European Insolvency Procedures - 2010 Edition

European InsolvencyProcedures - 2010 Edition

© Clifford Chance LLP, July 2010

ContentsChapter Page

European Regulation on Insolvency Proceedings . . . . . . . . . . . . . . . . . . . . . . . 4

England & Wales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

The Czech Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

The Slovak Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Insolvency and Restructuring Trends in Europe - Summary Table

Automatic Stay and Rescue Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Cram Down of Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Position of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Personal Liability of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Time Limits for Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

New Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Clifford Chance Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

European Insolvency ProceduresContents

IntroductionThis note primarily focuses on theinsolvency considerations and legislationin specific European jurisdictions.However, before considering theindividual jurisdictions, it is important torecognise the influence of the pan-European legislation.

The European Regulation on InsolvencyProceedings (Council Regulation1346/2000) (“the Regulation”) came intoeffect on 31 May 2002. It applies to allEU member states except Denmark(including the European countries thathave joined the EU since that date.)

The Regulation does not provide uniformsubstantive law provisions for membersof the European Union. The purpose ofthe Regulation is primarily to codify howa member state should determinewhether it has jurisdiction to openinsolvency proceedings, whilst alsoimposing a uniform approach to thegoverning law which is applicable tothose proceedings. Once these factorshave been determined, the proceduralrules of the member state in whichproceedings are opened will generallyapply. The Regulation also provides forthe automatic recognition of insolvencyproceedings throughout the EU.

ScopeThe Regulation applies to all collectiveinsolvency proceedings which entail thepartial or total divestment of a debtorand the appointment of a liquidator orsimilar insolvency officeholder. TheRegulation primarily applies to

corporates and individuals within themember states. This encompassesvarious corporate entities such astrading companies, special purposevehicles and group treasury companies.Its scope of application is confined toparties with their centre of main interestswithin a member state of the EU. (Ittherefore applies to entities whose placeof incorporation may be outside of theEU, but whose centre of main interestsis within a member state.)

The Regulation does not apply toentities who do not have their centre ofmain interests within a member state.The extent to which insolvencyproceedings from outside of the EU arerecognised, depends upon the domesticlegislation and practice of eachparticular member state. (See theseparate sections for individual memberstates.)

The Regulation does not apply to banks,credit institutions, insurance companies,investment undertakings which holdfunds or securities for third parties, orcollective investment schemes. Thereorganisation and winding up of creditinstitutions is addressed in CouncilDirective 2001/24 and the reorganisationand winding up of insuranceundertakings is addressed in CouncilDirective 2001/17. These two directivesare beyond the scope of this note.

JurisdictionThe primary jurisdiction for insolvencyproceedings, as provided by theRegulation, is the court of the memberstate where the debtor’s centre of main

interests is located. In the case of acompany or other legal person, in theabsence of proof to the contrary, there is a rebuttable presumption that this iswhere the registered office of thecompany is located.

The Regulation allows for the courts incountries other than the home state toopen “territorial” insolvency proceedingsor, after the commencement of mainproceedings “secondary” proceedings,in the event that such debtor possessesan establishment in the territory of suchother member state. The applicable lawof such territorial or secondaryinsolvency proceedings will be the law of that other member state. However,territorial insolvency proceedings orsecondary insolvency proceedings arelimited in scope to the debtor’s assets in that member state and so will notextend beyond the member state wherethey are opened. Furthermore, under theRegulation, secondary proceedings arelimited to winding-up proceedings.

Governing LawThe Regulation imposes a unified codefor the governing law which, inconjunction with the mandatory regimeof jurisdiction rules, aims to enable thosewho have dealings with a debtor whosecentre of main interests is within the EUto identify with greater certainty thesubstantive legal provisions by whichtheir rights will be determined in theevent of the debtor’s insolvency. Thegeneral rule is that the law applicable to the insolvency proceedings and itseffects shall be that of the member state within the territory in which such

European Insolvency ProceduresEuropean Regulation on Insolvency Proceedings


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Key Elements:

n Effective since May 2002

n To promote recognition and co-operation between different insolvency regimes of individual member states within the EU

n Unified code for governing law rules

n Concept of “centre of main interests” to determine opening of main proceedings

n Jurisdiction for the opening of territorial or secondary proceedings

n Carve outs include rights in rem and rights of set-off

n Differences in legal regimes for individual member states to remain

The European Insolvency Regulation

European Insolvency Procedures

proceedings are opened.

So, unless secondary or territorialproceedings can be initiated as well, the law of the home state is likely todominate. Once the proceedings areopened the specific jurisdictionalconsiderations set out in the latter partof this note assume relevance.

The Regulation recognises that there willbe cases where strict adherence to thegeneral rule will interfere with the rulesunder which transactions are carried outin other member states, and thereforethe general rule is subject to a numberof exceptions and carve outs.

These exceptions include ‘rights in rem’including rights of security (to includeholders of floating security over afluctuating pool of assets), rights of set-off permitted by the law applicable tothe insolvent debtor’s claim, rights undera reservation of title clause, contractsrelating to immovable property, rules ofpayment systems and financial markets,contracts of employment, etc.

Disagreements BetweenMember StatesDifferent jurisdictions may interpret theRegulation in ways inconsistent witheach other. This has been apparent fromthe case law which has been generatedsince the introduction of the Regulation,which has primarily focused on thedetermination of an entity’s centre ofmain interests. No guidance is given inthe Regulation itself. Different memberstates’ interpretation of what constitutesthe centre of main interests has resultedin main proceedings being opened inmore than one member state. This issomething that the Regulation wasdesigned to avoid.

Any disagreement between memberstates as to where the centre of maininterests is located would ultimately haveto be resolved by the European Court ofJustice (“ECJ”).

Reference to The EuropeanCourt of JusticeThe first significant reference was madein 2004 to the ECJ in respect of the Irishincorporated subsidiary of the Parmalat

group, Eurofood IFSC (“Eurofood”). Inrelation to that company, a difference ofinterpretation led to two different courtsasserting that the centre of maininterests for Eurofood was in theirrespective jurisdictions. The Irish courtconsidered that Eurofood’s centre ofmain interests was in Ireland, based onthe following: it was incorporated inIreland and subject to the fiscal andregulatory controls there; the day to dayadministration was carried out in Irelandwhere the company’s accounts werealso maintained; the company’s boardmeetings took place in Ireland; and, thecreditor’s perception was that the centreof main interests was in Ireland.

The Italian courts asserted that thecentre of main interests was in Italy,based on the following: the companywas merely a conduit for the financialpolicy of the Italian parent; its exclusivepoint of reference was to the Italianparent; its operating office was in Italy;and, the central management functionwas carried out in Italy. The IrishSupreme Court referred a number ofquestions in relation to this issue to theEuropean Court. The ECJ held that theregistered office presumption could only

be rebutted if there were factorsascertainable by those dealing with thecompany that objectively establishedthat its administration was conductedelsewhere.

The ECJ further held that thepresumption could not be rebuttedsimply by producing evidence that theheadquarters of the parent company(that has the ability to make or influenceeconomic choices for its subsidiary) waselsewhere. It is to be noted that theburden of proof is placed on thoseseeking to rebut the presumption thatthe location of the registered officedetermining the centre of main interestsis a high one.

Discrepancies in the interpretation of theRegulation (in respect of extending amember state court’s jurisdiction) may in some circumstances result in forumshopping, something the Regulation wasdesigned to prevent. On a positive note,there have been examples where theRegulation has been used to facilitatepan-European restructurings byimplementing local compositions in main proceedings.


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IntroductionThis section is designed to provide ageneral outline of the main corporateinsolvency procedures in England andWales. Most of the legislation relevant toinsolvency is contained in the InsolvencyAct 1986 (the “Act”) and the InsolvencyRules 1986 as amended by theEnterprise Act 2002 (the “EA 2002”).

The main procedures encountered incorporate insolvencies are administrativereceivership, administration andliquidation. We also consider very brieflycompany voluntary arrangements andschemes of arrangement pursuant tothe Companies Act 2006. We considereach of these procedures in turn, thelegal basis for challenges to antecedenttransactions, and the personal liability ofdirectors.

Receivership andAdministrative ReceivershipAdministrative receiverThis is a receiver appointed over all orsubstantially all of the assets andundertakings of the company pursuantto a debenture which includes a floatingcharge. It is not technically an insolvencyprocedure, it is an enforcementmechanism used by a secured lendermost notably at a time when a companyis actually insolvent.

The introduction of the EA 2002 brought about substantial insolvency law reforms. The most significant reformwas the prohibition of the appointmentof administrative receivers by debentureholders other than pursuant to floatingcharges created prior to 15 September2003 and certain other exceptions. Theexceptions to the prohibition mean thatthe administrative receivership regime

will still be used as an enforcementmechanism.

Function and duties of receiverThe main function of the receiver is torealise the assets subject to the charge.His duty is to obtain the best pricereasonably obtainable at the time ofrealisation. The receiver owes hisprimary duty to his appointor, but alsohas subsidiary duties of good faith toguarantors of the company’s debts and to the company. He has very littleresponsibility to the unsecured creditorsof the company and is entitled to act inwhat he considers to be the bestinterests of his appointor.

The powers of the receiverThese derive from two sources:

(a) express powers granted in thedebenture or charge under which he is appointed; and

(b) statute, as an administrative receiverhas the extensive powers conferredby schedule 1 of the Act. It shouldbe noted that schedule 1 does not apply to fixed charge receivers,who have to rely on the expresspowers in the charge under whichthey were appointed and the limitedstatutory powers in the Law ofProperty Act 1925.

Power to sell charged propertyThe most significant of the powers of an administrative receiver is the powerto dispose of charged property. Anadministrative receiver has wide powersto dispose of charged property and maydo so by public auction or by privateagreement. This is generally on suchterms as he sees fit. The assets may besold separately or as part of a sale of

the business as a whole. However, sincethe receiver will generally sell without anywarranty or other recourse, the price hecan obtain for assets is generally lessthan that which would be obtained in anormal sale by the company.

Fixed charge receiverThis is a receiver appointed under a fixedcharge (i.e. a specific security interestover specific property). His role is torealise security and he is known as a“bare receiver” or “fixed charge receiver”.

AdministrationAdministration is principally a procedureintended to rescue companies which are or may become insolvent. Theprocedure has been streamlined by theEA 2002. A company can be placed intoadministration by way of an applicationto the court for an administration ordermade by either: the company; or itsdirectors; or by a creditor (includingcontingent and prospective creditors); orin certain circumstances by a clerk of aMagistrates Court. Administration mayalso be commenced without the needfor a court order initiated by the filing ofrequisite notices by: the holder of aqualifying floating charge as defined byparagraph 14 of schedule B1 of the Act;or the company; or its directors.

The overriding purpose of anadministration is to rescue a companyas a going concern. If this is notreasonably practicable, then anadministrator may perform his functionswith a view to achieving a better resultthan would be achieved if the companywere wound up. Again if this is notreasonably practicable, he may realisethe property in order to make adistribution to one or more secured orpreferential creditors.

European Insolvency ProceduresEngland & Wales


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Key Elements:

n Limited application of administrative receivership regime

n Administration procedure with focus on company rescue

n Practical guidance for lenders and shadow directors

n Ranking of claims in different procedures

England & Wales


Effect of administrationAdministration creates a moratoriumduring which no insolvency proceedingsor other legal proceedings, includingenforcement of security, can be takenwithout the consent of the administratoror the permission of the court.

The effect of this moratorium is toenable the administrator sufficientbreathing space to formulate proposalsfor rescuing the company, or in theevent that this does not prove possible,an orderly realisation of the company’sassets.

Qualifying charge holder has choice of administratorA qualifying floating charge holder has the power to choose the identity of anadministrator, whether by making theappointment himself (if the floating chargeis enforceable) or by intervening in anapplication to court. An administratorappointed by a qualifying charge holderowes a duty to act in the best interests of the general body of creditors, notsimply his appointor. A qualifying floatingcharge holder may also be able to blockthe appointment of an administrator incertain circumstances by appointing anadministrative receiver (see above).

Powers of an administratorThe powers vested in the administratorare extensive. He is authorised to do allsuch things as may be necessary for themanagement of the affairs, business andproperty of a company. He may dismissdirectors. Also, powers of directorswhich might interfere with the exerciseby the administrator of his powers willonly be exercisable with his consent.Most importantly, an administrator hasthe power to sell the assets of thecompany, even if they are subject tosecurity (see below). He also has thepower to make distributions to thecreditors of the company (in the instanceof distributions to unsecured creditors,he must first obtain the permission ofthe court).

Property subject to fixed chargeWhere the property which theadministrator seeks to dispose of issubject to a fixed charge, or is propertyheld by the company under a hirepurchase agreement, the administrator

is first required either to obtain the leaveof the court (who will need to be satisfiedthat the disposal is likely to promote thelegitimate purposes of the administration)or the consent of the charge holder.

It will be a condition of the courtpermitting the disposal of propertysubject to a fixed charge or hirepurchase agreement that the netproceeds of the disposal must beapplied by the company first towardsmeeting the debt of the secured creditor.The administrator must sell the assets at “market value”, failing which he willhave to make up the deficiency to thesecured creditor.

Property subject to a floating chargeIf the security, as created, took the formof a floating charge, the administrator isfree to deal with and dispose of theproperty without permission of thecharge holder and without the sanctionof the court. The floating charge holder’sclaims transfer to the proceeds of saleof the charged property but his claimsrank after (a) administration liabilities, (b)costs and expenses of the administrator,and (c) claims of preferential creditors.

Importantly the administrator is entitledto use floating charge assets to fund thecontinuation of the business during theadministration. This is one of thereasons why administrators sometimeschallenge the legal nature of fixedcharges (i.e. contending the charge tobe floating rather than fixed).

LiquidationThere are two forms of liquidation,namely:

(a) winding-up by the court (sometimescalled compulsory winding-up); and

(b) voluntary winding-up.

Winding-up by the courtA compulsory liquidation begins by awinding-up order of the court made on the presentation of a petition by acreditor, the company, its directors, or a shareholder.

Grounds for a winding-up orderA company may be wound-up by thecourt in a number of circumstances

although the two most common are:

(a) that the company is unable to pay itsdebts; or

(b) that the court considers that it is justand equitable that the companyshould be wound-up.

Although it is unusual for a solventcompany to be wound-up by the court,it can happen in certain circumstanceson the ‘just and equitable’ ground. Forinstance where minority shareholders are being unfairly treated or where thereare, for example, only two shareholdersneither of whom has effective controland who cannot agree how the affairs of the company should be conducted.Winding-up is, however, an extremeremedy and minority shareholders whoare being unfairly treated are usuallybetter advised to seek alternativeremedies under section 994 of theCompanies Act 2006 which gives thecourt a broad discretion so that it can,for example, order the purchase of aminority shareholder’s shares.

