais de justice). New money contributions made during the course of a conciliation procedure that preceded the Safeguard or Recovery Procedure. Shareholder capital contributions do not benefit from this priority. Debts secured by real property or debts secured by possessory security interests in personal property (mobilire spciale).
New money contributions made during the course of a conciliation procedure that preceded the Safeguard or Recovery Procedure. Shareholder capital contributions do not benefit from this priority.
Debts that arose subsequent to the judgment opening the procedure Debts that arose prior to the judgment opening the procedure
The trustee has the exclusive right to enforce ongoing contracts regardless of any provision or ipso facto clause which purports to allow the termination of the contract upon the opening of bankruptcy proceedings. Ongoing contracts are those contracts which are in force, but have not been fully executed, at the opening of recovery proceedings. Contracting parties that do not fulfil their obligations under such ongoing contracts may be subject to an action for breach of the contract. A contracting party may send a formal notice to the trustee in order to request that the trustee decide within one month whether to abandon or adopt a specific ongoing contract. Should the trustee not provide an answer within such time-period, the contract is considered terminated. Until such time as the contract is rejected by the trustee or the contract is otherwise considered terminated, the contracting party must continue to perform its obligations under the contract. If the trustee decides to continue an ongoing contract, he is required to pay amounts due under the contract. When confirming that he
Employee debts that were not advanced by the AGS. Court expenses, administrators and attorneys fees, and certain other expenses (frais de justice). Debts resulting from loans or contractual obligations assumed subsequent to the judgment opening the bankruptcy proceedings. Sums advanced by the AGS. Other post-judgment debts based on their relative ranking.
Other pre-judgment debts (unsecured debts).
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all or part of the business of the debtor is to be sold to a buyer; or with the conversion of the Recovery into a Liquidation. The proceeding may also be closed when the cessation of payments no longer exists. Liquidation comes to an end once all of the debtors assets are sold, whether through the sale of the business or through an asset sale. If, following the closure of a Liquidation proceeding, the debtor is unable to pay all outstanding debts, the debtors former executives (and under certain circumstances, de facto managers), may be pursued for the shortfall. In the event a court determines that the former executives mismanaged the debtor, and that that mismanagement contributed to the debtors shortfall, the executives may be held personally liable for all or part of the shortfall.
Tax debts are paid on a priority basis in all of the proceedings (see question 5.2). Public creditors (financial administrative authorities, social security bodies, institutions administering unemployment insurance programmes) may grant the debtor full or partial debt remission or decide to transfer or waive their senior ranking.

Creditors must be consulted on debt remissions and extensions of payment dates in a plan. They may be consulted either individually or as committees. When a company undergoing bankruptcy proceedings employs more than 150 salaried employees or generates a turnover of 20M, two creditor committees must be formed: the first committee encompasses all credit institutions which are creditors of the company; and the second committee is composed of its main suppliers (the claim of which exceeds 5% of the aggregate amount of all suppliers claims). Below these thresholds, the formation of these committees is optional. The debtor must present each of these committees with a draft plan within two months from the committees formation. This period may be extended for two months. Each of the committees must vote on whether to accept the plan within thirty days, in compliance with the rule of the double majority: the adoption of a draft plan is conditional upon its acceptance by the absolute majority of the creditors representing at least two-thirds of the total amount of the claims, exclusive of tax. If the draft plan is adopted by both committees, the proposals for debt cram down and extension of payment dates contained in the plan become binding upon all members of the committees, even those committee members who voted against the plan. Those creditors which are not members of a committee are consulted individually. They must individually consent to any proposal of debt cram down or extension of the payment date which relates to them. During the adoption process, the court may impose extension of payment dates upon certain creditors. However, the court cannot impose any cram down or increase the commitments already undertaken by the creditors in connection with the plan proposal.

7.1 Is it common to achieve a restructuring outside a formal procedure in France? In what circumstances might this be possible?
Outside of informal workouts, which are not uncommon, two frequently-used procedures are the mandat ad hoc and conciliation, both of which proceed under the aegis of a third-party appointed by the court. These procedures may only be employed if the company is either not in cessation of payments, or, with respect to conciliation, if the company has not been in cessation of payments for more than 45 days. These procedures are not completely out of court procedures to the extent that the mandataire ad hoc and conciliator are appointed by and report to the court and may, in the case of a conciliation, result in an agreement between the parties that is homologated (officially recognised) by the court.
It is possible to reorganise a debtor rather than realise its assets and business. The Safeguard procedure is specifically designed to achieve a reorganisation so as to avoid formal insolvency proceedings. Once formal insolvency proceedings have commenced, the availability of a reorganisation depends upon the courts assessment of the prospects of the reorganisation succeeding.
The Safeguard Procedure comes to an end either with the adoption of a safeguard plan to be implemented by the debtor; or, in case of a cessation of payments which intervenes during the Safeguard Procedure, with the opening of a Recovery or Liquidation. The opening of Liquidation proceedings is, however, mandatory if cessation of payments intervenes during the implementation of the Safeguard Plan. The Safeguard Procedure may also be closed when the difficulties which caused its opening cease to exist. Recovery comes to an end either: with the adoption of a continuation plan, to be implemented by the debtor under the supervision of a court-appointed trustee (commissaire lexcution du plan); with the adoption of a sale plan under which
Until the beginning of 2009, there had been no precedents of a prepackaged sale being implemented to restructure a debtors liabilities via a debt to equity swap before the commencement of Safeguard (or other formal insolvency) proceedings. The first true example of this practice is the Akerys-Autodistribution restructuring. The Safeguard Law permits debt to equity swaps but does not provide for an accelerated procedure during which the creditors must agree to the pre-packaged consensual deal before formal proceedings are commenced removing the flexibility of a pre-package negotiation from the creditors. The pressure of time before the debtor decides to file for Safeguard proceedings can, however, provide sufficient incentive on willing creditors to persuade their recalcitrant counterparts to toe the consensual line.

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8 International
8.1 What would be the approach in France to recognising a procedure started in another jurisdiction?
France
With respect to procedures opened outside of the European Union: A decision opening bankruptcy proceedings in a country outside the European Union would have no effect in France, except through obtaining an exequatur (a special decision by a French court providing for the execution of a foreign judgment) or by virtue of an international treaty. Absent an exequatur, the foreign judgment will nevertheless have an evidentiary value: it permits the debtor to establish, in the absence of a parallel insolvency proceeding in France, the powers of the trustee or other foreign representative of the debtor. The foreign trustee will be permitted to request actions to conserve the debtors assets in France and to seek an exequatur procedure in France of the foreign decision. However, without an exequatur, the trustee may not liquidate the debtors French assets or dissolve the debtors French corporate structure. Moreover, creditors may continue to pursue the debtor in France, and obtain payment based on the debtors French assets. The exequatur of the foreign judgment may be requested by any interested person, unless a bankruptcy proceeding has already been opened in France with respect to the debtor. Once the exequatur has been granted, claim preclusion applies to the foreign judgment. An Exequatur does not, however, transform a foreign bankruptcy proceeding into a French proceeding. The French court should take care to be guided by the applicable foreign law with respect to any decisions it makes based on the foreign judgment.
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With respect to a procedure in a Member State of the EU In applying EU regulation n 1346/2000 on bankruptcy, French courts recognise as fully binding a decision of a court in another Member State opening an insolvency proceeding with respect to a debtor located in a Member State. The only exception to this recognition is if the decision is contrary to the public order of France (this exception is strictly interpreted). A French court that is requested to open a main bankruptcy proceeding that would compete with a main proceeding already instituted in another Member State would refuse the request. Applying EU jurisprudence (European Court of Justice, Eurofoods, May 2, 2006, No. C-341/04), French courts would conclude that they lack jurisdiction to review the analysis of the debtors centre of main interests made by the court having originally instituted the main procedure in another Member State. Accordingly, the sole means to seek review of a decision instituting the main procedure in another Member State is through the appeal or other review process provided for in that Member State (Cass. com. Daisytek, June 27, 2006, n 03-19.863). A French court may, however, open a secondary procedure, when the debtor has a secondary establishment in France. This procedure may only be instituted as a liquidation proceeding and would be governed by French law.
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Bredin Prat
France
Tim Portwood
Cabinet Bredin Prat 130, rue du Faubourg Saint-Honor 75008 Paris France
Nicolas Laurent
Cabinet Bredin Prat 130, rue du Faubourg Saint-Honor 75008 Paris France
Mr. Tim Portwood is a partner at Bredin Prat, and a French qualified English barrister. He specialises in international arbitration and international litigation. Originally trained as a litigator/arbitrator, Mr. Portwood was involved in a number of major bankruptcy cases in France where he used expertise in litigation combined with his knowledge of bankruptcy law. He is the author of the French sections of the comparative law manual Directors in the Twilight Zone II published by Insol International. Born in the United Kingdom, Mr. Portwood graduated from Cambridge University. He was the co-editor of European Human Rights Reports (1991-1994) as well as the author of Mergers in European Community Law (Athlone Press, 1995), and of Competition Law and the Environment (Cameron May, 1995). He is the co-author (with Louis-Christophe Delanoy) of La Responsabilit de lEtat pour Dni de Justice dans lArbitrage dInvestissement Rev. Arb. 2005, p. 603. Mr. Portwood is a native English speaker and is also fluent in French, Italian and German.
Mr. Nicolas Laurent is a partner at Bredin Prat, whose primary areas of practice include mergers and acquisitions and bankruptcy/restructuring. Originally trained as an M&A lawyer, Mr. Laurent was involved in a number of major bankruptcy cases in France where he used his expertise in M&A combined with his knowledge of bankruptcy law. A member of the Paris Bar since 1998, Mr. Laurent received his law degree from the University of Paris, Sorbonne (DEA de droit des affaires et de droit conomique) and taught bankruptcy law at University of Paris, Sorbonne. Before joining Bredin Prat in 2001 as an associate, he worked as an associate at an American firm in Paris and Beijing offices. Born in France, Mr. Laurent is also fluent in English and has a working knowledge of Spanish.
Drawing on its M&A, Litigation and Financing practices, Bredin Prat has a strong restructuring and bankruptcy practice with extensive experience in managing high profile, domestic and cross-border, financial restructurings and bankruptcy situations. Bredin Prat has acted as counsel (for debtors, creditors or parent companies) on a number of the largest restructurings in the French market. Bredin Prat has also acted as counsel (for debtors, parent companies or potential acquirers) in connection with the bankruptcy proceedings of major French public and private companies. Recent Restructurings/Bankruptcy cases handled by Bredin Prat include: Autodistribution pre-packaged sale (the first in France). Teksids restructuring. Eurotunnels pending restructuring. DMCs pending restructuring. Rhodias restructuring. Vivendi Universals restructuring, together with Slaughter and May. Crdit Lyonnaiss restructuring. The bankruptcy of Metaleurop Nord and Metaleurop SA. The bankruptcy of Pronne Industrie (Flodor) and Geladour. The bankruptcy of AOM. The bankruptcy of the French daily newspaper France Soir. The bankruptcy of Cadence Innovation France (ex-Pguform). The lawsuits initiated against managers in the context of the Moulinex-Brandt bankruptcy.

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+33 1 4435 3535 +33 1 4289 1073 timportwood@bredinprat.com www.bredinprat.com
+33 1 4435 3535 +33 1 5856 2308 nicolaslaurent@bredinprat.com www.bredinprat.com
Chapter 16
Germany
Hengeler Mueller
Dr. Ulrich Blech

1.1 How does a creditor take security over assets in Germany?
comparable transactions having the same economic effect, e.g. any payments by the Company to a third party in order to settle a liability secured by the shareholder. In this case the third party has to return the monies and may then foreclose on the security initially provided by the shareholder.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Germany?
Generally, a Creditor needs an agreement with the Company to take security over the assets of the Company. Depending on the asset and the security, additional requirements may need to be met to validly establish a security: a mortgage or land charge needs to be registered with the land register and a pledge over tangible assets - other than real estate - requires that the Creditor holds possession of such assets. No possession, however, is required if title to the respective asset is transferred to the Creditor for security purposes. Intangible assets as well as claims may be assigned for security purposes to the Creditor. Only a landlord with respect to his tenants assets on the premises and a contractor with respect to assets of the Company held by the contractor, by law take security over such assets. There is no general register for securities granted over assets other than for charges on real estate, ships and aircrafts.
A managing director (Geschftsfhrer) of a GmbH or a member of the executive board (Vorstandsmitglied) of an AG (both hereinafter referred to as directors) is obliged to file a petition to open insolvency proceedings without undue delay, at the latest within three weeks, if and when the Company is: (i) insolvent, i.e. not able to pay its debts as they fall due; or (ii) overindebted, i.e. its liabilities exceed its assets (for details please see question 2.2). Once the Company is insolvent or overindebted, a director is liable to the Company for all payments effected thereafter by the Company, unless the director can demonstrate the payments were made with the diligence of a prudent businessman in such a situation. If a director fails to file for insolvency and the Company continues trading, he may, in addition, be liable towards the Creditors as well as the shareholders for any damages resulting therefrom. Creditors who entered into a contract prior to the Company being insolvent are entitled to claim damage equal to the amount they lose due to the fact that - as trading had continued - now more Creditors exist; whereas Creditors who enter into a contract with the Company at a time when it is already insolvent may claim the damage they sustained by entering into a contract with an insolvent Company. If the Company has no directors, the obligation to file for insolvency is imposed upon each shareholder (Gesellschafter) of a GmbH and in an AG on each member of the supervisory board (Mitglied des Ausichtsrats). Failure to file for insolvency and the granting of preferences to individual Creditors, even though the Company is insolvent and the director is aware thereof, constitute a criminal offence. Any such offence may lead to disqualification from certain positions in the future.
Transactions, including the granting of securities, prior to the opening of an insolvency proceeding are voidable if they have a detrimental effect on other Creditors - which generally has to be assumed unless specific circumstances apply - and provided that: (a) the transaction was effected within three months prior to the filing of the application for an insolvency proceeding or thereafter if the Company was already insolvent and the Creditor was aware thereof or the fact that an application had been filed; or a security was granted or a claim was settled, which were not due for granting or settlement at that time, and such granting or settlement was effected either during the month preceding the filing for insolvency or during the second or third month prior to the filing, in such case, however, only if the Company was insolvent already or if the Creditor knew that the transaction would be to the detriment of other Creditors.
(b)
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Furthermore, detrimental transactions implemented even more than one year prior to the filing for insolvency may be voided if: (i) the Company acted in bad faith with the intent to discriminate other Creditors; or (ii) no consideration was granted. In addition, any repayment of shareholder loans within one year prior to the filing of the application for opening insolvency proceedings can be voided and the monies so paid have to be returned. The same applies to
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Germany?
If a Company is insolvent, only the statutory insolvency proceeding
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(Insolvenzverfahren) under the Insolvency Act (Insolvenzordnung) is available. Under the Insolvency Act the Insolvency Administrator (Insolvenzverwalter) may pursue the standard procedure (Regelverfahren) and decide to liquidate the Company either by laying off the personnel and selling the assets or by selling the operations including its personnel to a new entity. Alternatively, the Administrator and the Creditors may develop and implement an Insolvency Plan (Insolvenzplan). The concept of an Insolvency Plan is similar to the Chapter 11 procedure under the United States Bankruptcy Code - with a number of differences. In an Insolvency Plan, defined Creditor groups may resolve to structure the insolvency proceedings differently in order to provide more flexibility for a special liquidation, a disposal or a financial restructuring (see question 6.1). Unlike the procedure available under Chapter 11, however, any reduction of the rights of the existing shareholder, i.e. any capital reduction or dilution affecting the existing shareholders, will require their consent. Insolvency Plans have been rarely used in the past, and only lately have become a more often used instrument.
2.2 What are the tests for insolvency in Germany? 2.3
Germany
The insolvency proceeding under the Insolvency Act is mandatory provided there are sufficient assets available to cover the costs for such proceedings. If the funds do not suffice to cover the costs, no proceeding will be opened and Creditors will be free to individually pursue their claims. Upon insolvency proceedings being opened, the Insolvency Administrator, the Creditors Committee (Glubigerausschuss) and major Creditors in practice will decide whether a regular proceeding or an Insolvency Plan is pursued. Whether a full liquidation, a sale of the enterprise by means of an asset deal or a restructuring by means of an Insolvency Plan is implemented, therefore depends on the circumstances.
A Company has to be put into insolvency proceedings if it is (i) either insolvent or (ii) overindebted; it may be put into proceedings - exclusively upon application of the Company itself - if insolvency is imminent in the future: A Company is insolvent if it is not able within the next two to four weeks to pay the debt which falls due in such period. Minor delays in paying outstanding debt not exceeding 10 % of the debt due do not necessarily mean insolvency, depending on the circumstances. Insolvency is imminent if the possibility not to be able to pay its debts is greater than the chance to get such debt paid within the foreseeable future. In principle, the Company is overindebted if its liabilities exceed its assets. To mitigate the effects of the worldwide financial crisis, the German legislator has amended the Insolvency Act so that the test to be applied for overindebtedness has been changed for a limited period of time (until 31 December 2010) to avoid that major book losses force companies into insolvency. Until 31 December 2010, therefore, the following temporary regime applies: The Company is overindebted if, based on liquidation values, its liabilities exceed its assets, unless the continuation of the business of the Company is more likely than not. This means that, effectively, the Company is not considered overindebted when continuation of the business, based on a reasonable and careful assessment, is more likely than not, regardless of whether the liabilities exceed the assets. Until the amendment came into force on 18 October 2008, however, the following test comprising of three elements applied and will again apply as of 1 January 2011: first, the assets are valued at their liquidation value. If the liabilities exceed the assets so valued, it secondly - has to be decided whether the continuation of the business of the Company is more likely than not. If it seems more likely - based on a reasonable and careful assessment - that the business cannot be continued (for example, as the business model cannot be sustained), then the Company is overindebted and has to be put into insolvency. If, however, it seems more likely that the business can be continued, then - in a third test - the assets have to be valued on a going concern basis. If the assets so valued still fall short of the liabilities, the Company is overindebted and has to be put into insolvency.
A petition to open insolvency proceedings has to be filed at the insolvency court (Insolvenzgericht) at the local court (Amtsgericht) where the Company has its official seat. The court will either decide itself whether the Company is insolvent and has sufficient assets to finance the proceeding (see question 2.3) or - most likely - will appoint an expert or a Preliminary Insolvency Administrator (vorlufiger Insolvenzverwalter) to determine the relevant facts and submit a report thereon. In order to protect the assets of the Company the court - as it deems necessary - may grant the Preliminary Insolvency Administrator extensive rights to control and supervise the transactions of the Company and to block attempts by Creditors to individually enforce their claims. The preliminary proceedings may last up to several months depending in particular on the financing available. Very often, such preliminary proceedings are used to explore the chances of restructuring the Company. Once the expert or Preliminary Insolvency Administrator has submitted its report on the Company, the court will decide as to whether the official insolvency proceedings are opened and an official Insolvency Administrator (Insolvenzverwalter) is appointed. Generally, the Preliminary Insolvency Administrator subsequently becomes the Insolvency Administrator. While Creditors or the Company may submit to the court their proposals on the Administrator, it remains in the sole discretion of the court, whom it appoints. Furthermore, the insolvency court will - at least in major insolvencies - appoint a Creditors Committee (Glubigerausschuss), which shall comprise all major Creditor groups, i.e. the secured and unsecured Creditors as well as large and small amount Creditors. The Creditors Committee supports and supervises the Administrator, who requires the consent of the Creditors Committee for major transactions, in particular, the disposal of the operations as a whole or in parts, the taking-up of new loans and major litigation. The Creditors Meeting (see question 2.5) may replace the Administrator as well as the Creditors Committee.

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If the Company is insolvent or overindebted (see question 2.2), the directors have to file without undue delay, at the latest within three weeks, a petition to open insolvency proceedings at the competent court. Such a petition may also be filed by a Creditor or, if the Company is a limited partnership (KG), by any of its partners. If insolvency is imminent in the future, only the directors may decide to file for insolvency, however, without being obliged to do so.
Hengeler Mueller
Germany
control of the Insolvency Administrator, who realises such assets, rights and claims and forwards the proceeds to the Creditor. The Insolvency Administrator may charge a certain amount for such realisation - generally around 5%. He may even block or delay realisation for a certain period, however, only against a defined compensation. Securities held by the Creditor in his possession and mortgages or land charges are realised in separate proceedings, which the Creditor can initiate but - with respect to land charges or mortgages - may also be initiated by the Administrator. The Administrator may - to a limited extent - delay a foreclosure, inter alia, in order to gain time for the implementation of an Insolvency Plan or if such foreclosure would hinder a more successful realisation of the assets of the Company. If - with the consent of the major creditor groups (see question 6.1) - an Insolvency Plan is agreed and implemented, such plan may limit the rights of secured creditors.
The opening of proceedings (and other publications relating to the insolvency proceedings) are published in a central publication on the internet (www.insolvenzbekanntmachungen.de). In addition, known Creditors are generally informed by the Administrator or the court of the opening of insolvency proceedings. Furthermore, a notification is entered into the relevant public registers in which the Company or certain of its assets (land register, aircraft and ship register) are registered. The court order stating the opening of the insolvency proceedings also sets the dates for mandatory Creditors Meetings (Glubigerversammlungen). Generally, in the first Creditors Meeting the Administrator reports to the Creditors on the options of continuing or disposing of the operations of the Company. The Creditors meeting may, in particular, resolve that the Administrator is required to prepare an Insolvency Plan. In a further Creditors Meeting the Administrator will report on the claims raised by Creditors and whether he accepts such claims (see question 5.1). Additional meetings of the Creditors may be called by the Administrator, the court, the Creditors Committee or certain groups of Creditors. Any resolution by the Creditors Meeting requires the consent of Creditors holding at least 50% of the claim amount owed to the Creditors present in such meetings.
Germany
Creditors may set off sums against amounts owed by the Company to them during an insolvency proceeding if both amounts had been owed and were either both already due prior to the opening of insolvency proceedings or were owed before but became due only thereafter, in such case provided, however, that Creditors claims did not become due after the sums owed to the Company. No set off is possible, inter alia, if the Creditor acquired his claim only after the insolvency proceedings had been opened. A set off is also not possible if the Creditor acquired the ability to set off only by a voidable transaction (see question 1.2).
3 Creditors

Once a petition for opening insolvency proceedings has been filed, the court may - in order to protect the assets of the Company resolve that unsecured Creditors must not enforce their rights. Upon the final insolvency proceedings being opened, by law no individual enforcement of the rights of unsecured Creditors is possible. Instead, the Creditors must file their claims with the Insolvency Administrator (see question 5.1).
As for the unsecured Creditors, the insolvency court may also order for the secured Creditors that all measures to enforce such securities are blocked during preliminary insolvency proceedings. Once insolvency proceedings have been opened, however, the enforcement of such securities depends on the nature of the security granted: If the Creditor has full title to the asset, such asset has to be returned to the Creditor. This applies, in particular, to assets sold to the Company, subject to retention of title by the Creditor. Most securities, however, only grant a right to receive proceeds from their realisation. Hence, the secured Creditor has to file his claim with the Administrator. It depends on the kind of security, whether the security is then realised by the Insolvency Administrator himself or in special proceedings outside the insolvency proceedings. Generally, assets which have been transferred to the Creditor only for security purposes or rights and claims pledged remain under the
During the preliminary insolvency proceedings the Company generally continues to be run by the directors. The insolvency court may, however, forbid the Company to enter into any transactions (Allgemeines Verfgungsverbot) and may vest the power to control and administrate the Company to the Preliminary Insolvency Administrator. Any liabilities incurred by such a strong Preliminary Insolvency Administrator are privileged in the subsequent insolvency proceedings (see question 5.2). In most cases Preliminary Insolvency Administrators, however, do not have such extensive rights - liabilities incurred with such normal or weak Preliminary Insolvency Administrators are therefore not privileged. During the preliminary insolvency proceedings shareholders rights remain unaffected - except for the right to instruct the management, which becomes ineffective. The shareholders however remain entitled, for example, to resolve on a capital injection in order to restructure the Company. Once insolvency proceedings are opened, by law only the Insolvency Administrator may enter into contracts on behalf of the Company and dispose of Companys assets. Instead of appointing an Insolvency Administrator the court may, however, provide for a so-called self-administration of the Company (Eigenverwaltung), by which the management continues to manage the Company, but under the supervision of an Administrator. Lately, such self-
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administration has been used more often, however, not with the incumbent management, but with a newly appointed management often comprising restructuring experts. Shareholders rights during the insolvency proceeding in theory remain unaffected, unless they refer to the management of the Company and the disposal of its assets by the Insolvency Administrator. This means that any structural decision on the equity of the Company, for example any capital increase or issuance of new shares, still requires the consent of the shareholders.
Germany
arrangements to avoid the option right of the Administrator are generally considered to be void. For certain contracts however special rules may apply: No option right exists if the Company has sold real estate to the Creditor and a priority notice (Vormerkung) has already been registered with the land register in favour of the Creditor. With such notice the Creditors claim to get the real estate transferred is then not affected by the insolvency. Lease agreements to which the Company is a party as a tenant are not automatically terminated - but may be terminated by the Administrator. A Creditor is not entitled to terminate such tenancy agreements after the opening of the insolvency proceedings with the argument that the Company defaulted on the rent payments prior to the opening of the insolvency proceedings. So-called unilateral agreements, like agency agreements or powers of attorney, automatically terminate upon the opening of the insolvency proceedings. Certain financial transaction agreements (such as financial collateral arrangements and close-out netting agreements) are settled by operation of law if the statutory conditions are fulfilled and only the balance can be claimed by a Creditor.
During the preliminary insolvency proceedings the operations of the Company are generally financed out of the available funds. In addition, funds required for the wages of the employees may result from a pre-financing of the so-called insolvency protection payments (Insolvenzgelder): if and to the extent the Company during the three-month period preceding the opening of insolvency proceedings fails to pay wages, the employees are entitled to receive insolvency protection payments from the labour administration. The insolvency protection payments only become due upon the opening of insolvency proceedings. Rather than paying the wages to the employees prior to the opening of the insolvency proceedings, the Preliminary Insolvency Administrator often provides that the employees sell - with the consent of the labour administration - their claims to receive the insolvency protection payments for such period to a bank who pays out the corresponding cash to the employees. Upon the opening of the Insolvency Proceeding, the Banks are then reimbursed by the labour administration. Once the insolvency proceedings have been opened any claims of the employees for wages for the period as of the opening of such proceedings are privileged (see question 5.2).
5 Claims
Creditors - whether secured or unsecured - must file their claims in writing with the Insolvency Administrator, who will verify such claims and decide whether to accept them. The filing has to stipulate the legal basis and the amount of the claim. If a claim is not accepted, the Creditor may try to obtain a court ruling to establish the validity of his claim.
The opening of insolvency proceedings does not automatically terminate existing employment agreements. Clauses providing for an automatic termination are invalid. The Insolvency Administrator, however, may terminate the employment contracts with a three-month notice period, even if a longer notice period would otherwise apply. If not all employees are laid off simultaneously, but consecutively, as, for example, is required for winding down the operations, the Employment Protection Act (Kndigungsschutzgesetz) applies, and each termination has to be socially justified. Often, the issues resulting therefrom or from other restructuring measures affecting employees are settled in a social plan which provides for compensation of the employees. Such social plan, if agreed after the opening of the insolvency proceedings, is - within defined limits - a privileged claim (see question 5.2).
Generally four groups of Creditors exist in insolvency proceedings: Privileged Creditors are Creditors (i) who became Creditors upon an agreement with or certain actions by the Insolvency Administrator after the opening of the insolvency proceedings (inter alia, the employees with respect to wages as of the opening); (ii) under an agreement for which the Insolvency Administrator exercised the option to have such agreement executed (see question 4.4 above); or (iii) under an agreement with a so-called strong Preliminary Insolvency Administrator (see question 4.1). The Administrator has to procure that such privileged Creditors are fully settled - otherwise he might be subject to a personal liability. Secured Creditors are entitled to satisfaction out of the securities granted to them (see question 3.1). Ordinary Creditors are satisfied out of the proceeds of the insolvency proceedings. Subordinated Creditors are Creditors entitled to interest, penalties or (in principle) all shareholder loans or alike liabilities towards a shareholder. Such claims are junior to the claims of Ordinary Creditors. Generally the claims within each group are treated equally. However, certain limitations may apply for specific claims. In an Insolvency Plan different structures may be agreed for various Creditor groups. For example, minor Creditors may be privileged
If neither the Creditor nor the Company has performed entirely under a contract prior to the opening of the insolvency proceedings, the Insolvency Administrator may opt whether to execute such agreement or not. If he opts for execution - generally because such agreement is favourable for the Company - then Creditors claims under such agreement are privileged (see question 5.2). Otherwise Creditors may only claim damages for non-performance, such damage claims being unsecured ordinary claims. Contractual

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vs. major Creditors. An Insolvency Plan, however, requires the consent of all Creditor groups (see question 6.1).
Germany
incurred, the actual equity of the Company is reduced to less than 50% of its registered share capital. Failure to call a shareholder meeting may (i) entitle shareholders to compensation if the Company could otherwise have been saved and (ii) constitute a criminal offence. A pre-insolvency restructuring is most likely to be successfully implemented if: (i) there is only a limited number of experienced Creditors - primarily banks, major suppliers or customers; (ii) the shareholders are cooperative; and (iii) if formal insolvency proceedings are likely to result in a considerable loss of value. In such cases a refinancing of the Company or debt-for-equity-swaps - subject to shareholders consent - may be possible and is frequently implemented, often in close cooperation with the financing banks and other secured creditors who need to consent to any release of their security. Rather than refinancing the Company, a restructuring may also be effected by transferring the operations by means of an asset deal to a new legal entity and using the proceeds to pay off major Creditors. Such asset deals are not without risk for the acquirer, as by law he may be held liable for certain liabilities of the insolvent entity, without - generally - having a valid indemnification claim. Furthermore, there may be a risk that such a transaction is subsequently challenged if the selling entity should file for insolvency (see question 1.2). In addition, an overall restructuring may be frustrated by non-cooperative Creditors, who generally cannot be forced to agree to a pre-insolvency restructuring.
Germany
The opening of insolvency proceedings does not change the tax regime. The insolvent Company may therefore be obliged to pay income tax, corporate income tax, wage taxes, trade tax, or VAT. Generally, tax claims relating to periods prior to insolvency are not per se privileged.

There is no general concept of cramming down Creditors or the shareholders in the Company if they refuse to consent to certain resolutions. Exceptions may apply when establishing an Insolvency Plan. Generally, no Creditors consent is required for the regular proceedings. The Insolvency Administrator may, however, require the consent of the Creditors Committee for certain transactions (see question 2.4). The implementation of an Insolvency Plan on the other hand requires the consent of both the court and all Creditor Groups: Creditor Groups may be defined by the nature, size and ranking of their claims, or the type of security they hold. A Creditor Group has consented to a plan, if (i) the majority of Creditors in such a group has approved the plan and (ii) such majority holds more than 50% of the claim amount of such Creditor Group. Provided the majority of Creditor Groups has consented to an Insolvency Plan, a group which has not consented is deemed to have approved the plan if the Creditors of such group are likely not to be worse off by the Insolvency Plan than without such plan, and if such Creditors are adequately participating in the proceeds from the implementation of the plan. Even if an Insolvency Plan has been approved by the various Creditor Groups, a court may refuse to approve the Insolvency Plan, if a Creditor has objected to the plan and if such Creditor is likely to be worse off than without a plan.
The statutory insolvency proceeding (Insolvenzverfahren) provides for a reorganisation by means of an Insolvency Plan (see questions 2.1, 2.3 and 6.1). As the contents of an Insolvency Plan are at the discretion of the parties involved, it can envisage a reorganisation of the debtor instead of a realisation of the assets and business. In addition, a voluntary pre-insolvency reorganisation is possible (see question 7.1).
Upon disposal of all assets and the final distribution of the proceeds to the Creditors, the Company is deleted from the various registers and ceases to exist. Simultaneously, the insolvency proceeding is terminated. Once an Insolvency Plan has been approved by the various Creditor Groups and the court, it becomes effective and the insolvency proceedings are terminated.

7.1 Is it common to achieve a restructuring outside a formal procedure in Germany? In what circumstances might this be possible?
To avoid the risks and problems of pre-insolvency asset deals or restructurings (see question 7.1), the sale of the operations is often pre-arranged prior to the opening of insolvency proceedings and only becomes effective upon such proceedings being formally opened. Depending on circumstances, a pre-packaged sale may thereby be part of a regular proceeding or an Insolvency Plan. Generally, a pre-packaged sale is negotiated with all or at least the major Creditors and the Preliminary Insolvency Administrator prior to the formal opening of the proceedings to ensure a successful implementation during the insolvency proceedings. Once the proceeding is opened and - as the case may be - the Insolvency Plan is implemented (see question 6.1), the sale of the assets or transfer of the business and distribution of the proceeds takes place in accordance with the Insolvency Plan.
8 International
8.1 What would be the approach in Germany to recognising a procedure started in another jurisdiction?
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Prior to a Company actually being insolvent (see question 2.2), a voluntary pre-insolvency restructuring is possible. In order to allow for sufficient time for such a restructuring, the directors are obliged by law to call a shareholder meeting if and when, due to losses
With respect to insolvency proceedings relating to a Company
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based and active within the EU, EU Regulation no. 1346/2000 applies. Consequently: if the company has its centre of main interest in Germany, German courts will open main proceedings in Germany; a court decision in another Member State to open main insolvency proceedings in such other Member State will automatically be recognised by German courts unless such proceedings are contrary to public order. Furthermore, the acts and/or measures of the Insolvency Administrator of such other jurisdiction will generally be recognised; and if the Company has a branch in Germany, German courts may, upon application, open secondary proceedings exclusively for the assets located in Germany. Such secondary proceedings need to be coordinated with the main proceedings. With regard to cross-border insolvency proceedings for debtors outside the EU or for debtors to which the EU Regulation does not apply (like credit institutions and insurance undertakings), the general provisions on international insolvency proceedings apply which, in substance, correspond to the provisions of the EU Regulation. Under such rules foreign insolvency proceedings are recognised, provided that under German law the foreign court was competent and such proceedings are not contrary to the public order in Germany.
Germany
Dr. Ulrich Blech

Hengeler Mueller Behrenstr. 42 10117 Berlin Germany
+49 30 20374 195 +49 30 20374 333 ulrich.blech@hengeler.com www.hengeler.com
Ulrich Blech has been a partner with Hengeler Mueller since 1995. From 2000 to 2003 he was resident in London. His activities are focussed on advising German as well as foreign clients on transactions in Germany. Recent transactions include the sale of the Berliner Bank by Landesbank Berlin to Deutsche Bank and various portfolio transactions for real estate investors. Mr. Blech is, in particular, experienced in transactions relating to companies being in need of restructuring. He, inter alia, advised investors in connection with the insolvency of the Kirch Media Group and the subsequent disposal of various entities of such Group. Furthermore, he advised Palamon Capital Partners on the acquisition of Omnibus Systems Ltd and D.A.V.I.D. GmbH from their insolvent parent in a pre-arranged transaction with the Administrator.
Hengeler Mueller is universally recognised to be one of Europes pre-eminent law firms. It is dedicated to absolute quality of legal advice, the highest standards of service, and to delivering the most creative and efficient solutions designed to optimise clients business objectives. The prerequisite: an independent partnership of professionals, entrepreneurial both in thinking and practice, international both in education and training. Hengeler Muellers M & A Team has sixty partners located in Dsseldorf, Frankfurt, Berlin, Munich and London. A group of six partners, comprising partners from the M&A Team as well as partners with a financing background, have special focus on restructuring measures in and outside of insolvency proceedings. The firm advises on all major M&A transactions for financial as well as strategic investors.

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Chapter 17
Greece
Alexiou & Kosmopoulos Law Firm
Dr. Constantine Alexiou
Sotiris Foteas

1.1 How does a creditor take security over assets in Greece?
2. Pledge: See above B.1. A notional pledge on receivables is possible to register, to the extent that these exclude claims vis--vis consumers. D. Guarantees: Under Greek law, a guarantee is an obligation ancillary to the obligation of the prime obligor and, therefore, valid to the extent that the primary obligation has been validly assumed. However, depending on the contractual terms of the guarantee, such link between the primary obligation and the guarantee may be loosened. E. Special rules on security arrangements: Special rules on security arrangements include those set forth in the Legislative Decree of 17.7/14.8.1923, Law 3156/2003 on bond loans and securitisation transactions, Law 3oo1/2004 on financial collateral, etc.
Securities over assets under Greek law may be briefly presented on the basis of the underlying asset as follows: A. Security over land and buildings: 1. Mortgage: It affords its beneficiary the right to collect proceeds of liquidation (forced sale) of mortgaged assets by way of priority over other creditors. A mortgage may be registered on the basis of any of the following: (i) an agreement between the security-taker and the owner of the property; (ii) a court judgment; and (iii) by operation of law, under the limited circumstances set forth in Article 1262 of the Greek Civil Code (GCC) (none of which is typically relevant to commercial transactions). A mortgage is perfected by registration in the public books kept at local Land Registries. 2. Prenotation of mortgage: It is registered in the same public books as a mortgage, by virtue of either a court judgment, issued in injunction proceedings, or a payment order, i.e. an order of a competent judge, issued in summary proceedings with respect to payment of a fixed sum of money. It is widely used, because, although it costs less than a mortgage, it offers the same security to the creditor upon its conversion into mortgage. The conversion is conditional upon the secured claim being validated by a final court judgment and has retroactive effect: the mortgage is deemed to have been registered on the date of the initial registration of the prenotation. B. Security over movables: 1. Pledge: It affords the creditor the same security on movable assets as a mortgage on land and buildings. It is established by means of an agreement having a date certain, and by the physical delivery of the assets into the creditors or a custodians possession. However, Law 2844/2000 permits the creation of a pledge on movable property without requiring the debtor to release the property from its possession (notional pledge), under specific requirements, including registration in a public register. 2. Other types: Floating charge and fiduciary transfer are also common in the security commercial practice, although the latter is still contested in civil theory. C. Security over receivables: 1. Assignment: It is a contract, by means of which the assignor transfers to the assignee a claim it has towards a third party. The assignment becomes effective towards the debtor of the claim assigned through a relevant notification by either the assignor or the assignee.
If a company is declared bankrupt, its acts during the suspect period may be rescinded by the decision of the bankruptcy court. The suspect period is a period determined by the bankruptcy court, commencing on the date of actual cessation of payments and ending on the date of issuance of the bankruptcy decision. Such period may not exceed two years. (i) Acts subject to compulsory rescission include: i. ii. iii. Transfers of assets without receipt of consideration. Payments of debts prior to their agreed maturity. Payments of debts which have fallen due, effected not by cash payments, but by other means, e.g. by issuance of promissory notes or bills of exchange. Creation of any kind of security, including mortgages, prenotations of mortgage and pledges, securing preexisting obligations.
iv.
(ii)
Acts subject to potential rescission (voidable acts) include any other transactions or acts, whether for or without consideration, effected by the insolvent debtor during the suspect period with parties who were aware of the cessation of payments.
In addition to rescission, third parties may be entitled to recover assets from the bankruptcy estate, including goods sold on retention of title. Even if a company is not declared bankrupt, a transfer of its assets may be invalidated by a court decision, if: (a) such transfer was effected with the intent to cause damage to its creditors; (b) its remaining estate is not sufficient to satisfy its creditors; and (c) the
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transferee was aware of the above intent of the company (Article 939 ff GCC).
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Greece?
Greece
bankruptcy decision. Furthermore, a debtor may itself request to be declared bankrupt prior to ceasing its payments, if its failure to make payments is foreseeable and highly probable. (ii) Reorganisation plan: Within 4 months as of the issuance of the bankruptcy decision, the company is required to compile and propose a draft reorganisation plan. If the company fails to do so, the court-appointed bankruptcy officer may propose such a plan. The draft reorganisation plan must, at a minimum, provide for the satisfaction of at least 20% of the aggregate amount of claims within a period not exceeding one year. A draft reorganisation plan is subject to review by the bankruptcy court, within 20 days as of its submission; the court reviews whether the conditions set forth in Article 114 of the Code are met. Acceptance of the reorganisation plan is then subject to creditor approval, requiring a double and mixed majority vote of creditors, namely: more than half of all creditors (50% + one) must vote in favour of acceptance; and creditors voting for acceptance must represent at least 60% of the total amount of claims (by value), as well as at least 40% of secured claims (by value). If approved by creditors, the draft reorganisation plan is subject to court ratification, within 20 days as of the date of the relevant meeting of creditors; if granted, ratification renders the plan binding and enforceable vis--vis all creditors, without any exception. The ratification decision is subject to appeal, but the appeal itself does not suspend the effects of ratification. The court may refuse to ratify a reorganisation plan on grounds of reduced protection of creditors, violation of procedure, reasons of public interest, fraudulent extraction of the approval, etc. A plan may be invalidated by the bankruptcy court in case of material breach of its provisions, evidence relating to its fraudulent approval, or evidence of fraudulent incurrence of insolvency. (iii) Formation of the creditor group: The procedure advances automatically to this stage upon failure to have approved or implemented a reorganisation plan. The liquidation process is initiated by the bankruptcy officer and supervised by the bankruptcy judge and the bankruptcy court; specific rules, notification requirements and formalities apply in respect of each category of assets (see below, particularly questions 5.1 and 5.2).
Directors may sustain personal civil liability: (a) for damages caused to creditors as a result of failing to make a timely filing to have the company declared bankrupt; and/or (b) for fraudulent or grossly negligent acts or omissions leading to bankruptcy. Articles 171 and 172 of Law 3588/2007 (hereinafter the Code) introduce various relevant criminal offences.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Greece?
The Code establishes a single system of insolvency procedure, which may comprise one or more interdependent alternatives or stages: (a) (b) (c) (d) A conciliation procedure may precede the bankruptcy process stricto sensu. Failure of the conciliation procedure entails the declaration of bankruptcy. Declaration of bankruptcy activates the reorganisation plan procedure. Failure to complete successfully the reorganisation plan stage leads to the formation of the creditor group, which involves the liquidation of either the companys business as a whole, or assets (or groups of assets) within the bankruptcy estate, for distribution of the proceeds to the creditors.
What are the tests for insolvency in Greece?
2.2
According to the Code, the event triggering bankruptcy is the cessation of payments to creditors in general. Although a default situation towards several creditors is generally required to justify bankruptcy, failure to make payment to a single creditor who has a material claim has occasionally been held by courts to constitute sufficient grounds.
Issuance of a relevant decision of the bankruptcy court that declares bankruptcy is a formal requirement. Declaration of bankruptcy automatically initiates the reorganisation plan stage as described below. If the reorganisation plan process fails to complete, subsequent invalidation or failure to apply the reorganisation plan entails the stage of the formation of the group of creditors.
(i)
Bankruptcy: The bankruptcy decision is published on the Bulletin of Judicial Publications of the Jurists Fund (the Bulletin) and is registered in the public books kept at the Land Registries where the company owns real property, as well as in the General Commercial Register. Summaries of notices of creditor meetings issued by the bankruptcy judge are published on the Bulletin.
(ii)
Reorganisation: The decision of the bankruptcy court which reviews the reorganisation plan and invites a special meeting of creditors to have such plan approved, is notified by the bankruptcy court secretary to the creditors, the bankruptcy officer and the company. The decision of the bankruptcy court which approves or rejects the reorganisation plan is published on the Bulletin.
(i)
Declaration of bankruptcy:
If a company (or, more generally, a debtor qualifying as a merchant) stops its payments to its creditors generally, the company must (and its creditors may) apply for the issuance of the

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(iii) Creditor Group: If the companys business is to be sold as a whole, the bankruptcy officer publishes a public tender on the Bulletin and in the newspapers specified in Article 138 2 of the Code.
4.3
Greece
What is the effect of each procedure on employees?
Declaration of the bankruptcy does not automatically terminate employment contracts, but constitutes grounds for valid termination thereof by the insolvency officer. Successful implementation of a reorganisation plan permits continued employment of employees specified in the plan. If the creditor group is formed, employees claims are treated preferentially (see below question 5.2).
Greece
If companys assets are liquidated, the public tender is published in the Bulletin and, at the bankruptcys officer discretion, in newspapers. A notification of the completion of the allocation list of the liquidation proceeds is published on the Bulletin and in the newspapers specified in Article 153 2 of the Code.
3 Creditors
In principle, declaration of bankruptcy does not affect existing reciprocal contracts or permanent contracts, which remain in force, unless otherwise specified by their terms. The insolvency officer may choose to perform obligations of the company arising from reciprocal contracts. In such cases, the counterparty of the company is considered as a creditor of the bankruptcy procedure and is treated preferentially in any distribution of proceeds. If the bankruptcy officer does not exercise his above right, despite a relevant invitation of the counterparty, the latter is entitled to withdraw from the contract.
Upon bankruptcy being declared, unsecured creditors may no longer exercise any remedies individually, but need to follow the collective satisfaction procedures applicable to bankruptcy and prescribed by the Code (see below question 5.1).
Secured creditors may initiate or continue individual enforcement measures (subject to the exceptions provided in Article 26 3 and 5 of the Code), but only in respect of their security interests on particular encumbered assets (see also below question 5.1).
5 Claims
Set off is permitted, if the conditions specified in the GCC had been met before the declaration of the bankruptcy. Rules on set-off do not affect rules regarding the netting of claims under eligible derivatives contracts and financial collateral arrangements.
The bankruptcy officer invites the identifiable creditors (on the basis of a list provided by the company) to notify in writing their claims to the secretary of the bankruptcy court. Such notification must be effected within a 3-month period, starting from the publication in the Bulletin of the decision declaring the bankruptcy. The bankruptcy officer verifies the claims before the bankruptcy judge, who draws up a list affirming their existence and quantum. Objections to the procedure of verification, as well as requests to have additional claims verified may be submitted to the bankruptcy court.

Distribution of proceeds (after liquidation within the creditor group stage) is made in the following sequence: (i) First, towards bankruptcy costs, court-approved fees of the bankruptcy officer and claims arising out of the bankruptcy procedure, i.e. incurred by the bankruptcy officer. Then, to generally preferred claims, i.e. those categories of claims that have a privilege under Article 154 of the Code, in the following order: (a) (b) claims in respect of financing extended to the company to permit it to continue its activity; claims of employees and salaried legal counsels of the company for their salaries of the last two years before the bankruptcy declaration and for their severance payments; claims of non-salaried legal counsels for services rendered during the last six months before the bankruptcy declaration; claims of the State for taxes of the year of liquidation
Bankruptcy does not per se affect the designation of an entitys management, but deprives it of its powers to manage and dispose the bankruptcy estate, with the exception provided for in Article 18.1 of the Code. Such power is conferred upon the bankruptcy officer, who is a lawyer appointed by the bankruptcy court. A judge of such court the (bankruptcy judge) is also appointed to supervise the insolvency process.
(ii)
Financing of the procedure is funded either out of the proceeds of the insolvency estate or financing raised on the market. Creditors who finance the conciliation procedure or the reorganisation plan are treated preferentially for moneys advanced to the process.
(c)
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and the immediately preceding year, provided they were determined by reference to the income generated by or the nature of the liquidated assets; and (e) claims of social security organisations for contributions (excluding surcharges) of the last two years before the bankruptcy declaration. debtor remain effective.
Greece
Upon satisfaction in full of all claims of the debtor, the debtor is reinstated, i.e. the consequences of the declaration of bankruptcy are lifted.
7.1
(iv)
If claims of generally preferred creditors and specially preferred creditors exist in respect of an asset (i.e. the asset has been encumbered), proceeds distributed in respect of such asset are allocated to each of the two categories of creditors in the manner specified in Article 977 of the Greek Code of Civil Procedure (GCCP). Any balance remaining is distributed to unsecured creditors, including preferred creditors, to the extent of their balances remaining unpaid following the application of the above. In each of the following cases, distribution of proceeds within each of the generally preferred and specially preferred categories of creditors is made to the various sub-groups within such categories in the order specified in Articles 154 and 155 of the Code and pro rata within each such sub-group.
Is it common to achieve a restructuring outside a formal procedure in Greece? In what circumstances might this be possible?
A restructuring outside a formal procedure is not common in Greece, as the reorganisation plan process assumes prior insolvency of the debtor. The Code foresees a procedure of conciliation, which aims at preventing the declaration of bankruptcy; such procedure is available to companies which have not yet devolved to a cessation of payments. As part of the conciliation process, a mediator is appointed by the bankruptcy court, to facilitate the conclusion of an agreement between the company and its creditors. If such agreement is achieved, the bankruptcy court is called to ratify it within a period of 10 days. The court may refuse to ratify such an agreement on grounds of prior cessation of payments, lack of assurances of business continuation, material prejudice to the interests of non participating creditors or the agreement involving a term that exceeds 2 years as of the date of proposed ratification. Ratification renders the agreement enforceable and suspends any other process or remedy relating to individual satisfaction of a creditor. Claims of creditors who do not participate in the agreement are suspended for the term of the agreement, but remain otherwise unaffected. The conciliation agreement terminates upon the expiry of its term, upon the advent of bankruptcy or upon being invalidated by the bankruptcy court.
(v)
(vi)
(vii) Lastly, to subordinated creditors in a bankruptcy of a credit institution or insurance company. Rules of distribution constitute strict law and cannot be modified contractually.
(i)
A transfer of the company as a whole as well as transactions dependent on or incidental to such transfer are exempt from tax other than VAT. Transfers of assets of the company are validly effected without the requirement for the bankruptcy officer to procure tax and social security certificates of good standing.
(ii)

In the conciliation procedure (if companys agreement with its creditors is ratified by the court), claims of dissenting creditors are suspended for the term of the agreement, but remain otherwise unaffected and not subject to the agreement so ratified. A reorganisation plan approved by a qualifying majority of creditors is binding upon all creditors. A decision as to whether to continue the companys activity for a particular period of time, or to lease or sell its business as a whole, or to liquidate its assets (Article 84 of the Code) requires the consent of the majority of creditors, representing the majority of claims, but binds all creditors.
The Code indicates a clear preference to reorganisation aspirations rather than liquidation and distribution of assets, as evidenced by the central role of the reorganisation plan and the flexible ways in which it may be tailored.
If a reorganisation plan is approved by creditors and ratified by the competent court, the bankruptcy procedure ends and the debtor resumes management of its business. If all assets of the debtor are liquidated, the bankruptcy procedure ends, but the consequences of declaration of the bankruptcy on the
A sale of the business as a whole, within the framework of a bankruptcy procedure, may be decided by the meeting of creditors within 20 days from the verification of the claims and must be approved by the bankruptcy judge. The bankruptcy court decides about the value of the debtors estate, the price of the first offer as well as the terms of the sale upon detailed proposition of the bankruptcy officer. The latter, within 10 days from the publication of the court decision, proclaims public tender under specific requirements of publicity and draws up a list of evaluation of the offers proposing the successful bidder. Approval or refusal of the offers is submitted by the bankruptcy judge to the bankruptcy court, which ratifies the award and approves the contract of transfer. The relevant notarial agreement includes transfer of any relevant

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(iii)
Then, to specially preferred (i.e. secured) creditors (including interest accrued during the last two years), to the extent that the liquidation proceeds originate from the specific assets on which their respective security interest was registered and are within the registered secured amount.

licence of administrative nature. Potential partnership of the State is also envisaged. Failure to award results in the repetition of the public proclamation procedure within 15 days. (i) (ii)
Greece
The foreign decision applies the substantial law which is applicable according to Greek private international law. The foreign decision is issued by a court establishing jurisdiction according to the laws of the State of which the substantial law has been applied (lex causae). The content of the judgment is not contrary to accepted principles of morality and public order.
8 International
(iii)
Greece
8.1
What would be the approach in Greece to recognising a procedure started in another jurisdiction?
Recognition of an insolvency procedure completed abroad is subjected to the conditions generally required by the GCCP in respect of the recognition by Greek Courts of decisions of foreign voluntary jurisdiction:
Concerning the scope of application of EC legislation, the issue is treated by Regulation 1346/2000/EC which establishes a set of conflict rules giving priority in principal to the application of the lex fori concursus. To the extent that the Regulation would apply, primary proceedings commenced in another European Union jurisdiction in respect of an entity that has its centre of main interests in that jurisdiction, would be directly recognised.
Dr. Constantine Alexiou

Alexiou & Kosmopoulos Law Firm 23A, Vas. Sofias Ave. Athens 10674 Greece
Sotiris Foteas
Alexiou & Kosmopoulos Law Firm 23A, Vas. Sofias Ave. Athens 10674 Greece
+30 210 339 2600 +30 210 362 8320 c.alexiou@aklawfirm.gr www.aklawfirm.gr
+30 210 339 2600 +30 210 362 8320 s.foteas@aklawfirm.gr www.aklawfirm.gr
Dr. Constantine Alexiou is the managing and founding partner of Alexiou & Kosmopoulos Law Firm. He holds a PhD from the Faculty of Law of the University of Freiburg, Germany. He specialises in insolvency, recovery and reconstruction, public works and litigation. He has advised major domestic clients on a wide range of insolvencies in recent years. He is fluent in English, French and German.
Sotiris Foteas joined the firm in 2006. He holds a Postgraduate Diploma (LLM) in Civil Law from the Athens University Law School and a DEA in European Union Law from the Strasbourg III Law School. His legal expertise mainly focuses on European law, insolvency and civil law. He is fluent in English and French.
ALEXIOU & KOSMOPOULOS LAW FIRM builds on the foundation of over a century and four consecutive generations of practitioners to provide modern full-service capabilities to international and domestic clients across diverse industries. The Firm has earnt prominence in Greece, through its consistent quality legal advisory and consultancy and is respected for its efficiency. The Firms expansion in recent years has permitted a growing circle of loyal clients to benefit from integrated services for their full range of activities. In 2007, the Firm enhanced its capabilities, by adding a strong banking & finance practice and strengthening its M&A, commercial and IT practices. A team of select professionals in a variety of fields, with solid experience and business awareness, work seamlessly to realise the firms vision of excellence in todays increasingly complex business environment.
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Chapter 18
Guernsey
Ozannes
Jeremy Wessels
Jeremy Le Tissier

1.1 How does a creditor take security over assets in Guernsey?
1.2
There is a distinction between immovable assets (real property) and movable assets (all other property, tangible and intangible). A charge can be taken over real property by an agreement of the parties entered into before the Royal Court, which is then subsequently registered on the property title. It is also possible for a Claimant to register proceedings against real property, with the leave of the Court, in order that security is obtained for the enforcement of any judgment. There is a distinction between movable assets depending on whether they are tangible or intangible. For tangible movables the following are recognised: pledges; liens; a landlords right to priority for unpaid rent secured by movable property on the demised premises (tacite hypothque); mortagages over ships; and reservation of title clauses. For intangible movables the following are recognised: A security interest may be created, under the Security Interests (Guernsey) Law, 1993, in any intangible movable property (including the contents of a bank account) other than a lease. A security interest in securities and in policies of life insurance can be created when the certificates of title or policies of assurance are held by the secured party pursuant to a security agreement. A security interest in a bank account can be created when a bank holds and takes control of a customers account pursuant to a security agreement. A security interest over all other intangible movables (except a lease) can be created where the collateral is assigned to the secured party pursuant to a security agreement, subject to the requirement to give notice to the person from whom the asset would be claimed if not subject to security. Set-off agreements and assignments with provisos for reassignment are recognised under the Law of Property (Miscellaneous Provisions) (Guernsey) Law, 1979. Foreign security over movables sited outside of Guernsey will be recognised even though the form of security is not recognised under Guernsey law: see s10 Security Interests (Guernsey) Law, 1993.
Where a company has granted a preference to any person six months prior to a resolution being passed to wind the company up or six months prior to an application for the compulsory winding up of the company the liquidator may, in certain circumstances, apply to the Royal Court for an order placing the company in the position had the preference not been granted. Where the person who received the preference is connected to the Company the period is extended to two years from the relevant date. A transaction defrauding creditors can be challenged within six years, subject to certain rules of limitation. Only a liquidator may seek to set aside a preference whereas the creditors may challenge a transaction intended to defraud them.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Guernsey?
Where a director has permitted a company to trade wrongfully (when he ought to have concluded that there was no prospect of the company avoiding going into insolvent liquidation), the Court may make the director personally liable to make such contribution to the companys assets as it thinks proper. Where any business appears to have been carried on with an intent to defraud the creditors of a company, the Court may require any persons who were knowingly parties to the carrying on of such business to make such contributions to the companys assets as it thinks proper. Where the Court considers a person is unfit to be concerned in the management of a company, it may make an order disqualifying him from being a director or other officer of any company or from participating in the management, formation or promotion of any company for a period of up to 15 years. In such circumstances it is also possible that a director could also be found to have committed a criminal offence for certain actions, such as obtaining property or services by deception.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Guernsey?
A Guernsey company can be put into voluntary liquidation, compulsory liquidation or administration.

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Voluntary liquidation will usually commence by the passing of a special resolution to wind the company up. A voluntary winding up commences upon the passing of the resolution for voluntary winding up.
Guernsey
been placed into liquidation. It will also be good practice for the liquidator to contact all known creditors. Where the company has not been wound up within one year of the commencement of the winding up, the liquidator must convene a general meeting of the company. Where the companys affairs are fully wound up, the liquidator must convene a general meeting of the company. Where a company has been placed in compulsory liquidation and the liquidator has realised the companys assets, the liquidator shall apply for the appointment of a commissioner of the court to examine his accounts and distribute the funds derived from the companys assets. The Commissioner must arrange a creditors meeting in order to examine and verify the financial statements and the creditors claims and preferences. Where a company has been placed into administration, every invoice, letter and other document issued by the company must also state that the company is in administration and the name of the administrator. The Registrar of Companies also publicises the fact that a company has been placed into administration.
Guernsey
Compulsory liquidation can only be ordered by the Court. It will occur most frequently on an application by a creditor(s) of the company. A Guernsey company may be placed into administration by an order of the Royal Court. An administration order would be initiated by an application to the Royal Court by a person with the requisite standing to do so, such as creditors or shareholders.
2.2 What are the tests for insolvency in Guernsey?
Insolvency will occur where a company is unable to pay its debts. A company will be deemed as unable to pay its debts where a statutory demand for over 750 has been served upon the company and that sum remains outstanding for 21 days after the demand has been made, or if the Court is satisfied that the company is otherwise unable to pay its debts. A company is also deemed to be unable to pay its debts where it fails to satisfy the solvency test. The solvency test is detailed and is set out at length in s527 The Companies (Guernsey) Law, 2008 as amended. However, in general, a company will fail to pass the solvency test where (without prejudice to the above provisions): (i) (ii) the value of the companys liabilities is greater than the companys assets or is unable to pay its debts; or in the case of any company designated as a supervised company under Guernseys regulatory laws, that company is unable to satisfy a requirement as to solvency imposed by those regulatory laws.
3 Creditors
Yes, although in a liquidation, payment to unsecured creditors will only occur once all claims have been proved and the final dividend declared. In an administration there is a statutory moratorium preventing creditors pursuing their claims subject to the leave of the Court.
2.3
Yes, secured creditors can enforce their security in each procedure.

There are no required grounds for a company to be placed into voluntary liquidation. A creditor may apply to the Royal Court for a company to be compulsorily wound up where, for example, the company is unable to pay its debts and certain other grounds. An administration order may be granted either where the Court is satisfied that the Company is or is likely to become unable to pay its debts, or where the Court considers that the making of such an order may assist in the survival of the Company as a going concern and/or may achieve a more advantageous realisation of the Companys assets than would be effected on a winding up.
Yes, creditors can set off sums owed by them to the company against amounts owed by the company to them in each procedure.

For voluntary liquidation see question 2.1. For compulsory liquidation, an application, supported by affidavit, will need to be made to the Royal Court seeking an order that the Company be wound up and setting out the reason(s) why the Company should be wound up. A similar process must be followed when making an application to place a company into administration.
As soon as a liquidator is appointed he controls the company. Any person who purports to exercise any powers of a director of the company after the liquidator has been appointed commits a criminal offence except where such power has been sanctioned. In an administration, the administrator controls the business. Any transfer of shares after the resolution to wind a company up voluntarily is void, save where sanctioned by the liquidator.
The Registrar of Companies publicises the fact that a company has
A liquidator or administrators remuneration is to be paid from the companys assets in preference to all other claims.
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Guernsey
Neither liquidation nor administration has any statutory effect upon contracts of employment. A liquidator will, most likely, terminate employment contracts as part of the winding up of the company. Payments due to employees may attract priority.
The company is dissolved at the end of a liquidation. At the end of an administration the Company may either be released from any procedure or placed into liquidation.

7.1 Is it common to achieve a restructuring outside a formal procedure in Guernsey? In what circumstances might this be possible?
Commencement of the winding up or administration of a company does not automatically terminate contracts.
This may be possible particularly where there is a certain class of creditors who are all able to agree on the proposals without the assistance of a formal procedure.
5 Claims
Creditors claim amounts owed to them by notification of the claim to the liquidator or administrator.
Yes, within an administration where a scheme of arrangement may be used.

Yes, subject to obtaining the approval of the Court. Certain claims will attract priority. Other than secured creditors and claims which have been set off, the claim with highest priority is the liquidators remuneration followed by other claims with priority such as rent due to a landlord, salaries, unpaid income tax and unpaid social security contributions. Claims without priority rank pari-passu.
8 International
8.1 What would be the approach in Guernsey to recognising a procedure started in another jurisdiction?
A company will continue to incur tax liability as it would have had it not been wound up.
The Royal Court is likely to agree to suitable cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries on the basis of comity.

The Court can approve a scheme of arrangement giving effect to a compromise or arrangement between the creditors, or a class of them, and the Company, subject to obtaining the approval of 75% in value of the creditors.

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Guernsey
Ozannes
Guernsey
Jeremy Wessels
Ozannes 1 Le Marchant Street St Peter Port Guernsey, GY1 4HP
Jeremy Le Tissier
Ozannes 1 Le Marchant Street St Peter Port Guernsey, GY1 4HP
Guernsey
+44 1481 731439 +44 1481 710487 jeremy.wessels@ozannes.com www.ozannes.com
+44 1481 739322 +44 1481 710487 jeremy.letissier@ozannes.com www.ozannes.com
Jeremy specialises in commercial litigation generally, particularly cases involving contentious trust disputes and financial services businesses, along with asset tracing and freezing orders. He also advises on insolvency related matters and money laundering issues. He acted for Westminster City Council in relation to the proceedings against Dame Shirley Porter and was also involved in the Flightlease Group liquidation.
Jeremy practices in matters of commercial litigation and specialises in issues involving fraud, money laundering, regulatory and associated matters. Much of his work involves multi-jurisdictional disputes. His clients are generally banks and fiduciaries. Jeremy was rated as an associate to watch in the 2008 edition of Chambers and Partners.
Ozannes is the only Guernsey law firm rated in the top tier of all categories by the Legal 500. Ozannes Litigation is widely regarded as offering the best litigation service on the Island. It has been involved in all the leading litigation cases in recent years, and stands alone at the top of this field of expertise. The team is recognised as having great strength and depth and is well resourced with 11 advocates, some of which are amongst the most senior and experienced in the Island. Ozannes is one of the only firms in Guernsey with any experience in complex insolvency matters, both contentious and non-contentious. In particular, the firm was instructed on behalf of the liquidators of the Flightlease group, in the last major contentious insolvency proceedings in the island.
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Chapter 19
Hungary
Ferenczy / Gide Loyrette Nouel
Dr. Balzs Jzsef Ferenczy
Dr. Tibor Nagy

1.1 How does a creditor take security over assets in Hungary?
undertake any commitment for the encumbrance of any part of the obligors assets, or if the stipulated consideration constitutes unreasonable and extensive benefits to a third party. Undue services. The liquidator, on behalf of the obligor, is also entitled to reclaim (within a certain limited time period), any service the obligor has provided within 60 days prior to the date of petition for liquidation, if it had the effect of giving a preference to any of the creditors and if such service is not usually provided under normal circumstances.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Hungary?
In Hungary common types of security include mortgages over moveable assets (fixed charge) and immoveable assets (real estate mortgages), pledge, floating charge, pledge over rights and receivables, and cash and security deposit. Bank lenders also use security assignment. In case of a real estate mortgage, floating charge, fixed charge and pledge over certain rights (e.g.: pledge over quotas of a limited liability company) the security needs to be registered in the corresponding public record (i.e.: Land Registry, Chattel Register of the Notaries, or the Firm Registry) for valid establishment. There are various quasi security interests, such as bankers rights of set off, account debit order, and right of purchase. A right of purchase is usually registered in the Land Registry. This is not required for the valid establishment of this collateral. Otherwise securities are established in written (and in certain cases, notarised) contracts.
Solvent Company. Whilst the company is solvent, board members (in case of a company limited by shares), or a managing director (in case of limited liability companies, together: executive officers) shall act with a professional (higher than standard) liability basis and will - provided the law does not set otherwise - serve at their best the overall commercial interests of the company. Also, a company must, in the normal course of business, benefit from the underlying transaction. Constitutive documents may limit, or divide the right of representation among executive officers, however, these limitations shall not be valid vis--vis third parties. (Act no IV of 2006 on Economic Companies (Companies Act)). Financial Difficulties. When circumstances threaten the company with insolvency, executive officers shall - pursuant to the Companies Act - perform their duties with primary regard to the interests of the creditors (instead of the company). As a result, the Act on Liquidation entitles creditors to file a claim against executive officers (taking this office for a period of 3 years prior to the Liquidation) in order to establish their liability for not observing the creditors interest during the financial difficulties. Civil law liability. Executive officers may be liable for damages caused to the company as a result of breaching the law, the members resolutions, or their tasks deriving from executive duties (specified by law), under the damage liability rules of the Hungarian Civil Code. Criminal law liability. An executive officer commits criminal bankruptcy, if, actually or fictitiously, he diminishes the companys assets by way of, for example, concealing, disguising, damaging, destroying assets, or by making unusable any property that may be used to cover the companys debts. Criminal bankruptcy is a felony, and is punishable (in the base case scenario) by imprisonment of up to 5 years. Criminal law and civil law liability can be asserted against executive officers simultaneously.
Voidable preference. Based on Act no. XLIX of 1991 on bankruptcy and liquidation (Act on Liquidation or the Act), upon the insolvency of an obligor, any creditor or the liquidator may, within 90, but a maximum of 365, days from the date of liquidation, challenge the validity of: (i) contracts or the obligors other commitments concluded within 5 years prior to the date of the liquidation petition, if such transactions were intended to conceal the debtors assets or to defraud any creditors, and the other party had or should have had knowledge of such intent; and/or contracts or other commitments of the obligor concluded within 90 days prior to the date of liquidation petition or thereafter, if intended to grant preference and privileges to any creditors, such as the amendment of an existing contract to the benefit of a creditor, or to provide financial collateral to a creditor that does not have any.
(ii)
Transaction at an Undervalue. Also, based on the Act, any creditor or the liquidator may challenge the validity of contracts (or other commitments) concluded in the 2-year period preceding the date when the court received the liquidation petition, if it is intended to transfer the obligors assets without any compensation or to

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2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Hungary?
Hungary
Hungary
The main types of formal procedures in Hungary are bankruptcy and liquidation procedures. In bankruptcy the debtor asks for a moratorium (lasting from 60 to 120 days) in order to be able to reorganise its obligations towards the creditors. Under moratorium, the debtor has composition discussions in order to reorganise its debts and, if agreed by a certain qualified majority of creditors (see the definition in question 5.1) and approved by the administrator, enters into a composition agreement with creditors, setting forth the terms and conditions of the debt reorganisation (Bankruptcy). The purpose of liquidation is to satisfy the companys creditors by applying a formalised process to alienate the companys assets, and thereafter, terminate the company from the company register without legal successor (Liquidation).
2.2 What are the tests for insolvency in Hungary?
If Liquidation is filed by a creditor, the petition shall describe the debts, their due date and a summary of reasons why the debtor is deemed insolvent. The documents in proof of the allegations, and a copy of the written notice sent to the debtor shall also be attached. The Court investigates the debtors insolvency based on the evidence. If it finds the debtor insolvent, it orders the Liquidation by decree, within 60 days of receipt of the petition. The starting date of the liquidation shall be the date when the decree is published.
The Court shall declare the company insolvent: (i) upon its failure to settle or contest its previously undisputed and acknowledged contractual debt within 15 days of the due date, and failure to satisfy such debt upon receipt of the creditors written payment notice; upon its failure to settle its debt within the deadline specified in an enforceable Court decision; if the enforcement procedure against it was unsuccessful; or if it did not fulfil its payment obligation as stipulated in the settlement agreement entered into with its creditors as a result of a Bankruptcy procedure.
In Bankruptcy, the debtor shall hold a meeting within 30 days from the procedures starting date in order for the creditors to approve the moratorium. Known creditors shall be invited directly, meanwhile unknown creditors shall be invited through public announcement, published in two daily newspapers of national circulation (within 3 days from the starting date). The debtor shall notify the Court of the outcome of the meeting within 3 days. The Court shall decide whether to terminate the proceeding, or to confirm the moratorium. Its decision will be published in the Company Gazette within 15 days. The Court shall appoint an administrator in the decree for the period of the moratorium. During the moratorium the debtor shall draw up a programme to restore its solvency and will arrange a meeting for the reorganisation negotiation. The administrator and all known creditors shall be invited at least 15 days prior to the meeting. The venue and the date shall be published in two daily papers with national circulation at least 15 days in advance. Additional negotiations may be held during the moratorium. The moratorium may be extended by not more than 60 days at the request of the debtor and the qualified majority of creditors. In Liquidation, if proceedings were requested by a creditor, the Court shall notify the debtor forthwith by sending a copy of the petition. The debtor shall, within 8 days of receipt, declare whether it acknowledges its insolvency. If accepted, the company shall declare if any respite for the settlement of debts is requested. Failure to respond within the deadline shall result in the insolvency being presumed. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt. If the Court finds the debtor insolvent, it shall, in the decree, appoint a liquidator (who will, consequently, appoint its receiver). The liquidation decree shall be published in the Company Gazette. The Court shall notify, inter alia, the competent tax and customs authorities, the health insurance administration agency, the pension insurance administration agency and all financial institutions where the debtor has bank accounts, of the insolvency.
(ii) (iii) (iv)
2.3
Bankruptcy can be filed with the Court only by the company, thus, by nature, it is used as the last defense before Liquidation. The purpose of it is to reorganise the debts under the protection of the moratorium. Bankruptcy procedure, when failed, is almost certainly (though not necessarily) followed by Liquidation. A claim for Liquidation may be filed with the Court by the debtor, the creditors, the administrator, or the Criminal Court. It is usually done when the company is insolvent, and no petition for Bankruptcy had been filed a priori with the Court (No parallel proceedings principle).
3 Creditors
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No filing of a Bankruptcy claim shall be valid without the preliminary consent of the share/quota-holders of the debtor. The filing shall also be communicated to the employees, the trade unions and the workers council. A document evidencing these prior approvals, a balance sheet not older than 3 months to date and the tax number, as well as the list of creditors, the amounts of debts and their due dates, plus the document in proof of payment of the publication fee shall be attached to the petition. The starting date of the Bankruptcy shall be the date when the claim is filed with the Court (i.e.: no formal decision on the launching of the process is brought by the Court).
There is no difference between secured and unsecured creditors in a Bankruptcy. All creditors are entitled to take part in the composition discussions in order to reach settlement with the debtor to reorganise the debts. In Liquidation secured and unsecured creditors shall also take part in the procedure by announcing their claims to the liquidator within a set period of time. Nevertheless secured creditors (by pledge, mortgage and/or security deposit) shall fall in a better position in
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ranking than those whose claim is not secured by any of the above security interests (see questions 5.1 and 5.2 for more details).
Hungary
In the Liquidation decree the Court shall appoint a liquidator (who appoints a receiver). From this date on, only the liquidator shall be authorised to dispose of the debtors assets. It may also enter into contracts with third parties in case of services/works, which requires particular knowledge or expertise. The rights of the debtors share/quote-holders shall cease to exist on the Liquidations starting date. The executive officer shall collaborate with the liquidator, the receiver and the Court during the process and will prepare the closing inventory, the annual report, and other documents required by law, etc. The debtors name shall be appended by the words Under Liquidation (Felszmols Alatt) or U.L. (F.A.).
Save for statutory duties and payments for the State and various authorities, no enforcement procedures can be started against the debtor (by any of its creditors) during the Bankruptcy procedure. In Liquidation, ongoing foreclosure procedures shall be terminated and seized assets (if any) shall be handed over to the liquidator. Following the starting date, claims against the debtor may only be enforced in the framework of the Liquidation procedure itself. Notwithstanding, litigations and non-litigious procedures commenced prior to the starting date of the Liquidation shall be continued before the Court. Subject to one exemption (see question 5.2 (A)(a)), no enforcement of security can be made in either proceeding by the secured creditors themselves. Instead, subject to the type of the specific securities, they might obtain preferential satisfaction from the proceeds of the sale of the respective assets even before the closing of the Liquidation, or have the benefit of priority ranking at the final sharing from the liquidated assets.
The costs and fees associated with the Bankruptcy, including the debt reorganisation negotiations, as well as the fees and the justified expenses of the administrator shall be paid by the debtor. These fees shall be one per cent of the book value of the assets shown in the simplified balance sheet, filed to the Court with the bankruptcy petition. The debtor may seek also for additional funds for financing the above from its bankers. The terms of such funding shall be provided for in the composition agreement. In Liquidation, the liquidators fees shall be paid by the debtor. The liquidators fee (in the base case scenario) shall be 5 per cent of the total amount of the proceeds from the assets sold in the course of liquidation, and the proceeds from claims received, subject to the minimum HUF 100,000 (approximately EUR 333), VAT excluded.
In Bankruptcy, creditors are free to set-off their claims against the debtor in the framework of the composition agreement. In Liquidation only those claims can be set-off, which have been registered by the liquidator as acknowledged, and have not been assigned subsequent to the starting date of the Liquidation, or, if the claim has occurred at a later date, subsequent to its occurrence. Also a creditor - in a court case filed by the debtor - may set-off its claim existing on the starting date of the Liquidation against the debtor, provided that the beneficiary thereof was the same creditor on the starting date of the process. The creditor may not set-off its claims against the debtor if it exercises its right of purchase or repurchase right through its unilateral action following the starting date of the Liquidation. If the debtor provides financial collateral (caution) before the starting, the creditor shall be able to realise it within 3 months from the publication of the Liquidation, irrespective of whether the Liquidation has been started or not.
The executive officer or the Liquidator shall inform the debtors employees and the trade unions (or the competent workers councils, or employee representatives) on the filing of the Bankruptcy or the opening of the Liquidation procedure. The prior consent of the employee representation organs is not required but these organs must be informed on any measures of the employer affecting a large number of employees. It is recommended, therefore, to inform these organs 15 days before filing the bankruptcy petition or the starting date of the Liquidation. In Liquidation, the liquidator must register the claims that become due at the time of completing the liquidation proceedings. In this register the employees average wages, the severance payments, and other payments payable to employees upon the dissolution of the debtor in connection with their employment relationships must be indicated separately among other creditors claims. This must be done even if no notice for such claims had been filed. The liquidator must settle these claims according to the general rules on the order of satisfaction of the Act. In Liquidation the liquidator shall be entitled to exercise the employers rights towards the employees and he/she will be responsible for fulfilling the debtors duties towards employees and employee representation organs. Otherwise, during both procedures, the rules of the Hungarian Labour Code, especially the rules relating to collective redundancies, are applicable.

