Creditor Banks and Preventive Financial Restructuring ...
Transcript of Creditor Banks and Preventive Financial Restructuring ...
Creditor Banks and Preventive
Financial Restructuring
Proceeding
Content
• Incorporation into the International Sphere • Basic Points of Regulation • Overview of Important Rules • Position of Creditor Banks
Creditor Banks and Preventive Financial Restructuring Proceeding 2
Abbreviations
• Preventive proceeding – Preventive restructuring proceeding according to
ZFPPIPP
• Regulation – Council Regulation (EC) No 1346/2000 of 29 May 2000 on
insolvency proceedings
• Brussels I – Council Regulation (EC) No 44/2001 of 22 December 2000 on
jurisdiction and the recognition and enforcement of judgments in civil and
commercial matters
• Act – Financial Operations, Insolvency Proceedings and Compulsory
Dissolution Act (ZFPPIPP) Official Gazette of RS no. 126-6413/2007 to
100-3599/2013
• MS – Member State
Creditor Banks and Preventive Financial Restructuring Proceeding 3
• Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency
proceedings
• Preventive proceeding shall not be recognized as a proceeding under the
current Regulation, since it is not a proceeding in case of insolvency.
• Regulation is currently under revision (on 22 October 2013):
Regulation should also cover proceedings, (i) that are only connected
with insolvency and (ii) where there is a risk of future insolvency,
Definition of „collective proceedings" will expand to cases when
proceeding covers „significant share“ of creditors
• It is possible that after the revision of Regulation preventive proceeding will
be recognized as a proceeding under the Regulation. If this will be the
case, legal effects of preventive proceeding could not be challenged in
another member state.
Incorporation into the International Sphere
Council Regulation
No 1346/2000
Creditor Banks and Preventive Financial Restructuring Proceeding 4
Creditor Banks and Preventive Financial Restructuring Proceeding 5
Incorporation into the International Sphere
Brussels I
• Recognition and enforcement of resolution on the confirmation of
agreement on financial restructuring in EU (except Denmark)
• Is decision of the court on the confirmation of agreement judgment
according to Brussels I? Brussels I shall also apply to confirmatory
judgments. It is important for the recognition of the judgment under the
Brussels I that the court, before passing the ruling, examines the grounds of
the judgment – it should not be just a confirmation of a private agreement.
• Under the Article 34 of Brussels I a resolution shall not be recognised in
another member state in 4 cases, alternatively:
if such recognition is manifestly contrary to the public policy of the MS
where it was given in default of appearance, if the defendant was not
served with the document which instituted the proceedings in sufficient
time and in such a way as to enable him to arrange for his defence,
unless the defendant failed to commence proceedings to challenge the
judgment when it was possible for him to do so;
if it is irreconcilable with a judgment given in a dispute between the
same parties in the MS in which recognition is sought;
if it is irreconcilable with an earlier judgment given in another MS or in
a third State involving the same cause of action and between the same
parties, provided that the earlier judgment fulfils the conditions
necessary for its recognition in the MS addressed.