Inability of a company to pay debtsA company is deemed unable to pay itsdebts if:

(a) a creditor, to whom the company isindebted in a sum exceeding £750then due, has served on thecompany a written demand (knownas a statutory demand) requiring thecompany to pay the sum so due,and the company has for threeweeks neglected to pay the sum or to secure or compound for it tothe reasonable satisfaction of thecreditor; or

(b) a judgment against the company is unsatisfied; or

(c) it is proved to the satisfaction of thecourt that the company is unable topay its debts as they fall due.

A company is also deemed unable to pay its debts if it is proved to thesatisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking intoaccount its contingent and prospectiveliabilities.


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In order to obtain a winding-up order itmay not be necessary for a creditor tohave served a statutory demand on thecompany or to have an unsatisfiedjudgment debt, if it has other evidenceto demonstrate that the company isinsolvent.

Provisional liquidationAfter the presentation of a petition,where the company’s property is indanger or where it is alleged that those in control of the company aremisappropriating or wasting thecompany’s assets, an application maybe made by any creditor or contributoryor by the company itself for theappointment of a provisional liquidator,and the court in a proper case will, at any time before the making of awinding-up order, appoint one.

Duties and powers of the liquidatorThe liquidator in a compulsory liquidationis an officer of the court and subject atall times to the control of the court. He is responsible to the creditors for theconduct of the liquidation and remainsso responsible until his release asliquidator. The functions of a liquidator in a compulsory liquidation are to ensure that the company’s assets aregot in, realised and distributed to thecompany’s creditors, and to pay anysurplus to the persons entitled to it. Theliquidator or the provisional liquidator (asthe case may be) takes into his custody,or into his control, all the property towhich the company is or appears to be entitled. The powers of the directorscease. The liquidator has very broadpowers some of which may only beexercised with the sanction either of thecourt or of the liquidation committee ofcreditors. However, the liquidator onlyhas a limited power to carry on thebusiness (to the extent necessary tocollect and realise the assets) and inpractice it is relatively unusual for aliquidator to achieve a sale of thebusiness as a going concern.

Power of disclaimerIn addition to his general powers aliquidator has a special power todisclaim onerous property. It is importantto note that the power to disclaimapplies to any unprofitable contract orany other property of the company

which is unsaleable, or is not readilysaleable, or is such that it may give riseto liability to pay money or perform anyother onerous act. Property subject toonerous burdens may be disclaimedeven though it is not actually unsaleable.The most typical exercise of disclaimeris in respect of a low value leasehold.The effect of disclaimer is that iteffectively terminates the rights andliabilities of the company on the propertydisclaimed but does not affect the rightsand liabilities of any other person. Anyinterested party is entitled to request theliquidator to decide whether he intendsto disclaim and can apply to the court tohave the disclaimed property vested inhim. A person suffering loss or damageas a result of the liquidator exercising hisstatutory power of disclaimer, will havean unsecured claim for any loss ordamage in the liquidation.

Secured creditors may enforce rightsAlthough liquidation has the effect ofsuspending legal proceedings againstthe company, liquidation does notoverride the rights of secured creditorswho remain free to enforce their security and to retain the proceeds ofenforcement in priority to the claims of unsecured creditors.

Unsecured creditors are generally paidpari passu, although preferentialcreditors, as defined by section 386 andschedule 6 of the Act, have a priorityover general unsecured creditors and

there is a limited class of deferredcreditors.

Voluntary winding-upThere are two types of voluntarywinding-up, a members’ voluntarywinding-up and a creditors’ voluntarywinding-up, the essential differencebeing that the former applies to solventcompanies and the latter to insolventcompanies. Accordingly voluntaryliquidation is not always an insolvencyprocedure. Members’ voluntary winding-up is often used to effect a corporatereorganisation or reconstruction.

Powers of the liquidatorOne consequence of both members’and creditors’ voluntary liquidation isthat the powers of the directors cease.The liquidator has a number of powersset out in the Act some of which, in thecase of a creditors’ voluntary liquidation,must be exercised with the sanction of a liquidation committee appointed bycreditors, and some of which require the sanction of the court. There are also a number of enabling provisionswhich entitle the liquidator to, forexample, apply to the court for guidanceon questions arising in the winding-up.As with a compulsory liquidation, theliquidator’s general function is to realisethe assets and to pay creditors inaccordance with their entitlements (andthe liquidator in a voluntary winding-upalso has a similar power regarding thedisclaimer of onerous property). The



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order of priority of debts is the same asin a compulsory liquidation.

Company VoluntaryArrangementsA Company Voluntary Arrangement(“CVA”) might take the form of a rescueplan or may simply be used to facilitatea distribution to creditors. The objectiveof such arrangements is to binddissenting creditors to the proposals.

The Insolvency Act 2000 introduced,amongst other things, a new regime for CVAs of small companies which areeligible for a moratorium period of up tothree months when a CVA is proposedby its directors. A small company is onewhich currently satisfies at least two ofthe following three requirements:turnover of not more than £6.5m; assetsof not more than £3.26m; and less than50 employees. Although the moratoriumis only available to small companies, aCVA can be used by the directors of anycompany to come to an arrangementwith its creditors. For larger businessesthat do not qualify for the smallcompany moratorium, the administrationprocess (which has the benefit of amoratorium) may be used in conjunctionwith a CVA.

There are a number of exceptions andcertain companies will not be treated as eligible for a moratorium, for example,insurance companies, banks, andbuilding societies. During the moratorium,amongst other things, security cannot be enforced and proceedings cannot becommenced or continued against thecompany or its property except with theconsent of the court. Again, the effect ofthis moratorium is to allow a companytime to formulate a proposal so that itcan come to an arrangement with itscreditors.

The arrangement proposalThe proposal cannot affect the rights of secured creditors to enforce theirsecurity without the concurrence of thecreditors concerned; this effectivelygives the secured creditors a veto on an arrangement if it affects their rights. A meeting may not approve a proposalunder which a preferential debt of thecompany is to be paid otherwise than

in priority to non-preferential debts,unless the preferential creditor consentsto such a change in priority. In order for the proposal to be approved morethan one half majority in value of theshareholders and more than threequarters in value of the creditors mustvote in favour of the CVA. (Although ifthe decisions of the creditors and theshareholders differ, the decision of thecreditors will prevail subject to the rightof a member to apply to the court.)

Schemes of ArrangementThis is not an insolvency procedure buta mechanism contained in Part 26:sections 895-901 of the Companies Act2006 which allows the court to sanctiona “compromise or arrangement” that hasbeen agreed between the relevant classor classes of creditors or members andthe company.

A scheme of arrangement bindsmembers or creditors within a class,including unknown creditors who fallwithin a class of creditors. The power of the majority to bind a minority in theclass operates regardless of anycontractual restrictions (e.g.requirements for amendments andvariations set out in the loan documentwhich governed the debt beingcompromised.) For the scheme to beapproved there needs to be a majority innumber, representing three quarters invalue, in each class of those voting forthe scheme.

A scheme of arrangement requires thesanction of the court to summon ameeting or meetings of the relevantclass or classes of creditors ormembers. Assuming the scheme hasbeen approved by the requisite majorityof creditors at the meetings, the courtshould sanction the scheme itself.

Challenges to AntecedentTransactionsTransactions at an undervalue: section 238 of the ActAn administrator or liquidator may applyto the court to set aside transactionsentered into at an undervalue within two years of the onset of insolvency. For this purpose a transaction is at anundervalue if it constitutes a gift or if the

value of the consideration received (inmoney or moneys worth) is significantlyless than the consideration provided bythe company.

It is a defence to a challenge undersection 238 to show that the companywas solvent at the time it entered intothe relevant transaction or that it wasentered into in good faith and that therewere reasonable grounds for thinkingthe transaction would benefit thecompany. Although historically the viewof the court was that granting securitydid not deplete a company’s assets and therefore did not constitute anundervalue, secured creditors should be aware that following the Court ofAppeal’s decision in Hill v SpreadTrustee Company Limited [2006] EWCA542, the grant of security may now bethe subject of a challenge as atransaction at an undervalue.

Preferences: section 239 of the ActAn administrator or liquidator may applyto set aside transactions which occurred within six months of the onsetof insolvency (this period is extended to two years for transactions involvingconnected parties) which had the effectof putting the creditor, surety orguarantor in a better position in theliquidation than would otherwise havebeen the case and where the companywas influenced by a desire to producethat (i.e. preferential) effect. A companymust have been influenced in deciding to give the preference by a desire toproduce the effect of putting the creditorin a better position. If this desire ismissing the security will not beinvalidated. It is a defence to a challengeunder section 239 to show that thecompany was solvent at the relevanttime (taking account of the effect of therelevant transaction, act or omission).

Transactions defrauding creditors(section 423)Under section 423 of the Act the courtmay, on the application of the liquidatorof a company (or with the leave of thecourt, on the application of a “victim ofthe transaction” even if the company isnot in liquidation), set aside a transactionentered into by the company “at anundervalue” if the company entered intothe transaction for the purpose of


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putting assets beyond the reach of aperson who is making, or may at sometime make, a claim against it or ofotherwise prejudicing the interests ofsuch a person in relation to the claimwhich he is making or may make. It isnot a condition of the making of such an order that the company was insolvent at the time of the transaction.

A transaction at an undervalue is defined under section 423 of the Act insubstantially the same terms as undersection 238 of the Act (i.e. lackof/inadequate consideration). Theprincipal differences are:

(a) To set aside a transaction undersection 423, the court must besatisfied that it was entered into for the purpose of putting assetsbeyond the reach of creditors orotherwise prejudicing the interest of creditors.

(b) The remedy is available not only toadministrators and liquidators, butalso to “a victim of the transaction”.

(c) There is no requirement that thecompany be subject to a formalinsolvency proceeding.

Avoidance of floating charges: section 245 of the ActA charge, which as created was afloating charge, entered into by acompany within 12 months (the period isextended to two years if the transactionwas in favour of a connected party) ofthe onset of insolvency is invalid exceptto the extent of any new moneyadvanced (or the value of goods orservices provided) or the dischargereduction of indebtedness which occursat the same time or on or after thecreation of the charge.

It is a defence to a challenge undersection 245 to show that the companywas solvent when it entered into thecharge.

Extortionate credit transactions:section 244 of the ActAn administrator or liquidator maychallenge credit transactions enteredinto within three years of the onset ofinsolvency if, having regard to the risk

accepted by the counterparty, the terms were such as to require “grosslyexorbitant” payments (whetherunconditionally or in certaincircumstances) or if the terms of thetransaction otherwise “grosslycontravened” ordinary principles of fairdealing.

Personal Liability for DirectorsDirectors can incur civil and criminalliability for the debts of an insolventcompany in a number of ways under theAct. For this purpose, director includes,any person in accordance with whosedirections the appointed directors areaccustomed to act.

The principal areas of risk for directorsare breach of duty, fraudulent tradingand wrongful trading.

Breach of duty: section 212 of the ActThis section enables the court on theapplication of a liquidator, creditor orshareholder to make an order requiringany officer of the company (or anyperson who has taken part in thepromotion, formation or management of the company), liquidator oradministrative receiver who has mis-applied or mis-appropriated orwrongfully retained money or property of the company or been guilty ofmisfeasance or breach of any fiduciaryduty, to repay or restore the mis-appliedor mis-appropriated or wrongfullyretained property or contribute to thecompany’s assets by way ofcompensation for breach of duty.

Fraudulent trading: section 213 of the ActThis section enables a liquidator to applyfor contributions from any persons (i.e.not just directors and shadow directors)who were knowingly parties to thecarrying on of business with the intent todefraud creditors. The section requires“actual dishonesty involving, accordingto current notions of fair trading amongcommercial men, real moral blame”.

The facts supporting a claim undersection 213 will also render every personknowingly party to the carrying on of thebusiness with intent to defraud creditors

liable to criminal penalties under section993 of the Companies Act 1985.

Wrongful trading: section 214 of the Act A liquidator may apply to the court forcontributions towards the assets of thecompany from any person who heldoffice as a director (this includes shadowdirectors) from the point at which thatperson “knew or ought to haveconcluded that there was no reasonableprospect of avoiding insolventliquidation”.

It is a defence to a challenge undersection 214 for a director to show thatfrom the point that he knew or ought tohave known that insolvent liquidationwas unavoidable he “took every stepwith a view to minimising the potentialloss to the company’s creditors”. Thismay include directors initiatinginsolvency proceedings.

It should be noted that resigning doesnot necessarily enable a director toavoid liability under section 214 and thatunder section 214 there is no need toprove an intention to defraud creditors.

Part 10 of the Companies Act 2006codifies the duties of directors. Itprovides a list of seven general dutiesaimed to provide greater clarity todirectors, and also a non-exhaustive listof factors that directors must take intoaccount when exercising their duties. In particular the factors include a duty to consider not just shareholders, butemployees, suppliers, consumers andthe environment. The statement ofduties in the Companies Act 2006 is not comprehensive. In particular, it doesnot include the duty which is owed tocreditors when the company is insolventor on the verge of insolvency, thoughthis is preserved.

The Companies Act 2006 also containsa new procedure for enforcement ofdirectors’ duties by shareholders onbehalf of the company although theclaimant must show a prima facie casebefore being given permission toproceed with a claim. In practice therehas not been any increase in litigation todate against directors as a result of thesechanges to the legislation.



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Lender LiabilityGenerally speaking, the risk in Englandof lenders being held liable to pay theircustomers’ debts is small. The principalrisk for a lender, however, arises where it is found to be acting as a shadowdirector of a company that becomesinsolvent. In such circumstances it isconceivable that a lender may be madeliable to make a contribution to aninsolvent company’s assets for wrongfultrading under section 214 of the Act.

“Shadow Director” is defined in section251 of the Act as meaning “...a personin accordance with whose directions orinstructions the directors of thecompany are accustomed to act (but sothat a person is not deemed a shadowdirector by reason only that the directorsact on advice given by him in aprofessional capacity.)”

Consequences of being a shadow directorA liquidator or creditor of an insolventcompany might seek to pursue a lenderon the basis that it is a shadow director.As previously mentioned, a lender maybe made liable to make a contribution to an insolvent company’s assets forwrongful trading where it is held to be a shadow director of that company.Wrongful trading occurs from the pointin time that a reasonable director oughtto have concluded that the companywould not avoid insolvent liquidation.From that point on the directors,including shadow directors, run the riskof being ordered to contribute to thecompany’s assets in its liquidation.