In a Bankruptcy the company shall be represented by its executive officers. The rights of the share/quota-holders, apart from their duty to approve the bankruptcy petition prior to its filing, are not impacted. The Court shall, however, appoint an administrator for the period of the Bankruptcy. The actions of the executives cannot violate the powers of the administrator. The administrators primary duty is to protect the creditors interests. The administrator shall participate in the settlement negotiations, and it must approve the composition agreement.
The main impact of Bankruptcy on the existing contracts is the payment moratorium. During the moratorium, legal consequences associated with late (or non-) performance of money payments shall

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not apply; the enforcement of money claims shall be suspended; creditors claims, unless otherwise prescribed in the agreement, shall earn interest; and the debtor (save for certain exceptions) cannot effect any payment for claims existing on the starting date of the bankruptcy proceedings. During Bankruptcy the company may terminate contracts under their general conditions, or, if the contract is involved in the composition agreement, with mutual consent of the concerned parties. In Liquidation, all debts of the debtor shall become ipso iure, due and payable on the starting date. Also the liquidator is entitled to terminate, with immediate effect (save for certain agreements), any contracts concluded by the debtor; or if none of the parties rendered any services, may rescind from them. The claim due to the other party as a result of the termination/rescission can be enforced against the debtor by notifying the liquidator within 40 days from the date of termination/rescission was notified to the concerned party. (c)
Hungary
beneficiaries of floating charges will be entitled to obtain 50% of sale proceeds (after deducting certain fees and costs) arising from the sale of any assets (from the charged pool of assets). liquidation expenses; claims (remaining after satisfaction under (A) (c) above) secured by a floating charge prior to the starting date; alimony and life-annuity payments, compensation benefits, income supplement to miners, certain lifetime monetary aids etc.; exception for claims based on bonds, other claims of private individuals not originating from economic activities, claims of small and micro companies as well as small-scale agricultural producers; social insurance and overdue private pension fund membership dues, taxes and public debts, as well as water and sewage utility charges; other liabilities; irrespective of the time and grounds of occurrence, default interests and late charges, as well as surcharges and penalty and similar debts; and finally claims held by any executive officer or executive employee of the company.
(B)
Order of (other) claims: (a) (b)
Hungary
(c)
(d)
(e)
5 Claims
(f) (g)
(h) In Bankruptcy the debtor shall invite known creditors to the composition discussions. Creditors shall claim the amounts owed to them during these discussions. The composition agreement then finally contains all known claims; its terms cannot be more disadvantageous for the Dissenting Creditors than to the Consenting Creditors (see questions 6.1 and 6.2 for more information). The composition agreement shall be valid if (i) more than half of the creditors, whose claims were due on the starting date, and (ii) more than one-fourth of the creditors with outstanding claims agree to it, provided that the combined claims of these two group of creditors amount to two-thirds of all creditors claims shown in the debtors balance sheet (qualified majority of creditors). In Liquidation both secured and unsecured creditors shall announce their claim to the liquidator within 40 days from the starting date of the procedure (and during the procedure, within 40 days from the maturity date of their actual claim).
These claims shall be satisfied if there are sufficient funds by alienation of the debtors assets/business. Composition/settlement between the debtor and creditors during liquidation is also possible, in which case the creditors are free to agree upon the order (and level) of satisfaction their claims. Creditors not registered in the liquidation procedure cannot enforce their claim against the debtor following such settlement. If, as a result of the settlement, the insolvency is resolved, the Court approves it, and terminates the procedure.
A Bankruptcy or Liquidation does not entail adverse Hungarian tax consequences or significant tax burdens. Corporate Taxation. A company under Liquidation does not fall within the scope of corporate income tax during the procedure. A practical consequence is, for instance, that any depreciation incurred during the procedure is not tax-deductible. Primarily, the corporate income tax base (to be generally subjected to 16% tax) has to be modified (increased or decreased, as applicable) by the difference between the taxation value and the book value of tangible and intangible assets. In addition, the deferral of corporate income tax becomes due in certain cases. Furthermore, if the company continues to exist after Liquidation, (if it was not eventually liquidated), any increase in its equity capital is taxable, while any decrease is tax-deductible. Value Added Tax. In case of sale of tangible assets worth more than HUF 100,000 (approximately EUR 330) by a company under liquidation, the VAT is payable - i.e. is to be self-charged - by the Hungarian taxpayer recipient, thus saving the company from a potential cash-flow exposure. Also moratorium in the Bankruptcy shall not apply to VAT. Procedural Duties. A stamp duty ranging from HUF 20,000 to HUF 50,000 (approximately EUR 60 to EUR 170) is payable for the Bankruptcy or Liquidation procedure, as fees for Courts. Accounting. The period starting the day before the commencement of the Liquidation qualifies as one single business year until the end of the procedure, regardless of its duration, therefore the entire
In Bankruptcy, claims do not have any preferential status vis--vis each other by law. The parties are free to agree on the ranking (and level) of satisfaction their claims, respectively, in the composition agreement. In Liquidation: (A) there are certain special types of securities which entitle the beneficiary thereof to preferential satisfaction during the course of Liquidation (see (A) below); and (B) there is a set order of the claims, which, subject to provisions in (A), needs to be followed by the liquidator when satisfying creditors (see (B) below): (A) Preferential (prior) satisfaction: (a) beneficiaries of (cash or security) deposits may directly enforce their claims (even after the starting date of Liquidation, within 3 months thereafter) against the securities they hold; beneficiaries of mortgages, fixed charges and pledges will be entitled to obtain 100% of sale proceeds (after deducting certain fees and costs) arising from the sale of any such charged assets; and
(b)
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period shall be covered by one sole annual report. Tax Procedures. From the starting date of the Liquidation, the liquidator will exercise the overall taxation rights and obligations of the company, resulting in tax sanctions maybe being imposed on the liquidator for non-compliance with taxation rules. Any historic tax overpayment is credited against the outstanding tax liabilities by the tax authority ex officio. The tax authority qualifies as a creditor of the debtor during the procedure. It is compulsory for the tax authority to carry out a tax audit of the debtor, except if it waives its rights as a creditor. Within 45 days following the starting date of the Liquidation, all applicable tax returns shall be filed with the tax authority. Once the Liquidation has been completed, the closing tax returns shall be submitted the day after the closing accounting report has been prepared. Tax Effects on creditors and shareholders of the debtor. Cancellation of receivables against the company shall be exempt from corporate income tax for creditors; nevertheless the 4% solidarity surtax would still apply. The capital gains accrued by the shareholder as a result of the cancellation of its shares in the debtor would be exempt from corporate income tax, but they will remain subject to the 4% solidarity surtax.
Hungary
Bankruptcy proceedings end by the Court ruling on the official closing thereof, if Consenting Creditors reach an agreement; the agreement is approved by the administrator; and the court regards it to be in accordance with the laws. Bankruptcy proceedings also end if no agreement is reached by a sufficient number of creditors, the agreement is not approved by the administrator, or the Court regards it not to be in accordance with the laws. If Bankruptcy has been started by simultaneous suspension of a Liquidation, the Court shall order then continuance of the suspended Liquidation. In any other cases, any creditor or the debtor itself may submit petition for the liquidation. In Liquidation, upon disposal of all assets and the final distribution of the proceeds thereof to the creditors (and the shareholders, as the case may be), the Court decides on the closing of the Liquidation and also the termination of the debtor without legal successor, upon which the debtor shall be terminated and de-registered from the company register.

7.1 Is it common to achieve a restructuring outside a formal procedure in Hungary? In what circumstances might this be possible?

In general, there is no concept of specifically cramming down creditors not consenting to the reorganisation proposals (Dissenting Creditors) in Bankruptcy, nevertheless cramming down Dissenting Creditors is possible to the extent the Consenting Creditors (Consenting Creditors) are similarly crammed down. If Consenting Creditors represent a qualified majority of creditors, the composition agreement will also bind Dissenting Creditors, provided that the terms of such an agreement are not less favourable for Dissenting than for Consenting Creditors. It is not permitted, therefore, to cram down one group of creditors or any member thereof, against the other group of creditors. In general, there is no concept of cramming down Dissenting Creditors against Consenting Creditors in a Liquidation. If Consenting Creditors represent a certain majority percentage of all creditors and total outstanding credit exposures, the settlement/composition agreement reached by them in the Liquidation will also bind Dissenting Creditors. Majority percentage, by contrast to the qualified majority concept of Bankruptcy, is reached in case if (1) at least one half of the registered creditors in each group of the priority ranking tier vote for the agreement, provided that (2) claims held by such Consenting Creditors represent at least two thirds of the amount of the total claims against the debtor. The composition agreement must be approved by the Court. In addition, the Court shall, by law, decide on the amount payable to Dissenting Creditors for satisfying (a part of) their respective claims. Pursuant to this, Hungarian Courts would probably refuse to approve any composition agreement if the satisfaction of claims of Dissenting Creditors and Consenting Creditors would be unbalanced. Otherwise, in Liquidation, pay-outs are made in accordance with a specific priority ranking set out by the Act. Settlements of claims are to be made group by group, cascading downwards in that priority ranking grid so that creditors in one particular group are satisfied pro rata to their outstanding claims.
There is a tendency in Hungary to agree with creditors outside the formalised procedures (i.e. a work out). When the company shows signs of financial difficulties, the executive officer convenes the management body, the supervisory board and/or the shareholders meeting, in order to discuss the situation and any potential reorganisation plans. Non-formal restructuring can be successful when the companys assets cover the debts, there are not too many, but educated creditors, shareholders are cooperative and there is a willingness on all sides to restate the companys good financial status. Restructuring discussions are often started with bankers in order to reorganise short, medium or long term debts. Once it is successful (or in parallel), other undertakings are renegotiated through individual negotiations with the concerned parties. The non-formalised discussion, however, has its drawbacks: unknown creditors cannot be invited to the discussions, there is no moratorium and during the renegotiations the company shall pay its creditors in due time (unless the individual agreement with the creditor specifies otherwise).
The Act on Liquidation does not support the corporate reorganisation of a debtor once petition for Bankruptcy or Liquidation has been filed. In the non-formalised procedure, however, the debtor can always be reorganised. This may include merging subsidiaries, dropping business/product lines, downsizing employees, as well as selling assets or business sites of the company (always in harmony with the applicable law). The success of these actions, however, is largely dependent on the willingness of all creditors to agree on the various elements and timing of the reorganisation. The Companies Act provides for an out-of-Court reorganisation process when, according to the annual report, the company does not have sufficient equity to cover the statutory registered capital during two consecutive years, and the shareholders fail to provide the missing equity, the company shall decide on its transformation

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into another company form where the registered capital can be satisfied, or, provided the assets are covering the debts, its solvent liquidation.
What would be the approach in Hungary to recognising a procedure started in another jurisdiction?
Hungary
The composition agreement in a Bankruptcy may provide that third parties or creditors shall purchase (entirely or partly) assets as a result of the debt reorganisation. Though the Act does not provide for it expressis verbis this structure, in merit, appears to be similar to the pre-packaged sale concept, known in other jurisdictions. The Act, nevertheless, remains short in explaining how a pre-packaged sale should be implemented. Therefore the elements of a prepackaged sale will have to be negotiated thoroughly between the creditors and the debtors during the composition discussions.
For insolvency proceedings of a company having its centre of main interest within the European Union, EC Regulation no. 1346/2000 on Insolvency Proceedings (EC Regulation) shall apply. Insolvency proceedings opened in an EU Member State under the EC Regulation should be recognised in all Member States, including Hungary, once the ruling on the commencement of the proceedings becomes effective under the laws of the Member State in which the proceedings were commenced, except if recognition of such proceedings would be obviously contrary to Hungarian public order. Other than as expressly provided for in the EC Regulation (for companies in Member States), Hungarian law does not recognise insolvency proceedings against companies registered in Hungary commenced before any foreign court or authority (e.g. those of any non-EU country).
Note
Please note that the Hungarian Parliament is currently discussing a proposal, amending certain provisions of the Act on Liquidation. The amendment is targeted to enter into force in Autumn, 2009.
Dr. Balzs Jzsef Ferenczy

Ferenczy / Gide Loyrette Nouel Rkczi t 42. IX. floor Budapest Hungary, H-1072
Dr. Tibor Nagy

Ferenczy / Gide Loyrette Nouel Rkczi t 42. IX. floor Budapest Hungary, H-1072
+36 1 411 7400 +36 1 411 7440 ferenczy@gide.com www.gide.com
+36 1 411 7400 +36 1 411 7440 nagy@gide.com www.gide.com
Dr. Balzs Jzsef Ferenczy, a local partner in the Budapest office of Gide Loyrette Nouel since 2002, is the head of the Banking & Finance Team. He obtained an MBA in Finance and Management at Budapest Technical University in 2006, accredited by the State University of New York at Buffalo and the Rochester Institute of Technology. His practice concentrates mainly on banking law, capital markets, and investment matters in Hungary. He has extensive experience in corporate and project finance, mergers and acquisitions, PPP structures, debt and debtor reorganisation transactions.
Dr. Tibor Nagy is a senior associate in the Budapest office of Gide Loyrette Nouel and a member of the Banking & Finance team. He has unique experience in providing various legal services in structured finance and corporate banking transactions for major financial institutions and corporate borrowers. He worked as an inhouse legal counsel at ING Bank and ING Barings between 1995 and 1999. He advised a major international telephone company in its international merger and acquisition matters, as well as various Hungarian banks and several other international financiers on their cross border lending and security taking transactions.
Founded in Paris in 1920, Gide Loyrette Nouel is one of the premium international law firms worldwide, with more than 700 lawyers, including 106 partners, drawn from over 30 different nationalities. It is one of the few international law firms to have originated in continental Europe rather than the UK or North America. Operating out of 24 offices, Gide Loyrette Nouel offers some of the most respected specialists in each of the various sectors of national and international finance and business law. The Budapest office of Gide Loyrette Nouel was established in 1993. The legal teams comprise national and international lawyers and legal consultants with years of hands-on experience in Hungary. The Banking and Finance practice within the Budapest Office is ranked as one of the leading providers of legal advice on banking & finance and project finance transactions by the legal guides of Chambers and European Legal 500.
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Chapter 20
India
DSK Legal
Raksha Kothari
Sajit Suvarna

1.1 How does a creditor take security over assets in India?
the goods on which some skill or labour has been employed by him. A lien is therefore similar to a pledge, the only difference being that under a lien, the goods in question are initially deposited with the creditor not for the purposes of security. In other words, at the time of depositing the goods, a debtorcreditor relationship does not exist. (e) Hypothecation: means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes a floating charge and crystallisation into a fixed charge on movable property. Under the Companies Act, 1956 (Act), where the debtor is a company, necessary filings have to be made with the Registrar of Companies (Registrar) within the prescribed time period for recording the creation of such security, failing which the security so created in favour of the creditor shall be void against the liquidator (so appointed where the debtor company is wound up).
As per Indian laws, a creditor can take security over the assets in the following five ways: (a) Mortgage: A mortgage is the transfer of an interest in specific immoveable property in favour of the creditor for the purpose of securing the payment of money advanced or to be advanced by way of a loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. Under the Transfer of Property Act, 1882, there are six types of mortgages namely: (i) (ii) (iii) (iv) (v) (vi) Simple Mortgage; Mortgage by Conditional Sale; Usufructuary Mortgage; English Mortgage; Mortgage by way of deposit of title deeds / Equitable Mortgage; and Anomalous Mortgage.
Generally in India, the most common forms of mortgage are the English Mortgage and Mortgage by way of deposit of title deeds. It is mandatory to register a mortgage deed. However, in case of an Equitable Mortgage where the title deeds are only deposited and no mortgage deed is executed, registration is not compulsory. (b) Charge: Where the immoveable property of one person is by the act of the parties or by operation of law made security for the payment of money to another and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property. A charge does not create an interest in the immovable property. A charge, in contrast to a mortgage, does not involve the transfer of interest in the immovable property, but simply creates an encumbrance thereon. It is mandatory to register a charge. (c) Pledge: The bailment of goods as security for payment of a debt or performance of a promise is called a pledge. The essential ingredient of a pledge is the delivery of goods upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the person delivering them. Lien: Lien is an active right of retainer, which arises by law and not contract, possessed by a person who has custody of
Under the Act, if a company enters into certain types of transactions (as listed below) within specified periods before winding up or during the winding up, the same are susceptible to challenge by the liquidator: (a) Fraudulent Preference: Any contract entered into by a company within six months before the commencement of its winding up, for transferring its property (movable or immovable), delivery of goods, payment, execution or any other act relating to its property, which is made with a view of giving a creditor preference over other creditors shall if the company is wound up be deemed to be invalid. Voluntary Transfer: Any transaction entered into by a company within one year before the commencement of its winding up for transferring its property (movable or immovable) or delivery of goods, not being (i) a contract entered into in the ordinary course of its business or (ii) in favour of a purchaser or encumbrancer in good faith and for valuable consideration shall be void as against the liquidator. Transfers for benefit of all creditors: Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void. The object of this provision is to prevent evasion of the winding up procedure. Floating Charge: A floating charge created by a company may be invalid if it is created within twelve months immediately preceding the commencement of its winding up,
(b)
(c)
(d)
(d)

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2 Formal Procedures
2.1
India
unless it is proved that the same was created when the company was solvent. (e) Disclaimer of onerous property: The liquidator may at any time within twelve months after the commencement of its winding up, or such extended period as may be allowed by the Court, disclaim any property acquired by such company, which is onerous in nature. Avoidance of transfers: In the case of a company under winding up, any transfer of shares in the company or any disposition of property (including actionable claim) or any alteration to the status of the members made after the commencement of the winding up without the sanction of the liquidator shall be void.
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in India?
What are the main types of formal procedures available for companies in financial difficulties in India?
India
(f)
When a company is in financial difficulties, the following formal procedures may be applicable: (a) The board of directors (Board) may file an application before the Board for Industrial and Financial Reconstruction (BIFR) for registering the company as a sick company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) in order to revive and rehabilitate the company. The members or the creditors may draw up a scheme of compromise or arrangement under the provisions of the Act for reorganisation / restructuring / revival of the company. The company or the creditors can also initiate proceedings for the liquidation of the company, wherein the assets of the company are sold and the proceeds appropriated by the liquidator in accordance with the priority of claims, as set out in question 5.2 below.
1.3
(b)
(c) The Act casts several duties and liabilities upon directors, when the company is solvent. Similarly, numerous liabilities are cast upon directors of the company, during the winding up process. Several duties are cast upon directors during the process of winding up in order to assist the liquidator in completing the winding up process of the company, including but not limited to delivering to the liquidator necessary documents in his possession, disclosing all information in respect of the company in his possession, etc. Apart from the above, the following liabilities are cast upon all the officers of the company, which term includes every director, manager, secretary and every person at whose direction the directors are accustomed to act. Moreover, these liabilities are personal in nature. If a director is found guilty of any of the following offences, such director would be disqualified to be appointed as a director. I. Falsification of books: If any officer of the company with an intent to defraud or deceive any person, destroys, mutilates or falsifies any books, papers or securities or makes any false or fraudulent entry in any register, book of accounts or document belonging to the company, such person shall be punishable with imprisonment and a fine. Fraud: If any officer: (i) has by false pretences or by fraud, induced any person to give credit to the company; or (ii) with an intent to defraud creditors of the company, has gifted or transferred a property of the company, such person shall be punishable with imprisonment and fine. Maintenance of Proper Accounts: Where it is proved that proper accounts of a company in winding up have not been maintained throughout a period of two years immediately preceding the commencement of winding up, then every officer of a company liable to maintain the accounts shall be punishable with imprisonment. Fraudulent conduct of business: If during the course of winding up, it appears that any business of the company has been carried on, with an intent to defraud creditors of the company or any other person, then every person / party to such business shall be personally responsible and shall be punishable with imprisonment and / or fine. Misfeasance: If during the course of winding up, it appears that any person (including the promoter or director of a company): (i) has misapplied any money or property of the company; or (ii) is guilty of any misfeasance or breach of trust, shall be compelled by the Court (upon an application filed in that behalf) to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just.
There are two modes of liquidation namely: (i) compulsory winding up; and (ii) voluntary winding up. (d) The secured creditors can also initiate proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) either to sell the secured asset(s) or to take over the management of the company.
What are the tests for insolvency in India?
2.2
The tests for insolvency under various legislations are as under: I. The Act does not use the term Insolvency. The relevant term used by the Act with respect to liquidation is inability to pay its debts. Inability to pay its debts is one of the several grounds for compulsory winding up. A company shall be deemed to be unable to pay its debts: (a) if a creditor, to whom the company is indebted in a sum exceeding Rs.500 (amended as Rs.1,00,000, but the amendment has not yet come into force) has not been paid or secured by the company despite a notice for the same in accordance with the Act; or if execution or other process issued on a decree or order of any Court in favour of a creditor is returned unsatisfied in whole or in part.
II.
(b)
III.
II.
SICA provides that a company (being registered for not less than five years) has at the end of any financial year accumulated losses equal to or exceeding its net worth, shall be eligible to be declared as a sick company. SARFAESI provides that proceedings can be initiated by a secured creditor against a company, when such company has been classified as a non-performing / sub-standard asset by a bank or financial institution under the various guidelines issued in that behalf by the Reserve Bank of India (RBI).
IV.
III.
V.
2.3
I.
Registration as a sick industrial company: Where a company (being registered for not less than five years) has, at the end of any financial year, accumulated losses equal to or exceeding its net worth (as per SICA), such a company can register itself with the BIFR, under the provisions of SICA. Scheme of compromise or arrangement: There is no formal requirement that a company has to satisfy for filing a
II.
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scheme of compromise or arrangement. Whenever a company proposes a compromise or arrangement with its: (i) creditors or any class of them; or (ii) members or any class of them, a scheme to that effect has to be filed with the competent court. III. Compulsory winding up: Amongst the several grounds provided under the Act, under which a company can be wound up, a company can also be wound up if it is unable to pay its debts, as aforesaid. SARFAESI: Where a borrower has defaulted in repayment of a secured debt or any instalment thereof, and its account is classified by the secured creditor as a non-performing asset, then, the secured creditor can initiate necessary proceedings under SARFAESI.
Please describe briefly how the company is placed into each procedure.
India
provisional liquidator/administrator/receiver, who may take custody of the affairs of the company. Upon the Court directing winding up, the official liquidator shall be appointed as the liquidator of the company, who takes necessary steps to liquidate the company by conducting the sale of the companys assets and appropriating the sale proceeds towards the dues in accordance with the priority of claims. Thereafter, the company stands dissolved. B. Members voluntary winding up The process of members voluntary winding up begins with the members passing a special resolution in a shareholders meeting for voluntary winding up of the company. A notice of such resolution shall be published in accordance with the Act. Immediately upon passing such a resolution the company shall cease to carry on its business. However, the corporate state and corporate powers of the company shall continue until it is dissolved. The Board shall deliver to the Registrar a declaration of solvency stating that the company has no debts, or that it will be able to pay its debts in full within such period not exceeding three years from the commencement of the winding up. The company in its shareholders meeting shall appoint a liquidator. The powers of the Board will cease on the date of appointment of the liquidator. The liquidator shall take necessary steps to liquidate the company by conducting the sale of the companys assets and appropriating the sale proceeds of the same towards the dues in accordance with the priority of claims. After the winding up is completed, the liquidator is required to make a report to the Official liquidator who will in turn report to the Court. The Court, if it comes to the conclusion that the winding up has been properly effected, will order that the company stands dissolved. C. Creditors voluntary winding up The company shall convene a meeting of its creditors to pass a resolution for appointing a liquidator for winding up the company based on the statement of the financial position of the companys affairs, as submitted by the Board and such resolution shall be filed with the Registrar. The company shall also hold its shareholders meeting and pass a resolution of creditors voluntary winding up. On the appointment of a liquidator, all the powers of the Board shall cease. As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up, and call a shareholders meeting and creditors meeting. Within one week after the date of the meeting, the liquidator shall send a copy of the account to the Registrar and the Official Liquidator, which shall be registered by the Registrar. The Official Liquidator, on receiving the account shall make a scrutiny of the books and papers of the company and if in its opinion the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest, then, from the date of the submission of the report to the Court, who may order that the company stands dissolved.
IV.
2.4
I.
Registration as a sick industrial company: A company eligible under SICA may be declared a sick company if a reference is filed: (a) (b) by the Board within the prescribed time limit; or by bodies such as the RBI or the Central Government or a public financial institution or a scheduled bank.
Upon receipt of a reference, the BIFR may appoint an operating agency to make an inquiry for determining whether industrial company in question has become a sick industrial company. The operating agency shall formulate a scheme to revive/restructure the company and publish the same for inviting objections from the creditors, members, employees, etc. After considering the objections and suggestions the BIFR shall decide whether it is practicable to revive the company by passing the necessary scheme, which may be for: (i) financial reconstruction of the sick company; (ii) change or takeover of management of the sick company; (iii) amalgamation of the sick company; (iv) sale or lease of any part or whole of any industrial undertaking of the sick company; (v) rationalisation of managerial personnel, supervisory staff and workmen; and (vi) any other preventive or remedial measures as may be appropriate. But, where the BIFR comes to the conclusion that it is not possible to revive the company and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned Court, which may order winding up of the sick company in accordance with the provisions of the Act. II. Scheme of compromise or arrangement: The company or its members or its creditor(s) may draw up a scheme of compromise or arrangement between the company and (i) its creditors or any class of them; or (ii) its members or any class of them for the purposes of restructuring/reorganising/ reviving the company and apply to the Court to approve such scheme. If a majority in number representing three-fourths in value of the: (i) creditors or class of them; or (ii) members or class of them, as the case may be, present at the meeting, approve the scheme, such scheme shall be forwarded by the Court to relevant authorities, for their consent. Upon obtaining the consent from the relevant authorities indicating that the proposed scheme is in the public interest, the Court shall pass an order sanctioning the scheme. The order so passed by the Court becomes effective only upon the same being filed with the Registrar. III. A. Winding up: Compulsory winding up Upon an application for winding up being presented before a Court inter alia by a creditor, the Court may appoint a
Refer to question 2.4.

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3 Creditors
3.1 Are unsecured creditors free to enforce their rights in each procedure? 3.3
India
(a) (b)
take possession of the secured assets of the borrower including the right to transfer the same; and take over the management of the borrower.
India
I.
Registration as a sick industrial company: Since the intention of the legislature for enacting SICA was to restructure and revive a sick company, there is no provision in the act, allowing creditors to enforce or claim amounts due to them through the process before the BIFR. Upon being registered as a sick industrial company, a company gets respite from all sorts of litigation, since the provisions of SICA lay down that no proceedings as set out in SICA shall lie or be proceeded with further except with the consent of the BIFR or the Appellate authority. Therefore, the creditors can enforce their rights either through the restructuring scheme, if so drawn up by the BIFR or by instituting a civil suit or arbitration for recovery or any proceeding for execution against the company but only after obtaining the consent from the BIFR or the Appellate authority.
In each procedure, where there have been mutual dealings between the company and a creditor, and upon proving the debts due from either side, the parties shall be entitled to a set off.

I.
II.
Scheme of compromise or arrangement: Unsecured creditors are considered as a separate class of creditors. If a scheme is drawn up between the company and the unsecured creditors and the same is approved by requisite majority of three-fourths, of unsecured creditors, such scheme upon being sanctioned by the Court shall be binding on all the unsecured creditors. If the scheme does not pertain to unsecured creditors, the unsecured creditors can institute a civil suit or arbitration for recovery against the company.
Registration as a sick industrial company: During the process before the BIFR, the company continues to be governed by the Board of the company unless the BIFR or the Appellate authority passes a scheme wherein there is a change or takeover of management of the sick company. Scheme of compromise or arrangement: The company is governed by its own management. Winding up: From the date of filing of the winding up petition till the Court passing an order for winding up, the company is governed either by the Board or the provisional liquidator/administrator/receiver, as may be appointed by the Court. Once the Court passes an order directing a company to be wound up, the official liquidator is appointed in respect of the affairs of the company. SARFAESI: The company is governed by its own Board, unless the secured creditor takes over the management of the company.
How does the company finance these procedures?
II. III.
III.
Winding up: A creditor may institute a winding up petition against the company. Upon a company being wound up, an unsecured creditor can enforce his rights by filing his proof of debt with the liquidator. Upon filing of the proof of debt, the creditor is entitled to receive the sale proceeds of the assets of the company, when sold by the liquidator on the basis of their priority of claims (as set out in question 5.2 below).
Can secured creditors enforce their security in each procedure?
IV.
4.2
3.2
Generally the company finances all the three procedures out of the various sources available to the company.
I.
Registration as a sick industrial company: The process for enforcing the rights by a secured creditor is similar to the process set out above for an unsecured creditor, except that in the event the secured creditors representing three-fourths in value of the amount outstanding against financial assistance disbursed to the company, have initiated proceedings under SARFAESI, the process under SICA abates. Accordingly, the protection under SICA also stands withdrawn. Scheme of compromise or arrangement: The process for enforcing the rights by a secured creditor is similar to the process set out above for an unsecured creditor. Winding up: The process for enforcing the rights by a secured creditor is similar to the process set out about for an unsecured creditor, except that a secured creditor can choose to remain outside the winding up process. In such an event, it is entitled to the exclusive charge over the asset secured in its favour by the company but at the same time, such creditor will not be entitled to receive any share from the sale proceeds of the other assets sold by the liquidator. SARFAESI: Where a borrower, classified as a nonperforming asset fails to discharge his liabilities within sixty days from receipt of notice issued in that behalf by a secured creditor, the secured creditor shall inter alia be entitled to:
I.
Registration as a sick industrial company: There is no change in the status of the employment. The employees are also entitled to participate in the scheme by putting forth their objections and suggestions. Scheme of compromise or arrangement: Under this procedure, the effect on employees shall be as per the scheme proposed. The employees are also entitled to participate in the scheme by putting forth their objections and suggestions. Winding up: During the winding up of the company, the employment continues. However, once the court passes the order for liquidation, the employment of the employees automatically stands terminated.
II.
II.
III.
III.
4.4
IV.
The contracts continue to operate in each of the procedures, unless held otherwise by the BIFR under SICA, the liquidator in case of winding up.
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5 Claims
5.1 Broadly, how do creditors claim amounts owed to them in each procedure? 6.2 What happens at the end of each procedure?
India
I.
5.2
II. I. Registration as a sick industrial company: In the event the BIFR directs that the company be wound up, the priority of claims as applicable to a company under winding up are applicable. Winding up: In the winding up of the company, priority amongst creditors is classified as follows: (a) workers claims and secured creditors, who rank pari passu along with certain crown debts, which in their legislation specifically provide that the same can be recovered in priority to other dues; preferential payments to government claims, claims of employees up to Rs.20,000 per person; employees terminal benefits; employers liability to contribute employees benefit funds; workmens compensation; sums due to employees from pensions, gratuity and other welfare funds; investigation expenses; unsecured creditors; preference shareholders; and equity shareholders.
III.
II.

7.1 Is it common to achieve a restructuring outside a formal procedure in India? In what circumstances might this be possible?
(b)
(c) (d) (e)

5.3
For the purposes of putting in place an institutional mechanism for restructuring of corporate debt, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by RBI for implementation by financial institutions and banks. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.20,00,00,000 and above.
Are tax liabilities incurred during each procedure?
The entry of a company into any procedure does not in itself affect the corporation tax liabilities of the company. Tax arising on disposal of assets, or on income earned during the course of each procedure shall be a liability of the company in the normal way.

I.
Registration as a sick industrial company: Once a scheme is passed by the BIFR/Appellate authority, such scheme is binding on the sick industrial company, its shareholders, creditors, guarantors and employees. Scheme of compromise or arrangement: A scheme upon being sanctioned by the Court and being filed with the Registrar is binding on all the creditors or class of them. Winding up: In case of compulsory winding up, since the winding up is pursuant to the order of the Court, the same is binding on all the creditors. However, the secured creditors have an option either to participate in the winding up by surrendering their security, or staying outside winding up thereby retaining their security as set out in question 3.2 above.
Yes, as mentioned in our response above, under the schemes sanctioned by the BIFR and the scheme of compromise or arrangement sanctioned by the Court, it is possible to reorganise a debtor rather than realise its assets and business.
II.
III.
Yes, by and under the scheme sanctioned by the BIFR, the scheme of compromise or arrangement sanctioned by the Court and the proceedings initiated under SARFAESI, it is possible to sell the assets of the company with a view to achieve expedited restructuring of the debtor.
In case of voluntary winding up, as soon as the special resolution is passed by the members of the company, voluntary winding up is deemed to have commenced. Therefore, the creditors are bound by the decision taken by the members of the company.
8 International
8.1 What would be the approach in India to recognising a procedure started in another jurisdiction?
In case of scheme of compromise or arrangement involving a cross-

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Refer to questions 3.1 and 3.2 above.
Registration as a sick industrial company: If the BIFR/Appellate authority decides that it is practicable to revive/restructure the company, the BIFR/Appellate authority may order for implementation of the sanctioned scheme. On the other hand where the BIFR/Appellate authority decides that it is not possible to revive the company and that it is just and equitable that the company should be wound up, it may record and forward its opinion to the concerned Court. The Court may order winding up of the sick company in accordance with the provisions of the Act. Scheme of compromise or arrangement: Upon the order of the Court sanctioning the scheme being filed with the Registrar, the scheme becomes effective. Winding up: Upon the companys assets being sold and appropriating the sale proceeds towards the dues in accordance with the priority of claims, the company stands dissolved.
DSK Legal
border merger, where a transferor company is a foreign company and the transferee company is an Indian company, proceedings have to be instituted before the Foreign Court within whose jurisdiction the registered office of the transferor company is situated and an order passed in such Foreign Court shall be used before the Court within whose jurisdiction the registered office of the transferee company is situated to give effect to such cross-border merger.
India
An Indian company can be wound up only by an order passed by an Indian Court. An order for recovery passed by a Foreign Court can be executed in India, provided that such foreign judgment is proved to be conclusive in accordance with the provisions of the Code of Civil Procedure, 1908.
India
Raksha Kothari
DSK Legal 4th floor Express Towers, Nariman Point Mumbai - 400 021 India
Sajit Suvarna
DSK Legal 4th floor Express Towers, Nariman Point Mumbai - 400 021 India
+91 22 6658 8000 +91 22 6658 8001 raksha.kothari@dsklegal.com www.dsklegal.com
+91 22 6658 8000 +91 22 6658 8001 sajit.suvarna@dsklegal.com www.dsklegal.com
Joined firm: 2001. Partner since: 2004. Practice areas: Corporate and Commercial, Restructuring and Strategic Investments and Financing. Raksha has vast experience in handling a variety of matters including transaction support, restructuring, strategic investments, private equity, distressed assets, and financing transactions.
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Chapter 21
Indonesia
Ali Budiardjo, Nugroho, Reksodiputro
Theodoor Bakker
Herry N. Kurniawan

1.1 How does a creditor take security over assets in Indonesia?
receiver by issuing an extrajudicial declaration. If the counterparty refuses to accept the nullification, the receiver must commence proceedings. Nullification of a transaction made by the debtor may be invoked if the following conditions are met: (i) a legal act was performed by the debtor company before it was declared bankrupt; legal acts are acts that are intended to have a legal effect, such as a sale and purchase agreement, a gift or a waiver. Legal acts are either reciprocal (a sale and purchase agreement) or unilateral (a gift or a waiver) in their nature; the debtor company was not obligated by contract or by law to perform the legal act, or in other words the legal act/transaction was voluntarily conducted by the debtor company. Some examples of transactions voluntarily made: payment of a debt which is not yet due and payable; granting of security for a debt when the debtor was not obligated to do so; sale of goods by a debtor to his creditor followed by a set-off of the purchase price; and payment of a debt in kind instead of in cash; (iii) the legal act/transaction prejudiced the creditors interests; e.g., a sale of goods below their fair market value or their disposal as a gift; and/or the debtor and the other party in the transaction had knowledge that the legal act/transaction prejudiced the creditors interests. There is a statutory presumption of knowledge that all transactions performed within one year of a declaration of bankruptcy to be prejudicial to the companys creditors by law, provided that it can be established that such a transaction falls into one of the following categories: (i) transactions in which the consideration that the debtor company received was substantially less than the estimated value of the consideration given; payments or granting of security for debts which are not yet due; and transactions entered into by the debtor with certain relatives or related parties of the debtor or the directors of the debtor company.
Under Indonesian Law, there are, in general, three types of in rem security. 1. Mortgage (ii) A mortgage is used to encumber fixed property as security for the payment of a debt. Delivery of possession from the company to the creditor is not required. A land mortgage, which is subject to Mortgage Law, represents a charge on the land itself and on all buildings and other fixtures attached to it, including machinery affixed thereto. A mortgage cannot be created on land that is to be acquired in the future. The security right follows the mortgaged property, the transfer of the property notwithstanding, until the respective debt has been paid. A mortgage only secures the payment of a debt up to the amount specified in the mortgage deed. In the event of additional loans by the same or another creditor to the company, a lower ranking mortgage can be imposed. Registered vessels with a gross weight of 20 cubic meters or more and registered aircraft can also be secured by way of a mortgage. 2. Pledge A pledge can be vested in movables and shares and requires the delivery of the pledged goods from the debtor to the creditor. The consequence of this is that a pledge can only be created upon movable property. A pledge can also be made upon intangible assets by way of declaring the assets in a document documentary intangible assets. 3. Fiduciary Transfer of Ownership and Fiduciary Assignment of Rights
(iv)
A fiduciary transfer of ownership for security purposes may be exercised upon movable property, intangibles and untitled land (provided they are not bound under a mortgage). Unlike the pledge, a fiduciary transfer of ownership does not require the physical delivery of the goods.
(ii) (iii)
A transaction that is entered into within a specific period before the declaration of its bankruptcy may be nullified by a claim of the
The annulment of a payment, even one that is due and payable, is possible in cases where a payment was made to a creditor who knew that a petition for bankruptcy has been registered. The same applies to the payment of a debt based on conspiracy between the company and its creditor with the intention of preferring that creditor over other creditors.

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1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Indonesia? 2.4
Indonesia
Bankruptcy procedure
Indonesia
Directors are personally liable for the losses suffered by the company where (i) the company is declared bankrupt and the bankruptcy has been the result of the fault or negligence of the directors and (ii) the assets of the company are not sufficient to cover the obligation of the company. The only way to avoid such liability is timely resigning.
The petitioner must file a bankruptcy petition with the Commercial Court. The court summons the company and its creditor to a hearing to be held, where the petitioner must prove that the tests/conditions referred to in question 2.2 are met. If successful, the court declares the company bankrupt and appoints a receiver to manage the bankruptcy estate and a supervisory judge to supervise the bankruptcy. Suspension of Payments procedure The company (or its creditors) must file a suspension of payments petition with the Commercial Court. Upon receipt the court must (i) forthwith grant a temporary suspension of payments for a period of ninety days, (ii) appoint an administrator who, together with the directors of the company, will manage the assets of the company, and (iii) appoint a supervisory judge to supervise the suspension of payments. The purpose of the suspension of payments is to give time to the company to propose a composition plan to the creditors for their approval. The ninety-day period extension can be further extended to a period of 270 days as of the date of the petition, if such extension is approved by (i) the unsecured creditors that fulfil a quorum of one half in number and two thirds in amount of the total unsecured claims; and by (ii) the secured creditors that fulfil a quorum of one half in number and two thirds in amount of the total secured claims.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Indonesia?
The Bankruptcy Law provides for two main organisational procedures for companies having financial difficulties: (i) (ii) bankruptcy; and suspension of payments.
Each can be initiated by either the debtor company or by its creditors. A bankruptcy petition may also be filed by the public prosecutor if the public interest so requires. Specifically for banks, security houses, insurance and reinsurance companies and state-owned companies engaged in the public interest business, the bankruptcy petition can only be filed by the Central Bank, Capital Market Supervisory Board and the Minister of Finance respectively. The suspension of payments procedure is provided for a company that faces temporary liquidity problems and is unable to pay its debts but may be able to pay them some time in the future. It gives the company temporary relief in order for it to reorganise and continue its business, and ultimately to satisfy its creditors claims. The company is required to submit a composition plan for the approval of the creditors and for ratification by the court. The rejection of the composition plan by the creditors or its nonratification by the court or a failure to implement it will result in the bankruptcy declaration of the company.
2.2 What are the tests for insolvency in Indonesia?
Bankruptcy procedure After the declaration of the bankruptcy of the company, the courtappointed receiver must (i) send a notification of the bankruptcy to the known creditors, (ii) invite the creditors to submit their claims, (iii) attend the creditors meeting on a date specified by the court, and (iv) announce the invitation in the newspapers. Suspension of payments procedure Substantially the same sequence takes place as in bankruptcy.
3 Creditors
Indonesian Bankruptcy Law distinguishes between insolvency and bankruptcy. Bankruptcy: Under Indonesian Bankruptcy Law, a companys bankruptcy proceedings (or suspension of payments proceedings) is pronounced by the court if it fulfils the following tests: (i) the company has at least two creditors (plurality of creditors); and (ii) at least one of the two debts is currently due and payable. Insolvency: Under Indonesian Bankruptcy Law, a company is insolvent if following its bankruptcy declaration by the court, (i) no composition plan is submitted by the company to the creditors, (ii) a composition plan is submitted but subsequently rejected by the creditors, or (iii) a composition plan is submitted and subsequently approved by the creditors but is not ratified by the court.
Bankruptcy procedure The enforcement of all rights by unsecured creditors of a bankrupt company is halted and the assets of the bankrupt company are put under general attachment, to be subsequently liquidated and used to pay the claims of the creditors unless a composition plan becomes effective. The power to dispose of the assets of the company lies with the Receiver. The unsecured creditors are entitled to payment of their unsecured claim on a pro rata basis in proportion to the amount of the claim. Suspension of payments procedure The unsecured creditors of a company that is under a suspension of payments procedure are also not free to enforce their rights. All of the unsecured creditors of such a company are bound by the suspension of payments procedure that calls for a stay of a maximum period of 270 days. The power to manage the assets of the company is in the hands of the administrator, together with the
A company is placed into either procedure if it passes the respective tests discussed in question 2.2 above.
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4.1
Indonesia
management of the company. If a composition plan is approved by the creditors and ratified by the court, the agreed composition plan will replace the terms and conditions of the individual debts. If the composition plan is rejected by the creditors or not ratified by the court, the company will immediately be declared bankrupt.
Bankruptcy procedure Upon the declaration of the companys bankruptcy, the directors of the company lose the power to manage the company. The power is transferred to the Receiver, who now manages the bankruptcy estate and the settlement of the companys debts. The Bankruptcy Law does not specifically discuss the powers of the shareholders, but it is understood that the shareholders are still entitled to pass resolutions with respect to the companys matters except those which pertain to assets and management. Suspension of payments procedure During a suspension of payments proceeding, the directors of the company, together with a court-appointed administrator and supervised by a supervisory judge, jointly run the management of the company. Shareholders are restricted in the same manner as in bankruptcy.
Bankruptcy procedure The secured creditors may enforce their security right as if there were no bankruptcy, subject to a stay of 90 days. The stay does not apply to cash collateral and does not affect the right of the creditors to a set off. Any party whose rights are stayed may file a petition to the receiver for the lifting of the stay or otherwise for varied terms of the stay. If the stay does not serve any purpose, the stay should be lifted voluntarily by the Receiver. If a petition regarding a stay is rejected by the Receiver, the stayed party may submit a petition to the Supervisory Judge. In deciding on the petition the Supervisory Judge is obliged to take into account, inter alia: the duration of the stay as from the filing of the petition; the protection of the (financial) interests of the stayed parties; the likelihood that a composition will be reached; and the impact of the stay on the business, the management of the business of the debtor and the settlement of the bankruptcy estate. A decision of the Supervisory Judge can be appealed to the Commercial Court, as regards which the Court must make its decision on short notice. There is no legal remedy against the decision of the Court. Suspension of payments procedure The secured creditors are not free to enforce their rights. The obligations of the company to pay its debt are suspended during the suspension of payments proceeding. If a composition plan is approved by the creditors and ratified by the court, the agreed composition plan will replace the terms and conditions of the repayment of the debt. If, on the other hand, the composition plan is rejected by the creditors or not ratified by the court, the company will immediately be declared bankrupt.
If for the purpose of rescuing itself as a going concern the company needs new financing, the Receiver (in the case of bankruptcy) is authorised to take a new loan, and if the new loan requires security, the Receiver may, with the supervisory judges approval, pledge the companys assets as security.
Neither the bankruptcy procedure nor the suspension of payments procedure have a direct impact on employees. Employees fall into the classification of estate creditors, and as such they are entitled to payments in full of their claim on the basis of the employment contract. In the case of bankruptcy, the Receiver may terminate employment contracts taking into account the entitlement of the employees to receive severance payment in accordance with the Labor Law.
In both the bankruptcy and the suspension of payments procedures, creditors can set off sums owed by them to the company against amounts owed by the company to them. In the bankruptcy procedure, however, to do so the following requirements must be met: the claim and the debt already existed prior to the declaration of bankruptcy; or the claim and the debt exist as a result of transactions carried out with the bankrupt company before the bankruptcy was declared. These rules make a creditors set off right in an event of bankruptcy more favourable than its set off right outside of a bankruptcy event. There is no requirement for the debts to be currently due and payable. On the other hand there is uncertainty whether or not the receiver or administrator must approve an intended set off.
Bankruptcy procedure The bankruptcy of a company does not change the validity or the terms of a contract the company has entered into. The rights and obligations of the parties to such contracts remain unchanged. However, the Receiver does not have the obligation to perform the contract. If the Receiver confirms performance he must guarantee performance; if he confirms cancellation the other party will have to submit a claim as an unsecured creditor. Suspension of payments procedure The granting of a suspension of payments to a company does not change the validity of a contract the company has entered into; it only stays the obligations of both parties for a maximum period of 270 days.

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Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders.

5 Claims
Indonesia
amounts in haircuts and debt write-offs are subject to income tax on the part of the company.

Indonesia
Bankruptcy procedure Creditors must submit their claim in writing to the receiver with all underlying documentation. The receiver adjudicates claims during a so-called verification meeting. The receivers adjudication is subject to appeal to the Supervisor Judge and then to the Court. Secured claims need not be adjudicated. Unsecured creditors are entitled to a pro-rata portion of their claim. Secured creditors are entitled to receive payments from the proceeds of the sale of the assets serving as security, and to claim for the remaining balance as unsecured creditors. Suspension of payments procedure Creditors must submit their claims in the same manner as in bankruptcy. The claims of the creditors are subject to the terms of the composition plan that may have been agreed to by the creditors and ratified by the court.
Bankruptcy procedure Unsecured creditors who voted against the composition are crammed down if the composition is approved by unsecured creditors by a specified majority and ratified by the court. Secured creditors are not entitled to take the vote and are not affected by the result of the votes. Suspension of payments procedure Unsecured creditors who voted against the composition are crammed down if the composition is approved by unsecured creditors and ratified by the court. Secured creditors have a vote and those who voted against the composition are entitled to be compensated for the amount of the outstanding claim or the value of the security, whichever the lower.
There is no unified provision on the ranking of creditors claims. The provisions on the ranking of claims are spread out in several legislations. In general, the shareholders of the company rank behind all of the creditors in the distribution of the proceeds of the bankruptcy estate. Any distribution they receive is in proportion to the percentage of the shares that they hold in the company, if there are remaining assets after distribution to the creditors. The general rule for the distribution of the proceeds of a bankruptcy estate to unsecured creditors is one of equality, subject to the statutory priority rights of certain categories of creditors. The creditors ranking is as follows: Tax Claims, which priority right lasts only 2 (two) years as of incurrence. Post-bankruptcy creditors (who have claims on the bankruptcy estate), which are entitled to receive payments in full: (i) (ii) (iii) (iv) (v) salary of the receiver; costs in the liquidation of the bankruptcy estate (appraisers fee, accountants fee, etc.); post bankruptcy financing; lease of the bankrupts house or offices; and wages of the employees of the bankrupt company.
Bankruptcy procedure The bankruptcy is lifted if there are insufficient assets to pay the Receiver and otherwise if a composition plan is agreed by the creditors and ratified by the court; or if the claims of the creditors have been fully satisfied by the bankruptcy estate. If the company becomes insolvent (please refer to the term insolvency in question 2.2), the bankruptcy procedure is concluded with the liquidation of the company. Suspension of payments procedure If the composition plan proposed by the company is approved by the creditors and ratified by the court, the suspension of payments proceedings end upon such approval and ratification. Otherwise, the bankruptcy procedure will commence.

7.1 Is it common to achieve a restructuring outside a formal procedure in Indonesia? In what circumstances might this be possible?
Secured Creditors. Unsecured creditors: 1. Specific statutorily preferred creditors whose preference relates only to specific assets. Specific statutory preferred creditors prevail over general statutory priority rights. General statutory priority rights. Non-preferred unsecured creditors.
Yes, a significant number of creditors and borrowers achieve a restructuring outside a formal procedure. As a matter of fact, the creditors preferred route is negotiation on a private basis with cooperative debtors. Prominent international accounting firms, international and domestic law firms and investment banking advisers have frequently advised on, documented and generally assisted and supported these private processes. Indonesia has in the past facilitated private restructuring negotiations. In 1998 the Jakarta Initiative Tasks Force (JITF), the Financial Sector Policy Committee and the Oversight Committee were established. The JITF mediated in debt restructuring negotiations among Indonesian debtors and their creditors by using the London Approach, and gave tax concessions to the debts restructured. The JITF closed in December 2003 at the governments consideration that its work had been largely completed by then.
2. 3.
5.3
Tax liabilities are ordinarily incurred during each of the procedures if the business is continued during each procedure. The written-off
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7.2 Is it possible to reorganize a debtor rather than realise its assets and business?
Indonesia
8 International
8.1 What would be the approach in Indonesia to recognising a procedure started in another jurisdiction?
7.3
The Bankruptcy Law adopts the principle of territoriality. A bankruptcy procedure initiated in another jurisdiction has, in principle, no effect in Indonesia. Assets located in Indonesia belonging to a company which has been declared bankrupt outside Indonesia are not considered part of the bankruptcy estate.
Yes, it is. Provided that the sale agreed by the debtor, it may be conducted privately or otherwise by way of an auction. The procedure involves the Receiver and the Commercial Court who will agree on a composition plan that contains the pre-packaged cram down and sale of asset
Theodoor Bakker
Ali Budiardjo, Nugroho, Reksodiputro Graha Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia
Herry N. Kurniawan
Ali Budiardjo, Nugroho, Reksodiputro Graha Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia
+62 21 250 5125/5136 +62 21 250 5001/5121 tbakker@abnrlaw.com www.abnrlaw.com
+62 21 250 5125/5136 +62 21 250 5001/5121 hkurniawan@abnrlaw.com www.abnrlaw.com
Mr. Theodoor Bakker is admitted to the Amsterdam bar. He has worked in Southeast Asia since 1984. He has considerable experience in: direct foreign investment; project finance work, including private power and petrochemical projects; and infrastructure development. During the first Asian financial crisis, he was involved in many aspects of restructuring and insolvency, and has advised on foreign law issues of bankruptcy reform in Indonesia. He has published various articles on insolvency and cross-border investment issues and teaches at the Faculty of Law of University of Indonesia and at the Department of Law and Human Rights. He speaks Dutch English, French and Indonesian. He is not admitted to the Indonesian courts.
Mr. Herry Nuryanto Kurniawan joined ABNR as an associate in February 1999 after having completed several months of internship with ABNR and has been a Senior Associate since 2005. He graduated from the Faculty of Law, University of Indonesia, majoring in Economic Law. He has been involved in corporate matters, foreign investment, capital market, project finance and corporate finance, restructuring and bankruptcy projects, and has regulatory knowledge in these areas. He was involved in project of monitoring the implementation of the bankruptcy law in 1999 and thus has regulatory knowledge in bankruptcy and suspension of payments. He is a co-writer for various articles and publications concerning bankruptcy, merger and acquisition. He also participated as speaker in seminars and workshops on bankruptcy and suspension of payments, investment, merger and acquisition. In his current practice, he has also intensively involved in numerous bankruptcy/suspension of payments and commercial litigation/arbitration.
Ali Budiardjo, Nugroho, Reksodiputro (ABNR), is one of the oldest, largest and most prominent law firms in Indonesia. The firm was founded in 1967 by professionals with a deep respect for the law and a keen interest in assisting clients, both foreign and domestic, to achieve their commercial goals within the Indonesian legal environment. The firm, now supported by almost 80 lawyers, has wide area of practice, including Corporate Law, Banking and Finance, Capital Markets, Investment Law, Restructuring, Privatisation, Merger & Acquisitions, Telecommunication, Oil, Gas and General Mining, Environmental Law, Intellectual Property, Maritime Law, Aviation Law, Real Property, Bankruptcy Law, Labour Law, Project Finance.

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Indonesia
Yes, but it is to be noted that informal reorganisation will require the agreement of the respective debtor. There is no procedure for privately appointed administrators to reorganise the debtor company.
Chapter 22
Ireland
Dillon Eustace
Lorcan Tiernan
Adrian Benson

1.1 How does a creditor take security over assets in Ireland?
1.2
Fraudulent Preference Any wrongful favouring of one creditor over others by a company which is unable to pay its debts is a fraudulent preference and is invalid. Where a company is put into liquidation, any preference of a creditor in the six months prior to winding up can be set aside as a fraudulent preference. Demonstrating an intention to prefer however is crucial and this can be difficult. Where the creditor is a director of the company or a person connected with a director, any payment made to such persons in the two years prior to the winding up can be considered and set aside if deemed a fraudulent preference. Fraudulent Disposition On the winding up of a company, if shown that there has been a disposal of company property the effect of which was to perpetrate a fraud on the company, the court may order the return of such property or payment of a sum to the liquidator by the recipient of the proceeds on any transfer of the property. Invalid Floating Charges Where a company is being wound up, a floating charge created within 12 months before the commencement of the winding up shall be invalid unless proved that immediately after the creation of the charge the company was solvent. The charge remains valid in respect of money actually advanced or paid at the time of or subsequent to the creation of and in consideration for the charge. The relevant period is 24 months in respect of any charge created in favour of a director or a person connected with a director on the undertaking or property of the company.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Ireland?
Security can be taken by way of the following: Equitable Mortgage An equitable mortgage is a mortgage that passes only an equitable estate or interest; either because the form of transfer or conveyance is an equitable one or because the mortgagors estate or interest is equitable only. Legal Mortgage A legal mortgage is a transfer of the legal estate or interest in land or other property. The borrower retains the right to redeem the legal title to the property charged on repayment of the debt. A legal mortgage of property of which physical possession cannot be taken (e.g., contractual rights under a life assurance policy) is effected by a security assignment. The assignment is subject to the repayment of the secured obligation. Fixed charge A fixed charge is a charge over specifically identifiable assets which have been offered as security but does not operate to transfer title in the secured assets to the creditor. On default by the borrower (and in accordance with the terms of the charge documentation) it provides the creditor with the right to receive payment from the proceeds on the realisation of the specific property. The borrower can generally only deal with the charged asset(s) with the lenders consent or following repayment of the secured obligation. Floating Charge A floating charge generally consists in a charge over all the assets of a borrower company as are acquired from time to time. The company remains free to deal with such assets in the normal course of its business. It does not attach to the assets charged until crystallisation, i.e., on the appointment of a receiver or the winding up of a company. Lien A lien is the right to hold the property of another as security for the performance of an obligation. A particular lien exists only as security for the particular debt incurred. Pledge A pledge arises where a pledgor transfers possession but not ownership of certain goods or documents of title to a pledgee as security for the discharge of a debt or discharge of some other obligation.
Continuing to trade in times of financial difficulties does not of itself automatically give rise to directors liability. However certain conduct in times of insolvency will give rise to directors liability on a winding up of the company. Moreover, where an insolvent company is not being wound up and the principal reason is the insufficiency of its assets, certain provisions of company law that impose personal liability on directors will apply in the absence of a winding up. Personal liability or other sanction will be imposed in the following situations:
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Fraudulent trading If in the course of a winding up of a company or an examinership, or where an insolvent company is not being wound up, any person that was knowingly a party to the carrying on of the business of a company with intent to defraud company creditors, or for any fraudulent purpose may be guilty of fraudulent trading. Irish company law provides for a maximum penalty of imprisonment for a term not exceeding seven years or a fine not exceeding 63,487 or both. In addition, any person may be held personally responsible, without limitation of liability for all or any of the liabilities of the company as the Court may direct. Reckless trading In the course of the winding up of a company or in the course of examinership proceedings or where an insolvent company is not being wound up, any officer of the company shown to have knowingly carried on any business of the company in a reckless manner may be personally liable for all or any part of the debts or other liabilities of the company. An officer shall be deemed to be knowingly a party to the carrying on of any business of the company in a reckless manner if having regard to the general knowledge, skill and experience reasonably expected of such a person he ought to have known that his actions or those of the company would cause loss to the companys creditors, or he was a party to the contracting of debt by the company without honestly believing on reasonable grounds that the company would be able to pay its debt as they fall due. It is a defence to show that a director acted in an honest and responsible manner. Restriction order If an insolvent company is wound up then, unless the Director of Corporate Enforcement relieves the liquidator from doing so, the liquidator must apply to the High Court for an order restricting each of the directors of the company from acting as a director or the secretary of any other company for a period of five years unless such other company is capitalised to the requisite level. The High Court must make such an order unless satisfied that the director has acted honestly and responsibly and that there is no other reason making it just and equitable that such an order should be made against him. The burden of proof is on the director. Although the Irish Supreme Court has recently described this regime as draconian; and in the relevant case, lifted a restriction order imposed by the Irish High Court, the statutory provisions in this regard are unchanged as yet. Disqualification A person convicted on indictment of any indictable offence in relation to a company or involving fraud or dishonesty may during the five year period from date of conviction or such other period as the court may order, be disqualified from acting as a Director or being directly or indirectly involved in the promotion, formation or management of any company. The onus is on the liquidator or other applicant to show that the director has committed conduct that would justify a disqualification order. Misfeasance Where in the course of a winding up, it can be shown that company money or property has been misapplied or wrongfully received by a director or other officer, such a director (or officer) may be compelled to repay or restore all or part of such money or property pursuant to misfeasance proceedings. Damages may also be payable in respect of some other breach of duty or misfeasance by a director or other officer. Care should also be taken when making statutory declarations of solvency in connection with financial assistance for the purchase of shares in a company or with certain transactions involving
Ireland
directors. If the company is wound up within twelve months after making the required statutory declaration of solvency and its debts are not paid or provided for in full within the period of twelve months after the commencement of the winding up it is presumed that the directors did not have reasonable grounds for making such a declaration and such directors can be made personally liable for the companys debts in full as they become due. The High Court can also consider whether any relevant arrangement with a director contributed materially to the companys inability to pay its debts, in which case, it may, on the application of the liquidator or any creditor or contributory of the company, declare that the beneficiary of the arrangement shall be personally liable for all or part of the debts and other liabilities of the company.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Ireland?
Examinership Examinership provides for a period of court supervised protection (a maximum of 100 days) during which a company is protected from creditors pursuing legal actions or remedies against it, thereby enabling the company and an appointed examiner to formulate and present proposals for a restructuring of the company. Compulsory (Court) Liquidation On application to the High Court, a liquidator, acting under the supervision of the court, is appointed to wind-up the company. Creditors Voluntary Liquidation A procedure whereby the members of an insolvent company (usually on the recommendation of the board of directors) resolve to wind-up the company and appoint a liquidator for that purpose. Receivership A receiver is appointed to a company by either a debenture-holder or the High Court to take control of the assets of a company to achieve the repayment of the debt owing to the debenture-holder, either through receiving income or realising the value of the charged asset. Receivership is technically a method of enforcing a security but is often regarded as a form of insolvency procedure. Statutory Scheme of Arrangement This is a court supervised procedure which provides for the formulation and implementation of a compromise or arrangement between a company and its members or creditors. The compromise or arrangement with creditors is usually proposed when the company is in financial difficulties.
2.2 What are the tests for insolvency in Ireland?
There are two tests for establishing insolvency in Ireland, as follows: (i) (ii) the cash flow test - is the company able to pay its debts as they fall due for payment? the balance sheet test - do the value of a companys assets exceed its liabilities?
2.3
Examinership Before the court will appoint an examiner, the petitioner must

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satisfy the court that: (i) there is a reasonable prospect of the survival of the company and the whole or any part of its undertaking as a going concern; the company is unable to pay its debts or is likely to be unable to pay its debts as they fall due; and no resolution subsists and no order has been made for the winding-up of the company.
Ireland
of the companys affairs verified by one of the companys officers must be filed in court. The statement must set out certain information including a statement of the companys assets, debts and liabilities, details of the companys creditors and assets held by them. Every creditor, interested party and the company is entitled to be heard on the petition at the petition hearing. Creditors Voluntary Liquidation The directors of the company convene a meeting of the members and a meeting of the creditors. At the members meeting an ordinary resolution is passed to wind-up the company. The creditors meeting is held on the same day as or the day following the members meeting. At the creditors meeting (which is presided at by one of the directors of the company) the creditors approve the members choice of liquidator or propose their own. The creditors also consider the statement of affairs in respect of the company and appoint a committee of inspection. Receivership The debenture document itself will usually authorise the debentureholder to appoint a receiver upon the occurrence of an event of default (as set out in the debenture document). The debentureholder can designate a receiver once the conditions of exercising that power are satisfied. Alternatively, the High Court has the power to appoint a receiver on application in certain circumstances. Statutory Scheme of Arrangement One of the following may apply to the High Court to propose a scheme of arrangement: (i) (ii) (iii) (iv) the company; any creditor of the company; any member of the company; and in the case of a company being wound up, the liquidator.
(ii)
Ireland
(iii)
Compulsory (Court) Liquidation The court has a discretionary power to order the winding-up of a company on a number of grounds, including: (i) (ii) (iii) (iv) the company resolves by special resolution to be wound-up in this way; the company is unable to pay its debts; the court is of the opinion that it is just and equitable; and the affairs are being conducted, or the powers of the directors are being exercised, in a manner oppressive to any member or in disregard of his interests as a member.
Creditors Voluntary Liquidation The members of the company can pass an ordinary resolution for the company to be wound-up on the grounds that it cannot by reason of its liabilities continue its business. Receivership The grounds on which a debenture-holder will be entitled to appoint a receiver to a company will be set out in the debenture document which provides for the appointment of the receiver. Statutory Scheme of Arrangement The court will supervise a scheme of arrangement on application to the court by the company or any member or creditor.
Examinership A petition for the appointment of an examiner is presented by: (i) (ii) (iii) (iv) the company; the companys directors; any of the companys creditors (including an employee); or members of the company holding at the date of the presentation of the petition at least one tenth of the paid-up voting capital of the company.
Following such application, the High Court will order meetings of the creditors and members to vote in respect of the scheme of arrangement.
Examinership The petitioner must deliver to the CRO a copy of the order appointing the examiner; and the examiner must advertise notice of his appointment in two daily newspapers and in an Irish official publication. Once the examiner has formulated proposals for the scheme of arrangement for the company, he must convene meetings of the members and creditors of the company to vote on the proposals. Compulsory (Court) Liquidation The petition presented to the High Court must be advertised in an Irish official publication and two daily newspapers. The petition must be served on the company and any creditor or contributory that requests a copy. Notice of the winding-up order must be filed in the CRO and also advertised in an Irish official publication and two daily newspapers. Creditors Voluntary Liquidation Creditors must be given at least 10 days notice of the proposed creditors meeting and the notice must be published in two daily newspapers. Notice of the resolution to wind up the company must be published in the Gazette and a copy of the resolution must be given to the CRO.
The petition must be accompanied by a grounding affidavit; and an independent accountants report containing an opinion as to the companys prospects of survival as a going concern and a statement of the conditions necessary to ensure its survival. At the hearing to have the examiner appointed every creditor of the company is entitled to be heard on the application. Compulsory (Court) Liquidation A petition for an order of the court to wind-up the company and appoint a liquidator (together with a verifying affidavit) is presented by: (i) (ii) (iii) (iv) (v) (vi) the company itself; any creditor (this is the most common petitioner); any member; any contributory; the Director of Corporate Enforcement; or the Registrar of Companies.
The petition must be served on the company at the registered office of the company and must be advertised in newspapers. A statement
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See question 2.4 above for meetings of members and creditors. Receivership No meetings are required. The appointment of a receiver must be published by the debenture-holder in the Gazette and in one daily newspaper. Notice must also be given to the CRO. A receiver appointed under a floating charge must notify the company of his appointment. Statutory Scheme of Arrangement See question 2.4 above as to meetings of members and creditors. The order of the court sanctioning the scheme of arrangement must be filed in the CRO. Statutory Scheme of Arrangement
Ireland
The court is empowered by statute to stay all proceedings or restrain further proceedings against the company however this will not prevent the appointment of a receiver by a secured creditor during the process. Commencement of a court or voluntary liquidation does not prevent a secured creditor from appointing a receiver. Receivership The appointment of a receiver to a company does not prevent other secured creditors from enforcing their security.
3 Creditors
Examinership During the period of an examinership, the company enjoys a stay during which creditors may not exercise their rights against the company. In addition no proceedings of any nature can be commenced against the company without prior leave of the High Court and subject to certain limited exceptions; any pending proceedings may be stayed. Certain specific procedures must be followed vis--vis guarantors and the enforcement of guarantees by creditors. Compulsory (Court Liquidation) No action or proceedings against a company which is the subject of a compulsory liquidation may be proceeded with or commenced without the permission of the High Court. Creditors Voluntary Liquidation Proceedings and actions against a company are generally not stayed in a voluntary liquidation and unsecured creditors remain free to exercise their rights in this regard. However, the liquidator of the company in voluntary liquidation may apply to the High Court for an order effecting such a stay. Receivership The appointment of a receiver to a company does not preclude unsecured creditors from enforcing their rights in respect of the debt owed to them. Statutory Scheme of Arrangement On application to the High Court to put in place a scheme of arrangement, that Court may stay all proceedings or restrain further proceedings against the company for a certain period. During such period, the rights of unsecured creditors against the company will be restrained.
Generally, yes, where there is mutuality of debts. A company in liquidation cannot set off against its liabilities to a secured creditor unless he elects to prove in the liquidation.

Examinership The directors continue to manage the affairs of the company subject to the examiners ability to convene, set the agenda for and attend board meetings. The court may order that only the examiner may exercise the powers of the directors; but in general, the directors and the examiner work together. Shareholders may continue to attend and vote at general meetings however, the examiner also has the power to override any decision which is likely to be to the detriment of the company or any interested party. Existing shareholders interests will likely be diminished as part of the proposals in any event. Compulsory (Court) Liquidation) / Creditors Voluntary Liquidation In both compulsory and voluntary liquidations the liquidator takes control of the company. On the appointment of the liquidator the directors powers cease. Shareholders similarly have no involvement beyond the initial approval of the liquidators appointment other than payment of any unpaid amounts on their shares or receipt of any distributions on a solvent liquidation. Receivership The directors will cease to have power over the assets which are secured by the debenture, under which the receiver is appointed and the debenture may authorise the receiver to manage the companys business. The appointment of a receiver has little effect on the shareholders as they remain entitled to the same voting powers as prior to the appointment; although shareholder value will have diminished. Statutory Scheme of Arrangement The directors continue to control the company and any effect on the shareholders will be dictated by the terms of the scheme.
Examinership Once a petition for the appointment of an examiner had been presented, the rights of creditors to enforce their security are severely restricted: no action may be taken to realise the whole or any part of a creditors security except with the consent of the examiner (although regard should be had to the provisions of the Financial Collateral Arrangements Directive 2002/47/EC). Furthermore, the examiner has the right to use and dispose of a creditors security.

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Compulsory (Court Liquidation) / Voluntary Liquidation
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court to affirm or repudiate any contract under which an obligation other than payment remains to be performed. Court Liquidation / Voluntary Liquidation The terms of the contract may dictate the effect which the liquidation will have on the contract. Often a contract will provide that the appointment of a liquidator to the company will constitute a breach of the contract or trigger a forfeiture provision (where the contract is a lease). Onerous contracts may be disclaimed by the liquidator with permission of the court and the other party to the contract or third parties suffering damage as a result will be entitled to be compensated for such damage and can prove the amount as a debt in the winding up. Receivership Those contracts entered into by a company prior to the appointment of a receiver to that company will generally remain enforceable by and against the company following the appointment of a receiver (unless the contract expressly or impliedly provides otherwise) and are not enforceable directly against the receiver. Statutory Scheme of Arrangement This will not result in automatic termination of contracts. However, contracts often provide that the occurrence of such an event will constitute a breach of the contract or trigger a forfeiture provision (where the contract is a lease).
Examinership If the scheme proposed by the examiner is approved by the High Court it will usually make provision for the examiners fees, costs and expenses from the companys revenue or assets or from new investment. The examiners costs must be approved by the court and once approved must be paid before any other claim against the company. Compulsory (Court) Liquidation) / Creditors Voluntary Liquidation The liquidators remuneration and costs will generally be paid from the realisation of companys assets in priority to all creditors other than those secured by a fixed charge and an examiners costs. Receivership The receivers costs and expenses are funded from the realisation of the secured assets. Statutory Scheme of Arrangement Generally funded from the companys assets or revenue.
Ireland
Compulsory (Court) Liquidation A winding up order effectively terminates employee contracts. Creditors Voluntary Liquidation A resolution to wind up a company voluntarily does not automatically terminate employee contracts although in practice a liquidator will often proceed to make most if not all of the employees redundant. Examinership & Statutory Scheme of Arrangement The appointment of an examiner does not immediately affect employees. The proposals put forward by the examiner or applicant in a statutory scheme may in practice affect employees particularly if the scheme for the survival of the company involves redundancies. Receivership Where a receiver is appointed, the company's employees are not automatically dismissed; however, in practice, the appointment of a receiver manager often results in redundancies. If the business of the company is sold the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 usually applies. This will be the case for any transfer of a business other than as part of a court liquidation.
5 Claims
Court Liquidation In compulsory liquidations the creditors must prove their debts. The liquidator or the court may fix a time by which written proof of debts must be lodged. Voluntary Liquidations Formal proof of debts is not essential in voluntary liquidations however submission of claims in writing may be required by the liquidator. Examinership Claims should be submitted in writing to the examiner. Receivership The receivers main duty is to ensure the repayment of the debt of the secured creditor who appointed him. Preferential creditors should, nonetheless notify the company and the receiver of their claims in writing. Statutory Scheme of Arrangement Creditors should notify the company/applicant of their claims in writing.
Examinership The commencement of the examinership procedure does not affect the contracts subsisting at the date of such commencement, unless express or implied provision to the contrary is made in the contract. The general rule is that an examiner may not repudiate a contract entered into by company prior to the period during which the company is under protection except that the examiner may avoid certain provisions of a contract entered into by the company, in particular, negative pledge clauses if the examiner is of the opinion that the provision would be likely to prejudice the survival of the company or the whole or any part of its undertaking as a going concern if enforced; and the company itself may apply to the
Liquidations Any amount due to the holder of a fixed charge will be made out of the proceeds of sale of the charged asset and fall outside the statutory ranking of claims. Outside of those claims secured by fixed charges the ranking of claims is as follows:
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fees, costs and charges of an examiner; costs, charges and expenses of the liquidation; certain social insurance contributions; preferential creditors (such as Revenue and employees); payment due to the holder of any floating charge; and unsecured creditors. Examinership and Scheme of Arrangement There are no legal rules governing ranking of claims in an examinership or a scheme of arrangement. Receivership Where a receiver is appointed under a fixed charge the holders debt will be repaid to him and the receivers costs and expenses rank with the debenture holders debt. Scheme of Arrangement There is no general rule on ranking of claims and the arrangement itself will set out the terms of payment.
Ireland
Receivership The receiver will be discharged once he has realised the assets over which he has been appointed and the secured creditor (and any preferential creditors if appropriate) has been paid. Scheme of Arrangement This procedure will come to an end once the scheme comes into effect. The scheme takes effect once a copy of the High Courts sanction is filed with the CRO.

7.1 Is it common to achieve a restructuring outside a formal procedure in Ireland? In what circumstances might this be possible?
Tax liabilities are for the most part incurred as normal under each procedure. For example corporation tax will accrue to the extent that any trading continues as will VAT. Capital gains tax will arise on all chargeable gains on the disposal of assets and gains on distributions to shareholders as part of a liquidation will be taxable but as capital as opposed to income.
Informal schemes of arrangement are being considered more in recent times due to the perceived advantages of lower cost, the level of control which the board retains, the relative speed of the process and the privacy it affords. In such schemes corporate recovery is sought by the restructuring of the troubled companys finances by approaching the companys creditors to negotiate a private agreement. The disadvantages which accompany such informal schemes are that they do not import the immediate protection which more formal schemes enjoy and there is a risk from those creditors who do not sign up to the informal arrangement as there is no mechanism by which to compel them to participate.

Cramming down is possible in examinership and schemes of arrangement bearing in mind the level of approval necessary for such schemes. Cramming down does not arise in liquidations or receiverships.
In theory it is possible to reorganise a debtor if the requisite consent and co-operation is received from shareholders and creditors (if reorganising debts) or in the case of shareholders if the requisite control can be exercised e.g. by virtue of powers of attorney or other forms of security in place. In practice, the reorganisation of debt would require the consent of all creditors and the concern would be that approaching the creditors would result in insolvency proceedings being commenced by concerned creditors.
Court Liquidations Having passed his final account with the Examiner, the official liquidator usually applies to court for directions regarding how the balance should be disposed of. Once disposed as directed, the liquidator will obtain an Order dissolving the company. A compulsory liquidation ends when the Order dissolving the company has been notified to the Registrar of the CRO. Voluntary Liquidations As soon as the affairs of the company are fully wound up the liquidator prepares an account of the winding up and calls a general meeting. The liquidator must file a copy of the account with the CRO and on the expiration of three months from the registration thereof the company shall be deemed to be dissolved. Examinership The court protection afforded to the company during the examinership process ceases when the examiners proposals come into effect and the examiner is discharged. The High Court may direct that the process cease at an earlier date e.g. if the court refuses to confirm the examiners proposals.
The pre-pack process is a process which is experiencing increased use in the United Kingdom however it has not to date achieved the same level of notoriety in Ireland. A pre-pack is where a company is put into receivership/administration and then its business and/or assets are immediately sold under a sale which was arranged prior to the appointment of the receiver/administrator. Prior to the appointment of the insolvency practitioner a range of activities are undertaken to prepare for an immediate sale on appointment. These include sourcing potential purchasers, seeking initial offers, undertaking due diligence and negotiating a contract, the contract is not completed until the insolvency practitioner is appointed.