Accelerated Financial
Safeguard Proceedings
Preventive Proceeding
Intended for companies in financial
difficulties, that are not yet insolvent
Intended for companies, that are not
insolvent, but are threatened by
insolvency
Only for large companies (more than
150 employees, 20 million € of
turnover)
Only for large and medium
companies according to ZGD-1
(more than 50 employees, 8,8
million € turnover)
Only financial creditors Only financial creditors
Administrator appointed by court No administrator
The court guards the interests of
minority creditors (not necessarily
equal treatment of creditors)
The court decides whether all
creditors are equally treated
Duration max 2 months Duration max 8 months
Confirmation of agreement with 66%
majority of claims
Confirmation of agreement with 75%
majority of claims
Recognized under the Regulation Not recognized under the
Regulation
Comparison with
French Accelerated
Financial Safeguard
Proceedings
Creditor Banks and Preventive Financial Restructuring Proceeding 6
Incorporation into the International Sphere
• confidential nature of the proceeding
• proceeding intended only for well informed creditors
• debtor and financial creditors have the initiative
• limited role of courts and simple assessment of decisions
• fixed and unequivocal time limits
• simple proceeding initiation/standstill (consent of 30% of the total of all
financial claims is sufficient)
• simple termination of proceeding/standstill (consent of 30% of the total of all
financial claims is sufficient)
• equal treatment of creditors is decided on the merits, other decisions of the
court at the beginning or the end of the proceeding are formal in nature
• no court administrator of the proceeding
• goal of preventive proceeding is to enable the debtor, with the consent of
creditors, the necessary time to negotiate financial restructuring
• management of the debtor is liable for business operations in the course of
proceeding under the „Business Judgment Rule“; management of the
debtor is not obliged to manage the debtor conservatively with the goal to
retain assets of the debtor for repayment of creditors
• proceeding is linked to the subsequent insolvency proceedings in terms of
time frame and substance
Basic Points of Regulation
Creditor Banks and Preventive Financial Restructuring Proceeding 7
• Preventive proceeding, according to Amendment F, is not excluding out-of-
court agreement on financial restructuring, for which the total (100%)
consent of creditors and the debtor is necessary
• Proceeding is initiated by the request of the debtor to commence the
proceeding (preliminary proceeding), creditors cannot propose
commencement of the proceeding
• Attachments to the petition shall be:
a basic list of all financial claims against the debtor (according to the
end of the latest quarter before lodging the request)
an auditor‘s report on reviewing the basic list
notarized statements by creditors with at least 30% (75%) of total
amount of financial claims
• Procedural obstacles for commencement of the proceeding:
2 years from the previous proceeding (except with 75% consent)
ongoing compulsory settlement proceedings
2 years from the day when the debtor settled all liabilities arising from
a previous compulsory settlement (except with 75% consent)
ongoing bankruptcy proceedings
• Consequences of the initiation of the proceeding:
compulsory settlement proceedings may not be proposed
Overview of Important Rules
Preliminary
Proceeding
Creditor Banks and Preventive Financial Restructuring Proceeding 8
bankruptcy proceedings may not be initiated
• Financial creditor may notify the participation in the proceeding until
resolution on the initiation of proceeding has been issued and may appeal,
inter alia, that:
the debtor is already insolvent or
the debtor is not threatened by insolvency (1 year period) or
the basic list of claims does not contain all financial claims against the
debtor
• In such case the court shall be obliged to assess the disputed facts. Difficult
for the court to rule on. Question arises whether appeal makes sense, when
the termination of the proceeding can be achieved faster if it is requested
by creditors with at least 30% of the sum of all financial claims.
• Preliminary proceeding does not have an impact on claims or recovery of
claims, however, it constitutes an obstacle for initiation of compulsory
settlement and bankruptcy proceeding.
Overview of Important Rules
Preliminary
Proceeding
Creditor Banks and Preventive Financial Restructuring Proceeding 9
• The court shall decide on the request to commence proceeding with a
resolution, and if there is no appeal, assesses only formal requirements of
the Act
• Main proceeding is initiated on the beginning of the day when the court‘s
resolution on the initiation of proceeding is published on AJPES
• Legal consequences of the initiation of the proceeding (only for financial
claims):
Bar on initiation of enforcement or security proceedings
Enforcement and security proceedings shall be terminated upon the
request of the debtor
The limitation period for claims included in the basic list is suspended
The debtor is not in default for payment of the principal amounts
• Discharge of the proceeding
Validity of the agreement is conditional on:
signing the agreement on financial restructuring of:
the debtor
financial creditors with at least 75% of the sum of all ordinary
claims included in the basic list
financial creditors with at least 75% of the sum of all secured claims
included in the basic list (if agreement affects secured claims)
Overview of Important Rules
Main Proceeding
Creditor Banks and Preventive Financial Restructuring Proceeding 10
The fulfilment of additional conditions (if stipulated by agreement):
consent of all secured creditors for restructuring different from
reduction of interest rates and deferral of maturity
consent of commercial creditors
change of share capital (The Act is not introducing APR rule for
change of share capital)
In debt review of agreement by auditor (basis for court‘s decision) if the
agreement:
stipulates equal share of reduction and equal deferral of maturity
for ordinary financial creditors
stipulates equal deferral of maturity (not more than 5 years after
finality) and equally changed interest rate for secured financial
creditors
reaches 75% threshold
fulfils additional conditions
Agreement is signed and notarized by all consenting parties and one
original copy of agreement is deposited by the debtor with the notary.