Defences available to lendersOne line of defence for a lender accusedof shadow directorship lies in thewording of the definition. The directorsof the insolvent company are required to be accustomed to act in accordancewith directions or instructions receivedfrom the shadow director. The word“accustomed” implies that there hasbeen a course of dealings between theparties. If the lender has a constantpresence in the company, for examplewhere the lender has appointed acompany doctor who is exercisingmanagement authority, the position maybe different. The key to the definition isthe idea that it is the shadow director,

not the board of directors, who isexercising the management discretion of the company.

Practical advice for lendersThere is no authority as to what activitiesare safe for a lender to conduct. Thisquestion remains largely unanswered bythe courts. Although yet to be tested bythe courts, lenders to a company infinancial difficulty may be entitled to takeaction to protect their interests, such assending in an investigating team;demanding a reduction in the overdraft;demanding security or further security;calling for information, valuations of fixedassets, accounts, cash flow forecasts,etc; requesting the customer’sproposals for the reduction of theoverdraft, including the submission of abusiness plan, schedule of proposedsales, etc; advising on the desirability ofstrengthening management, and seekingfresh capital. In doing all these things thelenders may well expect their demandsto be met, firstly because they are likelyto be commercially sensible, andsecondly because the customer has nooption if it wants its facility continued.This should not be sufficient toconstitute the lenders being regarded as shadow directors.

So long as the lenders can be viewed tobe merely setting out what conditionsattach to their continued support theyshould not incur liability. Crucially, thedecision as to whether to continue

trading in the face of these conditions,or to cease trading or go into liquidationrests with the directors.

Recent pensions legislation may alsoaffect a lenders’ liability where there is a defined benefit pension scheme.Lenders should take care not to become“connected with” or associates of aborrower with such a scheme, as doingso could put them at risk of incurringobligations under financial support orcontribution notices issued by thePension’s Regulator. One of the tests of whether a lender is connected orassociated is the ability to control onethird of the voting rights in a relevantborrower. Security over shares therefore,needs to be carefully drafted to avoid alender being liable.

GuaranteesGuarantees are available in mostcircumstances, e.g. downstream (parentto subsidiary), upstream (subsidiary toparent) and cross-stream (betweensister companies within a group).

Corporate benefit issues need to beaddressed especially in the context ofupstream and cross-stream guarantees.

A guarantee is a secondary obligation by a third party relating to a primaryobligation by a contracting party (i.e. aborrower under a loan agreement). If theprimary obligation is altered, discharged


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or fails the guarantee may not beenforceable. Usually the documentcontaining a guarantee will also containa direct indemnity as an independentprimary obligation. This should surviveeven if the guarantee is not enforceable.

A guarantee must be in writing to beenforceable.

Generally speaking, if security orguarantees are granted at the time aloan is drawn, and at that time it is notcontemplated that the company willbecome insolvent, the requisite desire toprefer the creditor/guarantor is usuallymissing and therefore it should notconstitute a preference (see above).

Following the Court of Appeal thedecision in Hill v Spread TrusteeCompany Limited the granting ofsecurity/guarantee may be challengedas a transaction at an undervalue (seeabove).

PrioritySecurity usually ranks by order ofcreation, but to preserve the priorityposition, notice may need to be given.For some assets registration is requiredin an asset register and security will rankby date of registration.

Subject to the rights of the creditors toagree their relative priority, the order forpayment of claims depends upon thetype of insolvency procedure.

Broadly speaking in the context ofreceivership from the charged assets,rank as follows:

(a) Holders of security which ranks priorto the security under which thereceiver is appointed;

(b) Holders of security (from theproceeds of which the receiver willrecover costs, remuneration andexpenses (as prescribed in thecharge appointing the receiver));

(c) Preferential creditors (ranks ahead offloating charge only, fixed chargestake priority);

(d) Unsecured creditors up to amaximum of £600,000 if the

company’s net property is £10,000or more (ranks ahead of floatingcharge only, fixed charges takepriority);

(e) Holders of a floating charge;

(f) Any surplus is payable tosubsequent charge holders (if any) or to the company or its liquidator.

A recent amendment to the law has beenmade which affects the priority of thecosts and expenses of a liquidation. Ithas the effect of making the expenses of a liquidation rank ahead of a floatingcharge. The change in priority waseffective from 6 April 2008 and applies toall liquidations commenced after that datewhere there are insufficient unsecuredassets to meet the payment of liquidationexpenses. Claims in a liquidation after 6April 2008 will rank as follows:

(a) Holders of fixed charge security(usually dealt with outside of theliquidation process);

(b) Costs and expenses of theliquidation in accordance with theorder stipulated by the enactinglegislation;

(c) Preferential creditors;

(d) Unsecured creditors up to amaximum of £600,000 if thecompany’s net property is £10,000or more (payable out of floatingcharge assets);

(e) Holders of floating charge;

(f) Unsecured creditors;

(g) Post liquidation interest on debts;

(h) Deferred creditors;

(i) Shareholders (only if there is asurplus after the debts are paid).

Claims in administration rank as follows:

(a) Fixed charge security;

(b) Costs and expenses of theadministration in accordance withthe order stipulated by the enactinglegislation;

(c) Preferential creditors;

(d) Unsecured creditors up to amaximum of £600,000 if thecompany’s net property is £10,000or more;

(e) Holder of a floating charge;

(f) Unsecured creditors;

(g) Post administration interest ondebts;

(h) Deferred creditors;

(i) Shareholders (only if there is asurplus after the debts are paid).

New Money LendingNormally lenders will insist on additionalsecurity or priority (ahead of debtsincurred prior to the proceedings) beforeany new monies are advanced tocompanies after the opening of anyinsolvency proceedings.

Recognition of ForeignInsolvency Proceedings Within the EUThe Regulation applies, see first part ofthis note.

Recognition of foreign insolvencyproceedings outside of the EUThe Model Law On Cross BorderInsolvency promoted by UNCITRAL was adopted in Great Britain on 4 April2006 in the form of the Cross BorderInsolvency Regulations in 2006. Thisextends the English court’s ability torecognise foreign insolvencyproceedings outside of the EU, tojurisdictions such as the US. In additionto the Cross Border InsolvencyRegulations 2006 there are statutoryprovisions allowing the English court toexercise its jurisdiction if the foreignentity has a sufficient connection withEngland (section 221 of the Act) or if aspecific request for assistance is madeby the court from one of the territoriesspecified in section 426 of the Act(largely commonwealth countries).

Further, a recent House of Lordsdecision in the case of McGrath andothers v Riddell and others [2008]



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UKHL21 held that pursuant to section426 of the Act, the English Court coulddirect the remittal of assets realised in anEnglish liquidation to another jurisdictionand absent any manifest injustice tocreditors, the English Court has theability to make an order, even if theeffect of that order will facilitate theapplication of an insolvency regimewhich differs from English insolvencylaw. Where remittal is to a jurisdictionwhose court cannot make a requestpursuant to section 426, the EnglishCourt’s inherent jurisdiction may onlyfacilitate a transfer where the foreigncourt’s rules do not infringe theprinciples of English insolvency law.

Under the general principles of comity,foreign proceedings may also berecognised, and in a recent PrivyCouncil decision (which as a matter ofEnglish law is persuasive but notbinding), Cambridge Gas TransportCorporate v The official committee ofunsecured creditors of NavigatorHoldings Plc and others [2006] UKPC26,it was held that it was not necessary toopen ancillary proceedings in the Isle of Man, to facilitate the implementation of a US plan of reorganisation.


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This section is designed to provide ageneral outline of the main pre-insolvency proceedings and insolvencyproceedings in France.

The legislation applying to the insolvencyand pre-insolvency proceedings of allprivate legal entities (limited liabilitycompanies, unlimited liability companies,partnerships, trade unions, etc.),individuals conducting a commercialbusiness, craftsmen, farmers and otherpersons running an independentprofessional activity, including thosehaving a regulated status (e.g. lawyers,doctors etc.), is contained in Book VI ofthe French Commercial Code. Therelevant proceedings are:

n mandat ad hoc;

n conciliation;

n safeguard proceedings;

n rehabilitation proceedings; and

n judicial liquidation.

The objectives of French insolvency laware (i) the preservation of the business,(ii) the preservation of jobs and (iii) thepayment of creditors.

The legislation applying to insolvencyproceedings of individuals who do no not fall within the scope of Book VI of the French Commercial Code (e.g.employees) and to insolvencyproceedings of credit institutions, financialinstitutions and insurance companies isnot described in this section.

The European Regulation on InsolvencyProceedings (the “EUIR”) applies, with

respect to private international lawissues, where the debtor in theinsolvency proceedings is not a creditinstitution, an investment company or aninsurance company and the “centre ofmain interests” (the “COMI”) of thedebtor is within the territory of a memberstate of the EU. For cases which do notfall within the scope of the EUIR (e.g. thecompany’s COMI is outside the EU), therules of private international lawessentially stem from French precedents.

Consensual Pre-insolvencyProceedingsPre-insolvency procedures under Frenchlaw are mandat ad hoc and conciliationproceedings. they are intended tofacilitate negotiations between the debtorand its main creditors, with a view toreaching an agreement and avoiding theopening of insolvency proceedings.

Debts may only be restructured on aconsensual basis in pre-insolvencyproceedings, and creditors who refuseto negotiate or to participate in theproceedings will not be affected by anycompromise or arrangement reached bythe debtor and its other creditors inthose proceedings. However, it shouldbe mentioned that under French generalcivil law, French courts have a generaldiscretion to impose a grace period ofup to two years on any creditor: inpractice, the availability of this discretioncan be used as a tool to encouragedissenting creditors to participate in thediscussions.

Mandat ad hocA debtor that is facing any type ofdifficulties (but which is not insolvent yet,

i.e. which is still able to pay all its dueand payable debts with its immediatelyavailable assets) may file a petition withthe president of the local court havingjurisdiction to obtain an order appointinga mediator / advisor called a mandatairead hoc to the debtor. His appointmentinitiates the pre-insolvency proceedingscalled mandat ad hoc.

The mandataire ad hoc assists thedebtor in its negotiations with thirdparties (e.g. creditors, employees) and / or helps the debtor assessing its situation (e.g. whether the opening of insolvency proceedings would beappropriate).

The debtor remains in charge of runningits business. The mandataire ad hocdoes not have the power to interfere inthe management of the business.

Mandat ad hoc is not an insolvencyproceeding. The existence of a mandatad hoc is confidential, and will bedisclosed only to those parties withwhom negotiations need to beconducted. Creditors are not barred fromtaking legal action against the debtor to recover their claims, but, in practice,they do not usually try to do so.

The debtor may suggest to the court the name of the mandataire ad hoc itwould like to see appointed. Thissuggestion is usually followed by thecourt. Mandataires ad hoc are generallychosen from the register of insolvencyadministrators.

The ability of the mandataire ad hoc tohelp the debtor in its negotiations comesfrom the fact that he is an independent,

European Insolvency ProceduresFrance


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Key Elements:

Considers:

n Consensual pre insolvency proceedings: mandat ad hoc and conciliation

n Formal insolvency proceedings: safeguard proceedings, rehabilitation proceedings and judicial liquidation

n Creditors’ ranking

n Challenge to antecedent transactions

n Liabilities and sanctions

France


court-appointed third party, havingsignificant experience of companiesfacing financial difficulties. In particular,he is able to explain to the creditors thatthey also have an interest in finding aconsensual solution with the debtor bydescribing the potential consequencesof insolvency proceedings if anagreement is not found. The mandatairead hoc usually sends written reports tothe president of the court, on aconfidential basis.

ConciliationConciliation is available to debtors thatare facing actual or foreseeable legal,economic or financial difficulties, andthat are either (a) not insolvent (i.e. arestill able to pay all their due and payabledebts with their immediately availableassets); or (b) insolvent but have been insuch a position for a period of less than45 days.

Conciliation is very similar to mandat adhoc. In particular:

The debtor can request the appointmentof the conciliator (“conciliateur”) by filinga petition with the president of the localcourt having jurisdiction. The conciliatorwill assist the debtor in its negotiationswith third parties (e.g. creditors,employees) and / or help the debtorassess its situation (e.g. whether theopening of insolvency proceedingswould be appropriate).

The debtor remains in charge of runningits business. The conciliator does nothave the power to interfere in themanagement of the business.

Conciliation is not an insolvencyproceeding. The existence of aconciliation is confidential, and will bedisclosed only to those parties withwhom negotiations need to beconducted. Creditors are not barred fromtaking legal action against the debtor to recover their claims, but, in practice,they do not usually try to do so.

The debtor may suggest to the court thename of the conciliator it would like tosee appointed. This suggestion isusually followed by the court.Conciliators are generally chosen fromthe register of insolvency administrators.

The ability of the conciliator to help thedebtor in its negotiations comes from thefact that he is an independent, court-appointed third party, having significantexperience of companies facing financialdifficulties. In particular, he is able toexplain to the creditors that they alsohave an interest in finding a consensualsolution with the debtor by describingthe potential consequences of insolvencyproceedings if an agreement is notfound. The conciliator usually sendswritten reports to the president of thecourt, on a confidential basis.

The main differences with mandat adhoc are the following:

(i) The conciliator can only beappointed for a maximum of 4months and this period may only beextended by 1 month in exceptionalcircumstances (i.e. a maximum of 5months), unlike the mandataire adhoc whose length of office is at thediscretion of the president of thecourt.

(ii) The debtor cannot enter conciliationagain within three months of thetermination of the earlier conciliation.

(iii) If the parties reach an agreement(the “Conciliation Agreement”), suchagreement can either beacknowledged by an order of thepresident of the court (“accord de

conciliation constaté”), or approvedby a formal judgment of the court,upon request of the debtor (“accordde conciliation homologué”).

In practice, debtors frequently combinethe use of mandat ad hoc andconciliation: they first request theopening of a mandat ad hoc (the lengthof which is very flexible) and, when theybelieve that they are about to reach anagreement with their creditors, theypetition the president of the court toconvert the mandat ad hoc intoconciliation. Once in conciliation they will be able to seek acknowledgement of the Conciliation Agreement by thepresident of the court or its approval bya judgment of the court.

Acknowledgement by the president ofthe court. If the Conciliation Agreementis simply acknowledged by an order ofthe president of the court, it remainsconfidential.

Approval by judgment of court.Alternatively, approval of the ConciliationAgreement by a formal judgment givescomfort to the parties thereto in that, ifthe debtor subsequently goes intoinsolvency proceedings:

(i) lenders making new money and/orsuppliers making trade creditavailable to the debtor under theConciliation Agreement will benefit


15

from a priority ranking in thoseinsolvency proceedings; and

(ii) the court may not fix the startingdate of the Hardening Period (seeChallenge to AntecedentTransactions section below) at a dateearlier than the date on which theapproval judgment became final.