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8 International
8.1 What would be the approach in Ireland to recognising a procedure started in another jurisdiction?
Ireland
Ireland
Cross-border insolvency proceedings within EU Member States are governed by the EU Insolvency Regulation, Council Regulation
(EC) 1346/2000 (the Insolvency Regulation). This was adopted in Ireland in May 2002 and has the effect that irrespective of the jurisdiction of incorporation of the company, once insolvency proceedings have been commenced in one Member State, they must be recognised as having effect throughout the EU. Similar regulations have been brought into effect for banking and insurance undertakings.
Lorcan Tiernan
Dillon Eustace 33 Sir John Rogersons Quay Dublin 2 Ireland
Adrian Benson
Dillon Eustace 33 Sir John Rogersons Quay Dublin 2 Ireland
+353 1 667 0022 +353 1 667 0042 lorcan.tiernan@dilloneustace.ie www.dilloneustace.ie
+353 1 667 0022 +353 1 667 0042 adrian.benson@dilloneustace.ie www.dilloneustace.ie
TITLE: Head of Corporate and Mergers & Acquisitions. PRACTICE AREA: Corporate and M&A, Insolvency and Corporate Recovery, Banking and Capital Markets, and Financial Services. EDUCATION: University College Dublin, University of London and the Law Society of Ireland. PROFILE: Lorcan became a partner of Dillon Eustace in 2000 and Head of its Corporate and Commercial Department in 2004. Between 2007 and 2009 he ran a boutique private equity investment firm. His main areas of practice are corporate finance, corporate insolvency and mergers and acquisitions. He is a member of the International Bar Association and is a past-Chairman of the IFIAs Alternative Investment Committee as well as a past member of FEFSIs Hedge Funds Working Group. He is a director of a number of well known hedge funds and funds of funds.
TITLE: Partner. PRACTICE AREA: Corporate and M&A, Insolvency and Corporate Recovery. EDUCATION: University College Dublin and the Law Society of Ireland. PROFILE: Adrian joined Dillon Eustace in January 2005 and was appointed a partner in 2006. Adrian has extensive experience in mergers and acquisitions across a wide range of industries including IT, Energy, Food, Financial Services and Recruitment. Additional areas of expertise include corporate recovery and insolvency, shareholders agreements and disputes, joint ventures, inward investment, equity fundraising and venture capital, corporate finance and corporate governance. Adrian is a member of the Business & Commercial law committee of the Dublin Solicitors' Bar Association.
Dillon Eustace is one of Irelands leading law firms focusing on financial services, banking and capital markets, corporate and M&A, litigation and dispute resolution, real estate and taxation. Headquartered in Dublin, Ireland, the firms international practice has seen it establish offices in Tokyo (2000) and Boston (2003) as well as a strategic alliance with Arendt & Medernach, a leading Luxembourg law firm. Most recently, the firm has also opened an office in Cork (2007). In tandem with Irelands development as a leading international financial services centre, Dillon Eustace has developed a dynamic team of lawyers representing international and domestic asset managers, investment fund promoters, insurers, banks, corporates, TPAs and custodians, prime brokers, government and supranational bodies as well as newspapers , wind energy companies, aviation and maritime industry participants and real estate developers. We strive to develop our teams, to provide a sophisticated proactive service to clients and to deepen our understanding of each clients business and needs. We hope that the information provided on this site assists you firstly, as well as introduces us and our services to you. Firm and individual partner endorsements appear over the following pages. Contact Details Mark Thorne (Managing Partner) Dillon Eustace 33 Sir John Rogersons Quay, Dublin 2 Phone: 353 1 6670022 / Fax: 353 1 6670042
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Chapter 23
Israel
Meitar Liquornik Geva & Leshem Brandwein
Dan Geva
Debbie Kahila

1.1 How does a creditor take security over assets in Israel?
Under Israeli law, there are several customary types of charges securing debts of creditors of a company: Fixed Charge. The charge of a certain asset as a security until the debt of the assets owner or of a third party is settled. Unless otherwise agreed, the company may pledge the same asset by a second ranking charge and even transfer the rights in the asset to a third party, although, the rights of the third party will remain subject to the rights of the initial creditor(s). An additional type of a fixed charge is a fixed charge securing a debt utilised to acquire the pledged asset. The latter type of fixed charge enjoys a preferential distribution, even over earlier floating charges containing a negative pledge provision. Floating Charge. A charge over all or a part of unspecified assets of the company, including its future assets, which is created by a debenture registered with the Companies Registrar. Unless otherwise specifically stated, a floating charge would include the real property of the pledging company, as well as all of its assets that by their nature may change from time to time in accordance with the companys business and the nature of its operations. Generally and unless otherwise restricted pursuant to the debenture under which it is created, a floating charge does not restrict the companys conduct in its ordinary course, the sale of the charged assets in the ordinary course of business, or the imposition of additional charges and liens on the companys assets. When the floating charge crystallises, it becomes, in effect, a fixed charge over all the companys assets at the time of crystallisation. Lien. A contractual or a statutory lien is a right to retain possession of a third partys property until that other party settles its debt. However, the asset may not be sold by the creditor. In a statutory lien the assets in question are initially deposited with the creditor not for the purpose of security, but for some other purpose, typically, the performance of a service. The circumstances may vary in a contractual lien. Israeli case law has recognised the proprietary nature of a lien. See question 5.2 below for a discussion of the preferential treatment of a creditor holding a lien. Charges - Creation, Validity and Rights of the Creditor. The charge of an asset or assets of a company is a proprietary right which is created by an agreement between the company and the creditor. The charge is valid against third parties solely if registered with the Companies Registrar within 21 days of its creation; however, certain charges may be
1.2
perfected by the possession of the asset by the creditor or its agent. A charge over real-estate of a company (a.k.a., a mortgage) must also be registered with the Land Registry Bureau. Charges over vessels, patents, trade-marks and other assets subject to separate government registrars may be also registered with such registrars. Certain laws create statutory pledges, such as a maritime pledge and a pledge to secure the payment of certain taxes due in connection with real-estate. See question 5.2 below. A creditor has several rights in respect of the charged assets, the most important of which, is the right of the creditor to settle its debt by the sale of the pledged asset. The sale of the pledged asset may be solely effected by the court (or an official on its behalf) or the Office of Execution of Judgments, save for several specific exceptions which allow for self-help. Such procedures are more fully described in Section 2 below. Certain scholars also relate to a right to set-off in insolvency as an additional type of security. See question 3.3 below.
Fraudulent Preferences. One of the key principles of the Israeli insolvency rules is the rule of equality amongst paripassu creditors. In order to avoid illicit preferential payments to creditors, Israeli law stipulates that certain types of transactions, entered into within specified periods prior to the commencement of formal insolvency proceedings, may be deemed to comprise fraudulent preferences and shall therefore have no force and effect. The following transactions may be challenged: Any transfer, mortgage delivery of goods, payment or any act in relation to the assets of the company, effected during the three-month period preceding the commencement of a companys liquidation proceedings, will be void as a fraudulent preference if the following conditions are met: (a) the company has been declared insolvent; (b) upon the execution of the transaction, the company was unable to pay its debts when due; and (c) the transaction was executed in order to give a preference to certain creditor(s). The requirement that the transaction in question was executed in order to give a preference to certain creditor(s) requires that the party seeking to void a transaction as a fraudulent preference prove that the dominant purpose of the debtor effecting the transaction in question was in fact to give a preference to specific creditor(s). The foregoing would not derogate from the rights of a person who purchased

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property in good faith and for valuable consideration from the creditor of a bankrupt company. A transfer by a company of all its assets to a trustee for the benefit of all its creditors is void. Furthermore, a general assignment or endorsement of existing or future rights to another, if effected by a company that is declared insolvent in a later stage, shall not be valid unless duly registered. Current law does not stipulate a time limit between such transfer or assignment and the commencement of the insolvency proceedings. A floating charge on the companys assets, created within six months before the beginning of the liquidation proceedings, shall not be valid, except in respect of the amount paid to the company in cash in consequence of the charge, plus interest on that amount unless it is proven that the company was solvent immediately after creation of the charge. The general effect of this is that a floating charge for new money (that is, a new extension of credit at the time the floating charge is entered into) is not invalidated to the extent of the new money (or extension of credit) provided, but may be invalidated if granted for preexisting debt if the requirements stated above are satisfied. The repudiation of an onerous asset. A receiver may request the court presiding over an insolvency to repudiate the following assets/agreements of the insolvent company: (i) a transaction for the purchase of a real estate, containing burdensome conditions; (ii) shares of other companies which are not fully paid; (iii) a non-profitable contract; and (iv) any asset that cannot be sold by the liquidator at all or readily, as it requires the performance of a burdensome act or the payment of an amount. From the day of repudiation and onwards, all the companys rights to and liabilities from the repudiated asset shall cease, provided that the foregoing repudiation shall not prejudice any third partys rights except to the extent required to release the company from the onerous asset. Any party affected by such repudiation may demand any amount due to it under a repudiated agreement and may request damages as legitimate debt in the insolvency proceeding in accordance with the process outlined below. It is potentially possible to attack the validity of a contract on the basis of the general principles of good faith and pubic policy.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Israel?
Israel
companys assets will be allocated among them in preference to any shareholder. The Companies Ordinance imposes additional potential personal liability on officeholders of the company upon the issuance of a liquidation order. A breach of these fiduciary duties in the context of insolvency (including prior to the issuance of the liquidation order) exposes the directors to unlimited personal liability for all the companys debts, criminal liability and possible disqualification to continue to act as a director of the company (if public) and of other public companies for a specified period, as follows: In the liquidation of a company, the liquidator, the official receiver or a participant (a shareholder or a person who was a shareholder the year prior to day of liquidation) may request the court to order that any director (including past directors and persons instructing the directors) who was knowingly a party to carrying on the business of a company with intent to defraud creditors or any other person, or for any fraudulent purpose, be liable for the companys liabilities, in an unlimited amount. Where the court holds that the above conditions are met, the court may also impose civil or criminal personal liability on the director. Since the Ordinance also allows the imposition of criminal liability, a high level of proof is required for the purpose of the application of the foregoing liability. Based on the existing case law, the incurrence of additional debt where there is no reasonable likelihood that such debt will be repaid when due constitutes fraudulent trading, whereas, the rolling of the companys credit with the belief that the company is able to pay its debts when due does not qualify as such. The liability under this provision is not conditioned upon the proof of a causal relation between the fraud and the damages to the company. In the liquidation of a company, all the abovementioned applicants may request the court to order that any of the companys founders, officeholders, receivers and liquidators (temporary or permanent), who are found to have misused or retained any of the companys money or assets, be held accountable for them. Alternatively, if they have committed misfeasance or an unlawful act in any negotiations relating to the company, they may be compelled to repay, return or account for the money or property of the company with interest or compensate the company as the court deems just. Breaches of duty which could be relevant here, would include a breach of the fiduciary duties, fraudulent transfers, unlawful payments to directors and founders and the like. The application of this section is broader than that of the preceding one and only civil liability may be imposed on such a defendant, up to the amount of the damages caused to the company. A person shall be unfit to serve as a director in a public company for a period of five years following his/her conviction in a final judgment of offences by managers of a corporate body if so determined by the court, based on the gravity or circumstances of such offences. In certain recent precedents the Israeli courts have applied criminal and unlimited personal liability imposed to Schemes of Arrangement even in the absence of a liquidation process.
Israel
The Companies Law codifies the fiduciary duties that an office holder (including directors and executive officers, regardless of their title) owes to a company and its shareholders (taken as whole), and more specifically, the fiduciary duty (or duty of loyalty) and the duty of care. Such duties essentially create potential civil liabilities of the office holders. Furthermore, we note that pursuant to Israeli law, officeholders are subject to additional duties, such as the duty of good faith by virtue of the Contracts Law and the duty not to commit tortious acts pursuant to the Israeli Torts Ordinance. As long as a company is solvent, the creditors of the company are not entitled to interfere with the conduct of the companys business, with the exception of prohibited distributions. By virtue of the foregoing, the company or its shareholders (by a derivative action), may enforce the officeholders duties towards a company. Whilst a company is in financial difficulties, the fiduciary duties for the benefit of the company remain in place. However, the weight of the creditors interests increases once a company enters into financial difficulties, as any proceeds from the distribution of the
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Israel?
There are four formal procedures which may apply to a company in financial difficulties: A non-voluntary liquidation by the court. A voluntary liquidation by creditors and voluntary
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liquidation under the supervision of the court (collectively, unless otherwise specified, a voluntary liquidation). The appointment by the court of a permanent or temporary receiver over all or a part of the companys assets at the request of a secured creditor. A scheme of arrangement between the company and its creditors or shareholders or any particular class of the foregoing. As detailed in question 7.1 below, these arrangements are often utilised to allow the creation of a recovery plan and are combined with a negotiated reorganisation of the company in question. This procedure may include the appointment of an administrator or trustee. We note that a solvent company may initiate a voluntary liquidation without the supervision of the court but as such a liquidation applies to solvent companies we will not address it in this questionnaire.
2.2 What are the tests for insolvency in Israel?
Israel
process may be initiated upon the following occurrences: (a) upon the end of the companys duration or a terminating event to the extent defined in the companys articles of association) and the adoption of a subsequent resolution by the majority of the shareholders in each case; and (b) by the adoption of a resolution of the shareholders by a threequarters majority vote and the filing of a declaration of solvency by the directors of the company. If the directors are unable to declare that the company is able to pay its debts in full within 12 months, the liquidation will be controlled by the creditors. To the extent a court deems fit, the court may decide that such liquidation shall continue under its supervision and it may stipulate the manner in which the company shall be liquidated. Scheme of arrangement. There are no formal requirements that a company has to satisfy in order to be placed in such procedure. The initiation of such proceeding is not conditioned upon the companys insolvency. Receiver. At the request of the creditor, based on the conditions of the security agreement.
Under the Israeli law, a company is deemed insolvent if: (a) an undisputed debt of NIS 5 or more of the company is due and was not paid, provided that a demand was made and has remained outstanding for three weeks; (b) if the company does not fulfil an order in favour of a debtor; or (c) if the court determines that the company is unable to pay its debts when due, taking into consideration its future and conditional debts. Typically, Israeli courts have applied either the cash flow test or the balance sheet test to determine whether a company is insolvent. The cash flow test examines whether the company is unable to pay its debts as they fall due, taking into account such cash resources as it can obtain throughout the sale of its assets. The balance sheet test is satisfied if the value of the companys assets is less than the amount of its liabilities, taking into account its prospective and contingent liabilities. The appointment of a receiver or the companys admission of its inability to pay its debts may also indicate the companys insolvency.
2.4
See also our response to questions 2.1 and 2.3 above. Liquidation by the court. As described above, a company enters into a compulsory liquidation through a liquidation order issued by the court. Generally, an application for such liquidation of a company may be filed by the company, a creditor (including a conditional or a future creditor, subject to the deposit of security), a participant (as defined above, subject to certain limitations) and/or in certain of the situations specified above also by the Attorney General and the Companies Registrar. A copy of the application must be filed with the company (if not filed by it) and the Official Receiver together with a bond as an advance for its expenses. The applicant must publish a notice in a daily paper and the Official Gazette (a publication of the Israeli government) at least 14 days prior to the date of the hearing on the filing. Any person wishing to participate in the hearing may do so by notifying the applicant and may object to the procedure at least seven days prior to the hearing. At the hearing, the court may elect to issue a liquidation order and may appoint a temporary receiver or special administrator until the issuance of the liquidation order. Voluntary Liquidation. Concurrently with the calling of the shareholders meeting or a day after, the company has to call a creditors meeting by giving notice to the creditors and by publishing notice of the meeting in the Official Gazette and in one widely circulated local newspaper. Receiver. Generally, the enforcement of rights under a debenture or charge agreement does not require a court approval, however, the realisation of a charged asset may be made solely by application to a court or to the Office of Execution of Judgments (except for limited exceptions applicable mostly to banks). The enforcement of rights under a floating charge or of a charge over uncalled capital and goodwill requires the approval of the court. The court may provide any remedy, including the appointment of a receiver and it may stipulate the rights and authorities of such receiver. Scheme of Arrangement. A company (or an administrator or liquidator) or any creditor or shareholder of a company may request the court to summon a meeting of creditors or shareholders to agree to a compromise or arrangement between the company and its creditors or shareholders.
Liquidation by court. The court may liquidate a company on each of the following grounds: The company adopted a special resolution under which it resolved to be liquidated by the court. The company did not commence its operations within one year of its inception or has ceased to operate for a year. Liquidation on these grounds may be also requested by the Attorney General. The company has become insolvent. The court finds that it is just and equitable to liquidate the company. Liquidation on these grounds may be also requested by the Attorney General. These grounds have been typically used in instances of fraud or illegality, when the company could not fulfil the purpose of its incorporation, deadlock, or deprivation of minority rights. The company was not properly registered. Liquidation on this basis may be requested solely by the Attorney General. If within a period of three years the company did not pay when due more than two fines imposed upon it by the Companies Registrar. Liquidation on this basis may be requested solely by the Companies Registrar. Voluntary Liquidation. A voluntary liquidation is controlled by the shareholders without the supervision of the court and is typically utilised with respect to solvent companies. Such

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liquidation is not an officer of the court, is not obligated to report to the Official Receiver and it is not obligated to notify the Companies Registrar of its appointment or to deposit a security. Receiver. Within seven days following its appointment, a receiver must notify the Official Receiver and the Companies Registrar of its appointment, and the Companies Registrar is supposed to register the appointment in the companys public records. The appointment of the receiver must be specified on every invoice, order for goods or business letter issued by the company, the receiver or on their behalf. Within one month (or later if so instructed by the Companies Registrar) and six months of its appointment and six month intervals thereafter, the receiver is required to send a report to the Companies Registrar, together with a summary of its actions, and a final report within one month following completion of the process. During this period the court may stipulate that the performance of certain actions by the receiver shall be subject to the approval and/or instructions of the court. Scheme of Arrangement. To secure the approval of a scheme, the shareholders and each separate class of creditors must vote in favour of the scheme, by a majority of the number of those voting and a three-quarters majority in interest at each meeting. If the court approves the scheme of arrangement, the compromise or arrangement will be binding on the company and all the creditors or shareholders. Following approval, an official copy of the scheme of arrangement is delivered to the Companies Registrar for registration and it is that filing process which makes the scheme effective and binding.
See also our response to question 2.4 above. Liquidation by court. In the event that the court decided to appoint a temporary liquidator, the task of the liquidator shall be to collect and safeguard the assets of the company until the appointment of a permanent liquidator. The temporary liquidator shall file with the court a final report of his actions as well as a financial report. The court that issued the liquidation order will provide the Official Receiver with three (3) copies of the order. The Official Receiver then automatically assumes the role of the liquidator until another liquidator is appointed, if any. The Official Receiver must publish a notice of issuance of the liquidation order and the time of gathering of the creditors and participants in the Official Gazette as well as in a daily newspaper. Notifications of the order shall be also registered in the companys public records (including the land registrar etc.). The Official Receiver must then convene a meeting of the companys creditors, the function of which is to elect the liquidator and the audit committee. The appointment of the liquidator must be specified on every invoice, order for goods or business letter issued by the company, the receiver or on their behalf. The liquidator is an officer of the court and its principal duty is the management of the liquidation proceedings in accordance with the courts instructions. The Official Receiver or the liquidator must send the court a copy of each and every decisions made by the assembly of creditors and it has various authorities and responsibilities. Voluntary Liquidation. The applicant must publish a notice of issuance of the order in the Official Gazette, or otherwise as instructed by the court. After the decision to liquidate is made, a meeting of creditors will be assembled, to which the board of directors must provide a report of the companys affairs and provide the full list of the companys creditors and debts. In the creditors meeting, the creditors may elect a liquidator and/or an audit committee comprised of up to five members. The appointment of the liquidator must be specified on every invoice, order for goods or business letter issued by the company, the receiver or on their behalf. A voluntary liquidation of this sort is controlled by the creditors, although a court may determine to conduct part of the liquidation under its supervision. The liquidation would be managed by a liquidator appointed by the company, unless the creditors have elected a different liquidator. The liquidator may generally utilise its authorities without the approval of the court (subject to specified exclusions). The court may appoint an additional liquidator having similar authorities. The Official Receiver or any other person entitled to apply for liquidation under the supervision of the court may request that the voluntary liquidation shall be converted into a standard liquidation if the rights of the creditors and/or participants may be compromised in the absence of the courts more stringent supervision. If the course of the liquidation takes more than one year, the liquidator must: (a) call a meeting of the shareholders and a meeting of the creditors at the end of the first year and each successive year to keep the shareholders and creditors informed of the progress in the liquidation; and (b) provide the Companies Registrar with reports on the progress of the liquidation and its current state. A final meeting of the shareholders is held prior to dissolution where the liquidator presents to the shareholders an account of how the liquidation was conducted. This meeting is called by publication of notice in the Official Gazette at least one month before the meeting. Within one week of this final meeting, the liquidator is required to file a final report with the Companies Registrar with respect to the outcome of the final meeting. We note that in contrast to the liquidator in an involuntary liquidation, the liquidator in a voluntary
2.6
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How does somebody establish whether the company has been placed into one of these procedures?
Please refer to response to question 2.5.
3 Creditors
Liquidation by the court. Once a temporary receiver has been appointed, upon the issuance of an order for liquidation, a stay of proceeding automatically arises. As long as the stay is in effect, the continuance or commencement of any proceeding against the company is prohibited, including under the Execution of Judgments Law other than (a) with respect to any proceeding the implementation of which was completed before the stay was issued even if money was received later, or (b) proceedings allowed to proceed or commence with the permission of the court or (c) realisation by secured creditors as explained below or (d) criminal proceedings against the company. As unsecured creditors occupy the lowest position in the hierarchy of creditors, ranking only above the shareholders, such creditors have no freedom to enforce their rights under a liquidation, and are compelled to prove their debt to the liquidator and receive the distribution pari passu with all other unsecured creditors (if available). The above description would also apply to a liquidation under the supervision of the court. Voluntary Liquidation. Unlike in the event of a liquidation by the court, no automatic stay of proceeding order is issued upon the issuance of an order for a voluntary liquidation by the creditors. The liquidator may request the court to issue such an order and the similar limitations described in the preceding paragraph would apply in the event such stay was issued. Appointment of a Receiver. The appointment of a receiver
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does not create an automatic stay of proceedings and creditors may begin or continue legal actions against the company, including petitioning for its liquidation, whilst the company is under receivership. Scheme of Arrangement. If a scheme of arrangement is approved by the applicable majorities of the shareholders and the creditors and the court, it binds the company, its shareholders and all its creditors who would have been entitled to vote even if they did not actually vote for the scheme. Any objection may be heard solely in the framework of the approval of the arrangement by the court. Until the approval of the arrangement, the court may, if it is satisfied that doing so will assist the formulation and approval of the scheme, issue an order for a stay of proceedings of up nine months. During the pendency of any such stay, it would not be possible to continue or to initiate any proceeding against the company (including under the Execution of Judgments Law other than (a) with respect to any proceeding the implementation of which was completed before the stay was issued even if money was received later, or (b) proceedings allowed to proceed or commence with the permission of the court, including, a request by a secured creditor to realise its security. Such order may be issued ex parte, provided that its issuance has been made public or the affected party has been notified as per the instructions of the court. Any person injured by the order may apply for its cancellation within 30 days following the issuance of the order or during a longer period if circumstances have changed substantially.
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counterparty, subject to the conditions specified in the law, unless otherwise agreed between the parties. Current case law in Israel provides that set-off under the Bankruptcy Ordinance shall apply as of the issuance of a liquidation order. The Bankruptcy Ordinance provides that where there have been mutual credits, mutual debts or other mutual dealings between a debtor whose assets are subject to liquidation, a set-off of the amount due from one party to the other in respect of such mutual dealings is permissible to the extent provable and the balance of the account shall be claimed or paid respectively. No set-off against the property of the debtor is allowed, if, at the time of giving credit to the debtor, the creditor had notice of an act of insolvency, which term is not clearly defined under Israeli law. The transactions and obligations subject to set-off under this Section shall be determined according to the status of the dealings between the parties at the date of appointment of the liquidator. These provisions of the Bankruptcy Ordinance are applicable as a matter of law, and as such they override any contrary contractual agreement and cannot be expanded by contractual agreement.

Liquidation by the court & voluntary liquidation. In each such liquidation and regardless of whether a stay of proceedings is in effect, secured creditors may enforce their security to recover up to the amount of their secured debt. Any balance from such realisation exceeding the secured debt will form part of the assets of the company to be distributed by the liquidator. If the value of the security is less than the value of the debt, then, the secured creditor may recover the balance of the sum owed to him (exceeding such value) pari passu with the unsecured creditors. The creditor may allow the liquidator to realise the security and receive payment from the liquidator based on an estimate. The creditor may also surrender its security for the general benefit of the creditors, and agree to rank as an unsecured creditor in respect of the debt owed to it. No limitations apply on the enforcement upon the appointment of a receiver, as explained above. Scheme of arrangement. In such case, the secured creditors (as well as creditors seeking to crystallise a floating charge) may enforce their security solely with approval of the court.
Liquidation by court. The commencement of the liquidation does not affect the existence of the companys separate legal capacity. However, the entry into liquidation revokes and terminates the authorities of the management and officeholders of the company, although the liquidator may request, at the courts discretion, that the officers of the company continue to manage the company for a limited period of time. In the period between the filing of the petition and the liquidation order, the court may appoint a temporary liquidator. Generally, a request for the appointment of a temporary liquidator would be submitted in addition to the liquidation petition; this is usually due either to the urgent nature of the need for confiscation of property in order to maintain the assets of the company or due to the need for the continuing operation of the company. Upon the issuance of a liquidation order, the liquidator is empowered with wide-ranging authority in order to allow him to collect and distribute the assets of the company, including the authority to mange the companys affairs to the extent necessary for an expedient liquidation, subject to the instructions of the court and subject to law. After the commencement of the liquidation all share transfers are deemed void as is any alteration in the standing of the shareholders, unless otherwise instructed by the court. Once the liquidator is appointed, the shareholders may not file any derivate claim or a claim on behalf of the company. Voluntary liquidation by creditors and under court supervision. Upon the appointment of a liquidator, the company must cease its operations, apart from those that are required for an efficient liquidation. Nonetheless, the companys corporate existence continues until the company has been finally dissolved. The liquidator is obliged to perform its duties solely for the purpose of an efficient liquidation and once a liquidator is appointed, the directors cease to have the authority to act on behalf of the company, unless such authority is specifically granted by the audit committee or by the creditors. The creditors of the company control the insolvency proceeding throughout the liquidation. As an integral element of the continuation of the business operation, all share transfers, apart from those transferred to the liquidator (or approved by him), are deemed void as is
The application of insolvency set-off is not relevant in the context of receiverships. As to schemes of arrangement, insolvency laws make no special provisions in respect of the application of setoff in these circumstances, however, courts have limited contractual setoff in certain circumstances. In a liquidation of a company, prior to and following the issuance of a liquidation order, the following shall apply: Prior to the issuance of a liquidation order, the Israeli Contracts Law allows one party to a contract to set-off obligations arising under another contract with the same

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any alteration in the standing of the shareholders after the initiation of liquidation. Liquidation under court supervision is legally identical to liquidation by the court apart from several exceptions which are not relevant to this question. A receiver is a manager of the whole (or substantially the whole) of the companys property, however, its particular authority is stipulated by the court upon its appointment. In certain cases, the company is under the control of the administrative receiver and its appointment leads to the suspension of the directors powers of management. The receivers primary duty is owed to the secured lender who appointed him to seek repayment of the secured debt. Similarly, in certain cases, the powers and rights of the companys shareholders are also suspended. Scheme of Arrangement. In a scheme of arrangement the management remains in control of the company, and no reliance is placed upon an independent insolvency officer. A scheme of arrangement does not necessarily affect the rights of a shareholder. We note however that shareholder rights may be modified by the scheme itself.
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although and based on the terms and conditions of the applicable contract, the liquidation may be a ground for termination. The liquidator may request the court to repudiate an onerous asset of the company as described in question 1.2 above. In the event that both parties stated in a contract have not executed their contractual obligations, the company under liquidation proceedings will remain committed to perform its obligations under the agreement. The Israeli court determined that a liquidator is not authorised to demand the counterparty to execute a contract, in the event that the company is not capable of executing its part of the agreement. Contracts entered by a company or share transfers effected following the filing of the liquidation application are void unless the contracts were carried out or approved by the liquidator, and approved by the court. Generally, a scheme of Scheme of Arrangement. arrangement does not inherently have an effect on the companys contracts; any effect depends entirely upon the terms of such arrangement. The stay of proceeding order which may be issued does not prevent counterparties from cancelling contracts with the company, if permitted under the applicable agreement. The company will potentially need to negotiate with its key suppliers and customers if it wishes to continue its business in the ordinary course. The appointment of a receiver does not terminate or affect company contracts, unless provided for in the contract itself.
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Liquidation by court or Voluntary Liquidation. Generally, in the absence of additional funding sources which may be procured (subject to the applicable procedures and approvals), the liquidation expenses are payable out of the companys assets available for distribution in the liquidation and are considered as preferred debts in liquidation. See further information in our response to question 5.2 below. The financing of such expenses in a scheme of arrangement is made by the company pursuant to the particulars of the scheme. In the case of an appointment of a receiver, the parties typically contract that the expenses shall be borne by the company and payable from its assets.
5 Claims
A scheme of arrangement or a receivership procedure do not have a direct effect on employees, however, the content of any arrangement may by itself refer to employees and their rights and set specific arrangements pending upon the merits of the matter. Liquidation by court. As soon as the liquidation order is published, all the employees (including the general manager) are deemed to have been automatically discharged and the employees will be entitled to claim severance pay from the Social Security Institute, up to a certain limit and employment claims may arise against the company as a result. Voluntary liquidation. Under Israeli case law, in the event of voluntary liquidation, if the liquidator does not require all of the employees in order to perform an efficient liquidation, it may discharge any employee which is not required and such employee shall be compensated in accordance with law. Accordingly, the courts have ruled that an employee terminating his employment at will, shall not be entitled to severance payment. Note that certain amounts of employees wages are deemed as preferential payment. See question 5.2 below.
In order to ascertain the debts of the company, the Companies Ordinance has established a process for the claiming of debts in a liquidation. The Ordinance provides that the liquidator shall receive all the provable claims and decide upon their acceptance. Any existing, future, certain or contingent, fixed or unfixed debt may be claimed in a liquidation. A creditor wishing to claim in a liquidation must submit a formal claim, known as a proof of debt, to the liquidator within six months following the commencement of an involuntary liquidation. In a voluntary liquidation or a liquidation under the supervision of court, a creditor who wishes to claim his debt, can also elect to claim its debt in court. Once the creditor elected an application to the liquidator, it cannot claim its debt in court. If the creditor is not satisfied with the liquidators decision it may appeal to the court. In the event of a claim for wages, a unified claim may be filed on behalf of all affected employees. There are no similar procedures applicable to a scheme of arrangement and/or receivership. The mechanism by which creditors seek payment of sums owed to them will vary according to the terms of each arrangement. For information relating to secured creditors - see question 3.2 above.
Generally, the priority of claims on the companys assets will be determined in the following order: 1. Secured Creditors - including: (a) statutory pledges: (i) outstanding tax debts subject to a statutory pledge over the land in question which pledge overrides pledges registered up to the amount of the tax due; or (ii) with respect to maritime vessels - holders of statutory maritime pledges with respect to certain debts; (b) certain costs related to execution of judgments; and (c) secured creditors with valid security
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Voluntary and non-voluntary liquidation. The liquidation by itself does not automatically terminate company contracts,
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interests including fixed equitable charge, legal mortgage and floating charges which crystallise prior to the liquidation process and holders of a lien in the framework of a contractors services. 2. 3. Liquidation expenses. Preferential creditors - specifically certain employee wages (to a limited extent), and different payments or taxes to tax authorities. Pledgees under floating charges which crystallised with the liquidation of the company. Unsecured creditors. Surplus assets are distributed between the members (shareholders) in accordance with their entitlements.
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implemented under the supervision of the companys directors. Once the implementation is completed, the company reverts to its former status. Receiver. The outcome of such proceeding varies and is generally stipulated by the court.
4. 5. 6.
7.1
Is it common to achieve a restructuring outside a formal procedure in Israel? In what circumstances might this be possible?
The costs and expenses of the liquidator that are to be paid from the proceeds of the liquidation estate are usually ranked after the secured creditors (number 1 above) and before the preferential creditors (number 2 above), unless the expenses are for safeguarding the integrity of the assets of the company or their realisation, in which case they will be ranked prior to the secured creditors (number 1 above). However, not every debt created after the liquidation process should be regarded as liquidation expenses and given priority. The rule stipulates that the expenses must have been spent for the benefit of the creditors.
A company entering into each of the procedures remains subject to the same tax regime applicable to it prior to any such proceeding. If appointed, the liquidator is responsible for payment of any tax due from the liquidation estate and its actions.

While there is no specific statutory arrangement similar to Chapter 11 of the US Bankruptcy Code under Israeli law, there are various arrangements and procedures which allow for the achievement of a restructuring outside formal insolvency proceedings. As there is no statutory source for such arrangements, the courts have, where appropriate in their discretion and after taking into account the particular circumstances of the company in question, utilised the available insolvency proceedings to the same end. Such arrangements have created hybrid proceedings of a negotiated arrangement under the supervision of the court. In these cases, the company remained in the state of temporary liquidation until its recovery and only then did the temporary liquidation cease. The primary and most utilised proceeding in that respect is an order for a stay of proceedings issued for a maximum period of nine months. During that stay period any new or continuing proceedings against the company may not be conducted (including executions of judgments and the realisation of a fixed or a floating charge, save with the approval of the court). In addition, companies often utilise a scheme of arrangement or the appointment of an administrator, trustee, special manager or a receiver over the companys assets, as detailed above, when combined with a stay of proceeding.
See question 3.1 above under the title scheme of arrangement.

Liquidation by court. Following the dissolution of the company, the court will issue an order by which the company will be liquidated from the date of issuance of the final dissolution order. The liquidator must inform the Companies Registrar of the issuance of order within 14 days from its date of issuance and the Companies Registrar will record the liquidation in his records. Voluntary Liquidation. Following the dissolution of the company, the liquidator shall prepare a report regarding the dissolution process, to be presented to and approved by the shareholders and creditors at the final shareholder and creditors meetings, called by at least one month notice. The liquidator is thereafter required to file with the Companies Registrar a copy of the report and a notification of the calling of the shareholder and creditors meetings within one week from the date on which the meetings were held. Upon the expiration of three months from such notification, the company is deemed liquidated, unless the court has postponed such dissolution upon an application by the liquidator or any interested party. In each of the above proceedings, a company may be revived within two years following its liquidation upon the application of the liquidator or an interested party. Scheme of Arrangement. Once a scheme is approved, it is
As outlined in question 7.1, there is no prescribed format for a reorganisation of a debtor; however, in response to the arising need for creative and more flexible solutions, courts have, where appropriate in their discretion, utilised the available insolvency proceedings to the same end.
Although there is no mechanism for the independent sale of assets other than a Liquidation by court or voluntary liquidation and a scheme which require the consent of the creditors, courts have permitted a package sale of all of a companys assets to one buyer in instances where, the courts determined, such sale was for the benefit of the companys creditors.
8 International
8.1 What would be the approach in Israel to recognising a procedure started in another jurisdiction?
We note that under Israeli law, Israeli courts possess the authority to wind up an insolvent foreign company which has a branch in Israel or which has assets in Israel. The Israeli proceedings would be

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ancillary to or in cooperation with the foreign proceedings and the Israeli courts have an inherent jurisdiction to co-operate with foreign insolvency representatives and recognise foreign proceedings. The Israeli court stated that the enforcement and recognition of a foreign judgment in connection with insolvency is possible under Israeli law, pursuant to the provisions of the Israeli Enforcement of Foreign Judgments Law, even in the absence of a specific agreement between Israel and the country of origin of the judgment, subject to certain limitations. In the consideration of the enforcement of the foreign judgment, the court takes into account public policy concerns stemming from the effect that enforcement would have over preferred debtors in an Israeli insolvency proceeding (employees and the like). The court stated that an
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Israeli court is obligated and is authorised to secure the interests and sovereignty of the State of Israel, and must therefore ensure that the position of the Israeli tax authorities, Israeli employees and other creditors having priority under Israeli law would not be impaired due to the overall proceeding being conducted abroad. Therefore, it may authorise the initiation of an ancillary local insolvency proceeding over the assets and activities in Israel which shall be governed by the Israeli insolvency laws. The courts stressed that with respect to the assets and operations in Israel the local proceeding is the primary proceeding, overriding the international proceeding in the home country. The foreign country liquidator would receive from the Israeli liquidator any surplus assets remaining after the completion of the Israeli ancillary proceedings.
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Dan Geva
Meitar Liquornik Geva & Leshem Brandwein 16 Abba Hillel Silver Road Ramat Gan 52506 Israel
Debbie Kahila
Meitar Liquornik Geva & Leshem Brandwein 16 Abba Hillel Silver Road Ramat Gan 52506 Israel
+972 3 610 3100 +972 3 610 3766 dan@meitar.com www.meitar.com
+972 3 610 3100 +972 3 610 3766 debbie@meitar.com www.meitar.com
Dan Geva, a partner in the Corporate and Securities Group, advises Israeli and international corporations in planning and structuring complex transactions involving acquisitions, divestitures, restructurings and associated corporate finance matters. Dan also has significant experience advising emerging growth companies in all stages of their development. Dan represents Israeli and international issuers and investment banks in a variety of financing matters, and has worked on numerous initial public offerings and other offerings registered with the US Securities and Exchange Commission, as well as offerings exempt from SEC registration pursuant to Rule 144A and Regulation S. Prior to joining MLG&LB, Dan was an associate at Skadden, Arps, Slate, Meagher & Flom in New York. Education: Tel-Aviv University (LL.B., 1983); New York University (LL.M., 1990). Member: The Israel & New York Bar Associations. Admitted: 1989 Israel, 1992 New York. Languages: Hebrew and English. Born: Israel.
Debbie Kahila, a partner in the Corporate and Securities Group, represents corporations in a wide range of international and domestic corporate and commercial transactions, including mergers and acquisitions, venture capital investments, venture lending, public and private debt and equity financings, joint ventures and strategic collaborations, technology licensing and distribution and marketing arrangements. Debbie also provides to both public and privately held companies ongoing legal advice on corporate and commercial issues. Education: Tel-Aviv University, Israel (LL.B. 1999). Member: The Israel Bar Association. Admitted: 2000 Israel. Languages: Hebrew and English. Born: Tel-Aviv, Israel.
Meitar Liquornik Geva & Leshem Brandwein is one of Israels largest law firms, and is Israels leading practice in international corporate transactions. The firm has over 100 lawyers and is highly ranked by Chambers Global and the European Legal 500. The firm handles domestic and international matters, including mergers and acquisitions, public offerings, private equity, banking, litigation and other matters. The firm represents clients from both the international and domestic Israeli business communities, and offers clients hands-on international legal practice. Many of the firms partners are U.S. natives or Israelis who practiced in the U.S., and the firm focuses particularly on introducing foreign clients to the Israeli business community and legal environment.
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Chapter 24
Italy
Bonelli Erede Pappalardo
Vittorio Lupoli
Andrea De Tomas

1.1 How does a creditor take security over assets in Italy?
(e)
transactions expressly excluded from bankruptcy claw-back: payments for goods and services in the normal course of business on standard terms; payment on a bank account, not substantially and permanently reducing the exposure of the debtor towards the bank; sales and preliminary contracts of sale of real estate for adequate consideration (to be used as the residence of the purchaser, relatives and persons connected by affinity within the third degree) that have been transcribed pursuant to art. 2645 bis of the Italian Civil Code and whose effects are still in force; acts, payments and securities made or granted on the debtors assets on the basis of a restructuring plan certified by an independent expert that has to be: (i) enrolled in the auditors register; and (ii) a lawyer or a professional accountant or an association of professional practices or a professional partnership whose associates are lawyers or professional accountants; acts, payments and securities made or granted in connection with the implementation of a pre-bankruptcy agreement or an in-court debt restructuring agreement; payments of salaries/compensation to the employees of the debtor; and payments of expired debts relating to the consideration for services necessary for the debtors admittance to prebankruptcy agreement and in-court debt restructuring agreement.
A credit may be secured by: (a) (b) (c) pledge over (i) movables; (ii) receivables; and (iii) other rights in movables; mortgage over: (i) vessels; (ii) aircraft; (iii) motor vehicles; and (iv) real estate; and privilege over movables, stock and real estate assets, granted in accordance with the law, depending on the source of the credit.
1.2
1.
Certain transactions may be clawed-back if they are entered into during a specific period before the bankruptcy declaration (suspect period): transactions entered into for no consideration (suspect period: two years); payment of debt, whose date of expiry is simultaneous or subsequent to the date of declaration of bankruptcy (suspect period: two years); anomalous transactions: transactions which may be clawedback unless the third party proves that at the time of the transaction it was unaware of the insolvency of the debtor: transactions in which the value received by the third party is at least 25% higher than (A) the consideration actually paid to the debtor, or (B) the value of the benefit actually received by the debtor (suspect period: one year); anomalous payments, i.e., not in cash or by other normal means of payment (suspect period: one year); the granting of security interests to secure pre-existing unexpired debts (suspect period: one year); and the granting of security interests to secure pre-existing expired debts (suspect period: six months); 1. (a)
1.3
(a) (b)
(c)
2.
Transactions entered into whilst the company is in financial difficulties may be also clawed-back under the rules governing the ordinary claw-back actions (art. 2901 Italian Civil Code), which, for their successful conclusion, call for more rigorous requirements and that, therefore, are rarely brought about.
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Italy?
Civil liability: vis--vis the company for the non-fulfilment of their respective duties with the diligence required and for the nonfulfilment of their duties to prevent prejudicial acts that the directors were previously aware existed; vis--vis the companys creditors for the non-observance of their respective duties concerning the preservation of the companys assets; vis--vis the company, the shareholders, the companys creditors and third parties, in case of delay or omission in
(d)
normal transactions: transactions which may be clawed-back provided that the official receiver proves that the third party was aware of the insolvency of the debtor at the time of the transaction (suspect period: six months): transactions for adequate consideration; normal payments of expired debts; and the granting of a priority right for the payment of a debt (including third partys debt) simultaneously created; and
(b)
(c)

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ascertaining an event that causes the dissolution of the company; and (d) vis--vis shareholders and/or third persons who have been directly damaged as a result of the directors malice, fraud or negligence. Criminal liability in case of: non-disclosure or destruction of all or part of the assets and in the case of disclosure of non-existing debts; destruction of accounts with the intent of causing prejudice to the creditors; irregular bookkeeping and consequent impossibility to ascertain the companys assets; the director does not commence the insolvency proceeding and such delay causing losses; the company raises further indebtedness and the directors failure to disclose that the company was insolvent to the relevant creditors; and payments made to some creditors, in order to offer benefit to them but damaging other creditors, being that the company is already insolvent. (c)
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for bankruptcy was filed or, if less than three years elapsed, in the financial years prior to the date on which the business of the company was started; or more than Euro 500,000 of debts (including no overdue debts).
2.
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(a) (b) (c) (d) (e)
A company cannot be placed into a bankruptcy procedure when all of the above mentioned thresholds are not met. In any case a company cannot be placed into a bankruptcy procedure when the amount of the debts overdue and not paid is less than Euro 30,000 irrespective of the above mentioned thresholds. 2. Compulsory administrative liquidation: a company is placed into this procedure when (i) it is insolvent and (ii) it is a company which, in accordance to Italian law, may be placed into a compulsory administrative liquidation procedure (i.e., banks, insurance companies). 3. Pre-bankruptcy agreement: the debtor is placed into this procedure when: (a) (b) it is in a state of crisis; and it proposes to its creditors a plan which may provide for the following: the restructuring of debts and the payment of credits to be carried out by any possible means, including the sale of assets, assumption of obligations (accollo) or the assignment of shares, quotas, bonds - also convertible into shares - or other securities in favour of the creditors or companies participated by the creditors; the assignment of the debtors assets in favour of an assignee (assuntore); the subdivision of the creditors into different classes categorised according to their similar legal status (i.e., seniority) and economic interests; or the different treatment for creditors belonging to different classes. However, the debtor cannot be placed into a pre-bankruptcy agreement when all of the thresholds sub question 2.3 paragraph 1 are not passed. The plan may also provide for creditors whose claims are secured by pledge, mortgage or privilege not to be paid in whole if the amount they receive is not less than the amount they would have received from the proceedings from the sale of the secured assets. The different treatment for creditors who belong to different classes shall not affect the priority of payment of the priority claims. The plan sub (b) below must be supported by a report on its viability made by an expert. Such expert has to be (i) enrolled in the auditors register; and (ii) a lawyer or a professional accountant or an association of professional practices or a professional partnership whose associates are lawyers or professional accountants. 4. Bankruptcy agreement: the debtor is placed into this procedure when, during a bankruptcy proceeding, one or more creditors, a third party or the debtor itself propose a plan, which may provide for the following: (a) (b) (c) the restructuring of debts and the payment of credits to be carried out by any possible means (see point 3 (i) above); the assignment of the debtors assets in favour of an assignee (assuntore); the subdivision of the creditors into different classes categorised according to their similar legal status (i.e., seniority) and economic interests; or the different treatment for creditors belonging to different classes.
(f)
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Italy?
Bankruptcy (fallimento); compulsory administrative liquidation (liquidazione coatta amministrativa); bankruptcy agreement (concordato fallimentare); pre-bankruptcy agreement (concordato preventivo); Prodis extraordinary administration proceeding (amministrazione straordinaria); and Marzanos extraordinary administration proceeding (amministrazione straordinaria Marzano).
2.2 What are the tests for insolvency in Italy?
Insolvency is the debtors incapacity to regularly fulfil its obligations. This might occur not only when a debtor is unable to regularly perform its obligations or to pay its debts, but also when: (a) (b) a debtor sells all or part of its assets for a price well below their fair market value in order to obtain cash; and/or a debtor pays its creditors through means different from those regularly employed (e.g., payments in kind).
Therefore, the status of insolvency does not even require that the debts of the debtor exceed the assets of the business. In fact, if the debtor needs to sell its assets in order to meet its obligations, the commencement of a bankruptcy proceeding should nonetheless occur.
1. Bankruptcy: a company is placed into a bankruptcy procedure when it is insolvent and when any of the following thresholds is passed: (a) more than Euro 300,000 of annual asset (attivo patrimoniale annuo) in each of the last three financial years prior to the date on which the petition for bankruptcy was filed or, if less than three financial years elapsed, in the financial years prior to the date on which the business of the company was started; more than Euro 200,000 of annual revenue in each of the last three financial years prior to the date on which the petition
(d)
(b)
Please note that the debtor may propose a plan only after one year
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from the declaration of bankruptcy and within two years from the decree that has closed the list of liabilities of the bank proceeding (stato passivo). 5. Prodis extraordinary administration proceeding: a company is placed into this procedure when it has more than 200 employees and a total indebtedness of not less than two-thirds of the aggregate of the total assets and the revenues of the preceding financial year and its business may be preserved through: (a) the sale of its business according to a plan which provides for the continuance of the business for a maximum of one year; or the economic and financial restructuring of the debtor according to a restructuring plan lasting a maximum of two years.
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The Court may grant to the debtor a 15-day period from the filing of the plan to amend the application and deposit additional documentation. The plan may not be amended after the creditors start voting. Upon the file of the request, the Court - after briefly evaluating the conditions of admissibility of the procedure - appoints, inter alia, a judicial commissioner, who has the task to communicate to all creditors the substance of the debtors proposal and the date of the hearing in which the creditors shall be required to vote on the debtors plan. Such plan has to be approved by the majority of the creditors (where different classes of creditors are envisaged, the plan is deemed approved when the majority of creditors in the majority of classes has voted in its favour). The plan may also provide for creditors whose claims are secured by pledge, mortgage or privilege not to be paid in full if the amount they receive is not less than the amount they would have received from the proceedings from the sale of the secured assets. The different treatment for creditors who belong to different classes shall not affect the priority of payment of the priority claims. Priority claims to be paid in full (credits secured by pledge, mortgage or privilege) do not carry voting rights unless the creditors waive in whole or in part their right of priority. Upon approval of the pre-bankruptcy agreement by the creditors, the Bankruptcy Court has to approve the agreement within six months as from the date on which the debtor has filed the petition. If the debtors proposal is not approved, the Bankruptcy Court may declare bankruptcy upon request of the public prosecutor or of the official receiver. 4. Bankruptcy agreement: upon the lodge of the plan (see question 2.3 above), the Bankruptcy Judge requires the opinion of both the official receiver on the viability of the proposal and the securities that have been offered and the creditors committee on the same matter. The opinion of the Bankruptcy Judge is limited to the compliance of the bankruptcy agreement with the relevant rules of the procedure. If the plan meets the favour of the official receiver and the creditors committee, it has to be communicated to the creditors by the official receiver, together with the opinions of the official receiver and the creditors committee and with the indication of the hearing in which the creditors shall be required to express their opinion on the proposal. Such proposal has to be approved by the majority of the creditors (where different classes of creditors are envisaged: see sub-paragraph 3 above). The creditors are informed that in case express remarks on the plan are not made within a specific time, the approval of each creditor to the plan will be deemed to be granted. After the approval of the bankruptcy composition agreement by the creditors, the Bankruptcy Judge sets a deadline for (i) opposition by any third party to the composition, and (ii) the deposit of a final opinion by the creditors committee. In case the creditors committee does not file a final opinion, this shall be filed by the official receiver at the expiry of the deadline the Bankruptcy Court issues. 5. Prodis extraordinary administration proceeding: this procedure may begin following: (a) (b) (c) a petition by the creditors or by the debtor itself; a motion of the public prosecutor; or ex officio.
(b)
6. Marzanos extraordinary administration proceeding: a company may be placed into this procedure when it alone, or on a group basis, has more than 500 employees and a total indebtedness of not less than 300 million and its business may be preserved through: (a) (b) the sale of its business according to a plan which provides for the continuance of the business for a maximum of one year; or the economic and financial restructuring of the debtor according to a restructuring plan lasting a maximum of two years (the Prodi extraordinary administration proceeding supplements the Marzano extraordinary administration proceeding unless the latter specifies otherwise or expressly derogates to the Prodi extraordinary administration proceeding).
2.4
1. The bankruptcy proceeding may be initiated by: (a) (b) (c) petition of the debtor; petition of one or more creditors; or initiative of the public prosecutor (in specific circumstances).
After the filing of the petition, and prior to the judgment, the Court has to convene for an ad hoc hearing the debtor and the creditor(s) who filed the application with the competent Court; if the proceeding is initiated by the public prosecutor, the latter shall participate in the proceeding. The Court has the duty to assess the insolvency status of the company and, after this test, it may either reject the petition or declare bankruptcy. 2. The compulsory administrative liquidation procedure may be initiated by: (a) (b) (c) petition of the debtor; petition of one or more creditors; or initiative of the public authority entrusted by law with the task of monitoring the activity of the debtor.
After the filing of the petition and prior to the judgment, the Court has to convene the debtor and the public authority entrusted with the task to monitor its activity. The Court has to proceed in the same ways envisaged sub-paragraph 1. 3. Pre-bankruptcy agreement: the procedure is commenced by the debtor, who files a plan (see question 2.3 above) with the competent Court. Together with this plan, the debtor has to present: (a) a report drawn up by an expert (who complies with the requirements specified sub question 2.3, point 3 above) on the viability of the plan and on its current economic and financial situation; and a list of its creditors.
(b)
The filing of the request shall be communicated to the public prosecutor.
After having declared the insolvency of the company, the Court, based on the report submitted by the judicial commissioner(s) and considering also the opinion of the Ministry of Industry, approves the extraordinary administration procedure in the event that there is a real possibility of the redressing of the economic balance of the debtor. If the court deems that there is not such possibility, it declares the bankruptcy of the debtor.

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6. Marzanos extraordinary administration proceeding: this procedure begins only by way of a voluntary debtors petition to the Ministry of Economic Development and a concomitant petition to the competent Court to be declared insolvent. The Ministry immediately admits the debtor to the procedure and appoints an extraordinary commissioner. The extraordinary commissioner conducts the business and drafts two acts: a programme specifying whether the restructuring is possible by means of the sale of the business or by means of economic and financial restructuring; a report on the reasons of insolvency accompanied by a list of the companys assets and by a list of all creditors. The former has to be approved by the Ministry; in the event that the programme is not approved, this procedure is turned into a bankruptcy procedure.
2.5 What notifications and meetings are required after the company has been placed into each procedure? 3.2 Can secured creditors enforce their security in each procedure?
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1. Pledge: a creditor whose claim is secured by pledge can sell the pledged asset if: (a) (b) (c) he has previously filed a petition for the admission to the bankruptcy estate; he has been admitted as secured creditor; and the judge has authorised the sale of the pledged asset.
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Alternatively, the judge can order the official receiver to redeem the pledged asset against payment to the creditor of the full amount of its claim. 2. Mortgage: the secured creditor cannot continue the foreclosure proceeding pending at the time the debtor is declared bankrupt, and the official receiver will intervene in the pending foreclosure proceeding and exercise any related right in the interest of all the creditors. 3. Fondiario Mortgage: in case of a fondiario loan (i.e., a loan granted for the purchase or the development of real estate assets), the secured creditor can begin and/or continue the enforcement proceeding against a bankrupt borrower over the mortgaged properties. 4. Privileges (including floating charge): the creditor does not have any right to foreclose and can only obtain recognition of his privileged (senior) status at the time of distribution of the bankruptcy estate.
1. Bankruptcy: the official receiver appointed by the Bankruptcy Court has to notify to all creditors the date of the hearing in which the Bankruptcy Judge shall assess the bankruptcy estate, setting them a deadline for the filing of their claims. At this hearing the Bankruptcy Judge, with the assistance of the official receiver, decides on each claim filed by creditors. The decision may be appealed by creditors within 30 days as of its communication. 2. Compulsory administrative liquidation: within one month from its appointment, the commissioner has to communicate to all creditors the amount of their credits towards the debtor. Not later than 15 days of the receipt of this communication, creditors may notify the commissioner their observations and claims. Within 90 days of the date of the public order declaring the opening of the procedure, the commissioner lodges the list of the credits admitted to the procedure with the competent Court. Such list is notified to all creditors and may be appealed within 15 days of the date of its receipt. 3. Pre-Bankruptcy agreement: the decree, which approves the composition agreement, is notified to the debtor and to the judicial commissioner, who has to communicate it to all creditors. Then the agreement is carried out in accordance with the indications set out by the Court in its decree, under the supervision of the judicial commissioner. 4. Bankruptcy agreement: after the approval by the creditors and the Court, the agreement is carried out in accordance with the indications set out by the Court in the decree, under the supervision of the Court itself, the official receiver and the creditors committee. 5. Prodis and Marzanos extraordinary administration proceedings: the commissioner(s) has(ve) to communicate to all creditors the amount of their credits towards the debtor. The admittance of credits to the procedure estate is decided in accordance with rules laid down for the bankruptcy procedure (see sub-paragraph 1 above).
Bankruptcy, compulsory administrative liquidation, Prodis and Marzanos extraordinary administration proceedings allow creditors to set off sums owed to the insolvent company against amounts owed by the company to them, though their credits are not overdue before the opening of the procedure. Nevertheless, in case of credits, which are not yet overdue, set-off operations are not allowed where the credit has been assigned to creditors by means of an inter vivos act executed after the debtor has been placed into the concerned procedure or during the previous year before the beginning of the said procedure.

3 Creditors
1. Bankruptcy: the Bankruptcy Court appoints the judge in charge of the procedure and the official receiver. The judge directs the whole procedure and authorises the extraordinary administration acts proposed by the official receiver. The official receiver is in charge of the management and administration of the bankrupt company and its relevant assets. The directors no longer have the right to dispose of them. 2. Compulsory administrative liquidation: the Public Authority with the task to monitor the activity of the debtor directs the whole procedure and authorises the extraordinary administration acts proposed by the commissioner. The commissioner is in charge of the management and administration of the bankrupt company and its relevant assets. The directors no longer have the right to dispose of them.
Once the competent authority has decided to place the debtor in any of the formal procedures described above, the creditors, whose rights accrued prior to the date of such decision, cannot take legal action against the debtor in order to enforce their claims.
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3. Bankruptcy Agreement: the debtor has to carry out the agreement. The Bankruptcy Judge, the official receiver and the creditors committee supervise the procedure. 4. Pre-bankruptcy Agreement: the judge directs the procedure. The judicial commissioner has to analyse, inter alia, the debtors assets, the creditors claims and the proposed pre-bankruptcy agreement and has to submit a detailed report to the judge. The directors maintain the management of the business and of its assets, under the Courts supervision and the direction of the judicial commissioner. 5. Prodis extraordinary administration proceeding: the judge directs the procedure. The judicial commissioner(s) has(ve) to: (a) supervise the management of the company (upon the issue of the relevant decree by the Bankruptcy Court, the judicial commissioner(s) may also be in charge of the management of the company until the approval of the extraordinary administration procedure by the Bankruptcy Court); and express its opinion on the existence of the conditions for the approval of such procedure. The Ministry of Industry appoints the extraordinary commissioner(s) and the surveillance committee and supervises the procedure. The extraordinary commissioner(s) only is in charge of the management and administration of the company and its relevant assets.
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3. Italian law on Prodis extraordinary administration proceeding (applicable also to the Marzanos proceeding) specifies that, as a consequence of its beginning, employment contracts are not terminated.
1. Pre-bankruptcy agreements do not affect pending contracts. 2. In case of bankruptcy and compulsory administrative liquidation procedures the general rule is that in case of unexecuted or noncompletely executed contracts by both parties, the commencement of the procedure suspends the execution of the contract, till the official receiver (or the commissioner) - upon the approval of the creditors committee (or of the surveillance committee) - decides in favour of their performance or to terminate them. This rule does not find application with regard to some contracts, which are deemed terminated by law as a consequence of the commencement of any procedure. 3. The general rule envisaged for bankruptcy and compulsory administrative liquidation procedure finds application also in case of extraordinary administrative procedures, with the exception of employment contracts and of leases on real estate (when the debtor is the lessor), which is deemed not terminated by law or even suspended.
(b)
6. Marzanos extraordinary administrative proceeding: the extraordinary commissioner is in charge of the management of the company and directors cease their functions. The extraordinary commissioner can ask the judge, since the very beginning of the proceeding, to authorise the payment of pre-proceeding credits when this is necessary to avoid a detriment to the prosecution of the business or to the assets. In the program specifying whether the restructuring is possible by means of the sale of the business or by means of economic and financial restructuring (see question 2.4 above) the extraordinary commissioner has to consider the position of the small savers having subscribed a bond issued by the company.
5 Claims
1. Creditors have to file a petition to the Bankruptcy Court or the commissioner(s), indicating: (a) (b) (c) the amount of its claim or the indication of movables or immovables which the creditor intends to re-obtain; the exposition of the facts and reasons supporting the claim and the relevant documents; and the indication whether the claim is secured or unsecured.
Costs of procedures are as follows: (a) (b) (c) fees for the official receiver/commissioner; administration costs of the procedures; and fees for professionals who act on behalf of the procedures, such as lawyers, accountants and experts.
Costs of the procedures are paid on a pre-deducted basis (see question 5.2 below) by means of the sale of the asset.
2. The competent Court or the commissioner(s) have the task to assess each claim and to decide on its admittance to the procedure estate. The Courts decision may be appealed by the creditor.
1. Pre-bankruptcy agreements do not have formal effects on employment contracts. 2. As to bankruptcy and compulsory administrative liquidation , the opening of an insolvency proceeding does not constitute a cause for dismissal, but the execution of employment contracts is suspended till the official receiver or the commissioner - upon approval of the creditors committee or of the surveillance committee - decides in favour of their performance or to terminate them. In case of companies with more than 15 employees placed in bankruptcy, compulsory administrative and extraordinary administration procedures, employees have the right to benefit from a treatment of employees salary integration. When the on-going business of the activity cannot be achieved, the official receiver and the commissioner(s) are empowered to put employees into mobility.
The ranking depends on the fact that the relevant proceeds arise from the sale of (a) real estate assets or (b) movable assets. As to point (a) the order of priority is the following: 1) claims that are pre-deducted vis--vis all other claims (except for claims granted by a mortgage, unless the pre-deducible claim is connected with expenses suffered in relation to the mortgaged asset) in accordance with article 111 of Italian Bankruptcy Law: sum of payment of expenses and sum due to the bankruptcy administration (including official receivers fees) or to be paid for the temporary management of the business (if authorised); privileged claims arising in connection with the relevant real estate asset: (i) judicial costs incurred to preserve the asset or to proceed with enforcement against such asset in favour of all mortgaged creditors; (ii) sums due in respect of various claims
2)

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for taxes on real estate assets, contributions, water concessions, indirect taxes, local taxes on the increment of immovable assets; (iii) claims against the relevant promissory for failure to perform a preliminary contract (if certain conditions, laid down by law, are met); and (iv) all other privileged claims, the priority of which is not set by law; 3) claims secured by the mortgage rank; other privileged claims, in the order of priority provided by law; and unsecured claims (paid pro-rata in compliance with the principle of equal treatment of creditors [par condicio creditorum]). claims that are pre-deducted vis--vis all other claims (except for claims granted by pledge, unless the pre-deducible claim is connected with expenses suffered in relation to the pledged asset) in accordance with article 111 of Italian Bankruptcy Law: sums for payment of expenses and sums due to the bankruptcy administration (including official receivers fees) or to be paid for the temporary management of the business (if authorised); other privileged and secured claims, in the order of priority provided by law; and unsecured claims (paid pro-rata in compliance with the principles of equal treatment of creditors [par condicio creditorum]).
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majority of classes has approved the agreement; and (ii) the Court holds that the agreement is more favourable towards the creditor that raised the objection than any other feasible alternative; or (b) in case no objection to the agreement is expressly raised the Court may approve the composition agreement if the majority of creditors in the majority of classes has approved the agreement. Once approved, the composition agreement is binding over all creditors whose credits were existent before the opening of the procedure.
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4) 5)
6.2
As to point (b) above, the order of priority is the following: 1) 1. Bankruptcy: as a consequence of the end of the procedure: (a) (b) (c) (d) (e) the effects of the Bankruptcy procedure on the debtors assets expire; the bankruptcy bodies cease their functions; actions brought by the official receiver cannot continue; creditors re-acquire the right to freely enforce their credits towards debtor; and in case of individuals and if certain conditions provided by law are met, creditors, who have not been completely satisfied by the debtors assets, definitively lose the right to enforce their claims against the debtor (esdebitazione).
2) 3)
5.3
From a direct tax standpoint, companies placed in bankruptcy, compulsory administrative Liquidation, bankruptcy agreement, Prodis and Marzanos extraordinary administration proceedings are subject to specific rules regarding the calculation of the taxable income and the filing of the income tax return. In particular, a first tax period ranges from the beginning of the ordinary tax period of the company and the declaration of the beginning of the procedures. During such period the company shall determine its taxable income according to the ordinary rules provided by the Italian Tax Code. Starting from the beginning of the procedure, the company shall determine a single taxable period for the entire procedure period, even if it lasts more than 12 months. During such period, the company is not subject to corporate income tax. However, if - at the end of the procedure period - a positive difference between: (a) the remaining equity; and (b) the companys net equity at the beginning of the procedure arises, such difference is subject to taxation in the hand of the company according to ordinary rules. In case of a pre-bankruptcy agreement, companies are subject to the ordinary rules provided by the Italian Tax Code. From an indirect tax standpoint, ordinary rules apply.
2. Compulsory administrative liquidation: the Public Authority monitoring the procedure approves the definitive balance relating to the procedure, together with the plan relating to the distribution of the debtors asset to the creditors and a report drawn up by the surveillance committee. Upon the approval, these documents are published by the Official Journal and by the newspapers indicated by the same Authority. Within 20 days of the publication, creditors and any person interested in the proceeding may challenge such documents before the competent Court. If such deadline expires without any challenge, the balance of the procedure is deemed approved and the commissioner may proceed to the final distribution of the debtors assets to the creditors. The Public Authority monitoring the liquidation can authorise one or more creditors, the company or a third party to propose a bankruptcy agreement (sub question 2.3, point 4). 3. Bankruptcy agreement: the Bankruptcy Judge verifies the conclusion of the procedure and its decree is made public with the same modalities envisaged for the decision declaring bankruptcy. 4. Prodis and Marzanos extraordinary administration proceedings: the Authority monitoring the procedure approves the balance relating to the procedure, together with a report drawn up by the surveillance committee. Such documents are published by the Official Journal and by the newspapers indicated by the same Authority. Within 20 days of the publication, creditors and persons interested in the proceeding may contest before the competent Court. If such deadline expires without any contestation, the balance of the procedure is deemed approved. The conclusion of the procedure is declared by the Court by way of decree upon petition of the commissioner(s) or of the debtor itself.


7.1 Is it common to achieve a restructuring outside a formal procedure in Italy? In what circumstances might this be possible?
Pre-bankruptcy and bankruptcy agreement procedures (which require the approval of creditors) expressly provide that, in case one or more classes of creditors has(ve) voted against the agreement, the Court may nevertheless approve it. Two scenarios may arise: (a) in case a creditor belonging to the dissenting class expressly raises an objection to the proposal, the Court may approve the composition agreement if: (i) the majority of creditors in the
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The Italian Bankruptcy Law has been reformed in the last three years, with the aim of favouring the restructuring of distressed companies outside formal procedures or, at least, with a limited
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involvement of the Bankruptcy Court. As a consequence thereof, the debtor, who is in a state of crisis, may pursue its restructuring other than by means of the typical formal procedures (see question 2.3) - also by means of: (a) a restructuring plan able to allow the recovery of the debtor: the plan has the main effect of avoiding the risk of claw-back actions with relation to acts and payments made in accordance with such plan, when its viability has been certified by an independent expert. The plan may also consist of an agreement entered into by the debtor and its creditors, whose terms and conditions are freely negotiable (e.g., such agreements usually provide for (i) moratorium and postponement of claims, (ii) partial or total waiver of claims, (iii) debt refinancing, and (iv) undertaking from the creditors to refrain from requesting the beginning of any insolvency proceeding of the debtor). In this case, while acts and payments made in accordance with the plan cannot be clawed-back, the plan itself is binding only on creditors who have entered into it; a debt restructuring agreement entered into by the debtor and at least 60% of its creditors, whose viability to ensure the payment of all the credits pertaining to creditors, who have not entered into the said agreement, has to be assessed by an independent expert. Such independent expert has to be: (i) enrolled in the auditors register; and (ii) a lawyer or a professional accountant or an association of professional practices or a professional partnership whose associates are lawyers or professional accountants. The agreement, whose terms and conditions are freely negotiable (such agreements generally provide for conditions outlined above in subparagraph [a]), calls for a limited intervention by the Bankruptcy Court, to whom the agreement has to be submitted. The Bankruptcy Court has to approve the agreement; such approval avoids the risk of claw-back actions for payments made in accordance with the plan but, in any case, the plan is binding only on creditors who have entered into it; and agreements entered into by and between the debtor and its creditors different from the agreements above outlined subparagraphs (a) and (b). Such agreements: (i) are freely negotiable; (ii) are binding only on creditors who have entered into them; and (iii) in any case does not prevent acts or payment, made during their execution, from claw-back actions.
Is it possible to reorganize a debtor rather than realise its assets and business? 7.3
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above) can be achieved (as an alternative to the sale of business) by means of the economic and financial restructuring of the debtor according to a restructuring plan lasting a maximum of two years.
Pre-packaged business sales in Italy are not specifically provided for under law. In practice however, they are usually achieved prior to the admission of the debtor to an insolvency proceeding providing for its liquidation (usually a pre-bankruptcy agreement or bankruptcy proceeding) through the following alternative structures: (i) the debtor enters into a lease of its going concern (affitto di azienda) with a lessee, which provides for a call/put option for the purchase/sale of such going concern to be exercised after the admission of the debtor to the pre-bankruptcy agreement or the bankruptcy proceeding; or the debtor enters into a sale and purchase agreement for its going concern with a third party purchaser, the execution of which is subject to the approval of the Court presiding over the pre bankruptcy agreement or the approval of the courtappointed bankruptcy receiver.
(b)
(ii)
The appraisal of the value of the going concern is of paramount importance because the third party lessee/purchaser shall pay to the debtor admitted to the pre bankruptcy agreement or the receiver of the bankrupt debtor a market value rent first and/or a market value price afterwards in order to avoid the risk of the unwinding of the agreement.
8 International
8.1 What would be the approach in Itay to recognising a procedure started in another jurisdiction?
(c)
7.2
1. The outside formal procedures foreseen by the bankruptcy law (restructuring plan and debt restructuring agreement) can be carried out either by means of reorganisation or by means of sale of the assets and of the business (see question 7.1 above); in the current practice, the most common means is the restructuring plan. 2. The debtors reorganisation can be made also in formal procedures and specifically: (i) pre-bankruptcy agreement: when the debtor files the application to be admitted to the procedure, he must submit a plan which may provide for the restructuring of debts and the payment of credits to be carried out by any possible means; such restructuring can be made also by a reorganisation not providing for a sale of assets (although in the current practice the restructuring in the pre-bankruptcy agreement is made by means of the assignment of assets): Prodis extraordinary administration proceeding and Marzanos extraordinary administration proceeding: such formal procedures specifically foresee that the redressing of the economic balance of the debtor (see question 2.4, para.5
1. With regard to procedures opened in a Member State of the European Union, EC Regulation 1346/2000 provides that the opening of an insolvency proceeding in an EU Member State shall be recognised in all other Member States from the time it becomes effective in the State of opening of the proceedings. In any case, the recognition of the procedure shall not preclude the opening of an insolvency proceeding in another Member State concerning only the assets of the debtor situated in the territory of this Member State. A Member State may refuse to recognise insolvency proceedings opened in another Member State or to enforce a judgment handed down in the context of such proceeding where the effects of such recognition or enforcement would be manifestly contrary to that States public policy. 2. As to procedures opened in States outside of EU Italian law n. 218/1995 applies: the competent court of appeal will declare the foreign judgment enforceable in Italy provided that: (a) (b) the foreign court was competent to issue the judgment according to Italian law on jurisdiction; the defendant received adequate notice and was afforded sufficient time to appear in accordance with the law of the foreign tribunal; the parties in the foreign action actually appeared or the absence of either party was properly taken into account in accordance with the law of the foreign tribunal; the foreign judgment was final (i.e., not subject to appeal);
(c)
(ii)
(d)

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(e) (f) the foreign judgment is not in conflict with a final judgment handed down by an Italian Court; the parties are not litigating the same matter before an Italian court in a proceeding started before the beginning of the foreign proceeding; and (g)
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the foreign judgment is not contrary to Italian rules of public policy and public order.
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Vittorio Lupoli
Bonelli Erede Pappalardo Viale Padre Santo, 5/8 16122 Genova Italy
Andrea De Tomas
Bonelli Erede Pappalardo LLP 30 Cannon Street London EC4M 6XH United Kingdom
+39 0108 4621 +39 0108 13849 vittorio.lupoli@beplex.com www.beplex.com
+44 20 7653 6888 +44 20 7653 6888 andrea.detomas@beplex.com www.beplex.com
Vittorio Lupoli is a partner in the Firms Genoa office and focuses on commercial law issues and financial markets law. He has extensive experience in corporate consultation, restructuring of companies in crisis, management of extraordinary corporate finance transactions, public purchase offers and bid requests. Mr Lupoli joined Bonelli e Associati in Genoa in 1990 and became a partner at Bonelli Erede Pappalardo in 2000. Mr Lupoli graduated from the University of Genoa in 1990 and was admitted to the Italian Bar in 1993.
Andrea De Tomas is a partner in the firms London office and focuses on banking and finance, real estate finance and insolvency and restructurings. He advises both lenders and borrowers in relation to LBOs and real estate finance and investors in insolvency and restructuring deals, both domestic and international. Before joining Bonelli Erede Pappalardo in 2003, Mr De Tomas worked for a specialised law firm and then for Allen & Overy in London. He became a partner in 2006. Mr De Tomas graduated with honours from the University of Turin in 1994 and went on to complete a Masters in International Trade Law from the University Institute of European Studies of Turin. He was admitted to the Italian Bar in 1997.
Bonelli Erede Pappalardo enjoys a distinguished reputation as one of Italys finest law firms and is one of the few Italian firms capable of offering comprehensive legal advice in all sectors of business law. Bonelli Erede Pappalardo is a multidisciplinary law firm comprised of over 300 lawyers located in our offices in Milan, Genoa, Rome, Brussels and London. Our firm offers a full range of legal services, focusing on various areas of law, including among others, corporate, restructuring, bankruptcy, banking, tax, EU, competition, litigation, real estate, administrative, intellectual property, and law relating to power and energy sectors, to serve our clients interests in Italy and worldwide.
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Chapter 25
Japan
Anderson Mori & Tomotsune
Tomoaki Ikenaga
Nobuyuki Maeyama

1.1 How does a creditor take security over assets in Japan?
creditors; however, the transaction will not be avoided if a person who is subject to avoidance action and receives a benefit from the transaction (the Beneficiary) proves that it had no knowledge of such fact at the time of the transaction; or (ii) the transaction is detrimental to creditors and executed after the company suspends payment or a petition for Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings is filed; however, the transaction will not be avoided if the Beneficiary proves that it had no knowledge of such facts at the time of the transaction.
Mortgage (teito-ken) and Floating Mortgage (ne-teito-ken) on real estate Mortgages and floating mortgages on real estate may be granted as security for a debt. Ownership of the underlying asset is not transferred, but rather its transfer is restricted by the possible enforcement of the mortgage through judicial foreclosure. Pledge on Real Estate, Movables (including securities) and Monetary Obligations A pledge is a security interest on ownership of the underlying asset or title for a debt. A pledge on real estate or movables is created by an agreement between the owner of real estate or movables (pledgor) and the pledge-holder (pledgee). A pledge on a monetary obligation is created by agreement between an obligee (pledgor) and the pledgeholder (pledgee). Note that, as listed securities are subject to electronic registration with Japan Securities Depository Center, Inc. (JASDEC), pledges should be created and perfected on the listed securities by registration of the pledge with JASDEC. Transfer pledges (Joto Tampo) on Real Estate, Movables (including securities) and Monetary Obligations A transfer pledge is a security interest created by agreement between the transfer-pledgee and either the owner of the real estate/movables or the obligor of the monetary obligation (pledgor).
B. Avoidance of Preferences Any transaction by the company which provides collateral to a creditor for an existing obligation of the company or discharges an existing obligation of the company is avoidable if: (a) the transaction is executed after (i) the company becomes unable to pay its debts when due or (ii) a petition for Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings is filed; and the creditor knows that: (i) the company becomes unable to pay its debts when due or suspends payments in case of (a)(i); or, (ii) a petition for Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings is filed in case of (a)(ii).
(b)
In addition, if the above transaction is taken within 30 days before the company becomes unable to pay, and (i) the company is not obligated to perform the transaction or (ii) the transaction constitutes the performance of an obligation by the company that is not then due, the transaction can be avoided. However, the transaction cannot be avoided if the creditor proves that he does not know that the transaction is detrimental to other creditors. C. Avoidance of Transaction in Exchange of Reasonably Equivalent Value Disposition of asset by the company in exchange of reasonably equivalent value can be avoided only if all of the below requirements are met: (a) the disposition results in changing the form of asset, such as, by way of example, disposition of real estate for cash, and creates a present danger that the company will take further action which would be detrimental to creditors (Malicious Action), such as, by way of example, hiding the asset, providing the asset for no consideration to specific creditors or taking other action; the company has an intent to take Malicious Action at the time of the disposition; and the counterparty to the disposition knows that the company has the intent above at the time of the disposition.
As explained in section 2, there are Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings, Bankruptcy Proceedings and Special Liquidation Proceedings. The following explains avoidance by a trustee in Bankruptcy Proceedings, a supervisor in Civil Rehabilitation Proceedings and an administrator of Corporate Reorganisation Proceedings. Note there are other avoidance actions available as well. A. Avoidance of Fraudulent Transfers Any transaction by the company (excluding a transaction for providing collateral by the company or discharging an obligation of the company) can be avoided if: (i) the company knows that the transaction is detrimental to
(b) (c)
D. Avoidance of Perfection of Collateral Perfection of collateral can be avoided if the act of perfection:

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(a) occurs after the company suspends payments or a petition for Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings is filed; is taken after 15 days from creation, transfer or change in security interest in the collateral; and is taken with knowledge of the companys suspension of payments to creditors or the filing of a petition for Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings.
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Japan?
Japan
D. Special Liquidation Proceedings Special Liquidation Proceedings concern the voluntary dissolution of a company outside of other insolvency proceedings. When a company voluntarily starts liquidation in accordance with provisions of the Company Act and the liquidator finds that the company may be insolvent, the liquidator has a duty to file a petition for Special Liquidation Proceedings. Creditors, the liquidator, the statutory auditor, or shareholders may file a petition. Certain actions by the liquidator are subject to the approval of the creditors, the courtappointed supervisor, or the court. The company may make a proposal with respect to changes in the rights of secured creditors, the release and discharge of certain obligations, the postponement of due dates, etc., which are subject to a vote by the creditors and the approval of the court.
2.2 What are the tests for insolvency in Japan?
(b) (c)
Japan
1.3
There are no specific statutes imposing civil or criminal liability on directors under the circumstances described above. However, if a director of the company knows, or reasonably should know, that payment for an obligation will not be made at the time of the transaction, then such director may be liable for damages incurred by the counterparty to the transaction.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Japan?
The test is whether the total liabilities of the company exceed the total assets of the company. If so, then the company is regarded as insolvent under the Company Act. However, as described below, the grounds for commencing insolvency proceedings are not necessarily triggered by insolvency alone.
A. Civil Rehabilitation Proceedings Civil Rehabilitation Proceedings are debtor-in-possession (DIP) proceedings, where incumbent management remains in place and proposes a rehabilitation plan to creditors. DIP proceedings are subject to the supervision of a supervisor appointed by the court. The DIPs rehabilitation plan must be approved by the creditors. Secured creditors are excluded from the proceedings and are free to enforce their collateral. B. Corporate Reorganisation Proceedings Corporate Reorganisation Proceedings are the most powerful insolvency proceedings, whereby all secured creditors and unsecured creditors are subject to the proceeding. After the petition for commencement, the court issues: (i) an Administration Order, which divests the authority of the incumbent management and appoints an Interim Administrator; and (ii) a Protection Order, which prohibits the company from paying any debt (with certain exceptions). The court may also issue a Comprehensive Protection Order prohibiting any secured creditor from enforcing its rights in collateral. After the Interim Administrators review and investigation, the court may appoint an Administrator who has full responsibility to manage the company and create a reorganisation plan, which is subject to approval of the creditors and the court. Recently, the Tokyo District Court started DIP-type Corporate Reorganisation Proceedings, where the court does not issue an Administration Order and the incumbent management remains in power. In such proceedings, the court issues (i) a Protection Order prohibiting the company from paying any debt (with certain exceptions) and (ii) a Supervision and Investigation Order, pursuant to which the court appoints a Supervisor/Investigator to carry out an initial review of whether the DIP proceeding is appropriate for the case. C. Bankruptcy Proceedings Bankruptcy Proceedings are liquidation proceedings administered by a court-appointed trustee. Secured creditors are not subject to the proceeding and are free to enforce their collateral. The company is liquidated and there may be a distribution at the end of the proceeding to creditors.
A. Bankruptcy Proceedings If a company is unable to pay its debts when due, Bankruptcy Proceedings may be commenced. As a matter of law, a company is presumed to be unable to pay its debts if (i) the company fails to pay a promissory note or important debt such as the principal of a corporate bond or bank loans, or other obligations in general, or (ii) the company is insolvent. B. Civil Rehabilitation Proceedings and Corporate Reorganisation Proceedings A company may file a petition to commence the proceedings if (i) there is a possibility that the grounds for commencing Bankruptcy Proceedings occur, or (ii) the company is unable to pay its obligations without creating a significant burden for continuing its business. C. Special Liquidation Proceedings Please see question 2.1.
Voluntary Petition A voluntary petition is generally commenced by evaluating the financial status of the company and the selection of the appropriate proceedings with the assistance of attorneys and accountants. The board then adopts a resolution to file a petition for one of the proceedings. Involuntary Petition The proceedings may also be commenced by an involuntary petition, although such practice is uncommon. Only creditors having claims in excess of a minimum threshold are entitled to file involuntary petitions. Requirements for commencing involuntary cases include the petitioners proof that the company has grounds for the commencement of the proceedings, which are the same as those for commencing voluntary Bankruptcy Proceedings. With respect to Special Liquidation Proceedings, please refer to question 2.1.
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2.5 What notifications, meetings and publications are required after the company has been placed into each procedure? 3.2
Japan
With respect to Civil Rehabilitation Proceedings, Corporate Reorganisation Proceedings or Bankruptcy Proceedings, no actual notice to creditors is required with respect to commencement of the case, the filing deadline for a proof of claim (bar date), etc. Instead, the law provides that any notice shall be publicly posted in Government Official Gazettes. There are some exceptions where the actual notice by the court is necessary. With respect to Special Liquidation Proceedings, notice of the creditors meeting as well as notice of the distribution to creditors shall be sent by the company.
A. Civil Rehabilitation Proceedings, Bankruptcy Proceedings, and Special Liquidation Proceedings Secured creditors can generally enforce their security outside of the proceedings. However, under certain conditions in Civil Rehabilitation Proceedings and Corporate Reorganisation Proceedings, the security will be cancelled by the court or its enforcement by the creditor will be stayed. B. Corporate Reorganisation Proceedings Secured creditors can only enforce their securities within the proceeding as a Creditor with Security in Corporate Reorganisation Proceedings. Thus, claims of secured creditors will be paid pursuant to the reorganisation plan. However, claims of secured creditors are entitled to priority in Corporate Reorganisation Proceedings. Further, under certain conditions, a secured creditor can enforce its security outside the proceeding with the approval of the court.
3 Creditors
Unsecured creditors are prohibited from enforcing their unsecured claims outside of each proceeding. However, the following exceptions are applicable to unsecured claims: A. Civil Rehabilitation Proceedings With respect to unsecured claims, Common Benefit Claims and General Priority Claims can be enforced outside the proceeding. Common Benefit Claims, as a rule, include: (i) (ii) a claim for expenses necessary for execution of the proceeding (e.g., remuneration of a supervisor); and a claim arising from the business operations of the company after the commencement of the proceeding. a claim for wages or salary of an employee; and a tax claim.
A. General Rule Generally speaking, creditors can exercise the right of set off. B. Exceptions In a typical set off, it is necessary for the obligations of each party to be due and owing. However, upon the commencement of a Bankruptcy Proceeding, the obligations of the debtor become immediately due. In Civil Rehabilitation, Corporate Reorganisation, and Special Liquidation Proceedings, creditors cannot set off obligations owed by the debtor until the due date of such obligations. Further, in Civil Rehabilitation Proceedings and Corporate Reorganisation Proceedings, creditors can only exercise the right of set off within the period for the filing of their claims specified by the court.
General Priority Claims include: (i) (ii)
B. Corporate Reorganisation Proceedings With respect to unsecured claims, only Common Benefit Claims can be enforced outside the proceeding. Common Benefit Claims in Corporate Reorganisation Proceedings, as a rule, include the following: (i) a claim for expenses necessary for execution of the proceeding (e.g., remuneration of a trustee of the proceeding); a claim arising from the business operations of the company after the commencement of the proceeding; and a claim for the wages or salary of an employee.

(ii) (iii)
A. Civil Rehabilitation Proceedings In Civil Rehabilitation Proceedings, directors of the company maintain authority to control the company and administer and dispose of its assets. However, where the company will conduct material actions including disposition of assets, the approval of the supervisor appointed by the court is necessary. When a Civil Rehabilitation Proceeding is commenced, directors and shareholders of the company do not automatically lose their positions or interests. B. Corporate Reorganisation Proceedings In Corporate Reorganisation Proceedings, a trustee appointed by the court is authorised to control the debtor and to administer and dispose of its property. Directors are removed from the board unless reappointed through the reorganisation plan. When a Corporate Reorganisation Proceeding is commenced, shareholders of the company do not automatically lose their ownership interests. However, when the reorganisation plan is
C. Bankruptcy Proceedings With respect to unsecured claims, Estate Claims can be enforced outside a bankruptcy procedure. Estate Claims in bankruptcy proceeding, as a rule, include: (i) a claim for expenses necessary for execution of the proceeding (e.g., remuneration for a trustee of the procedure); and a claim for the wages or salary of an employee.
(ii)
D. Special Liquidation Proceedings With respect to unsecured claims, a claim for expenses necessary for execution of the proceeding and General Priority Claims can be enforced outside Special Liquidation Proceedings. General Priority Claims are the same as defined in question 3.1 A above.