Notary shall hand over a notarized copy of the agreement to each
signatory and to creditor whose claim is included in the basic list of
claims, even if such creditor is not a signatory to this agreement.
Basic list of claims shall be attached to agreement.
Overview of Important Rules
Main Proceeding
Creditor Banks and Preventive Financial Restructuring Proceeding 11
• The court confirms the agreement with a resolution:
if the request for the confirmation is filed within 5 or 3 months
(prolongation for 3 or 2 months with 30%)
Attached documents:
an engrossed notarized copy of the original of the agreement
minutes on the deposition
auditor‘s report
• Legal effects of the agreement:
after finality of court‘s resolution
on financial claims of creditors who agreed to agreement – other
obligations shall also have an effect on these creditors, if so agreed
on financial claims of ordinary creditors who did not agree (reduction of
interest rates and maturity)
on financial claims of secured creditors who did not agree (reduction of
interest rates and maturity)
the rights of creditors as specified in the agreement shall have effect in
favour of creditors who did not agree to agreement
at D/E „change of control“ clause and article 498 ZGD-1 (5 years after
finality) do not apply
Overview of Important Rules
Confirmation of the
Agreement by the
Court
Creditor Banks and Preventive Financial Restructuring Proceeding 12
subordinated claims terminate
enforceable instruments that are above the level of claims agreed in
agreement terminate
enforcement proceedings continue in limited way
subsequent court decisions - only up to the level of claims in
agreement
Overview of Important Rules
Confirmation of the
Agreement by the
Court
Creditor Banks and Preventive Financial Restructuring Proceeding 13
Termination of proceeding
if a reason for termination of the proceeding emerges the court
shall not terminate the proceeding but shall firstly merely issue a
resolution on the finding that a reason for termination of the
proceeding has emerged
resolution shall be published (AJPES)
the debtor and creditors (20% of financial claims) have a right to
lodge a petition for the initiation of the compulsory settlement
proceeding within 1 month after resolution has been published
(insolvency test, no automatic insolvency)
In case of subsequent bankruptcy
priority repayment of financial claims emerged during preventive
proceeding before priority claims in 21.1. in 2. (wages for the last
3 months, indemnity for occupational injury etc.)
actions of the debtor, carried out due to the fulfilment of obligations
under agreement, shall not be challenged
In case of subsequent compulsory settlement
priority repayment of financial claims emerged during preventive
proceeding – compulsory settlement does not effect such claims
Overview of Important Rules
Confirmation of the
Agreement by the
Court
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Creditor Banks and Preventive Financial Restructuring Proceeding 15
Out-of-court
Restructuring
Preventive
Restructuring
Compulsory
Settlement (CS)
Required consent
ordinary
100% 75% 6/10
Required consent
secured
100% 75% 75%
Repayment
agreement
Free Equal treatment of
all creditors
Equal treatment of all
creditors
Consent of
creditors for „stand
still"
100% 30% Consent is not required
Duration of
negotiations
Unlimited Limited (5+3, 3+2) Limited
Contesting actions
in bankruptcy after
agreement
Yes No No
Has the new
financing senior
position in
bankruptcy/CS ?
No Yes Yes
Does rule in art.