The drawback of approval by way of ajudgment is that confidentiality is lost.

Formal InsolvencyProceedings: GeneralOverviewUnder French law, a debtor isconsidered to be insolvent (“en état de cessation des paiements”) when it is unable to meet its due and payabledebts with its immediately availableassets (being cash plus assets that can be immediately realised for cash).

The debtor must file a petition with a view to opening a RehabilitationProceedings (“redressement judiciaire”)or a Judicial Liquidation (“liquidationjudiciaire”) within 45 days of the datewhen it became insolvent (unless it haselected to enter conciliation within suchtime frame). A petition can also be made by an unpaid creditor, by thepublic prosecutor or by the court of itsown motion.

The law further allows the filing of apetition for Safeguard Proceedings(“procédure de sauvegarde”) thattriggers an automatic stay of paymentsand is aimed at recovery if the debtorestablishes that, although not insolvent,he is facing difficulties which he isunable to overcome on its own. If thedebtor is insolvent, this procedure willnot be available to him.

Safeguard Proceedings, RehabilitationProceedings, or Judicial Liquidation arecollectively referred to below as“Insolvency Proceedings” with eachbeing an “Insolvency Proceeding”.

Insolvency officers Insolvency Proceedings are essentiallycourt-driven proceedings where most ofthe key decisions are made orauthorised by the court.

In an Insolvency Proceeding, aninsolvency judge (“juge-commissaire”) isappointed by the court in the judgmentopening the proceedings. He is incharge of taking certain decisions (e.g.admitting claims against the insolvencyestate) and authorising certaintransactions (e.g. authorising entry intoagreements that are not within theordinary course of business; authorisingthe sale of assets). However, the courtitself retains jurisdiction over keydecisions in the proceedings, inparticular (i) the adoption of a SafeguardPlan or a Rehabilitation Plan, (ii) the saleof the business as a going concernpursuant to a Sale-of-Business Plan, (iii) the termination of the InsolvencyProceedings, (iv) claims against thedebtor (e.g. for mismanagement) andagainst third parties (e.g. claw-backactions). The public prosecutor isconsulted by the court before it takessuch key decisions, but the court is notobliged to adopt his position. The publicprosecutor is also entitled to initiatecertain legal actions.

In Safeguard Proceedings andRehabilitation Proceedings, anadministrator (“administrateur judiciaire”)(selected from the register of insolvencyadministrators) is generally appointed bythe court to assist, supervise or, underexceptional circumstances, replace thedebtor in the management of thebusiness. However, it is possible for thecourt not to appoint an administrator ifthat does not seem necessaryconsidering the size of the estate of thedebtor. In parallel, the court alsoappoints a representative of thecreditors (“mandataire judiciaire”)(selected from the list of registeredmandataires judiciaires) who is in chargeof (i) receiving and verifying the proofs ofclaims, (ii) initiating legal actions onbehalf of the creditors as a whole (e.g.claims against the directors of theinsolvent company), and (iii) moregenerally, defending the general interestof creditors.

In Judicial Liquidation, a judicialliquidator (“liquidateur judiciaire”)(selected from the list of registeredmandataires judiciaires) is appointed bythe court. He represents the debtor andhe is also entitled to initiate legal actions

on behalf of the creditors as a whole.He also receives and verifies the proofsof claims.

Up to five creditors can be appointed ascontrollers (“contrôleur”) if they sorequest. This appointment gives themprivileged access to information, and theyare entitled to initiate legal actions onbehalf of the creditors as a whole if thecreditors’ representative fails to do so.

Purpose of insolvency lawFrench insolvency law is aimedessentially at the preservation of theenterprise and of employment (byrescue of the company or of thebusiness of the company) and to alesser extent the repayment of thecreditors.

The possible outcomes of InsolvencyProceedings are as follows:

(i) If recovery is possible, the court willpermit the debtor to prepare either a “Safeguard Plan” (in the case ofSafeguard Proceedings) or a“Rehabilitation Plan” (in the case ofRehabilitation Proceedings) which ineach case will provide the measuresnecessary for the rehabilitation andcontinuation of the operations of thedebtor.

(ii) If the debtor is unable to prepare a viable Safeguard Plan orRehabilitation Plan, the court canorder the sale of the business as a going concern (free of debts, and including employees and keycontracts) to a third party (who mustbe independent from the debtor), ina so-called “Sale-of-Business Plan”(“plan de cession”).

(iii) If recovery is manifestly impossible,the court must order the opening ofa Judicial Liquidation.

Outcome of Safeguard Proceedingsand Rehabilitation ProceedingsThe process for implementing aSafeguard or Rehabilitation Plan isessentially as follows:

(i) In both Rehabilitation and SafeguardProceedings, after verifying theeligibility of the debtor to enter the



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relevant proceedings, the courtorders the commencement of a time period during which the debtorcontinues to operate its businessunder the protection of the courtwhilst its financial and businesssituation is assessed and anarrangement with creditors issought. This time period is known as the observation period (“périoded’observation”). The observationperiod may initially last for up to 12months and may be extended sothat its maximum total duration is 18 months.

(ii) The proposed restructuring of thedebt must be approved, whereapplicable, by creditors’ committees(see below). Each creditor committeeacts by a majority of two thirds ofcreditors present and such majorityis empowered to approve acompromise and/or a repaymentschedule that is binding on theirmembers.

(iii) If there are no creditors’ committeesor if the proposed restructuring ofthe debt is not approved by thecreditors’ committees, the court mayimpose a rescheduling of the debtwhich cannot exceed 10 years (15years for agricultural businesses).The court is not empowered toreduce a debt at its own initiative.

(iv) Alternatively, at the hearing for entryinto Safeguard Proceedings orRehabilitation Proceedings the courtmay decide that recovery isimpossible, and order that JudicialLiquidation be opened in respect ofthe debtor. The court can orderJudicial Liquidation either (i) from thebeginning of the relevant InsolvencyProceedings without allowing anobservation period where the debtoris insolvent and any recovery isobviously impossible, or (ii) at anytime during the observation period ifit becomes obvious that recovery isimpossible.

Outcome of a Judicial LiquidationIn a Judicial Liquidation, the debtor’sassets are realised and the proceedsfrom those realisations are distributedamong the creditors on a pro rata basis

subject to the order of prioritiesprescribed by legislation.

The court may approve a “Sale-of-Business Plan” if it determines that thedebtor’s business can be realised as agoing concern. Under such a plan thecourt may approve the sale of all or partof the business and assets of thedebtor, as a going concern, preserving a certain number of employmentpositions.

If the court considers that no sale of thebusiness as a going concern is likely totake place, the assets can be realisedpiecemeal.

Automatic stay of payments and otherrestrictions on rights of creditorsDuring Insolvency Proceedings, therights of the creditors are restricted, interalia, as follows:

(i) subject only to very limitedexceptions, the debtor may notrepay any debts incurred prior tothe insolvency judgment;

(ii) as a principle, the commencementof Safeguard Proceedings orRehabilitation Proceedings freezes alllegal actions of creditors to enforce a payment obligation incurred priorto the insolvency judgment or toenforce security over the assets ofthe bankrupt debtor. However thereare some limited exceptions to thisrule even during an observationperiod; and some secured creditorsrecover their right to enforce theirsecurity if the debtor is placed inJudicial Liquidation;

(iii) contracts cannot be terminated for reasons originating prior to the insolvency judgment, andclauses providing for termination or acceleration in the event ofinsolvency are of no effect;

(iv) insolvency officers have the power to choose which agreementsentered into by the debtor prior tothe insolvency judgment shouldcontinue. Contracts which aninsolvency officer elects to continuemust be performed in accordancewith their terms;

(v) creditors must prove their claimsarising prior to the judgment openingInsolvency Proceedings within 2months (4 months for creditorsresiding outside of France) from thedate of publication of such judgmentin the designated legal gazette.Where the creditor has failed to fileits proof of debt in a timely manner, it will not be allowed to participate inthe distribution of proceeds. Certainpost-judgment claims must also beproved;

(vi) the right to set off reciprocal debtswith the insolvent debtor is limited to “related debts” (“créancesconnexes”) i.e. debts which arose in the framework of the samecontract (or, to a certain extent, fromthe same group of contracts); and

(vii) when the Insolvency Proceedingsare closed and there is a shortfallbetween the assets of the debtorand its liabilities, the remedies of thecreditors to obtain repayment are, as a general principle, extinguishedeven if their claims were not satisfiedin full. This is subject to certainexceptions e.g. fraud, “insolvencysecond offenders”, etc.

Safeguard ProceedingsSafeguard Proceedings are onlyavailable to debtors which, although notinsolvent, establish that they are facingdifficulties (usually financial) which theycannot overcome. The purpose ofSafeguard Proceedings is to facilitate a restructuring of the debtor while itsdifficulties are still at an early stage in the framework of formal proceedings.

The judgment opening the proceedingsstays all individual claims of creditors,irrespective of their rank, subject only to very limited exceptions such asenforcement of retention of title clauses,set-off of related debts, rights ofretention attached to certain securityinterests. The judgment opens anobservation period of a maximumduration of six months, renewable once,and exceptionally twice, for thepurposes of preparing and submitting to the approval of the court a SafeguardPlan restructuring the debts and the


17

business. The judgment approving theplan ends the observation period.

The court appoints an administrator toassist and supervise the debtor, but therationale is to allow sufficient flexibility toenable the management of the debtor to remain in possession. The debtor hasthe option of nominating anadministrator for the court to approve.

In contrast to Rehabilitation andLiquidation Proceedings, SafeguardProceedings do not provide for simplifiedredundancy procedures, and theredundancy regime is the same as for a non-distressed business. SafeguardProceedings are therefore moreappropriate for financial restructuringsand debt work-outs (e.g. over-leveragedsituations, distressed LBOs, etc.) ratherthan industrial reorganisations requiringnot only debt restructuring but alsobroad scale redundancies.

However, if a redundancy scheme isneeded, and if the debtor is not in aposition to finance the cost of itsimplementation, a state-organisedinsurance scheme will provide thenecessary financing to the debtor,subject to certain criteria and limitations.The repayment of the advances madeby the insurance scheme must be made within a limited period of time,which is to be agreed with the insurancescheme, and is generally one to twoyears after the approval by the court of the Safeguard Plan.

Safeguard Proceedings provide for the creation of at least two creditors’committees, if the debtor (a) has morethan 150 employees or (b) has aturnover of more than €20,000,000 and (c) its accounts are certified by astatutory auditor or carried out by acertified public accountant. Nevertheless,the Insolvency Judge can decide tocreate committees even though thethresholds are not met.

The first committee is comprised ofcreditors who are the main suppliers of goods and services. The secondcommittee is comprised of creditors that are credit institutions and“assimilated” institutions in particularbanks, local public credit institutions,

finance companies (“sociétésfinancières”) or special purpose financialinstitutions, the assignees of bank debtthat occurred prior or after the openingof proceedings (e.g. hedge funds), aswell as any entity granting credit oradvances in favour of the debtor. If thereare bondholders, a “third” committeecomprising all bondholders (“assembléeunique des obligataires”) must approvethe plan that has been voted by the twocreditors’ committees.

The powers of the committees aremainly to approve or reject the debtor’srestructuring proposal. The debtor has a wide flexibility in structuring suchproposals. In particular, these proposalsmay include the debt being written off orthe partial closure or disposal of thebusiness. The draft Safeguard Plan canprovide for the rescheduling of the debtsof the members of the committees overa period longer than ten years, andthere is no requirement that the debt bereduced by a certain amount within acertain period. Since reform legislationwas passed in 2008, the plan canprovide for debt-for-equity swaps incertain circumstances. The law providessufficient scope to treat creditors of asame committee differently if theobjective economic situation so requires.Creditors can make counter proposalsto the debtor and to the administrator,but the debtor has no obligation to takethem into consideration when submittingthe plan to the committees.

Within each committee, approval isachieved by a majority of two thirds invalue of creditors present who voted onthe plan. Dissenting creditors are boundby the decision of that majority. Each ofthe creditors’ committees must haveapproved the plan before it will beadopted by the court. After havingdiscussed with the debtor and theadministrator, the committees must takea decision on the proposed Safeguardor Rehabilitation plan within 20 to 30days following the submission of theproposals by the debtor. The decision of the committees on the Safeguardplan must take place within 6 monthsfollowing the opening of the SafeguardProceedings or RehabilitationProceedings. If all creditors’ committeeshave not approved a Safeguard Planwithin this 6-month period, they nolonger have any role in the proceeding.

In parallel, non-committee creditors areconsulted individually on the options forthe payment of their claims (e.g.reduction of the debt with shorterdeferral or full repayment over a longerperiod). The court cannot impose areduction of the debt on creditorsrefusing the debtor’s proposals, but onlya rescheduling or deferral of payment.The rescheduling cannot exceed tenyears. After the second year, theminimum annual instalment is 5% of thetotal liabilities (except in the case ofagricultural businesses).



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State creditors (such as the taxadministration) are not members of anyof the creditors’ committees. They mayhowever waive or reduce their debt.Rescheduling of their debt can also beimposed, under the conditionsmentioned above.

After approval of the Safeguard Plan bythe committees, and before sanctioningthe plan, the court must satisfy itself thatthe interests of all the creditors (whichincludes minority committee creditors)are sufficiently protected. After thesanction of the Safeguard Plan by thecourt, all members of the committeesare bound by the plan. At the sametime, the court acknowledges anywaiver of debts granted by non-committee creditors and/or orders arescheduling or deferral of payment oftheir claims.

If all creditors’ committees have notapproved a draft Safeguard Plan within 6months of the opening of the SafeguardProceedings, or if the Court has refusedto sanction the draft Safeguard Plan, allcreditors are consulted individually on theoptions for the payment of their claims(according to the rules described abovefor consultation of non-committeecreditors).

At any time during the observationperiod, the court can convert theSafeguard Proceedings into eitherRehabilitation Proceedings or JudicialLiquidation, if it is shown that the debtorwas actually in a state of cessation ofpayments when it applied for SafeguardProceedings, or if the debtor finds itself in a state of cessation of paymentsafter the opening of the SafeguardProceedings. At the request of thedebtor, the court also may order theconversion of Safeguard Proceedingsinto Rehabilitation Proceedings if theadoption of a Safeguard Plan appearsimpossible and if the termination of theSafeguard Proceedings would lead,without doubt and rather quickly, to thedebtor’s insolvency.

Rehabilitation ProceedingsRehabilitation Proceedings are availableto debtors that are insolvent but whosebusiness appears viable.