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approved by the court, the shareholders forfeit their ownership interests unless they are otherwise provided for by the reorganisation plan. C. Bankruptcy Proceedings In Bankruptcy Proceedings, a trustee appointed by the court is authorised to administer and dispose of the debtors property. The directors are divested of such authority when a Bankruptcy Proceeding is commenced. When the Bankruptcy Proceeding is completed, the debtor becomes a defunct entity, the directors lose their positions as a result thereof, the company is dissolved, and any remaining assets after administration of the debtors estate are distributed to the shareholders. D. Special Liquidation Proceedings In Special Liquidation Proceedings, a liquidator is authorised to control and dispose of the property of the debtor. A Special Liquidation Proceeding is commenced after a resolution to wind-up the company is passed at a shareholders meeting, and the directors of the company will lose their positions at the time such resolution is passed. When a Special Liquidation Proceeding is completed, the company is dissolved and any remaining assets after administration of the debtors estate are distributed to the shareholders.
4.2 How does the company finance these procedures? 4.4
Japan
Generally speaking, a debtor cannot terminate the contracts for the sole reason that it has commenced one of the proceedings. Nevertheless, in Civil Rehabilitation, Corporate Reorganisation, and Bankruptcy Proceedings, if both the obligation of the debtor and its counterparty under a bilateral contract is executory at the time of commencement of the proceeding, the debtor (or the trustee) may (i) terminate the contract, or (ii) perform the contract and request the counterparty to perform.
Japan
5 Claims
Broadly, except where a creditor is permitted to enforce its claim outside the proceeding (see question 3.1 and question 3.2), creditors can enforce their claims through the following steps: A. Filing of a Claim A creditor who intends to participate in the proceeding shall file its claim with the court within the period established by the court. B. Investigation A claim which was filed with the court (Filed Claim) will be investigated by the company in Civil Rehabilitation or Special Liquidation Proceedings and by the trustee in Corporate Reorganisation or Bankruptcy Proceedings. Creditors can also investigate the claim. C. Fixing of a Claim If there are no objections to the Filed Claim, then the claim will be fixed. If there are objections, the Filed Clam will be decided through a claims fixing procedure and ordinary litigation. D. Payment/Distribution In Civil Rehabilitation and Corporate Reorganisation Proceedings, a Filed Claim that has been fixed will be changed and paid on a pro rata basis with other filed claims pursuant to the relevant plan, which is voted on by the creditors and approved by the court. In Bankruptcy Proceedings, the distribution will be made to creditors depending on the fixed amount of their Filed Claims. In Special Liquidation Proceedings, a Filed Claim that has been fixed will be changed and paid on a pro rata basis with other filed claims pursuant to the arrangement, which is voted on by the creditors and approved by the court.
A. Bankruptcy Proceedings/Special Liquidation Proceedings These proceedings are for liquidation of the company and financing is, therefore, not necessary. B. Civil Rehabilitation Proceedings After the petition for commencement of Civil Rehabilitation Proceedings has been filed, but before any further steps are taken in such proceedings, the company can obtain financing with approval of the supervisor. A claim for such financing is one type of Common Benefit Claim (see question 3.1), which is accorded priority over other claims. C. Corporate Reorganisation Proceedings Financing is obtained in the same manner as with Civil Rehabilitation Proceedings described above.
A. Contracts with employees i. Civil Rehabilitation Proceedings/Corporate Reorganisation Proceedings Contracts with employees continue even if Civil Rehabilitation or Corporate Reorganisation Proceedings are commenced. It is often the case that a reduction in force is implemented as part of the restructuring of the companys organisation, which is carried out in accordance with labour regulations. ii. Bankruptcy Proceedings/Special Liquidation Proceedings Contracts with employees are not terminated only because Bankruptcy or Special Liquidation Proceedings are commenced. However, as Bankruptcy Proceedings and Special Liquidation Proceedings are proceedings to carry out the liquidation of the company, all employees will be laid off by the end of the proceedings. B. Claims of employees In all of the proceedings, the employees rights to wages and salaries are accorded priority (see question 3.1).
A. Civil Rehabilitation Proceedings Secured claims, Common Benefit Claims and General Priority Claims can be enforced outside the proceedings and accorded priority (see question 3.1 and question 3.2). B. Corporate Reorganisation Proceedings Common Benefit Claims can be enforced outside the proceedings and accorded priority (see question 3.1). Also, secured claims and General Priority Claims are accorded priority and include:
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(i) (ii) a claim of an employee of the company; and a tax claim. C. Special Liquidation Proceedings
Japan
C. Bankruptcy Proceedings Secured claim and Estate Claim can be enforced outside the proceedings and accorded priority (see question 3.1 and question 3.2). Also, General Priority Claims are accorded priority and include: (i) (ii) a claim of an employee of the company; and tax claim.
Claims are paid according to the plan. After payment of such claims, the company will be dissolved.

7.1 Is it common to achieve a restructuring outside a formal procedure in Japan? In what circumstances might this be possible?
D. Special Liquidation Proceedings Secured claims, claims for expenses necessary for the execution of the proceedings, and General Priority Claims can be enforced outside the proceeding and accorded priority (see question 3.1 and question 3.2 above).
There are cases where the company is restructured out of court by agreement between the creditors and the debtor (private restructuring). One of the benefits of a private restructuring is its privacy. Whereas other types of restructuring could seriously affect a debtors goodwill, image and ability to recover, private restructurings are not necessarily disclosed to the public Private restructurings do, however, have certain drawbacks. For example, the debtor cannot bind any creditors who do not agree to the private restructuring plan.
A. Tax liabilities after commencement of Proceedings In Civil Rehabilitation, Corporate Reorganisation, and Special Liquidation Proceedings, tax liabilities arising after commencement of the proceedings are paid outside the procedure and entitled to super-priority. In contrast, in Bankruptcy Proceedings, tax liabilities arising after commencement of the proceedings are subordinate to prepetition claims in the bankruptcy case. B. Taxation on Income from discharge of indebtedness In Bankruptcy Proceedings and Special Liquidation Proceedings, the discharge of the debtors indebtedness is not deemed income. On the other hand, in Civil Rehabilitation Proceedings and Corporate Reorganisation Proceedings, the debtor will continue to operate as a going concern, so the discharge of the debtors indebtedness does result a taxable event.
It depends on the case. Without realising its assets and business, a debtor can be reorganised by an equity injection from a new sponsor or by a loan from a new lender under Civil Rehabilitation or Corporate Reorganisation Proceedings.

Pre-packaged sales are possible and Civil Rehabilitation Proceedings are often used for pre-packaged sales. Before filing a petition for the commencement of the proceedings, the debtor must locate a buyer and obtain the consent of the largest creditors for any such sale. After the petition is filed, such sale is carried out following court approval and may involve a competitive bidding process among other potential buyers.
A. Civil Rehabilitation, Corporate Reorganisation, and Special Liquidation Proceedings Plans of rehabilitation/reorganisation are voted on by certain creditors. If a majority of eligible creditors votes in favour of a plan and the plan is approved by the court, then dissenting creditors are bound by the plan. B. Bankruptcy Proceedings In Bankruptcy Proceedings, there is no cramdown. Rather, assets are simply converted into money, which is distributed to creditors on a pro rata basis.
8 International
8.1 What would be the approach in Japan to recognising a procedure started in another jurisdiction?
Although a Proceeding started in another jurisdiction may be recognised by a Japanese court, a Japanese court cannot recognise such Proceeding in the following circumstances: 1. 2. 3. where it is clear that the procedure in foreign jurisdiction will not have any effects outside the jurisdiction; where it is against public policy to support the procedure; and where it is clear that the support is not necessary.
A. Civil Rehabilitation Proceedings/Corporate Reorganisation Proceedings The plan voted on by the creditors and approved by the court is implemented by paying creditors claims in accordance with the plan. B. Bankruptcy Proceedings The company will be dissolved.
Acknowledgment
The authors would like to acknowledge the assistance of their colleagues Daiki Akimoto and Michael Sjuggerud in the preparation of this chapter.

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Japan
Tomoaki Ikenaga
Anderson Mori & Tomotsune Izumi Garden Tower, 6-1, Roppongi 1-chome Minato-ku, Tokyo, 106-6036 Japan
Nobuyuki Maeyama
Anderson Mori & Tomotsune Izumi Garden Tower, 6-1, Roppongi 1-chome Minato-ku, Tokyo, 106-6036 Japan
Japan
+81 3 6888 1070 +81 3 6888 3070 tomoaki.ikenaga@amt-law.com www.andersonmoritomotsune.com
+81 3 6888 1071 +81 3 6888 3071 nobuyuki.maeyama@amt-law.com www.andersonmoritomotsune.com
Tomoaki Ikenaga has been practicing in numerous practice areas for more than 27 years in Japan and the US. His experience includes various corporate transactions, finance, derivatives, securitisation, regulatory issues and insolvency matters. For more than eight years as Chief Regional Counsel of JPMorgan Chase for Japan and Korea and General Counsel of Deutsche Bank for Japan, he obtained extensive experience in sophisticated finance transactions, compliance and regulatory issues, and involved in legal issues arising from insolvency proceedings such as public administration of Long Term Credit Bank, Chiyoda Life Insurance and other financial institutions. He has also served as a trustee in many bankruptcy cases and frequently advises clients with respect to civil rehabilitation and corporate reorganisation issues.
Joined firm: 1998. Partner since: 2008. Practice areas: Nobuyuki Maeyama has been engaged in an extensive range of legal practice at Anderson Mori & Tomotsune. Mr. Maeyama acts as a trustee in bankruptcy appointed by the court in the corporate liquidation process, assisting clients in civil rehabilitation and corporate reorganisation related issues. He has also been involved with various financial transactions, including securitisation of real property and receivables, Acquisition Finance, CMBS (Commercial Mortgage-Backed Securities), Project Finance and PFI (Private Finance Initiatives). Further, he has also provided a wide range of advice to domestic and overseas clients in M&A transactions (including Management Buy Out).
Anderson Mori & Tomotsune was formed on January 1, 2005 as a result of the merger of two leading Japanese law firms, Anderson Mori and Tomotsune & Kimura. The firm is one of the largest, full service corporate law firms in Japan, with approximately 260 Japanese lawyers (bengoshi) and over 10 lawyers qualified in foreign jurisdictions. Among Japanese international law firms today, Anderson Mori & Tomotsune has one of the longest histories of serving the international business and legal community in Japan.
Tokyo Office Anderson Mori & Tomotsune Tokyo Office Izumi Garden Tower 6-1, Roppongi 1-chome Minato-ku, Tokyo 106-6036 Japan
Tel: +81 3 6888 1000 Email: info@amt-law.com
Beijing Office: Anderson Mori & Tomotsune Beijing Office Beijing Fortune Bldg., Room 809 No.5, Dong San Huan Beilu Chao Yang Qu, Beijing 100004 China
Tel: +86 10 6590 9060 Fax: +86 10 6590 9062 Email: beijing@amt-law.com
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Chapter 26
Jersey
Ozannes
Marcus K. Stone
Johannes H. Botha

1.1 How does a creditor take security over assets in Jersey?
better than the position the creditor or guarantor would have been in if that thing had not been done. In order for the preference to be set aside, the giver must (a) have been influenced in deciding to give the preference by a desire to put the creditor or guarantor into the position referred to above and (b) have been either insolvent at the time of giving the preference or rendered insolvent as a result of it. Conditions (a) and (b) are presumed to be the case, unless otherwise proved, where the preferred party is connected with, or an associate of, the giver of the preference.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Jersey?
There is a distinction between security over immovable property and movable property, both tangible and intangible. Security can be taken over Jersey immovable property and certain movable property. Immovable property can only be hypothecated under the Proprit Foncire Law or the Loi (1996) sur lhypothque des biens-fonds incorporels. Movable property (other than in respect of a mortgage over a ship) can only be hypothecated under the Security Interests (Jersey) Law 1983, as amended (the Security Interests Law). There is a distinction between movable property that is tangible and that which is intangible. The most common securities taken in Jersey over tangible movables are: 1. 2. 3. pledges; liens; non-judicial - landlords right to distrain (a landlord of demised property situate in Jersey has a common-law right to seize all goods belonging to his tenant and located on the premises to satisfy a claim for unpaid or future rental); mortgages over ships; and reservation of title clauses.
Under the Companies (Jersey) Law 1991, as amended, if in the course of a creditors winding up or under the Bankruptcy (Dsastre) (Jersey) Law 1990 in respect of the dsastre of a Jersey company it is proved that there was an intention to defraud creditors, the Royal Court of Jersey may make a person who was knowingly party to the carrying on of such business liable to contribute to the companys assets and such a person may be subject to criminal sanction.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Jersey?
4. 5.
In respect of intangible movables, the most common security taken in Jersey is security interests pursuant to the Security Interests Law. The Security Interests Law permits a security interest to be taken in a number of ways, such as possession, control or title.
The most common insolvency procedures are, for an individual, a dsastre and for a company, a dsastre or a winding up. There are other procedures available, such as amalgamation and schemes of arrangement, but these are rarely used in insolvency proceedings.
2.2 What are the tests for insolvency in Jersey?
A preference may, in certain circumstances, be set aside by the Royal Court of Jersey in the event of the giver thereof becoming formally bankrupt in Jersey (in a dsastre) within 12 months of giving the preference. A preference is defined by statute, but in summary it is anything done or suffered to be done by a party that has the effect of putting a creditor or guarantor of that party into a position which, in the event of the formal bankruptcy of that party in Jersey, would be
Insolvency is established by applying the cashflow test, which means that insolvency will occur when a company is unable to pay its debts as they fall due.
An application for a declaration en dsastre may be made to the

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Royal Court of Jersey by a creditor of the debtor, having a liquidated claim exceeding 3,000. A liquidated claim means a certain debt to which there is no reasonably arguable defence. An individual or corporate debtor may apply for self-declaration en dsastre.
Jersey
As soon as the affairs of a company in a creditors winding up are fully wound up, the liquidator must make up an account of the winding up showing how it has been conducted and how the companys property has been disposed of. Thereafter, the liquidator must call a general meeting of the company and a meeting of the creditors for the purposes of laying the accounts before the meetings and giving an explanation of the accounts. The liquidator is further required to make a return to the Registrar of Companies confirming that the meetings had been held and the dates on which the meetings were held. The Registrar of Companies would then register this return received from the liquidator, and at the end of three months from the registration of the return the company is deemed to be dissolved, subject to the power of the Royal Court of Jersey to defer the dissolution.
Jersey
2.4
It is necessary to give the Viscount in Jersey, who is the Chief Executive Officer of the Jersey courts and of the States of Jersey, at least 48 hours notice of an intention to make an application for a dsastre. There is no formal procedure for such a notification. An application for a dsastre will be commenced by representation setting out all relevant facts to satisfy the requirements. Subject to certain limited exceptions, an application for a declaration en dsastre must be accompanied by an affidavit containing certain confirmations. In respect of a creditors winding up, all creditors of a debtor must be notified by post of a meeting of creditors which, usually, will immediately follow the meeting of members, at least fourteen days before the holding of the meeting to pass a special resolution to wind up a company. The company must also give at least ten days public notice of the meeting in the Jersey Gazette. The directors must make a statement regarding the companys affairs, which must be verified by affidavit and laid before the creditors meeting. A creditors winding up is deemed to commence when the resolution for winding up is passed or when a summary winding up becomes a creditors winding up on the directors conclusion that the company will not be able to discharge its liabilities in full within six months of the commencement of the winding up or if there are liabilities arising more than six months after its commencement that they will not be able to be discharged as they fall due.
3 Creditors
Yes, although, in a liquidation, payment to unsecured creditors will only occur once all claims have been proved and the final dividend declared, following payment to secured creditors.
Yes, secured creditors can enforce their security.

Yes, creditors can set off sums owed to the company against amounts owed to them by the company.
Under the Bankruptcy (Dsastre) (Jersey) Law 1990, the Viscount is not required to convene any meeting of creditors. In practice, however, meetings of creditors are sometimes convened for purposes of considering the funding of a dsastre or the desirability of the Viscount pursuing different alternatives in the conduct of a dsastre. The Viscount must provide all creditors with a report and accounts relating to a dsastre on its completion. Whether or not any creditors meetings have been held, the Viscount can, at any time, apply to the Royal Court of Jersey for directions on any issue, or to endorse any course of action, proposed by him in a dsastre. In a creditors winding up, a meeting of creditors follows the meeting of shareholders held to resolve to put the company into a creditors winding up. If a creditors winding up continues for more than twelve months, the liquidator must call a general meeting of the company and a meeting of the creditors, both to be held at the first convenient date within three months after the end of the first twelve months from the commencement of the winding up. Such meetings must also be called at the end of each succeeding twelve-month period or such longer period as the Jersey Financial Services Commission may allow.

In the case of a dsastre, the powers that the debtor may have over his or its affairs, along with the capacity to exercise and to take proceedings for exercising all such powers, shall vest in the Viscount. In the event of a dsastre of a Jersey company, the powers of the directors of such company shall vest in the Viscount. In the case of a creditors winding up, a company must immediately cease to carry on business, except in so far as may be required for its beneficial winding up. The corporate state and capacity of the company continue until the company is dissolved. As soon as a liquidator is appointed, he controls the company.
A liquidators remuneration and the costs of the insolvency proceedings are to be paid from the companys assets in preference to all other claims.
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the Viscounts opinion can be realised without needlessly protracting the dsastre, the Viscount must: (a) (b) supply all the creditors of the debtor with a report and accounts relating to the dsastre; and pay whatever final dividend is due.
The declaration of a company en dsastre has no legal effect on the contracts of employment of the employees of the company. It is likely that the liquidator will, as part of the winding up of the company, terminate the employment contracts. It should be noted that payments due to employees may attract priority over other claims.

7.1 Is it common to achieve a restructuring outside a formal procedure in Jersey? In what circumstances might this be possible?
It will not have any legal effect on any contracts to which the company is a party.
5 Claims
This may be possible where there are a small number of creditors and shareholders who are willing and able to agree on such matters. In practice, it is common to achieve a restructuring outside a formal procedure.
Creditors should claim amounts due to them by sending notification of the claim, together with supporting documentation in respect thereof, to the liquidator.
A Jersey company has the power to compromise with its creditors and members. If such an arrangement is proposed, an application must be made to the Royal Court of Jersey by either the company (or its liquidator if it is being wound up), its creditors or its members for the Royal Court of Jersey to order a meeting of the creditors or members and give directions for the manner in which it is to be held. If a majority in number representing three-quarters in value of the creditors or class of creditors or members or class of members present and voting agree to the proposed scheme, then, if the scheme is sanctioned by the Royal Court of Jersey, it shall be binding on all of them and the company (and on the liquidator of a company being wound up).
Certain claims will attract priority, such as claims by secured creditors and claims that have been set off. The claim with the highest priority is the liquidators remuneration, followed by other claims, such as, inter alia, payments due to employees and income tax payments.
A company will continue to incur tax liability as it would have had it not been wound up.

There is no specific cramming down procedure, but as stated above, the liquidator of a Jersey company may at any time apply to the Royal Court of Jersey for directions in relation to any matter which arises and the Royal Court of Jersey may make such an order as it thinks fit.
Generally, the Viscount may sell the whole or any part of the property (both movable and immovable) of the debtor by public auction or public tender on such terms and conditions as the Viscount thinks fit, with power to buy in at any auction or to rescind or vary any contract for sale on such terms as the Viscount thinks fit, and with power also to sell the whole thereof to any person or to sell the same in parcels and in any order. However, except in the case of perishable property, none of the property of the debtor shall be sold until after the specified date, which is the date by which claims are to be filed as published in the Jersey Gazette, being a date that is not less than 40 and not more than 60 days after the date of the declaration.
8 International
8.1
In a creditors winding up, the Registrar of Companies would register the return received from the liquidator, and at the end of three months from the registration of the return the company is deemed to be dissolved, subject to the power of the Royal Court of Jersey to defer the dissolution. If a Jersey company has been declared en dsastre, and after the Viscount has realised all the debtors property, or as much of it as in
What would be the approach in Jersey to recognising a procedure started in another jurisdiction?
The Royal Court of Jersey is likely to recognise the appointment of a foreign insolvency office holder administering a bankruptcy which has arisen in a foreign jurisdiction where there is a valid connection between the debtor and the law under which the insolvency occurred. Generally speaking, the Royal Court in Jersey

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is likely to assist such office holder in such circumstances. In order for foreign insolvency officials to have authority to act in Jersey, an application to the Royal Court of Jersey is, usually, made.
Jersey
Historically, foreign officials have been recognised and granted locus standi.
Jersey
Marcus K. Stone
Ozannes 29 Esplanade St Helier, JE4 0ZS Jersey, Channel Islands
Johannes H. Botha
Ozannes 29 Esplanade St Helier, JE4 0ZS Jersey, Channel Islands
+44 1534 784 055 +44 1534 723 465 marcus.stone@ozannes.com www.ozannes.com
+44 1534 784 003 +44 1534 723 465 johannes.botha@ozannes.com www.ozannes.com
Marcus has 13 years experience in Jersey law and has advised on corporate restructuring and mergers and acquisitions. He is a partner of Ozannes in Jersey and regularly advises corporate conglomerates on various legal issues.
Johannes specialises in corporate restructuring and mergers and acquisitions. He joined the Jersey office of Ozannes in February 2008 as an associate in the corporate department and has recently advised on a number of noteworthy restructurings and distressed acquisitions.
Ozannes, a law firm with an established history and a modern, dynamic approach, has an international reputation for professionalism and excellence. We take great pride in being at the forefront of the legal profession in the Channel Islands and, with a presence in both Guernsey and Jersey, we are in an ideal position to provide our corporate & private clients with first-class, integrated legal services across all practice areas.
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Chapter 27
Korea
Lee & Ko
Eunjai Lee
Wan Shik Lee

1.1 How does a creditor take security over assets in Korea?
(2)
Right of Avoidance
Under the Debtor Rehabilitation and Bankruptcy Act (Act), the trustee in a bankruptcy procedure or receiver in a rehabilitation procedure may avoid the following acts, among others: (a) Any act of the company with the knowledge that it would prejudice creditors (unless the creditor benefiting from the act did not know at the relevant time that such act is prejudicial to other creditors). In case of avoidance, prejudice includes not only a reduction of assets but also a preferential treatment. Any act of the company taking place after a suspension of payment (which term is explained in question 2.2 below) or a petition for commencement of bankruptcy or rehabilitation procedure (collectively Triggering Event) that: (i) creates a security interest in the debtor; (ii) discharges any obligation of the debtor; or (iii) is otherwise prejudicial to creditors; provided that the person benefiting from the act knew at the relevant time that there had been a Triggering Event. Any creation of security interest in the debtor or discharge of obligation of the debtor, that takes place after or within 60 days prior to a Triggering Event, which was not an obligation of the debtor, provided that the creditor benefiting from the act knew at the time of the act that such act is prejudicial to creditors and that there had been a Triggering Event (if any). Any gratuitous act taking place after or within six months prior to a Triggering Event.
Under the Civil Code, the debtor may grant security interest over real property, personal property, claims and other rights (such as stocks and bonds) in favour of the creditor by agreement. The most common form of security is mortgage in case of real property, and pledge in case of personal property, claims and other rights. A security interest created by agreement under the Civil Code is perfected through the procedures prescribed thereunder, namely recordation in the property register in case of mortgage, and possession in case of pledge over personal property (for pledge over a claim or right, the procedure for transfer of the relevant type of claim or right applies). Further, a security interest under the Civil Code can validly exist only if there is a debt being secured. However, in case of kun mortgage and kun pledge, which are predicated on a fluctuating amount of underlying debt (revolving credit), the security interest remains effective even if the amount of underlying debt temporarily becomes zero. It is also possible to obtain certain rights that are not provided for as security interests under the Civil Code but serve that function. A commonly used method, for instance, is transfer of title to the property to the creditor for security purposes.
(b)
(c)
(d)
If the transaction was with a person having a certain special relationship with the debtor as defined by the Act, e.g. its shareholder, then a more relaxed standard for avoidance applies. For instance, in respect of (b) above, the specially related person is presumed to have known that there was a suspension of payment.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Korea?
Transactions entered into whilst the company is in financial difficulties may be subject to cancellation or avoidance, as discussed below. (1) Right of Cancellation Under the Civil Code, where the company engages in a legal act (including contracts) that prejudices its creditors (i.e. company assets are decreased due to the act, and company liabilities exceed company assets prior to or as a result of such act), and the company and the beneficiary of such act are aware of the prejudice to the creditors, the creditors have a right to seek cancellation of such act and return of the benefit to the company. This right can be exercised by the creditors where the company is not in a rehabilitation or bankruptcy procedure, and is not available once such procedure is commenced (whereupon the rehabilitation receiver or bankruptcy trustee has a right of avoidance as discussed below).
A director does not become liable simply for continuing to trade whilst the company is in financial difficulties, unless he or she has violated his fiduciary duty in relation to a particular transaction. In case of a violation of fiduciary duty, the director may be held liable for civil damages and/or subject to a criminal charge. The director may also be subject to a shareholders derivative suit, but not after commencement of a rehabilitation or bankruptcy procedure. The court overseeing the rehabilitation or bankruptcy procedure may, in its own discretion or upon request of the trustee/receiver, render a ruling on the liability of a director.

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2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Korea?
Korea
Korea
The Act provides for a debtor rehabilitation procedure, the purpose of which is to assist the companys rehabilitation, and a bankruptcy procedure for liquidation of the company.
2.2 What are the tests for insolvency in Korea?
In an order for commencement of rehabilitation procedure, the name of the receiver and a schedule for certain events (period for preparation of creditors list, period for reporting of claims, period for investigation of claims, and date of the first meeting of interested parties) are included and published. Thereafter, major events (such as date and agenda of meeting of interested parties, court approval of rehabilitation plan, termination of the rehabilitation procedure, etc.) are notified and/or published. In a rehabilitation procedure, there should be at least 3 meetings of interested parties which include the receiver, the investigation committee, the company, creditors and shareholders/equity holders. The main agenda for the first meeting is a report on the financial status of the company by the receiver and the investigation committee. At the second meeting, the main agenda is review of the rehabilitation plan. At the third meeting, the main agenda is resolution on the rehabilitation plan. Upon the declaration of bankruptcy, the name of the trustee, period for reporting of claims, date of first meeting of creditors, and hearing date for investigation of claims are published. Also major events (such as date and agenda of meeting of creditors, special hearing date for investigation of claims, distribution, termination of the bankruptcy procedure) are notified and/or published. In a bankruptcy procedure, there is no mandatory agenda to be discussed at the first meeting of creditors.
The common test for insolvency in Korea is the inability to pay liabilities when due. When a debtor suspends payments to creditors, it is presumed to be unable to make payments as they become due. A prime example of a suspension of payment is suspension of transactions by a clearing house, where the company issues a note, which is presented to the clearing house for settlement, but fails to make the payment of the note. If the debtor is a company rather than an individual, another basis for insolvency is excess of liability over assets. However, this is not true in case of a Hapmyung Hoesa or Hapja Hoesa (which are similar to a partnership).
3 Creditors
A petition for rehabilitation under the Act may be filed by a company (or by certain specified creditors as explained in question 2.4 below) if (i) it is unable to pay its debts as they become due without causing a significant impediment to the continuation of its business, or (ii) there is a danger that the company will become insolvent. A petition for bankruptcy can be filed if the company is insolvent.
Unsecured creditors are free to participate in a rehabilitation or bankruptcy procedure, although their rate of recovery is usually much lower than that of secured creditors. Unsecured creditors cannot enforce their rights against the company except by participating in the rehabilitation or bankruptcy proceeding.
A petition for rehabilitation procedure may be brought by the company, and, if the company is a corporation or limited liability company, by (i) creditors with claims equivalent to 10% or more of the paid-in capital or (ii) shareholders/equity holders with 10% or more of the total shares/equity. In general, it takes around one month for the court to review the evidence submitted (with or without hearing) and decide whether or not to commence the rehabilitation procedure. A bankruptcy petition may be filed by the company, its director or liquidator, or a creditor. The court will review the evidence submitted (with or without hearing) and decide whether or not to declare bankruptcy of the company. A bankruptcy procedure may be terminated upon declaration of bankruptcy if the companys assets cannot cover even the expenses of the procedure.
In a rehabilitation procedure, even secured creditors can obtain satisfaction of their claims only in accordance with the rehabilitation plan, as in the case of unsecured creditors. In a bankruptcy procedure on the other hand, secured creditors may enforce their rights regardless of the bankruptcy procedure.
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In both a bankruptcy procedure and rehabilitation procedure, the fact that the petition is filed is not published or notified, except that it is notified to the company representative for the purpose of an interview by the court. In the event that the court takes provisional measures to protect the companys assets prior to the commencement of either proceeding, such measures are notified to relevant persons and/or published.
In general, creditors may set off their claims against their obligations toward the company without court approval, in both a bankruptcy proceeding and rehabilitation proceeding, except that set off in a rehabilitation procedure is permitted only within the period for reporting of claims, while there is no such time limitation in a bankruptcy procedure. In general, a right of set off is not available in the following cases: (a) where the creditors obligation is accrued after commencement of the bankruptcy or rehabilitation procedure; where the creditors obligation is accrued with knowledge that a Triggering Event has occurred, provided that exception is granted where the obligation is founded on a cause: (i) that
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is provided by law; (ii) that occurred before the creditor became aware of the Triggering Event; or (iii) that occurred one year or longer before the commencement of rehabilitation procedure or declaration of bankruptcy; (c) where the creditor is an obligor of the company, who acquired a third partys claim against the company after the commencement of rehabilitation or bankruptcy procedure; or where the creditor is an obligor of the company, who acquired the claim after a Triggering Event has occurred, provided that exception is granted where the claim is founded on a cause: (i) that is provided by law; (ii) that occurred before the creditor became aware of the Triggering Event; or (iii) that occurred one year or longer before the commencement of rehabilitation procedure or declaration of bankruptcy.
4.3
Korea
What is the effect of each procedure on employees?
(d)
A company may not terminate an employee on grounds of commencement of a rehabilitation procedure. A company under rehabilitation is subject to all labour laws and regulations. Moreover, any wage, severance allowance and certain other monetary obligations of the company toward employees are common interest claims, regardless of whether such obligation accrued before or after commencement of the rehabilitation procedure. In case of a bankruptcy procedure, on the other hand, the trustee terminates all employees immediately upon commencement of the procedure. The trustee may separately hire the necessary personnel to assist him/her, usually from among the terminated employees. As is the case for rehabilitation, any wage, severance allowance and certain other monetary obligations of the company toward employees are estate claims, regardless of whether such obligation accrued before or after commencement of the bankruptcy procedure.

In case of a rehabilitation procedure, the receiver has full control over all affairs and assets of the company, while the directors and shareholders cannot exercise their rights. The receiver is closely supervised by the court and all material decisions are subject to court approval. Unless and until otherwise required by the rehabilitation plan, directors and shareholders do maintain their status and may exercise rights that are not related to the business and assets of the company. Such rights, however, are further restricted by the Act. The Act provides for the existing representative of the company (usually the representative director) to serve as the receiver absent special circumstances, namely where the representative himself has engaged in acts that caused the financial distress, where the creditor committee requests appointment of a different person with reasonable basis, or where appointment of a different person is otherwise necessary for company rehabilitation. In case of a bankruptcy procedure, all assets of the company belong to the bankruptcy estate and the trustee has full control over the estate. Similarly, the trustee is subject to close supervision and approval of the court. The directors and shareholders do not have any right with respect to the bankruptcy estate, but they have certain limited rights as to matters unrelated to company assets.
In case of a rehabilitation procedure, if there is any contract entered into by the company but not performed before commencement of the procedure, and if the unperformed obligations are in a relationship of mutual consideration, then the receiver may in his/her option perform or terminate the contract. This option must be exercised before close of the meeting of interested parties for review of the rehabilitation plan (or in case the rehabilitation plan is to be voted upon in writing without meeting, before the courts decision for such voting). The counterparty to the contract may send a notice to the receiver demanding a decision whether to perform or terminate the contract, and the receiver is deemed to have elected to perform if such decision is not made within 30 days following receipt of such notice. If the receiver elects to perform, then the companys obligations under the contract become common interest claims. If termination is elected, then the claim arising out of the termination becomes a rehabilitation claim. There are certain exceptions to this rule in case of some types of contracts (financial contracts, leases and utility supply, etc.). In case of bankruptcy, the trustee has a similar option as the rehabilitation receiver. The difference is that the trustee is not subject to any time limit for the exercise of the option, and also the trustee is only required to respond to the counterpartys demand for a decision within a reasonable period. Unlike the case of rehabilitation, failure to respond is deemed to be an election to terminate.
In a rehabilitation procedure, all costs and obligations incurred by the receiver in operating the company are paid as a matter of priority as common interest claims, without regard to the rehabilitation plan. Any amount borrowed by the receiver becomes a common interest claim, although a company undergoing rehabilitation is unlikely to be able to obtain a loan in reality. Usually, the court requires advance payment of the rehabilitation costs to be incurred by the court, upon filing of the petition. Likewise, all costs and obligations incurred by the bankruptcy trustee in operating the bankruptcy estate are paid as a matter of priority as estate claims, without regard to the distribution procedure. Usually, the court requires advance payment of the costs of bankruptcy procedure to be incurred by the court, upon filing of the petition.
5 Claims
In a rehabilitation procedure, the receiver prepares a creditors list for review by the interested parties. If a creditor believes that its claim is omitted or understated, it must report its full claim within the prescribed period. In practice, this reporting period is extended until the second meeting of interested parties. In a bankruptcy procedure on the other hand, there is a prescribed reporting period but the Act does not provide for any limitation on

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the period for reporting of claims and therefore claims may be reported at any time before the final distribution. However, reporting within the prescribed period assists in avoiding procedural difficulties and unnecessary costs.
Korea
premised on a determination that the company can operate normally with a financial structure comparable to other companies, but such determination is of course not always easy to make. Upon termination of the rehabilitation procedure, the company is released from the restrictions imposed by the Act. On the other hand, if it becomes clear that the company cannot implement the rehabilitation plan, the procedure is terminated and a bankruptcy procedure is commenced with respect to the company. (2) Bankruptcy Upon completion of distribution to creditors from the bankruptcy estate, so that there is no remaining asset of the company, the procedure is concluded and the company is legally extinguished.
Korea
In a rehabilitation procedure, claims rank in the order of (i) common interest claims, (ii) rehabilitation secured claims, (iii) rehabilitation (unsecured) claims, and (iv) other claims arising after commencement. Rehabilitation secured claims and rehabilitation claims are claims arising before commencement, while claims arsing after commencement are classified as either (i) or (iv). Common interest claims are paid without any restriction under the rehabilitation procedure. In principle, rehabilitation secured claims and rehabilitation claims are paid only through the rehabilitation plan. Other claims arsing after commencement cannot be paid until lapse of the prescribed payment period or completion of all payments to creditors provided in the rehabilitation plan, whichever is earlier. In a bankruptcy procedure, the claims are in the order of (i) estate claims, (ii) bankruptcy claims with priority (priority provided in laws other than the Act), (iii) ordinary bankruptcy claims, and (iv) subordinated bankruptcy claims. Secured claims (which are not included among the foregoing claims) are not subject to the bankruptcy procedure. Meanwhile, estate claims, like common interest claims, are paid without any restriction under the bankruptcy procedure. In principle, all three types of bankruptcy claims listed above are claims arising before commencement.

7.1 Is it common to achieve a restructuring outside a formal procedure in Korea? In what circumstances might this be possible?
An informal restructuring where all creditors participate is not commonly achieved. However, an informal restructuring of a distressed company, through agreement among financial institutions, is frequently achieved. Korean banks have in place an agreement for restructuring of financially distressed companies, pursuant to which a Creditor Banks Standing Council is established and operated. In 2008, banks and other financial institutions entered into a separate agreement for liquidity support of construction companies, in the wake of a downturn in construction business. Also in 2008, the Corporate Restructuring Promotion Act came into force, to encourage debt restructuring of companies that have a certain threshold amount of loans and other credits and are in financial distress, through agreement among banks and other financial institutions. This law is in effect only until the end of 2010, and serves as a system for voluntary debt restructuring, much like the agreement among banks.
In a rehabilitation procedure, taxes assessed on activities of the company after commencement of the procedure are paid as a matter of priority as common interest claims. Tax liabilities incurred prior to commencement of the procedure are rehabilitation claims, and in order to apply any change to tax liabilities in a rehabilitation plan, consultation with and/or consent of the relevant authorities is necessary, unlike other types of claims. Withholding tax and other similar taxes that the company pays with funds received from the actual taxpayer are common interest claims, even if they are assessed on activities prior to commencement of the procedure.

Reorganisation of a debtor is possible through merger, spinoff, share exchange, and business transfer, pursuant to the Commercial Code. In case of a merger, a creditor protection procedure is required to be taken as a precondition, whereby creditors objecting to the merger can obtain satisfaction of their claims or adequate security. The creditor protection procedure is sometimes not required in case of a spinoff.
A similar process is available in case of rehabilitation procedure. In case where one class of creditors consents to the rehabilitation plan while other class(es) do not, the court may in its discretion approve the plan by including provisions in the rehabilitation plan for protection of the opposing class(es).
(1)
Rehabilitation
Once the rehabilitation plan is approved by the court, payments start to be made in accordance with the plan. Once the court is satisfied that the plan can be implemented without difficulty, the procedure may be terminated. In principle, such a finding is
The Act does not specifically provide for a pre-packaged sale. However, in case of rehabilitation, such sale can be achieved through an early submission of a rehabilitation plan. Specifically, creditors holding 50% or more of the claims against the company are entitled to submit a rehabilitation plan at any time after commencement of the procedure. An early submission of a rehabilitation proposal does not otherwise materially affect the rehabilitation procedure, but has the effect of abridging discussions on the plan. In fact, the company and/or creditors sometimes arrange a sale of
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8 International
8.1
Korea
Recognition of the foreign procedure does not by itself mean recognition of the effectiveness of such procedure. Rather, the Korean court may render specific decisions to support the foreign procedures. For instance, the court may suspend enforcement of claims by creditors, or order preservation of the debtors assets. The court may also appoint an international receiver with authority to manage and dispose of the debtors assets in Korea. The regulations on international insolvency procedure came into effect in 2006, and there are not yet many significant precedents involving those regulations.
Eunjai Lee
Lee & Ko 18th Fl., Hanjin Main Building 118, 2-ka, Namdaemun-ro, Chung-ku Seoul Korea
Wan Shik Lee

Lee & Ko 18th Fl., Hanjin Main Building 118, 2-ka, Namdaemun-ro, Chung-ku Seoul Korea
+82 2 772 4342 +82 2 772 4001 lej@leeko.com www.leeko.com
+82 2 772 3106 +82 2 772 4001 wsl@leeko.com www.leeko.com
Mr. Eunjai Lee graduated from Seoul National University, College of Law in 1983, and Seoul National University, Graduate School of Law in 1989. Mr. Lee also obtained his LL.M. degree from the University of Chicago Law School (1990) as well as the University of Pennsylvania Law School (1991), as well as a Juris Doctor degree from the University of Iowa College of Law (1994). Mr. Lee was admitted to the Korean Bar in 1985 and the New York Bar in 1992. Mr. Lee has numerous publications in the area of insolvency law, including M&A in Korean Bankruptcy Proceedings, Asialaw M&A Review, October 2005.
Mr. Wan Shik Lee obtained his Bachelor of Laws degree from Seoul National University in 1988, and was admitted to the Korean Bar in 1990. Mr. Lee then served as a judge in Seoul, Inchon and Taejon in 1990-2002, including the Bankruptcy Division of the Seoul District Court in 2000-2001. Mr. Lee joined Lee & Ko in 2002. In 2006-2007, Mr. Lee was a visiting scholar at the University of Washington Law School. Mr. Lees publications include Corporate Restructuring Practice (published by the Seoul District Court, 2000).
Lee & Ko is one of the largest and most prominent law firms in Korea, with over 250 professionals. Lee & Kos Insolvency Team is headed by a former Supreme Court justice with expertise in insolvency matters, and members who have vast experience in all types of insolvency matters including debtor rehabilitation, bankruptcy and debt restructuring. In particular, during the financial crisis in 1997-1999, Lee & Kos insolvency lawyers have accumulated a great wealth of expertise and know-how in insolvency-related issues through participation in many of the largest insolvency proceedings in Korean history, including the restructuring, acquisition and dissolution of some of the leading financial institutions and multinational corporations based in Korea, and are poised to exploit that experience to the full extent in the current economic crisis.

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the company prior to commencement of the procedure, and then submit a rehabilitation plan reflecting the arrangement. The sale of the company is in principle effectuated through an approved rehabilitation plan (the buyer usually acquires shares of the company pursuant to the plan), but also may be effectuated prior to such approval, if the court deems appropriate (for example, upon court approval, the receiver sells, and the buyer acquires, the assets/business of the company).
What would be the approach in Korea to recognising a procedure started in another jurisdiction?
In order for a foreign insolvency procedure to be recognised in Korea, the foreign company must have a place of business or address in the country where the foreign procedure is pending. Only the representative appointed in the foreign insolvency procedure may apply for the recognition, and in order to be recognised, such recognition of the foreign procedure must not be in violation of Korean public policy.
Chapter 28
Luxembourg
Elvinger, Hoss & Prussen
Marc Elvinger
Philippe Prussen

1.1 How does a creditor take security over assets in Luxembourg?
1.2
Security may be given by way of (i) a sret relle or (ii) a sret personelle. In case of a sret relle, specified assets, which may be the property of the debtor himself or of a third party (in which case such third party obviously needs to concur to the constitution of the security), guarantee the due fulfilment, by the debtor, of his obligations. In case of a sret personelle, a third party is personally guaranteeing the due fulfilment, by the debtor, of his obligations. Within the first category (sret relle), the kind of security will depend on the nature of the asset given as security. Movable things (biens mobiliers) whether tangible (such as certain goods) or intangible (such as a bank deposit in cash or a securities deposit), will be granted as security by way of pledge (gage) and/or, where claims and financial instruments form the subject matter of the security, by way of transfer of property for security purposes. Real estate will be granted as security by way of a mortgage (hypothque). A sret personelle will take the form of a personal guarantee (caution). Where a sret relle is granted on assets owned by a person different from the principal debtor, it will qualify as cautionnement rel, even though this concept is the matter of a debate in legal writing. Security in the broader sense of the term can however also be obtained via certain other contractual mechanisms or arrangements, such as repurchase transactions (repos), set-off and netting arrangements and property reservation clauses. Luxembourg legislation with regard to security over assets which qualify as claims or financial instruments has undergone significant changes as a result of a law of 5 August 2005 on financial collateral arrangements (to be referred to hereafter as the financial collateral law) which transposes Directive 2002/47 of June 6, 2002 on financial collateral arrangements into Luxembourg law. The financial collateral law in particular aims at making financial collateral arrangements bankruptcy proof. It is worth noting that the Luxembourg legislator has chosen to broaden the scope of application of the new legal provisions as per what was required for the purpose of properly transposing the EU Directive. The Luxembourg law indeed applies irrespective the quality of the parties to an agreement qualifying as a financial collateral arrangement pursuant to the law.
The most common insolvency procedure provided for by Luxembourg law is the faillite (to be referred to hereafter as bankruptcy or faillite) which is governed by articles 440 ff of the Luxembourg Code de Commerce. While Luxembourg law provides for other types of insolvency proceedings and while faillite strictly speaking is not applicable to companies engaging in certain specified activities, such as in particular banks and insurance companies (see below under question 2.1), many (but not all) of the main substantive provisions applicable in case of faillite, will, or rather may, also be made applicable in other kinds of insolvency proceedings. Article 444 of the Code de Commerce provides that in case of faillite, the insolvent debtor (le failli) is deprived from the administration of his assets as from the date on which he is declared in bankruptcy by the competent court (being the District Court sitting in commercial matters (to be referred to, hereafter, as the Court)). The bankruptcy judgment sets a date prior to the bankruptcy decision as from which the company will be deemed to have been insolvent (en cessation de paiements). Such date of cessation de paiements can be set to a date up to 6 months prior to the bankruptcy judgment and, in fact, is systematically and without further scrutiny fixed at such earliest possible date. The period from the date so determined until the bankruptcy decision is referred to as the preference period (priode suspecte). The concept of preference period is among the most central concepts of Luxembourg insolvency law because transactions made during that period are particularly vulnerable to attack. In particular, certain transactions and acts defined in article 445 of the Code de Commerce, if made during the preference period (and up to 10 days before), are void by operation of law and shall thus be annulled by the Court upon application of the curateur (the bankruptcy administrator). The transactions and acts referred to in article 445 are: (i) transactions transmitting property without any or without reasonable counterpart; (ii) payments, made by whatever means, of debts which were not yet due; (iii) payments of debts made otherwise than in cash (or by cheque and similar payment instruments); and (iv) security granted for debts previously incurred. An important exception to the rule in (iv) arises from the previously mentioned financial collateral law. Article 446 of the Code de Commerce further provides that all other payments and transactions made by the failli during the preference period may be annulled by the Court if they have been made or entered into while the other interested party (beneficiary of the payment; co-contractant) was aware of the cessation de paiements.
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Article 447 of the Code de Commerce provides that mortgages constituted during the preference period (and up to ten days before) may be declared void by the Court if there have been more than 15 days between the day on which the mortgage has been created and the day on which it has been duly registered. Finally, article 448 of the Code de Commerce provides that all transactions and payments made fraudulently against the other creditors interests are null and void, whatever be the date on which they have been made.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Luxembourg?
Luxembourg
The procedures of sursis de paiement as provided for by the Code de Commerce and concordat prventif de faillite are hardly used at all in present times, and will therefore not be discussed further hereafter, being noted that the sursis de paiement provided for by the Code de Commerce is not to be mixed up with sursis de paiement proceedings provided for by financial sector laws as set out below. Faillite is, as mentioned earlier, the most common insolvency procedure applicable to companies which appear unable to meet their obligations towards their creditors. Controlled management (gestion contrle) is available in circumstances where there is a perspective for the business of a company, which is momentaneously unable to face its obligations to be redressed or where such procedure might enhance an orderly realisation of the companys assets in the best interest of all creditors. This procedure is applied from time to time but is rarely successful and is often followed by faillite proceedings. It is worth noting that gestion contrle is occasionally applied for by companies, and in particular holding or finance companies, which form part of an international group and whose inability to meet their obligations is the result of a default at the overall group level. A significant amount of uncertainty as to whether a Luxembourg incorporated company will, at the end of the day, be subject to the insolvency proceedings provided for by Luxembourg law, arises from the (often somehow erratic and unpredictable) application of the centre of main interest (COMI) criteria provided for by EC regulation n 1346/2000 on insolvency proceedings of 29 May 2000. Another, somewhat similar, uncertainty may arise from the fact that Luxembourg company law applies the so called real seat system, meaning that a company will be considered to have its domicile at the place where its central administration is located, which does not necessarily coincide with its place of incorporation. For the sake of good order, it should be mentioned that both the COMI and the real seat criteria may also result in foreign incorporated companies becoming subject to Luxembourg insolvency laws. The uncertainty so arising is particularly critical where and to the extent that it results in uncertainty as to the effectiveness (and enforceability) of certain contractual arrangements such as, typically, pledges or set off clauses. Certain types of companies, mainly of the financial sector, such as banks and all other professionals of the financial sector which manage third party funds, insurance companies, undertakings for collective investments (FCPs, SICAVs or SICAFs), investment companies in risk capital (SICARs) or securitisation vehicles are subject to special winding up and/or insolvency proceedings. These special proceedings make a distinction between (i) an observation/preliminary period during which the company benefits from a suspension of its payment obligations and is managed under the supervision of court appointed administrators (commissaires) (such procedure to be referred to hereafter as sursis de paiement (suspension of payment)) and (ii) a liquidation phase if it appears that the business cannot be redressed and/or pursued (such procedure to be referred to hereafter as liquidation (liquidation)). These proceedings provide the Court with a great amount of flexibility as to the rules to be applied, particularly, when it comes to liquidation. Typically, indeed, the relevant legal provisions provide that when opening sursis de paiement or liquidation proceedings, the court will determine the rules according to which these proceedings will take place. The limited space available for this contribution makes it impossible to provide information regarding the insolvency proceedings relating to each of the types of companies mentioned above. Therefore, and because the provisions applicable to banks and other professionals of the financial sector managing third party
Article 440 of the Code de Commerce obliges the directors of a company which is incapable to meet its payment obligations to, within a months time from such cessation des paiements, declare the same at the greffe (secretariat) of the Court. If directors do not comply with this obligation, different types of sanctions may apply. A possible sanction is the prohibition to further engage in a commercial activity. In certain circumstances, the directors may also be condemned as banqueroutier simple or as banqueroutier frauduleux, each of these a criminal offence subject to a fine and, at least in theory, to imprisonment. The civil liability of directors continuing to trade where a company is in financial difficulties remains in principle subject to the ordinary rules of directors liability but continuing to trade while the company has ceased to meet its payment obligations will, so to say, by definition amount to faultive behaviour on the part of the directors. Without prejudice to the application of the ordinary rules of directors liabilities, article 495-1 of the Code de Commerce in addition, provides that where directors gross negligence has caused or contributed to the occurrence of bankruptcy, the Court may decide that they will have to bear part of the debts of the bankruptcy.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Luxembourg?
The applicable procedure depends on (i) the nature of the difficulties a company is facing and (ii) the activity pursued by the company. The following types of procedures are provided for by Luxembourg law for general corporates which are domiciled in Luxembourg and are not governed by a special legislation as mentioned hereafter: Faillite (bankruptcy) (articles 437 ff of the Code de Commerce). Gestion contrle (controlled management) (grand-ducal decree of 24 May 1935). Sursis de paiement (suspension of paiements) (articles 593 ff of the Code de Commerce). Concordat prventif de faillite (composition with creditors, law of 14 April 1886). Article 203 of the Luxembourg law on commercial companies of 10 August 1915 further provides for a procedure of compulsory winding up (liquidation judiciaire) but rather than to companies in financial difficulties, this procedure applies to companies which do not comply with certain requirements of company law such as the requirement to file annual accounts in due time, in fact a company, subject to liquidation judiciaire can later on, if insolvent, be declared bankrupt.

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funds have inspired most of the provisions applicable to the various types of companies enumerated above, we shall, hereafter, only refer to the insolvency proceedings provisions contained in the law of 5th April 1993 on the financial sector (hereafter the financial sector law). It needs however to be noted that while the entities falling within the scope of the special insolvency proceedings provided by the financial sector law and the insurance company law are exempted from the ordinary insolvency proceedings provisions, this is not the case for undertakings for collective investments to which, depending on the circumstances, the ordinary insolvency proceedings may apply notwithstanding the existence of special proceedings.
2.2 What are the tests for insolvency in Luxembourg?
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rejected in the first place, one of the judges composing the Court is appointed to make a report on the business situation of the applicant. It is in the light of this report, always prepared with the assistance of an expert, that the Court decides whether or not to retain the application and, where the application is accepted, appoint one or more administrators (commissaires) who shall supervise the management of the company while elaborating a plan in order to reorganise its business. An application to the Court for sursis de paiement as provided for by the financial sector law can only be made by the company itself or by the CSSF, i.e. the regulator of the financial sector. An application to the Court for liquidation as provided for by the same law can only be made by the CSSF or the Procureur dEtat (public prosecutor).
2.5 What notifications and meetings are required after the company has been placed into each procedure?
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Article 437 of the Code de Commerce retains two criteria which have to be met cumulatively: (i) the inability to pay ones debts as they fall due; and (ii) the inability to raise credit.
While, depending on the type of proceedings, certain meetings and/or notifications may be held/required to be held as the proceedings progress, the limited space available in this contribution does not enable us to enter into further detail.
Where the ordinary rules on faillite apply, a company will be declared bankrupt by the Court if the two conditions contemplated under question 2.2 above are met. A single unpaid debt might be sufficient for that purpose if the inability to raise credit criteria is also met. As indicated earlier, a company in financial difficulties can apply for gestion contrle in view of either (i) reorganising its affairs or (ii) realising its assets in better conditions. Courts have ruled that in order for a company to be admissible to gestion contrle, there needs to be a real reorganisation or ordered liquidation prospect. Otherwise gestion contrle should be refused and ordinary bankruptcy instituted. Sursis de paiement and liquidation as provided for by the financial sector law can be instituted including in circumstances other than insolvency and in particular where, for whatever reason, the companys licence has been withdrawn by the regulator. Article 60-2 of the financial sector law indeed provides that sursis de paiement may occur where (i) the creditworthiness of the company is undermined or it finds itself in a liquidity crisis, whether or not there is a cessation of payments; (ii) the ability of the company to meet its commitments is compromised; or (iii) the companys licence has been withdrawn but such decision is not yet legally final. And article 60-8 of the same law in substance provides that liquidation may occur where (i) suspension of payment has not allowed a redress of the companys situation; (ii) the financial situation of the company is undermined to an extent such that it can no longer meet its commitments; or (iii) the withdrawal of its licence has become final.
3 Creditors
Whatever be the type of insolvency proceedings, unsecured creditors will not be in a position to enforce their rights once such proceedings are under way. In ordinary faillite proceedings, it is as from the day of the bankruptcy decision that claims can no longer be enforced. In gestion contrle proceedings, the relevant date is the date on which the Court decides to appoint one of its judges to investigate and make a report on the business of the applicant. In sursis de paiement proceedings as provided for by the financial sector law, the relevant date is the one on which the request is filed with the Court. In liquidation proceedings as provided for by the same law, it is for the Court to determine the rules according to which the liquidation will be operated. No doubt, however, unsecured creditors will, in practice, be precluded from enforcing their claims individually. Creditors benefiting from some type of general preference right (privileges gnraux) which does not qualify as a security strictly speaking are, in this respect, treated like unsecured creditors.
Faillite may be instituted by the Court (i) upon a declaration made by the directors of the company; (ii) upon proceedings instituted by an unpaid creditor; or (iii) by the Court acting on its own initiative upon having received information from various sources on the companys financial difficulties. In the latter case, the representatives of the company have in principle to be previously convened and heard by the Court. It is for the directors of the company to file an application for controlled management with the Court. If the application is not
In faillite proceedings, beneficiaries of security strictly speaking, such as pledges and mortgages, which have been validly instituted, are entitled to enforce their secured claims notwithstanding the bankruptcy. Article 546 of the Code de Commerce on the contrary imposes certain restrictions on the enforceability of certain special preference rights normally benefiting to the seller of movable goods. On the other hand, article 567-1 of the same Code now confirms the validity and enforceability, subject to certain conditions, of express property reservation clauses (clause de rserve de proprit) in sales agreements of movable goods. It follows from the provisions of the grand-ducal decree of 1935
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that in gestion contrle proceedings, even the beneficiaries of pledges and mortgages are, in principle, precluded from enforcing their secured claims. However, as a result of the provisions of the financial collateral law, security falling within the ambit of such law will be enforceable notwithstanding gestion contrle proceedings. In case of sursis de paiement as provided for by the financial sector law, collateralised claims also appear to be unenforceable except with the permission of (the regulator) or where the law provides otherwise. The major exception in existence is, again, collateral falling within the ambit of the financial collateral law. In case of liquidation as provided for by the financial sector law, secured claims should, in principle, be enforceable just as in ordinary faillite proceedings. It should be mentioned that when certain assets located outside Luxembourg have been made the subject matter of a security mechanism which is not similar to security mechanisms known and recognised by Luxembourg law, the recognition and effectiveness of such security in Luxembourg insolvency proceedings may be problematic. This issue is however addressed to a certain extent by the EC insolvency regulation no 1346/2000 and, where insurance companies or credit institutions are at issue, by EC directives no 2001/17 of 19th March 2001 and n 2001/24 of 4th April 2001.
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disseised of the administration of its assets. It is thus for the bankruptcy administrator to act on behalf of the company under the supervision of a juge-commissaire appointed by the Court among its members. The mission of the bankruptcy administrator is to realise the assets of the company and to pay off its debts to the largest extent possible. The directors of the company have no active role to play in the administration of the bankruptcy (but they have an obligation to, whenever necessary, assist the bankruptcy administrator). Nor have the shareholders of the failli. A special decision from the Court is required, pursuant to article 475 of the Code de Commerce, in order for the bankruptcy administrator to continue the business of the bankrupt company. A company in gestion contrle is managed under the supervision of the court appointed commissaires who will be in charge of authorising all acts of some importance to be performed by the directors and management who continue to be in charge of the companys affairs. If the plan prepared by the commissaires has been approved by the Court and the creditors, the company in principle regains control over its affairs. The regime of sursis de paiement as provided for by the financial sector law is in this respect somewhat similar to the controlled management proceedings while the regime of liquidation provided for by the same law is in this respect rather similar to faillite proceedings.
Pursuant to article 445 of the Code de Commerce, set off, including as a result of a set off/netting agreement, is prohibited as of the date of the faillite. The courts have ruled that this principle also applies to companies in gestion contrle. As to whether the post-bankruptcy set off prohibition would apply in sursis de paiement and liquidation proceedings as provided for by the financial sector law, would depend upon the decision of the Court determining the rules according to which the sursis de paiement or liquidation should proceed. It may however be assumed that the Court will normally make the traditional post-bankruptcy set off prohibition applicable in such proceedings (subject always to the exceptions set out herebelow). Case law has however decided, although in a restrictive way, that post-bankruptcy set off is admissible if there is connexity between the mutual claims to be set off, meaning that such claims need to have a common cause and, therefore, be indivisible. At any rate however, the financial collateral law now provides that set off between mutually owed claims and financial instruments (as further defined by the law) is valid notwithstanding the existence of any type of insolvency proceedings if it is the result of transactions which are the subject matter of bilateral or multilateral set off arrangements or clauses. The traditional post-bankruptcy set off prohibition is thus now neutralised to a very large extent. Where the assets subject to a set off clause are located abroad, set off may further be secured as a result of the provisions of the Council Regulation and EC Directives referred to in question 3.2 herebefore.
In principle, the cost of the insolvency proceedings are to be borne by the company itself and such cost are to be paid prior to pre-bankruptcy creditors unsecured claims. If the company has insufficient assets to cover such cost, then the state authorities will bear them.
Article L.125-1 of the Code du travail (labour code) states that employment contracts are terminated with immediate effect and by operation of law when a company is declared en faillite. Any amounts due to the employees for the last six months are guaranteed by the Fonds pour lemploi within the limit of six times the amount of the minimum salary. The other types of insolvency proceedings do not automatically affect the continuation of labour contracts.
Save for employment contracts in case of faillite (see under question 4.3 above), contracts are not, in principle, affected by bankruptcy proceedings. Where the bankruptcy administrator, commissaire or liquidator will wish to terminate a contract otherwise than in accordance with its terms or the law, the insolvent estate may incur liability towards the co-contacting party.

5 Claims
A company in faillite is, as indicated under question 1.2 above,
In case of faillite, creditors have to make a declaration of their claims with the secretariat (greffe) of the Court. Broadly speaking,

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the procedure will in practice be the same in the case of liquidation as provided for by the financial sector law, but it is for the Court to fix the rules to be followed. The same is true in sursis de paiement proceedings but there the issue appears to be less relevant because of the essentially temporary nature of these proceedings, to be followed by liquidation, except where the company recovers its independence. The 1935 grand-ducal decree on gestion contrle does not provide for a special procedure according to which claims are to be made.
5.2 What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status? 6.2
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Faillite results in the liquidation and dissolution of the company. Where gestion contrle proceedings succeed, the company will continue to exist and be able to pursue its business. Otherwise, faillite proceedings will normally be instituted. Sursis de paiement proceedings, as provided for by the financial sector law, cannot be instituted for a period exceeding six months though it has been decided that in exceptional circumstances, it can be prolonged by the Court. Thereafter, the company will either recover its autonomy or liquidation proceedings be instituted. Liquidation proceedings will result in the company being dissolved and in ceasing to exist once the liquidation is closed.
All creditors whose claims compete in the faillite constitute the mass of creditors (masse des cranciers). Courts have admitted that this concept of mass of creditors is also applicable in the gestion contrle procedure. Creditors who benefit from a first ranking mortgage or pledge are considered out of the mass as they may enforce such security and therefore do not compete with the other creditors. Apart from that, certain claims shall have preferential status, such as: (i) the preferential right of employees as mentioned under question 4.3 above; (ii) certain social security claims; or (iii) claims by the tax authorities. Generally speaking the above will equally apply in other types of insolvency proceedings. Where the estate elects to maintain certain contacts or to enter into new contacts after the opening and for the benefit of the insolvency proceedings (such as a lease contract or an employment contract), the claims arising therefrom will rank before any other claims and qualify as debts of the estate (dettes de la masse) as opposed to debts in the estate (dettes dans la masse).

7.1. Is it common to achieve a restructuring outside a formal procedure in Luxembourg? In what circumstances might this be possible?
It is not common in Luxembourg to achieve a restructuring outside a formal procedure. If a company faces difficulties without the conditions requiring the directors to declare bankruptcy being met, the parties are free to contractually restructure the debt. But no creditor can, in such circumstances, be forced to accept and concur to such restructuring. Informal restructuring is thus a difficult exercise if there is a plurality of creditors. It should, for the sake of good order, be mentioned that articles 1265 ff of the Code Civil envisage this type of agreed restructuring but seem hardly, if at all, to be applied in practice.
7.2. Is it possible to reorganise a debtor rather than realise its assets and business?
During insolvency proceedings, the company remains an ordinary tax payer. In particular, any profits realised during that period are in principle subject to tax. In practice, however, a bankrupt company should have tax losses available!
As is apparent from the answers to previous questions and in particular to question 2.1, gestion contrlee (and sursis de paiement) offer a legal framework within which general corporations and certain financial sector entities may be reorganised rather than just having their assets and business realised.
7.3. Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale effected?

This type of procedure is not provided for by Luxembourg law.
The reorganisation plan prepared by the commissaires in gestion contrle proceedings may provide for the waiver of part of the unsecured creditors claims. If approved by the creditors according to certain majority rules and by the Court, the plan becomes compulsory for all creditors, whether in agreement or not. For the sake of good order, it should be mentioned that a similar procedure - called concordat - is incidentally provided for in ordinary faillite proceedings. In practice however, it appears to be hardly applied, if at all. We shall therefore not elaborate further thereon.
8 International
8.1 What would be the approach in Luxembourg to recognising a procedure started in another jurisdiction?
Luxembourg law is based on the so-called principle of the universality of insolvency proceedings. Accordingly, insolvency proceedings started in another competent jurisdiction will, as a general rule, be automatically recognised in Luxembourg without, in particular, exequatur being required. With regard to proceedings opened in another Member State of the European Union, EC regulation 1346/2000 confirms this traditional approach of Luxembourg law.
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Luxembourg
Marc Elvinger
Elvinger, Hoss & Prussen 2, Place Winston Churchill BP 425, L-2014 Luxembourg
Philippe Prussen
Elvinger, Hoss & Prussen 2, Place Winston Churchill B.P 425, L- 2014 . Luxembourg
+352 4466 440 +352 4422 55 MarcElvinger@ehp.lu www.ehp.lu
+352 4466 44 2332 +352 4422 55 PhilippePrussen@ehp.lu www.ehp.lu
Marc Elvinger, born 1960, is a partner with Elvinger, Hoss & Prussen since January 2000, when he joined the firm after having conducted an individual practice during ten years. He is a member of the Luxembourg Bar since 1985. Matre en droit, he further holds a post-university degree (DEA) in international conflict law (Strasbourg) and one in international development law (Paris). He has extended experience in commercial and civil litigation (including as bankruptcy administrator and in bankruptcy matters) as well as in international arbitration. He also has a wide practice in administrative law and litigation, including matters such as public procurement, immigration law, urbanism and environment. Apart from litigation, he practices contract, company and banking law on a regular basis. He has published on a large variety of matters relating to, among others, human rights, administrative law, banking law and construction law, etc. He has been a member of the Council of the Luxembourg Bar and chairman of the Young Bar Association. He is fluent in Luxembourgish, French, English and German.
Philippe Prussen became a member of the Luxembourg Bar in 2004 and joined Elvinger, Hoss & Prussen the same year. He is matre en droit from the Universit dAix-Marseille III and holds an LL.M in Innovation, Technology and the Law of the University of Edinburgh. He is fluent in English, French, German and Luxembourgish.
Elvinger, Hoss & Prussen is a leading Luxembourg law firm with strong practices in corporate law, corporate finance, mergers and acquisitions, banking and general commercial law, insurance, investment and pension funds, SICARs, asset management, private equity structures, European law, securitisation, intellectual property, administrative law and tax law. The firm provides high level legal services, both in terms of legal advice and litigation as well as arbitration to local and international financial and industrial groups and financial institutions, Luxembourg investment funds and their service providers. Partners of the firm participate at industry and governmental level in the development of the legal and regulatory environment of the financial services sector in Luxembourg. The firm has a long standing experience and a strong track record in advising on cross border transactions such as concurrent multi-jurisdictional public exchange offers, secured and unsecured financing transactions, mergers and acquisitions, corporate restructurings as well as in national and international litigation and arbitration. The firm assists clients in relation to all other legal matters they are faced with including, among others, issues pertaining to administrative law and labour law. The firm advises and represents a large number of international clients on all aspects of Luxembourg law and is working closely and on a daily basis with other leading law firms worldwide.

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Chapter 29
Mexico
Cervantes, Aguilar-Alvarez y Sainz, S.C.
Alejandro Sainz
Manuel Ruiz-de-Chvez

1.1 How does a creditor take security over assets in Mexico?
1.3
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Mexico?
Under Mexican law there are different types of securities for different types of assets. For example, the most common securities for movable and/or intangible assets are the guaranty trust and the floating lien pledges. For real estate assets the most common security is the mortgage. Guaranty trust and floating lien pledges are governed by federal law whilst mortgages are governed by state law. Securities require a publicity principle by means of registration before public record offices so that they may be opposed to third parties. However, there are some cases where the security does not require registration before public record offices and a direct notification to debtor of the collectors rights is sufficient; also there are some cases in which an additional registration is required (i.e., Federal Telecommunication Registry).
Directors of a company declared insolvent by a competent Court, who engages in any malicious act or conduct that causes the nonperformance of the Companys payment obligations, is liable to civil actions and/or criminal prosecution. However, if the company has not been declared insolvent by a competent Court the directors may not be liable for continuing to trade in financial difficulties.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Mexico?
Under the Concursos Law there is a single insolvency proceeding known as Concurso Mercantil (Concurso Procedure). The Concurso Procedure consists of two main stages, conciliation stage and bankruptcy stage, each of them supervised by the Federal Institute of Specialists in Mercantile Insolvency and Bankruptcy Procedures (Instituto Federal de Especialistas de Concursos Mercantiles) (IFECOM). The Concursos Law forms part of the Federal commercial legislation of the United Mexican States (Mexico). Pursuant to Article 17 of the Concursos Law, jurisdiction over a commercial bankruptcy case lies in the Federal District Court of debtors (Debtor) corporate domicile, or its principal place of business, as the case may be (Court). The Concursos Law further provides that all claims against a Debtor must be brought before the Court hearing the case, in order to avoid different courts hearing claims against the estate in a piecemeal fashion. The Concursos Law is based upon certain general principles, as follows: (i) all creditors of the same class shall be treated the same, without regard to nationality, domicile or capacity; (ii) all creditors of the Debtor, whether domestic or foreign, shall have access to the Concurso Procedure, and shall collect in equal proportion (according to the class) from the assets located within the territorial jurisdiction of the Court; (iii) the Debtors operations should be preserved where possible for the benefit of the general economy of Mexico. This principle seeks to avoid the phenomenon of chain bankruptcies, where the commercial bankruptcy of one company and its cessation of operations causes the commercial bankruptcy of its creditors; and (iv) all assets of the Debtor shall be consolidated and liabilities determined. This principle is the basis for actions taken to eliminate dubious credits, such as the commencement of legal proceedings to collect debts due in favour of the Debtor, or
It may be considered that transactions related with creditors collections rights that have not been segregated are more vulnerable to be attacked. Additionally, according to the Mexican Insolvency Law (Ley de Concursos Mercantiles, Concurso Law), any of the following transactions may be invalidated if entered during the period starting on the day which is 270 calendar days before the declaration of insolvency by a competent Court: (i) transactions made by a Debtor before the declaration of insolvency with the intention to defraud creditors (knowledge of the counterparty is not required if the act was gratuitous); (ii) gratuitous transactions; (iii) transactions at an undervalue; (iv) transactions not made at an arms length basis; (v) waivers of debts made by a Debtor; (vi) payments of obligations before their maturity date; and (vii) discounts made by a Debtor. Additionally, there is a presumption that the following transactions are made in fraud of creditors, unless the debtor proves good faith: (i) to create new security interests or to increase any existing security interests if the original obligation did not contemplate the foregoing; (ii) payments made with assets other than money if such form of payment was not originally agreed; and (iii) transactions made by a debtor with related persons, such as its spouse, relatives, members of the board or decision-making persons within the business, or with companies where at least 51% of their capital stock is owned or voted by any of the foregoing persons.
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actions to invalidate fraudulent conveyances or other transfers contrary to the Concursos Law taken by the Debtor in violation of the principle that all creditors of the same class should be treated the same. Also, in furthering the goals of this principle, third parties are permitted to recover assets in the Debtors possession that are not owned by the Debtor.
2.2 What are the tests for insolvency in Mexico?
Mexico
expenses (gastos y costas, the amount is regulated by statue), including the Examiners fees, if any judgment is issued declaring no insolvency of the company. The filing of an insolvency petition of a company does not have effect over the subsidiaries or affiliates of the Debtor. Immediately after the insolvency petition is accepted by the Court, the Court must request the IFECOM for the appointment of an examiner (visitador) (Examiner). Once the Examiner has been appointed and he/she has accepted such appointment, the Examiner must report to the Court, within the following 15 to 30 days, whether the Debtor is in fact insolvent (according to the measures provided for in the Concursos Law) and, thus, is in one or more of the hypothesis contemplated by the Concursos Law to be declared in Concurso. The Debtor and, in cases where the insolvency petition is filed by creditors (involuntary procedure), such creditors, may challenge the Examiners report. The Court must resolve as to the solvency or insolvency of the Debtor within 15 days following the date of its receipt of the Examiners report. If the Court resolves that the Debtor is solvent, the Concurso Procedure ends. If the Court resolves that the Debtor is in fact legally insolvent, it must so declare (the Declaration of Insolvency) and the Conciliation stage shall begin. The Declaration of Insolvency must establish that the Debtor has incurred in a general default of its payment obligations, and must include a provisional list of creditors identified in the Debtors accounting records. This list does not exhaust the proceeding for recognition, ranking and determination of the priority of creditors claims. Pursuant to the Concursos Law, the Declaratory of Insolvency will include the date of retroactivity (i.e., the date to which the effects of the Concurso Procedure will be applied retroactively) (hardening period); a declaration that the conciliation stage has commenced; instructions to the IFECOM to appoint a professional conciliator (Conciliador) (Conciliator); and an order to the Debtor to immediately provide to the Conciliator Debtors books, records and all other documents, and allow the Conciliator and interveners, if any, to carry out the activities necessary to accomplish their duties, and to suspend the payment of debts. The first stage of a Concurso Procedure is the Conciliation stage, which is purported to encourage a binding reorganisation agreement among the Debtor and its creditors and, thus, avoid the Debtors bankruptcy or liquidation (Creditors Agreement). The Conciliation stage may not last more than 185 calendar days unless extended for up to two additional consecutive periods of 90 calendar days each, provided, however, that in no event the Conciliation stage could last more than 365 calendar days. Once the commercial insolvency of the Debtor has been declared, the conciliation stage will initiate and attempts to find a formula to allow the Debtor and creditors to come to an agreement will begin. A Conciliator, who initially acts as an intermediary between the company and its creditors, must direct this attempt. The roll of the Examiner and of the Conciliator may be performed by the same person. Pursuant to the purposes of the Concursos Law, the idea is for the Conciliator to act as an amicable intermediary between the parties. One of the functions or powers of Conciliator is to recognise claims based on the Debtors accounting records in order to make the claim recognition process faster. The Conciliator will also collaborate in the decision on whether the business will continue to be operated by Debtors restructuring the debt, or whether it is necessary to remove existing management from the operation of the company. The objective of the Conciliation stage is to preserve the operation of the Debtors business. The Conciliator is responsible for, inter
A Debtor may be declared insolvent if it has generally failed to comply with its obligations. For purposes of the Concursos Law, an individual or entity has generally failed to comply with its obligations if: (i) it has failed to repay its due obligations to two or more different creditors, and (ii) the obligations of the Debtor which have been due for at least 30 days represent at least 35% or more of all the Debtors obligations on the date on which the demand or insolvency petition is filed; and/or (iii) the Debtor does not have on hand any of the following assets in an amount sufficient to repay at least 80% of its obligations due on the date on which the demand or insolvency petition is filed: (a) cash and demand deposits; (b) term deposits and investments becoming due within 90 calendar days following the date on which the demand or insolvency petition is accepted by the Court; (c) customer receivables with a maturity date not exceeding 90 calendar days after the date on which the demand or insolvency petition is accepted by the Court; or (d) securities available at the relevant markets which may be sold within a term of 30 business days, with a known value on the date on which the demand or insolvency petition is filed at the Court.
According to the Concursos Law, it is assumed that a Debtor has generally failed its payment obligations if such Debtor: (i) does not have enough assets for attachment to secure satisfaction of a judgment; (ii) fails to pay its due obligations to two or more different creditors; (iii) hides or disappears without leaving a person in charge of its business; (iv) shuts down its business establishment without leaving a person in charge; (v) has carried out fraudulent acts to avoid fulfillment of its obligations; (vi) Fails to comply with any Creditors Agreement; or (vii) is involved in any situation similar to the above.
As a first step, a creditor is required to establish a valid claim for payment of an obligation against the Debtor. If appropriate, the creditor would proceed to serve official notice to the Debtor through a notary public or court officer, requesting payment of a debt. At such stage, the creditor would request the notary public or court officer to attest to the inactivity of the Debtor and/or its inability to perform its payment obligations. The purpose of this request would be to establish that the Debtor is in a condition where it can no longer perform its obligations, giving rise to a valid cause for commencing a Concurso Procedure. Having established a valid cause, a creditor could then file a petition with the Court requesting the Concurso of the Debtor. The Debtor itself, any creditor, the district attorney, a court (if the situation ever actually arises), and tax authorities in their capacity as creditors, may file insolvency claims. The Court will sentence the creditor that filed the demand, or the company that filed the insolvency claim, to pay attorneys fees and

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alia, publishing the deadline for creditors to submit proofs of claims, processing proofs of claims, serving as a mediator among the Debtor and creditors, and proposing to the Court a plan of reorganisation (Creditors Agreement). The second stage of a Concurso Procedure is the bankruptcy stage. The Debtor may be declared bankrupt if: (i) the Conciliation stage finishes without having reached a Creditors Agreement; (ii) the Debtor fails to comply with the Creditors Agreement; or (iii) the Debtor requests its bankruptcy, or the Conciliator requests the Debtors bankruptcy and the Court agrees to grant it. In addition to the effects attributed to the Declaration of Insolvency, the bankruptcy judgment: (i) suspends the ability of the Debtor to perform legal acts, which disability affects its business and assets; (ii) causes the appointment of a Receiver, with full authority, to replace the Debtor and/or the Conciliator in the management of the Debtors business; (iii) orders the Debtor and any third party having possession of the Debtors assets to deliver all such assets to the Receiver; (iv) requires that payments to the Debtor only be made with the Receivers authorisation (failure to obtain such authorisation causes double payment); (v) invalidates any acts performed by the Debtor or its representatives after the bankruptcy judgment without the Receivers authorisation; and (vi) invalidates any payments made by the Debtor after the bankruptcy judgment.
Mexico
Set off is permitted under the law; however, it is advisable to obtain a court order modifying the automatic stay.
Mexico

Creditors may request the acknowledgment or recognition of their credits since the date of publication of the Declaration of Insolvency. Notwithstanding the foregoing, the Conciliator shall provide the Court with a provisional list of the Debtors liabilities within 30 days following the last publication of the Declaration of Insolvency in the Federal Official Gazette. The Court will provide creditors a short term for the approval of such list and shall issue the judgment for acknowledgment or recognition and preference of credits within the following 15 days. The Creditors Agreement must be approved by the acknowledged creditors whose debts represent at least 51% of the total amount acknowledged to the unsecured creditors, the secured creditors and creditors with a special privilege. The approved Creditors Agreement must be filed with the Court, who shall give an additional term to the creditors for objections. If a simple majority of unsecured creditors or any number of creditors representing jointly at least 50% of the total amount of acknowledged debt oppose the Agreement, the Creditors Agreement shall not be deemed approved.
During the Conciliation stage, the Debtor may continue its ordinary course of business with a Conciliator reviewing the Debtors operations and accounting. In principle, the Debtor keeps management of its business, unless the Conciliator requests from the Court the removal of the Debtor in order to protect the pool of assets. If the Debtor keeps the management, the Conciliator shall: (i) supervise the accounting and all transactions performed by the Debtor; (ii) decide if any existing agreements binding on the Debtor must be terminated; (iii) approve, with the prior opinion of the interveners appointed by the creditors, new credits in favour of the Debtor, the creation of new security interests, the substitution of any existing security interests or the sale of any assets not involved in the ordinary course of business of the Debtor; and (iv) call the board or any other decision-making committee of the Debtor to discuss and approve any kind of matters relating to the Debtors business. In the event the Debtor is removed from the management of its business, the Conciliator will become the administrator and will be granted full authority to conduct the business, on the understanding that the authorities of the Debtor and its decision-making committees shall cease. The Conciliator may also request from the Court to suspend the Debtors operations if the pool of assets or an increase in the Debtors liabilities is at risk. The Court may adopt measures to safeguard assets of the Debtor for the benefit of the creditors, and assure that no actions are taken outside the ordinary course of business.
In principle, the company finances the abovementioned procedures with its own resources.
3 Creditors
The abovementioned procedures have no direct effects over the company employees.
With the insolvency declaration by the competent court a stay is imposed in automatic over enforcement of the unsecured creditors rights and remains in force through the conciliation stage.
Pursuant to the Concursos Law an intervener (interventor) may represent the interests of creditors in the Concurso Procedure and may be assigned the responsibility of overseeing actions of the Conciliator and of the Receiver, as well as the actions of the Debtor in relation with the operation of its business (the Intervener). Any creditor or group of creditors that represent, at least, 10 percent of the value of the credits owed by the Debtor, pursuant to the provisional list of credits, has the right to request the Court to appoint an Intervener in the Concurso Procedure. The fees of the
In principle, secured creditors must be paid in full according to the terms of their credits or agree to a lesser treatment, or else secured creditors retain their pre-concurso liens and other rights.
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Intervener shall be paid by the creditor(s) requesting such an appointment. The Intervener does not have to be a creditor. Any creditor or group of creditors may file before the Court requests for the appointment of an Intervener. The Intervener may be substituted or removed by those who requested his/her appointment. Interveners have the following powers: (a) deal with the service and publication of the Declaration of Insolvency; (b) request that the conciliator or trustee examine books, documents or any other means of storing information belonging to the Debtor subject to the Declaration of Insolvency, with regards to the issues that, in his judgment, may affect the interest of the creditors; (c) request that the conciliator or trustee provide information in writing with regard to questions related to the administration of the Estate that, in his/her judgment, may affect the interest of the creditors, as well as request the reports the trustee and the conciliator shall provide to the judge bimonthly on the activities they have undertaken in Debtor; (d) request the Court an order requiring Debtor to allow the conciliators and Interveners to conduct the activities required of their posts; (e) challenge before the Court the acts and omissions of the Examiner, Conciliator or Receiver that do not follow the provisions of the Concursos Law, so the Court orders the coercive measures deemed appropriate and, if applicable, may request that the IFECOM replace the Examiner, Conciliator or Receiver in order to avoid endangering the estate; (f) oppose the complaint to reclaim the property when the legal requirements are not satisfied; (g) he/she shall make decisions concerning pending contracts and shall approve, after considering the opinion of the Intervener, new obligations, the creation or substitution of guarantees and the sale of assets if they are not related to the ordinary operation of the Debtor, providing the Court with a report of such decisions; (h) he/she shall consider the advisability of continuing to operate as the Debtor, and after considering the opinion of the Intervener, if any, may request that the Court order the total, partial, temporary or definitive closing of the Debtor for purposes of avoiding an increase in debt or the deterioration of the Estate; (i) request the Court to establish a retroactive date prior to the 270 calendar days before the Declaration of Insolvency is declared, provided that such requests are filed prior to the decision acknowledging, grading and establishing preference of credits; (j) he/she shall be notified on the day after the decision acknowledging, grading and giving preference of the credits issued; and, (k) he/she may appeal the decision acknowledging, grading and giving preference to the credits.
Mexico
and pledges); (iii) creditors with special privilege; (iv) common creditors in commercial transactions; and (v) common creditors in other transactions. Satisfaction of credits must be made in the following manner: secured creditors (with mortgages and/or pledges) are paid first with proceeds from the sale of mortgaged or pledged items. If the items have a value or a price in excess of the debt, any such excess is directed to cover subsequent debt payments to other creditors. If the price does not cover the debt, mortgage or pledge creditor may participate, pro-rata, as a common creditor, to collect the remaining amount. This procedure is the same for other creditors with preemptive rights. Common commercial creditors collect pro-rata from the balance after the initial sale of assets to satisfy all prior debts. The balance thereof will then be apportioned among noncommercial creditors. Labour credits and tax credits shall be paid after payment of the singularly privileged credits and the secured creditors, but prior to the payment of credits with special privilege. However, in addition to these categories, there are other types of credits that have priority over all other categories: (i) pending wages for the last two working years, prior to the date of Declaration of Insolvency; and (ii) expenses incurred in the administration of the secured assets.
Yes, the debtor is subject to the tax laws regulating its business.