498 ZGD 3-1 apply
for D/E?
Yes No No
Creditor Banks and Preventive Financial Restructuring Proceeding 16
Out-of-court
Restructuring
Preventive
Restructuring
Compulsory
Settlement (CS)
Does „Change of
control“ clause
remain valid?
Yes No
No
Absolute priority
rule
No No Yes
Management of
debtor‘s
business
„Business Judgment
Rule“, risky
transactions are
allowed
„Business Judgment
Rule“
risky transactions are
allowed
Restrictive governance,
preservation of value
for creditors, only
regular business
operations
Compulsory
change in
management
No No Yes
Reduction of
surety‘s
obligation
Yes
(accessory of surety
art. 1017 OZ)
Yes
(accessory of surety
art. 1017 OZ)
No
(exception from
accessory art. 1022
OZ)
Creditor Banks and Preventive Financial Restructuring Proceeding 17
Out-of-court
Restructuring
Preventive
Restructuring
Compulsory
Settlement (CS)
Possible
compulsory
effect („cram
down“) on
secured claims
No Yes (maturity for max
5 years)
Yes (no limitation for
maturity)
Division of
secured claims
No No Yes
Possible view of financial creditors on preventive proceeding:
• it is appropriate proceeding, when majority consent among financial
creditors on a manner of restructuring of the debtor is reached
• minority interests may be subordinated with this proceeding
• information on the debtor may be obtained (of assets, liabilities, business
operations and growth in business operations of the debtor) for subsequent
creditors‘ petition for compulsory settlement (limited only on financial
creditors or on all creditors),
• it is important that banks (i) get to know business operations of the debtor
(due diligence) early enough and (ii) that they are prepared to take over the
managing of the debtor from the beginning of the proceeding, logically all
the time during the proceeding (iii) prepare scenario of compulsory
settlement
• it is appropriate that the banks have an expert, that is familiar with the
industry and is capable to take over managing of the debtor, present from
the beginning
• decision making of the banks should be hastened, since the time limits are
unequivocally stated (proceeding is repeated only with 75% consent)
• simple (statutory) „stand still“, that is connected with compulsory settlement,
that may be filled within one month after resolution of the court
Position of Creditor Banks
Creditor Banks and Preventive Financial Restructuring Proceeding 18
• Negotiations should be conducted in a way that the debtor (and owners) is
aware from the beginning that he must be cooperative during time of
negotiations and that banks are the one that actually run the negotiations;
in compulsory settlement the debtor is looking into derived absolute priority
rule and (likely) change of debtors‘ management.
• 30% consent for initiation may be subject to certain commitments of the
debtor during the negotiations, e.g..: limit of investments, sale, restriction of
business operations, forming data base (for business operations „Business
Judgment Rule“ applies).
• Equal repayment rule in preventive proceeding may be, in certain
circumstances, changed with special agreement among financial creditors
(before or after finalized preventive restructuring proceeding).
• Perhaps financial creditors should come to a principal agreement that that
failed preventive restructuring proceeding would lead to immediate
continuation of insolvency proceedings, which would be a clear message
for debtors. Such agreement would form a distinct D-day that is so often
missing.
• Absolute priority rule may be agreed on in preventive proceeding and
consequently (perhaps partial) expropriation of owners (additional condition
of change in share capital as part of preventive restructuring). The debtor
must know what follows in compulsory settlement.
Position of Creditor Banks
Creditor Banks and Preventive Financial Restructuring Proceeding 19
• debtor has as much room in negotiations as the banks leave him
Position of Creditor Banks
Creditor Banks and Preventive Financial Restructuring Proceeding 20
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Srečo Jadek, Partner
Law office JADEK & PENSA d.n.o.-o.p.
Tavčarjeva ulica 6
1000 Ljubljana
Slovenia
Tel: +386 1 234 25 20
Fax: +386 1 234 25 32
www.jadek-pensa.si