Such proceedings are commenced by a judgment, which is rendered either atthe debtor’s request or upon request ofan unpaid creditor, of the publicprosecutor, or of the court itself. Itshould be stressed that the debtor has a duty to file a petition with a view to theopening Rehabilitation Proceedings or of a Judicial Liquidation within 45 daysof the date when it became insolvent(unless it has elected to enterconciliation within such time frame).

Most of the organisational provisions ofSafeguard Proceedings apply toRehabilitation Proceedings (in particularthe limitations imposed on the rights ofthe creditors). The administrator isrequired to make an assessment of thecompany’s financial situation, thecauses of that situation and the potentialsolutions e.g. whether the businessshould be continued under aRehabilitation Plan (similar to aSafeguard Plan), assigned in whole or in part to a third party or put intoliquidation. Depending on the scope ofhis duties, as determined by the court,the administrator may either assist orreplace the debtor in the managementof its business and assets.

As in Safeguard Proceedings:

(i) the observation period can last forup to 12 months with an exceptionaladditional extension of 6 monthsupon request of the publicprosecutor (i.e. a maximum of 18months);

(ii) the creditors’ committees areconsulted and can compromise thedebt of their members in the samemanner as with the SafeguardProceedings; and

(iii) if the creditors’ committees do notapprove the proposals of the debtorfor the reorganisation of the debt inthe framework of a RehabilitationPlan, all creditors are consultedeither individually or collectively onthe options for the payment of theirclaims (see above).

The law provides for expeditedredundancy procedures in the case of Rehabilitation Proceedings. If the

debtor is not in a position to finance the redundancies, a state organisedinsurance system provides thenecessary financing, subject to certaincriteria.

For a Rehabilitation Plan to be approvedby the court, the debtor must show thatits recovery scheme is viable, and on thebasis of the past and forecastedoperations’ accounts, that the debtor willbe able to generate sufficient operationalprofits to repay the rescheduled liabilitiesand finance its day-to-day operationsand business plan.

A significant difference betweenRehabilitation Proceedings andSafeguard Proceedings is that, if thedebtor proves unable to prepare a viableRehabilitation Plan, the court mayimpose the sale of part or all of thebusiness as a going concern, under aSale-of-Business Plan (see below). If thisroute is taken, the administrator makesa call for tender, and the court choosesthe offer that best meets the three goalsprovided for by the law.

At any time during the observationperiod, the court can order the JudicialLiquidation of the debtor, if the businessappears not to be viable.

Judicial LiquidationA debtor must file a petition for JudicialLiquidation within 45 days of becominginsolvent where recovery through aRehabilitation Plan is not possible(unless it elects to enter Conciliationwithin such time frame).

The court appoints a liquidator, whoexercises all the powers of managementand also represents the general interestof the creditors. He must realise thedebtor’s assets at the best availableprice and distribute the proceeds to thecreditors.

The assets will be sold either pursuantto a Sale-of-Business plan (plan decession) or piecemeal.

Liquidation by means of Sale-of-Business Plan If the court determines that the debtor’sbusiness can be sold as a going


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concern pursuant to a Sale-of-BusinessPlan, the liquidation judgment imposes a time period for the implementation ofsuch sale (3 months, renewable onceupon request of the public prosecutor).

During such time period the debtorbasically operates its business as if itwere within an observation period (as perSafeguard Proceedings or RehabilitationProceedings). The court may decide thatan administrator remains in office inaddition to the liquidator.

Third parties (including creditors, butexcluding the officers of the debtor andtheir relatives) may make offers for theacquisition of the entire business of thedebtor, or of a substantial part thereof.

A Sale-of-Business Plan is in essence an asset transfer approved by the court.The purchaser is only liable (i) to pay aprice as ratified by the court and (ii) tocomply with the undertakings asincluded in the offer and at the courthearing (e.g. commitments in relation to level of employment, level ofinvestments, etc.). As a matter ofprinciple, the purchaser of the businesspursuant to a Sale-of-Business Plan isnot liable for the liabilities of the debtor.The payment of the price clears allmortgages, charges and other securityover the assigned assets, exceptsecurity in favour of creditor(s) whofinanced the acquisition of the securedassets. In the latter case, failingagreement with the secured lender, thepurchaser of the relevant assets mustassume the debt instalments remainingdue as from the date of its coming intopossession of the assets.

When reviewing a Sale-of-Business Planthe court can decide which contractsare “necessary for the rehabilitation ofthe business”. These contracts aretransferred to the assignee of thebusiness notwithstanding anycontractual prohibitions. They must becarried out on the terms in force as atthe date of the commencement of theproceedings.

Employees whose employment is notcontinued by the purchaser are maderedundant at the expense of the debtor.

If necessary, the cost of redundancy isassumed by the insurance systemmentioned above.

The creditors are repaid from theproceeds of the sale of the business in accordance with their ranking in the order of priorities prescribed bylegislation.

Piecemeal realisation of assetsThe piecemeal sale of assets mustsimply be authorized by the InsolvencyJudge, whereas a Sale-of-Business Plan must be decided by the court itself.

Creditor’s RankingsPrioritiesCertain salary payments, court fees, and post-judgment debts incurred whilethe debtor was subject to RehabilitationProceedings or debts arising whilecontinuing the business during theobservation period are paid in priority to all other debts (whether secured orunsecured).

Unpaid salaries and certain employment-related items originating prior to theopening of the proceedings supersede allother creditors (secured and unsecured),and those originating after the opening ofthe proceedings have a preferentialranking which may vary upon the type ofproceedings instituted.

Generally, the priority of mortgages andother types of security over real estatedepend on the date of registration at theland registry. Preferred creditors rankahead of pledges unless the securedcreditors request attribution ofownership of the pledged assets.

Debts arising during the InsolvencyProceedingsDebts incurred by the company after the opening of Insolvency Proceedingsrelating to the conduct of theproceedings or the commercial activitiesof the debtor during that period must bepaid as they fall due.

If they are not paid as they fall due, theyare given preferential status by law andmust be paid out of the proceeds of thesale of the debtor’s assets, in priority tomost other debts.

Challenge to antecedenttransactionsIn the framework of RehabilitationProceedings or Judicial Liquidation (butnot in Safeguard Proceedings), the courtmust fix the date on which it believesthe debtor actually became insolvent.This date can be fixed up to 18 monthsprior to the judgment opening theproceedings.

Certain transactions entered into orpayments made between the actualdate of insolvency and the judgmentopening insolvency proceedings (the“Hardening Period”) may be declarednull and void. Regarding transactionsmade for no consideration, the 18months period is extended for anadditional six months.

Certain transactions entered into orpayments made during the HardeningPeriod are automatically voidable bytheir nature, in particular:

n transaction made withoutconsideration;

n “unbalanced” transactions i.e. inwhich the obligations of the debtorare notably in excess of those of the other party;

n prepayment;

n payment made otherwise than in a manner commonly accepted inbusiness transactions;

n deposit, or escrow of money withouta final court decision;

n security in relation to pre-existingdebt;

n attachment or other remedialmeasure in favour of a creditor; and

n authorisation, exercise or resale of“stock options”.

In addition, any payment or agreemententered into or made during theHardening Period may be nullified by thecourt if those who dealt with the debtorwere aware of its insolvency.



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Liabilities and SanctionsCivil Liability Civil liability of directors of aninsolvent legal entity

Persons who are in effect responsible for the running of a legal entity, including“shadow directors”, are potentiallyexposed to liability in the InsolvencyProceedings of that legal entity.

In particular, if a liquidation (eitherordered ab initio or as a result of thefailure of Safeguard Proceedings or ofRehabilitation Proceedings) shows adeficiency of assets against liabilities andthe court determines that any shortfall isattributable to management faults andthat such faults have contributed to theinsolvency of the company, the courtmay decide that such de jure or de factodirectors/managers/officers shall bearjointly or severally whole or part of thedeficiency of assets.

A de facto director/manager is a person(individual or corporate) who performspositive acts of management.

The action may be brought by theJudicial Liquidator or the publicprosecutor. A majority of the creditorsappointed as “controller” (“contrôleur”)are entitled to initiate such a claim if theyunsuccessfully requested the JudicialLiquidator to initiate such claim.

Civil liability of lendersA lender may be liable in tort for grantingor extending credit to a borrower inirredeemable financial difficulties. Alender in this context is anyone whoextends credit to the company andincludes shareholders (on the basis ofshareholder loans), or suppliers (inconnection with their trade debt) or anyfinancial institution.

However, the potential liability of lenderswho have granted credit facilities withinSafeguard Proceedings, RehabilitationProceedings or Judicial Liquidation islimited, except in the case of (i) fraud, (ii) interference in management, or (iii)where they received disproportionatesecurity in connection with the creditfacilities. If a lender is held liable on thelatter grounds, security securing therelevant debt can be nullified or reduced.

The limitation of liability does not seemto apply in the event of “abusive”termination of credit facilities (“ruptureabusive de crédit”) (i.e. termination ofcredit without prior notice) unless (i) theborrower’s behaviour is “seriouslyreprehensible” or (ii) the borrower is in an“irremediably deteriorated situation”.

French criminal law provides that anentity commits the offence of fraudulentbankruptcy if it obtains ruinous means tofinance the operations of a business withthe intention of avoiding or delaying theopening of Rehabilitation Proceedings orJudicial Liquidation. Lenders that providesuch ruinous financing can be held bothcivilly and criminally liable as accompliceson this basis.

Extension of Insolvency Proceedings to another entity A court can extend the InsolvencyProceedings of one entity to anotherentity (either a legal or natural person,which belongs for example to the samegroup as the insolvent entity) on thefollowing two grounds:

(i) if the assets and liabilities of theseentities are commingled (“confusiondes patrimonies”); or

(ii) if the legal personality of thecompany is fictitious (“sociétéfictive”).

As a result of the extension, the twoentities will become subject to the sameInsolvency Proceedings.

Criminal Liability or Quasi-Criminal Liability Faillite personnelle and prohibition to manage a business

The Court may order the “faillitepersonnelle” of a director (including a de jure and a de facto director) or anindividual for a period of up to 15 years.The order may prohibit such personfrom managing, directing, administrating,controlling directly or indirectly anyenterprise or corporate entity) for theperiod in which the order is in effect. The court may make such order if such person:

(i) carried out a commercial or othereconomic activity or worked as a

craftsman or undertook the duties of a manager of a corporate entity in breach of any legal prohibition;

(ii) with the intention to avoid or delay the opening of insolvencyproceedings, purchased goods inorder to resell them below value, orused ruinous means to obtain funds;

(iii) committed the debtor to performobligations which were undulyonerous on the debtor, when theywere entered into, having regard toits situation;

(iv) knowingly paid or caused to be paid, after cessation of payments, a creditor to the prejudice of othercreditors;

(v) impeded the good functioning of the insolvency proceedings bydeliberately refusing to cooperatewith the insolvency organs; and

(vi) disposed of accounting documents,or did not hold accounts whilstobligated to do so under applicablelaw, or held fictitious, manifestlyincomplete or irregular accountshaving regards to the applicableprovisions.

“Faillite personnelle” may also beordered in the following circumstancesagainst any de jure or de facto manager of legal entity in InsolvencyProceedings who:

(i) disposed of the assets of thecorporate entity as if they were hisown;

(ii) under the guise of the corporateentity concealing his acts, carried out acts of commerce for hispersonal benefit;

(iii) used the assets of the corporateentity in a way contrary to itsinterests to serve a personal interestor the interests of another companyor enterprise in which he had adirect or indirect interest;

(iv) continued abusively, in his personalinterest, a loss-making operationwhich could only lead to cessation ofpayments of the corporate entity; and


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(v) embezzled or concealed the wholeor part of the assets, or fraudulentlyincreased the liabilities of thecorporate entity.

“Faillite personnelle” may also beordered in the following circumstancesagainst any individual subject toInsolvency Proceedings who:

(i) abusively continued operating a loss-making business that could only leadto his insolvency; or

(ii) embezzled or concealed the wholeor part of his assets, or fraudulentlyincreased his liabilities.

Instead of “faillite personnelle”, the courtmay make an order prohibiting a personfor a period of up to 15 years, fromleading, managing, administering, orcontrolling directly or indirectly aparticular enterprise.

BankruptcyThe criminal offence of bankruptcy(“banqueroute”) is punishable byimprisonment for a period of up to 5years and a fine of up to EUR75,000.

A debtor or de jure or de facto managerof a legal entity in Insolvency Proceedingscan be found guilty of bankruptcy in thefollowing circumstances:

(i) with the intention to avoid or delayopening of RehabilitationProceedings or Judicial Liquidation,either purchased goods for re-salebelow value, or used ruinous meansto obtain funds; or

(ii) embezzled or concealed the wholeor part of the assets of the debtor;

(iii) fraudulently increased the liabilities of the debtor;

(iv) maintained fictitious accounts, orremoved accounting documents, orabstained from maintaining accountswhilst applicable provisions requiredit to maintain accounts; or

(v) held manifestly incomplete orirregular accounting having regard to applicable legal provisions;

Persons found guilty of bankruptcy may suffer additional penalties includingbeing:

(i) deprived of civic, civil and familyrights;

(ii) prohibited from carrying out publicduties, or certain professionalactivities for a period of up to 5years;

(iii) excluded from public tender offersfor a period of up to 5 years;

(iv) prohibited from drawing cheques;

(v) posting or publishing the decision;and

(vi) subjected to “faillite personnelle”, orbeing prohibited from managing acorporate entity as described above.

Where the offender is a corporate entity,it may itself be subjected to fines andother penalties including being excludedfrom public tender offers, and beingprohibited from carrying out certainactivities.

Other criminal sanctionsThe debtor and/or the directors may beprosecuted on other grounds as well.Certain breaches of the stay on creditoraction arising on the opening ofInsolvency Proceedings, and breachesof the terms of a Safeguard Plan or

Rehabilitation Plan are punishable byimprisonment of up to 2 years and/or a fine of EUR30,000, namely:

(i) granting a mortgage or charge over,or disposal of certain assets withoutobtaining the consents required bylaw, or payment of debts in whole or in part in breach of the stay onindividual claims; or

(ii) payment of a creditor in breach ofthe terms of discharge of liabilitiesprovided in an approvedRehabilitation or Safeguard Plan, or disposal of assets in breach ofsuch plan.

The beneficiary of the above breaches is liable for the same sanctions as thedebtor and directors.

The penalties applicable in case ofbankruptcy apply to whoever hasremoved, received or concealed inwhole or in part the assets of thedirectors (de jure or de facto) of thecompany.

The same penalties also apply to thosewho fraudulently submit claims inSafeguard, Proceedings or InsolvencyProceedings.