Not as provided under other foreign jurisdiction. It is possible to reach a plan of reorganisation without the vote of all the creditors if certain mandatory conditions and percentages of votes are met.
5 Claims
During the Conciliation stage, the Debtor must work with its creditors to reach a Creditors Agreement. If a Creditors Agreement is reached and approved by the Court, the Concurso Procedure ends. If the Conciliation stage expires without the Debtor having reached a Creditors Agreement with its creditors whose claims have been recognised in the proceeding, then the Court shall declare the bankruptcy of Debtor. However, the Court may declare the bankruptcy prior to the moment that the Debtor or the Conciliator proves to the Court that a Creditors Agreement is unfeasible. Once in bankruptcy, the administration of the Debtors assets is turned over to the Receiver, who may elect to continue or discontinue the Debtors business pending final liquidation. During the Bankruptcy stage, as in the Conciliation stage, the Court may adopt measures seeking to safeguard the Debtors assets for the benefit of the creditors and insure that no actions are taken outside the ordinary course of business. The Bankruptcy stage ends with the liquidation of the Debtors assets for the benefit of its creditors in accordance with their respective rankings and privileges. This stage does not have a specific term. The Receiver must provide a status report to the Court every two months. Liquidation continues until no assets are left, and may be re-started by any creditor every time the Debtor receives new assets.
In order for a creditor to file a claim, it must first submit a petition for the recognition of its credit (proof of claim). Once such claim is admitted, the Court will call upon the Conciliator or the Examiner, as the case may be, and the Debtor to submit a response indicating their views of the claim. One permitted response is to request the Court to require additional evidence of the validity, legality or amount of the claim. The Court will then issue a judgment and divide credits into three categories: (i) those recognised; (ii) those excluded; or (iii) those still pending upon their status is sufficiently clarified.
The Concursos Law classifies creditors into five categories: (i) singularly privileged creditors; (ii) secured creditors (with mortgages

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7.1 Is it common to achieve a restructuring outside a formal procedure in Mexico? In what circumstances might this be possible?
Mexico
Mexico
bankruptcy, insolvency and reorganisation matters, it recognises foreign representative appointed through a recognition request. In this subject, the Concursos Law recognises foreign proceedings when legally held in a foreign country in accordance with bankruptcy or insolvency laws applicable to the Debtor due to its activities, the location of assets or other similar causes. Under the Concursos Law a Foreign Representative is the person or entity, even the one designated as provisional, who (i) has been empowered under a foreign bankruptcy procedure to administrate the reorganisation or settlement of the business, or (ii) has been designated as the representative of such foreign bankruptcy procedure. The Concursos Law states that any representative of a foreign bankruptcy procedure may request the presiding Mexican Court the recognition of the foreign bankruptcy procedure in the Concurso Procedure. Pursuant to the Concursos Law any Foreign Representative is legitimated to appear directly before the presiding Mexican court in all procedures brought under the Concursos Law. Such filing should be made by means of an interlocutory procedure before the civil federal court knowing of the Concurso principal proceeding. The recognition interlocutory procedures shall follow the following stages: (i) delivery of a copy of the recognition request to the creditors who have appeared to the procedure abroad, so that within the term of five days, they state to what their interest corresponds. The foreign representative allegations will be taken as certain in case the creditors do not reply in the specified term; (ii) evidence will be offered in the interlocutory claim and in the interlocutory reply; (iii) once the term of the five days has elapsed, the Mexican Court will summon to a hearing of proves and pleas that will be celebrated within the ten following days; (iv) when offering expert or testimonial tests, at the time of offering the test, one copy of the interrogations shall be exhibited to each one of the parties so that they can formulate verbally or written questions when verifying the hearing. Three witnesses are allowed for each fact. The Mexican Court may designate an expert or those that he considers necessary, in order to render joint opinions with the parties experts or separately. With the purpose that the parties produce their proof in the hearing, the authorities or civil employees have the obligation to dispatch them promptly; and (v) once the hearing is concluded, within the term of three days and without summon, the Mexican Court will pronounce the interlocutory judgment relative to the recognition of a foreign procedure. In terms of the Concursos Law, there are two manners under which a Mexican Court can recognise a foreign bankruptcy procedure: (i) as a Principal Procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has its main place of interests; and (ii) as Non-Principal Procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has an establishment. The main difference between the recognition of a foreign bankruptcy procedure as a Principal Procedure or as a NonPrincipal Procedure strives in the direct effect of such recognition over business assets located in Mexico. Pursuant to the Concursos Law, if a foreign bankruptcy procedure is recognised as a Principal Procedure, (i) any and all foreclosure over business assets; and (ii) any and all rights to transfer or grant any lien over business assets, shall be suspended. A Mexican Court shall recognise the foreign bankruptcy procedure as a Non-Principal Procedure if the Debtor has a permanent place of business outside Mexican territory, but not as a Principal foreign bankruptcy procedure. The recognition effects of a Non-Principal foreign bankruptcy procedure are:
Pursuant to the December 2007 amendments to the Mexican Concurso Law a new chapter was included governing a procedure of pre-package plan. Under such chapter now it is possible for the company to agree on a restructuring plan out of the Concurso procedure, and subsequently proceed to file it within a summary procedure. In such case, there is no controversy with respect to the recognition, graduation and degree of the credits. However, if the company is subject to an insolvency procedure, it is more common to achieve a restructuring within the formal procedure through entering into an agreement between the company and its creditors named Convenio Concursal (reorganisation plan).
Yes, it is possible to reorganise a debtor rather than realise its assets and business.
Now, it is indeed feasible for the debtor and its creditors to agree in advance on a restructuring plan out of the Concurso Procedure, and subsequently proceed to file it through a voluntary insolvency procedure, Concurso, but within a summary procedure. In such case, there will not be controversy or disagreement with respect to the recognition, graduation and degree of the credits, which means that the procedure will be simplified. A Concurso Procedure filing with a pre-package plan should be admitted by the competent judge, provided that: (i) it complies with the insolvent test under the Concursos Law for a debtor to be declared insolvent; (ii) it is signed by the debtor with the creditors that represent, at least, 40% of debtors credits; (iii) the debtor declares under oath that: a) it is in a condition where it can no longer perform its payment obligations; or, b) it is imminent, in a period no longer than 30 days, to be in a condition where it can no longer perform its payments obligations, explaining the causes of such insolvency; and (iv) it contains a restructuring plan of the debtors credits signed by the creditors which represent, at least, 40% of the debtors credits or claims.
8 International
8.1 What would be the approach in Mexico to recognising a procedure started in another jurisdiction?
According to the Concursos Law, a foreign proceeding is defined as a collective or universal proceeding, whether judicial or administrative, including provisional proceedings, followed in a foreign state pursuant to a law governing bankruptcy, liquidation, or insolvency matters of the Debtor; as a result of these proceedings, the property and businesses of the merchant may result subject to the control or supervision of a foreign court, for purposes of reorganisation or liquidation.
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When the Concursos Law recognises foreign proceedings in
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(A) The granting of appropriate injunctions that concede a Mexican Court to protect the business assets or the creditors interests who may request through the Foreign Representative, that the Receiver (sndico), Conciliator (conciliador) or Examiner (visitador): (i) suspends all execution injunctions against the business assets; (ii) suspends the rights exercised to transmit or to mortgage the business assets, as well as to dispose of such assets in any other way; (iii) orders the delivery of proof or the provision of information regarding the business assets, activities, rights, or liabilities of the business; (iv) entrusts the Foreign Representative, the Receiver, Conciliator or Examiner, the administration or foreclosure of all or part of the business assets located in Mexican territory; (v) extends every granted injunction granted by the foreign recognition procedure request; and (vi) grants any other injunction that under Mexican law may be grantable to a Receiver, Conciliator or Examiner. Since the recognition of a foreign procedure, the Foreign Representative will be able to urge the Receiver, Conciliator or
Mexico
Examiner, so that they entrust through a Foreign Representative, the distribution of all the bussines assets located in Mexican territory. The Mexican Court must make sure that the creditors interests domiciled in Mexico are sufficiently protected so that he may decree the injunctions briefed above.
(C) The authorisation to the foreign representative to take part in the procedures promoted against the businessman that are in proceeding and that have a patrimonial content. The injunctions that may arise from the recognition of a foreign bankruptcy procedure under a Concurso Procedure depend on the procedural phase that is: (i) since the filing of the recognition request throughout the corresponding resolution; and (ii) as from the issuance of the recognition resolution.

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(B) The foreign representatives powers and capacity to ask that the Examiner, the Conciliator or the Receiver, initiates the recovery assets actions that belong to the entirety of a property and of nullity acts celebrated in fraud of creditors.
Mexico
Alejandro Sainz
Cervantes, Aguilar-Alvarez y Sainz, S.C. Blvd. Manuel Avila Camacho 24-Piso 6 Lomas de Chapultepec C.P .11000, Distrito Federal Mxico
Manuel Ruiz-de-Chvez
Cervantes, Aguilar-Alvarez y Sainz, S.C. Blvd. Manuel Avila Camacho 24-Piso 6 Lomas de Chapultepec C.P .11000, Distrito Federal Mxico
Mexico
+52 55 9178 5046 +52 55 5540 3433 asainz@caays.com www.caays.com
+52 55 9178 5089 +52 55 5540 3433 mruizdechavez@caays.com www.caays.com
He represents national and multinational clients in transactional matters, providing legal advice in corporate, banking, finance and commercial law, reorganisations, restructurings and work-outs, bankruptcy and insolvency procedures, project & corporate finance, mergers & acquisitions, foreign investment, joint ventures, and infrastructure, real estate, and telecommunications transactions. Selected by Latin Lawyer as one of Mexicos top 40 lawyers under the age of 40 (Forty under 40). Author of articles in corporate, real estate, and insolvency matters. Languages: Spanish and English. Background: Cervantes, Aguilar-Alvarez & Sainz, (Founder), Partner; Juregui, Navarrete y Nader, Partner; Santamarina y Steta, Senior Associate; Wilmer Cutler Pickering Hale and Dorr (Boston, Massachusetts). Degrees: Harvard University, Postgraduate Studies in U.S. Law and Business Transactions, 1996; Escuela Libre de Derecho, Postgraduate Studies in Corporate, Banking and Finance Law, 1994-1995; Universidad Panamericana, Diploma Program in North American Legal System, 1993; Universidad Panamericana, Licenciado en Derecho (J.D. equivalent), 1993. Harvard Business School, Executive Education, Diploma Program in Negotiation, October 2004. Memberships: Mexican Bar Association, International Bar Association and American Bar Association; Professor at Universidad Iberoamericana; Certified Mediator of the Instituto Mexicano de la Mediacin, A.C. Board member of public and private corporations.
He is an experienced litigation lawyer in the fields of commercial litigation, bankruptcy and creditors rights, commercial fraud, shareholder suits and general business litigation, with significant experience in alternative dispute resolutions. His practice has included representation of clients at all levels of the local and federal court system, at national and international arbitral tribunals, and at local and federal administrative agencies. Languages: Spanish and English. Background: Cervantes, Aguilar-Alvarez & Sainz, Partner; Juregui, Navarrete y Nader, Associate. Degrees: Instituto Tecnolgico Autonomo de Mxico, Licenciado en Derecho (J.D. equivalent), 1998; Master in Science and Course in Regulation, London School of Economics and Political Science, 2000, London School of Economics and Political Science, 2000. Universidad Panamericana, Postgraduate Studies in Amparo Law (Constitutional Law), 2001. Memberships: Mexican Bar Association, Chartered Institute of Arbitrators, United Kingdom. Part-time Professor, Instituto Tecnolgico Autnomo de Mxico.
CERVANTES, AGUILAR-ALVAREZ & SAINZ is a full service law firm with an extensive array of creative problem-solving techniques for optimum, lasting outcomes. The Firm was founded by, and is composed of prestigious lawyers accumulating many years of experience, who ventured to form and achieve an innovative style of organisation. Its rapid growth reflects the dynamic nature of a vital and healthy developing law firm. We represent clients in a broad spectrum of transactional and litigious matters. Our clients range from some of the worlds largest companies to individuals and small businesses. The client and practice variety is matched by the diversity of our lawyers. As lawyers of lawyers, we handle complex litigation for Mexican firms clients, and have worked with most of the respected international law firms in various types of cross-border transactions. CERVANTES, AGUILAR-ALVAREZ & SAINZ offers services in a variety of areas of the law, which overlap and complement a mixture of client industries.
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Chapter 30
Netherlands
De Brauw Blackstone Westbroek
Sijmen de Ranitz
Lucas Kortmann

1.1 How does a creditor take security over assets in the Netherlands?
has been notified, the debtor is precluded from paying the pledgor as its creditor. Should the debtor nevertheless make payments to the pledgor, his obligation to pay the pledgee will remain in effect.
Dutch law provides for two types of security over assets of a debtor: (i) (ii) a right of mortgage (hypotheek); and a right of pledge (pandrecht).
Also, a creditor can obtain security by means of instruments like retention of ownership and financial lease. Dutch law does not recognise fiduciary transfer of ownership. Mortgage A mortgage can only be granted on registered property, such as real estate, registered vessels and aircraft, and on limited rights (beperkte rechten) vested therein. A right of mortgage is created by means of a notarial deed and subsequent registration thereof. Pledge All other assets, whether tangible (such as moveable property) or intangible (such as claims and shares), can generally be subject to a pledge. In order to achieve a valid security right on property, that property object must be transferable or assignable. Pledge on moveable property and bearer instruments A pledge on moveable property and bearer instruments can be either a disclosed pledge (vuistpand) or an undisclosed pledge (stil or bezitloos pand). To create a disclosed pledge, the collateral must be effectively placed with the pledgee or a third party mutually agreed upon by pledgor and pledgee. Should the pledgor regain control over the collateral, the disclosed pledge will be terminated by law. If the collateral is subject to an undisclosed pledge, the pledgor remains in control of the collateral. An undisclosed pledge is created by means of a notarial deed or a registered private deed. Pledge on (non-bearer) claims A claim against a third party can either be pledged with notification to the debtor (openbaar pand or disclosed pledge) or pledged without notification (undisclosed pledge). A disclosed pledge is created by a deed and notification to the debtor of the claim. An undisclosed pledge is created by an authentic deed, generally a notarial deed, or the registration of a (non-authentic) deed with the tax authorities. The debtor need not be notified. The pledgee is authorised to notify the debtor about the pledge if the pledgor is in breach of contract or if the pledgee has good reason to believe that such a breach will occur. Once the debtor
The Bankruptcy Act provides for an invalidation of legal acts that a company performed prior to the adjudication of bankruptcy and that are detrimental to its creditors (Actio Pauliana). In a bankruptcy, the receiver may invoke the nullity of a legal act performed by the company if (i) the company did not have a legal obligation to perform the act, (ii) as a consequence of the act the creditors of the company were prejudiced, and (iii) at the moment of the performance of the legal act the company and its counterparty knew or should have known that one or more creditors (present or future) would be prejudiced. The latter requirement of knowledge does not apply if the legal act is performed for no consideration. In the event that a transaction is entered into by a company within a period of one year preceding the declaration of bankruptcy, and the company did not oblige itself to carry out such transaction previously, the knowledge that the transaction would prejudice one or more (present or future) creditors is assumed for both the company and its counterparty (proof to the contrary being allowed) in case, inter alia, the transaction regards: (i) an agreement in which the value of the performance by the company considerably exceeds the value of the performance by its counterparty (not at arms length); or the company paying a debt or giving security for a debt which is not yet due; or a legal act between certain related parties, such as group companies.
(ii) (iii)
The Civil Code has largely similar provisions for creditors to challenge legal acts of the company outside bankruptcy. In addition, the receiver may invoke the nullity of a legal act performed by the company even if the company did have a legal obligation to perform the act in case: (i) (ii) the counterparty knew that a request for bankruptcy had been filed; or the performance of the obligation was the result of consultation between the company and the counterparty with a view to give preference to the latter over the companys other creditors.

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1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in the Netherlands?
Netherlands
been an important cause of the bankruptcy. An individual director can exculpate himself if he can prove that other factors were an important cause of the bankruptcy. However, the burden of proof lies with the director. Similar liability rules apply for supervising directors and factual directors. Criminal liability Under particular circumstances, (factual) directors can be prosecuted, inter alia, for violating statutory obligations under Corporate Law, the non-compliance of which constitutes a criminal offence.
Netherlands
Managing directors can be held liable both in civil law and criminal law. Dutch law does not have the concept of disqualification. Civil liability By statute each managing director has a duty towards the company to properly perform the duties assigned to him. There is only a failure under that duty if it is established that the director has failed in the performance which could be reasonably expected under the specific circumstances. Failure does not automatically lead to liability. Liability is only incurred in the case of serious culpability (ernstige verwijtbaarheid). Whether serious culpability is involved is determined on a case by case basis taking into account all relevant circumstances. All managing directors are, in principle, jointly and severally liable. An individual director may be discharged if he can prove that (i) he cannot be held responsible for the failure and (ii) he has not been actively - negligent in preventing the consequences thereof. A director may be held liable in tort (onrechtmatige daad) by a creditor on the grounds that he entered into a transaction on behalf of the legal entity, while at the time he knew or should have reasonably known that the company would not be able to meet the obligations, and would not have sufficient assets from which the debt could be recovered. It is not sufficient that there was a more than negligible risk that the legal entity would not be able to meet its obligations. The director should have anticipated that the risk would actually materialise. If the managing director has not taken an irresponsible risk when he entered into the transaction, the managing director cannot be held liable if in retrospect it appears that the company nevertheless does not fulfil its obligations and it was foreseeable from the start that the legal entity would not provide for recourse. A managing director can also be held liable in tort if he has allowed or effectuated that the legal entity does not meet its obligations under an earlier commitment and consequently causes damage to the other party. Such claim in tort can also be brought by the receiver in bankruptcy, on behalf of the joint creditors of the company. If the legal entity does not provide sufficient resources to pay all creditors in the case of bankruptcy of the legal entity, the directors shall be jointly and severally liable for the deficit in the bankruptcy if (a) it is apparent that the management has not discharged its duties properly and (b) it is likely that the bankruptcy was caused by the mismanagement of the board. This is referred to as manifestly improper performance of duties (kennelijk onbehoorlijke taakvervulling). Only manifestly improper performance of duties during the three years preceding the bankruptcy is taken into account. Manifestly improper performance of duties means that no reasonably acting entrepreneur would have acted similarly, in equivalent circumstances and with the knowledge the director had (or should have had) at the time. If manifestly improper performance of duties by the board is established, all managing directors are, in principle, jointly and severally liable for the entire deficit of the bankrupt estate (although the court can mitigate damages). If the management has failed to keep its books properly or has failed to timely publish the annual accounts with the Chamber of Commerce, improper performance is (irrefutably) deemed to have occurred and improper performance is (refutably) presumed to have
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in the Netherlands?
(i) (ii)
2.2
Suspension of payments (formal corporate restructuring procedure). Bankruptcy (formal corporate liquidation procedure).
What are the tests for insolvency in the Netherlands?
Suspension of payments The debtor who foresees that he will not be able to continue to pay his debts as and when they become due and payable, can apply for suspension of payments by filing a petition with the District Court. An application for suspension of payments cannot be made by creditors or other third parties. Bankruptcy If a debtor has ceased to pay his debts, the District Court will declare him bankrupt, either on his own request or on request of one or more creditors. To have ceased to pay its debts, there must be at least two creditors, one of whom has a claim that is due and payable and which the debtor cannot pay or refuses to pay. If the petitioner is a creditor, the petition must also contain prima facie evidence of the petitioners claim against the debtor. Both insolvency procedures can only be commenced if the Dutch court has jurisdiction, based on the fact that the company has (had) its corporate seat of place of business in the Netherlands or, if the European Insolvency Regulation is applicable, has its centre of main interest in the Netherlands or has an establishment in the Netherlands.
See question 2.2.

Suspension of Payments Upon receipt of the request, the court will immediately grant a provisional suspension of payments and appoint an administrator (bewindvoerder; usually an insolvency lawyer) and usually a member of the Court as supervisory judge (rechter-commissaris). The provisional suspension of payments may only be converted into a definitive suspension of payments, if a meeting of creditors has been held and the required majority has consented (see question 2.5 below).
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Bankruptcy The request for bankruptcy must be handled expediently by the Court. The Court usually will allow the debtor to be heard. The Court will appoint a judge in charge of the supervision of the bankruptcy (rechter-commissaris) and one or more receivers (curatoren) who are entrusted with the administration of the bankruptcy. Generally, only lawyers specialised in insolvency law are appointed.
Netherlands
All insolvency procedures are published in a central public register, which is accessible on the internet and an announcement is made in the Government Gazette. Suspension of payment All known creditors of the company will be informed in writing of a date on which they will be heard by the court in respect to the request for suspension of payment. After they have been heard the court will decide whether a final suspension of payments is granted. Bankruptcy All known creditors will be informed in writing of a date before which they must file their claims (for verification) with the receiver and on which date a verification meeting will be held at which all claims will be verified. In general no verification meeting will be held if there is no prospect that ordinary pre-bankruptcy creditors will receive any dividend.
A claim against the insolvent debtor which has been acquired prior to the adjudication of the insolvency procedure may only be set off by the assignee if he acted in good faith at the time of the assignment, i.e. if the assignee had no reasons to believe that an insolvency was forthcoming. Claims acquired after the adjudication of the bankruptcy may not be set off.

During suspension of payments the debtor is not entitled to administer and dispose of its assets without the consent, cooperation or assistance of the administrator. In bankruptcy the receiver is entrusted with the administration of the bankruptcy and thus in control of the assets of the company. Directors maintain their corporate authorities, but they can no longer control, administer or dispose of the assets of the company. The position of shareholders does not change in insolvency procedures. The receiver requires the approval of the supervisory judge if he wants to continue the business as a going concern.
3 Creditors
Unsecured ordinary creditors cannot enforce their rights during insolvency proceedings to the extent that they can take recourse against assets of the estate. In suspension of payment legal proceedings are continued as if no suspension of payments has been granted. Also new proceedings can be commenced. During a bankruptcy unsecured creditors cannot commence or continue legal proceedings against the company; they must file their claims for verification.
The costs of insolvency proceedings are paid out of the estate with priority over all other claims. It is not unusual that (major) creditors provide money to the trustee for proceedings. Repayment of such funds can have priority over the other (estate) claims. Also, the receiver may obtain a guarantee from the State in case he needs to finance proceedings for directors liability.
Principally, secured creditors can foreclose on their collateral, as if no insolvency procedure exists. In insolvency procedures the administrator/receiver (or an interested party) may request the court to grant a temporary stay (afkoelingsperiode) during which no recourse may be taken against assets of the estate without the permission of the supervisory judge. During such temporary stay, third parties (such as parties with a retention of title or financial lessors) cannot claim any assets which are in the control of the debtor or the receiver either. A temporary stay can only be granted for a maximum of two months with a maximum extension of another two months.
In insolvency proceedings employment contracts remain existent, but termination periods (for employer and employee) are limited, in bankruptcy to six weeks, in suspension of payments to a period up to four months for the employer. In case of suspension of payments, permission from the Centre for Work and Income must be obtained (as usual outside insolvency) for the employer to terminate unilaterally.
In principle and unless contracted for otherwise, a bankruptcy alters neither the validity nor the contents of an agreement. However, if an agreement contains rights and obligations for both the debtor and its counterparty and neither party has completely fulfilled its obligations, the counterparty is entitled to request the receiver in

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Creditors who have a right of set-off are not adversely affected by the insolvency proceedings, but possibilities for set-off are increased. The creditor may set off where the debt and the claim (i) have arisen before the insolvency procedure was declared, or (ii) result from acts entered into with the insolvent party prior to the adjudication of the insolvency procedure.

writing to declare within a reasonable period of time that it will perform the agreement. If the receiver fails to reply or if the answer is in the negative, he loses his right to claim performance. Only in respect of certain specific types of agreements, including employment agreements, lease agreements, hire purchase agreements (huurkoop) and future trades (termijnhandel), the Bankruptcy Act provides for (maximum) termination provisions. Similar provisions apply to suspension of payments. According to the Supreme Court, if the receiver/administrator (actively) terminates the contract, claims arising from that legal act constitute estate claims.
5.3
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In principle, tax liabilities may be incurred during insolvency proceedings.
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Suspension of payments
5 Claims
Simultaneously with or after the request for suspension of payments, the debtor is entitled to submit a composition plan to the court. The composition plan must be approved by a certain majority of ordinary creditors. If the court confirms the plan it becomes binding on all ordinary creditors. Thus, opposing creditors may be crammed down. Bankruptcy As creditors have very little influence in a bankruptcy, there are no particular procedures to cram them down outside an approved and court-confirmed composition plan.
Secured creditors can foreclose on collateral. Any amounts exceeding proceeds of the foreclosure can be claimed as unsecured creditor. During suspension of payments, unsecured ordinary creditors file their claims with the administrator (after the debtor has submitted a composition plan). A meeting will be held to verify the claims. In bankruptcy unsecured creditors file their claims with the receiver for verification. Creditors of estate claims (see the answer to question 5.2) have a direct claim against the estate and are paid immediately, unless there are no assets available to pay all estate claims.
Suspension of payments Final suspension of payments is not granted, if (i) either (a) ordinary creditors holding 1/4 of the total amount of the claims represented at the meeting or (b) more than 1/3 of the number of creditors holding such claims, oppose a final suspension of payments; (ii) there is no prospect that the debtor will be able - in due course - to satisfy its creditors (through a composition or otherwise); or (iii) there are good grounds for suspecting that the debtor will try to prejudice its creditors during the suspension of payments. In such cases the suspension of payments is withdrawn and the court may (and most often will) declare the company bankrupt. If (i) a final suspension is granted, (ii) the creditors approve the composition plan offered by the debtor and (iii) the court has confirmed the plan, distribution will take place in accordance with the composition plan (usually cash pro rata parte). As soon as the courts confirmation (homologatie) has become final, the suspension of payments ends. If the debtor does not pay in accordance with the plan, a creditor may have the plan dissolved and the company will be declared bankrupt. The suspension of payments can also end, if at a certain moment in time, the debtor is able to pay (100%) its debts. Bankruptcy After all assets are sold and after all legal proceedings initiated by the receiver are completed, the bankruptcy can be terminated in the following ways: Liquidation without a verification meeting If the proceeds of the estate only allow for payment of the fees and costs of the receiver and the estate claims, a bankruptcy terminates by way of liquidation without a verification meeting for creditors. A simplified liquidation (vereenvoudigde afwikkeling) without a full verification meeting occurs in bankruptcies where the estate claims can be paid in full but the assets of the estate are insufficient to expect that a distribution can be made - in whole or in part - to the ordinary creditors (i.e. only (certain) preferred creditors will receive partial payment on their claim).
Broadly speaking, the following types of claims can be distinguished in a Dutch bankruptcy: a. estate claims (boedelschulden): claims which arise by virtue of law (e.g. lease costs and employee wages during the bankruptcy) and claims that have come into existence through actions of the receiver (e.g. claims pursuant to an agreement with the receiver). Estate creditors have a direct claim on the estate and, consequently, get paid in (accordance with their ranking if any) before any non-estate creditor gets paid; pre-bankruptcy preferred claims (preferente faillissementsvorderingen): claims of preferred creditors such as tax authorities, social security administrations and employees, as far as they have come into existence prior to the adjudication of the bankruptcy. These claims fall outside the scope of a suspension of payment; pre-bankruptcy ordinary claims (concurrente faillissementsvorderingen): claims that have come into existence before the suspension of payment/bankruptcy adjudication (and that are eligible for verification). In bankruptcy these claims must be filed for verification with the receiver. The holders thereof share pro rata parte in the amount of the proceeds that results from the liquidation of the estate after the secured creditors have executed their security rights and all creditors with a general right of preference have been paid in full; and claims that are not eligible for verification: particularly claims that have come into existence after the bankruptcy adjudication and which do not qualify as estate claims. The holders hereof will not receive any distribution from the estate.
b.
c.
d.
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Liquidation after a verification meeting In practice, only if distribution to ordinary creditors is expected, a verification meeting is held. The purpose of a verification meeting is to list, verify, and classify all ordinary claims. If a claim is disputed, the supervisory judge will refer the parties to legal proceedings to determine whether the claim can be admitted. After the verification meeting and after the list of admitted creditors is finalised, the receiver prepares a(n) (interim) plan of distribution. The plan of distribution must be approved by the supervisory judge. Upon approval, the plan is filed with the court for inspection by creditors during a ten-day period. If the plan of distribution is not opposed, the bankruptcy - in the case of a final distribution terminates after the plan has become irrevocable and the creditors are paid in accordance with the plan. Composition plan In a bankruptcy, a composition plan may be offered. The rules governing a composition in bankruptcy essentially follow the rules on a composition in suspension of payments. Termination of a bankruptcy will automatically lead to the dissolution (ontbinding) of the legal entity. In contrast, a composition in bankruptcy will be aimed at preventing dissolution (and curing the financial position of the debtor).
Netherlands
successful implementation and execution of a composition plan. A pre-pack sale in line with the statutory requirements for a composition plan is prepared prior to the insolvency proceedings. The plan is negotiated with all major creditors to ensure a successful implementation during the insolvency proceedings. Subsequently the company files for insolvency, immediately presenting its composition plan. Once approved, the sale of the assets or transfer of the business and distribution of the proceeds takes place in accordance with the composition plan. Another way a pre-packaged sale can be structured is that the company seeks a buyer/investor for (part of) the business prior to the opening of insolvency proceedings. The directors may agree a sale, subject to the approval of the insolvency administrator. Subsequently, the company files for suspension of payments or for bankruptcy and presents the administrator/receiver with the proposed sale. If it is considered in the interest of the creditors as a whole, the receiver will usually agree to the sale and the sale can be executed within days after the opening of the insolvency proceedings.
8 International
8.1 What would be the approach in the Netherlands to recognising a procedure started in another jurisdiction?

7.1 Is it common to achieve a restructuring outside a formal procedure in the Netherlands? In what circumstances might this be possible?
Despite the absence of a statutory basis, informal restructuring by means of out-of-court composition plans commonly exists in the Netherlands and can be useful if all creditors involved approve the plan. In essence, an out-of-court composition plan is an amendment to existing agreements between each creditor and the debtor. Such plan does not affect debt collection measures and/or enforcement of a validly established security right over an asset of the debtor. The Supreme Court is very hesitant to rule that such plan should be binding on non co-operating creditors. In general, the effectiveness of an out-of-court composition plan is limited unless (practically) all (critical) creditors involved approve. Companies which have a limited amount of relatively large creditors are more likely to successfully restructure outside a formal procedure than companies with a large number of relatively small creditors.
According to Dutch private international law, foreign insolvency proceedings (outside the EU) as such will generally not be recognised in the Netherlands. For example, a general seizure of assets pursuant to a foreign bankruptcy does not affect the assets of the (bankrupt) debtor in respect of those assets located in the Netherlands. However, it is generally thought that rules of authority over a company and its assets as a result of the insolvency proceedings are recognised (such as the authority of a foreign trustee to act on behalf of the estate). European Insolvency Regulation Foreign insolvency proceedings within the EU are recognised pursuant to the European Community Regulation on Insolvency Proceedings of 29 May 2000. Thus, insolvency proceedings adjudicated by other EU Member States are recognised in the Netherlands.
Note: New Insolvency Act

In November 2007 a first draft for the new Dutch insolvency act, prepared by a special Government Committee on Insolvency law (Commissie Insolventierecht), was presented to the Ministry of Justice. Although it is expected to take a few years before the new bankruptcy act will come into force, such act will certainly have an effect on how insolvencies are treated under Dutch law. The main change suggested in the proposal is to have one insolvency proceeding, suited to either restructure or liquidate the company.
Yes; the suspension of payments is aimed at reorganisation rather than liquidation of the debtor.
If an out-of-court restructuring as described under question 7.1 is not feasible, due to non-cooperation of certain creditors, the restructuring can be pre-arranged prior to the opening of insolvency proceedings and only becomes effective upon such proceedings being opened. Such pre-packed sale increases the chances of a

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Sijmen de Ranitz
De Brauw Blackstone Westbroek N.V. Tripolis Burgerweeshuispad 301 1076 HR Amsterdam The Netherlands
Lucas Kortmann
De Brauw Blackstone Westbroek N.V. Tripolis Burgerweeshuispad 301 1076 HR Amsterdam The Netherlands
Netherlands
+31 88 888 1744 +31 88 888 1775 sijmen.deranitz@debrauw.com www.debrauw.com
+31 88 888 1539 +31 88 888 1775 lucas.kortmann@debrauw.com www.debrauw.com
Sijmen de Ranitz is a specialist in insolvency and corporate recovery. Building upon his extensive accumulated international expertise, Sijmens practice currently has a dual focus. He advises and assists banks in their clients reorganisation activities, as well as national and multinational companies in financial distress. He also advises court-appointed trustees in bankruptcy. Recent work includes advising: the IMF on insolvency and restructuring issues in various jurisdictions; Philips on miscellaneous issues relating to the insolvency and disentanglement of LG Philips LPD; Vos Logistics, one of the major European logistics companies, based in the Netherlands, with subsidiaries worldwide, in relation to the restructuring of its business and activities worldwide; the restructuring of a US - German - Dutch corporation, acting for the lenders; Enron/Prisma, in our capacity as special counsel, on miscellaneous issues relating to the worldwide Enron restructuring; and a major Dutch franchise group in the Netherlands, on restructuring its activities by way of sale of assets, also involving private equity participation. Sijmen has been and is part of many international teams working on restructuring matters both in Europe and the US. Sijmen is the former president of INSOL International.
Lucas Kortmann is an associate of De Brauw Blackstone since 2003. Lucas specialises in insolvency law and corporate restructuring. His practice includes advising and litigating for banks, (multinational) companies, management and court-appointed administrators on all insolvency or restructuring related issues. Recent experience includes advising: Vos Logistics, a major European logistics company, with subsidiaries worldwide, in relation to the restructuring of its business and activities worldwide, including debt for equity swaps; major financial institutions on a regular basis in (crossborder) insolvencies and distress situations; advising institutions and companies on bankruptcy issues and bankruptcy remote structures in setting up carbon credit funds; and a major listed company in the energy sector on its contracts with major chemical companies in distress. Lucas recently spent nine months on secondment with Hengeler Mueller in Berlin. He regularly acts as a guest-lecturer on insolvency law. Lucas is a member of the Core Committee of the INSOL Younger Practitioners Committee. Lucas holds both a degree in English law (University of Southampton, 1998), and a degree in Dutch law (University of Groningen, 2003). He speaks Dutch, English, German and French.
De Brauws Corporate Recovery and Insolvency practice advises and assists banks, (multinational) companies and management on all insolvency- or restructuring-related issues. Our lawyers have been involved in almost every major Dutch restructuring or insolvency in the last 30 years, as well as many international and multi-jurisdictional cases. De Brauw works closely with the top tier firms in other jurisdictions. We consistently strive to maintain our reputation as leading experts in the area of security rights, moratorium of payment issues and bankruptcy law. In addition to our technical expertise, our experience in this field enables us to provide our clients with practical legal solutions. De Brauw designed many of the measures taken by the Dutch authorities to stabilise the financial markets during the credit crunch and was involved in all of them, either advising the Dutch State or major financial institutions (like Fortis, ING Group and SNS REAAL), including the establishment of a EUR 200 billion interbank lending guarantee and the EUR 20 billion emergency funding plan for Dutch financial institutions. De Brauw is the only Dutch law firm that is a member of the Insol Group of 36, an Insol International related body. Sijmen De Ranitz is past President of Insol International.
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Chapter 31
Nigeria
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Funke Adekoya SAN
Olanipekun Orewale

1.1 How does a creditor take security over assets in Nigeria?
1.2
A creditor can secure payment or performance of an obligation under a contract or transaction by way of a mortgage or charge, a contractual lien or a pledge. Mortgage In those States in Nigeria which have retained the received English land law as at 1900, a mortgage can be created over a companys landed property. Although in theory the ownership of the property passes to the creditor, with title to be re-conveyed if the mortgage debt is liquidated, physical control of the property does not usually pass to the creditor, as the immovability of the security affords the creditor sufficient comfort. In States which have aligned their land laws with that of England as at 1925, a mortgage cannot be created; rather the creditor will obtain a charge over the landed assets of the company. In such States, different creditors can take consecutive charges over the same landed property. The Charge A charge does not involve a transfer of ownership, but is an agreement between debtor and creditor that upon the happening of certain events, charged assets will be appropriated towards the settlement of a debt. While a fixed charge is in respect of ascertained or ascertainable and definite or definable assets and immediately attaches to the assets charged, a floating charge typically covers present and future assets, such that until some future occurrence/action takes place the company may continue to use the assets in the ordinary course of business. As a general rule a fixed charge has priority over a floating charge on the same property (179 of Companies and Allied Matters Act CAMA). Contractual lien A contractual lien is a possessory security, whereby the creditor has a right to detain certain property until money owed to it has been paid off. A deposit of share certificates as collateral for bank borrowings is a common form of such lien. It does not however constitute a transmissible interest nor does it confer a right of sale on the creditor, unless agreed under the contract. Pledge A pledge is a form of promissory security that merely requires the transfer of possession of an asset, with the intention that it should be held as security.
A floating charge created over the undertaking or property of the company within three months prior to the commencement of a winding up petition is invalid unless the party affected thereby can prove that the company immediately after the creation of the charge was solvent. Any dealing in its property which would constitute a fraudulent preference in bankruptcy proceedings would also amount to a companys fraudulent preference of its creditors and would be invalidated. Similarly any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors will be void (495 of CAMA). Any transaction relating to the shares of the company may be subject to attack if the transfer of the shares is made after the commencement of a voluntary winding up without the sanction of the liquidator.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Nigeria?
Every director in default may be personally liable for a refund of money or property received from a party as advance payment for the execution of a project and with intent to defraud the company fails to apply money for the purpose for which it was received [290 CAMA]. A director who carries on company business in a reckless manner or with intent to defraud creditors of the company whilst the company is in the process of winding up may be made personally responsible for all or any of the debts or liabilities. A director who is found to have traded with fraudulent intent shall also be guilty of an offence and liable to imprisonment for two years or to a fine of N2,500.00 or both. If in the course of a winding up a director who has taken part in the formation or promotion of the company, is found to have misapplied, retained or become accountable for any money or property of the company, or been guilty of any misfeasance or breach of duty in relation to the company, he may be compelled to repay or restore the money or property with interest at such rates as the court thinks fit. The court may also order him to contribute to the assets of the company by way of compensation. Any director who has been found guilty of fraudulent trading may be disqualified from acting as a director of any other company. Where it appears to the court in the course of a winding up, that any past or present director of the company has been found criminally

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liable for an offence, it may direct the liquidator to refer the matter to the Attorney-General of the Federation who may institute criminal proceedings.
2.4
Nigeria
Receivership
2 Formal Procedures
Nigeria
Whenever a fixed and floating charge has become enforceable, creditors can either by deed if applicable or by application to the court appoint a receiver and/or manager of the assets of the charge. Where a company is being wound up, a creditor may apply for the appointment of an official receiver. Winding up Only a solvent company can be wound up voluntarily. An application to the court for the winding up of a company is made by petition presented by any of the following persons: (a) (b) (c) (d) (e) (f) (g) the company; a creditor including a contingent or prospective creditor of the company; the official receiver; a contributory; a trustee in bankruptcy or a personal representative of a creditor or contributory; the Corporate Affairs Commission under 323 of the Act; or a receiver if authorised by the instrument under which he was appointed.
2.1
What are the main types of formal procedures available for companies in financial difficulties in Nigeria?
The three formal procedures available for companies in financial difficulties in Nigeria are: 1. 2. 3.
2.2
Receivership. Winding up. Schemes of Arrangement and compromise.

What are the tests for insolvency in Nigeria?
The tests for insolvency recognised by the Company and Allied Matters Act are: a) A companys inability to pay a debt exceeding N2,000.00 [approximately US $15] within three weeks after a demand for payment has been made. A wholly or partially unsatisfied court process issued in respect of a judgment debt. A courts determination after taking into account any contingent or prospective liability of the company that the company is unable to pay its debts. Where the companys liabilities exceed its assets.
b) c)
The grounds upon which a winding up petition can be presented are stated in question 2.3 above. Schemes of Arrangement and Compromise Arrangement A special resolution is required resolving that the company be put into members voluntary winding up and that the liquidator be authorised to sell the whole or part of its undertaking or assets to another body corporate. Compromise Where a compromise is proposed between a company and its creditors, the court may order that a meeting of the creditors or a class of creditors, or of the members of the company, be summoned. If a majority representing not less than three-quarters in value of the shares of members or class of members or class of creditors vote in support, the compromise or arrangement may be referred by the court to the Securities and Exchange Commission which then appoints an inspector to investigate the terms of the said compromise or arrangement and make a written report thereon within a time specified by the court. If the court is satisfied as to the fairness of the compromise or arrangement it will be sanctioned and shall thereafter be binding on all the creditors or class of creditors or on the members.
d)
2.3
Receivership Depending on the terms of the agreement between the company and its debenture holder, a company can be placed into receivership where: a. b. the principal sum borrowed by the company or the interest is in arrears; the security or property of the company is in jeopardy. The security of the debenture holder shall be in jeopardy if the court is satisfied that events have occurred or are about to occur which render it unreasonable in the interest of the debenture holder that the company should retain power to dispose of its assets; the company fails to fulfil any of the obligations imposed on it by the debentures or debentures trust deed; any circumstances occur which by the terms of the debentures or debentures trust deed entitled the holder of the debenture to realise his security; the company is being wound up; any creditor of the company issues a process of execution against any of its assets; the company ceases to carry on business; or the companys assets lose value amounting to more than onehalf of the total amount owing in respect of a class of outstanding debentures.
c. d.
e. f. g. h.
Receivership A court appointed receiver or manager must advertise his appointment in the gazette and in two daily newspapers. He must also, within seven days of his appointment, give notice of his appointment to the Corporate Affairs Commission which will enter the appointment in the register of charges. Where a receiver or manager has been appointed out of court by the debenture holders, notice must be given to the Commission within 14 days indicating the terms of appointment and remuneration. Thereafter every invoice, order for goods or business letter by or on behalf of the company shall contain a statement that a receiver has been appointed. The receiver also upon his appointment must send
Winding up A company in financial difficulties may be wound up if it is unable to pay its debts. Schemes of Arrangement and Compromise There are no grounds specified by statute before a company can utilise this procedure.
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notice forthwith to the company. Winding up Where the order for the winding up of a company has been made by the court, 416 of CAMA requires the company to forward a copy of the order to the Commission which is then noted in its record books relating to the company. Arrangement and Compromise If a compromise has been sanctioned by the court, a certified true copy of the order must be delivered by the company to the Commission for registration and a copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made. Scheme of Arrangement and Compromise The same position as in receivership above applies.
Nigeria

Receivership Once a receiver has been appointed the power of the directors and shareholders to deal with the assets over which the receiver was appointed ceases and same is vested in the receiver. If a receiver is also appointed manager, he has power in law to carry on and manage the business of the company although the directors remain in office. Shareholders are unaffected. Winding up The liquidator takes over the company and all the powers of the directors cease except the company at general meeting or the Committee of Inspection in case of creditors voluntary winding up or the court or the liquidator sanctions the continuance thereof. Scheme of Arrangement and Compromise The directors under a scheme of arrangement or compromise remain in control of the company. The powers of the shareholders are not affected under this scheme.
3 Creditors
Receivership There is no law that prohibits an unsecured creditor from enforcing its rights outside of the receivership. Accordingly, an unsecured creditor can commence a recovery action against the company and if judgment is given in his favour, he may cause execution to be issued against the assets in the hands of the receiver or manager. Winding up Once winding up proceedings have commenced, an action by an unsecured creditor commenced during the pendency of the proceedings can be stayed by the court. Where a company is being wound up by the court, any attachment, sequestration, distress or execution by an unsecured creditor against the assets of the company shall be void. Scheme of Arrangement and Compromise Once the scheme of arrangement is sanctioned by the court, it is binding on all the creditors even if the secured or secured creditors did not vote in favour of it. Consequently, once the scheme is sanctioned, an unsecured creditor is bound by the terms of the scheme and will not be able to enforce its rights against the company other than as modified by the scheme.
A receiver of the whole of a companys undertakings has the power to borrow money and may do so if finance is required. The lenders or creditors invoking these insolvency procedures may also provide required finance.
A receiver or liquidator appointed under these procedures has no obligation to retain the employees of an insolvent company. Where the employees are disengaged, he has a duty under the Act to settle all their wages and salaries in respect of the services rendered to the company in priority to all other debts. The status of employees contracts under a scheme of arrangement would depend on the terms of the scheme document.
A secured creditor can enforce his security outside of each procedure, unless he elects or is required by the liquidator in a winding up to surrender his security [Rule 125 Companies Winding Up Rules].
Receivership The commencement of the receivership exercise does not in any way affect the contracts of the company. The power of the company to continue to deal with the contracts relating to the undertaking or property over which receiver or manager has been appointed ceases from the date of his appointment. He may decide to either carry on with the contract or terminate it. Winding up The commencement of winding up does not affect the contracts of the company unless the contract itself makes insolvency or liquidation a basis for its termination. Once a company has been wound up, such contracts stand terminated. A liquidator appointed has no power to carry on with the contracts.
Receivership There is no statutory provision for the exercise of such right against the company in receivership. In the absence of any contractual agreement, the creditor will not be able to exercise a right of set off. Winding up There is no statutory provision for the exercise of a right of set off by a creditor against a company in liquidation. A contractual agreement for the creditor to exercise a right of set off ceases to be enforceable once a company has been wound up.

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Scheme of Arrangement and Compromise The effect on contracts would depend on the terms of both the contract and the scheme of arrangement or compromise, as a reorganisation may be an act that determines a contract. Scheme of Arrangement
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The above ranking of claims in a scheme of arrangement will depend upon the terms agreed by the creditors.
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5 Claims
Receivership Secured creditors, if not the appointer, will file their claims with the receiver. Unsecured creditors may commence an action against the receiver for the recovery of debt. Where the creditors have recovered judgments, they may levy execution on the assets of the company. Winding up Creditors must submit proof of their debts to the liquidator, who has power to reject the claims. Once the claims are accepted after proof, the liquidator has power to settle the claims which shall rank equally unless the assets are insufficient to meet the claims. No recovery action can lie against a company after the commencement of a winding up petition as the court would readily grant stay of proceedings of such action in favour of a winding up petition. Any execution levied by the judgment creditor on the assets of a company in the process of winding up is rendered void in law. This position is also applicable to schemes of arrangement.
In receivership, winding up and a scheme of arrangement, the receiver or liquidator appointed have an obligation to pay taxes such as ground rent, tenement rates, Value Added Tax and taxes arising on disposal of assets or income earned during the exercise and other taxes owed by the company prior to the exercise.

There are no processes under the Act for cramming down dissenting creditors.
Receivership Once a receiver/manager is discharged, the control and management of the company revert to the owners. Every receiver or manager of a company must within one month after he ceases to act deliver to the Corporate Affairs Commission for registration a statement in the prescribed form showing his receipts and his payments during all the preceding periods since his appointment. Winding up Once a company has been wound up and the liquidator has distributed the assets among the members and creditors in satisfaction of its liabilities, the company can no longer exist in law. The liquidator prepares his final accounts to be considered by the companys general meeting and within seven (7) days thereafter to be filed at the Corporate Affairs Commission. The Commission will register it and on the expiration of 3 months from the registration of the return, the company shall be deemed dissolved. The powers of the directors and the members of the company then finally cease. Scheme of Arrangement and Compromise If the scheme requires the company to be wound up by special resolution, once the liquidator has sold all its assets to another body corporate and distributes the proceeds to members and creditors, the company no longer exists in law. The powers of the directors and members will also cease. A scheme of compromise with creditors documents may be referred to the Securities and Exchange Commission for approval and thereafter must be filed with the Corporate Affairs Commission. Under the scheme of compromise, the company still exists and the powers of the directors are not affected.
Receivership The law does not make provision for the ranking of claims in receivership. The duty of a receiver is to realise the security for the benefit of those on whose behalf he is appointed. If there is a surplus, he is empowered to rank other claims for the purpose of liquidation. Winding up In winding up the ranking of claims are as follows: (a) All local rates and charges due from the company at the relevant date, and having become due and payable within 12 months before that date, and all Pay-As-You-Earn tax deductions, assessed taxes, land tax, property or income tax assessed on or due from the company up to the annual day of assessment next before the relevant date, and in the case of Pay-As-You-Earn tax deductions. (b) Deductions under the National Provident Fund Act (Cap No. 88). (c) All wages or salary of any clerk or servant in respect of services rendered to the company. (d) All wages of any workman or labourer whether payable for time or for piece work, in respect of services rendered to the company. (e) All accrued holiday remuneration becoming payable to any other servant, workman or labourer (or in the case of his death to any other person in his rights) on the termination of his employment before or by the effect of the winding up order or resolution. (f) Compensation due under the Workmen Compensation Act. (g) Claims of General Creditors.

7.1 Is it common to achieve a restructuring outside a formal procedure in Nigeria? In what circumstances might this be possible?
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The increasing resort to court by debtors to thwart the liquidation process has resulted in heightened interest in using turnaround
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8 International
8.1
Nigeria
management to promote corporate recovery. This can only happen however where a receiver/manager is appointed over the whole or a substantial part of the companys undertaking, the business is viable and the creditors cooperative.
What would be the approach in Nigeria to recognising a procedure started in another jurisdiction?
A receiver who is also appointed as manager has a statutory duty not only to realise the assets of the company but to manage the affairs of the company in the best interest of the company so as to preserve its assets, further its business and promote the purposes for which it was formed. A debt/equity swap may achieve this.
There is no statutory provision on cross-border insolvency in Nigeria. Also, Nigeria has not as yet adopted the UNCITRAL Model Law on Cross-Border Insolvency although moves are afoot to enact insolvency legislation based on the Model Law. Therefore any procedure started in another country may not be recognised in Nigeria and foreign creditors will not be treated differently from local creditors. However foreign insolvency judgments and orders may be enforced in Nigeria if they comply with the terms of the Foreign Judgment (Reciprocal Enforcement) Act Cap. F35, Laws of the Federation of Nigeria, 2004 which requires the existence of a wholly or partly unsatisfied foreign judgment debt. The law is based on reciprocity of treatment of similar judgments in the originating country.
A pre-packaged sale is not provided for under either the Companies and Allied Matters Act or the Companies Winding Up Rules, and so is an unknown procedure. It may be liable to attack as a fraudulent preference of creditors.
Funke Adekoya SAN

LEX Legal Practitioners and Arbitrators 7th Floor Marble House 1 Kingsway Road, Ikoyi Lagos Nigeria
Olanipekun Orewale
LEX Legal Practitioners and Arbitrators 7th Floor Marble House 1 Kingsway Road, Ikoyi Lagos Nigeria
+234 1 463 0580 +234 1 461 7092 oadekoya@aelex.com www.aelex.com
+234 1 461 7321 - 3 +234 1 461 7092 oorewale@aelex.com www.aelex.com
Funke has over 30 years experience in conducting litigation and corporate dispute resolution within the corporate, commercial and energy sectors. Apart from acting as a commercial litigator, she also represents parties as counsel in arbitration proceedings and has been appointed as either party appointed Arbitrator, Sole Arbitrator or Presiding Arbitrator in several disputes. She also advises clients on legal issues regarding business insolvency, receivership, corporate liquidations and business turnaround issues. She authored the chapter on Nigeria in Colliers International Business Insolvency Guide. Funke is a member of the Law Society of England and Wales and a Life Bencher of the Body of Benchers (Nigeria). She is also a member of the International Bar Associations (IBA) Legal Practice Division. She was appointed Notary Public in 1986 and was elevated to the rank of Senior Advocate of Nigeria (SAN) in 2001. Funke holds an LL.M from Harvard Law School (1977).
Ola is a Senior Associate in the Firm. He handles telecommunications, corporate/commercial and taxation disputes in the High Court and Appellate Courts in Nigeria. He has successfully handled and is currently handling several Insolvency matters including a multi million Nigerian naira suit instituted by a consortium of Nigerian Banks. Ola is a member of the Chartered Institute of Arbitrators, UK and Nigeria as well as an active member of the Nigerian Bar Association.
LEX is a full service commercial and litigation law firm. It is one of the largest law firms in West Africa with offices in Lagos, Port Harcourt and Abuja in Nigeria and Accra, Ghana. LEX is the only law firm in West Africa that can provide seamless and integrated legal service in several commercial centres within the region. We merge local legal expertise and presence, political and industry wide connections with an appreciation of global standards and demands. In todays highly competitive and rapidly changing business environment it is survival of the fittest, the strongest and the smartest. We are interested in your business - we want to know more about it, to help you plan, maximise rewards, mitigate and possibly eliminate risk, help you identify options; solve problems, overcome obstacles - achieve your goals. We want to serve you better so that you survive when others fail, prosper when others falter.

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Chapter 32
Poland
Siemiatkowski & Davies
Michael Davies & Magdalena Witek

1.1 How does a creditor take security over assets in Poland?
gratuitously or for inadequate consideration during the year prior to the filing of the bankruptcy petition are ineffective. In addition, transactions involving the provision of security or the repayment of a debt which is not yet due are ineffective if they take place within two months prior to the filing of the bankruptcy petition. There are other transactions which are ineffective when made between related parties. The relevant period here is six months prior to the filing of the bankruptcy petition. In the case of legal entities the transactions include those between the bankrupt entity and its shareholders, their representatives or spouses, and related companies or partnerships. These provisions are contained in the Law and Bankruptcy and Rehabilitation, as amended (the Bankruptcy Law). There are also the provisions of the Civil Code dealing with the claim of actio pauliana (fraudulent treatment of creditors). These provisions provide that acts undertaken by the debtor which provide a benefit to a third party to the detriment of the creditors may be declared ineffective. The debtor must have acted deliberately and the third party must have known or should have known that the act was to the detriment of the creditors. There are other provisions in the Bankruptcy Law whereby the judge-commissioner (sedzia-komisarz) may declare acts ineffective. These include: a) encumbrances established over the assets of the bankrupt within one year prior to the date of the filing of the bankruptcy petition in circumstances where the bankrupt did not receive any benefits from the establishment of the encumbrance, or the benefit received was substantially less than the value of the security granted; and b) remuneration of the debtors representatives determined in an employment contract or in a contract on performance of services which flagrantly exceed the average amount of compensation given for similar work or services performed and is not justified by the work.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Poland?
There are various types of security interests available for lenders to companies in Poland, the most common of which are: a mortgage over real property; a registered pledge over movables and/or the enterprise of the Borrower; registered pledge over shares; a civil code or ordinary pledge; a financial pledge; a security transfer of title to movables; and a security assignment of rights. A mortgage over real property must be executed in the form of a notarial deed or, in the case of a bank or credit institution, by way of a simple declaration. It is then registered in the appropriate Land and Mortgage Register (ksiega wieczysta). There is currently no central register of mortgages in Poland and therefore the Land and Mortgage Registers are maintained by regional courts around the country. There is a centralisation process underway from an information point of view involving electronic Warsaw based data. The registered pledge over an enterprise is governed by the Law on Registered Pledges. A registered pledge can be taken over the whole business of the borrower except for real property and nontransferable rights. This type of pledge will also cover moveable and transferable property rights which the pledgor/borrower acquires in the future and which will be included in its business. A registered pledge can be taken over shares. The pledge would have to be entered into between the creditor and each of the borrowers shareholders. The financial pledge is a form of pledge ever monetary claims or financial instruments, such as shares. It is governed by provisions of the Act on Specific Financial Collateral. There is no form of registration; however, such a pledge should be disclosed in the companys share register. Each time, following registration of a change in shareholding, the management board of a limited liability company must file with the registry court a new list of shareholders signed by all members of the board together with the notice of the creation of a pledge. There are certain restrictions over who can take such a pledge.
The management board members are jointly and severally liable, unless the board member can show that a petition for bankruptcy or composition proceedings was initiated in good time, or the failure to apply for bankruptcy or composition was not his/her fault, or creditors suffered no damage even though no bankruptcy or composition proceedings were commenced. This only applies to limited liability companies. A member of the management board, who fails to file an application for bankruptcy where circumstances exist justifying bankruptcy, is subject to a fine or imprisonment. The Bankruptcy Law provides
There are a number of circumstances when legal transactions entered into by the insolvent debtor may be set aside, i.e., considered legally ineffective. Transactions involving the disposal of assets concluded
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further sanctions on members of the management board who fail to file for bankruptcy: they may be deprived of the right to carry out an economic activity on their own account or to be members of management boards, supervisory boards, representatives, attorneys or proxies in companies and cooperatives, foundations, associations etc., for a period from 3 to 10 years. The same sanction may be imposed on members of the management board who interfere with the bankruptcy proceedings by hiding, destroying, disposing of or encumbering the assets comprising the bankruptcy estate, or otherwise fail to perform duties and obligations to be performed under the Bankruptcy Law.
Poland
The court may dismiss a petition if the delay in performance of the obligations does not exceeds three months and the total amount of the non-performed obligations does not exceeds 10% of the balance sheet value of the debtors enterprise. In addition, the delay in performance of the obligations should not be permanent in character and the dismissal of the petition must not be detrimental to the creditors. If the court is satisfied that the debtor is insolvent and that the conditions for a composition with creditors are not satisfied, it will issue an order which will declare the debtor bankrupt and subject to the liquidation proceeding. The contents of the debtor application must comply with the provisions of the Bankruptcy Law and should indicate which form of bankruptcy proceeding the debtor is applying for - composition of creditors or liquidation of assets. The application should contain as attachments various documents including a current list of assets plus estimated values, balance sheet, declaration of claims or debts paid in the last six months, list of creditors, and information on security. If the debtor is filing a petition which includes the possibility of a composition of creditors, he should also provide proposals for such composition. If a creditor is filing for the bankruptcy, he should demonstrate the basis of his claim and if he is including the possibility of a composition of creditors, he should submit an initial proposal for the composition.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Poland?
There are essentially three types of procedures available when a company is in financial difficulty. These are the following: a b c bankruptcy proceedings leading to the liquidation of the debtor; bankruptcy proceeding leading to a composition with creditors; and the rehabilitation proceeding, which also leads to a composition with creditors.
What are the tests for insolvency in Poland?
2.2
The tests of insolvency of a debtor, being a legal entity, are twofold: a b it has ceased to perform its pecuniary obligations as they fall due; and the value of its liabilities exceeds that of its assets (even if it is performing its obligations as they fall due).
Once the declaration of bankruptcy has been issued, it is published in the official gazette, Monitor Sadowy i Gospodarczy, and in a local paper. Various other notifications also take place: the court ruling is delivered to the trustee (syndyk) court supervisor (nadzorcy sadowemu) or receiver (zarzadca), and to the creditor who petitioned for bankruptcy. Tax chambers and social insurance authorities are informed. The ruling itself will summon creditors to submit their claims within a fixed time, not less than one month and no longer than three. The court may summon an initial meeting of creditors in order to adopt a resolution on whether to proceed on the basis of a composition with creditors or liquidation; select the creditors committee; or to enter into the composition with creditors. It may decide not to call the creditors meeting if it considers it will be too costly or if the total sum of the contested claims exceeds 15% of the total value of the claims. The initial meeting of creditors is empowered to do the following: pass a resolution on whether to proceed on the basis of a composition with creditors or liquidation; select the creditors committee; or express its opinion on the selection of the trustee or court supervisor. The meeting may decide on a composition with creditors if at least of the creditors holding of the total sum of debt (uncontested, supported by execution titles or where there is probable cause) are present.
2.3
Bankruptcy proceedings either with the aim of liquidation or of composition with creditors are declared if the debtor has become insolvent. If it can be demonstrated that the creditors would be satisfied to a greater extent than through liquidation, the debtors bankruptcy will be declared with the aim of reaching a composition with creditors. If, on the other hand, the basis for a composition with creditors does not exist, the declaration of bankruptcy will be declared with the aim of liquidation. In the case of either proceeding, the court may change the method of carrying out the bankruptcy proceeding to the other if the grounds for such change appear after declaration of bankruptcy. The above change of the method of carrying out the bankruptcy proceeding needs to be announced in the official gazette, Monitor Sadowy i Gospodarczy.
3 Creditors
A debtor is obliged to file a bankruptcy petition if it is insolvent. Likewise a creditor has the right to file such a petition. The court dismisses the petition if the assets are insufficient to cover the cost of the proceedings or if they are sufficient but encumbered and the free assets do not cover the costs.
Unsecured creditors may not enforce their rights in normal court proceedings following the declaration of bankruptcy of the debtor. This applies both in the case of a bankruptcy where there is a composition with creditors proceeding and where there is a liquidation of assets. Their rights must be enforced in the course of

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the relevant bankruptcy proceeding. Unsecured creditors will, in the case of a liquidation of assets, be listed in the list of creditors and are paid in accordance with the priority established by law (see question 5.2 below). The general rule is that unsecured creditors take part in the composition with creditors.
Poland
Where the court has issued an order for bankruptcy aimed at a composition with creditors, the bankrupt administers the estate constituting the bankrupt estate unless the court appoints the receiver (zarzadca). The court appoints the receiver in case the bankrupt does not satisfy the court that the administration will be performed properly. Administration by the bankrupt is undertaken under the supervision of the court supervisor (nadzorca sadowy). As a general rule, the bankrupt can, in these circumstances, carry out acts in the ordinary course of business. Acts outside the ordinary course need the approval of the court supervisor unless the Bankruptcy Law requires the consent of the creditors committee. As far as the shareholders are concerned, their position with respect to their corporate rights remains unchanged during the bankruptcy proceedings.
Poland
Creditors secured over a particular asset will have priority over unsecured creditors with respect to that asset. In the case of a bankruptcy aimed at a liquidation of assets, the claim of a secured creditor where the security is a mortgage, civil law pledge, registered pledge, statutory pledge or ship mortgage will be satisfied from the proceeds of the liquidation of the secured asset. In the event that these proceeds are not sufficient to satisfy the claim in question, the outstanding claim will be satisfied in accordance with the priority applicable to the claims of unsecured creditors. The position is different in the case of a bankruptcy aimed at a composition with creditors. Secured creditors are not covered by the composition unless they give their consent to have their claim included in the composition. If a secured creditor consents to have his claim included his security remains in place but upon the conditions as determined by the composition.
Where the bankruptcy proceeding is being carried out with a view to a composition with creditors, the business of the bankrupt company will most commonly be continued. Indeed the receiver is under an obligation to preserve the bankrupt estate so that it does not deteriorate. In the event the business requires further financing for its continuation, creditors who provide such financing may be granted favourable conditions to be covered by the composition. In the case of bankruptcy proceedings aim at liquidation, the business of the bankrupt may be continued if the committee of creditors approve. In such circumstances the income generated will form part of the bankrupt estate.
The position is different depending on the two types of bankruptcy proceeding. In the case of the bankruptcy aimed at a composition with creditors a set-off of claims can take place. However, this is not permitted where the creditor becomes the debtor of the bankrupt after the declaration of bankruptcy or where the debtor of the bankrupt becomes a creditor after the declaration of bankruptcy by the acquisition of claims which existed before the declaration of bankruptcy. In the case of a bankruptcy aimed at a liquidation, the claims of the bankrupt can be set-off against those of a creditor provided both parties claims existed at the date of declaration of bankruptcy. However, the claim of the bankrupt can be set-off in the full amount whereas the claim of the creditor is only set-off as to principal and interest accrued until the date of the declaration of bankruptcy. Setoff is not permitted if the creditor acquired his claim by transfer or endorsement after the date of declaration of bankruptcy or even if he acquired it during the one year prior to the declaration, if he knew about the grounds for bankruptcy. There are some exceptions to this rule.
In the case of bankruptcy proceedings which are aimed at liquidation, the claims of the employees rank as preferred creditors, in some cases over certain secured claims. The bankrupt company may terminate its contacts of employment upon the declaration of bankruptcy. Where there is a composition of creditors, employee claims are not covered by the composition unless the employee agrees otherwise.
An important point which should be noted at the outset is that any provisions contained in a contract which provide that the legal relationship between the parties is terminated or changed upon a declaration of bankruptcy are invalid. The provisions of a contract to which the bankrupt is a party which make impossible or impede the aim of the bankruptcy proceeding are ineffective in relation to the bankrupt estate. There are certain exceptions to the above rule involving finance transactions. In the case of master agreements for derivatives or repurchase contracts, claims arising may be settled by way of netting, outside of the bankruptcy proceedings. A contract of transfer of an asset, claim or other right concluded as a security of claim is effective in relation to the bankrupt estate if concluded in written form with a certified date. In the case of a declaration of bankruptcy which is aimed at liquidation, the following applies to monetary claims and contracts: a all monetary claims against the bankrupt which have not yet become payable, become due and payable upon the date of declaration of bankruptcy;

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In the case of bankruptcy proceedings aimed at liquidation, the debtor will, upon the declaration of bankruptcy, lose its right to administer, use or dispose of its assets, constituting the bankrupt estate. Upon the declaration of bankruptcy, the court will appoint the trustee (syndyk) who will take over control and management of the assets and proceed to the liquidation of the assets.
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b non-monetary obligations are converted into monetary claims and become payable upon the date of declaration of bankruptcy, regardless of whether the term for performance of the obligation has matured; obligations arising from mutual contracts which are not performed or are only partially performed may be performed by the trustee; alternatively, the trustee may withdraw from the contracts. If the trustee does withdraw from the contract, the other party is not entitled to the return of the performance provided. He can, however, claim for compensation from the bankruptcy estate; the trustee is not permitted to withdraw from agreements such as master agreements for derivatives but all parties may rescind the master agreement in compliance with terms agreed upon in the agreement dealing with the means of calculating the parties close-out amount in the event of the termination of the agreement; loan agreements expire if the loan has not been advanced; bank account agreements, agreements for mandatory property insurance, and lease agreements for real property owned by the bankrupt (where the real property has been handed over to the lessee prior to the declaration of bankruptcy) remain in force; and if the bankrupt is a lessee, the trustee may terminate the lease upon the statutory term of notice (unless the lease provides for shorter period), whether or not such termination is permitted by the lease; in the case of a lease of real property from where the enterprise of the bankrupt is being carried out, the notice period is six months.
5.2
Poland
1.
the costs of the bankrupt proceedings, claims arising out of the undue performance of bankrupt estate, claims from contracts concluded by the bankrupt prior to the declaration of bankruptcy, whose performance was required by the trustee, claims arising from acts of the trustee or receiver, claims arising from acts performed by the bankrupt after the declaration of bankruptcy, which were not subject to the approval of the court supervisor or which were performed with his approval; claims for employees earnings due for the period prior to the declaration of bankruptcy, allotments for social insurance due for two years prior to the declaration of bankruptcy together with interest due and costs of execution; taxes and other public levies as well as social security payments which are not included in category 2, together with interest and the costs of execution; other claims if are not subject to satisfaction in the fifth category together with interest for the last year prior to the date of declaration of bankruptcy, plus contractual damages and costs for proceedings and execution; and interest not included in any of the above categories, court fees and administrative penalties, claims from donations or inheritance.
2.
e f
3.
4.
5.
In the case of bankruptcy aimed at a composition of creditors, different rules apply: a once the declaration of bankruptcy has taken place with the aim of concluding a composition with creditors, neither the bankrupt debtor nor the receiver may perform obligations arising out of the claims which are the subject of the composition; and a lessor may not, without the consent of the creditors committee, terminate a lease contract where the enterprise of the bankrupt operates. This applies equally to other forms of leasing contracts, certain insurance contracts, bank account contracts, suretyship contracts, bank guarantees, letters of credit and licensing agreements where the bankrupt is the licensee.
The basic principle is that claims in a higher category must be satisfied before claims in a lower category. If the bankrupt estate is not adequate to satisfy all the claims in the same category, they will be satisfied on a proportional basis. As far as secured claims are concerned, the general position is that the secured creditor is satisfied out of the liquidation of the asset in question after payment of the costs of the liquidation and other costs of the bankruptcy proceeding in the amount defined in the Bankruptcy Law. However, in the case of mortgaged real property or a mortgaged ship, certain claims will rank in priority to the secured creditor. These are alimony and pension claims and employee remuneration claims where the employees have worked on the real property or the ship. The remuneration claims in these circumstances is limited to three months at three times the minimum wage for such work. The claims of secured creditors are satisfied based on their priority which means that the timing of the security will determinate the priority of the claims. If the secured asset is not sufficient to satisfy the claim of the secured creditor, the outstanding amount will be satisfied as a claim according to the ranking of unsecured creditors. In the case of a bankruptcy where a composition with creditors is involved, the judge-commissioner may, after the confirmation of the list of claims, decide that voting on the composition arrangement will be carried out by way of a vote in separate categories of creditors. In such case, the judge commissioner draws up separate lists of creditors entitled to vote. The lists may contain the following categories of creditors: a creditors entitled to claims based on an employment relationship and they gave their consent to have their claim included in the composition; farmers entitled to claims based on a contract to supply their farm products; creditors secured over assets by mortgage, pledge, registered pledge, statutory pledge or ship mortgage as well as by security transfer of title to movables; and a security
5 Claims
Creditors must submit their claims providing full details and evidence proving the existence of the claim. In addition the creditor should state the category in which the claim is to be ranked. The claims are presented to the trustee (syndyk) in the case of bankruptcy with the aim of liquidation and to the court supervisor (nadzorca sadowy) in the case of a bankruptcy with the aim of a composition with creditors. The trustee or court supervisor will verify the claims submitted and will then prepare a list of claims which is delivered to the judge commissioner (sedzia komisarz). The list of the creditors and claim is published in the Court and Economic Monitor (Monitor Sadowy i Gospodarczy). There is a procedure for creditors to file objections within two weeks with respect to those claims which have been recognised and those which have not.
b c

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The claims of unsecured creditors where the proceeding involved is that aimed at liquidation are ranked by division into five categories as follows:

assignment of rights; d creditors being shareholders, holding shares giving at least 5% of votes at the shareholders meeting even if they are entitled to claims listed in points a - c above; and other creditors.
Poland
his approval or amendment. A separate plan is prepared for the funds arising for the sale of property or rights, which are secured. The plan is then published and there is a two-week period for objections to be filed. If there are no objections filed, the judgecommissioner confirms the plan and it is then immediately implemented. After implementation of the plan, the court will issue a ruling declaring the bankruptcy proceedings completed. The company is then dissolved and deleted from the National Court Register. In the case of a composition with creditors, the court will: a b approve the composition (see question 5.1 above); and issue a final ruling confirming the performance of the reorganisation whereupon the bankrupt regains the right of administration of his estate.
The basic rule is that the conditions for the restructuring of the liabilities of the bankrupt should be identical with respect to all creditors, or if the judge commissioner decided that voting on the composition arrangement will be carried out by way of a vote in separate categories of creditors - with respect to the creditors of the same category unless a creditor has explicitly approved less favourable conditions for itself. However, more favourable conditions can be granted to creditors having small claims, and to those creditors who, after the declaration of bankruptcy, have provided or will provide finance essential for the execution of the reorganisation.
Poland

7.1 Is it common to achieve a restructuring outside a formal procedure in Poland? In what circumstances might this be possible?
There are no particular taxes incurred as a result of the bankruptcy. There is also no particular relief. The bankrupt entity is obliged to pay its taxes, and the tax authorities with outstanding claims are treated as unsecured creditors ranking in the third category of creditors (see question 5.2 above). In certain circumstances, a statutory mortgage can come into force with respect to tax claims which would make the tax authority a secured creditor.

Bankruptcy proceedings will always involve the court in some way. It is possible for restructuring to take place where the debtor is threatened with insolvency (i.e., when the assets of the debtor still exceed his liabilities and the debtor still meets his obligations but it is apparent he will become insolvent within a short period of time). This is a form of rehabilitation proceeding and is outside the bankruptcy proceeding but it must be carried out under the supervision of the court appointed supervisor. Once an arrangement is reached with the creditors, it must be approved by the court.
Secured creditors cannot have their rights affected by a composition proceeding without their consent. In a bankruptcy with the aim of a composition proceeding, the reorganisation is subject to acceptance by the creditors and to the approval of the court in order to become binding. Once it is binding, all unsecured creditors are covered by the reorganisation, even those who objected to it. The reorganisation arrangement is deemed to be accepted if the majority of creditors entitled to vote having together not less than two thirds of the total amount of claims entitling participants to vote, express their approval. In case the judge-commissioner decides that voting on the reorganisation arrangement will be carried out by way of a vote in separate categories of creditors, the reorganisation arrangement is deemed to be accepted if the majority of creditors in each category of creditors votes in favour and these creditors hold not less than two thirds of the total amount of the claims included in the separate category of creditors entitled to vote. Notwithstanding these creditor approval processes, the court is required to refuse to confirm the reorganisation if: a b it violates the law; or it is obvious that it cannot be performed.
It is possible for restructuring to take place where the debtor is threatened with insolvency (i.e., when the assets of the debtor still exceed its liabilities and the debtor still performs its obligations but according to a reasonable assessment of its economic situation, it apparently will become insolvent within a short time). This is a form of rehabilitation proceeding and is outside the bankruptcy proceeding but it must be carried out under the supervision of the court appointed supervisor. Once an arrangement is reached with the creditors, it must be approved by the court. The aim of this procedure is to ensure that the entrepreneur, after the rehabilitation proceeding, will be able to compete in the market
The court may refuse to confirm the reorganisation if the conditions are flagrantly detrimental to the creditors who voted against it and who filed objections.
The trustee is required to draw up a distribution plan for the funds of the bankrupt estate and subject it to the judge-commissioner for
After commencement of the rehabilitation proceeding to the day the court issues a legally valid decision on the confirmation of a reorganisation arrangement with creditors or the discontinuance of proceedings, an entrepreneur may not transfer or encumber its assets. This does not apply to assets transferred within the scope of entrepreneurs ordinary business activity. Proposals for the restructuring of the entrepreneurs estate should indicate which parts of the estate are to be transferred, leased or rented out, determine the means of transfer and how acquired funds shall be assigned.
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8 International
8.1 What would be the approach in Poland to recognising a procedure started in another jurisdiction?
Poland
Acknowledgment
The authors would like to acknowledge the assistance of Andrzej Siemiatkowski, one of the two founding partners of Siemiatkowski & Davies, in the preparation of this chapter.
The Bankruptcy Law contains provisions dealing with cross-border bankruptcy. Those provisions are based upon the regulations contained in the 1997 UNCITRAL Model Code, and cover the recognition of cross-border bankruptcy proceedings and the setting aside of such proceedings. The Bankruptcy Law provisions on cross-border bankruptcies do not, however, apply to bankruptcies in other EU Member States. In such cases the EC Council Regulation dated 29 May 2000 (No 1346/2000) on insolvency proceedings applies.
Michael Davies
Siemiatkowski & Davies Al. Rz 10/9 00-556 Warsaw Poland
Magdalena Witek
Siemiatkowski & Davies Al. Rz 10/9 00-556 Warsaw Poland
+48 22 529 3782 +48 22 529 3799 Michael.Davies@sdlaw.eu www.sdlaw.eu
+48 22 529 3780 +48 22 529 3799 Magdalena.Witek@sdlaw.eu www.sdlaw.eu
Michael Davies is one of the two founding partners of Siemiatkowski & Davies. He is an English solicitor and has lived and worked in Poland since 1991. He specialises in commercial, real estate, energy and finance transactions and has extensive experience of acting for both domestic and international clients in high-profile transactions. He has advised on numerous joint ventures, privatisations, merger & acquisition transactions and project finance deals in a variety of sectors (including the energy, food, telecoms, real estate, human resources, petrochemicals and defence sectors). He lectures at the University of Warsaw and at the International Development Law Organisation (Rome, Italy) on aspects of financial law and practice. He is also a Senior Fellow with the United Nations Institute for Training and Research where he provides training on aspects of international finance law. Michael Davies has published various texts on subjects such as sovereign debt management, foreign investment in Poland, the impact of the European Union on the energy markets in Eastern Europe, liberalisation in the power sector, the financing of power projects and energy emission trading.
Magdalena Witek obtained a Master of Laws degree from the Department of Law and Administration at the Warsaw University in 2001. She has work with Siemiatkowski & Davies since 2005; before that she worked in-house with a Swedish Construction Company. Her practice areas include general corporate work, finance transactions and real estate acquisitions and disposals. She also advises on company liquidations and dissolutions.
Siemiatkowski & Davies was founded in 2005 by two highly experienced lawyers, one Polish and one English, who for many years were partners at a major international law firm. Siemiatkowski & Davies has been established to focus on five specific areas: corporate transactions; finance transactions; real estate; private equity; and projects. Both founding partners have been involved in many high-profile transactions in these areas in Poland over the last 18 years. They have recently co-authored a book entitled Joint Ventures in Poland: a Legal Guide.