The penalties apply also to de jure or de facto directors of a corporate entitywho have embezzled, or concealed, orattempted to embezzle or concealed inwhole or in part their assets, or whohave fraudulently acknowledgedindebtedness for amounts that were notdue, in order to avoid the consequencesof their liability as a result of insolvencyof the company.

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IntroductionUnder Italian law a company can bewound up either through a liquidationprocedure, applicable when thecompany is solvent, or through a“procedura concorsuale” (procedureaffecting creditors’ rights generally),applicable when the company isinsolvent.

The statutory framework for insolvency-related procedures is primarily set out inRoyal Decree no. 267 of 16 March 1942(the “Bankruptcy Act”), as amended bylaw no. 80 of 2005 and LegislativeDecree no. 5 of 2006 (as furtheramended by Legislative Decree n.169/2007), in Legislative Decree no. 270of 1999 (“the Law on ExtraordinaryAdministration”) and by law no. 39 of 23December 2003 (“Urgent Measures forthe Industrial Restructuring of LargeInsolvent Businesses”, the so-called“Marzano Decree” ).

The first amendments to the ItalianBankruptcy Act are in force as of 17March 2005.

In light of the above, (i) the new claw-back regime is applicable to anyclaw-back action enforced within anybankruptcy proceedings which arecommenced after 17 March 2005; and(ii) the provisions relating to the Pre-Bankruptcy Creditors’ Composition areapplicable to any pending andunapproved pre-bankruptcy creditors’composition from 17 March 2005.

The rules reformed by Legislative Decreeno. 5 of 2006 are applicable to all thebankruptcy proceedings which beganafter 16 July 2006 while the previous lawis still applicable to cases commencedbefore that date.

The rules reformed by the correctiveLegislative Decree no. 169/2007 areapplicable to all the outstandingbankruptcy proceedings at the time itcame into force and to those whichwere commenced after 1 January 2008.

Most Important ReformsThe changes to the principles of theItalian Bankruptcy Procedure have beencarried out in different phases; the firststep was taken in 2004 when thedecree “Urgent Measures for theIndustrial Restructuring of LargeInsolvent Businesses” was enacted. Itwas aimed at the financial restructuringof large insolvent companies meetingspecific requirements as to the numberof employees and the amount of theirdebts: its purpose is therefore to allowsuch companies to continue theiroperations and return to a soundfinancial position on the basis of a 2-year restructuring plan. Secondly, in2005, the Bankruptcy Act was partiallyamended by the reforms relating toclaw-back action, the pre-bankruptcycreditors’ composition and theintroduction of the Debt RestructuringArrangements.

Finally, 2006 saw the almost total reformof the Bankruptcy Act (except theaspects that contain criminal sanctions)fully completed by the Legislative Decree169/2007. After the reforms, the ItalianBankruptcy Act focuses to a greaterextent on allowing companies to continuetheir operations and, consequently,protecting investments in Italy. Thisdecision by the Italian legislators is aimedat reviving the Italian economy which hasbeen beset by considerable difficulties inthe last few years.

The most recent reforms included in the Legislative Decree No 78 dated 31May 2010 focuses on business rescue.The reforms include: a new legal priorityfor rescue finance; partial relief fromequitable subordination; exemptionsfrom liability for lenders in certaincircumstances; and an extension to themoratorium which is now available in the restructuring negotiations stage.

It will take some years to be able toassess the impact of this reform on theItalian economy.

The principal aim of the reform is toallow companies to continue theiroperations and many changes havebeen made to such an end, forexample:

n increasing the number of entitiesexcluded from bankruptcyproceedings;

Key Elements:

n Significant legislative reforms 2003–2010

n Amendments to claw-back provisions and the so-called “concordato preventivo” (Pre-bankruptcy Creditors’ Composition)

n Extraordinary Administration Procedure for the Industrial Restructuring of Large Insolvent Businesses

n Potential civil and criminal liabilities of directors

n “Esdebitazione”

n Debt Restructuring Arrangements under the new article 182 bis of the Bankruptcy Act

n Priority for rescue finance

n Relief from equitable subordination

n Exemptions from liability for lenders in respect of criminal sanctions

Italy

n changing and widening the powersof the bankruptcy receiver;

n extending the powers of thecommittee of creditors.

In addition, the position of the debtorhas been improved by the:

n abolition of the public register ofdebtors declared bankrupt;

n introduction of the so-called“esdebitazione”.

Great changes have also been madewith regard to:

n the provisions relating to claw-backaction;

n the pre-bankruptcy creditors’composition.

Winding up ProceduresLiquidation - voluntary and mandatoryThe liquidation procedure is governed by company law. The decision to put acompany into voluntary liquidation mustbe taken by shareholders. A liquidator isappointed at the shareholders’ meetingto sell the assets, pay off creditors andprepare a final liquidation balance sheetand report. Shareholders may object tothe balance sheet within ninety days. Ifno objection is raised, approval isdeemed to have been given and theliquidator can distribute any proceeds toshareholders. Ultimately, the company isstruck off the companies’ register.

Companies are subject to mandatoryliquidation when their equity capital isreduced below the legal minimum, andalso (at least in principle, although inpractice this very rarely occurs) whenthe object for which the company wasformed is attained or for any otherreason set out in the by-laws.

Bankruptcy proceedings (fallimento)This court-supervised procedure isgoverned by the Bankruptcy Act. Afterthe recent reform, the Bankruptcy Actapplies to all entities that carry on acommercial activity, except publicbodies. The recent reform (LegislativeDecree 169/2007) has introduced anumber of criteria to identify the entities

and the businesses (includingindividuals) that cannot be declaredbankrupt. The entities and theentrepreneurs that can be declaredbankrupt are the ones that:

n have reached in the last three years(from the bankruptcy petition or fromits incorporation) an annual balancesheet revenue higher than€300,000;

n have reached in the last three years(from the bankruptcy petition or itsincorporation) an annual grossproceeds higher than €200,000;

n have debts (including debts not yetdue) for an amount higher than€500,000.

The companies and the entrepreneursthat want to avoid being declaredbankrupt must demonstrate that theyhave not exceeded all the three above-mentioned requirements.

A receiver is appointed who will usually,but not necessarily, be a lawyer or acertified accountant. Following the recentreforms, the receiver may also be a lawfirm as long as there is no conflict ofinterest. The main goal of the BankruptcyProcedure (and therefore of the receiver)is to liquidate the assets of the companyin order to satisfy the creditors.

Bankruptcy AdministrationThe reforms have modified the roles andduties of the administrative bodies thatoperate in a bankruptcy. First of all,following the reforms, the bankruptcyjudge no longer has any managerialpowers, but only supervisory and controlfunctions. These supervisory functionshave been improved in order to avoiduncontrolled management by thereceiver. The receiver on the other handnow has more duties: he administers thedebtor’s assets and is responsible forthe procedure. He must produce areport on the causes of the insolvencyto the judge within sixty days of thebankruptcy declaration. The role of thecommittee of creditors has been greatlymodified by the reforms and nowpossesses powers of authorisation andcontrol over the receiver in addition to itsadvisory functions.

Once the procedure has commenced,no individual actions by any creditor areallowed. The company’s directors losethe right to manage the business or dealwith the corporate assets. Continuationof operations may, however, beauthorised by the court if an interruptionwould cause greater damage to thecompany, but only if the continuation ofthe company’s operations does notcause damage to creditors. After thereform, it is possible to lease thebusiness or a part of it, the lessee,chosen by the receiver, decides uponthe best solution in order to prevent thedispersion of company assets, workersand their professional skills. The aim ofthe company lessor is to save andrestructure the company.

The transactions pending as of the dateof the bankruptcy declaration aresuspended until the receiver decideswhether to take them over, this is unless the ruling on the declaration ofbankruptcy allows the company tocontinue its operations on a provisionalbasis. The possibility of allowing thecompany’s operations to continue, asregulated by the new article 104 of theBankruptcy Act, is one of the mostimportant reform measures aimed atavoiding the dispersal of the insolventcompany’s assets and protectingcreditors.

If the bankruptcy of the company doesnot allow it to continue its operations,then the loans intended for a specificactivity (introduced into the Italian legalsystem by the recent reform of theCompany Law) are terminated. Thecontinuation of such funding isinstrumental in the continuation of thecompany’s operations. The receiver shallprovide, pursuant to article 107, for thetransfer to third parties of the assets inorder to allow the company to continueoperations. The receiver can decide todelegate the judge to sell movable,immovable and registered movable. Iftransfer is not possible, the receiver willprovide for the liquidation of the assetsin accordance with the liquidation rulesof the company to the extent compatiblewith the procedure.

As regards to the liquidation phase,according to the reformed article 105,

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individual assets of the company may besold but only when the sale of the wholecompany or part of it does not satisfycreditors in a more advantageousmanner.

The bankruptcy proceedings end when:(i) all the assets have been distributedamongst the company’s creditors or alldebts and expenses have been paid; or(ii) a post-bankruptcy composition hasbeen finalised (see below); or (iii) in thefixed term, after the bankruptcydeclaration no creditors have filed aclaim; or (iv) all creditors have been paidin full; or (v) the company’s assets havebeen liquidated but they are insufficientto satisfy all or a part of outstandingclaims. In (iv) and (v) if the bankruptentity is a company, it is removed fromthe Companies Register. In the past,bankruptcy proceedings could last forup to five or more years but followingthe reforms, the procedure will probablybe quicker.

Post-Bankruptcy Creditors’ Composition* This procedure is an alternative way ofbringing the bankruptcy proceedings toan end. One or more creditors or a thirdparty are authorised to propose thecomposition but it cannot be proposedby the debtor or by a company in which it holds a stake or companiessubject to the same control if less thansix months have passed since the

insolvency declaration or if less than one year has passed since the orderenforcing the insolvency. The proposalfor post-bankruptcy composition withcreditors can include (article 124 of theBankruptcy Act):

n the subdivision of creditors intodifferent classes;

n different treatments of different kinds of creditors;

n the restructuring of debts and thesatisfaction of claims in any way,including through the supply ofgoods, takeover (Accollo) or otherextraordinary transactions.

The proposal may provide that thecreditors that hold a preference, apledge or a mortgage are not satisfied infull on the condition that the planprovides for their satisfaction in anamount not lower than the best possibleprice which may be obtained from thewinding-up taking into consideration themarket value of the goods or rights onwhich there is the preference asestimated by a qualified consultant. Thetreatment established for each class ofcreditors may not have the effect ofchanging the ranking of the preferentialclaims as laid down by the law.

In cases where more than one proposalare submitted to the court, the creditors’committee is entitled to decide whichproposal would be communicated to

the creditors; upon request of thereceiver the judge may communicate to the creditors the proposal which the receiver considers convenient at the same level of the one chosen by the creditors’ committee.

This procedure must be approved bythe creditors that represent the majorityof the claims admitted to the vote. In theabsence of any objections a creditor’sconsent to the composition is deemedto have been given.

Bankruptcy of CompaniesAccording to article 146 of theBankruptcy Act, the directors andliquidators of companies must observethe obligation imposed upon the debtor.The receiver can bring actions for liabilityagainst directors, statutory auditors,general managers and liquidators.

The judgment which declares acompany insolvent will also involve themembers of the company who haveunlimited liability, (article 147 of theBankruptcy Act). Unlimited liabilitymembers cannot be declared bankruptif a year has passed since the end of the relationship or since the end of theunlimited liability.

The summary procedure (governed byarticles 155-156 of the Bankruptcy Act)has been eliminated and this abrogationis due to the streamlining of proceduresprovided for by the Bankruptcy Act. Thenew articles 155-156 regulate the assetsintended for a specific activity (article2447 bis of the Italian Civil Code). Thereceiver can transfer them to thirdparties in order to preserve their initiallyintended use or he can liquidate them.The proceeds from the liquidation will bepart of the assets.

The ExtraordinaryAdministration Procedureand the MarzanoProcedure for the IndustrialRestructuring of LargeInsolvent BusinessesThe Legislative Decree 270/1999regulated the “ExtraordinaryAdministration for Large Insolvent

* Please note that the post bankruptcy creditors’ composition has been recently amended by the Law n. 69/09.

Businesses” (“ExtraordinaryAdministration Procedure”) that is a sort of insolvency procedure for largebusinesses.

The Extraordinary AdministrationProcedure is applicable to largebusinesses in a state of insolvency when there is the expectation that thecompany’s situation may be rebalancedeither through (a) the sale of its assets,undertakings or going-concerns(provided that the duration of therelevant programme cannot exceed 1 year); or (b) the execution of arestructuring programme, the duration of which cannot exceed 2 years.

The Extraordinary AdministrationProcedure applies to companiesmeeting the following cumulative criteria:

n more than 200 employees during thepreceding 12 months; and

n aggregate debts no lower than twothirds of each of (i) the assets on thecompany’s balance sheet and (ii) theincomes deriving from the salesmade and the services providedduring the latest accounting period.

Whilst the admission to the MarzanoProcedure usually precedes thedeclaration of insolvency, theExtraordinary Administration Procedurerequires the petition for the insolvencydeclaration to be filed before thecompetent Court, which may be thenfollowed, according to the steps set outbelow, by admission to the ExtraordinaryAdministration Procedure.

A petition for the insolvency declarationand the successive admission to theExtraordinary Administration Proceduremay be filed by the company, its creditors,the public prosecutor (pubblico ministero)or ex officio by the Bankruptcy Court.

In the judgment declaring the state ofinsolvency, the Court, inter alia appointsone to three judicial commissioner(s) forthe management of the company fromthe date on which it is declared insolventuntil the appointment of theextraordinary commissioner(s), after thecompany has been admitted to theExtraordinary Administration Procedure:within 30 days from the declaration of

insolvency, such judicial commissioner(s)must file before the Bankruptcy Court areport describing the reasons leading tothe insolvency of the company and areasoned evaluation of the existence ofthe conditions set forth by law for theadmission of the company to theExtraordinary Administration Procedure.A copy of such report is sent to theMinister of Economic Development.

From the date of the report, theBankruptcy Court has an additionaldelay of 30 days to resolve on theopening of the ExtraordinaryAdministration Procedure, to which thecompany is admitted if there is aconcrete expectation that its financialsituation can be rebalanced upon one of the possible alternative mentionedabove at letter (a) and (b): where this isnot the case, the Bankruptcy Courtdeclares the company insolvent and theBankruptcy Procedure will apply.

Within 5 days from the decree of theBankruptcy Court declaring the openingof the Extraordinary AdministrationProcedure, the Minister of EconomicDevelopment appoints one to threeextraordinary commissioner(s) which,within the following 55 days must deliverto the Minister of EconomicDevelopment the recovery plan of thecompany. Such term can be postponedfor a further period of 60 days.