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Chapter 33
Portugal
Srvulo & Associados
Carlos Pereira da Costa
Rui Simes

1.1 How does a creditor take security over assets in Portugal?
and of the Council of 6 June 2002 on financial collateral arrangements, Portuguese law also implements these types of guarantees, namely the title transfer financial collateral arrangement (alienao fiduciria) and the security financial collateral arrangement (penhor financeiro). These collateral arrangements may apply to cash or financial instruments. Further to all these, there are legally created securities (privilgios creditrios) in benefit of specific creditors (mainly employees and public entities, like Social Security or Tax Administration). These are created regardless of any voluntary act by the parties and grant the respective creditors a right to be paid prior to other creditors.
Under Portuguese law, there are five types of consensual security: the pledge; the contractual lien; the mortgage; the assignment of income; and the financial collateral arrangements. Pledge (Penhor) There are two types of pledges: the general pledge involves the creditor taking actual possession of the debtors assets as security. The commercial and banking pledge may not involve the transfer of possession to the creditor. A creditor has a preferential right to be paid with the proceeds of the judicial sale of the pledged assets. All assets that cannot be mortgaged can be pledged. Credits can also be pledged, as well as negotiable securities. Contractual Lien (Direito de reteno) A lien is the right to retain possession of another persons property until that other person performs a specific obligation related to that specific asset. The creditor may maintain possession of an asset that he is contractually obliged to deliver to the debtor, until the debtor fulfils its obligation related to such specific asset (for example, if the asset was delivered to the creditor for custody or repair). A lien is only applicable to assets, not to credits. Mortgage (Hipoteca) A mortgage is a security that does not involve the transfer of ownership nor possession of an asset. It creates an encumbrance which hangs on the asset and is enforceable before any third parties (including purchasers of such assets). A mortgage is valid only upon registration. Thus, it only applies to immovable assets or movable assets which are subject to a public registration, such as automobiles, ships or airplanes). Assignment of income (Consignao de rendimentos) This is a type of security where the debtor assigns to the creditor, in guarantee of a certain debt, all income originated by a specific asset. In order to be enforceable before any third parties, this security must be registered. It can only be created in relation to an asset subject to public registration (e.g. immovable assets). Financial collateral arrangements (Garantias financeiras) Subsequently to Directive 2002/47/EC of the European Parliament
Transactions entered into in the four years prior to the judicial declaration of insolvency might be vulnerable to attack. In general, such transactions may only be attacked if proof is made they were prejudicial to the insolvency creditors and that the third parties acted in bad faith (this means the third party involved had knowledge that the company was insolvent or that the transaction was prejudicial to the companys creditors). Some types of transactions can always be challenged, independently of any proof of bad faith of the third party involved. These include, for example: Gratuitous acts made in the two years prior to the commencement of the insolvency process. Transactions on terms where the company receives a consideration which has a value which is significantly less than the value of the consideration provided by the insolvent company. Securities over the insolvent companys assets granted in the 6 months prior to the commencement of the insolvency process, in guarantee of pre-existent debts.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Portugal?
A director of a company which is insolvent is obliged to file for insolvency within 60 days. If the directors do not comply with such obligation, they may be considered responsible for the insolvency of the company. If they are considered responsible for the insolvency, they may be
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subject to: Disqualification from administration of its own assets for a period of 2 to 10 years. Disqualification from any type of commercial activity (including appointment for any type of office in any companies) for a period of 2 to 10 years. Civil liability (compensation to the company for the damages suffered in consequence of their actions). Criminal liability (fraudulent bankruptcy is a crime, which may be punished up to 5 years imprisonment).
Portugal
Prior to the insolvency declaration, a creditor may request the appointment of a provisional administrator, in order to prevent any prejudicial acts to the companys assets. The extrajudicial conciliatory procedure will only commence upon a request by the company. The state agency competent for this procedure (IAPMEI) may refuse the request if it considers the company cannot be recovered, that the approval by its creditors is unlikely or that the company is not insolvent (or in the imminence of insolvency).
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Portugal?
Portugal has only one type of formal procedure, the insolvency process. There is also an informal procedure, called extrajudicial conciliatory procedure, which is conducted by a State agency (IAPMEI), which will try to arrange for a plan for recovery of the company, which is approved by its creditors.
2.2 What are the tests for insolvency in Portugal?
When the company is declared insolvent, the following entities will be notified: the directors of the company; the Salaries Guarantee Fund; the District Attorney; the entity that requested the insolvency process; the company itself; the workers commission; the five biggest creditors (those who are known at the time); and public creditors (Social Security and Tax Administration). The insolvency declaration is published in the official gazette (Dirio da Repblica), in the Court, in the companys head office and also in the Courts website (the unknown creditors will be summoned through these publications). The insolvency will be registered in the Commercial Registry Office, in the centralised enforcement proceedings database and in the Central Bank database (credit risks database). The Court judgment declaring the company insolvent will convene a creditors meeting to be held between 45 to 75 days after the judgment. In this meeting, the creditors will decide whether the companys assets shall be liquidated or if the insolvency administrator shall prepare an insolvency plan.
A company is insolvent if it is unable to pay its debts as they fall due (cash flow test) or if the value of the companys assets is significantly less than the amount of its liabilities (balance sheet test).
3 Creditors
A company can be placed into an insolvency process if it is insolvent or in the imminence of insolvency. In this last case (imminent insolvency), only the company can file for insolvency, not its creditors.
If an insolvency process is in place, unsecured creditors cannot enforce their rights outside of this procedure. On the contrary, the extrajudicial conciliatory proceeding does not suspend any enforcement rights of the creditors.
A company may file for insolvency before the Court. Any creditor, the District Attorney or any third party legally responsible for the companys debts can also request the Court to declare the insolvency of a company, based on facts that show the company is insolvent. When the company files for insolvency, the court will declare the insolvency within 3 weekdays (unless there is any formal insufficiency of the filing). When the insolvency is requested by a creditor, the company is summoned and may present its defence. The Court will decide, based on the evidences submitted by the parties, if the company is declared insolvent. In the insolvency declaration, the judge will appoint an insolvency administrator, which will be responsible for the liquidation of the companys assets, unless an insolvency plan is approved that provides for the recovery of the company. Once the insolvency is declared, the creditor that requested it cannot cancel its request. If the Court considers the request was purposely filed despite the absence of any grounds, the requestor is liable for the damages caused to the company and its creditors.
If an insolvency process is in place, secured creditors cannot enforce their rights outside of this procedure. Nevertheless, these creditors may be entitled to a compensation for damages suffered if the sale of the secured assets is unjustifiably delayed.
Yes, under certain circumstances. In general, such set off is only accepted if the requisites of the set off already occurred before the insolvency declaration or if the credit held by the insolvency creditor was already susceptible of set off before the credit held by the insolvent company. In some cases, the set off is never accepted, like for example when the credit over the insolvent company is a subordinated credit (see

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5 Claims
5.1
Portugal
the ranking of claims below) or if the credit was acquired from a different creditor after the insolvency declaration.
Broadly, how do creditors claim amounts owed to them in each procedure?
Portugal
4.1
Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders.
In an insolvency process, creditors claim amounts owed to them by sending a claim to the insolvency administrator within 30 days after the insolvency declaration. The insolvency administrator will then prepare a list of all claimed credits, organised according to the respective ranking.
In the insolvency process, the company is controlled by the insolvency administrator, unless the company requests to the Court to be maintained in possession of its assets. In this last case, the companys directors maintain their powers and the insolvency administrator will only supervise the administration. Unless this last option is accepted by the Court, the companys directors will lose all their powers to administer or sell any of the companys assets.
The ranking is the following: 1. Insolvency process expenses (including, for example, insolvency administrator remuneration, court fees and debts incurred after the insolvency declaration). Specific preferential credits (only those preferential credits which are specific to an asset; for example, employees credits have a prevailing security over the immovable where they work. Secured creditors. General preferential credits (these are preferential credits which are not specific to an asset; for example, Social Security credits). Unsecured creditors. Subordinated creditors. Shareholders.
2.
The insolvency process expenses shall be financed by the insolvent companys assets. If the value of the companys assets is insufficient to finance the insolvency process, the process shall be immediately closed (liquidation will proceed outside the insolvency process). In any case, the Court will advance an initial amount to the insolvency administrator in order to pay for the publications and other expenses related to the initial stages of the process. Any expenses related to the insolvency process (such as the insolvency administrator remuneration) or related to the continuing of the companys activity are ranked prior to any other claims over the insolvent company. The process can also be financed by new financing obtained by the insolvency administrator if he/she considers it necessary in order to preserve the value of the companys assets and the creditors committee approves it. Further to the priority ranking above mentioned, these new loans can be granted preferential rights in future insolvency processes.
3. 4.
5. 6. 7.
5.3
Yes, they are. A company entering into an insolvency process remains subject to taxes (tax on profits, VAT or others) arising during the procedure.

The declaration of insolvency does not automatically terminate the employment contracts. Only if and when the creditors or the insolvency administrator decide to close down the companys activities, the respective employment contracts will be terminated.
Yes, there is. In the insolvency process, the approval of an insolvency plan is decided by a majority of 2/3 of the issued votes (and a majority of non subordinated credits). The creditors which are affected by the plan and do not approve it, are obliged to accept it unless they prove that such plan produces a worse result for them than the liquidation of the insolvents assets.
Upon the declaration of insolvency, the general principle is that the insolvency administrator can choose whether to continue performing or terminate any contract.
In the insolvency process, there are three possibilities: 1. The insolvency process is ended because it is considered that the assets of the insolvent company are insufficient to cover for the process costs. In this case, not even the liquidation is made in the process (it will be made outside the Court). If no insolvency plan is approved, the assets are liquidated and, at the end of the procedure, the company is extinct. If an insolvency plan is approved and such plan includes measures to maintain the company operating, the end of the procedure will see the company restart its normal activity.
2. 3.
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7.1 Is it common to achieve a restructuring outside a formal procedure in Portugal? In what circumstances might this be possible?
Portugal
As a general rule, such sale will only occur after the Court has issued a final decision on the insolvency and the creditors meeting has occurred. However, the law provides that the insolvency administrator can sell assets prior to those events if that sale is necessary in order to preserve the value of such assets. In consequence, it is possible that the sale is prepared prior to the insolvency being declared and to perform that sale shortly after the beginning of the insolvency process. Such sale shall be approved by the creditors committee.
It is not common to achieve a restructuring outside a formal procedure. In very few cases, the extra-judicial conciliatory procedure achieves a restructuring agreement; the success is limited to few cases, given the fact that there is no process for cramming-down creditors who do not approve of such restructuring plan. Private agreements between the debtor and its creditors occur in limited cases, usually when dealing with large companies, but are not, in any way, common.
8 International
8.1 What would be the approach in Portugal to recognising a procedure started in another jurisdiction?
Yes, reorganisation is possible within the insolvency process. The insolvency process can either be conducted with the objective of liquidating the debtors assets or with the objective of reorganising the debtor. In order to achieve a reorganisation, the debtor or any creditor or group of creditors which own more than 20% of the credits can present a proposal of an insolvency plan. Such plan can provide for the continuance of the debtors business, as long as the debtor accepts it. The plan can, at the same time, provide for debt for equity swaps, the dilution of existing shareholdings (or even extinction) along with a further injection of funds, as well as changes to the by-laws of the company or changes as to the members of corporate bodies.
The Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings is applicable in Portugal. Therefore, proceedings opened in an EU Member State must be recognised without any formality. In what concerns procedures started in jurisdictions outside of the European Union, the recognition of such procedures depends on the prior publication of the decision of the foreign court by a Portuguese court. The insolvency administrator of the foreign court shall request such publication to the competent Portuguese court, which will accept the request unless such recognition breaches fundamental principles of the Portuguese law or if the foreign court, according to the criteria of the Portuguese law, would not have jurisdiction to take a decision on the insolvency of such debtor. The recognition of the foreign decision will allow the insolvency administrator to act in Portugal; however, in order to enforce any decisions taken by the foreign Court, a previous review and confirmation by Portuguese courts is necessary.
In the insolvency process, priority is conferred, by law, to the sale of the business as a going concern.

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Portugal
Carlos Pereira da Costa

Srvulo & Associados Rua Garrett, 64 1200-204 Lisbon Portugal
Rui Simes
Srvulo & Associados Rua Garrett, 64 1200-204 Lisbon Portugal
Tel: Fax: Email: URL: +351 210 933 000 +351 210 933 001 rs@servulo.com www.servulo.com
Portugal
+351 210 933 000 +351 210 933 001 cpc@servulo.com www.servulo.com
Carlos Pereira da Costa joined the firm* in 1999. He has extensive experience in litigation and banking matters, given his prior work for the Litigation Department of Crdit Lyonnais Portugal 1990 and 1999. He was also a lecturer at the Banking Training Institute between 1997 and 2002. He has been advising on a wide range of restructuring and liquidation in recent years. * Ferreira Pinto & Associados merged with Srvulo Correia & Associados in 2008, creating the firm Srvulo & Associados.
Rui Simes joined the firm* in 1997, specialising in litigation, dispute resolution, corporate and commercial matters. In 2003, he was appointed as Deputy Director of the Legal Planning unit of the Portuguese Ministry of Justice. In such capacity, he was the coordinator of the project of the new Insolvency Code and related legislation, in force since September 2004. He returned to the firm in 2008, advising on insolvency and corporate recovery matters, both on domestic and international matters. * Ferreira Pinto & Associados merged with Srvulo Correia & Associados in 2008, creating the firm Srvulo & Associados.
Srvulo is a multidisciplinary boutique providing legal services in the main areas of the current legal market, in accordance with three essential principles: full service capacity; synchronisation with EU law; and taking the international perspective. For each practice area, Srvulo provides legal services through the issue of legal opinions and legal advice with the highest degree of rigor, actively participating in procedures and negotiations and providing representation in crossjurisdictional dispute resolution procedures including arbitration. As a full service firm, Srvulo is able to provide a bespoke service to its clients, with a thorough understanding of their business and objectives and always acting in the best interests of the client. Srvulo has extensive experience in the area of liquidation and corporate recovery. Considering the complexity that frequently surrounds these operations, Srvulo is well placed to provide a fully integrated service with the intervention of multidisciplinary teams, encompassing specialists in corporate, tax, employment, administrative, finance and criminal law.
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Chapter 34
Romania
Pachiu & Associates
Dr. Ciprian Paun, Ph.D.
Silviu Predescu

1.1 How does a creditor take security over assets in Romania?
the debtor or to affect the creditors rights in any manner whatsoever; and transactions involving transfer of ownership for the payment of a previous debt, performed during a 120-day period prior to Opening of Proceedings, if the amount the creditor would obtain in case of winding-up of the Local Company would be lower than the value of the ownership transfer, etc. Furthermore, transactions performed with a holder of at least 20% of the share capital of the debtor, with a director of the debtor, with an affiliate company, or with a co-owner of an asset shall be revoked. After the restitution of the asset or the value of the asset by the third party to the debtor, the third party, acting in good faith, shall have a corresponding claim against the patrimony of the debtor.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Romania?
The Romanian law provides the right of creditors to secure their claims against debtors, by conclusion of securities agreements. Therefore, creditors are entitled to execute mortgage agreements, pledge agreements as well as security agreements regarding other rights in rem. Mortgage agreements require notarisation by a notary public in order to be valid and the registration with the competent Real Estate Register for the purpose of its enforceability towards third parties. Furthermore, the object of the pledge agreements can reside in movable tangible or intangible assets. The pledge agreements become legally binding upon signing by all parties. In order to be enforceable, pledge agreements as well as all other rights in rem are to be registered with the Electronic Archive for Security in Real Property.
According to Law No. 85/2006 regarding the insolvency procedures (the Insolvency Law), the judicial administrator or the liquidator is entitled to file with the syndic judge cancellation actions pertaining to deeds concluded by the debtor against the interest of its creditors within three years before the opening of the insolvency procedures. In this regard, the judicial administrator or the liquidator may demand cancellation of deeds regarding the establishment or the transfer of patrimonial rights in favour of third parties. Provided that the syndic judge rules for cancellation of such transactions, the third parties shall return the transferred assets or the amount representing the value of the performed services. Nevertheless, the Insolvency Law limits the deeds that can be challenged as mentioned above to operations that are basically detrimental to the Companys patrimony, such as: free transfers of property, during a three-year period prior to opening of insolvency procedures whereas humanitarian sponsorships are excluded; transactions performed during a three-year period prior to opening of insolvency procedures in which the value of the services performed by the debtor exceeds the received benefit; agreements concluded during the three-year period prior to the opening of procedures with the intention of all parties involved to circumvent assets from the pursuit of creditors of
In this regard, upon request of the judicial administrator/the liquidator, the syndic judge may rule that the supervising or the managing bodies of the company (including the director), may be held liable for a part of the debtors liabilities if such persons: (i) have used the assets or the credits of the company for their own use or for the use of a third party; (ii) have performed commercial acts in their own interest, under the cover of the company; (iii) have decided, for their own interest, the continuation of an activity which obviously led the company to payment cessation; (iv) have caused unlawful keeping of the accountancy; (v) have unlawfully taken or concealed a part of the companys assets or have fictively increased its liabilities; (vi) have used unsuitable means in order to obtain funds in order to delay the payment cessation; or (vii) have performed preferential payments to a certain debtor in the last month prior to the payment cessation. Joint liability may be held in case several persons performed such actions, provided that the cause of insolvency occurred prior or during the exercise of their duties. Furthermore, criminal liability may be engaged against the director, provided that it refuses to remit to the syndic judge the documents necessary for the course of the insolvency procedures or does not initiate the insolvency procedures within the mandatory terms provided by the Insolvency Law.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Romania?
The Insolvency Law provides: (i) a common insolvency procedure; and (ii) a simplified insolvency procedure. Under the common

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insolvency procedure, the debtor, provided that a 60-day surveillance period is observed, enters successively in both judicial reorganisation and in bankruptcy procedures or either of the judicial reorganisation or bankruptcy procedure. In order to facilitate the dissolution of certain legal entities, if insolvent, the Insolvency Law provides for a simplified procedure. Such procedure allows certain debtors to go bankrupt simultaneously with the opening of the insolvency procedure. Such is applicable only to the insolvent debtor listed hereunder: individual merchants; family associations; companies, provided that: (i) their patrimony comprises no assets; (ii) their constitutive or financial documents or the director cannot be found; and (iii) the premises cease to exist or to correspond to the address registered with the Trade Registry; companies which failed to provide in due time: (i) the complete list of their assets, including bank accounts; (ii) a list comprising details from public registers regarding secured assets; (iii) the list of creditors comprising the due amount and the preferred claims; and (iv) the list of current activities to continue during the surveillance period; companies liquidated prior to application of the insolvency procedure; and debtors demanding to be subjected directly to the bankruptcy procedure or debtors not entitled to a judicial reorganisation procedure. The judicial reorganisation applies to a debtor for the purpose of ensuring the payment of the debtors debts, according to a plan. Therefore the reorganisation procedure implies the approval, implementation and compliance with a reorganisation plan. The reorganisation plan may individually or separately refer to the: (i) operational and/or financial restructuring of the debtor; (ii) the corporate restructuring by way of changing the share capital structure of the debtor; or (iii) the decrease of the activity of the debtor by liquidation of assets included in the debtors patrimony. In case of non-compliance with the reorganisation plan, the judicial administrator, the creditors committee, a creditor, or the special administrator appointed within the reorganisation procedure, may apply with the syndic judge for the opening of the bankruptcy procedure. Bankruptcy is defined as the procedure to which a debtor is subject for liquidation of its patrimony and payment of its debts. Such liquidation is followed by the deletion of the debtor from the relevant register where it is recorded.
2.2 What are the tests for insolvency in Romania?
Romania
persons or institutions, as determined by law, within 30 days from the date of occurrence of the debtors insolvency. Moreover, in case of pending insolvency, debtors may also request commencement of the insolvency procedure. The petitions regarding the opening of insolvency procedures shall be signed by the person empowered to represent the company, based on the corporate statutes of the debtor. In the case of entities controlled and monitored by the National Securities Commission, such public institution is entitled to request commencement of the insolvency procedure for such companies. Furthermore, documents related to the patrimony of the debtor, its balance sheet, the debtors creditors, the current activities performed by the debtor, etc., shall be deposited with the Court as annexes to the insolvency petition. In case of non-delivery of all the aforementioned within 10 days from the filing of the insolvency petition with the competent Court, the syndic judge shall render a decision regarding the opening of a simplified insolvency procedure. The debtor shall bear patrimonial liability for the premature filing of insolvency petitions. The debtors who have been subject to a reorganisation procedure within the previous five years are not entitled to be subjected again to such procedure.
Romania
According to the Insolvency Law, if the insolvency petition meets the aforementioned conditions, the syndic judge shall issue a decision regarding the commencement of the common insolvency procedure. In case of failure to provide the Court with the information required by the Insolvency Law to open the general procedure, as well as if the debtor states its intent to perform a simplified procedure, the Court shall issue a decision regarding the commencement of a simplified insolvency procedure. In the case of a common procedure, the syndic judge shall appoint a judicial administrator, whereas a temporary liquidator shall be appointed in the case of a simplified procedure. Furthermore, the judicial administrator or the liquidator shall ensure the notification of the debtors creditors. After the opening of the insolvency procedure, all deeds and correspondence of the debtor, of the judicial administrator or the liquidator shall contain the annotation: in insolvency, in English, Romanian and French (Rom: in insolventa, French: en procedure collective).
According to the Insolvency Law, insolvency represents the condition of a debtors patrimony, characterised by insufficient funds to pay due debts. Such condition is presumed if several debts were not paid in 30 days as of the due date. Insolvency is imminent if proof is provided that the debtor will not be able to pay its debts upon their due date. Moreover, a creditor is entitled to file an insolvency petition, in case that the value of its claim amounts to RON 10,000 (approximately EUR 3,000), save for the claims arising from labour relationships which have to meet the threshold of at least six average salaries per national economy.
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According to the Insolvency Law, companies will be placed under insolvency procedures on grounds of the petitions filed with the competent Court by the debtor itself, by creditors or by any other
Upon the commencement of the insolvency procedures, the judicial administrator shall send a notification to the creditors mentioned in the list filed by the debtor when depositing the insolvency petition. In case of opposition by the creditors, the judicial administrator shall notice the debtor and the Trade Registry in this regard. Furthermore, if the debtor owns assets that require a special record with the competent authorities, the judicial administrator or the liquidator shall send a copy of the decision regarding the commencement of the insolvency procedure to the court and to other relevant authorities providing for performance of such registration. After receiving the abovementioned notice, the creditors shall deposit the petition for the approval of their claims. Such claims shall be recorded with a register maintained with the Court. The aforementioned claims shall be subject to examination as provided by the Insolvency Law and performed by the judicial administrator, except for the claims ascertained with an enforcement title. All claims recorded with the aforementioned
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register are presumed to be correct and valid, unless such are challenged by the debtor, the judicial administrator or by the creditors. After all claims are verified, the judicial administrator or the liquidator shall establish a preliminary panel with all the claims against the debtors patrimony. Such panel may be subject to the challenge of creditors, debtors and other interested third parties.
Romania
procedure, provided that all the legal requirements relating to set off operations are being met. Nevertheless, the creditor must have submitted, in accordance with the requirements of the notification received from the judicial administrator or liquidator, its request for admittance of its account receivable with the table of accounts receivable.
3 Creditors

According to Article 36 of the Insolvency Law, the opening of the insolvency procedure, as regards a debtor, triggers an automatic stay affecting all the judiciary and extra judiciary actions against such debtor or its assets, filed before the opening of the procedure, in order to recover the accounts receivable of the creditors. In order to render effective such provision, the court ruling initiating the insolvency procedure must be communicated to the courts having jurisdiction where the debtor has its registered office and to all the banks where the debtors hold bank accounts. As of the initiation of any insolvency procedure, the creditors are compelled to enforce their claims only within the frame of the respective insolvency procedure.
The automatic stay which occurs when an insolvency procedure is opened against a debtor also affects the petitions filed by secured creditors which are prevented to enforce their rights after the competent court approves a filing pertaining to the opening of an insolvency procedure. However, a creditor that has a claim secured by a mortgage, pledge or other right in rem may request that the court lift such stay. In order to lift the stay, where the value of the collateral of the right in rem has been appraised to be covered by the value of the claim secured by such object, the court must find that: the object of the right in rem is not vital to the success of the proposed reorganisation plan; and if the object of the right in rem is part of an operational process, its detachment and separate realisation will not devalue the remaining assets. The court may also lift the stay if it finds that the secured claim is not satisfactorily protected due to any of the following: the value of the object of the right in rem is under threat to depreciate; the claim may not be realised due to accrual of interest and penalties in relation to a higher-ranked claim; or the object of the right in rem is not insured against destruction or deterioration. Moreover, the debtor, the judicial administrator or the liquidator may not dispose in any way whatsoever of the collateral asset, insofar as the creditors account receivable is not entirely paid.
In compliance with Article 47 of the Insolvency Law, the opening of the insolvency procedure lifts the debtors right to administrate its business, meaning the debtor is no longer able to manage its activity and to manage or dispose of its assets. Such lifting extends over the assets that could be obtained by the debtor after the date of the opening of the procedure. However, the debtors administration right is not lifted provided that he opts to enter into the judicial reorganisation procedure, according to Article 28 paragraph 1, letter h) or Article 33, paragraph 6. Nonetheless, absent a viable reorganisation plan and subject to continuous losses, the creditors, the creditors committee or the judicial administrator may file a petition with the syndic judge demanding the lifting of the debtors administration right. The Insolvency Law provides for a supervision period, between the opening of the judicial reorganisation procedure and either the confirmation of the reorganisation plan or the initiation of bankruptcy. Within such period, the debtor is allowed to continue the current activity and to perform payments to usual customers. In any case, the debtors administration right is lifted de jure, once the bankruptcy procedure is opened. In such case, only winding-up necessary activities are allowed to be performed by the debtor. The banks where the debtor has accounts are notified not to dispose of available funds absent order from the judicial administrator or the liquidator.
According to the Insolvency Law, all the procedures mentioned thereto, including the notification and communication of the procedural deed made by the judicial administrator/liquidator, are financed out of the debtors patrimony. The available funds are deposited into a special bank account. Such amounts are deemed as liquidation expenses and are included in the creditors disbursement plan. Provided that no funds of the debtor are available for the legal insolvency procedures, the necessary payments shall be forwarded out of a special liquidation fund. According to the Insolvency Law, such liquidation fund shall be supplied out of the registration taxes owed to the Trade Registry Offices and by other public registries (such as the registries for agricultural companies and/or associations/foundations).
The Insolvency Law expressly provides in Article 52 that the opening of the insolvency procedure does not hinder the creditors rights to invoke set off of their accounts receivables against the sums owned by them to the company subject to the insolvency
Provided that the simplified procedure or the bankruptcy procedure is initiated against a company, the liquidator shall immediately proceed to the termination of the individual labour agreement of the companys personnel. In such case there is no need to follow the collective dismissal procedure provided by the Romanian Labour Code. However, the legal 15 days prior notice must be granted to such personnel.

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5 Claims
5.1
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In order to comply with the European Union legislation, Romania has adopted on May 25, 2006 Law No. 200/2006 on the guarantee fund for the payment of salary receivables. Such law entered into force on January 1, 2007 and implements into the domestic law the Councils Decision No. 80/98/EEC regarding the approximation of laws of Member States relating to the protection of the employees in case of insolvency of their employer. Accordingly, the employers have the obligation to contribute monthly to the guarantee fund with an amount equal to 0.25% of the total fund of the gross monthly salaries of their employees. The purpose of the guarantee fund is to protect the employees against losses they may incur in case their employers are subject to an insolvency procedure. However, Law No. 200/2006 provides for a limitation of the amount of the salary receivables that may be paid from such fund, which may not exceed three average gross salaries per economy for each employee. If the activity of the employer returns to normal and the insolvency procedure is closed, the employers have to reimburse the amounts paid from the guarantee fund within a term of six months as of the issuance of the ruling attesting to the closing of such procedure. The guarantee fund provides for the payment of the following outstanding amounts to the employees, upon the request of the administrator/liquidator of the insolvent employer: (i) outstanding salaries; (ii) compensations due by employers for the leave that was not taken by employees, but only for a maximum of one year of work; (iii) compensatory payments, in case of termination of the labour agreement, in the amount established by the collective and/or individual labour agreement; (iv) compensations due by employers in case of work accidents or professional diseases; and (v) indemnities due by employers for the temporary cessation of their activity. However, such amounts shall be paid only for a term of three months.
Broadly, how do creditors claim amounts owed to them in each procedure?
Romania
Pursuant to Article 86 of the Insolvency Law, in order to maximise the level of the debtors patrimony, the judicial administrator or the liquidator may maintain or terminate any contract, ongoing leases, or other long-term contracts, provided that such contracts have not been totally or substantially performed. For such purposes, the contractors shall notify the judicial administrator or the liquidator as regards its intent. The answer is to be granted in 30 days. Should this term be exceeded, the judicial administrator/liquidator may no longer maintain the contract, which in this case is considered terminated. However, any contractor which incurred damage upon such termination may file a legal action for damages, against the debtor. Provided that a seller of an immovable asset has withheld the ownership right until the performance of the entire payment, once the insolvency procedure is being opened, the sale is deemed as effective and the provisions from the above paragraph as not applicable. In case of movable assets sold to the debtor, if such assets are not in the debtors possession and have not yet been paid by the debtor when the insolvency procedure is commenced, the seller is free to retrieve the assets. However, if the seller agrees the assets to be delivered, it must register its claim on the panel. In case the judicial administrator or the liquidator maintains a contract that is performed by periodical payments, it will not have to perform any outstanding payments. For such amounts, the contractor shall turn against the debtor.
According to the Insolvency Law, the judicial administrator must give notice to all the creditors as regards the opening of the insolvency proceedings, the last day of filing claims and the procedure which has to be followed for filing the claims. Such notice is also published with the Bulletin of Insolvency Procedures. The creditors must file a petition regarding the acceptance of the claims against the debtor respecting the time bar set forth in the court ruling which opened the insolvency procedure. Such petition broadly comprises the name of the creditor, the domicile/registered office, the claimed amount, the grounds of the claim as well as the collateral securing the claims, if any. Justifying documents for the account receivables for the securities must also be filed. The claims in connection with salary rights are enlisted according to the available payrolls. The claims not yet matured or under condition at the procedure opening date shall be temporarily enlisted at the creditors claims panel. Save for unchallenged budgetary accounts receivable, all the other accounts receivable are subject to a verifying procedure. As a rule, all the forwarded accounts receivable are presumed to be valid and accurate absent a challenge by the debtor, the judicial administrator or the creditors. All the accounts receivable expressed in foreign currency are conversed and registered in RON at the exchange rate available at the date of opening of the procedure. Upon termination of the claims verifying procedures, the judicial administrator or the liquidator shall register with the competent court, a preliminary panel comprising all the claims against the debtors patrimony. Such panel also indicates the nature of each claim: unsecured; secured; under condition, etc. Such preliminary panel is subject to challenging originating from the debtor, the creditors or any other interested party. Once all such challenges are solved by the syndic judge, the judicial administrator/liquidator draws up the final panel.
Secured claims have in any case priority in relation with their collateral asset. Under Article 121 paragraph 1 of the Insolvency Law, the funds obtained from the sale of any collateral assets shall be first distributed to the respective secured creditors. Moreover, according to Article 121 paragraph 3, a secured creditor is entitled to participate at any disbursements performed prior to the sale of its collateral asset. Such amounts shall be deduced from the price obtained from the subsequent sale of the collateral asset, if necessary to prevent the creditor to collect more than its account receivable. Article 123 of the Insolvency Law institutes the following distribution priority, in case of a debtor winding-up: (i) taxes and any other procedural expenses; (ii) accounts receivable derived from labour relationships; (iii) accounts receivable derived from credits, including interests and related expenses, granted by credit institutions after the opening of the insolvency procedure, as well as deriving from the activity of the debtor further to the opening of the insolvency procedure; (iv) budgetary accounts receivable; (v) accounts receivable deriving out of life support obligations, child support or any other amounts necessary for subsistence means; (vi) amounts necessary for support of the individual debtor and his/her family; (vii) accounts receivable deriving from a) banking credit,
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including interest and afferent expenses, b) product delivery and c) rent; (viii) other unsecured accounts receivable; and (ix) subordinated accounts receivable, respecting the following order: a) amounts borrowed to the debtor by a shareholder holding at least 10% of the share capital; and b) accounts receivable deriving from free of charge deeds.
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his debts according to the payment schedule of claims. The reorganisation procedure implies the preparation, approval, implementation and observance of a plan, called reorganisation plan, which may provide, as a whole or separately, for: a) b) c) operational and/or financial restructuring of the debtor;
limitation of activity by liquidation of certain assets from the debtors estate.
Regardless of the insolvency procedures being initiated, all debtors are subject to the laws applicable to their business enterprises, including the tax laws. In any case, the tax and levies may be mitigated by taking advantage of the wide operational losses.
The conventional restructuring of the activity is defined only in direct connection with the labour legal provisions. The law does not indicate specific conditions in order to enter in this procedure.

The cramming down of creditors appears when a class of creditors accepts a reorganisation plan. Each claim gives the right to one vote, within the class where the claim belongs. According to the Insolvency Law, there are four classes of claims: (i) secured claims; (ii) budgetary claims; (iii) unsecured claims of the essential creditors for the activity of the debtor; and (iv) other unsecured claims. A plan is deemed as accepted by a class of claims once the plan is voted with an absolute majority by the creditors holding claims in such class. A plan is confirmed by the delegate judge if three out of the four classes previously mentioned have accepted the plan, provided that at least one disfavoured class votes the plan. However, in order for the delegate judge to confirm the plan, each disfavoured class must be subjected to an equitable and correct treatment, comprising, inter alia that: (i) none of the classes/claims rejecting the plan receives less than they would in case of liquidation; and (ii) none of the classes/claims receives more than the total value of the account receivable.
The Reorganisation process is part of the insolvency procedure being a first step towards the intention to save the economic activity. The Romanian Law allows the debtor, or the syndic judge to propose a reorganisation plan in order to increase the chances of saving the company.
The Romanian law does not allow a pre-packaged sale. Such a procedure could be considered to be used in the fraud of the creditors.
8 International
8.1 What would be the approach in Romania to recognising a procedure started in another jurisdiction?
In each stage of each procedure provided by the Insolvency Law, the syndic judge may pass a ruling ending the procedure and deleting the debtor from the registry where it is registered, provided that there are insufficient assets or no assets at all to cover the expenses incurred during each procedure, and no creditor forwards such amounts. The reorganisation procedure or liquidation procedure according to a plan may be closed by a ruling of the syndic judge based on fulfilment of the entire payment obligations undertaken in the plan. A bankruptcy procedure is closed by the syndic judge upon approval of the final report provided that all the available fund and assets have been distributed to the creditors and the unclaimed fund have been deposited in a bank account.

7.1 Is it common to achieve a restructuring outside a formal procedure in Romania? In what circumstances might this be possible?
According to the Romanian legislation Judicial reorganisation is the procedure applied to the debtor as legal person, in order to pay
Such matter is currently regulated by Law No. 637/2002 regarding the regulation of private international law relationships in the field of insolvency. The Law is structured by two titles. The first title represents the enactment of the UNCITRAL Model Law on Cross Border Insolvency, applicable to the relationships with all foreign states, except for the Member States of the European Union. According to such title, a representative of a foreign procedure has active capacity to stand trial in order to apply to the Romanian courts for recognition of the foreign procedure in which it has been appointed. The foreign representative must provide a statement regarding all the foreign procedures opened as to its knowledge against the debtor. The court needs to be aware of all the other foreign procedures in order to render the recognition decision and, particularly, for any type of relief that it has been requested to render. Such relief has to be consistent with other simultaneous insolvency procedures regarding the same debtor. The court may resolve upon the recognition of the foreign procedure only if the summoning procedure is legally fulfilled. Such recognition comprises mandatory relief measures and even triggers an automatic stay. However, in those situations where the recognition of a foreign procedure would run counter to Romanian principles of public order, the petition for recognition may be dismissed. The second title of the Law is transposing European Council Regulation No. 1346/2000 on insolvency procedures in the frame of domestic legislation, and applies only to the relationships with EU Member States. However, considering Romanias accession to the EU, the Regulation is currently directly applicable to Romania. The

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corporate restructuring by modification of the structure of the share capital; and/or
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principle that stands at the basis of the intra European Union insolvency relationships is that any court resolution for the commencement of an insolvency procedure rendered by the competent court of an EU Member State is directly recognised in all the other Member States if the resolution becomes effective in the
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state where it was rendered. Moreover, the court ruling which opens an insolvency procedure in an EU Member State produces the same effects in any other Member State as if under the law of the state of commencement, without any prior formalities.
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Dr. Ciprian Paun

Pachiu & Associates 15 Emil Isac Street, Suite No. 5 400023, Cluj-Napoca, Cluj County Romania
Silviu Predescu
Pachiu & Associates 15 Emil Isac Street, Suite No. 5 400023, Cluj-Napoca, Cluj County Romania
Tel/Fax: +40 364 100 762 Email: ciprian.paun@pachiu.com URL: www.pachiu.com
Tel/Fax: +40 364 100 762 Email: silviu.predescu@pachiu.com URL: www.pachiu.com
Ciprian graduated the Law School of Babes-Bolyai University from Cluj-Napoca in 2001. He is a graduate of the LLM programme of the Law School of the Westflische Wilhelms-Universitt, Mnster, Germany and is a Ph.D in Comparative Civil Law at the Law School of Babes-Bolyai University. Ciprian also served as a teacher with the Faculty of Economics and Business Administration of Cluj-Napoca University. Ciprian is a senior member of the Cluj Bar Association and a member of the National Romanian Bars Association. Ciprian has extensive experience in assisting Austrian and German investors in Romania. His expertise covers government and regulatory law, corporate law, commercial law, and real estate matters. He is also a regular contributor to several reviews and legal publications. Ciprian is fluent in Romanian, English and German and conversant in French.
Silviu graduated the Law School of Babes-Bolyai University from Cluj-Napoca in 2001. He is also a postgraduate in criminal law of the Law School of Babes-Bolyai University. Silviu is a senior member of the Cluj Bar Association and a member of the National Romanian Bars Association. Silviu currently heads our Cluj-Napoca branch office and provides legal advice in matters related to corporate law, real estate law, and commercial contracts. Silviu is fluent in Romanian, English and German.
Pachiu & Associates is a Bucharest-based business law firm established by Romanian attorneys. The firm currently consists of 24 lawyers plus additional staff comprising paralegals, authorised translators and supportive staff. The lawyers of the firm are all graduates of leading universities in Romania or abroad. More than half of the lawyers are senior members of the Bucharest Bar Association. All lawyers are fluent in Romanian and English, and some are fluent in German, French, Spanish or Hungarian. The Firm provides for a full range of commercial and corporate legal advice from its main office in Bucharest and its secondary office in Cluj-Napoca (west of Romania). The Firm has extensive expertise in matters related to corporate governance, corporate disputes, securities, mergers and acquisitions, insolvency, commercial contracts, offshore and tax structures, labour law, real estate, anti-trust law, intellectual property, banking and project financing, secured transactions, cross-border transactions, public acquisitions, procurement, and litigation. Apart from its consistent mergers & acquisitions and cross-border transactions practice, the firm has developed a strong practice in tax, securitisation and real estate, construction, labour and intellectual property. Any type of transaction is always duly considered from a tax point of view. The firm maintains a close relationship with some leading multinational law firms and other small and medium-sized law firms from abroad, so as to ensure efficient liaison with important foreign business centers and jurisdictions.
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Chapter 35
Russia
Clifford Chance CIS Limited
Logan Wright
Ivan Marisin

1.1 How does a creditor take security over assets in Russia?
otherwise provided in the guarantee. The bank gets its fee for the guarantee. Companies or individuals (as well as banks) can enter into suretyship agreements. A suretyship must be executed in writing by both parties and must contain a description of the underlying obligation. If the secured obligation is amended without the consent of the surety and such amendments increase the liability or create other unfavourable consequences for the surety, the suretyship terminates. A suretyship can also terminate if, during the term stipulated in the suretyship, the creditor does not bring an action in court against the surety. If a term is not provided in the suretyship, it terminates if the creditor fails to bring an action against the surety within one year from the date when the secured obligations become due. Factoring As a form of security, only an assignment by way of factoring arrangements (financing against assignment of a monetary claim) is expressly recognised. Such assignment allows the assignee to receive the proceeds under the assigned claim straight from the debtor under the claim. However, it can only be used in rather limited cases. It is not clear whether a general assignment can be used as security. Only outright assignment is expressly permitted by law. There are also issues with assignability of rights in general.
There are five types of security expressly referred to in the Russian Civil Code: (i) (ii) (iii) (iv) (v) (vi) bank guarantee; suretyship; pledge or mortgage; possessory lien; security deposit; and financing against assignment of a monetary claim (factoring).
Of the listed types of security, only the pledge or mortgage allows the creation of a security interest in an asset, and affords a lender the status of a secured creditor in the insolvency of the pledgor. Possessory liens and security deposits are not generally used for cross-border deals. Russian security (save for the bank guarantee) is accessory in nature, meaning that its existence depends upon the existence of the secured obligation. If the secured obligation terminates, or is invalid, the security is ineffective. Pledge or Mortgage A pledge (zalog) can be created by contract over almost any asset, incl. property and contractual rights. Certain property (e.g., goods of strategic importance, child support payments) and rights which may not be assigned as a matter of law (e.g., rights granted under a licence) cannot be the subject of a pledge. A mortgage (ipoteka) is a type of pledge creating security over real estate, aircraft and ships. A pledge is not possessory, unless the pledge agreement states otherwise. A creditor has certain rights in respect of the pledged assets, the most important of which is the right to sell the asset or acquire such assets and set-of the purchase price to meet a defaulted obligation. It can be granted by the debtor of the secured obligation or by a third party to secure the debtors obligations. A mortgage (and pledge of inventories) is not possesory due to its nature. A mortgage can be created by contract or by operation of law. A building or construction must be mortgaged with the land plot (or the mortgagors lease rights to the land plot) underneath it. Guarantee and Suretyship Only banks can provide guarantees. A guarantee is independent from the underlying contract and may not be revoked unless
The administrator or liquidator (and in certain cases a creditor) may challenge certain types of transactions of the company entered into within specified periods before or during its insolvency. In particular the administrator or liquidator may: (i) (ii) petition the court to declare certain transactions invalid (voidable transactions); or order the application of the rules on void transactions (including those in breach of the Insolvency Law).
Voidable transactions may be challenged within one year from the date on which a claimant knew or should have known of the circumstances underlying the grounds for invalidation. The limitation period for void transactions is three years from the date that performance started. There is also a number of specific grounds on which an external administrator or liquidator may challenge transactions entered into before or after commencement of bankruptcy proceedings. The following transactions can be set aside under Russian

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Insolvency Law: Transactions with interested persons. The court may declare invalid a transaction entered into by a company with an interested person if following the performance of that transaction the companys creditors or the company itself suffered or could suffer losses. There is no vulnerable period for such transactions. Transactions may be challenged within the oneyear limitation period applicable to voidable transactions. The following persons are considered as interested: (i) (ii) a companys parent or subsidiary company (based on criteria provided by law); a companys senior officers (including those relieved from their duties within three years before commencement of bankruptcy proceedings) and employees; other persons defined as interested by other Russian Federal Laws; and relatives of the above individuals. (3) (ii) (2)
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before such transaction is concluded); vulnerability periods differ according to the criteria on the basis of which a transaction is challenged. A concept of suspicious transactions is introduced providing the following grounds for challenge: (i) inadequate consideration (that is, transactions at an undervalue or transactions under the terms and conditions substantially unfavorable for the debtor compared to similar transactions concluded under the normal business terms); transactions concluded one year before or any time after the acceptance by the court of a bankruptcy petition are vulnerable; and intent to prejudice the property rights of creditors; transactions concluded three years before or any time after the acceptance of a bankruptcy petition are vulnerable. an interested person for the purposes of challenging (x) suspicious transactions with an intent to prejudice the property rights of creditors and (y) transactions entailing preferential satisfaction; and a controlling person for the purposes of vicarious liability of the debtors shareholders, directors and other persons that can give mandatory instructions to the debtor.
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(iii) (iv)
The criteria for determining the following are revised: (i)
Transactions entailing preferences. The court may declare a transaction invalid if the entry into or performance of it results in the preferential satisfaction of claims of a creditor (creditors) over those of other creditors. A creditor may also challenge such transaction. The vulnerable period is six months before the filing of a bankruptcy petition. Transactions entered into or performed after the acceptance by the court of a bankruptcy petition are also vulnerable. Transactions may be challenged within the one-year limitation period applicable to voidable transactions. Withdrawal from the company. A transaction of a participant withdrawing from a limited liability company involving payment to it of its participation may be declared invalid by a court on request of an administrator, liquidator or a creditor, if the performance of that transaction breaches the rights and legal interests of creditors. The vulnerable period is six months before the filing of a bankruptcy petition. Similar transactions performed after the acceptance by the court of a bankruptcy petition are void. Amendments. On 28 April 2009 the Russian President signed into law the Federal Law No. 73-FZ On Making Amendments to Certain Legislative Acts of the Russian Federation (the Amendments) according to which, among other things, certain amendments to the Russian Insolvency Law concerning (x) challenging transactions in a companys bankruptcy and (y) further development of a concept of liability of controlling persons were introduced. The Amendments will become effective within 30 days of the date of their official publication, i.e. on 4 June 2009, and the new provisions on challenging transactions will apply to bankruptcy proceedings initiated before the date the Amendments have come into effect, but in relation to the transactions concluded after such date. As a result, both old and new provisions on challenging transactions in a companys bankruptcy may apply during a certain transition period that may create practical issues to be resolved when they come for consideration before the courts. The challenge of transactions effectuated after the Amendments have come into force will be facilitated by the following new rules: (1) A concept of transactions entailing preferential satisfaction is developed by introduction of detailed criteria to determine whether a transaction gives preferences (among such transactions is granting a security for debtors or third partys obligations to certain creditors when such obligations have arisen before granting of such security or a transaction which results or may result in the change of the order of priority for satisfaction of those creditors claims which have arisen (ii)
1.3
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Russia?
Liabilities of controlling persons (incl. directors), shareholders and parent companies of a company (including in the case of that companys insolvency) are regulated by a number of Russian laws. Depending on the type of action and its gravity a director may be subject to civil, administrative or criminal liability as well as disqualification. Civil Liability As a general principle directors must act in good faith and reasonably in the best interests of the company. Unless otherwise provided by law or by specific agreement directors have an obligation to compensate in full the losses caused by them to the company including in the case of the breach of the Insolvency Law. Directors are jointly and severally liable to the company for damages incurred by the company due to their improper actions or inaction for which they are at fault (with the exception of those members of the board of directors who voted against the resolution that caused damages to the company). For a director to be liable, damages must be incurred by the company as a result of the directors failure to act reasonably and in good faith. At the same time, Russian law does not provide for direct liability of directors for undervalue transactions and preferences. However, certain transactions entailing preferences and suspicious transactions introduced by the Amendments may be challenged and according to the Amendments directors may arguably bear liability as a controlling person subject to satisfaction of relevant tests. With respect to bankruptcy proceedings initiated before the Amendments have come into force, in the event of the companys bankruptcy, resulting from the actions of a controlling person, such persons can bear subsidiary liability for the obligations of that company in the event such company has insufficient assets. The Amendments further develop the principles of vicarious liability of controlling persons by replacing a test referring to the companys bankruptcy resulting from controlling persons actions by a new one
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2 Formal Procedures
2.1
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referring to the injury inflicted upon the property rights of creditors, resulting from the performance by a company of instructions of a controlling person. The Amendments have also extended definition of controlling persons to cover any persons that within two years prior to the acceptance by the court of a bankruptcy petition can or could give mandatory instructions to, or otherwise determine the actions of, an insolvent company, and the actions of directors arguably may also fall within such definition. The new liability provisions will apply in bankruptcy proceedings initiated after the Amendments have come into effect. Directors in a joint stock company are liable only if they have used their controlling rights with intent that the company takes an action, knowing in advance that such action would result in its bankruptcy. In addition, the chief executive officer is obliged in certain cases to file for the companys bankruptcy. Failure to do so may result in secondary liability of the chief executive officer for new debts arising after the date when the petition should have been filed and potentially for all unsatisfied financial obligations. According to the Amendments the director will bear vicarious liability for the companys obligations if on the date of commencement of supervision or declaring a company bankrupt, certain obligatory accounting reports or documents are absent or lack certain compulsory information or contain misstatements. Criminal Liability As a general rule, a director of a company who uses his/her position in violation of the law and against the interests of the company and causes damage to the company faces liability ranging from a fine to an imprisonment. If such actions damaged only the interests of that company (and the company is not a state-owned enterprise), only that company may initiate prosecution of that director. The Criminal Code imposes criminal liability for the actions in anticipation of bankruptcy as well as for the actions taken during bankruptcy of a company, this includes: (a) deliberate bankruptcy; (b) fraudulent bankruptcy; and (c) unlawful actions during bankruptcy. In relation to unlawful actions during bankruptcy, a director of the company can be criminally liable if there is: (i) unlawful satisfaction of a claim; (ii) detriment to other creditors in the form of substantial damage; and (iii) presence of signs of the debtors bankruptcy. The above criminal offences are subject to a fine, public or correctional works, retention or imprisonment and a fine. For such actions to constitute a crime substantial damage must be caused and in certain cases there must be a direct intent in committing such offence. Where no substantial damage is caused, the director is subject to certain administrative fines. Disqualification Apart from personal liability a court may disqualify a director. Disqualification includes depriving an individual of the right to occupy any management position in the executive body of a legal entity, to sit on the board of directors or management (supervisory) board and to engage in any business activity involving the management of a legal entity. At the moment, the term of disqualification varies from six months to three years. Notes on all disqualified persons are entered in a special register. Legal entities are obliged, before hiring a director, to verify with the body responsible for keeping that register that the candidate has not been disqualified.
What are the main types of formal procedures available for companies in financial difficulties in Russia?
When the company is in financial difficulties there are five formal procedures which may apply: (i) Supervision - aimed at conducting a financial audit of a company to determine whether the company is likely to become solvent and preserving the companys assets, restricted capacity of directors. Financial rehabilitation - aimed at restoring the companys solvency and satisfaction of creditors claims according to a debt repayment schedule drawn, significantly restricted directors capacity. External administration - aimed at restoring the companys solvency, management power is vested in the external administrator. Liquidation - there are two types of liquidation: compulsory and voluntary, in general terms, the former applies to insolvent companies, and the latter - to solvent companies. Voluntary arrangement - aimed at terminating the bankruptcy proceedings; an amicable settlement between the company and its creditors, may be entered at any stage.
What are the tests for insolvency in Russia?
(ii)
(iii)
(iv)
(v)
2.2
Russian law does not have a sole test for insolvency. Generally, to commence proceedings, the unpaid debt should in aggregate equal or exceed 100,000 roubles and be overdue by at least 3 months.
Supervision This is an obligatory initial bankruptcy procedure commenced by the court upon bankruptcy petition after it determines such petition to be well founded. It can last up to 7 months, at which point generally either no bankruptcy procedures are commenced or the court takes a decision, generally on the recommendation of the initial creditors meeting, to commence one of the other stages described below. Financial rehabilitation This procedure commenced by the court on the basis of a decision of the initial creditors meeting held during supervision as a result of a proposal from the company or a third party or, in the absence of such decision, on the companys shareholders or third parties request to the bankruptcy court subject to certain conditions. It can last no longer than 2 years. It may terminate early, and the court will commence external administration or liquidation (if there are no grounds for instituting financial rehabilitation and there is evidence of bankruptcy) on the petition of the creditors meeting following: a failure to provide the required security for financial rehabilitation within 15 days after commencement of financial rehabilitation; or repeated or material default in scheduled payments (for more than 15 days).

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Before any insolvency proceedings are commenced there may be a restoration of debtors solvency - measures taken by shareholders, third parties and, in certain cases, creditors to restore the companys solvency, including provision of additional funds.

External administration External administration commences if there is a real possibility of restoring the companys solvency within the set time limits, provided that not more than 18 months have passed since the commencement of financial rehabilitation. It can be extended by a further 6-month period on the petition of the majority creditors voting. It may be terminated early if all registered creditors claims are settled. Where the creditors meeting fails to take certain steps with respect to the report prepared by the external administrator or rejects the report and petitions for liquidation the company shall enter into liquidation. Liquidation Liquidation commences by the court on declaring the company bankrupt where substantive tests are met. Liquidation lasts for six months, subject to a potential extension for up to six months. It may be terminated if, prior to its conclusion, all creditors claims are satisfied by the debtors shareholders or third parties, or the court approves a voluntary arrangement. Voluntary arrangement The creditors meeting can petition for voluntary arrangement at any bankruptcy stage. This requires the unanimous consent of those creditors whose claims are secured by pledge or mortgage. It must be approved by the bankruptcy court. The court may approve it only on unsecured claims of the first and second priority creditors and current claims being satisfied.
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administrator. After the external administration, the company enters into liquidation. Liquidation Liquidation is commenced by a court ruling when substantive tests are met and involves the appointment by the court of a liquidator to realise the companys assets and satisfy its debts in accordance with the statutory order of priority. Voluntary arrangement A voluntary arrangement may be initiated during any bankruptcy procedure by a companys directors (during supervision and financial rehabilitation) or, if the company is under external administration or liquidation, by the companys external administrator or liquidator. It may be also commenced by the creditors meeting. If new bankruptcy proceedings are subsequently brought against the company, the creditors that entered into the amicable settlement will have the right to claim only in the amount provided for under the settlement.
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Notifications As a general rule: prior to filing a bankruptcy petition, the CEO of the company should notify the shareholders of the financial difficulties. Other persons that may file for the companys bankruptcy are not obliged to notify third parties and the company; the relevant administrator should notify publicly of the commencement of each bankruptcy procedure. the CEO should notify the employees and shareholders of the commencement of supervision and other procedures and creditors should copy their claims filed with the court and the relevant administrator to the company. Meetings To become a registered creditor upon the implementation of supervision the creditor has 30 days to file its claim. Those creditors who have filed their claims during supervision period participate in the initial creditors meeting that takes place during supervision and all subsequent creditors meetings. A creditor that has filed its claims thereafter may participate in the creditors meetings taking place within the relevant bankruptcy procedure succeeding the procedure during which that creditor filed its claim. If the number of creditors is more than 50, a creditors committee representing interests of the creditors may be elected. For the voluntary arrangement a unanimous consent of all registered secured creditors is required at a relevant creditors meeting. Publications The relevant administrator publishes notifications on implementation of each bankruptcy procedure in the official Russian publication (currently, Kommersant newspaper) and on such publications web page.
Supervision The company, its chief executive officer (CEO), an authorised government agency or a creditor can (and in certain cases, must) file a bankruptcy petition to the court. The court may commence supervision if the claim is well-founded. After the commencement of supervision the court appoints an interim administrator whose primary aim is to preserve the companys assets while assessing its financial condition, including initial registration of creditor claims. During supervision, the companys management remains in place (with restricted capacity). The initial creditors meeting is conducted, that should take a decision (amongst other things) on what would be the next step for the company. Financial rehabilitation The financial rehabilitation is commenced by the court ruling on the basis of a decision of the initial creditors meeting as a result of a proposal from the company or a third party or on the shareholders or third parties request to the court. A repayment schedule is drawn up providing for satisfaction of all registered claims. A financial rehabilitation plan is also drawn if no security is provided for the performance of the debtors obligations in accordance with the repayment schedule. If successful, the company emerges from the insolvency proceedings and if not, the court will move to liquidation unless there are grounds to move to external administration. A temporary administrator supervises the implementation of the plan but again, the companys management remains in place (although their capacity is more restricted than at the supervision stage). External administration The court commences the external administration and on the basis of a decision of the creditors meeting and appoints an external administrator. Such administrator collects in debt, inventors assets and prepares a plan for restoring solvency. The companys management is removed and management power is vested in the
3.1
3 Creditors
The enforcement of unsecured creditors rights is subject to the following limitations:
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Supervision On commencement of supervision creditors claims which have been or are due on or before the date of supervision are dealt with in accordance with the procedure prescribed by the Insolvency Law; enforcement against the companys assets are suspended (except where enforcement is sought under enforcement orders on employment claims, claims for harm inflicted to health or life, claims for moral damages and some other claims) as are debt recovery proceedings against the company, the latter upon a creditors petition. In addition, set-off that breaks the statutory order of priority is prohibited and payment of dividends and other distribution of profit is prohibited and these prohibitions are extended to all other stages of bankruptcy. Discharge of current claims is allowed during each procedure. Financial rehabilitation On commencement of financial rehabilitation the limitations indicated above remain. In addition, settlement arrangements and other discharge of the companys monetary obligations in breach of the statutory order of priority or if such discharge results in preferential satisfaction are prohibited and any measures taken previously during the bankruptcy procedures to secure claims against the company are revoked. External administration During the external administration certain of the above limitations are retained. In addition, a moratorium is imposed on the settlement of creditors claims; any restrictions on the disposal by the debtor of its property can only be imposed within the ambit of the bankruptcy procedures (save for restriction imposed on the debtors property for the satisfaction of current claims); no penalty shall be accrued for a default on or improper performance of monetary obligations and mandatory payments (except for current claims). Liquidation Upon liquidation all monetary obligations and mandatory payments incurred by the company before liquidation become due (automatically accelerated) and certain limitations previously applied remain. In addition, creditors claims (except for certain current claims) may be presented only in the course of liquidation and are performed in accordance with the statutory order of priority. Voluntary arrangement A voluntary arrangement binds the company, the creditors (irrespective of whether they voted against such arrangement or did not vote) and third parties that intend to discharge the companys debts (which may also be parties to such arrangement and acquire the rights and assume obligations hereunder). From the date of its approval, the company or third parties start settlements with creditors.
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statutory order of priority of satisfaction of creditors claims, in practice no set-off is possible against the companys obligations at any bankruptcy stage.

Supervision Commencement of supervision does not entail replacement of management of a company, but the exercise of its powers is subject to the interim administrators consent with respect to certain transactions. The management cannot take decisions associated with corporate reorganisation. Any distribution of profit to shareholders, payment of dividends under any securities or other security interest is prohibited. This prohibition extends to all other stages. An interim administrator (and in certain cases other third parties) may petition the court to remove the CEO for breach of the Insolvency Law at any stage. Financial rehabilitation Once financial rehabilitation commences, the companys management (including the CEO) continue to run the company, subject to consent of a creditors meeting for certain transactions. External administration On commencement of external administration, the powers of the debtors CEO are terminated and his management power is vested in the external administrator. The debtors directors may continue to make decisions in relation to limited matters specified by law, including increasing capital and entry into agreements with third parties on provision of funds to fulfil companys obligations. Liquidation On commencement of liquidation, the remaining powers of the companys management bodies are terminated (with few exceptions), and assumed by the liquidator. Claims of shareholders are satisfied upon all claims of the creditors are discharged as a result of liquidation of the company. Voluntary arrangement Once the court approves an amicable settlement, the powers of an administrator or liquidator end. The person acting as an administrator or liquidator continues to act as the CEO of the company until the appointment of a new one.
There is a general moratorium on enforcement at the supervision stage. During financial rehabilitation and external administration secured creditors can enforce their pledges or mortgages over the companys property through the bankruptcy court, unless the company proves that such enforcement will make it impossible to restore the companys ability to pay its debts. Otherwise the security is enforced during liquidation.
The Insolvency Law does not provide a specific description of the ways the bankruptcy procedures may be financed. A full review of the ways in which the procedures are financed are outside the scope of a general overview. Such financing is subject to general limitations established by the Insolvency Law with respect to debtors transactions.
The implementation of the initial bankruptcy procedures does not necessarily affect the companys employees. If the bankruptcy petition is filed by CEO of the debtor it should contain, amongst other things, the figure indicating the amount of
Although set-off is expressly prohibited where it breaches the

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debts owed as wages/salaries and severance benefits payable to the debtors employees. Upon implementation of supervision steps to enforce against the debtors property are suspended except where enforcement is sought under enforcement orders on employment claims, claims for harm inflicted to health or life, claims for moral damages and some other claims. The same rule applies during financial rehabilitation and external administration. At the liquidation stage the liquidator has the right to dismiss the companys employees and all employees claims are satisfied in the second order of statutory priority of satisfaction of claims. The sums payable to the employees at liquidation should include a default interest and other payments specified by the labour legislation. Administration fees allocated for wages of the employees that are involved by the administrator for the purposes of each bankruptcy procedure are regarded as current claims and should be discharged ahead of the statutory order of priority during the procedure within which they have been incurred.
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dispose of the debtors assets in accordance with the external administration plan; and during the three-month period after commencement of external administration, rescind executory contracts if their performance impedes restoration of the debtors solvency or results in losses when compared to similar transactions. Furthermore (i) transactions significant in size or benefiting an interested person (such as a shareholder or director) and therefore requiring general corporate approval are subject to creditors meeting (committee) approval and (ii) transactions entailing the disposal or acquisition of shares in other companies or settlement of trust which fall outside an external administration plan must be agreed with the creditors meeting (committee). Liquidation In liquidation the liquidators has the right to rescind executory contracts if their performance impedes restoration of the debtors solvency or results in losses when compared to similar transactions, unless circumstances exist that prevent the debtor being restored to solvency. Voluntary arrangement If the voluntary arrangement is approved, it terminates the relevant stage of bankruptcy proceedings and the company starts settlements with creditors pursuant to the term of the arrangement. No contracts are terminated at this stage unless the new bankruptcy proceedings are initiated.
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As a general rule the commencement of a particular bankruptcy procedure is not itself grounds for terminating companys transactions or suspending its business. However the administrator has the right to petition the court to invalidate any transaction at any bankruptcy stage. The company may also and in certain cases must refrain from entering into certain transactions. Supervision In addition to having the power to consent to or veto the transactions described below, the interim administrator may, amongst other things: petition the court to declare any transactions invalid; and seek injunctions to preserve the debtors assets. During supervision directors may enter into transactions subject to the supervision of the interim administrator (for transactions over a specified value or related to granting or receiving loans, guarantees or similar instruments). In addition, the management has no authority to take decisions in relation to matters such as corporate reorganisation and paying dividends. Financial rehabilitation During financial rehabilitation restrictions similar to those introduced during supervision apply. In addition, consent of a creditors meeting or in certain cases the administrator, is required for the transactions, amongst other things: involving the companys interest; exceeding a specified value (including companys indebtedness increase for more than 5% of the amount of the registered creditors claims); involving granting or receiving loans, guarantees or similar instruments; assuming new obligations, if the amount of obligations incurred by the company after commencement of financial rehabilitation exceeds 20% of the aggregate amount of the registered creditors claims; and on assignment of rights or transfer of debts. External administration Once the external administration is commenced the above limitations are retained. In addition, the external administrator can (amongst other things):
5 Claims
On commencement of supervision all monetary obligations and mandatory payments incurred by the company before acceptance of a bankruptcy petition become due and all creditors claims that became due may be presented only under the Insolvency Law. Thereafter claims of all creditors should be presented under the Insolvency Law. Any creditors claims should be registered with the administrator and the court (and copied to the debtor). Upon the implementation of supervision the creditors have 30 days to file their claims with administrator and the court. Those creditors who have filed their claims during this period may participate in the initial creditors meeting that takes place during supervision. Creditors that have filed their claims thereafter may participate in the creditors meetings taking place within the relevant bankruptcy procedure succeeding the procedure during which the creditor filed its claim. For the voluntary arrangement that can be entered into at any stage, a unanimous consent of all registered secured creditors is required at a relevant creditors meeting. Upon commencement of liquidation all monetary obligations and mandatory payments of the debtor incurred prior to commencement of liquidation are deemed due (automatically accelerated) and are satisfied in accordance with the Insolvency Law. Claims submitted after the closing of the register of creditors are satisfied only after discharge of all registered creditors claims.
Current claims creditors As noted in other places of this overview, current claims rank ahead
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of claims of other creditors and are settled in accordance with the order of priority established for current claims (generally these can be settled at any stage of bankruptcy procedure). Current claims constitute monetary obligations and mandatory payments, which have arisen after the date a bankruptcy petition is accepted and includes: court and bankruptcy costs; insolvency administrators fees; payments to employees and other persons retained by an administrator; utilities and operational costs for running the companys business; and creditors claims for goods, services, performance of works and so on. (Mandatory payments include taxes, other payments to the state budget or otherwise to the Russian Federation. Registered mandatory payments can be paid in full by a shareholder (owner) of the company or any other third party at any stage of bankruptcy.) The current claims creditors have no right to vote at the creditors meetings. Secured creditors As a general rule claims of secured creditors are satisfied in the third order of statutory priority referred to below from the proceeds of sale of the secured property. However, secured creditors may enforce their security during financial rehabilitation or external administration. Arguably they can apply the proceeds of enforcement (up to 80% for claims under credit agreements and 70% for claims under other agreements of the proceeds of sale of the secured property to discharge their secured claims (but not exceeding the aggregate amount of principal and interest)) ahead of all other unsecured creditors and creditors under current claims during these stages. The balance of the proceeds is channelled through a special account to satisfy unsecured claims of registered first and second priority creditors (if unencumbered property is insufficient to satisfy their claims) and certain kinds of current claims. Anything remaining after satisfaction of the first and second priority claims is transferred to the secured creditors. Unsecured creditors Claims of unsecured creditors are satisfied in the following statutory order of priorities: first, claims for personal injury and non-pecuniary damage; second, employment claims and royalty claims under copyright agreements; and third, all other claims, including claims of secured creditors that were not discharged out of the proceeds of sale of secured property and mandatory payments. Non-registered claims Claims submitted after the closing of the register of creditors are satisfied only after discharge of all registered creditors claims. Shareholders claims Generally, shareholders are treated as creditors. However, the equity claims of shareholders are not subject to satisfaction in bankruptcy proceedings and may be satisfied only on liquidation of a company if any assets remain after all the creditors have been paid in full. Any subordination arrangements with a company are not recognised in company bankruptcy. Any transactions of a company with its shareholders may be set-aside during insolvency proceedings as transactions with an interested person. Voluntary arrangement There is no general rule which applies to the ranking of claims in
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this procedure. The agreement on voluntary arrangement can contain different ways of discharge of obligations by the debtor or a third party provided they do not contradict Russian law. However voluntary arrangement could not (amongst other things): create preferences of creditors whose claims are discharged in non-monetary form over those whose claims are discharge in monetary form; or deteriorate rights of those creditors who voted against such arrangement or did not vote.
General tax-related issues As noted in question 5.2 above, taxes (including any fines and penalties for underpayment or late payment of taxes) are included into the mandatory payments and rules applicable to such payments apply to taxes. The tax authorities act as a creditor in connection with taxes-related claims which together with other claims may be either included into the current claims or satisfied as unsecured claims of the third order of priority. Registered mandatory payments can be paid in full by a shareholder (owner) and even third parties for the debtor. As a result, an entity (as well as a person) or a state/municipal body that repaid 100% of mandatory payments included into the claims register may replace the tax authority and become a new creditor. Bearing in mind that tax-related claims may constitute a significant amount as compared to other debts included into the register, these provisions may become a useful tool for the owners to save their business or for third parties to acquire it by, literally, buying the debt from the state. However currently it is not clear as to how the above provisions would apply without necessary amendments into the tax legislation and new Governments resolutions that are yet to be adopted. Discharge of tax liabilities During all the procedures, a company discharges its current tax obligations (i.e. tax obligations crystallised in connection with events after commencement of bankruptcy) either by itself as a matter of routine or via an administrator or liquidator, which would represent a company during the respective procedures. There is a possibility to defer payment of taxes based on voluntary arrangement approved by the bankruptcy court or based on the debt repayment schedule during the financial rehabilitation procedure. Please note that proportional payment rule for the financial rehabilitation procedure set by the bankruptcy law would be applicable to mandatory payments only after respective changes are included into the Russian Tax and/or Budget legislation.

The Insolvency Law does not provide for a true cramming down of creditors. To a certain extent voluntary arrangement may be regarded as cram down as it requires a unanimous consent of all secured creditors and on the other hand if new bankruptcy proceedings are subsequently brought against the debtor, the creditors that entered into the voluntary arrangement will have the right to claim only for the amount agreed under the voluntary arrangement.

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6.2 What happens at the end of each procedure? 7.2
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Supervision Supervision may result in a court: commencing management; financial rehabilitation or external The Insolvency Law does not provide for a possibility to reorganise a debtor rather than realise its assets during the bankruptcy proceedings. It is arguable that such arrangement would be available should the petition for the companys bankruptcy is filed with the court and considered well founded, unless the court recognises such arrangements as the rehabilitation measures of the companys shareholders mention in question 7.1. This should be considered on a case-by-case basis.
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declaring the company bankrupt and commencing liquidation; refusing to declare the company bankrupt; terminating the bankruptcy proceedings; or leaving the bankruptcy petition without consideration. Financial rehabilitation Financial rehabilitation may result in a court: terminating bankruptcy proceedings if all creditors claims are satisfied according to the schedule; declaring the debtor bankrupt and commencing liquidation; or commencing external administration. External administration External administration may result in: restoration of the companys solvency and settlement of creditors claims (or a decision to transfer to such settlement); or a court declaring the company bankrupt and commencing liquidation. Liquidation Liquidation may result in return to external administration (if a real possibility of restoration of the companys solvency emerges). Otherwise on satisfaction of all creditors claims, the company is subject to liquidation. If the companys assets are insufficient to satisfy all creditors claims, such claims are considered discharged. Voluntary arrangement A voluntary arrangement terminates once its terms have been implemented.
Such arrangements are not specified by the Insolvency Law and should be considered on the case-by-case basis.
8 International
8.1 What would be the approach in Russia to recognising a procedure started in another jurisdiction?
According to the Russian Insolvency Law judgments rendered in the course of bankruptcy proceedings by foreign courts are recognised in Russia according to the relevant international treaty or convention between Russia and the state where the judgment was made. Without such applicable treaty or convention, a judgment of a foreign state court may be recognised and enforced in Russia on the grounds of reciprocity. We are aware of the court practice where Russian courts recognised judgments rendered in the course of bankruptcy proceedings in foreign states on the basis of this principle.

7.1 Is it common to achieve a restructuring outside a formal procedure in Russia? In what circumstances might this be possible?
The Insolvency Law provides that the shareholders of a debtor must take measures to restore companys solvency if a company encounters signs of bankruptcy, however it does not specify any measures save for rehabilitation (sanatsiya) and does not provide for any details of such rehabilitation. Creditors can take rehabilitation measures under an agreement with the company. Arguably such rehabilitation may include the restructuring. The possibility of restructuring were the company has financial difficulties should be carefully consider on a case-by-case basis.
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Logan Wright
Clifford Chance CIS Limited ul. Gasheka 6 125047 Moscow Russian Federation
Ivan Marisin
Clifford Chance CIS Limited ul. Gasheka 6 125047 Moscow Russian Federation
Logan Wright is a partner with Clifford Chance and heads the Banking and Finance practice in the firms Moscow office, where Logan has been resident for the past 9 years. Logan primarily advises major Western financial institutions on loans to Russian corporates and banks, but also advises a select number of local borrowers. Logan has broad experience in all areas of cross-border lending, including pre-export/import financings, trade finance and project finance, syndicated lending, asset finance, acquisition finance and real estate finance. His industry experience includes energy, oil and gas, metals and mining, telecommunications, and real estate. In the current market Logans practice focuses increasingly on advising lenders and borrowers on financial restructuring and insolvency with a cross-border element, including advising a Russian FMCG group on restructuring their international and local indebtedness and advising the co-ordinating committee on the restructuring of UC Rusals international indebtedness. Logan is recommended by Chambers Europe 2009, Legal 500 2009 and IFLR 1000 2009.
Ivan Marisin is Senior Partner and Head of the Litigation and Dispute Resolution Practice at Clifford Chances Moscow office. He specialises in all aspects of litigation and arbitration, domestically and internationally. Acted in some of the most high-profile disputes involving construction, tax, banking, contractual and commercial issues, share buyout offers, recovery of debts and assets, restructuring, bankruptcy and repossession. Mr. Marisin is a member of the Moscow Advocates Association and also an arbitrator at the ICAC (International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation), VIAC (Vienna International Arbitral Center of the Austrian Federal Economic Chamber) and other institutions. Recommended by Legal 500 2009, Chambers Global 2009, and PLC Which Lawyer 2008. Mr. Marisin is a frequent speaker at seminars and conferences and an author of numerous publications. He is also an editor of the Russian journal Arbitration.
Clifford Chance is a leading international law firm that has been advising domestic and international clients on all aspects of corporate and financial activity in Russia since 1991. With integrated teams of lawyers qualified under Russian, English, German and U.S. law, the team in Moscow works closely with experts across the firms global network of offices to provide commercially sound legal advice. Areas of expertise include Litigation & Dispute Resolution, Banking & Finance, Capital Markets, Corporate / M&A, Real Estate and Tax, as well as sector specialisation in Consumer Goods and Retail, Energy and Natural Resources, Health Care, Infrastructure and PPP Manufacturing, Mining and Telecommunications. , Clifford Chance has 30 offices in 21 countries worldwide. The firm has a highly impressive track record and advises on the most challenging deals.

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+7 495 258 5050 +7 495 258 5051 logan.wright@cliffordchance.com www.cliffordchance.com
+7 495 258 5050 +7 495 258 5051 ivan.marisin@cliffordchance.com www.cliffordchance.com
Chapter 36
Slovakia
White & Case
Silvia Belovicov
v
Tom Cibula

1.1 How does a creditor take security over assets in Slovakia?
1.2
In the Slovak Republic, creditors commonly secure their receivables by creating a pledge over various assets of a debtor. A pledge can secure both existing monetary and non-monetary claims, including the claims whose value is to be determined in the future, as well as future claims. General provisions governing the pledge can be found in Act No. 40/1964 Coll. the Civil Code as amended (the Civil Code). The Civil Code distinguishes between the creation of a pledge and its perfection. The pledge is usually created under a written agreement. (Movable assets are an exemption if the assets are handed-over to the pledgee or a third party custodian.) A pledge can be created over various types of assets such as movable assets, real property, intellectual property rights, receivables, groups of assets, enterprises or an enterprise unit, as well as future assets, provided that the assets are transferable and the pledge is not prohibited by law. A pledgor can be the debtor itself or a third party. The agreement must specify the pledged asset, the secured claim and the claim value or maximum amount of the principal up to which the claim is secured, if the claim value is missing. Generally, unless the creation of a second ranking pledge is prohibited by law, e.g., in case of shares, several pledges can be created over the same asset. The moment of registration of a pledge determines its priority. In order to be effective and perfect, the pledge must be registered in the respective pledge registry. A pledge over general movable assets can be perfected either upon the transfer of possession of the property to the pledgee/a third party custodian or by virtue of the registration of the pledge in the Central Notary Register of Pledges. Pledges over receivables are perfected upon registration in the Central Notary Register of Pledges. Pledges over real property must be entered in the Real Property Cadastre; trade mark, patent and design pledges are entered in a register kept by the Intellectual Property Office; securities pledges are registered with the Central Depository of Securities; pledges over ownership interests are entered in the Commercial Register; pledges over an enterprise, which consists of several types of assets, requires registration in even more than one register. Furthermore, aircrafts and ships have special registers. Unless an exemption is provided for by law, the transfer of pledged assets does not have an impact on the existence of the perfected pledge. The sale of movable assets in the normal course of business is an example of such exemption. In addition to pledges, other types of security are guarantees of third parties, security assignments of receivables and security transfers of rights.
General provisions stipulating the conditions for attacking the legal acts of a company can be found in the Civil Code. More stringent and specific rules are contained in Act No. 7/2005 Coll., the Bankruptcy and Restructuring Act, as amended (BRA) for companies that are declared bankrupt. The general rule under the BRA is that any legal acts involving the assets of a debtor are not effective towards creditors if they are contested by a trustee or respective creditor, in case the trustee rejected creditors request to contest, within six months from the declaration of bankruptcy. A legal act can be attacked if: a) a transaction is effected without adequate consideration, i.e. a transaction where the usual consideration in a similar transaction is significantly higher; a transaction results in the preferential treatment of only some creditors; a transaction is aimed to deprive the creditors of some benefits, provided that the debtor intended to do so and that the counterparty to the transaction had or should have had knowledge of this intention; or a transaction which was executed after the cancellation of the bankruptcy proceedings, is commenced again within the following six months.
b) c)
d)
The transactions listed under (a) and (b) above are vulnerable to attack if made during a one-year period prior to the commencement of the bankruptcy proceedings. If the transactions were concluded with a person affiliated to the debtor, a three-year period applies. In respect of the transactions listed under (c) above, a five-year period applies. In addition, these legal acts must have been the cause of the debtors bankruptcy or effected during the bankruptcy proceedings. The petition can be addressed to the court or the obligor but to the obligor only if he agrees with the right to challenge.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Slovakia?
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Under the BRA, a debtor represented by its statutory representative (directors) is obliged to file a petition for the declaration of bankruptcy within 30 days from the time when the debtor became aware that it is bankrupt or it should have become aware of its bankruptcy if it had exercised due care. If the directors fail to file the petition, they are jointly and severally liable for damages suffered by the creditors, unless they can prove that they acted with
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due care. Unless the damage is determined otherwise, there is a presumption that the damage is equal to the portion of claims which were not satisfied in the bankruptcy proceedings. Moreover, the failure of the directors to file for bankruptcy can, under certain circumstances, result in criminal liability. The director can be even disqualified from acting as a director in another company. c)
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there is a justified presumption of the debtors insolvency.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Slovakia?
Restructuring proceedings If the debtor is bankrupt or a bankruptcy is threatening, the debtor or the creditor can request a trustee it chooses to prepare a restructuring opinion. In its opinion, the trustee considers the financial condition of the debtor and the feasibility of the restructuring proceedings as well as the expected satisfaction of the creditors claims which must be higher than the possible satisfaction of the claims in the bankruptcy proceedings. If the trustee recommends in his report the commencement of the restructuring proceedings, a petition for restructuring can be filed by the debtor or a creditor. Creditors may file a petition under the same conditions but, in addition, the prior consent of the debtor must be obtained.
The BRA provides for two types of formal procedures: a) bankruptcy proceedings that are predominantly aimed to sell-off the property of the debtor and to use the proceeds to satisfy the creditors; and restructuring proceedings that are aimed to rescue the indebted debtor and agree on a certain plan, pursuant to which the debtor is restructured and the claims of the creditors taking part in the plan are fully or partially satisfied.
b)
In addition, any debtor in financial difficulties, but still solvent, may choose liquidation proceedings governed by Act No. 513/1991 Coll. the Commercial Code as amended (the Commercial Code). The purpose of liquidation proceedings is to distribute the assets of a solvent company that was voluntarily/involuntary liquidated. However, if during the liquidation proceedings the insolvency test is met, then the liquidator is obliged to file a petition for bankruptcy.
2.2 What are the tests for insolvency in Slovakia?
Bankruptcy proceedings Bankruptcy proceedings have two phases: (i) commencement of bankruptcy; and (ii) declaration of bankruptcy; each phase has its own legal consequences for the debtor. 1. Commencement of bankruptcy proceedings: Once the petition for bankruptcy proceedings is duly filed, the court shall decide on commencement within 15 days of the receipt of the petition. The petition has to be signed before a notary public. Foreign entities are required to have a proxy in the Slovak Republic. The bankruptcy proceedings are deemed commenced once the ruling on the declaration of the bankruptcy is published in the Commercial Journal (Obchodn Vestnk). (In fact, the date following the date of publication is deemed to be the date of publication.) If there are doubts about the sufficiency of the assets of the debtor, the court can appoint a temporary trustee within the same period. the debtor is allowed to execute only ordinary legal acts (defined as acts necessary to ensure the proper performance of business activities. The BRA expressly stipulates what is not considered as ordinary legal acts, e.g., the establishment of a company, transfer of real estate properties, transfer of an ownership interests in the company etc.); any enforcement proceedings of the debtors assets are prohibited and pending enforcement proceedings are interrupted; and any enforcement of any security rights is prohibited.
A debtor is considered bankrupt in the following situations: a) Insolvency of the debtor - when the debtor has more than one creditor and is not able to satisfy more than one of its pecuniary liabilities within 30 days following their due dates. (When assessing the debtors ability to pay due claims, all claims that belonged to one creditor during the 90 days prior to filing the petition for bankruptcy, are considered as one claim.) The proposed amendment to the BRA provides for additional condition i.e. to take into consideration the possibility of future operation of the business of the debtor. Excessive indebtedness of the debtor - when an entity, obliged to maintain bookkeeping, has more than one creditor and the overall value of its liabilities exceeds the value of its assets.
b)
Upon the commencement of the bankruptcy proceedings: a)
If a debtor files a petition for bankruptcy, the bankruptcy is assumed.

b)
Bankruptcy proceeding The debtor is obliged to file a petition for bankruptcy within 30 days from the time when it learned or should have learned of its inability to meet its financial obligations, had it exercised due care. A liquidator (when a company is in liquidation pursuant to the Commercial Code) is obliged to file a petition without undue delay if he/she becomes aware of the indebtedness of the liquidated company. A creditor can file a petition for bankruptcy if: a) b) the debtor is in delay with the payment of a creditors claim for more than 30 days; the claim is of a pecuniary nature; and
c)
The court may refuse to declare the commencement of bankruptcy proceedings if: (i) the debtor has insufficient assets to cover the bankruptcys procedural costs and none of the bankruptcy creditors pays an advance to ensure the settlement of these costs; or (ii) a petition is not justified. The proceedings may be terminated if the debtor repays all its due debt before the ruling on the declaration of bankruptcy is issued. 2. Declaration of bankruptcy: After the commencement of the bankruptcy proceedings initiated by the debtor, the court shall, within five days, declare the bankruptcy or appoint a preliminary trustee, if there are doubts as to the sufficiency of the debtors assets.