Within 30 days from the date of itsdelivery, the Minister of EconomicDevelopment authorises the recoveryplan, which must also contain anindication of the method and timing ofrepayment of outstanding debts. Onceapproved, the plan must be carried outby the extraordinary commissioner(s)under the supervision of the Minister ofEconomic Development.

Assets can be sold according to theplan on a going-concern basis or soldindividually. The distribution of therealisation proceeds will be generallycarried out in the order of priorityprovided for in the Bankruptcy Act.However, there may be cases where,should the continuation of the business so require, the extraordinarycommissioner is entitled to makeadvance payments to unsecured

creditors in preference to securedcreditors on the basis of the estimatedavailable funds.

If its goals have been achieved and the company, after the implementationof the plan, has returned to a soundfinancial condition and has repaidoutstanding debts, the Court willterminate the proceeding and thecompany may return to its normalcorporate activity.

If the above-mentioned requirements arenot met, and in any other moment inwhich, upon admission thereto, theExtraordinary Administration Proceduremay not be usefully continued, theBankruptcy Court may declare thecompany bankrupt.

On 23 December 2003, the Italiangovernment approved the Decree“Urgent Measures For The IndustrialRestructuring Of Large InsolventBusinesses” (the so-called “MarzanoDecree”), which came into force on 24December 2003 when it was publishedin the Italian Official Gazette.

The Marzano Decree introduces a fasterprocedure which aims to save and turnaround an insolvent company in order to maintain its technical, commercial,productive and employment value. Thepurpose is mainly the continuation of thecompany’s operations by restructuringthe company’s debts and selling assetswhich are not strategic or which do notform part of the company’s corebusiness.

The above mentioned extraordinaryadministration procedure is available tolarge insolvent businesses which have:

(a) actual prospects of recovery, throughthe economic and financialrestructuring of the business on thebasis of a restructuring plan whoseduration cannot be more than 2years or through a transfer of thecompany’s assets;

(b) a minimum of 500 employees for atleast one year; and

(c) debts, as well as obligations arisingfrom guarantees, for an aggregate


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amount not lower than€300,000,000.

A company which meets therequirements set out above may requestthe Minister of Production (“Ministrodelle Attività Produttive”, formerly theMinister of Industry), with a concurrentapplication of insolvency to thecompetent court, for admission to theMarzano Procedure. The admission tothe Marzano Procedure may berequested even before the declaration of insolvency by the competent court. Inthis case the competent court will verifythe insolvency of the company at a laterstage. Further to the request ofadmission, the Minister of Production,who is the procedure’s supervisor, willdesignate by decree an extraordinarycommissioner setting out his/her specificpowers. Such decree must be notifiedto the competent court within 3 days.

With reference to the companies whichprovide essential public services,pursuant to the amendments introducedby the Law Decree no.134/2008, theadmission to the Marzano procedure,the appointment of the ExtraordinaryCommissioner (and the determination of his powers) must be approved by thePresident of the Council of Ministers or by the Minister of EconomicDevelopment (Ministro dello SviluppoEconomico).

Once the company has been admittedto the procedure, no individual actionmay be brought by any creditor.

The extraordinary commissioner is incharge of running the company andmanaging its assets. He/she also carriesout the duties entrusted to the preliminarycommissioner (commissario giudiziale)under the Law on ExtraordinaryAdministration. In particular, theextraordinary commissioner must notifythe creditors of the company, and theparties who have security over assets inthe possession of the company, of thedeadline by which the company’screditors must file their statements ofclaim with the competent court.

Within 60 days from his/her appointment,the extraordinary commissioner files areport with the competent court together

with the following documents: (i) accounting records, (ii) the balancesheets from the last 2 fiscal years, (iii) anupdated financial statement, (iv) the list of the company’s creditors and the sumsdue to them, (v) list of parties who havesecurity over assets. The term of 60 daysmay be extended by the court uponrequest of the commissioner only onceand for a period not longer than 60 days.

Within the above term, thecommissioner may present to theMinister of Production the admissionrequest of other companies of the groupto the New Extraordinary Administration.

After ascertaining that the company isinsolvent, the court will:

(a) appoint a judge in charge of theprocedure (so-called “giudicedelegato”);

(b) invite the creditors of the companyand the parties who have securityover global change to “assets” to filetheir statement of the claims; and

(c) establish the date on which thehearing for the examination of thedebts of the company will takeplace.

The extraordinary commissioner willsubmit, within 180 days from his/herappointment, the restructuring plan anda report including (i) the reasons whichcaused the insolvency, (ii) the status ofthe business, and (iii) the list of creditors,with the sums due to them and theirpriority rights, to the Minister ofProduction. The term of 180 days maybe extended for a further 90 days.

If the Minister of Production does notauthorise the implementation of therestructuring plan and there is nopossibility to rescue the companythrough the sale of developingbusinesses according to the plan for the continuation of the company’soperations (whose duration shall not be longer than one year), the court willdeclare the company bankrupt. Thedecree no.134/2008 introduced also an extension of the deadline for up to 12 months. Thus the Extraordinary

Commissioner may obtain an extensionof the deadlines for the implementationof the plan.

Within 15 days from the appointment of the extraordinary commissioner, theMinister of Production designates adelegated committee, composed ofeither 3 or 5 members, one or two ofwhich (subject to the number of themembers) is chosen from amongst theunsecured creditors. In practice, itappears that the 15 days term may beextended. The remaining members areexperts in the type of business carriedout by the insolvent company or expertsin the insolvency field. The Minister ofProduction elects a chairman from themembers of the delegated committee.

The delegated committee is a consultingbody, whose comments and opinionsare not binding. The committee issuescomments/opinions on the actions ofthe extraordinary commissioner.

In addition to these powers, thedelegated committee may:

(a) inspect, at any time, any financialdocument relating to the procedureand ask the extraordinarycommissioner and the insolventcompany for elucidations;

(b) request the Minister of Production to dismiss the extraordinarycommissioner.

After being requested, the delegatedcommittee issues its comments/opinionswithin 10 days, except when it is invitedto respond earlier, for reasons ofurgency. In any event, the delegatedcommittee should be granted at least 3 days to submit its response. Itsresolutions are passed by a majorityvote of its members.

The extraordinary commissioner’srestructuring plan may include anarrangement with creditors (the so-called “concordato”).

The satisfaction of the creditors’ claims by means of an arrangement can provide for the repayment of debts in any form, such as a debt to equityswap, or the allocation of ordinary or

convertible debt securities. Thearrangement can also provide for theincorporation of a NewCo to which theinsolvent company will transfer all itsassets and the shares of which will bedistributed to the creditors of the debtorcompany in the context of a debt toequity swap. The distribution of sharesin the NewCo to the creditors isachieved through a vehicle (so-called“Assuntore”) to which the creditors haveconferred all their claims against theinsolvent company. The Assuntoreconfers the claims to the NewCo as anequity contribution and receives sharesinto the NewCo, which it distributes tothe creditors in accordance with theterms of the arrangement.

The arrangement can formulate separateclasses of creditors whose legal andfinancial interest is aligned (i.e. individualinvestors; bondholders, etc.) and providefor a different treatment by class. Adifferent treatment can also be providedfor creditors of different corporateentities within the insolvent group. In theevent the arrangement provides for aseparate treatment, its fairness issubject to the government’s scrutiny and must be approved by the Minister.

Once the Minister has approved theproposed arrangement, theextraordinary commissioner files thearrangement with the court, togetherwith a motion to proceed by way ofarrangement; in the next ten days thecreditors can file their comments on theproposed list of creditors, the proposedlist of claims and relevant amounts andranking. Within the same time, thecreditors excluded from the arrangementcan file their claim with the court.

Within the following sixty days, thejudge, assisted by the extraordinarycommissioner, announces a provisionallist of creditors and claims with therelevant amounts and ranking and theextraordinary commissioner notifies thecreditors. The creditors in the provisionallist are admitted to vote on thearrangement. The holders of securitiesthat have been distributed to the publiccan be admitted as a class and there isno need to identify each security holder.

Those creditors excluded from theprovisional list can appeal the relevantorder issued by the court. Pending theappeal they are allowed to vote on thearrangement and will participate in theallocation of shares in the NewCo.However, the bankruptcy judge mayorder that any shares issued to suchexcluded creditors are restricted. In thatcase the shareholder cannot sell thoseshares until the court has reached adecision on the appeal.

The arrangement will be finally approvedby a vote of creditors representing themajority in the value of claims admittedto the provisional list. Voting takes placeby post. A non-vote is considered to bea consent to the arrangement. In caseof several classes of creditors, thearrangement must be approved bycreditors representing a majority in thevalue of claims admitted to theprovisional list for each class. However,even if the arrangement is not approvedby a majority of the classes of creditors,the court can still authorise thearrangement if it considers that incomparison with the alternatives, it doesnot prejudice the dissenting creditors.

If the required majority vote is reached,the court issues a judgment approvingthe arrangement; if such majority is notreached, the extraordinary commissionermust file all the necessary amendmentsfor the arrangement to be approved.The judgment by means of which thearrangement is approved can alsoprovide for the transfer of all the assetsof the insolvency company to theNewCo (Assuntore) formed for thepurpose of implementing thearrangement.

The judgment approving thearrangement is enforceable against allcreditors whose claims arise prior to thejudicial declaration of insolvency and canbe appealed by the company, by thecreditors and by the extraordinarycommissioner within 15 days of beingpublished. If the appeal is successful,the list of creditors and claims isamended accordingly, though suchamendment will not affect the vote onthe arrangement.

Once the judgment approving thearrangement is res judicata, theproceeding comes to an end.

In case the creditors reject thearrangement, the extraordinaryadministrator can file with the Ministry adivestiture plan which can be extendedto a period of time as long as two years.If a divestiture plan is not promptly filedor the Ministry does not approve it, the court will issue an order to convertthe extraordinary administration into anordinary bankruptcy proceeding.

Upon the request of the extraordinarycommissioner, the Minister of Productionmay authorise the transfer, use andlease of assets, real estate, businessesand ongoing concerns of the companywith the aim of restructuring thecompany or its group.

The company may not grant securityunless (i) it has been authorised by thebankruptcy judge; and (ii) it has alsobeen authorised by the Minister ofProduction, if the security is for anundetermined value or for a valueexceeding €206,582.76.

When authorisation for theimplementation of the restructuring planhas been granted, the extraordinarycommissioner may also bring claw-backactions, if such actions benefit thecreditors.

The procedure ends when its goals have been achieved, i.e. when thecompany, after the implementation ofthe plan, is back in a sound financialposition. Otherwise, the company will bedeclared insolvent pursuant to the ItalianBankruptcy Act.

Compulsory AdministrativeLiquidationThis procedure is only available to publicundertakings, insurance companies,banks and certain other regulatedentities. The entities which can besubject to this procedure are specificallyindicated by the law and generally theycannot be declared bankrupt.



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Rescue ProceduresPre-bankruptcy creditors’ composition The amendments to the ItalianBankruptcy Act have widened theaccess to the “Concordato Preventivo”(Pre-Bankruptcy Creditors’ Composition)by eliminating:

(a) subjective requirements (insolvencystatus of the debtor; the registrationin the companies’ register for at least two years; no declaration ofBankruptcy in the previous fiveyears); and

(b) objective requirements (grant ofguarantee or security in order tosecure the payment of at least 40%of the unsecured creditors) that wererequired under the Bankruptcy Act.

The amendments to the ItalianBankruptcy Act have also reduced thecreditors’ majority required to approve aPre-Bankruptcy Creditors’ Composition.

Under the new article 160 of theBankruptcy Act the proposal mayprovide that the creditors that have apriority right, a pledge or a mortgage arenot satisfied in full, on the condition that,the plan provides for their satisfaction inan amount not lower than the bestpossible price which could be obtainedin a winding-up taking into considerationthe market value of the goods or rightson which there is the priority asestimated by a qualified valuer.

The Public Prosecutor must be informedthat a Pre-Bankruptcy Creditors’Composition petition has been filed.

Under the new article 177 of theBankruptcy Act, the Pre-BankruptcyCreditors’ Composition petition must beupheld by the majority of the votingcreditors. To the extent that the creditorsare divided in different classes, the Pre-Bankruptcy Creditors’ Compositionpetition must be upheld by the majorityof the classes of the voting creditors.The creditors that have a priority claim, a pledge or a mortgage for which thePre-Bankruptcy Composition petitionprovides for their full satisfaction do nothave to right to vote if they do not giveup their priority/security.

Debt restructuring arrangements under the new article 182-bis of the Bankruptcy ActThe Amendments to the ItalianBankruptcy Act have introduced the so-called “Accordi di Ristrutturazione dei Debiti” (Debt RestructuringArrangements), whereby an entity canenter into a composition with creditors(which is binding on all the creditors ofsuch entity) provided that:

(a) the Debt Restructuring Arrangement is agreed by creditors representingat least 60% of its debts;

(b) the feasibility of the DebtRestructuring Arrangements and thesuitability of such arrangements toensure repayment of those creditorswho did not agree with suchArrangements is confirmed by anindependent expert (who must havethe requirements provided by article67(d) of the Bankruptcy Act); and

(c) after the filing of the restructuringagreement there is a 60 day stay. In the recent reforms changes weremade to the provision according towhich the stay on enforcement andprecautionary measures may beextended to the negotiations phasefor the period of sixty days precedingthe filing of the restructuringarrangements. The LegislativeDecree No.78, further specifies thatthe Court will also prohibit thegranting of new security, unlessthese have been agreed.

Within 30 days from the issue of theDebt Restructuring Arrangement thecreditors and any other interestedperson can challenge it. The Court, after deciding on the challenges,homologates the Debt RestructuringArrangement with a decree.

Pursuant to article 182 ter as modifiedby Legislative Decree 196/2007, it ispossible to file a fiscal arrangement notonly together with a of a Pre-BankruptcyComposition with creditors but alsotogether with a Debt RestructuringArrangement. The fiscal arrangementenables the debtor to pay his fiscaldebts partially and periodically.

Other IssuesDirectors’ ResponsibilitiesDuties imposed on directors applyequally to those who, although notformally appointed to office, carry outmanagerial activities or are involved inthe running of the company.

Civil liabilityDirectors are jointly and severally liablefor breach of their duties. However, adirector must be blameworthy to sharein this liability. Liability between thedirectors is divided according to thedegree of fault and the damage caused;but where a director can establishhis/her lack of blame for the breach,he/she will not be liable at all.

A claim may be brought against adirector by the company, by ashareholder or by a creditor who hassuffered a loss as a consequence of thedirector(s)’ misbehaviour. If the companyis bankrupt or subject to any analogousprocedure, the claim may be brought bythe receiver.