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Under the BRA, if the debtor, despite being served with a written notice requesting the payment of the claims, is still in delay for more than 30 days with the payment of at least two pecuniary claims of two different creditors that can be enforced or that were acknowledged by the debtor, the presumption of insolvency is justified.
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If the petition is filed by a creditor, the court shall, within five days from receipt of the petition, deliver a copy of the petition to the debtor, who has 10 days from its receipt to respond to the petition and prove its solvency. If the debtor fails to prove its solvency, the court declares bankruptcy or appoints a preliminary trustee. The declaration of bankruptcy has a number of legal consequences for the debtor and its directors. For example, only the trustee appointed by the court can dispose of the assets of the debtor, no security enforcement over the debtors assets is allowed, no pledge may be created, no enforcement may be commenced or continued, etc. Some of the legal consequences are discussed in the following sections. Restructuring proceedings Restructuring proceedings also have two phases: 1. Commencement of the restructuring proceedings: The court decides on the commencement of restructuring proceedings within 15 days from its receipt of the petition filed either by the debtor or creditor. The ruling is published in the Commercial Journal and the effects of the commencement arise on the day following the date of publication. As a result of the commencement of restructuring proceedings: a) b) c) d) e) f) the debtor is allowed to conduct only legal acts in the ordinary course of business; enforcement proceedings of the debtors asset are prohibited and pending enforcement proceedings are interrupted; the enforcement of any security rights is prohibited; a contracting party cannot terminate a contract due to the debtors delay with payment; receivables covered by the proceedings cannot be set-off; and any contractual provision which entitles the other contractual party to terminate the agreement due to the commencement of restructuring or bankruptcy proceedings are not effective. Approval of the restructuring: Within 30 days from the commencement of the restructuring proceedings, the court decides whether restructuring will be allowed or rejected. The court shall allow the restructuring if: the trustees report meets the requirements stipulated by law; the content of the trustees appraisal report is clear and understandable; the appraisal report has been prepared by a trustee registered in the list of trustees and having its office is located in the district of the respective court; the appraisal is not older than 30 days from the day of the filing of the petition; and the trustee recommends the debtors restructuring. Bankruptcy proceedings
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convenes the first creditors meeting which must take place not earlier than on the first day and not later than on the fifth day after the expiry of the period for the rejection of the claims. All creditors who have duly lodged their claims can participate in such meeting. The creditors meeting has the right: (i) to elect and revoke members of the creditors committee (the unsecured creditors elect the members to exercise their rights during the bankruptcy proceedings); and (ii) to replace the trustee. The first members of the creditors committee are elected at the first creditors meeting. The creditors committee can have three or five members. Subsequent meetings are convened by the trustee upon his/her own initiative, upon the request of the court, the creditors committee or creditors whose voting rights represent more than 10% of all voting rights. The creditors meeting is convened by announcing the date of the meeting in the Commercial Journal. During bankruptcy, the insolvency trustee regularly reports to the insolvency court and the creditors committee on the status of the sale of the debtors assets. Creditors may instruct the insolvency trustee to prepare a special report on the status of the sale. In the course of the proceedings, after the sale of of the security assets as well as general assets, the trustee prepares separate distribution schedules for the secured creditors and unsecured creditors. In addition, at the end of the bankruptcy proceedings, the insolvency trustee prepares a final distribution schedule for the unsecured creditors, in which he summarises what the proceeds of the sale are and how they are to be distributed among unsecured creditors. The Final Report is reviewed by the insolvency court and is published. Creditors are allowed to comment on the Final Report, and their comments are heard by the insolvency court. Restructuring proceedings Similar to bankruptcy proceedings, when approving restructuring proceedings, the court appoints a trustee, invites all creditors to lodge their claims and, in addition, determines the scope of the debtors legal acts, which are subject to the trustees approval. The decision is announced in the Commercial Journal. Creditors bodies consist of the creditors meeting and creditors committee (both secured and unsecured creditors can be elected) that are organised in the same way as in the bankruptcy proceedings but their main purpose is to vote on a restructuring plan.
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2.
a) b) c)
3 Creditors
d) e)
In general, all formal notices made in insolvency or restructuring proceedings are published in the Commercial Journal. This includes notices on the commencement of proceedings, the appointment of the trustees, the decision of the insolvency court on bankruptcy or restructuring, the dates of court hearings and creditors meetings, etc. Bankruptcy proceedings In its decision on the declaration of bankruptcy, the court appoints a trustee and invites all creditors to lodge their claims with both the court and the trustee within 45 days from the date of the declaration of bankruptcy. The creditors cannot choose the first trustee.
Under the BRA, unsecured creditors create a creditors committee which consists of 3 or 5 members elected by the unsecured creditors. In respect of the satisfaction of unsecured creditors claims, their position is rather limited owing to the ranking of their claims. As a rule, the claims of secured creditors and special claims such as the trustee remuneration, fees, salaries, etc., are satisfied first. Claims of the unsecured creditors are paid out from the proceeds of the sale of the general estate but only after deduction of the claims having higher priority. As regards the enforcement of claims, no enforcement involving debtors assets is allowed after declaration of bankruptcy. Restructuring proceedings The position of the unsecured creditors in restructuring proceedings is slightly different. This is due to the entire concept and purpose
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Within 40 days after the declaration of bankruptcy, the trustee
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of the restructuring proceedings which is to maintain the business of the company and to draw up a plan to repay the debtors liabilities. They receive the amounts set forth in the restructuring plan which may alter the rights of the unsecured creditors (i.e. reduce the claim, satisfy the claim in installments or by the issuance of securities, etc.). When approving the restructuring plan, the secured and unsecured debtors are placed in separate groups; in order to approve the restructuring plan, each group must approve it by a majority pursuant to the BRA. Similar to bankruptcy proceedings, no enforcement involving debtors assets is allowed during the restructuring proceedings.
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those concerning the disposal of the debtors assets, are executed by the appointed trustee who is supervised by the court. The trustee acts on behalf of the debtor and in its name. The trustee may only continue in the business operation if certain special conditions under the BRA are met; basically if the proceeds from the sale of the business as a going concern can be higher than that of the sale of the assets by some other means. The debtor and its directors are obliged to co-operate with the trustee, to provide required explanations in the form and within the deadline determined by the trustee. The rights of the shareholders are limited to those not involving the disposal of assets. The creditors meeting and secured creditors with respect to the secured assets have a right to give the trustee binding instructions or recommendations in certain cases with respect to the sale of assets, asset management, business operations, etc. Restructuring proceedings During restructuring proceedings, the debtor continues its operation under the supervision of the trustee. The debtor is allowed to execute ordinary legal acts but certain acts enumerated in the courts decision require approval of the trustee. Lack of such approval, however, does not invalidate the act. If the debtors financial or business situation deteriorates so that the restructuring plan is no longer viable, the trustee shall without undue delay request the court to declare the bankruptcy of the debtor. Furthermore, the same applies, in the event of the debtors repeated or serious breach of its duties. A limitation of shareholders rights can be implied from limitations imposed on the legal acts of the company.
Generally, once the bankruptcy/restructuring proceedings are commenced, no commencement or continuation of security enforcement proceedings involving the debtors assets is allowed and all pending security enforcement procedures must be suspended. Security enforcement involving assets of third parties is generally allowed as it does not involve the debtors assets. In bankruptcy proceedings, in the period between the commencement and declaration of bankruptcy, the enforcement of pledges over cash funds, receivables from a bank account or transferable securities, or in respect of the continuance of the enforcement of a pledge in the form of a voluntary auction is allowed. No such exemption exists in the restructuring proceedings. The insolvency trustee administers the debtors assets that were provided as security to the secured creditors and arrange for their sale. The insolvency trustee is, in principle, bound by the instructions of the secured creditors in respect of the manner of the administration and sale of the secured assets.
In general, the company finances the costs of the proceedings out of its remaining assets. Bankruptcy proceedings In theory, the insolvency trustee may enter into new loan agreements, but in practice this would be realistic only if there were a chance to sell the debtors business as a going concern. The insolvency court may order the person that initiated insolvency proceedings to pay an advance for the costs. Restructuring proceedings The debtor in possession may conclude loan agreements, which would provide fresh financing, with the approval of the trustee. New loans can also be foreseen in the plan which is subject to approval. If the liquidation bankruptcy proceedings are later declared, the unsecured part of the new loans would have priority over other unsecured assets.
Bankruptcy proceedings As a general rule, set-offs are permitted. However, set-offs are prohibited in the event of: (i) a creditors claim that arose prior to the declaration of bankruptcy and a debtors claim that arose after the declaration of bankruptcy; (ii) a creditors contingent claims that, in the course of the bankruptcy proceedings, must be lodged; (iii) not registered claims; (iv) a lodged claim acquired by virtue of a transfer after the declaration of bankruptcy; and (v) a claim acquired on the basis of a legal action that may be contested. Restructuring proceedings As of the date of the commencement of the restructuring proceedings, set-off of any creditors claim lodged in the proceedings against the debtors claim against the creditor is prohibited.

Upon the declaration of bankruptcy, the trustee exercises all debtors rights vis--vis the debtors employees. The payment liabilities of the debtor towards its employees arising after the declaration of bankruptcy have the status of priority claims. Furthermore, some restrictions provided for by Act No. 311/2001 Coll., the Labour Code, as amended, regarding mass dismissals, e.g., the duty to discuss the plan of mass dismissals with the respective authority, etc., do not apply. Because in the restructuring proceedings the debtors continues to operate its business, it is assumed that salaries are paid in due course. No exemptions with respect to dismissals apply in the restructuring.
Bankruptcy proceedings Upon the commencement of bankruptcy proceedings, business operations are normally terminated and the legal acts of the debtor are restricted to ordinary legal acts. All other legal acts, especially

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order to determine the exact value of the claim. The exchange rate to be used for the conversion of foreign currency claims into Euro is the exchange rate of the European Central Bank or the National Bank of Slovakia as of the date of declaration of bankruptcy. Within 10 days of the expiry of the registration period, the trustee prepares the final list of receivables. It is the trustees duty to verify each claim, in particular with the bookkeeping of the debtor. Restructuring proceedings The procedure of registering the claims in the restructuring proceedings is almost identical to that of bankruptcy proceedings. The time period for lodging claims is 30 days following the approval of the restructuring. The failure to meet the deadline can not be remedied and the creditor will be not able to enforce its claim in the restructuring proceedings. The exchange rate to be used for the conversion of foreign currency claims into the Slovak Crown is not clearly set in the BRA; however, in practice the exchange rate of the European Central Bank or the National Bank of Slovakia as of the date of commencement of restructuring proceedings prevails.
Bankruptcy proceedings
Slovakia
The trustee may withdraw from a contract if: a) the agreement was concluded prior to the declaration of the bankruptcy and the other party has not yet fulfilled its obligations; or the other party has partly fulfilled its obligation; this right remains in respect to the non-fulfilled part of the obligation.
b)
If the counterparty that has fully or partly fulfilled its obligation withdraws from the agreement, it can only claim its receivables by registering its claims as contingent/conditional receivables and requesting their satisfaction in the bankruptcy proceedings. The same applies if both parties have not fully fulfilled their obligations under the contract, and one of them withdraws from the contract in respect of the unfulfilled part. In the case of a contract whereunder a repeated or permanent performance is delivered (e.g. a long-term supply contract) or parties are obliged to abstain from or tolerate certain activities, the trustee is entitled to terminate such contract with a two-month notice period (unless the agreement or law provides for a shorter period). The trustee may also terminate such agreement if it was agreed for a definite period (this does not apply to apartment lease agreements or employment contracts). If the debtors counterparty is obliged to fulfill its obligation, such party is required to do so only if a consideration to be paid is already paid or secured. Finally, as of the day of the declaration of bankruptcy, all debtors receivables and liabilities arising prior to the declaration of bankruptcy and related to the bankruptcy assets are deemed to be due and payable until the termination of the bankruptcy proceedings. The same applies to the contingent receivables lodged in the bankruptcy proceedings. Restructuring proceedings After commencement of the restructuring proceedings, a contract cannot be terminated due to debtors delay in the fulfillment of its obligations, provided that the delay arose prior to the commencement of the restructuring proceedings. In addition, any contractual provisions which entitle the debtors counterparty to terminate the agreement due to the commencement of the restructuring or bankruptcy proceedings are ineffective.
Bankruptcy proceedings The claims are divided into the following groups: a) claims against the bankruptcy estate (pohladvky proti podstate) such as taxes, customs duties, health and social insurance contributions, wages, the trustees fees, the costs of the bankruptcy proceedings which arose after the declaration of bankruptcy and other fees arising in relation to the administration and sale of the assets; such claims are satisfied first; claims arising from the operation of the business (pohladvky z prevdzkovania podniku) which are satisfied from the proceeds gained from the operation of the business; secured claims which are satisfied from the proceeds from the sale of the secured assets securing such claim. Prior to the payment of the sale proceeds to the secured creditor, a proportional part of the claims against the bankruptcy estate attributable to such assets (e.g. fees associated with the sale and administration of the assets) are deducted. If more than one pledge had been created over the pledged assets, the ranking of the pledges determines the priority of claims to be satisfied. If the first ranking secured claim exceeds the proceeds from the sale of the security assets, the unsatisfied portion of such claim is classified as an unsecured claim and is satisfied from the proceeds from the sale of the general bankruptcy estate, if any; unsecured claims are satisfied from the proceeds of the sale of the general estate that remain available after the satisfaction of the above creditors claims having higher priority; subordinated claims; and any proceeds that remain after the satisfaction of the above claims are transferred to the debtor.
b)
c)
5 Claims
d)
Bankruptcy proceedings Each claim arising prior to the declaration of bankruptcy must be duly and timely registered with the court and the trustee within 45 days following the declaration of bankruptcy. Non-registered claims and late registrations are not taken into consideration. The proof of claims must contain the information set forth in the BRA. The failure to meet the deadline can not be remedied and such claim is excluded from the process. Each claim must be lodged separately and in addition, multiple claims must be summarised in a summary of claims. The claims must be denominated in Euro and the proof of claims must be accompanied with relevant documents proving the authenticity of the respective claim. A statement of a nonpecuniary claim must be accompanied with an expert appraisal in
e) f)
The claims such as: (i) accessories of the claims arising after the declaration of the bankruptcy; (ii) court and legal fees incurred by the creditor in connection with the bankruptcy proceedings, unless the law stipulates otherwise; (iii) claims arising from legal acts without consideration; (iv) contractual penalties arising after the declaration of the bankruptcy; (v) penalties imposed in criminal proceedings; and (vi) creditors claims for damages arising from the failure of the debtor to file a petition for bankruptcy, can not be satisfied in the bankruptcy proceedings.
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Restructuring proceedings Claims that arise after the commencement of the restructuring proceedings are so-called priority claims (prednostn pohladvky) which are not included in the restructuring plan and are settled in the course of the restructuring proceedings, unless the creditor of such receivable agrees that the claim will be included in the plan and thus, satisfied together with other claims which had arisen prior to the commencement of the restructuring proceedings. All other claims which arise prior to the commencement of the restructuring proceedings are satisfied in accordance with the approved plan. However, in the event of the approval of the restructuring plan, the subordinated claims, claims from legal acts without consideration and accessories of the claim are deemed to be waived.
5.3 Are tax liabilities incurred during each procedure? 6.2 What happens at the end of each procedure?
Slovakia
Bankruptcy proceedings Once all proceeds from the sale of the debtors assets are distributed in accordance with the final distribution schedule, the court terminates the bankruptcy proceedings upon the request of the trustee. The court decision becomes effective on the next day following the date of its notification in the Commercial Journal. As of this day, all the effects of the commencing and declaration of the bankruptcy proceedings cease to exist, the trustee closes the accounting books and if any assets are left, these are handed-over to the debtor or liquidator. The debtor continues to exist or can be liquidated. The outstanding claims not satisfied in the bankruptcy survive. Restructuring proceedings If there are no reasons to refuse the plan approved by the creditors, the court confirms the plan within 15 days from delivery of the petition for confirmation and at the same time decides on the termination of the restructuring proceedings. Any effects of the commencement of the restructuring proceedings cease to exist as of the next day following the date of notification of the decision in the Commercial Journal which means that all suspended proceedings continue, the debtor has a right to dispose of its assets without trustees approval, if any remain, etc. After this date, the creditors who failed to lodge their claims lose their right to enforce the claims. The debtor continues its business operation unless the plan foresees otherwise, e.g., that all the assets are to be sold in which case liquidation usually follows. Usually, the plan foresees that claims not to be satisfied under the plan are waived by the creditors.
Any tax liability which arises prior to the declaration of bankruptcy and/or restructuring must be lodged by the tax authority. Tax liabilities that arise following the declaration of the bankruptcy, if any, are to be treated in the bankruptcy proceedings as any other claims against the bankruptcy estate or as priority claims, in case of the restructuring proceedings. One day prior to the date of the declaration of the bankruptcy, the respective tax period ends and as of the declaration of the bankruptcy, a new tax period commences and ends on the date of the termination of the bankruptcy proceedings. If the proceedings are still pending as of December 31st of the second year following the date of the declaration of the bankruptcy, the respective tax period ends on December 31st and new period starts on January 1st. In the last year of the proceedings, the period ends on the date of the termination of the bankruptcy proceedings. Once the restructuring plan is approved, all tax liabilities whose payments are not foreseen by the plan, cease to exist and the tax authority is not entitled to enforce them after the termination of the restructuring proceedings.

7.1 Is it common to achieve a restructuring outside a formal procedure in Slovakia? In what circumstances might this be possible?

Bankruptcy proceedings There is no process of cramming down creditors in bankruptcy proceedings. Restructuring proceedings In restructuring proceedings, the creditors vote on the plan. For those purposes, the restructuring plan divides claims into classes. Each class of creditors accepts the plan when more than half in number and those holding more than half of the value of the claims in the respective class, exceeding 1% of all claims in the class, approve the plan. The classes of shareholders accept the plan when more than half in number approve the plan. Under the BRA, if the required majority has not been reached in any of the classes, the petitioner can request the court to replace the missing classs consent by a decision of the court if: a) b) c) the majority of all the classes determined in the plan voted for its adoption; the majority of the creditors calculated according to the total value of their claims votes for the adoption of the plan; and the approved plan would not worsen the satisfaction of the disagreeing creditors.
Private workouts used to represent a significant alternative to per partes sales for companies in financial distress, since the old insolvency laws did not allow for effective court supervised reorganisation proceedings. In the past, only a few companies were successfully restructured. As in other jurisdictions, the greater the value of a going concern as compared to the liquidation value of the business, the involvement of experienced creditors and reasonable prospects for the sale of the business increase the chances of a successful restructuring. At the same time, the directors of the company have to be comfortable that by agreeing to restructure informally, they are still acting with due care.
It is possible to reorganise a debtor rather than realise its assets and business under the restructuring proceedings. The restructuring proceedings are generally available if the expected satisfaction of the creditors claims is higher than the possible satisfaction of the claims in the bankruptcy proceedings. The entire concept and purpose of the restructuring proceedings is to maintain the business of a debtor and to draw up a plan to repay the debtors liabilities. During restructuring proceedings, the debtor continues its operation under the supervision of the trustee. The court will commence the restructuring proceedings within 15 days from the receipt of the petition filed either by the debtor or creditor. Within 30 days from the commencement of the restructuring proceedings, the court

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8 International
8.1
Slovakia
decides whether restructuring will be allowed or rejected. The particulars of restructuring proceedings are described in previous comments.
What would be the approach in Slovakia to recognising a procedure started in another jurisdiction?
Slovakia
The expedited restructuring of the debtor by means of a prepackaged sale is not possible in Slovakia.
Since the Slovak Republic is a Member State of the EU/EEA, proceedings commenced before foreign authorities in the EU/EEA countries are recognised by Slovak courts. With respect to nonEU/EEA countries, the reciprocity principle applies, unless the international agreement regarding satisfaction of the creditors stipulates otherwise. If cross-border bankruptcy proceedings are commenced abroad and the foreign trustee proves its legal interest in its recognition in the Slovak Republic, the proceedings are recognised. Such recognition is not allowed if the debtor is already subject to another pending foreign or domestic proceeding.
Silvia Belovicov
v
Tom Cibula
White & Case Hlavn nmestie 5 811 01 Bratislava Slovakia
White & Case Hlavn nmestie 5 811 01 Bratislava Slovakia

v
+421 2 5920 6317 +421 2 5441 6100 sbelovicova@whitecase.com www.whitecase.com
+421 2 5920 6352 +421 2 5441 6100 tcibula@whitecase.com www.whitecase.com
Silvia Belovicov graduated from Comenius University Law School in Bratislava in 1997 and went on to obtain her International Business Law LL.M. degree from Utrecht University in the Netherlands. Before joining White & Case in 2003, she spent six years at the Prague office of Hogan & Hartson, one of the largest law firms in Washington D.C. Her major areas of specialisation are real estate and bankruptcy. Silvia has recently been involved as an advisor to a major London bank in formal restructuring proceedings taking place in Slovakia. In addition to bankruptcy, her practice includes mergers and acquisitions, energy law and corporate law. Silvia is a member of the Slovak Chamber of Advocates.
Tom Cibula received his masters degrees from the Faculty of Law and the Faculty of Economics in Bansk Bystrica in 2006 and is currently pursuing an LL.M. degree from the University of London. He joined White & Case in 2008. Prior to this, he worked at Ernst & Young in Bratislava for more than two years. He works primarily in the area of taxation, where he focuses mainly on tax structuring and optimisation, tax due diligences and ad-hoc tax advisory. He also deals with commercial restructurings, such as mergers or demergers, and various corporate law issues. Tom is a member of the Slovak Chamber of Tax Advisors and the Slovak Chamber of Advocates.
White & Case LLP is a leading global law firm with lawyers in 34 offices in 23 countries. As one of the first US-based law firms to establish a truly global presence, we provide counsel and representation in virtually every area of law that affects cross-border business. In 2007, White & Case was awarded the title Law Firm of the Year in Central and Eastern Europe by the independent publication, Chambers & Partners. The Bratislava office of White & Case, established in 1991, is perennially acknowledged by the independent benchmarking publications as one of the leading international law firms in the Slovak Republic. It offers multijurisdictional advice and provides legal services to major domestic and international corporations. Our office with 20 lawyers and tax advisors has acted as a legal advisor on some of the largest corporate and commercial, financial, tax and real estate projects, including bankruptcy advice, in the Slovak Republic.
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Chapter 37
Slovenia
Jadek & Pensa
Simon Gabrijelcic
v v

1.1 How does a creditor take security over assets in Slovenia?
There are three types of security over assets: pledge; land charge; and title transfer. Security interest is not possible over a fluctuating pool of assets, except for stock. Pledge A pledge is a right of the creditor to repay a defaulted obligation from the pledged assets. A pledge is classified into different subtypes. Pledge The pledge involves concluding an agreement and taking actual possession over movable tangible assets as security for the debt. The creditor has the right to sell the assets when the debtor defaults, or under certain circumstances and, with certain restrictions, appropriate the assets and apply their value in discharge of the debt. Similar principles apply for pledge over receivables or securities. Non-possessory pledge Certain tangible movable assets, specified by regulations, can be pledged without the creditor taking actual or constructive possession over assets. In this case, in addition to the security agreement, registration of pledges with the special register is required for perfection of security. When a debtor defaults, the creditor has the right to take actual possession of the assets. Mortgage A mortgage is pledge over real property. It is obtained with the entry of a security agreement in the land register. Lien A lien is a statutory right to retain possession of tangible movable assets until a debt is repaid. Assets have not been obtained initially by a creditor by way of security but for other purposes; the creditor has obtained them from the debtor in the course of certain transactions with the debtor. Land charge A land charge is the right to repay defaulted debt from real property. It is different from a mortgage because it is established by a deed of a land owner. When the deed is registered, the court issues a land charge letter which is a negotiable instrument. The land charge is thus incorporated in and transferable with the land charge letter. Title transfer A title transfer involves the transfer of ownership of a tangible movable asset or receivables by way of security for a debt. It is
established with the conclusion of a security agreement, with the possession over movable tangible assets remaining with the debtor. The title transfer is made on the condition that ownership will be transferred back to the debtor on the discharge of the debt, unless otherwise agreed. The creditor may sell the assets once he takes possession over them when the debtor defaults, or appropriate the assets and apply their value in discharge of the debt.
Certain types of transactions entered into within twelve months prior to an application for bankruptcy being filed may be subject to challenge in bankruptcy proceedings. The first group of transactions are transactions that reduce the net worth of debtor. Typically these transactions include a gift donation or selling or transferring an asset at undervalue. The other group is preferential treatments. These include any transaction that has the effect of putting a creditor in a better position in the bankruptcy proceeding than he would have enjoyed if the transaction had not been made. The above-described characteristics of transactions form objective criteria for determining whether a transaction is avoidable. Additionally to the objective criteria, in principle a transaction must satisfy also subjective criterion to be avoidable in bankruptcy proceedings. The subjective criterion is that the counterparty knew or must have known of the debtors insolvency at the time of transaction. It is presumed that any transaction (satisfying objective criteria), made in three months prior to an application for bankruptcy being filed, is avoidable. Certain transactions need not satisfy subjective criterion; gratuitous transactions and transactions where the value of consideration of a counterparty is insignificant are avoidable regardless of knowledge of the counterparty on the companys insolvency.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Slovenia?
Statutory liabilities Once the board ascertains that the company is insolvent, it has a statutory duty to observe the creditors interests. Creditors interests are protected by limits on the trading activity of the company. The company may not pay or assume any liability after it becomes insolvent other than discharging or assuming new liabilities which are necessary in its ordinary course of business. It may also not do anything which would upset the equality of treatment of creditors.

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The board must also prepare a plan of financial restructuring which includes an analysis of causes for insolvency and an opinion whether it is probable that the company can become solvent through financial restructuring. If the opinion on probability of the company becoming solvent is positive, the board must propose measures, including corporate actions (e.g. capital increase), that need to be undertaken to suppress the insolvency of the company. If the opinion is negative, the board must file an application for bankruptcy. Failure to act in accordance with above-described statutory duties once the company is insolvent, results in liability of the management board (and members of supervisory board) to the creditors for any damage the creditors suffer in bankruptcy proceedings as a result of their failure. The damage creditors suffer is set by the statute; it is the difference between the nominal value of their claims and the amount paid in the bankruptcy proceedings; however, the damages paid under this rule are limited for an individual person who is found liable. The liability of the management and supervisory boards members is limited to the double amount of a persons remuneration received in the year of the wrongful omission, but not less than a certain minimum amount. Defences available to these persons are also limited by statute. The creditors, on behalf of the bankruptcy estate, and the administrator of the bankruptcy estate have the right to file an action for this damage. The person who pays such damages has the right to claim recourse of the paid damages in the bankruptcy proceedings; his claim is subordinated. This statutory liability for damage pursuant to the Financial Business, Insolvency Proceedings and Compulsory Winding-up Act (Zakon o financnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju - ZFPPIPP) is without prejudice to the liability of the members of the management and supervisory boards for any damage caused to the company for breach of fiduciary duties under rules of corporate laws. Criminal liability Conducting business after insolvency in such a manner that assets are disposed at undervalue, disproportionate liabilities are assumed or contracts are made with insolvent third parties, or evidence of other reckless management of a companys assets and business, which results in bankruptcy and large damage for creditors, is a criminal offence, punishable with imprisonment. Any preferential treatment of a creditor or fraudulent trading, after the company is insolvent, which results in large damage for creditors, is also a criminal offence punishable with imprisonment. Disqualification A person who has been: (i) convicted for certain criminal offences, cannot be a member of a management or supervisory board of a company for five years after the conviction and two years after serving the prison term; (ii) prohibited by court in criminal proceedings to carry on a profession, cannot be a member of a management or supervisory board of a company until the prohibition expires; or (iii) ordered by court to pay damages to creditors under statutory rules on liability of members of management and supervisory boards in insolvency, cannot be a member of a management or supervisory board of a company for two years after a final judgment has been delivered.
2.4
Slovenia
company may go into liquidation if shareholders decide it has no future. Liquidation is governed by the Companies Act (Zakon o gospodarskih dru bah - ZGD-1).
2.2 What are the tests for insolvency in Slovenia?
Slovenia
Insolvency is defined as a situation of illiquidity or long term payment inability. Illiquidity is the inability to pay debts and it is presumed to occur when a company is in arrears for two months with the payment of debt exceeding 20% of its liabilities as shown in the companys latest annual financial statements. Long-term payment inability occurs when the value of a companys assets is less than the amount of its liabilities or if loss in a financial year exceeds half of the share capital and cannot be covered by profit brought forward or reserves. When either of the alternative situations occurs, a company becomes insolvent.
The ground for bankruptcy proceedings and compulsory settlement proceedings is insolvency. Compulsory settlement proceedings may be initiated only if the board of the debtor is of the opinion that the insolvent debtor may become solvent through financial restructuring. For this purpose, the board must prepare a report on the financial position of the debtor with an auditors opinion and a plan of financial restructuring with the opinion of a certified companys valuer and submit them to the court. Liquidation is commenced by the general meeting of shareholders passing a resolution on the companys winding up by a special majority (three quarters of votes present).
The bankruptcy proceedings are commenced through an order by the court. The petition for bankruptcy may be filed by the debtor, any creditor, or a personally liable shareholder of the debtor. A creditor applying for bankruptcy must substantiate its claim including the fact that the claim is overdue by two months. The compulsory settlement may be initiated by the debtor or a personally liable shareholder of the debtor. The court orders commencement of the compulsory settlement proceedings if it is satisfied that the petition is complete and satisfies all statutory requirements as to its content. Once the general meeting of shareholders passes the resolution on the companys winding up, the resolution is registered with the register of companies held by the court.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Slovenia?
The court order placing the debtor in bankruptcy or compulsory settlement is published online, on the internet page of the Agency of the Republic of Slovenia for Public Records and Services (AJPES), www.ajpes.si. On this page other relevant court orders, administrators and debtors reports and minutes of meetings, submitted or adopted during the proceedings, are also published. A liquidation administrator, appointed with the resolution on winding up, manages the affairs and business of the company with the purpose of its winding up. After his appointment, he has to
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Two procedures apply for insolvent companies: bankruptcy; and compulsory settlement. Both are governed by ZFPPIPP. A solvent
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publish a call to all creditors to prove their claims to him. He has to prepare a report on liquidation proceedings and a proposal for distribution of assets for approval of the general meeting of shareholders.
Slovenia
settlement is not deprived of its rights. It remains in control of the company, albeit its authority is limited. Consent of the administrator is required for operating debtors accounts. The board may not incur liabilities and dispose of assets except in the ordinary course of business; for any activity outside the ordinary course of business, the board must obtain approval from the court, provided that such activity is part of the financial restructuring. The rights of shareholders are affected by compulsory settlement procedure insofar as their rights are modified (e.g. diluted due to debt to equity swap) in accordance with the terms of the compulsory settlement. In bankruptcy proceedings shareholders rights lapse. In liquidation proceedings, the liquidation manager appointed by shareholders manages the affairs and business of the company. The shareholders rights lapse only with deletion of the company from the register at the end of proceedings and by that companys cessation as a legal entity. Until then the general meeting of shareholders retains all its powers including with the right to reverse the decision to liquidate the company until the assets are distributed among the shareholders.
3.1
Once bankruptcy or compulsory proceedings have been commenced, no creditor may enforce its claim in execution proceedings. All pending execution proceedings against the debtor are suspended and no new execution orders may be issued. Liquidation proceedings do not affect the right of unsecured creditors to enforce its claim in judicial proceedings if the liquidation administrator disputes its claim.
The rights of secured creditors are not affected by bankruptcy or compulsory settlement proceedings, provided that, in bankruptcy proceedings, the secured creditors file their claims and collateral within the prescribed time limit. A lien obtained in execution proceedings within the last two months before proceedings were opened is not enforceable. Secured creditors claims are satisfied from proceeds of the sale of relevant assets - i.e. collateral. Collateral is realised in bankruptcy proceedings by an administrator unless the creditor has the right to realise collateral extra judicially. Liquidation proceedings do not affect the rights of a secured creditor to enforce its security.
In general the petitioner must fund the initial costs of bankruptcy and compulsory settlement proceedings. This initial cost is treated in bankruptcy proceedings as a preferential claim in case a petitioner is creditor and if there are sufficient assets, a petitioners advance funding costs are satisfied. To the extent the business of the debtor continues after proceedings are commenced, the revenues must be sufficient to cover the cost of business. Cost of liquidation proceedings are borne by the company as its operating costs.
Claims that can be offset against the claims of the debtor at the time of the commencement of bankruptcy or compulsory settlement proceedings are automatically set off. The creditor does not prove such claim in bankruptcy proceedings, but notifies the administrator about the set off. Claims that have been assigned to a creditor within the last six months before bankruptcy proceedings were opened are ineligible for set off in bankruptcy proceedings, provided that the creditor knew or should have known of the debtors insolvency at the time of assignment. In liquidation proceedings no special set off rules apply. Set off is possible in accordance with general rules.
The commencement of bankruptcy proceedings does not automatically terminate employment contracts. The bankruptcy administrator terminates employment contracts with those employees, whose employment becomes redundant. In compulsory settlement, employees may be dismissed, if this is envisaged as part of financial restructuring. In liquidation proceedings, the employees are dismissed in due course, once their employment is not required any longer for collecting the debts and realising the assets of the company. If the business or part of the business is sold in any proceedings, the employees right to employment is protected pursuant to labour regulations on protection of employees in case of the transfer of the undertaking.

A court appoints an administrator in its order on commencement of bankruptcy and compulsory settlement proceedings respectively. Once the bankruptcy proceedings are commenced, the debtors boards powers cease. The bankruptcy administrator assumes the duties of the board and control over the debtor. Differently from bankruptcy, an incumbent board in a compulsory
Contracts, which have been entered into before commencement of bankruptcy or compulsory settlement proceedings and which have not been performed by either party, remain in force. But the debtor may, with leave of the court, rescind the contract in one month after the commencement of the compulsory settlement proceedings and in three months after the commencement of the bankruptcy proceedings. The court in compulsory settlement proceedings grants leave if rescission is in accordance with the terms of financial restructuring, and in bankruptcy proceedings if rescission contributes

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to more favourable terms of satisfaction of the creditors claims. The liquidation proceedings do not interfere with the contracts of the company.
5.3
Slovenia
The commencement of proceedings does not affect corporation tax liabilities of the company. The general tax regime applies.
Slovenia
5 Claims

Creditors must file their claims with the court within one month after commencement of compulsory settlement proceedings and in three months after commencement of bankruptcy proceedings. The claims are examined by the administrator and other creditors. The administrator may object to the claim on its initiative or on the motion of a creditor. The court decides whether objected claims are proven in the proceedings. If the court in bankruptcy proceedings does not prove a claim, the creditor must file an action to prove its claim in litigation proceedings. If a creditor does not file its claim in time in compulsory settlement proceedings he is not able to vote on compulsory settlement. In bankruptcy proceedings, a creditor who fails to file a claim in time loses the right to satisfy his claim out of the estate. The secured creditors do not have to file their secured claims in compulsory settlement proceedings. In bankruptcy proceedings secured creditors who may not realise collateral extra judicially, have to file their claims and collateral. Failures to file such collateral in time, results in that collateral lapsing. Collateral may also be contested by the administrator or other creditors. In liquidation proceedings, creditors file their claims within the time limit announced in the call for filing the claims. If the liquidation manager contests any claim, the dispute is resolved in litigation proceedings. The liquidation manager is required to secure sufficient funds for claims which have not been filed, but are known to him.
This process applies in compulsory settlement. The terms of compulsory settlement are approved by a majority of votes (60%) of creditors with the right to vote (broadly, those creditors who filed their claims in time and the claims have been proved). Claims carry different votes, depending on the type of the claim (ordinary, subordinated) and if it was subject to debt to equity swap. The approved settlement is binding upon the dissenting creditors also.
The proposal for compulsory settlement is put to the vote. The proposal includes extension of the payment term, reduction of principal or interest (haircut), share capital increase with debt to equity swap, or any combination of these measures of restructuring. If the majority of creditors approve it, the court confirms the compulsory settlement. The confirmed compulsory settlement may be challenged by any creditor whose claim has been affected by the compulsory settlement on the grounds that the debtor is able to pay its debts in full. During the term of compulsory settlement, the board must regularly report to the court on implementation of restructuring measures required for satisfaction of the terms of compulsory settlement. Once the bankruptcy manager has realised all assets of the debtors estate, the assets are distributed among creditors. After final distribution is made, the court upon report of the bankruptcy administrator orders end of bankruptcy proceedings and the debtor is deleted from the register and by that ceases as a legal entity. Once the assets are distributed in the liquidation proceedings, the administrator files the report and proposal on distribution adopted by the shareholders, together with his statement on the assets distribution with the register of companies held by the court and applies for deletion of the company from the register. With the deletion from the register, the company ceases to exist as a legal entity.
In general the ranking of the unsecured claims is the following: A. cost of proceedings, including the administrators cost and expenses, wages of employees who continue to work for the debtor, other costs of running the business of the debtor including certain taxes (VAT and tax on income from disposal of real estate); preferential claims (employees redundancy payments and other accrued employees pay and, in bankruptcy proceedings, also debtors taxes accrued within the last year before commencement of bankruptcy proceedings); ordinary claims; subordinated claims; and shareholders claims.
B.

7.1 Is it common to achieve a restructuring outside a formal procedure in Slovenia? In what circumstances might this be possible?
C. D. E.
These claims are satisfied from the debtors general estate excluding assets which are collateral of secured creditors. The secured claims are satisfied from collateral as segregated assets of debtors estate. Any excess of assets, once secured claims are satisfied, are transferred to the general debtors estate. Compulsory settlement affects only ordinary and subordinated claims, existing at the commencement of the proceedings. Other claims have to be satisfied in full.
No, restructurings outside formal procedures are not common. Such restructuring can be initiated whilst a company is still solvent and is feasible in cases with few creditors which can align their interest with the interest of shareholders.
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In liquidation proceedings the order of priorities is broadly the same as in insolvency proceedings.
Reorganisation of a solvent company is possible, in accordance with corporate law rules. Once a company is insolvent, reorganisation may be one of the measures of financial restructuring
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Jadek & Pensa

proposed by the debtor and is subject to approval by creditors in the compulsory settlement.
Slovenia
Simon Gabrijelcic
v v
Jadek & Pensa d.n.o.-o.p. v Tavcarjeva 6 1000 Ljubljana Slovenia
Such restructuring is not practised in Slovenia.

v v
+386 1 234 2520 +386 1 234 2532 simon.gabrijelcic@jadek-pensa.si www.jadek-pensa.si
8 International
8.1 What would be the approach in Slovenia to recognising a procedure started in another jurisdiction?
Simon Gabrijelcic has been a partner at Jadek & Pensa since 2002. His practice is in banking & finance, capital markets, corporate and competition. He has recently advised on a high profile restructuring case.
The approach to cross-border insolvency issues, including recognition of foreign proceedings, depends on the jurisdiction where the insolvency procedure is started. Recognition of insolvency proceedings opened in another EU Member State is regulated with the Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings. With regards to insolvency proceedings opened in other jurisdictions, the Insolvency Act has implemented rules provided in the UNCITRAL Model Law on Cross-Border Insolvency.
Jadek & Pensa provides its clients with a professional service in the areas of banking & finance, capital markets, competition, corporate, dispute resolution, employment, intellectual property, project finance, restructuring/insolvency and tax. The firms reputation of a combination of technical ability and commercial awareness has been widely recognised. Various legal publications continuously rank the firm in the top-tier. It collaborates with most of the top international law firms. Jadek & Pensa has extensive experience in insolvencies and restructurings and has advised on several high profile cases.

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Chapter 38
South Africa
Edward Nathan Sonnenbergs
Gary Oertel
Claire Morgan

1.1 How does a creditor take security over assets in South Africa?
the liquidator of the company but until such time as the transactions are set aside by the court they stand. Where a liquidator has reason to believe that a transaction may be impeachable, it is the liquidators duty to investigate the transaction and, if authorised by creditors, the liquidator may launch court proceedings to set the transaction aside. The prerequisites of the voidable transactions are as follows: A disposition made without value: a court may set aside a transaction where a liquidator proves that more than two years before liquidation the company disposed of an asset and, immediately following such disposition, the companys liabilities exceeded its assets and the disposition was not made for value; alternatively, the liquidator proves that within two years of liquidation the company disposed of an asset not for value, unless the person claiming under or benefited by the disposition proves that the companys assets exceeded its liabilities at the time of the disposition. Voidable preferences: the court may set aside a transaction where the liquidator proves that within six months before liquidation and immediately after the disposition the liabilities of the company exceeded its assets, unless the person in whose favour the disposition was made proves that it was made in the ordinary cause of business and that it was not intended to prefer one creditor above another. Undue preferences: the court may set aside a transaction where the liquidator proves that after the disposition the companys liabilities exceeded its assets and the disposition was made with the intention of preferring a creditor and the company was thereafter liquidated. Collusive dealings: the court may set aside such transaction where the liquidator proves that the asset was disposed of in such manner which had the effect of prejudicing creditors or preferring one creditor above another and the disposition was effected by the company in collusion with another. Voidable sale of business: where the company disposes of any business or goodwill belonging to it and the sale is not properly advertised to creditors in terms of the relevant provision of the Insolvency Act, the sale will be void against creditors for a period of six months after disposition and will be void if the company is liquidated any time within that period. The provisions of the Insolvency Act relating to impeachable transactions do not apply to dispositions effected in accordance with the rules of a securities exchange or clearing house. In addition to the statutory provisions referred to above, there is a common law remedy which applies to a disposition which is made in fraud of creditors.
Security in respect of corporeal movable property (i.e. tangible property) can be taken in the following manner: 1.1.1 A special notarial bond which lists the assets over which the bond is registered. This creates a statutory pledge in favour of the mortgagee; 1.1.2 A common law pledge. The creditors must be placed in possession of the assets subject to the pledge which is then held as security. This is uncommon in practice due to the practical constraints; and 1.1.3 A general notarial bond registered over the movable property of the debtor. This is essentially an agreement between the creditor and the debtor which entitles the debtor to take possession of the debtors movable assets upon the happening of a specified event, such as default. Once the creditor takes possession, which is normally pursuant to a court order, his security is converted to a pledge. Security in respect of immovable property (i.e. land) is taken in the form of a mortgage bond which is registered over the property. Security in respect of incorporeal property (i.e. intangible property such as rights) is taken in the form of a cession. The cessionary holds the rights as security for the indebtedness of the debtor. The most common form of cession is a cession of book debts.
The following types of transactions may be set aside where a company in financial difficulties is subsequently placed in liquidation: (a) (b) (c) (d) (e) dispositions made without value; voidable preferences; undue preferences; collusive dealings; and voidable sales of a business or of a property forming part thereof.
Transactions which are found by a court to have constituted dispositions made without value, voidable preferences, undue preferences and collusive dealings are voidable at the instance of
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1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties South Africa?
South Africa
by its own directors and members) or by a creditor. In certain circumstances the company may be wound up by special resolution which resolution is registered in the office of the registrar of companies in Pretoria. A liquidation may be either voluntary or involuntary.
2.2 What are the tests for insolvency in South Africa?
There is no civil or criminal liability that arises automatically in relation to directors trading in a company in financial difficulties. On liquidation, directors are, by law, divested of their powers and authority in relation to the company. After liquidation and after investigation into the affairs of the company have been conducted by the liquidator (which investigations may include formal enquiry proceedings in terms of the Insolvency Act or the Companies Act), the liquidator may sue the former directors for reckless or fraudulent trading within the provisions of the Companies Act. When it appears that the business of a company was or is being carried on recklessly with intent to defraud creditors of the company, the court may on the application of a liquidator, a creditor or a member declare that any person (not just a director of the company) who was or is knowingly a party to the carrying on of the business in the fraudulent or reckless manner, will be personally liable without any limitation of liability for all or any debts or other liabilities of the company as the court may direct. Where the liquidator finds evidence of fraud such evidence may be turned over to the relevant authorities for criminal prosecution.
The tests for insolvency relating to individuals and trusts are different and more onerous than the test for insolvency in relation to companies. The test for the insolvency of a company is commercial insolvency (as opposed to actual insolvency), that is, whether the company is able to pay its debts as and when such debts arise in the ordinary course of its business.
A company may be wound up by the court if: the company is unable to pay its debts; if it appears to the court that it is just and equitable that the company be wound up; if the company itself has resolved by special resolution that it be wound up by the court; if the company commences business before the registrar of companies certified that it was entitled to commence business; if it does not commence business within a year from incorporation or has suspended its business for a year; in a case of a public company, if the number of members has been reduced below seven; 75% of the issued share capital of the company has been lost; and in the case of an external company, the company is dissolved in the country in which it was incorporated. The main grounds on which companies are placed in liquidation by the court are the companys inability to pay its debts and on just and equitable grounds. On just and equitable grounds confers on the court a wide discretionary power taking into account all relevant circumstances. An applicant who relies on just and equitable grounds must come to court with clean hands, that is, the applicant must not itself be wrongfully responsible for the circumstances which have brought about the state of affairs alleged in the application. The five broad categories of just and equitable grounds for the winding up of a company are: the disappearance of the companys substratum; illegality of the objects of the company and fraud committed in connection therewith; deadlock (between members or directors); grounds analogous to those for the dissolution of partnerships; and oppression (usually minority oppression).
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in South Africa?
2.1.1 Scheme of Arrangement A company may enter into a formal, court sanctioned compromise or arrangement between itself, its members and creditors. Such compromise or arrangement must be agreed to by a majority in number representing three-quarters in value of creditors or a class of creditors or a majority representing three-quarters of the votes exercisable by the members or class of members. If such compromise or arrangement is sanctioned by the court then it is binding on all creditors or classes of creditors or on all members or classes of members. It is also binding on the liquidator if the company is already in the process of being wound up. Such compromises or arrangements are effected in terms of section 311 of the Companies Act. Compromises or arrangements in terms of section 311 may be made in an attempt to avoid liquidation or judicial management proceedings in respect of the company by creditors effectively agreeing to limit their claims in order to enable the company to continue trading. 2.1.1 Judicial Management When a company, usually by reason of mismanagement, is unable to pay its debts and is thereby prevented from becoming a successful concern, and there is a reasonable probability that if placed under judicial management it may be enabled to pay its debts and become a successful concern, the court may on just and equitable grounds order that a company be placed under judicial management. A judicial manager (usually a liquidator acting in that capacity) will be appointed by the court and will seek to trade the company out of its difficulties by reaching a compromise or arrangement with creditors and by proper management of the company. Judicial management is uncommon as it has almost always been found to be ineffective in saving a company. 2.1.3 Liquidation Most companies placed in liquidation are wound up by the court after application has been made, by the company itself (authorised
The court may order that the company be placed in liquidation where application to court is: made by the company itself; by one or more of its creditors; by one or more of its members; jointly by any or all of the above parties; and, in the case of a voluntary winding-up, by the Master or any creditor or member; or, in the case of the discharge of a judicial management order, by application by the judicial manager. Application is made on one or more of the grounds set out in question 2.3 above. Where the liquidation application is not opposed, an order of liquidation may generally be

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obtained within days of issuing the application at court. Where the liquidation application is opposed either by the company itself or by the intervention of another creditor, the court hearing will be delayed by a number of months for the filing of further affidavits. The date of liquidation is deemed to be the date on which the application is issued out of Court. The directors are divested of their powers and authority on liquidation. The liquidator who is appointed shortly after liquidation thereafter takes control of the affairs of the company and acts on its behalf. In the case of a voluntary liquidation by way of resolution, the winding up commences on the registration of the resolution in the office of the registrar of companies.
South Africa
their claims against the company in liquidation in the hope of receiving a dividend payment in due course. Dividends are paid out in the legal order of preference of creditors set out in the Insolvency Act.
South Africa
Secured creditors are not free to enforce their security on liquidation. Creditors, including secured creditors, may lodge their claims against the company in liquidation and may rely solely on their security to avoid being levied with a contribution for costs in the liquidation.
A director files a statement of affairs in the prescribed format setting out, inter alia, the asset and liability position of the company. The statement of affairs is a sworn statement which the director is obliged to furnish the liquidator. The former directors of the company are furthermore under a duty to assist the liquidator in the winding up of the company. As soon as a final winding up order has been made by the court or the resolution for a voluntary winding up has been registered, the office of the Master of the High Court calls a first meeting of creditors and members whereat the statement of affairs is considered, claims against the company are submitted for proof and the formal nomination of persons for appointment as liquidator occurs. The Master will appoint the final liquidator(s) based on the nomination and voting at the first meeting of creditors. Approximately two months later a second meeting of creditors is convened by the liquidator. At the second meeting the liquidators resolutions, which grant the liquidator authority inter alia to enter into compromises or arrangements with creditors, borrow funds to continue trading and sell off the companys assets without obtaining the prior sanction of the court, will be passed by members and creditors. The former directors of the company are obliged to attend the first and second meetings and may be called on to answer the questions of the liquidator, the Master of the High Court or a creditor at such meetings. The second meeting may be adjourned for formal enquiry proceedings. The liquidator may also institute formal enquiry proceedings after application to court in terms of the Companies Act. At such enquiry proceedings a commissioner will be appointed and persons including directors of the company may be summonsed to give information or documentation concerning the trade, dealings, affairs or property of the company. Such an enquiry may only be convened where the company is unable to pay its debts. Notice of the provisional order of liquidation is published in two local newspapers within the jurisdiction of the relevant court and in the Government Gazette. Notice of the first and second meeting of creditors is published in the Government Gazette.
A creditor may not set off a sum owed by it to the company in liquidation subsequent to the date of liquidation. Where a set off has already been effected between a creditor and a company that is placed in liquidation within six months of the set off, the liquidator may set aside the set off if it was not effected in the ordinary course of business. The creditor may then prove its claim against the company as if no set off had occurred.

The liquidator controls the company. On liquidation, directors are divested of their powers and authority to act on behalf of the company. Directors are obliged to assist the liquidator in winding up the affairs of the company. A liquidator may continue to employ a director or employees of the business to assist him or her in the winding up. On liquidation shareholders are also divested of any powers they may have, for example, to call a meeting of the company.
The costs of the liquidation are paid from the realisation of the assets and the business of the company in liquidation. Where the liquidator requires funding that is not readily available to the company but which may accrue to it in due course either through the sale of assets or through post-liquidation trading by the liquidator, the liquidator may borrow such funds on authorisation by creditors or the court.
3 Creditors
Unsecured creditors are not free to enforce their rights on liquidation. Court process against a company in liquidation is also suspended. Creditors, including unsecured creditors, may lodge
The contracts of employment of the companys employees are automatically suspended on liquidation, and employees are no longer required to tender their services although the liquidator may continue to employ some or all of the employees to assist in the winding up or post-liquidation trading. Employees contracts are finally terminated by the liquidator after giving employees notice to this effect. Employees enjoy a limited statutory preference for payment of their claims against the company for unpaid salaries and other benefits and rank just below secured creditors. In the event
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that the liquidator sells the business of the company as a going concern, the contract of employment of the employees are automatically transferred to the purchaser. The liquidator can negotiate with employees to regulate the number of employees whose contracts are transferred to the purchaser.
South Africa
Income tax would be payable on any income earned by the liquidator post liquidation. Such interest on the bank account is taxable.
6.1
In respect of executory contracts (that is, contracts in which performance is still outstanding by one or both parties), the liquidator has the election whether the company in liquidation will abide by the terms of the contract or whether the contract will be cancelled. Where the liquidator elects that the company will perform its obligations in terms of the contract, the other party is also obliged to perform its obligations under the contract, save where an accrued right to cancel the contract existed prior to liquidation in which case the other party may cancel the contract. Certain contracts, for example, contracts of agency, terminate automatically on liquidation.
Creditors vote by number and value in liquidation proceedings. A creditor may not vote on a matter in which it has a direct interest. There is no special process for cramming down creditors.
5 Claims
The winding up of a company is complete when the liquidator has realised all the assets and completed his investigations (and any action that may have arisen therefrom) into the affairs of the company. The liquidator will draw a final liquidation and distribution account and make the final dividend payment to creditors (if any). The registrar of companies will de-register the company. Alternatively, a company may be discharged from liquidation by court sanction where creditors enter into a compromise or arrangement with the company in terms of section 311 of the Companies Act.
The creditor will depose to an affidavit incorporating supporting documentation which sets out the creditors claim against the company in liquidation. The claim affidavit will be submitted for proof at a meeting of creditors. A claim admitted to proof at such meeting will subsequently be examined by the liquidator who will perform his or her own reconciliation of the claim from the books and records of the company in liquidation. Where the liquidator does not dispute the claim, the creditor becomes a proved creditor and may receive a dividend in due course. Damages claims are submitted to meetings of creditors but may not be proved against the company in liquidation until a liquidator authorised in terms of the second meeting resolutions has compromised such claim or until such claim has been settled by court process instituted by the creditor.

7.1 Is it common to achieve a restructuring outside a formal procedure in South Africa? In what circumstances might this be possible?
It is not common for a company to achieve a material restructuring outside the formal procedures because other creditors are not bound thereby.
5.2.1 The ranking of claims is governed by the Insolvency Act. 5.2.2 In respect of assets over which security is held, the proceeds of such assets are first utilised to settle realisation costs and any other costs of liquidation which are applicable to such asset as thereafter the surplus is utilised to settle the secured creditors claim. Any surplus is transferred to free residue. 5.2.3 In respect of unencumbered assets (i.e. free residue) the proceeds of such assets are applied as follows: costs of realisation and cost of liquidation; thereafter in settlement of creditors who enjoy statutory preferences such as employees and internal revenue; and thereafter in payment to concurrent creditors (i.e. unsecured creditors).
A scheme of arrangement, i.e. a compromise with creditors, may be entered into outside of a liquidation in terms of section 311 of the Companies Act. Attempts may also be made to reorganise a debtor within the context of judicial management (see question 2.1 above).
A liquidator may sell the business as a going concern. The liquidator may apply to court for its sanction to do so where such sanction is urgently required. Alternatively, the liquidator obtains his authority from creditors and members at meetings of creditors and members and may thereafter dispose of the business on the appropriate terms and conditions.
Where a liquidator continues for a time to trade in liquidation, then ordinary tax liabilities will be incurred in the course of trading.

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8 International
8.1 What would be the approach in South Africa to recognising a procedure started in another jurisdiction?
South Africa
South Africa
A foreign representative may apply to a South African court for recognition of the foreign proceedings in which the foreign representative has been appointed. The South African court may
recognise the foreign proceedings. Alternatively, the foreign representative may request from the South African court that proceedings commence under the laws of South Africa relating to insolvency or the right to file claims in such proceedings. On recognition of foreign proceedings, the foreign representative has standing to initiate any legal action to set aside a disposition that is available to a liquidator under South African insolvency law. The foreign representative may also intervene in any proceedings in which the debtor is a party.
Gary Oertel
Edward Nathan Sonnenbergs 150 West Street, Sandown Johannesburg 2196 PO Box 783347, Sandton 2146 South Africa
Claire Morgan
Edward Nathan Sonnenbergs 1 North Wharf Square, Loop Street Foreshore, Cape Town 8001 PO Box 2293, Cape Town 8000 South Africa
+2711 269 7600 +2711 269 7899 goertel@ens.co.za www.ens.co.za
+2721 410 2500 +2721 410 2555 cmorgan@ens.co.za www.ens.co.za
Gary is a director at ENS of thirteen years experience and provides advice on insolvencies, insolvency enquiries, liquidations, section 311 compromises and litigation arising out of insolvencies. He also assists banks and other creditors in relation to insolvencies and liquidations.
Claire is a director at ENS and has experience in insolvency enquiries, insolvency litigation and schemes of arrangement. She provides opinions on the implications of insolvency in commercial and banking transactions and advises clients on the implications of sequestration, liquidation, securing debt, corporate governance, impeachable dispositions and rehabilitation. Her clients include banks, retailers, oil and other listed companies, liquidators, trustees, entrepreneurs and corporate investors.
Edward Nathan Sonnenbergs was established in 2006 as the result of a merger between two of South Africas most prominent and leading law firms, Edward Nathan and Sonnenberg Hoffmann Galombik. As a full service law, tax, forensics and business advisory services firm, ENS offers a level of legal competence that sets a new standard in Africa, both geographically and in terms of service, skills and expertise. ENS is based in Johannesburg, Cape Town and Durban. ENSs Insolvency, Business Rescue and Debt Recovery department assists clients in proactively managing insolvency and financial exposure. When insolvency is inevitable, however, the strategy becomes one of minimising loss, maximising returns for creditors and developing and implementing a recovery strategy for viable business activities.
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Chapter 39
Spain
Ura Menndez
Alberto Nez-Lagos Burguera
ngel Alonso Hernndez

1.1 How does a creditor take security over assets in Romania?
declared void if they have caused damage to the debtors state, even if no fraud has been committed. Payment and settlement transactions in securities and financial markets and those entered into by the debtor in the ordinary course of business on an arm-length basis are not subject to claw-back claims. As a general rule the party who claims the annulment of a particular transaction carried out within the claw-back period (i.e., the Trustees or a creditor, which is entitled to do so if the Trustees do not claim such annulment in two months since the creditor requested it by written form, indicating the act subject to clawback) must give evidence of the damage caused to the debtors state. However, in the following cases it is presumed that damage to the debtors state has been caused irrespective of the evidence brought: (i) transfer of assets without consideration; and (ii) prepayment of indebtedness maturing after the time the insolvency is declared. In addition, in the following cases it is presumed that damage has been caused to the debtors state (although the debtor or the affected party are allowed to bring the necessary evidence to destroy the presumption): (i) transfer of assets to any of the persons that are specially linked with the debtor (e.g., inter-group transactions); and (ii) security granted for securing existing nonsecured obligations or new obligations replacing non-secured obligations. If the Judge annuls a transaction under the claw-back provisions, the Judge will order that the party who has received any asset from the debtor returns it back with its interests and proceeds. If this cannot be carried out because the relevant asset was subsequently transferred to a third party under any of the circumstances provided by Law according to which such sale cannot be annulled, the first acquirer will be obliged to deliver to the debtors estate an amount equal to the value of the asset as of the time when it took out from the debtors estate plus interests calculated at legal the interest rate. The consideration delivered by such first acquirer in the voided transaction would be considered as a credit against the debtors estate that must be paid simultaneously with the return, by the first acquirer, to the debtors estate of the relevant asset. However, if the Judge considers that the clawed back transaction was carried out in bad faith, the first acquirer will be obliged to indemnify the damages caused to the debtors estate. Likewise, it will be considered that the acquirers right to the return of the consideration delivered is only a subordinated claim, to be paid in the last position in the ranking (see question 5.2 below).
Under Spanish Law, in rem security interests are conceived as rights created upon certain assets and which allow creditors to enforce their credit rights against those assets with priority to other creditors of the owner of the assets. See questions 3.2 and 5.2 regarding restrictions for enforcement and ranking of secured creditors. In order to take security over the debtors assets, a creditor has a wide range of possibilities under Spanish Law: (i) Pledge (prenda) over movable assets. This type of pledge, which is applicable to almost all types of movable assets (shares, credits, etc.), requires mandatory transfer of possession on the relevant asset from the debtor (or owner of the asset) to the secured creditor. The pledge is granted in a public deed in order to have evidence of the date when the pledge was granted and cannot be registered, although the pledge over credits may be granted in another kind of document (not only public deed) which gives enough evidences on the date. Pledge over certain movable assets (e.g., machinery, assets with serial number, stocks, harvest products, livestock, farming machinery, receivables, even future, not represented by securities) that do not involve the mandatory transfer of possession of the relevant asset (prenda sin desplazamiento). This type of pledge is granted in a public deed and registered. Mortgage created on real estate assets (hipoteca). Mortgage must be granted in a public deed and registered with the Property Registry. No transfer of possession is necessary as the principles underlying the Property Registry allow everyone to be aware that a certain asset is the subject of a security interest. Mortgage on certain movable assets (businesses, motor vehicles, railway wagons, airplanes, industrial machinery, industrial and intellectual property) (hipoteca mobiliaria). This type of mortgage on certain movable assets must be granted in a public deed and registered. No transfer of possession is necessary.
(ii)
(iii)
(iv)
1.2
The Spanish Insolvency Act provides a claw-back period of two years starting from the date when the insolvency is declared by the Judge. All transactions carried out during such period can be

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1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Spain?
Spain
If the insolvency is qualified as guilty, the Judge may order that the directors (including shadow and de facto directors) and all the persons who have fulfilled management functions within the two years prior to the insolvency declaration: (i) are disqualified to manage assets or to become representative for a period of two to 15 years; (ii) lose any claims that may be held against the debtor; and (iii) indemnify any damages caused. Likewise, in the event of insolvency proceedings ending in liquidation, such directors can be sanctioned to pay the amount of credits that remain unpaid after the liquidation of the debtor. Likewise, the Insolvency Act foresees that at any stage the Judge may order the seizure of goods owned by directors (including shadow and de facto directors during the above-referred period of time) when it is foreseeable that the insolvency will be declared as guilty and that there would not be enough assets to pay all debts. The existence of any of the above-referred circumstances or facts that may cause the insolvency to be considered guilty may be alleged by any of the creditors, but will be in any case investigated by the Judge with the assistance of the Trustees and the Prosecutor Office (Ministerio Fiscal). (iii) Criminal liability Under Spanish Criminal Law (Cdigo Penal), directors may have criminal liability punished by prison (from two to six years and with penalties from eight to 24 months), if they have caused or wilfully aggravated the insolvency of the company (iv) General Corporate Law liability The trustees are entitled to claim damages against the Directors caused to the company as a result of breach of Law or By-laws, or breach of their fiduciary duty or duty of care, without prior consent from the General Shareholder Meeting. A third party can claim against Directors any damage caused by them exercising their Directors faculties.
Spain
If the directors continue to trade whilst a company is in financial difficulties, they may face the liabilities referred to below. Directors liabilities under any of these grounds can be claimed independently. (i) Capital impair situation According to article 260.1.4 of the Spanish Public Companies Act, if the companys net worth is reduced by losses to less than 50% of the share capital, the company is in a statutory cause of compulsory dissolution. Directors are obliged to call a general shareholders meeting within the two months following the date they become aware - or should have become aware - of this situation, in order to pass a resolution to dissolve or to recapitalise the company. If the general meeting is not held, or if none of these resolutions are passed, the directors are required to lodge a judicial claim requesting the dissolution of the company within the two months following the date of the general meeting or when such meeting should have been held. If the directors fail to comply with these obligations, they will be held joint and severally liable for those obligations arising after the capital impairment situation. All credits will be presumed that have arisen after the capital impairment situation, unless directors give evidence to the contrary. The directors obligation to apply for judicial dissolution may be substituted by application for insolvency if the company is in insolvency as provided in question 2.2 below. (ii) Liability in case of guilty insolvency If the insolvency proceedings lead to the liquidation of the company, or to a creditors agreement which provides for a reduction higher than 1/3 of the liabilities of the company or for a stay of more than three years, the Insolvency Judge shall analyse if the insolvency should be declared guilty or not. Pursuant to the Insolvency Act, the insolvency would be qualified as guilty if it has been caused or aggravated due to the debtors and/or its directors (including shadow and de facto directors) wilful misconduct or gross negligence. Absent evidence to the contrary, wilful misconduct or gross negligence will be presumed in the following cases (among others): (a) where directors fail to file an application for insolvency within two months from the date when they knew or should have known the insolvency situation of the company. It is presumed, absent evidence to the contrary, that the debtor was aware of its insolvency situation if any of the facts enabling creditors to file for insolvency has arisen (see question 2.2); and where the annual accounts related to the three fiscal years preceding the declaration of insolvency have not been issued, or audited or, once approved, have not been deposited with the Commercial Registry.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Spain?
The Insolvency Act establishes a single procedure (concurso) for any type of insolvency (both liquidation and restructuring) that is governed by a Judge with participation by a number of trustees (generally three: a lawyer and an auditor with at least five years of experience, and an ordinary or generally privileged, non-secured, creditor, which must appoint an auditor). This procedure has a common phase and two different solutions, namely: a) a creditors composition agreement, designed to permit the debtor to reactivate its business under certain conditions set forth in such agreement for the payment of their credits; and the liquidation of the debtors assets (see question 6.2) in order to pay its debts (through a trustees plan approved by the Judge, or if it is not approved, according to the rules stipulated in Insolvency Act). Insolvency Law intends to privilege the transfer of the entire business of the debtor to a third party as a going concern.
(b)
b)
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Additionally, it must be highlighted that, among other cases, the Insolvency Act provides that the insolvency will be declared in any case as guilty if: 1. the debtor has not complied with its accounting obligations or has double accounting or incurs in a relevant irregularity that may affect to the understanding of its net worth or financing situation; 2. the assets of the debtor are fraudulently transferred out from debtors estate during the two years prior to the declaration of insolvency; or 3. the debtor has carried out acts with the intention to simulate a fictitious net worth position.
During the common phase, the Judge will appoint the members of the trustees panel, whose main function is to determine the debtors estate and existing debts, and to control the management of the debtors business. They will issue a report drafted on the causes of the insolvency alleged by the debtor and its net worth and accounting situation, as well as set the inventory of the debtors estate and the list of creditors. The common phase ends once all claims brought by an interested party against such list of creditors
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and/or inventory drafted by the Trustees have been resolved by the Judge.
2.2 What are the tests for insolvency in Spain? 2.6
Spain
How does somebody establish whether the company has been placed into one of these procedures?
Only the Judge may declare that a debtor is insolvent (for publicity of the insolvency see question 2.5 above).
Additionally, the debtor can apply for insolvency if the debtor foresees that it will not be able to regularly comply with its obligations once they become due and payable. Likewise, any creditor is entitled to file for the debtor insolvency, basing its claim on the insufficiency of attachable assets when enforcing its credits against the debtor, or otherwise to provide evidence of any of the following facts: (a) (b) (c) (d) general default of the debtors payment obligations; general seizure of the debtors assets; sale of the debtors assets at a loss or in a negligent manner; and debtors failure to pay during the three-month period preceding the filing for Involuntary Insolvency its (i) tax liabilities; (ii) social security obligations; or (iii) salary and other monetary employment obligations.
3.1
No enforcements may be started during the insolvency proceedings. Enforcement of claims initiated before the declaration of insolvency will be suspended on the date of the declaration of insolvency, except for those of an administrative and labour nature, to the extent that they are enforced on assets which are not necessary to carry out the business of the debtor.
2.3
See question 2.2 above.

Either the debtor or any of its creditors may file for the insolvency of the debtor, as referred in question 2.2 above. The directors of a company have the obligation to file for insolvency (a Voluntary Insolvency) within two months from the date its directors become aware or should have become aware of the insolvency situation. Once the debtor evidences to the Judge its indebtedness and insolvency situation, the Judge automatically declares the debtor to be insolvent. The failure of a debtor to file for Voluntary Insolvency, if it is required to do so, subjects the company and its directors to various sanctions (see question 1.3 above). A creditor can also file an application for the insolvency of a debtor (an Involuntary Insolvency), according to the facts described in question 2.2 above. Such creditor, being an ordinary creditor, is privileged for an amount of the 25% of its credit (see question 5.2). The debtor is entitled to give evidence in a hearing to be held with this respect that, notwithstanding the concurrence of any of such facts, no insolvency as defined in question 2.2 above arises.
2.5 What notifications and meetings are required after the company has been placed into each procedure?
Until (i) the approval of any composition agreement or (ii) the expiry of one year from the date of declaration of insolvency provided that the liquidation phase is not opened (whichever is earlier), no enforcement of security can be commenced or continued if the enforcement relates to assets required for allocated to the business of the debtor (unless (i) advertisements on the collaterals auctions would have been published by the time of the declaration of the insolvency and (ii) the assets, although allocated to, were not necessary as to run the debtors business). Other creditors (e.g., financial lessors or sellers of real estate with deferred payment subject to termination conditions registered with the Commercial Registry) are subject to the same regime. If the secured assets are not assigned to the activity of the debtor, secured creditors can enforce their security. According to the scarce existing case-law, Spanish Courts consider that assets are not assigned to the activity when the debtor ceases to carry out business or at least the debtor has ceased the part of its business related to the assets granted as security.
No set-off can be carried out after the declaration of insolvency unless the requirements for such set-off pursuant to Spanish Civil Code are met prior to the declaration of insolvency. Notwithstanding any possible claw-back actions, insolvency will not affect the right of the creditor to set-off if: (i) the Law that governs the reciprocal credit of the debtor allows set-off in cases of insolvency; or (ii) such set-off is stipulated in a netting agreement pursuant to special legislation.
Declaration of the insolvency would be made public by placing the corresponding advertisements in the Spanish Official Gazette and in a newspaper of the same province where the debtor is located. Likewise the declaration of the insolvency would be registered in all Public Registries and published on the website www.publicidadconcursal.es run by the Spanish Ministry of Justice and the Registries Association. (See question 5.1 regarding communication of credits.)

The declaration of insolvency does not affect the continuation of the debtors ability to continue trading. However, upon request by the

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The test for insolvency is the incapability of the debtor to comply with its obligations regularly when they become due and payable.
3 Creditors
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Trustees, the Judge may decide to shut down the debtors operations totally or partially. In general, during the common phase (see question 2.1 above) of the insolvency proceedings, the Trustees will replace the debtors existing management in case of an Involuntary Insolvency (see question 2.4 above), and will have certain supervisory powers over the debtors management in case of Voluntary Insolvency. This notwithstanding, the Judge is entitled to reverse this regime at the beginning or during the insolvency proceedings. Once and if, the liquidation phase starts (see question 2.1 above), directors of the debtor will cease in their functions, which shall be performed during the liquidation by the Trustees. Trustees have the right to assist and participate in the board and shareholders meetings of the debtor, although they are not entitled to vote. The insolvency does not have any special effect on shareholders.
Spain
However, the Insolvency Judge may declare, if convenient for the insolvency proceedings, the termination of such contracts upon request by the Trustees or by the debtor (even if no specific termination provision exists). In absence of agreement on the termination terms, the Judge will determine such terms, including the indemnification to the creditor that must be paid out of the debtors state. Additionally, any non-compliance by any of the parties of a contract occurred after the insolvency declaration may enable the nondefaulting party to apply to the Judge for the termination of the agreement, although the Judge may decide not to terminate the agreement if it considers that this is convenient for the insolvency interest. (In this case the Judge will determine that any obligation arising under such agreement will be satisfied with the debtors state.) In some cases (for instance, lease or supply agreements), the termination may be based on defaults arisen prior to the insolvency declaration. Likewise, the Trustees may request the reinstatement of loans, credits and other financing agreements, if any of those agreements were terminated during the three months prior to the insolvency declaration, provided that the creditor had not initiated the enforcement of its credit. The Trustees shall pay or deposit all the amounts owed until the time the relevant agreement is reinstated and undertake to pay all future amounts on account of the debtors state. Reinstatement of other kind of agreements is also provided in Spanish Insolvency Law. Interest on unsecured claims ceases to accrue, while interest on secured claims continues to accrue up to the value of the collateral.
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Spanish Insolvency Proceedings are quite cost-effective in comparison with the insolvency proceedings regulated by other jurisdictions since: (i) steering committees are not established and consequently no fees arise in this respect; and (ii) the debtor does not pay the creditors lawyer fees, nor the steering committees lawyer fees. Almost all fees incurred by the professionals acting in the insolvency proceedings for the benefit of the debtor are considered credits against the debtors estate, and therefore are paid prior to any other credit. The fees of the Trustees are determined by law, and are determined based on the volume of the assets and the complexity of the insolvency proceeding. Insolvency would be terminated at any time if it is evidenced that the debtor or any other liable third party has no assets to pay creditors (see question 6.2 hereunder).
5 Claims
Creditors must communicate their credits to the Trustees one month after the last placed advertisement of the declaration of insolvency of the debtor. Late notice by creditors can lead to classify their claim as subordinated.
Employment contracts continue being binding and in force, although such contracts may become subject to collective reorganisation measures as amendment, suspension or termination (including those relating to severance payments or golden parachutes of high-ranked employees), ruled by the Insolvency Judge. Besides, the Insolvency Judge has jurisdiction to rule on labour claims of the debtors employees, as well as to: (i) dismiss, under certain circumstances, senior employees of the debtor; and (ii) decide on the compensation of such employees.
Where the insolvency proceedings result in the liquidation of the debtor, its debts are paid in the following order: 1st. Claims against the debtor estate: Certain debts incurred by the debtor following the declaration of insolvency, including inter alia: (i) salary claims for 30 days prior to the declaration of the insolvency, subject to a limit of twice the minimum legal salary; (ii) legal costs, expenses of the insolvency or for filing the insolvency proceedings (with certain limits); (iii) Trustees fees; (iv) debts incurred during the insolvency proceedings in the ordinary course of the business or any other obligations with the approval of the Trustees; (v) claims due as a consequence of reinstatement of claims (see question 4.4 above); and (vi) claims for clawback actions due to third parties who acted in good faith (see question 1.2 above).
As regards contracts with reciprocal obligations for both parties that are pending to be performed at the time of the declaration of the insolvency, such declaration will not affect the existence of the relevant contract that will continue in force and effect. Any obligations of the debtor under such contract will be funded with the debtors state. Likewise, in such kind of contracts, early termination clauses triggered by the declaration of insolvency become void and unenforceable.
2nd. Special privileged claims: Claims secured with assets of the debtor and which are paid on account of said assets with preference to any other creditor. For instance: (i) claims granted with in rem security interests (see question 1.1 above); (ii) salary claims arising from assets manufactured, restored or repaired by employees while such assets are
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owned by or are in the possession of the debtor; (iii) financial leases and purchase agreements with deferred payments which imply a retention of title, a prohibition of disposal or a termination condition; (iv) claims secured with securities; and (v) pledge over claims. 3rd. Generally privileged claims: Claims that are paid with preference to any creditor other than those referred above, including inter alia: (i) other salary claims and redundancy payments up to a certain threshold; (ii) tax and social security liabilities (for certain claims up to 50% of the amount owed); (iii) non-contractual civil liabilities; and (iv) in case of Involuntary Insolvency, 25% of the amount of the claim of the creditor that filed for insolvency. Ordinary claims: Claims that are not classified by the Insolvency Law as privileged (either specially or generally) or subordinated. Subordinated claims: Claims that will only be paid out once all other claims (privileged and ordinary) have been satisfied in full, including: (i) claims for which timely notice has not been provided to the Trustees (see question 5.1 below); (ii) contractual subordination claims; (iii) claims of individuals and companies related to the debtor (e.g., group companies, shareholders with a relevant stake [10% for non-listed companies], directors - including shadow directors, liquidators, and relatives); (iv) claims for interest and penalty payments; and (v) claims for claw-back actions due to third parties who acted in bad faith (see question 1.2 above).
Spain
who would have adhered to the agreement) adhere to this Anticipated Creditors Agreement before the term as to claim the list of creditors/inventory issued by the Trustees elapses (10 Court days since the publication of the Trustees report), this Anticipated CreditorsAgreement is deemed approved by the end of the common phase without there being any requirement for holding a general creditors meeting (although creditors may withdraw their adhesions to the Anticipated Creditors Agreement if their credits would have been modified as a result of any claim brought against the list of creditors). Such Anticipated Creditors Agreement may be also subject to claims by the Trustees or those creditors who have not adhered to the agreement. If there is no Anticipated Creditors Agreement proposed (or 50% of the ordinary claims do not adhere to it and the debtor does not request the opening of the liquidation phase), once the common phase is ended the Court will convene a creditors meeting to vote the creditors agreements proposed or to be proposed in legal term (Ordinary Creditors Agreement). As a general rule, an Ordinary Creditors Agreement is approved by a majority of 50% ordinary claims, including with this respect privileged and secured creditors voting in favour of the Ordinary Creditors Agreement. However, if the Ordinary Creditors Agreement contemplates either full payment of ordinary claims in a term not higher than three years or the immediate payment of outstanding claims with a discount of not more than 20%, such composition agreement is approved by simple majority. Subordinated creditors and assignees of credits who have acquired the credit after the declaration of insolvency have no right to vote (therefore, it is difficult to create a distressed debt market in Spain). An approved Creditors Agreement can be frustrated before entering into force by the debtor filing for liquidation within the same proceeding (see question 2.1 above). Once approved by creditors, both Anticipated Creditors Agreement and Ordinary Creditors Agreement need to be also approved by the Judge.
4th.
5th.
Such ranking has also some effects in relation to composition agreements, basically: (a) claims under 1st, 2nd and 3rd are not subject to the composition agreement unless such creditors wish (see question 6.1 hereunder); and claims under 5th are paid with twice deferral as agreed under the composition agreement for ordinary claims.
(b)
5.3
There are no particularities on tax liabilities or tax regime for trading whilst the company is in insolvency, except for certain rules on VAT recovery for unpaid claims.

An insolvency may be terminated: (i) once an approved composition agreement (see question 6.1 above) has been declared complied by the Judge without any appeal being possible; or by (ii) the liquidation of the debtors estate, which implies the dissolution -once the liquidation phase is opened- and subsequent extinction of the debtor once all the assets owned by the debtor (or by any third party liable) have been realised as to pay creditors. Finally, the Judge itself may seek the liquidation of the debtor if: (a) (b) (c) (d) a proposed composition agreement submitted by the debtor is not approved by the creditors; no composition agreement is filed; a composition agreement is declared null and void by a court; or the debtors default under the composition agreement is declared by a Court.
Only for ordinary and subordinated claims (see question 5.2 above, last paragraph). Such cramming down is provided in Spanish Insolvency Law if a creditor agreement (Anticipated or Ordinary) is approved by creditors plus the Judge since such creditors agreement binds ordinary and subordinated creditors. Secured and privileged creditors will only be bound to the extent that they vote in favour to the composition agreement. Besides, subordinated creditors will be paid under the creditors agreement once all ordinary creditors (and if applicable privileged creditors) are paid and, in the event the creditors agreement provides for a stay, subordinated creditors stay shall be counted since the day the stay for ordinary creditors has terminated. An Anticipated Creditors Agreement may be filed by the debtor with the support of the creditors representing at least 20% of the total debt till one month has elapsed since the date of the last publication of the Judges rule opening the Insolvency for early approval. In the event creditors representing at least 50% of the ordinary debt (including in such threshold the privileged and secured creditors

7.1 Is it common to achieve a restructuring outside a formal procedure in Spain? In what circumstances might this be possible?
The decision to structure a corporate rescue through out-of-court negotiations with creditors or through formal insolvency

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proceedings depends very much upon the applicable circumstances of each case. The main legal drivers to decide to follow an out-ofCourt restructuring are the following: (a) the agreements obtained as a result of out-of-court negotiations do not bind the creditors which are not a party to them - who therefore may accelerate debt or commence legal proceedings to recover overdue debt; formal insolvency proceedings interrupt the accrue of interest or the enforcement of rights (see questions 3.1, 3.2 and 4.4); and out-of-Court restructuring is not so lengthy.
7.3
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insolvency of a company of the same group of the debtor if both insolvencies were jointly ruled by the same Judge).
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(b)
(c)
Out-of-court negotiations normally keep the process confidential and are more flexible as to the content of the restructuring conditions. Besides, if secured creditors hold the main part of debt, or such debt is held by a reduced number of creditors, an out-ofCourt restructuring would be the normal outcome. With this respect, there may be some amendments to the Spanish Insolvency Law in the future months which, among other things, defence out-of-Court agreements from claw-back risk. The procedure provided by the Insolvency Act may help to implement pre-packaged arrangements already negotiated out-ofcourt by the debtor with some key creditors, in order to impose such arrangements to the rest of the creditors (except for secured and privileged creditors) through an Anticipated Creditors Agreement (see question 6.1 above).
A sale of the debtors business may be carried out as a part of a composition agreement (including Anticipated Creditors Agreements as a manner or pre-packaged deal) if: (i) the purchaser commits to continue running the business of the debtor as well as to pay to the creditors, in the terms stated in the composition agreement, by means of the funds raised from such business; and (ii) a viability planning is filed with this respect. If no Anticipated Creditors Agreements is filed or approved, there are doubts if under Spanish Insolvency Law it is allowed to sell the business of the debtor during the common phase, or otherwise it is necessary to wait till the liquidation phase is opened. In any case, such sale during the common phase should be authorised by the Trustees as well as by the Insolvency Judge. In the liquidation phase, Spanish Insolvency Law intends that the business of the debtor (or part of it) is sold as a going concert. The shareholders of the debtor may freely sell their stake during the insolvency proceeding.
8 International
8.1 What would be the approach in Spain to recognising a procedure started in another jurisdiction?
A composition agreement (Anticipated or Ordinary) may provide for reorganisation measures as: (a) (b) (c) (d) stays and/or debt reductions; mergers or other corporate measures; debt to equity swap if the creditors to become shareholders as well as the former debtors shareholders agree so; new money to be granted by third parties and/or creditors if they accept so by signing the proposal of the composition agreement; and sale of the debtor business (see question 7.3 below).
The EU Insolvency Regulation provides a set of rules for determining which is the competent jurisdiction and how assets and creditors of insolvent EU companies are to be treated in each case. It goes without saying that the EU Insolvency Regulation is applicable in Spain. With regard to those international insolvencies which are not governed by the EU Insolvency Regulation, the private international law system is very similar to the EU Insolvency Regulation, which enables the recognition of international insolvency rulings through exequatur proceedings provided that a series of conditions are satisfied. The Insolvency Act follows a cooperative-reciprocity approach: non-EU insolvencies shall be recognised through the exequatur proceeding provided that the same resolution if issued by a Spanish Court would be recognised in the State in which the resolution has been issued. Consequently, no evidence of reciprocity needs to be rendered when requesting the exequatur before the Spanish Court.
(e)
A composition agreement (Anticipated or Ordinary) may not provide for: (a) (b) (c) (d) (e) a change in the creditors ranking; a moratorium for more than five years (with legal exceptions); a debt reduction for more than 50% of the debts (with legal exceptions); a hidden liquidation by assignments of debts; or a condition precedent as to be effective (unless such condition is the approval of a composition agreement in the
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Spain
Alberto Nez-Lagos Burguera

Ura Menndez Prncipe de Vergara 187 Madrid Spain
ngel Alonso Hernndez

Ura Menndez Prncipe de Vergara 187 Madrid Spain
Alberto Nez-Lagos is a partner in the Madrid office of Ura Menndez. He joined the firm in 1987 and became a partner in 1998. He heads Ura Menndezs German Desk. Albertos practice covers a wide range of corporate and banking work, although he has tended to specialise in restructuring, thereby becoming engaged in insolvency proceedings involving leading Spanish and international corporations. He has represented clients involved in all major insolvencies in Spain, including cross-border insolvencies in the last years, acting either for the debtor, creditors or management. Alberto has also been active in M&A transactions involving insolvent companies within their restructuring process. Alberto has been recognised as a leading Restructuring and Insolvency lawyer by Global Counsel 3000 and Euromoney. Legal Teaching: Between 1990 and 1992, Alberto lectured on Commercial Law at the Universidad Pontificia de Comillas-ICADE in Madrid. Between 1994 and 1996, Alberto lectured on Commercial Law at the Universidad Abat Oliva in Barcelona. Legal Writing: Information on his publications is available on the firms Website.
ngel Alonso is a lawyer in the Madrid office of Ura Menndez. He joined the firm in 1997 and became a partner in 2009. ngel has extensive experience in mergers and acquisitions, financing, private equity investments and general commercial advice. He specialises in corporate recovery and insolvency, having advised all the parties involved when companies are in financial difficulties (company debtors, directors, creditors, receivers, etc.). His practice has an international scope as most of the transactions and insolvencies in which he has advised have cross-border elements. ngel has worked with clients in a wide range of economic sectors including, among others: real property, financial services, hotel business and technology and industrial sectors. ngel has been regarded as one of the Best Lawyers in Spain in Insolvency and Reorganization by Best Lawyers Directory, 2008. Legal Teaching: Professor on Insolvency Law and Corporate Recovery at the Masters in Legal Practice at the Universidad Pontificia de Comillas in Madrid (2000-2006). Lecturer in the International Business Course at the Universidad Autnoma de Madrid (2005). Legal Writing: Information on his publications is available on the firms Website.
Ura Menndez (UM) is an independent law firm founded in the 1940s by Professor D. Rodrigo Ura Gonzlez. The firm currently has 14 offices in Spain, Portugal, Europe and The Americas. UM specialises in providing legal advice to Spanish, Portuguese and European Community-based businesses. The firm also provides support to its clients through its network of offices and through its relationships with equally prestigious international law firms. The comprehensive legal advice provided by UM covers all areas of Commercial Law. With regard to insolvency matters, UM provides advice to all the parties that may be involved in a company crisis, covering all kinds of situations. These include, amongst others, company or group restructuring procedures, refinancing of debts, acquisition of distressed assets and debt, protection of creditors rights, directors duties and liabilities, protection of assets, claw-back actions, design of security structures, corporate recovery as well as general advice on insolvency proceedings and related litigation. UMs high level of expertise in insolvency matters covers a broad range of economic sectors including, amongst others, industrial companies, banks, financial and insurance institutions, technology, construction and real estate. This expertise enables UM to deal with insolvency situations with an intricate knowledge of the practical business issues and cross-border consequences in foreign insolvency cases.

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+34 91 586 0421 +34 91 586 0785 anl@uria.com www.uria.com
+34 91 586 0421 +34 91 586 0785 aah@uria.com www.uria.com
Chapter 40
Sweden
Mannheimer Swartling Advokatbyr
Thomas Pettersson

1.1 How does a creditor take security over assets in Sweden?
1.3
What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Sweden?
There are various ways of creating security under Swedish law, but the vastly predominantly used forms of security are floating charges and pledges. A creditor whose claims are secured by a floating charge is entitled to payment out of the assets covered by the charge in connection with a bankruptcy of the company or through seizure. If the company is not in bankruptcy, the creditor has to obtain an enforceable judgment or decision in order to demand seizure and receive payment. Generally speaking, a floating charge covers all assets of the company from time to time that are not subject to another specific security arrangement. A pledge can be taken over basically all different types of assets of a company (property, shares, securities, receivables, insurances, bank accounts, contracts, etc.), although the formalities for creating and perfecting the pledge differs depending on the asset.
Under the Swedish Companies Act, the directors are liable in relation to the company for any damage caused intentionally or by negligence. The directors are also liable in relation to shareholders or other third parties (including creditors) if the damage is a result of an action taken which is in breach of the Companies Act, applicable accounting legislation or the Articles of Association of the company. This liability is applicable irrespective of whether a bankruptcy is at hand, but may become applicable in a bankruptcy or reorganisation scenario. Under the Swedish Penal Code, the directors may be subject to criminal liability if they continue trading when the company is insolvent or when there is an apparent risk for insolvency. However, this only applies if the continued trading, somewhat simplified, can be seen as negligent and if the directors, by such actions, have intentionally or grossly negligent significantly worsened the financial position of the company.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Sweden?
Under the Swedish Bankruptcy Act, a transaction may be recovered to the bankruptcy estate if it has the effect that a certain creditor is inappropriately favoured. It is a requirement that the debtor is or becomes insolvent at the time of the transaction or by the transaction. Furthermore, the creditor must have been aware of the insolvency for the recovery to take place. If the creditor is closely related to the debtor, for example through ownership or by being an executive in the debtor, the creditor is presumed to be aware of the insolvency of the debtor. Recovery may only take place with respect to transactions that have been carried out within a certain time span prior to the filing of the bankruptcy at the bankruptcy court. The times vary depending on the type of transaction. However, under the general recovery rule described above, the recovery period is indefinite as regards transactions with closely related persons or companies. Besides the above stated general recovery rule, there are also special recovery rules which apply in certain situations (security, irregular payments, etc.) and for which specific time periods apply.
In Sweden there are two different proceedings with respect to a company which has difficulties meeting its payment obligations. These are bankruptcy proceedings (Sw: konkurs) pursuant to the Bankruptcy Act (Sw: Konkurslagen (SFS 1987:672)) and company reorganisation (Sw: fretagsrekonstruktion) pursuant to the Company Reorganisation Act (Sw: lagen (1996:764) om fretagsrekonstruktion). In a bankruptcy, the company does not normally emerge as a going concern, while in a company reorganisation the intention is that it does. However, the Company Reorganisation Act is relatively seldom used. There are approximately 100 reorganisations each year. The majority of these reorganisations are converted into bankruptcy proceedings within a couple of months after the initiation of reorganisation procedure.
2.2 What are the tests for insolvency in Sweden?
Insolvency is deemed to be at hand if the company cannot pay its debts as they become due and such inability is not merely temporary.
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2.3 On what grounds can the company be placed into each procedure? 3.2
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A company can be declared bankrupt following a court order if it is insolvent. If a petition is made by the company itself, insolvency is assumed and not independently tested. A company which has difficulty fulfilling its payment obligations may, pursuant to the Company Reorganisation Act and following a court order, commence specific proceedings in order to reorganise its business. No creditor consent is required in order for a company to initiate a rescue under the Company Reorganisation Act.
As mentioned under question 3.1 above, pledges over chattels and other property that is not real property may be realised by the pledgee during a company reorganisation provided that there exists a due and payable claim.
As regards bankruptcy proceedings, both the insolvent debtor as well as any creditor may file a bankruptcy petition to the court that has jurisdiction over the debtor. The decision to start the bankruptcy proceeding is made by the court based on the rules set out in the Bankruptcy Act. The starting of a reorganisation procedure requires the consent of the debtor, but the decision to initiate the procedure is made by the competent court based on the rules set out in the Company Reorganisation Act.
When the court declares the company bankrupt, it shall immediately (i) set a date for a meeting for administration of oaths (Sw: edgngssammantrde), (ii) appoint one or more administrator(s) to handle the bankruptcy estate, and (iii) summon the company, the administrator(s), the supervision authority and the creditor who made the petition (if applicable) to the meeting for administration of oaths. When the court approves a petition for reorganisation procedures and appoints an administrator, it will simultaneously set a date for a creditors meeting before the court. After being appointed the administrator must promptly notify all known creditors of the reorganisation procedures and provide them with certain financial information regarding the company.
Under Swedish law, the right of set-off in bankruptcy is generally viewed as generous to the creditor insisting on set-off. According to the Bankruptcy Act, a claim against a debtor which may be recognised in the bankruptcy may be used by the creditor to set-off a claim that the debtor had against him when the bankruptcy decision was issued. However, this does not apply if set-off was excluded outside bankruptcy by reason of the nature of the claim. In bankruptcy, only claims arising before the issue of the bankruptcy decision may be recognised. A claim under a contract is generally regarded as having arisen at the time such contract was entered into. A claim may also be recognised in bankruptcy irrespective of whether it is: (a) dependent upon conditions; or (b) not due for payment.

3 Creditors
As a bankruptcy proceeding is a global procedure for disposing of the debtors assets and distributing the proceeds to the creditors, no independent enforcement measures will typically be effective following the initiation of a bankruptcy procedure. During a company reorganisation procedure, seizures and other forms of execution under the Swedish Enforcement Execution Code is prohibited. However, this does not apply to pledges over chattels and other property that is not real property (Sw. Handpantrtt). Consequently, chattels, pledged shares, patents, trademarks and claims may be realised by the pledgee during a company reorganisation provided that there exists a due and payable claim.
In a bankruptcy proceeding, the bankruptcy administrator, who is typically a specialised lawyer appointed by the court, exercises the most control over the bankruptcy estate. The distribution of the net assets of the estate is however subject to court approval and the conduct of the administrator is subject to supervision by public authorities. The principal rule in the Bankruptcy Act is that the bankruptcy administrator is independently responsible for the administration of the bankruptcy estate. Thus, actions taken by the receiver are generally not subject to approval by the creditors or by the debtor. The only substantial areas where the creditors have formal right to intervene in the proceeding concerns objections against creditors claims in the bankruptcy, in certain cases the sales method for liquidating property, acceptance of a proposal for a composition and objections against the final distribution of the assets belonging to the bankruptcy estate. All in all, the creditors have rather limited influence on formal bankruptcy proceedings. The directors and the shareholders have very limited influence on the proceedings, if any. In a formal reorganisation procedure, the administrator responsible for the reorganisation exercises the most control, but the administrator is dependent on creditor approval for important issues such as a composition with the debtor. The directors and shareholders continue to function as normal, however, subject to the restrictions and limitations on actions that can be taken as set out in the Company Reorganisation Act.

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As a bankruptcy proceeding is a global procedure for disposing of the debtors assets and distributing the proceeds to the creditors, no independent enforcement measures will generally speaking be effective following the initiation of a bankruptcy procedure. However, a secured creditor may, under certain circumstances and subject to certain procedural restrictions, sell the security assets and thus effectively enforce their security.

Sweden
their claims with the court, but that procedure is less common. A reorganisation does not involve a disposal of assets and payment of claims and thus no formal claims procedure applies. However, the administrator will prepare a plan for the reconstruction of the company that typically involves the writing-down or conversion of certain claims which, as described further in question 6.1, requires certain consent levels.
Both in bankruptcy proceedings and reorganisation proceedings, it is technically possible for the administrators to take up new debt, with senior priority, to finance the operations.
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In a bankruptcy procedure, the administrator is under an obligation to liquidate the assets of the debtor as soon as possible and thus the question of financing the procedures becomes an issue primarily in a larger bankruptcy where the operations are carried on for some time before the assets are disposed of. In reorganisation procedures, the issue of how the reorganisation procedure is financed may very well be one of the primary reasons why there are so few successful reorganisations in Sweden. Obtaining sufficient financing for the working capital needs of the operations during the procedure does often prove difficult. For both bankruptcy proceedings and reorganisation proceedings, the State Salary Guarantee provided by the Government for the salaries of the employees under a certain time period does make it somewhat more viable to continue the business operations for a period of time, as the work force can remain intact during the time the guarantee applies.
In a bankruptcy proceeding, a distribution to the creditors shall take place as soon as all available property has been converted into cash. Distribution of the cash is settled according to the priority given to each claim in accordance with the Swedish Priority Rights Act (Sw: frmnsrttslagen (1970:979)). There are three main groups of claims: (i) claims with special priority (e.g. secured claims, claims secured by mortgage and claims secured by seizure); (ii) claims with general priority (e.g. claims given priority because of public interest and floating charges); and (iii) claims without priority. If any assets remain after the claims with special priority have been satisfied, claims with general priority shall be satisfied out of the remaining assets. Within the group of claims without priority, all claims rank equal in priority (pari passu) and will be satisfied proportionally. The waterfall is applied primarily in bankruptcy proceedings. However, as regards bankruptcy proceedings it is important to note that there are costs for the remuneration of the bankruptcy administrator, general costs and expenses for the management of the bankruptcy estate, as well as costs accrued by the estate during the bankruptcy proceeding (i.e. claims from third parties due to agreements that they have entered into with the bankruptcy administrator). These costs can in large bankruptcies be of a significant value. In a reorganisation procedure, the waterfall is not formally applicable, as no distribution of assets is intended. However, it does in practice have an effect on the likelihood of individual creditors to accept any proposal for a composition.
Neither bankruptcy proceedings nor reorganisation proceedings have in themselves any direct effect on the employees. The employees will continue their employment until terminated. As mentioned in question 4.2, the salaries of the employees are guaranteed by the state for a certain time period.
Under a bankruptcy proceeding, the bankruptcy administrator can choose to have the bankruptcy estate accede to one or several of the debtors contracts. This decision is made unilaterally by the administrator and the contract will generally speaking remain valid against the other party provided that the administrator can provide security for the estates obligations under the contract. However, the more normal procedure is that the administrator does not have the estate accede to the contracts, in which case they will just form the basis for an ordinary claim in the bankruptcy procedures. There is no specific right for the debtor to terminate contracts when it is declared bankrupt. In a reorganisation proceeding, the debtors contracts continue without adjustments. If a contract could be terminated by a third party prior to the reorganisation procedures, based on a failure by the debtor to pay or otherwise perform, such grounds for termination may not be invoked after the reorganisation proceedings have been initiated.
As regards a bankruptcy proceeding, the operations will continue to be liable for VAT, but regular income tax will, generally speaking, not apply in a bankruptcy. A reorganisation proceeding on the other hand does not have any effect on the tax status of the debtor and tax will continue to be payable.

5 Claims
In a bankruptcy, the administrator will produce a list of assets and liabilities, which will cover all known creditors. If a creditor is known, it will typically not have to take any action at all in this process. There are specific procedures whereby a more formal claims procedure is applied and where the creditors will have to file
In a bankruptcy, the administrator will prepare a proposal for the distribution of the debtors assets, based on the waterfall described in question 5.2 above. The proposal can be challenged by a creditor through the courts but it will ultimately be determined by the court based on the waterfall and no direct creditor influence applies. Under certain limited circumstances a composition procedure can be carried out within a bankruptcy procedure. Under the Corporate Reconstruction Act a composition can be made, which is subject to certain consent levels being met among the creditors. The composition is an arrangement whereby the
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creditors waive their rights to full payment and the debtor only pays a certain percentage of its debts. A composition which yields at least 50 per cent of the amount of the claim shall be deemed to be accepted by all the creditors where three-fifths of the creditors voting have accepted the proposal and their aggregate amount of claims amount to three-fifths of the total amount of claims held by creditors entitled to vote. If the composition percentage is lower, the composition requires support by not less than three-quarters of the creditors representing at least three-quarters of the total claims held by creditors entitled to vote.
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7.3
The purpose of the bankruptcy procedure is the dissolution of the company and the distribution of its assets (when converted into cash). A distribution to the creditors shall take place as soon as all available property has been converted into cash. The purpose of a company reorganisation is to reorganise the companys business and financial structure following an order by a court with the ultimate intention of continuing the business. However, as mentioned above, successful reorganisations are rare and most are converted into bankruptcy within a relatively short time period.
There are no established legal procedures for a pre-packaged sale under Swedish law. They do occur, however, and are typically based on pre-agreed documentation and deal terms with a proposed bankruptcy receiver. There can be significant legal uncertainty with such process though and it cannot be seen as a common procedure.
8 International
8.1 What would be the approach in Sweden to recognising a procedure started in another jurisdiction?

7.1 Is it common to achieve a restructuring outside a formal procedure in Sweden? In what circumstances might this be possible?
Swedish law would recognise procedures started in other jurisdictions based on and in accordance with the EU Insolvency Regulation and the Nordic Bankruptcy Convention
Private insolvency proceedings/workouts in a more formal sense of the word are rare in Sweden, although they are possible. It has generally been the aim of the Swedish government to improve the Swedish rescue culture (however, without extending the Swedish legal system to embrace the rescue friendly US system). These efforts have however been rather fruitless and rescues are still rather uncommon in Sweden, albeit increasing. Private rescues are primarily achieved through private compositions. In private compositions, all creditors whose claims will be affected must consent to the composition. In practice, this makes private rescues rather difficult to achieve. Private workouts or restructurings that are effectively based on a negotiation between the major creditor(s), the borrower and potential sponsors are however reasonably common and increasingly so in light of the current market conditions. There are no formal requirements in relation to such workouts and restructurings; they are based solely on a contractual agreement between the parties involved.
Thomas Pettersson
Mannheimer Swartling Norrlandsgatan 21, Box 1711 111 87 Stockholm Sweden
+46 8595 064 65 +46 8595 060 01 thp@msa.se www.mannheimerswartling.se
Thomas Pettersson is a partner in the Mannheimer Swartlings Banking and Finance group and is also a member of the Restructuring and Distressed Deals practice groups within the firm. Thomas Petterssons work is primarily related to advising on different types of financing and security structures, with a particular focus on derivates, property finance and workouts and restructurings. Examples of Thomas Petterssons recent experience includes advising the Swedish National Debt Office in relation to the support package for the financial sector and advising one of the major Nordic banks in relation to the international restructuring of the Nybron-group.
Mannheimer Swartling is the leading business law firm in the Nordic region. The firm works with many of Swedens, and the worlds, leading major and mid-sized companies and organisations. Mannheimer Swartling is a full service firm with an extensive international practice. The firm has approximately 650 employees, of which approximately 420 are lawyers. The firms lawyers can contribute and create added value to the clients transactions with both cutting edge expertise and solid industry experience. Within the area of restructuring and insolvency law, we handle matters which arise in connection with insolvency, bankruptcy and other financial difficulties. Furthermore, Mannheimer Swartling advises companies in financial difficulties, as well as the board members and shareholders of such companies, creditors, and trustees in bankruptcy and liquidators. A central part of our business in this field consists of assisting in disputes relating to different insolvency situations, especially as regards recovery.

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Reorganisations are possible under Swedish law, but apart from the procedure under the Company Reorganisation Act described above they would be based on a contractual agreement between the parties involved. There are no formal requirements to file for bankruptcy or formal reorganisation in case of financial difficulties, but the potential liability for management and board members may result in a de facto deadline for achieving a private reorganisation.
Chapter 41
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Lenz & Staehelin
Daniel Tunik
Tanja Luginbhl

1.1 How does a creditor take security over assets in Switzerland?
In rem secured rights granted under Swiss law can be classified under three broad categories: (i) mortgages or similar instruments on land; (ii) rights of pledge on movable goods; and (iii) analogous institutions. (i) The mortgage (Grundpfandverschreibung/hypothque) offers a broad protection to the secured creditor and is, in practice, used under the form of a mortgage certificate; (ii) the pledge (Faustpfand/nantissement) is the usual form of collateral insofar as movable goods are concerned. By charging a pledge on specific assets or claims, the pledgor retains the title over those assets or claims, granting, however, special rights to the pledgee. It is a condition under Swiss law for the perfection of a pledge to transfer possession of the assets to the pledgee or to an agent acting for him. As a result of the above, a general deed of pledge purporting to charge all assets, stock and inventory of the debtor in favour of the creditor is ineffective under Swiss Law; (iii) the stringent requirement that applies to the pledge in terms of transfer of the possession explains the development and the practical importance of alternative forms of collateral such as the transfer of movable or immovable goods and securities or the assignment of claims by way of security. Both transfer and assignment for security purposes imply a transfer of title from the debtor (which, consequently, needs to be the owner of the transferred property or the holder of the transferred claim) to the creditor, but this transfer intervenes on a fiduciary basis. This means that the transferee/assignee is committed towards the transferor/assignor to strictly exercise the granted rights in compliance with the purpose of the security and in particular to retransfer or reassign such property or claims once the secured claim is repaid or the security is otherwise released. A general deed of assignment whereby a debtor assigns by way of security all existing as well as future receivables is deemed to be valid under Swiss law, as opposed to the general pledge.
the debtor during the five years prior to the seizure of assets or the opening of bankruptcy proceedings, with the intention, apparent to the other party, of disadvantaging its creditors or favouring certain of them to the disadvantage of others (article 288 DCBA); (ii) all gifts and voluntary settlements made by the debtor during the year prior to the seizure of assets or the opening of bankruptcy proceedings. It is to be noted in this context that transactions in which the debtor accepted a consideration out of proportion to its own performance are deemed to be equivalent to a gift (article 286 DCBA); and (iii) in case a company is already insolvent, the granting of collateral for existing obligations which the debtor was hitherto not bound to secure; the settlement of a debt of money by another manner than in cash or by other normal means of payment as well as the payment of a debt that is not yet due are avoidable, provided that such transaction by an insolvent debtor occurred during the year prior to the seizure of assets or the opening of bankruptcy. However, the transaction is not avoided if the recipient proves that it was unaware and need not have been aware of the debtors insolvency (article 287 2 DCBA).
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in Switzerland?
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The Debt Collection and Bankruptcy Act (hereafter DCBA) describes the circumstances under which avoidance actions (Anfechtungsklage/action rvocatoire) can be launched. The cases can be summarised as follows: (i) all transactions entered into by
The issue of directors liability typically arises when a corporation has been declared bankrupt. The general legal basis as regards the civil liability of directors (Haftung fr Geschftsfhrung/ Responsabilit dans la gestion) is to be found in article 754 of the Swiss Code of Obligations (hereafter SCO), pursuant to which the members of the board of directors and any person entrusted with the management or the liquidation of a corporation shall be liable for damages caused by wilful or negligent violation of their duties. The liability of a director accordingly requires: (i) a breach of the directors duties; (ii) damages caused to the corporation or a particular creditor; (iii) a wilful or negligent conduct (fault); and (iv) a causal link between the breach and the damage. Damages typically cover the increase of loss which occurred between the moment the directors should have known the corporations distressed situation and failed to take appropriate actions (see question 2.2 below) and the moment the bankruptcy was actually declared. According to the above, courts have held liable directors who failed to take the steps required by law, by not informing the court about the over-indebtedness of the company. Several provisions of the Swiss Criminal Code (hereafter SCrimC) may also apply in the context of the activity undertaken by a director (Misswirtschaft/gestion fautive; Bevorzugung eines Glubigers/ avantages accords certains cranciers). Article 165 SCrimC punishes the debtor whose acts of mismanagement have caused the
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corporations bankruptcy. This criminal provision expressly refers to the case of the debtor who by means of an insufficient capital endowment causes or aggravates its over-indebtedness before being declared bankrupt. Special attention must also be paid to article 167 SCrimC which deals with the issue of the advantages granted to certain creditors by an insolvent debtor who is subsequently declared bankrupt. As for disqualification (Berufsverbot/ interdiction dexercer une profession) issues, article 67 1 SCrimC - which is in fact a very rarely implemented provision - provides that the court may prevent a convicted person from exercising its profession for a period extending from six months to five years if this person has been convicted to an imprisonment sanction exceeding six months for an offence committed within the exercise of a profession submitted to an official authorisation when the circumstances give reason to fear new abuses from the convicted person.
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has not been settled but upheld within the course of debt enforcement proceedings (Betreibung/poursuite) has successfully requested for the opening of bankruptcy proceedings (Konkursbegehren/ rquisition de faillite); (ii) upon a debtors request by declaring to the court that it is insolvent; (iii) upon a creditors request if the company has committed certain acts to the disfavour of its creditors or if it has ceased payments or if certain events have happened during composition proceedings; or (iv) upon a notification of the court by the board of directors (or the statutory auditors) of the company that the company is over-indebted within the meaning of article 725 2 SCO. Composition proceedings are typically initiated by the debtor, but can also be requested by a creditor if such creditor is entitled to request the opening of bankruptcy proceedings. As a first step, a reasoned formal application for a moratorium has to be submitted to the composition court. Furthermore, composition proceedings may also be opened ex officio if it appears to the bankruptcy court that a composition agreement is likely to be concluded with the creditors.
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in Switzerland?
There are two main types of insolvency proceedings in Switzerland: bankruptcy (i.e. liquidation) proceedings (Konkursverfahren/faillite); and composition proceedings (Nachlassverfahren/concordat). Composition proceedings can be used either: (i) to organise the liquidation and the realisation of debtors assets in a more flexible manner than bankruptcy (composition agreement with assignment of assets); or (ii) result in a debt restructuring (be it through a debtrescheduling or a dividend agreement).
2.2 What are the tests for insolvency in Switzerland?
There are different tests for initiating insolvency proceedings against a debtor: (i) if a debtor is qualified to be insolvent (zahlungsunfhig/insolvable), i.e. if the debtor is no longer able to pay its debts as they fall due. Insolvency, however, only leads to the initiation of bankruptcy proceedings upon a respective request by the debtor itself; (ii) if a debtor has ceased to pay its debts (Zahlungseinstellung/cessation de paiment); or (iii) if a debtor is over-indebted (berschuldet/surendett) within the meaning of article 725 2 SCO, i.e. if the companys liabilities exceed its assets; if the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered by the companys assets, the board of directors must without delay convene a shareholders meeting and propose measures to financially reorganise the company. In case of a substantiated concern of over-indebtedness, an interim balance sheet must be prepared and submitted to the auditors for examination. If the interim balance sheet shows that the claims of the companys creditors are neither covered if the assets are appraised at values on a going concern basis nor at liquidation values, the board of directors must notify the judge, i.e., file for bankruptcy unless (i) there is a subordination of claims and good prospects of financial restructuring of the company in due course or (ii) there are serious reasons to believe that the company may be financially restructured in short time.
In case a creditor has successfully completed prior debt enforcement proceedings, the debtor is issued a bankruptcy warning (Konkursandrohung/comination de faillite) to the effect that bankruptcy proceedings will be opened unless payment is forthcoming. Upon the expiry of 20 days after service of the bankruptcy warning, the creditor may request that bankruptcy proceedings be opened. The court will then summon the parties for a hearing on short notice. Unless very limited objections are sustained or procedural rules have been violated, the debtor is declared bankrupt (case (i) above). Bankruptcy may, as described above, also be declared upon the debtors or a creditors request (cases (ii) and (iii) above) or upon the notification of the court by the board of directors of the company in case of over-indebtedness (case (iv) above). Upon declaration of bankruptcy all assets of the debtor form the bankruptcy estate, which is used to satisfy the creditors claims. The debtor is deprived of its capacity to dispose of its assets and from the date of declaration of bankruptcy it will be represented exclusively by the bankruptcy administrator (Konkursverwalter/administrateur de la faillite). All obligations of the debtor become immediately due and payable, except for claims which are secured by mortgages on real estate. In general, interest stops to accrue at the date of bankruptcy declaration. Composition proceedings are typically opened upon the debtors request filed with the composition court. Upon receipt of such request the court will order provisional measures deemed appropriate and necessary for conserving the debtors assets and will grant a provisional moratorium (provisorische Nachlassstundung/sursis provisoire) of up to two months. Furthermore, a provisional administrator (provisorischer Sachwalter/commissaire provisoire) may be appointed by the court to permit an assessment of the debtors assets, its financial condition and the prospects of a successful reorganisation. If the court finds that a composition agreement is likely to be concluded, it must grant the definitive moratorium (definitive Nachlassstundung/sursis concordataire) for a period of four to six months (in particularly complex cases up to 24 months) and appoint an administrator (Sachwalter/commissaire). During the definitive moratorium the administrator seeks to negotiate a composition agreement with the creditors, while creditors of claims other than first class claims (see question 3.1 below) or claims secured by real estate are not entitled to commence or continue debt enforcement proceedings. Realisation of collateral is not permitted during the
A corporation may be declared bankrupt by the competent court and placed into bankruptcy proceedings: (i) if a creditor whose claim

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3 Creditors
3.1
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moratorium, and the debtor is restricted in its ability to dispose of certain of its assets and there are certain restrictions as to its power to manage the companys affairs.
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2.5
What notifications, meetings and publications are required after the company has been placed into each procedure?
First, the bankruptcy court will establish which rules apply to the bankruptcy proceedings. For this purpose the bankruptcy administrator has to draw up an inventory. Summary proceedings are ordered if the proceeds of the bankrupts assets are unlikely to cover the costs of ordinary proceedings or if the circumstances of the case at hand are particularly clear, unless one or more creditors explicitly request ordinary proceedings and are willing to advance the additional cost. If the rules for ordinary bankruptcy proceedings apply, the bankruptcy estate is administered as follows: the bankruptcy administrator publishes a notice of bankruptcy, instructing all creditors and debtors to file their claims and debts within 30 days and inviting creditors to a first creditors meeting (erste Glubigerversammlung/premire assemble des cranciers). The first creditors meeting may appoint a private bankruptcy administrator acting instead of the state bankruptcy office as well as a creditors committee which has certain supervisory (and limited decisive) competencies. A second creditors meeting (zweite Glubigerversammlung/seconde assemble des cranciers) is convened to pass resolutions as to all important matters, including the commencement or continuation of claims against third parties and the method of realisation of the assets belonging to the bankruptcy estate (the actual realisation, however, is reserved to the bankruptcy administrator). If the rules for summary bankruptcy proceedings apply, there are, in principle, no creditors meetings and the bankruptcy office will proceed to liquidation and realisation of the assets (including collateral) without participation of the creditors. Certain rights of the secured parties to oppose to particular realisation methods of their collateral remain reserved. Composition proceedings start with the grant of the moratorium, upon which the administrator takes the necessary preparatory measures for the following process of creditor and court approval. An inventory is taken and the assets are valued. The administrator makes a public announcement instructing the creditors to file their claims within 20 days (Schuldenruf/appel aux cranciers). All claims which have arisen either before the public announcement of the moratorium or without the administrators consent during the moratorium are subject to the composition agreement. As soon as a draft composition agreement is proposed, the administrator convenes a creditors meeting by public notice. Only creditors who have filed claims are admitted with the right to vote to the creditors meeting. The creditors meeting receives a report of the administrator, elects the liquidator and decides whether to approve or to reject the proposed composition agreement. Approval of the proposed composition agreement requires the affirmative vote by a quorum of either (a) a majority of creditors representing two-thirds of the total debt or (b) one-fourth of the creditors representing threefourths of the total debt. After approval by the creditors, the composition agreement requires confirmation by the composition court. With the courts approval, the composition agreement becomes valid and binding upon all creditors of claims subject to the composition agreement whether or not they have participated in the composition proceedings.
In bankruptcy proceedings, all unsecured creditors are entitled to claim the amount of principal plus interest until the date of the declaration of bankruptcy. Apart from attending the creditors meetings, the unsecured creditors have no individual rights to enforce their claims through realisation of any of the debtors assets. It is in the sole competence of the bankruptcy administration to realise the debtors assets. Unsecured creditors claims are successively satisfied out of the realisation proceeds according to the order as further described under question 5.2 below. In composition proceedings only creditors who have filed claims are admitted with the right to vote to the creditors meeting. Failure to file, however, does not affect the creditors entitlement to the composition proceeds which, in case of a composition agreement with assignment of assets, are distributed in the same consecutive order as in bankruptcy proceedings.
In bankruptcy proceedings, secured creditors have to hand in the collateral to the bankruptcy administration and have no right to realise the collateral privately, but will be satisfied in priority of any other creditors out of the proceeds of the sale of such collateral. This holds true for all claims secured by movable goods being pledged (rather than transferred by way of security). Real estate mortgages, however, are only realised and proceeds paid out to the creditors if their claims against the debtor are due; claims secured by real estate mortgages that are not yet due are assigned to the acquirer of the real property. In composition proceedings leading to a liquidation agreement with assignment of assets (Nachlassvertrag mit Vermgensabtretung/concordat par abandon dactifs) secured creditors with a pledge on moveable assets are not obliged to deliver the collateral to the liquidator. After the moratorium they are generally entitled to liquidate the pledged collateral by official enforcement proceedings or, if the pledge agreement so provides, by private sale.
Irrespective of the applicable substantive law which governs set off Swiss insolvency law has several impacts on the right to set off. Swiss insolvency law distinguishes between different categories of claims, of which the following are in practice the most important: the first category encompasses (i) claims of the insolvent party forming part of the insolvency estate and (ii) claims against the insolvent party (Konkurs- oder Nachlassforderungen/crances dans la faillite ou le concordat) to be satisfied in cash with dividend payments out of the proceeds of the insolvency estate. The second category encompasses claims of and against the insolvency estate (Masseforderungen und -verbindlichkeiten/crances et dettes de la masse). One of the main characteristics of these latter claims is that they have come into existence only after the opening of insolvency proceedings with the consent of the insolvency administration. As a rule, set off is only possible between claims of the same category based on the requirement of mutuality between the claims
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to be set off, i.e. claims of the insolvency estate can only be set off with debts of the insolvency estate, whereas claims of an insolvent debtor may be set off against insolvency claims. However, according to legal doctrine, a creditor may set off its claim against the mass with a claim of the insolvent debtor. In addition to these restrictions, set off is not admissible if (i) the debtor of the insolvent party became creditor of the latter only after the opening of bankruptcy proceedings or the grant of a moratorium, respectively, or (ii) the creditor of the insolvent party did not become debtor of the insolvent party or the insolvency estate until after the opening of the bankruptcy proceedings or the grant of a moratorium, respectively. In other words, the creditor of an insolvent party may as a rule set off its claims against debts it has towards the insolvent provided both the claims and the debts existed at the time of the bankruptcy decree or the grant of a moratorium, respectively.
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secured by a mortgage of real estate, whereas the realisation of the collateral as such is prohibited.
Enforcement proceedings trigger costs. Debts linked to the liquidation of the bankruptcy have to be paid in the first place. These debts are called debts of the bankruptcy estate (Masseverbindlichkeiten/dettes de la masse). All costs for the opening and carrying out of the bankruptcy proceedings and for the drawing up of the inventory are paid directly out of the proceeds. The debts of the estate are thus paid prior to the payment of any dividend to the ordinary creditors. In case there are no assets at all that can be realised, the bankruptcy administration shall pronounce the closure of the bankruptcy proceedings or invite the interested creditors to make an advance to cover the costs of the procedure. The above rules apply to the composition proceedings.

4.3 4.1 Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders. What is the effect of each procedure on employees?
Immediately after the filing of the request to open bankruptcy proceedings, the court can order conservatory measures (vorsorgliche Anordnungen/measures conservatoires) necessary for safeguarding the creditors rights. For example, the judge can forbid some payments or command the business to close. Once bankruptcy proceedings have been opened, the debtor is deprived of its right of disposal of its assets. A claim forming part of the bankruptcy estate can no longer be validly discharged by payment to the debtor; such payment only amounts to a valid discharge to the extent that it is received by the bankruptcy estate (Zahlungen an den Schuldner/paiements aux mains du failli). All other enforcement proceedings against the debtor cease and new enforcement proceedings relating to claims which arose before the opening of bankruptcy proceedings are not permissible. With the exception of urgent matters, civil court actions to which the debtor is a party and which affect the composition of the bankruptcy estate are stayed. The creditors committee appointed during the first meeting of creditors may have the task to authorise the continuation of the debtors business or trade, under specific conditions, whereas such continuation of business will have to be pursued by the bankruptcy authority. This committee is also allowed to supervise the management activities of the bankruptcy administration and to object to any measures which contravene the creditors interests. According to article 725a SCO, the judge may appoint a curator, and either deprive the board of directors of its powers to dispose, or make its decisions subject to the approval of the curator. The judge defines the duties of the curator. During the moratorium, the judge appoints an administrator, who supervises the debtors activities. The debtor may continue its business activities under the supervision of the administrator. The composition court may, however, direct that certain acts shall require the administrators participation in order to be legally valid, or authorise the administrator to take over the management from the debtor. Without the authorisation of the composition court, the debtor is prohibited during the moratorium to divest, encumber or pledge assets which are affected to business, to give guarantees or to make gifts. Any such transactions are null and void. During the moratorium, enforcement proceedings can neither be initiated nor continued, except for enforcement proceedings leading to seizure for first class claims or for the realisation of collateral for claims
Bankruptcy proceedings do not have an automatic effect on employment contracts. Claims for unpaid wages have to be filed and are scheduled as any other claim. In case the employer becomes insolvent, an employee may terminate the employment relationship without notice unless such employee is provided security for claims arising from the employment relationship. Subject to the other partys termination rights, the bankruptcy administration may decide to maintain some contracts which had not or had only partially been fulfilled at the time of the opening of the bankruptcy, as for example an employment contract. The other party to the contract may however request that security be furnished. The administration may also, as it happens in the majority of cases, cease the business and therefore decide to terminate the work contracts. When doing so it has to comply with the applicable notice period. The unpaid salaries have to be claimed and scheduled. Although there are some unsettled legal controversies, composition proceedings have a legal effect that is similar to bankruptcy with respect to employment contracts.
There are certain types of contracts that are terminated, ex lege, as is the case with insurance contracts, agency or simple partnerships, whereas others can be terminated immediately by one party in case of bankruptcy of the other (see e.g. employment contract, lease for rent or loan for consumption). The remaining contracts are not automatically affected by bankruptcy, which means that the bankruptcy estate and the contracting party are still bound unless the very contract provides for an automatic termination or a termination right. While the contracting party would have to perform in kind its obligations under an agreement which has not been terminated, the rights of the contracting party are affected by the principle of equality among creditors, as a result of which it is bound to accept a dividend rather than full payment or specific performance. However, should the bankruptcy administration elect to pursue the performance of a contract which had not or only partially been fulfilled at the time of opening of the bankruptcy proceedings, the other party to the contract may demand that security be provided, and it may further expect full performance by the bankruptcy authority. The right of the bankruptcy

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administration to elect performance of the contract is excluded in the case of financial future, swap, option and similar strict deadline transactions, if the value of the contractual performance can be determined based on market or stock exchange prices at the time of the opening of the bankruptcy. The bankruptcy administration and the contractual partner are each entitled to claim the difference between the agreed value of the contractual performance and the market value at the time of the opening of the bankruptcy proceedings. Opening of composition proceedings has no direct effect on the contracts with the company (unless the very contract provides to the contrary). However, upon the confirmation of a composition agreement with assignment of assets the same rules as for the bankruptcy proceedings are applicable by way of analogy.
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proceeds not be sufficient to satisfy the claim of the secured creditor, such creditor shall rank with unsecured creditors for the outstanding amount of its claim. Unsecured claims are satisfied in a specific order out of the proceeds of the entire remainder of the bankruptcy estate. There are three classes of claims. The first class consists of claims of employees derived from the employment relationship which arose during the six months prior to the opening of bankruptcy proceedings, and claims arising from premature dissolution of the employment relationship due to the opening of bankruptcy proceedings against the employer and the restitution of deposited security. The first class also includes claims of the assured derived from the Federal Statute on Accident Insurance and from facultative pension schemes, as well as claims of pension funds against employers. Finally, claims for maintenance and assistance derived from family law which arose during the six months prior to the opening of bankruptcy proceedings and which are to be performed by cash payments are also comprised in the first class. The second class consists of claims of persons whose assets were entrusted to the debtor as a holder of the parental power, for everything which the debtor owes them in such capacity. This preferential right is only valid provided that the bankruptcy proceedings are opened during the parental administration or within a year of its termination. Claims of various contributions to social insurances are also included in this class. All other claims are comprised in the third class. Creditors for such claims only get paid after all the privileged claims have been fully covered. Ultimately, claims which have been contractually subordinated will only be paid after the claims of all other creditors have been paid in full.
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5 Claims
Creditors are invited by the bankruptcy administration to file their claims against the bankrupt debtor within a certain deadline (Schuldenruf/appel aux cranciers). After expiration of the deadline, claims may still be submitted but the creditor must pay all such costs which have been caused by the delay. Once the deadline for filing the claims has passed, the bankruptcy authority examines the filed claims and makes the necessary inquiries. The debtor is invited to comment on each claim. The bankruptcy authority, which is not bound by the debtors opinion, decides whether or not to admit the claims. The bankruptcy administration then establishes a schedule of claims (Kollokationsplan/tat de collocation). Any creditor wishing to contest the schedule of claims because its claim has been entirely or partially rejected may bring an action against the bankruptcy estate within 20 days of the schedule of claims being made available for public inspection. Similarly, a creditor may bring an action to contest the admission of another creditor to the schedule of claims. The composition administrator appointed by the judge makes a public announcement enjoining the creditors to file their claims. If the composition agreement with assignment of assets is confirmed, the creditors elect liquidators and a committee of creditors to supervise the proceedings. While the realisation of assets is subject to less strict rules than in bankruptcy proceedings, the distribution of proceeds to creditors follow the same rules as in the case of bankruptcy. The liquidators draw up a schedule of claims without, however, making a further call to the creditors (article 321 al. 1 DCBA). This document will then be made available to the creditors and may be challenged through legal actions to contest the schedule of claims in the same way as in bankruptcy proceedings.
As a rule, companies in financial difficulties do not benefit from any special tax treatment under Swiss law. Dissolving hidden reserves or the forgiveness of debt granted by third parties is considered taxable profits. However, a company in financial difficulties has generally incurred losses in previous years that can be set off against these profits. In this context, one must note that Swiss tax law enables set-off with reported losses of the seven prior years. The forgiveness of debt granted by shareholders is, under certain circumstances, treated as a contribution for no remuneration and is subject to an issuance stamp duty of 1%, as is the case with respect to an increase of capital. The same analysis prevails in case of a reduction of the share capital followed by an increase of the share capital or the contribution for no remuneration. In the above cases, however, a waiver of this stamp duty can be obtained if levying such duty would be excessively harsh for the company.

In case the proceeds of the realisation of the bankruptcy estate do not suffice to cover all claims, as is generally the case, said proceeds are distributed pursuant to the order set in the law. Swiss law recognises different classes of creditors, one that is the result of special contractual arrangements (security interest) and three classes based on distinctions of different categories of claims deriving from the law. Secured claims (pfandgesicherte Forderungen/crances garanties par gage) are satisfied directly out of the proceeds from the realisation of the collateral. Should the
In bankruptcy proceedings, the creditors meetings are legally constituted if one quarter of the known creditors is present or represented. The meetings pass and adopt resolutions with the absolute majority of the voting creditors. The second creditors meeting may even pass and adopt resolutions by circular resolution. In composition proceedings the composition agreement must be adopted by a quorum as set forth in question 2.5 above and approved by the court. With the courts approval, the composition agreement becomes binding upon all creditors of claims subject to
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the composition agreement whether or not they participated in the composition proceedings and irrespective of their non-approval of the composition agreement.
Switzerland
In bankruptcy proceedings following distribution of the proceeds (according to question 3.1 above) the bankruptcy administration submits its final report to the bankruptcy court. If the court finds that the bankruptcy proceedings have been completely carried out, it declares them closed. The company ceases to exist and will be cancelled from the commercial register. In case of a debt-rescheduling or a dividend agreement, the debtor is not wound-up but rather continues its business, and once such agreement has been adopted by a quorum of creditors (according to question 2.5 above) and approved by the court, the debtor has again full power to manage the companys affairs. Only a composition agreement with assignment of assets will ultimately lead to the winding-up and the cancellation of the company from the commercial register.
It is possible to transfer the business of the debtor by means of a pre-packaged sale to a newly established hive-off vehicle or any other third party. In bankruptcy proceedings, such a transfer requires the consent of the bankruptcy administration which is generally bound not to sell the debtors assets prior to the second creditors meeting (ordinary proceedings) or the expiry date for filing claims (summary proceedings), respectively. According to article 243 2 DCBA, however, a sale may occur prior to such dates if the relevant assets are subject to rapid depreciation, require costly maintenance or cause disproportionately high storage costs. The Swiss Federal Supreme Court has ruled that an expedited sale of the entire business or certain business units of the debtor may be permissible under article 243 2 DCBA. The sale is documented in an asset purchase agreement and may occur pursuant to articles 69 et seq. of the Swiss Federal Act on Merger, De-Merger, Conversion and Transfer of Assets and Liabilities. In a moratorium, the sale requires the consent of the composition judge according to article 298 2 DCBA. A sale may also occur outside the scope of insolvency proceedings. However, there is a risk that in a subsequent insolvency proceeding such sale will become subject to challenge based on the avoidance regime in articles 285 et seq. DCBA (see question 1.2 above).

7.1 Is it common to achieve a restructuring outside a formal procedure in Switzerland? In what circumstances might this be possible?
8 International
8.1 What would be the approach in Switzerland to recognising a procedure started in another jurisdiction?
The achievement of a successful restructuring outside a formal procedure is not uncommon under Swiss law. It is precisely the purpose of the insolvency tests imposed by article 725 SCO to compel the board of directors to adopt measures to improve the financial situation of a company before being obliged to commence formal bankruptcy or composition proceedings. Article 725 1 SCO, dealing with the issue of loss of capital (Kapitalverlust/perte de capital), obliges the board of directors to convene an extraordinary shareholders meeting and to propose appropriate restructuring measures. Article 725 2 SCO describes the circumstances under which the board of directors must file for bankruptcy by notifying the situation to the judge (see hereafter under question 2.2). That being said, once being notified about the companys over-indebtedness (berschuldung/surendettement) pursuant to article 725 2 SCO, the judge is empowered to postpone the adjudication of bankruptcy, at the request of the board of directors or a creditor, provided that there is prospect of a financial reorganisation.
The judges motivation behind a postponement of the adjudication of bankruptcy in accordance with article 725 2 SCO is typically to allow for a reorganisation of a debtor rather than for a realisation of its assets within the course of bankruptcy proceedings. Such reorganisation may occur under the supervision of an administrator which is instated by the judge. In addition, there are two forms of composition proceedings which result in a debt restructuring (be it through a debt-rescheduling or a dividend agreement) rather than in a realisation of the debtors assets and business. It is fair to say, though, that such forms of composition agreements are rarely used in practice to reorganise large corporate debtors.
In bankruptcy matters, Switzerland follows the principle of territoriality. Accordingly, a foreign bankruptcy or any similar proceeding has no effect in Switzerland unless it has been recognised. The recognition of foreign proceedings (Anerkennung/ reconnaissance) is governed by a special chapter in the Swiss Private International Law Act (hereafter PILA). The conditions for the recognition are as follows: (i) the bankruptcy decree must have been rendered in the state of the debtors domicile; (ii) the petition for recognition may only be introduced by the bankruptcys administrator or by a creditor, but not by the debtor itself; (iii) the bankruptcy decree must be enforceable in the state where it was rendered; (iv) the bankruptcy must not be inconsistent with the Swiss public policy and the fundamental principles of Swiss procedural law; and (v) reciprocity (Gegenrecht/reciprocit) is granted by the state in which the decree was rendered. Pursuant to this latter requirement, the Swiss court must examine if the foreign jurisdiction would also recognise, under similar circumstances, a Swiss decree, at conditions which are not sensibly less favourable than the conditions prevailing under Swiss law for the recognition of a foreign bankruptcy decree. As soon as the petition for recognition has been filed, the court may, on application of the petitioner, order conservatory measures. In principle, once the recognition is granted, the foreign bankruptcy decree has the same effects as a Swiss bankruptcy decree with regard to the debtors assets located in Switzerland. The foreign bankruptcy is not extended in Switzerland, but gives rise to an ancillary minibankruptcy that can be viewed as a sort of procedure for judicial legal assistance. Moreover, pursuant to article 172 1 PILA, only certain claims may be included in the schedule of admitted debts, i.e. the claims secured by pledge according to article 219 1 to 3 DCBA and the unsecured but privileged claims of creditors having their domicile in Switzerland according to article 219 4 DCBA

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(first and second classes). After the satisfaction of these creditors, any remaining balance is remitted to the foreign bankruptcy estate (article 173 1 PILA). This transfer, which represents the result of the Swiss mini-bankruptcy, requires, however, the prior
Switzerland
recognition of the foreign schedule of claims, whereby the Swiss courts review in particular whether the creditors domiciled in Switzerland were fairly treated in the procedure and were granted an opportunity to be heard.
Switzerland
Daniel Tunik
Lenz & Staehelin Route de Chne 30 1211 Geneva Switzerland
Tanja Luginbhl
Lenz & Staehelin Bleicherweg 58 8027 Zrich Switzerland
+41 58 450 7000 +41 58 450 7001 daniel.tunik@lenzstaehelin.com www.lenzstaehelin.com
+41 58 450 8000 +41 58 450 8001 tanja.luginbuhl@lenzstaehelin.com www.lenzstaehelin.com
Daniel Tunik is a partner in the litigation group of the Geneva office of Lenz & Staehelin. He studied law at the University of Geneva, and is a graduate of the Geneva Institute of International Studies (1991) and of the LL.M programme at the Georgetown University Law School (1992). Daniel Tunik is active in the area of commercial litigation and is regularly involved in debt collection and bankruptcy matters, assisting creditors as well as debtors in debt collection, bankruptcy or reorganisation cases pending before Swiss courts.
Tanja Luginbhl is a partner in the corporate, M&A and insolvency group of the Zurich office of Lenz & Staehelin. She studied law at the University of Zurich, Switzerland, and is a graduate of the LL.M. programme at the New York University School of Law (1999), USA. Tanja Luginbhl specialises in the area of corporate, M&A, secured financing and insolvency and restructuring. She has been involved in various insolvency cases and advises banks, rating agencies and creditors.
Lenz & Staehelin is one of the leading law firms in Switzerland, having offices in Zurich, Geneva and Lausanne. The firm comprises more than 160 lawyers and has a strong and long-standing practice in insolvency and restructuring matters. The firm regularly represents creditors as well as debtors in debt collection, bankruptcy or reorganisation cases pending before Swiss courts. We advise Swiss and international clients in the context of official or out-of-court debt restructurings.
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Chapter 42
USA
Karen E. Wagner

1.1 How does a creditor take security over assets in the USA?
antecedent debt may also be avoided, as a preference, if the debtor was insolvent at the time of the transfer. The Code provides for avoidance of a transfer within 90 days of bankruptcy, or within one year if the transfer was to an insider. During these periods, a rebuttable presumption of insolvency exists.
1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in the USA?
The granting and perfection of security interests is governed by state law, and the method of taking and perfecting a security interest depends upon the asset involved. In most cases, a security agreement must be signed by the entity granting the interest, and, in order to perfect the interest against claims of third parties, a filing must be made in one or more state registries to provide notice of the security interest. In some cases, perfection is accomplished by possession. For real estate, a real property mortgage must be granted and filed. For other types of property, rules are found in the relevant states Uniform Commercial Code.
There is no civil or criminal penalty arising solely as a consequence of continuing to operate a business that is in financial difficulties. Generally, the business judgment rule applies and requires directors to be informed and act in good faith. If they act in a manner consistent with the business judgment rule, they should have a defense to any liability claims. No automatic disqualification results from a company continuing to operate while in financial difficulty. If a company files for bankruptcy and a trustee is appointed, the board of directors is displaced, but, otherwise, the board and management will continue in place, though with added responsibilities to creditors. After a bankruptcy, or a sudden stock price drop due to publication of information about financial difficulties, directors may face civil lawsuits from creditors who may assert claims such as breach of fiduciary duty, to which the business judgment rule may provide a defense. Investors may also sue under the securities laws, claiming that disclosure was inadequate.
A transaction may be avoided as a fraudulent transfer or conveyance, or as a preference, if the company was insolvent at the time of the transaction. If an insolvent company transfers an asset for less than reasonably equivalent value, the transfer may be attacked as fraudulent by a creditor, under state law, or by the debtor under either state law or under the Bankruptcy Code, if the transferor files for bankruptcy. A transfer made with the intent to hinder, delay or defraud creditors is an intentional fraudulent transfer or conveyance, avoidable because of the wrongful intent. However, a constructive fraudulent transfer is also subject to avoidance, even where there is no intent to defraud, and even without knowledge of insolvency. Sometimes, avoidance claims arise in connection with complex transactions involving several steps, such as leveraged buyouts, and a key issue is whether the steps may be collapsed. In such instances, good faith may play a particularly important role. If a transfer is avoided, the transferee may be required to return the asset or its value, and may retain only a claim against the debtor (though the claim may be avoided as well if there is evidence of bad faith). Under state law, the limitations period on avoidance may extend up to six years after the date of the transaction, so the period of risk is quite long. Under the Bankruptcy Codes independent provision, the limitations period extends back for two years from the date of filing. Under the Bankruptcy Code, a pre-petition payment of an
2 Formal Procedures
2.1 What are the main types of formal procedures available for companies in financial difficulties in the USA?
The main types are Chapter 11 of the Bankruptcy Code, which provides for reorganisation; Chapter 7, which provides for liquidation; and Chapter 15, which provides for assistance to foreign proceedings. Most corporations with a presence, or property, in the United States are eligible to file under Chapter 11 or 7. In addition, there are specialised subchapters for specific entities, such as stockbrokers. Insolvency proceedings for a broker dealer are governed by the Securities Investor Protection Act, or under a special section of the Bankruptcy Code. Some entities, usually those regulated under state law such as banks or insurance companies, and railroads, are not eligible to file under the federal Bankruptcy Code, though their holding companies may be eligible to file.

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A filing under Chapter 11 or 7 gives the bankruptcy court exclusive jurisdiction over the debtor, its estate, and the property of the estate. This jurisdiction is extraterritorial, though the choice of law rules do not require application of U.S. law in all circumstances. The automatic stay applies to all property of the estate, and all creditors. A Chapter 15 petition may be filed to commence an ancillary case. For a further discussion of Chapter 15, see question 8.1.
2.2 What are the tests for insolvency in the USA?
USA
These may include, for example, applications to pay critical vendors or to maintain bank account and cash management systems. An involuntary case is commenced by the filing of a petition by one or more creditors, but does not become effective until the court orders relief. During the gap period between the time the involuntary petition is filed and the time relief is ordered, the debtor may function without bankruptcy law restraints unless specific court orders are issued to address emergent matters. Whether voluntary or involuntary, petitions may be filed under either Chapter 11 or Chapter 7, though not every type of entity may be subjected to an involuntary filing.
2.5 What notifications and meetings and publications are required after the company has been placed into each procedure?
USA
The tests differ depending upon the circumstances in which the test is to be applied. Insolvency is not a prerequisite for a filing. Proof of insolvency is a prerequisite for successful assertion of an avoidance claim. The term insolvent is generally defined in the Bankruptcy Code as the sum of [an] entitys debts is greater than all of such entitys property, at a fair valuation. Valuation of some forms of property, and of some liabilities, such as contingent tort obligations, may be difficult, so application of the test may not be simple. This definition is applicable to the federal avoidance provision, to establish insolvency for fraudulent conveyance or preference purposes. However, avoidance may also be accomplished by a showing that the debtor was engaging in business with unreasonably small capital, or was incurring debts beyond the debtors ability to pay as such debts mature. In addition, relevant definitions under state law may apply. In most states, balance sheet insolvency and capital inadequacy are among the relevant standards.
The debtor must appear before creditors in a meeting presided over by the United States Trustee, the administrative arm of the bankruptcy courts. The debtor is also subject to the wide ranging investigatory and oversight powers of an official committee of unsecured creditors, usually chosen from among the 20 largest creditors, appointed by the United States trustee. Under recent legislation, the committee also has obligations to provide information to creditors. The debtor must also provide notice to creditors and other interested parties of all material events. The level and scope of the requisite notice is specified in the Bankruptcy Rules, and is often addressed in an early administrative order. Among the applications of which the debtor must provide notice are applications seeking authority to obtain a secured loan or to use cash collateral; for sale or use of property out of the ordinary course of business; for assumption or rejection of executory contracts and leases, including collective bargaining agreements; and for compromise of claims. Notice must also be given of the last date for filing of claims; of the filing of a disclosure statement and a hearing to determine its adequacy; and of plan voting and the confirmation hearing. Notice by publication may be required under some circumstances.
There are no specified criteria for eligibility to file a petition under Chapter 11 or 7 of the Bankruptcy Code. A company may voluntarily invoke bankruptcy protection where the company deems itself in need of restructuring. A filing may be attacked if it is made in bad faith, for example to thwart a judgment of foreclosure in a single asset case. A case may also be dismissed if effective relief is not possible or if the debtor is not eligible for the provision under which it files. Otherwise, there are few bases upon which to attack a filing. A company may also be placed involuntarily into a procedure. One, or three, creditors, depending upon the total number of creditors, with undisputed claims totalling at least $12,300, may file an involuntary petition. The debtor may accede to the filing, or may controvert it or seek to convert to a different chapter. If the filing is controverted, the petitioning creditors must prove that the debtor is not generally paying its undisputed debts as they come due. Any petitioner filing in bad faith is liable for compensatory and punitive damages. The specialised chapters or subchapters, like Chapter 15 or the stockbroker liquidation subchapter, have additional limitations with regard to eligibility.
3 Creditors
An automatic stay, or statutory injunction, that issues upon the filing of a Chapter 11 or 7 petition, prevents creditors whose claims arise pre-petition from pursuing claims against a debtor except in the bankruptcy court. Both pre- and post-petition creditors are restrained from exercising collection remedies unless they successfully seek relief from the court. Relief from the stay for the purpose of exercising remedies will seldom be granted, especially early in the case.
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A voluntary case is commenced by the filing of a petition by the debtor. The filing of the petition initiates the bankruptcy case. Usually, immediately after the petition is filed several other applications will be made, first day applications seeking relief geared toward maintenance of uninterrupted business operations.
The automatic stay also prevents secured creditors from enforcing their rights after a filing. However, secured creditors rights in their collateral are protected. If the debtor wants to use their collateral, or if the value of the collateral begins to decline, secured creditors may ask the court to grant additional protections, including the payment of interest or supplying of additional collateral. In some
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circumstances, a secured creditor may seek a court order providing for the return of its collateral.
USA
The institution of pre- or post-petition programmes for retention and severance of executives has been subjected to recent legislative restrictions. Pre-petition programmes may be avoided as fraudulent conveyances. Post-petition programmes must provide that any incentive programme prohibit a severance payment to an insider unless the payment is part of a programme available to all full time employees and is not more than 10 times the amount of mean severance given to non-management employees. It has been held that the business judgment rule does not apply to approval of these programmes. A liquidating company, under the supervision of a trustee, may not require the continuation of most employees; employees that are terminated will be entitled to the priority claims described herein, and to administrative claims to the extent they provide post-petition labour.
If setoff is permitted under state law, setoff rights exist: pre-petition claims may be setoff against pre-petition claims; and post-petition against post-petition claims. However, setoff generally may not be given effect without a court order modifying the automatic stay.

Generally, in a Chapter 11 case, absent evidence of fraud by the company, the debtor will remain in place as debtor in possession, though under recent legislation, it appears that a trustee may be more easily appointed where there is a charge of fraud or other wrongdoing by a member of senior management. If a trustee is appointed, the trustee will supersede the board. If the debtor remains in possession, corporate governance is not affected by the filing, except that the board of directors may have duties to creditors of an insolvent entity. Shareholders of an insolvent entity may not have the right to demand normal corporate governance procedures as their interests may have little value and the creditors may be the ultimate shareholders of the reorganised enterprise. In a Chapter 7 case, a trustee is appointed to liquidate the companys assets and make distributions to creditors according to the absolute priority rule. The board of directors is displaced. Shareholders do not have corporate governance rights in Chapter 7 and are unlikely to recover on their equity interests, because the premise of Chapter 7 is that the debtor cannot be reorganised as an operating enterprise.
Upon a Chapter 11 filing, a debtor may assume or reject most executory contracts (other than contracts for financial or personal service) or unexpired leases at any time before confirmation. Assumption and rejection require court approval. Assumption means that the debtor adopts the contract, after curing all curable defaults and demonstrating adequate assurance of performance, the legal effect of which is to give obligations under the contract administrative status. A contract or lease must be assumed as is; cherry picking of favourable portions of the contract or lease is not permitted. With some restrictions, an assumed contract or lease may be assigned to another person, despite a non-assignability clause. Rejection is not the same as termination permitted by the contract; it is akin to an authorised breach, and gives rise to a pre-petition claim for damages. Because assumption usually may not be followed by a later rejection, and could impose large administrative expense upon the estate, the debtor, and its creditors, usually prefer that a decision to assume assumption be made late in the case, after the debtors business strategy, and likelihood of its success, can be evaluated. However, under recent legislation, the time limits for assumption or rejection of unexpired leases of non-residential real property have been shortened. The non-debtor counterparty has no right to reject or terminate, even if the contract contains an insolvency or bankruptcy termination provision, absent a post-petition performance or payment default by the debtor. Special rules govern assumption or rejection of collective bargaining agreements, which may be rejected only after extensive bargaining and information exchange, and after a court finds that certain economic criteria are met. Special rules also govern assumption or rejection of other specific types of contract or lease, including intellectual property licences and shopping center leases.
A Chapter 11 debtor may use unencumbered cash or proceeds for normal corporate activities. The company may obtain a loan, secured by assets, upon court approval (a debtor in possession or DIP loan). The debtor may also seek court approval to use encumbered cash, cash collateral, by providing adequate protection to pre-petition secured lenders. The cash available to the debtor is used to operate the business and to finance the bankruptcy process. That process may be quite expensive, as the debtor pays for its own professionals and those of any official committees, and, often, of any secured lenders. Payment of all such professionals is usually subject to court approval. A Chapter 7 trustee is paid from unencumbered cash and proceeds of assets sales.
5 Claims
Current employees of a reorganising company continue to be employed and to be paid in the ordinary course. Pre-petition unpaid employee benefit claims may be entitled to priority treatment, up to a certain amount, but may not be paid until a plan of reorganisation is confirmed.
Creditors must file proofs of claim setting forth the basis for their claims, unless the debtor has filed a schedule showing the claim as undisputed and the creditor agrees. Generally, non-bankruptcy law governs the substance of the claim, and bankruptcy law governs the priority and status of the claim. A Chapter 11 debtor must give

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notice to all creditors of the bar date, the last day for filing claims, and of the procedure for filing claims. Claims must be filed in a Chapter 7 case within 90 days after the first meeting of creditors. The filing of a claim submits the creditor to the jurisdiction of the bankruptcy court, and may constitute a waiver of any jury trial right with respect to the adjudication of the claim.
USA
usually based upon the debtors business plan unless a separate fund is provided. The plan may provide for the creation of a postreorganisation entity, usually a trust, charged with collection of claims of the estate, and may be authorised to engage in litigation of which creditors will be beneficiaries. The court may approve a plan only if it meets criteria specified in the Bankruptcy Code. After confirmation and consummation of a reorganisation plan, the reorganised debtor will ultimately leave the protection of the bankruptcy court, though jurisdiction is retained as to some matters. In exchange for performance under the plan, a corporate debtor is discharged from claims that were, or could have been, asserted in the course of the Chapter 11 case. Ultimately, after all matters relating to the bankruptcy are resolved, the case is formally closed by the court. A Chapter 7 liquidation is concluded by the sale of all assets of the debtor, a distribution to creditors according to the absolute priority rule, and a closing of the case. No discharge follows a Chapter 7 liquidation.
USA
5.2
The ranking of claims is governed by the Bankruptcy Code. Claims that arise as a consequence of post-petition engagement with the debtor or on behalf of the estate, including trade claims, employee claims and tort claims, as well as claims of professionals involved in the bankruptcy process, have administrative priority, which means they are paid first. Secured claims have priority with respect to collateral securing them. Employee benefit and certain other claims, including some tax claims, have priority to a specified amount. General unsecured claims rank pari passu. Litigation frequently arises regarding the status of particular claims. In a Chapter 11 plan, the Bankruptcy Codes designated rankings may be varied as creditors negotiate and reach agreement among themselves as to how to allocate value, though there is some debate about the extent that such variation may be approved. In a cramdown, and in Chapter 7, the rules of the Code must be observed.

7.1 Is it common to achieve a restructuring outside a formal procedure in the USA? In what circumstances might this be possible?
It is not common for a sizeable corporation to restructure outside of a formal process because, absent such a process, there is no easy method by which to ensure that all creditors are bound by an agreed restructuring. If a restructuring is required solely to address a discrete problem with one or a few creditors, such as renegotiation of the terms of a mortgage, and all other creditors can be left unimpaired, an out-ofcourt process may be possible. Where the problem to be addressed is discrete, but many creditors will be affected, such as in a public debt restructuring, a pre-packaged or pre-negotiated, plan of reorganisation, which calls for negotiations and agreement on a plan prior to a filing, may combine an informal procedure with a relatively quick formal procedure.
A Chapter 11 debtor is subject to the laws governing the operation of its business, including the tax laws. However, many debtors can take advantage of large net operating losses which may reduce tax burdens. In addition, certain state taxes arising upon an asset transfer are not applicable to some transactions, including particularly real estate transfers, effected in connection with a plan.

In a Chapter 11 case, if at least one class of impaired creditors accepts a plan, then, upon a showing that creditors who reject are receiving as much as they would in a liquidation (the best interest of creditors test), and that no junior creditor receives any distribution before a senior class is paid in full (the absolute priority rule), the court may cramdown the plan on dissenting creditors and interests. The process can be time consuming and expensive as it can involve extensive valuation battles. There is no need for cramdown in a Chapter 7 liquidation.
Yes. See question 2.1.

Yes. The Bankruptcy Code provides for the sale of assets independent of a plan of reorganisation, and such sales may be expedited when necessary. Any such sale may be negotiated, agreed and documented prior to or after filing the bankruptcy petition. However, the nondebtor party, or stalking horse, is subject to the risk of an auction, a procedure which is usually mandated. The sale of substantially all assets of the debtor is likely to face greater hurdles than a sale of discrete assets. However, early sales of substantially all assets are becoming more common. The sale of stock of a debtor is uncommon, because while the assets may be sold free and clear of many liabilities, stock is sold subject liabilities of the business.
A Chapter 11 reorganisation (or liquidation) is concluded by the confirmation and consummation of a plan of reorganisation (or liquidation), which governs treatment of all creditors and interest holders. Confirmation is accomplished if creditors and interest holders vote to accept the plan (two thirds in amount and a majority in number in each class vote in favour) or a cramdown occurs. The plan provides for distribution of value to creditors, by class, and
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8 International
8.1 What would be the approach in the USA to recognising a procedure started in another jurisdiction?
USA
relevant definitions. In addition, a public policy exception does allow a U.S. court to deny recognition that would be manifestly contrary to a fundamental U.S. public policy. Emergency relief is available under Chapter 15. Among other things, the U.S. bankruptcy court may grant a stay against creditors execution against the foreign debtors assets, may entrust the administration of the foreign debtors assets to the foreign representative, and may suspend the right to dispose of the foreign debtors assets located with the territorial jurisdiction of the United States, if the foreign representative can show that such relief is urgently needed. The standards applicable to the grant of an injunction apply to an application under this section. Recognition of a foreign main proceeding results in mandatory relief, including an automatic stay. Recognition of both main and nonmain foreign proceedings may result in the grant of discretionary relief, granted to effectuate the purpose of Chapter 15 and to protect the assets of the debtor or the interests of the creditors. Such an order may include a stay of proceedings or suspension of the right to encumber assets of the debtor and its liabilities.
Chapter 15 seeks to balance the right of U.S. courts to administer assets of a debtor with ties to the United States with the rights of foreign courts with respect to assets of the same debtor and principles of comity. It has the objectives of cooperation between the U.S. courts, U.S. trustees and debtors and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; greater legal certainty for trade and investment; fair and efficient administration of cross-border insolvencies; protection and maximisation of the value of the debtors assets; and facilitation of the rescue of financially troubled businesses. Judges interpreting the law are to consider its international origin, and the need to promote an application of this Chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions. To seek recognition, a foreign representative of the debtor must file a petition accompanied by evidence of the existence of the foreign proceeding and appointment of the foreign representative. Thereafter, the foreign representative must provide to the court, in a timely manner, notices of change of status concerning all foreign proceedings involving the debtor. If the (1) pending foreign proceeding is main or nonmain; (2) the foreign representative is a person or body authorised to administer the reorganisation or liquidation of the debtor; and (3) the petition meets additional relevant requirements, the court is mandated to enter an order recognising a foreign proceeding. The decision to grant recognition is not dependent upon findings, of the sort previously mandated by section 304(c), about the nature of the foreign proceedings. However, in some of the first decisions interpreting Chapter 15, courts have refused to grant recognition in cases in which the foreign proceeding was not considered to meet
Karen E. Wagner
Davis Polk & Wardwell 450 Lexington Avenue New York, New York, 10017 USA
+1 212 450 4000 +1 212 450 3000 karen.wagner@dpw.com www.dpw.com
KAREN E. WAGNER is a partner at Davis Polk & Wardwell. She has represented debtors, creditors, acquirers and others in bankruptcy, primarily in litigation, and has been involved in a number of recent matters generated by the credit crisis. She has written on many topics in the insolvency area and is a member of the International Bar Association. She is a 1976 graduate of New York University School of Law.
DAVIS POLK & WARDWELL is a global law firm based in New York City. For more than 150 years, our lawyers have advised industry-leading companies and global financial institutions on their most challenging legal and business matters. Davis Polk ranks among the worlds preeminent law firms across the entire range of our practice, which spans such areas as insolvency and restructuring, capital markets, mergers and acquisitions, credit, litigation, investment management, executive compensation, intellectual property and tax. The firm has more than 600 lawyers in offices in New York, Menlo Park, CA, Washington, D.C., London, Paris, Frankfurt, Madrid, Hong Kong and Tokyo.

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A new Chapter 15 has been added to the Bankruptcy Code, replacing former Section 304. Chapter 15 effectively imports the UNCITRAL Model Law on Cross-Border Insolvency.
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The International Comparative Legal Guide to:

Corporate Recovery & Insolvency 2009

Published by Global Legal Group with contributions from:

Country Question and Answer Chapters:

Sarah Paterson, Slaughter and May

F&F Studio Design

10 Czech Republic 11 Denmark

Alan Falach LL.M Managing Editor Global Legal Group Alan.Falach@glgroup.co.uk

The Valuation Issue and English Schemes of Arrangement

1. English Schemes of Arrangement

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Slaughter and May

The Valuation Issue and English Schemes of Arrangement

2. The English Scheme of Arrangement and a Pre-pack

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Slaughter and May

The Valuation Issue and English Schemes of Arrangement

4. The English Approach and Consensual Restructuring

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Slaughter and May

The Valuation Issue and English Schemes of Arrangement

Tel: Fax: Email: URL:

+44 20 7090 3154 +44 20 7090 5000

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Valuation in Chapter 11: Overview and Tools for Consensual Resolution

I. Why the Valuation Question is Posed: The Absolute Priority Rule

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Davis Polk & Wardwell

II. Valuation Methods

Discounted Cash Flow Method

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Davis Polk & Wardwell

Securities Valuation Method

IV. Tools for Reaching Consensual Resolutions to Disputed Valuations

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Davis Polk & Wardwell

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Davis Polk & Wardwell

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Davis Polk & Wardwell

Tel: Fax: Email: URL:

+1 212 450 4099 +1 212 450 3099 marshall.huebner@dpw.com www.dpw.com

Tel: Fax: Email: URL:

+1 212 450 4580 +1 212 450 3580 damian.schaible@dpw.com www.dpw.com

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

1 Issues Arising When a Company is in Financial Difficulties

Please see the answer above.

There is no formal requisite. The Bankruptcy law states that when

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Estudio Uriburu Bosch & Asoc.

4 Continuing the Business

6 Ending the Formal Procedure

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Estudio Uriburu Bosch & Asoc.

Tel: Fax: Email: URL:

+5411 4815 9971 +5411 4815 9971 fbosch@uriburubosch.com www.uriburubosch.com

Tel: Fax: Email: URL:

+5411 4815 9971 +5411 4815 9971 ralgorta@uriburubosch.com www.uriburubosch.com

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

1 Issues Arising When a Company is in Financial Difficulties

ICLG TO: CORPORATE RECOVERY AND INSOLVENCY 2009

Schnherr Rechtsanwlte GmbH