Where a director has committed an actor omission against the provisions of lawor those of the articles of association(e.g. has failed to act with normaldiligence in supervising the conduct ofthe company’s affairs, or has failed todo his/her best to prevent theoccurrence of prejudicial acts or reducetheir harmful effects, or has acted with aconflict of interest), and the companysuffers damage as an immediate anddirect consequence, directors arepersonally and jointly liable to thecompany for the damage suffered.Directors must therefore be wary ofsimply resigning from a company infinancial distress, as this will not besufficient to discharge their duties.

Directors are liable to the company’screditors for non-observance of theirduties concerning the preservation ofthe company’s assets which results inloss to creditors. Shareholders or thirdparties who suffer damage whichdirectly affects their interests as a resultof a director’s malicious or intentionalact may be entitled to compensation.

Directors are under a duty to call ameeting without delay in the event thatthe equity capital has decreased bymore than one third because of thecompany’s losses. It is unusual for acourt to find liability for this breach, dueto the difficulty in proving causation. Analternative way to prosecute in thissituation is to prove liability for negligentmismanagement in not having acted toprevent losses.

Directors may also be liable for violationswhich create an over or under valuationof company assets; for falsifyingaccounts; for failing to make necessaryprovision for the payment of taxes whichcauses the liquidation of the company;or failing to make social securitypayments to employees.

The courts have applied the civil liabilityregime to de facto directors of acompany, on the basis of a test of actualmanagement of, or intervention in themanagement of, a company by a personwho was not formally empowered to actas a director. Thus, in the event that abank representative was found to havecaused damage to a company acting asa de facto director of the same, thebank representative may be held liableto pay damages to the company.

Criminal liabilitiesA director of company may be heldcriminally liable in respect of actions over the company’s assets taken priorthe bankruptcy of the company. Themost important of these are where acompany has:

(a) misused assets in order to prejudiceits creditors - article 216 of theBankruptcy Act;

(b) taken imprudent actions to delay thedeclaration of bankruptcy - article217 of the Bankruptcy Act; and

(c) disguised its financial distress or itsinsolvency state in order to obtainfinancing (unlawful recourse tolending) - article 218 of theBankruptcy Act.

The administrators and the liquidators of a company are also subject to thesepotential liabilities.

The Law Decree No.78 introducedexemptions from criminal liability inrelation to lenders providing finance todistressed businesses, as long as thefinance is provided in the context of aformal restructuring.

Claw-backAny act of a company, which issubsequently declared bankrupt(including any payments and thegranting of security), may be clawedback by the court at the request of thereceiver if carried out during a “riskperiod”. The amendments to the ItalianBankruptcy Act have halved all of theclaw-back periods, such claw-backperiods now amount to:

(a) 1 year, with respect to transactionsat an undervalue, or involvingunusual means of payment (e.g.payment in kind) or security takenafter the creation of the securedobligations, whereby the creditormust prove his lack of knowledge of the state of insolvency of therelevant entity in order to rebut anyclaw-back action;

(b) 6 months with respect to securitygranted in order to secure a debtdue and payable, whereby thecreditor must prove his lack ofknowledge of the state of insolvencyof the relevant entity in order to rebutany claw-back action; and

(c) 6 months with respect to paymentsof due and payable obligations,transactions at arm’s length orsecurity taken simultaneously to thecreation of the secured obligations,whereby the receiver must prove thatthe creditor was aware of the stateof insolvency of the relevant entity inorder to enforce any claw-backaction.

It is important to underline the differencebetween situations provided by (a) and(b) above, that, in order to rebut anyclaw-back actions, the third party mustdemonstrate that he did not know thatthe debtor was insolvent whereas in (c) it is the receiver that must prove thatthe other party knew the debtor wasinsolvent.

Furthermore, with regard to paragraph (a) above, the amendments to the ItalianBankruptcy Act, expressly set out when a transaction is deemed to be atundervalue, i.e. when the asset orobligation given or undertaken exceedsby one quarter the value of theconsideration received by the debtor. The amendments to the ItalianBankruptcy Act have, therefore,incorporated the “one quarter principle”established by the Italian case law inorder to limit any discretion of the Trusteeor the courts.

The amendments to the ItalianBankruptcy Law have also established



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several exemptions to the application ofthe claw-back regime.

Under the new regime, a claw-backaction cannot be filed in relation to:

(a) payments made within the ordinarycourse of business for assets andservices at a market price;

(b) payments made into a bank currentaccount, provided that suchpayments have not considerablyreduced over a period of time theindebtedness of the bankrupt vis-à-vis the account holding bank;

(c) the sale of real estate for residentialpurposes at arms length, to theextent that such real estate is usedas a main house by the buyer orhis/her relatives and relatives-in-law;

(d) transactions involving payments as well as security taken over theassets of the debtor, provided that such payments were made or security was taken in order toimplement a plan which is deemed“suitable” to redress theindebtedness of the debtor and toreadjust its financial situation;

(e) transactions involving payments as well as security taken over theassets of the debtor, provided that such payments were made or security was taken so as toimplement a Pre-bankruptcyCreditors’ Composition, ControlledManagement or the DebtRestructuring Arrangements (seeparagraphs above);

(f) payments of the amounts due forthe services carried out by theemployees and the independentcontractors of the debtor entity; and

(g) payments of due and payableobligations in order to obtainservices which are auxiliary to the access to the ControlledManagement and Pre-bankruptcyCreditors’ Composition.

The exemption contemplated under (d) is of particular interest. The reference to the expert’s report must

be interpreted as a report assessing the reasonableness of the plan which is deemed “suitable” to redress theindebtedness of the debtor and toreadjust its financial situation, e.g. incase of a refinancing plan (where thereis no leveraged merger buy-out), thesaid report must assess thereasonableness of the plan as far as the reimbursement of the refinancing is concerned.

EsdebitazioneAn important measure introduced by the reform is the discharge of somedebts in the case of good conduct. This privilege is available only if thedebtor is an individual and where someof the creditors have not been satisfied.The debtor may benefit from thisprocedure if:

n he has cooperated with theadministrative bodies in theproceedings;

n he has not caused delay in theproceedings;

n he has complied with the order to provide the receiver with thecorrespondence concerning therelationships involved in thebankruptcy;

n he has benefited from the sameprocedure in the last ten years;

n he has not committed criminaloffences such as themisappropriation of assets in orderto prejudice creditors or thereporting of non-existent liabilities;causing or worsening the insolvencyin order to make difficult thereconstruction of the assets andbusiness, unlawful financing;

n he has not been convicted offraudulent bankruptcy or offencesagainst the economy, industry orcommerce if there has been norehabilitation for these crimes.

SecurityTaking a security interest over an assetdoes not involve a transfer in ownership.Transferring an asset for the purposes of creating something analogous to asecurity interest is generally forbidden

by law and any agreement to such anend is, in principle, null and void.

Security cannot be taken over leaseholdinterests, and floating charges are notpossible (although a “privilegio speciale”– a special type of pledge not requiringdelivery - may be analogous in somerespects). The concept of a trust is notfully recognised by Italian law.

Security usually ranks in order ofcreation. Where registration is required,security will rank in order of registration.Certain creditors, e.g. tax and socialsecurity authorities are preferred byoperation of law.

Enforcement of Security -in general and in relation to BankruptcyOther than in respect of pledges (where the parties can agree on specific procedures for enforcement),enforcement of security is normally acourt-supervised procedure, and islengthy and bureaucratic.

The enforcement of a mortgage can only be requested on the basis of anenforceable right for a definite, liquidatedand matured amount. Enforceable rightsinclude enforceable judgments, bills ofexchange and other credit instruments.Notice of the right to enforce must beserved on the debtor together with the warning to fulfil its obligation within a term not shorter than ten days.Thereafter the creditor may request thesale of the charged asset. This sale is normally carried out by the court or a notary in accordance with the ItalianCode of Civil Procedure.

Pledges can be enforced duringbankruptcy proceedings provided thatthe secured creditor has filed itsstatement of claim with the court andthe court has ascertained its securedcreditor status. Thereafter, the securedcreditor must request the authorisationof the judge in charge of the bankruptcy,who will establish the manner and timing of the sale. The judge may alsoauthorise the official receiver to keep thepledged assets and to pay the securedcreditors.

Security over real estate cannot beenforced independently of the generalliquidation of the assets. The sale of therelevant real estate is made by thereceiver, although the secured creditorhas a priority right over the proceedsfrom the sale.

GuaranteesGuarantees are available in mostcircumstances. However, corporatebenefit must be established if acompany is granting a guarantee. This may take two different forms:

(a) the act must not be ultra vires,i.e. must be within the objects of the company as stated in the by-laws; and

(b) any director and any shareholderhaving an interest in conflict with theinterest of the company is not allowedto vote in the meeting on the issue.

These issues must be addressed andcan effectively limit the amount that canbe guaranteed (e.g. to the net worth ofthe guarantor). It can be particularlydifficult to establish corporate benefit forupstream guarantees. However, somecase law has recognised the existenceof a “group interest” which goes beyondthe interest of the single company. Such“group interest” can justify the grantingof upstream guarantees, provided thatthe grantor obtained some benefit, evenif indirectly.

PrioritiesIn a bankruptcy, the ranking of creditorsis regulated by the Bankruptcy Act andthe Civil Code. The order is, in summary:

(a) claims associated with thebankruptcy proceedings as set out in a specific legislation;

(b) debts secured by a pledge ormortgage;

(c) debts having a general priority such as claims for salaries, socialcontributions, taxes; then

(d) unsecured debts.

The receiver must distribute the availablefunds to the creditors in accordancewith a distribution plan that must beapproved by the court. The bankruptcydeclaration does not stop the accrual ofinterest for claims secured by each kindof preferential right.

New Money LendingLenders(including shareholders)providing new loans or interim finance todistressed companies in the context ofpre-bankruptcy creditors' compositionsor restructuring arrangements benefitfrom a priority ranking and will be paidbefore the general body of unsecuredcreditors. Previously under Italianbankruptcy lawshareholder/intercompany loans grantedto a company within the same groupmay have been subordinated byoperation of law to all other debts ofsuch company, if granted at a timewhen, taking into consideration also thebusiness carried out by the company: (i)the company's indebtedness wasexcessively high compared toshareholders' equity, or (ii) thecompany's financial situation was suchthat a shareholders' contribution wouldhave been reasonable under thecircumstances. In addition, any paymentreceived in repayment of suchshareholder/intercompany loans mayhave been clawed-back by a receiver inbankruptcy of the borrower had theborrower become insolvent within oneyear from the date the relevant paymentis made. The new provision introducedby the Legislative Decree No 78,derogates from the equitable

subordination rules, by allowingshareholders to acquire priority over theexisting creditors of the companyprovided that the shareholder loan isprovided in the context of specificrestructuring procedures (namely, thedebt restructuring arrangements andpre-bankruptcy creditors' composition(“concordato preventivo”)) and up to anamount equal to 80% of the amount ofthe shareholder loan.

Recognition of ForeignInsolvency Proceedings Within the EUThe Regulation applies; see first part of this note.

An entity that has its principal place of business abroad could be declaredbankrupt in Italy even if the declarationof bankruptcy has been pronouncedabroad. Although the principal place ofbusiness is abroad it may fall within thejurisdiction of the Italian Authority if it istransferred after the request forbankruptcy declaration.

Recognition of foreign insolvencyproceedings outside the EU The recognition in Italy of foreigninsolvency proceedings from a non EU member State is subject to thejurisdiction of the Court of Appeal.

These proceedings, known as“delibation” proceedings, are howeveravoided in cases where bilateral ormultilateral conventions exist andestablish an easier recognition processwith less specific formalities.



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European Insolvency ProceduresLuxembourg

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General – ProceduresThe standard insolvency procedures forcommercial companies are bankruptcyproceedings (faillite). In addition, acontrolled management procedure(gestion contrôlée) exists.

Other types of proceedings are thesuspension of payments (sursis depaiement) and the pre-bankruptcycomposition arrangements with creditors(concordat préventif de faillite) which arehowever only rarely used in practice andwill not be analysed hereafter.

Specific insolvency procedures (such as for credit institutions, insuranceundertakings or investment funds) arenot analysed herein.

Controlled management (gestion contrôlée)Controlled management proceedings(gestion contrôlée) can be opened onlyupon the application of a commercialdebtor if such person establishes that itscommercial creditworthiness is tainted orthat the integral performance of itsobligations is at risk and if it can showthat the controlled management (gestioncontrôlée) may allow it to reorganise itsbusiness and to return to a normalactivity, or that such procedure will ensurea better realisation of its assets.

The procedure is subject to two differentphases. During a first phase, while themanagement of the company stays inplace, the company will in principle not

be able to take any measures regardingits assets (in particular any measures ofdisposal) without the consent of thesupervising magistrate appointed by thecourt. During this phase, the rights ofcreditors (including secured creditorsexcept where specific laws providedifferently) will be frozen. The approval ofthe appointed supervising judge will berequired for all acts to be carried out bythe debtor.

During a second phase, and following the nomination of a commissioner(commissaire), the approval of thecommissioner will be required for either all or certain categories of decisions (asdetermined by the appointing judgment).The rights of creditors will continue to befrozen (as above). The commissionerdraws up a reorganisation plan or a planfor distribution, which is subject toapproval by a majority of creditors. Itmust then be approved by the courtbefore becoming compulsory for thedebtor and the creditors.

Controlled management proceedings(gestion contrôlée) are excluded (i) afterbankruptcy proceedings (faillite) havebeen opened against the applicant, (ii) ifthe court considers that such measureswould not have the purported effect, or(iii) if the court becomes convinced duringthe proceedings that the applicant has infact stopped being able to makepayments (in which case bankruptcyproceedings (faillite) may be openedimmediately).

Bankruptcy proceedings (faillite)Bankruptcy proceedings (faillite) can beopened upon the application of eitherthe bankrupt company itself, uponapplication of any creditor, or upon anex officio decision of the court. Theconditions for the opening of bankruptcyproceedings (faillite) are the stoppage of payments (cessation des paiements)and the loss of commercialcreditworthiness (ébranlement du créditcommercial). In addition, the failure ofcontrolled management (gestioncontrôlée) proceedings may alsoconstitute grounds for openingbankruptcy proceedings (faillite).

As of the day of the opening judgment,the company’s statutory officers (such

Key Elements:

n Considers the two main types of insolvency procedure:

n Bankruptcy (faillite)

n Controlled management (gestion contrôlée)

n The effects of insolvency proceedings on the rights of secured creditors

n Guarantees

n Ranking of creditors’ claims

n Lender liability issues

n Directors’ duties

n Recognition of foreign proceedings outside of the EU

Luxembourg


as the board of directors) are divested of all powers to represent the company.The only legal representative of thecompany will be the bankruptcy receiver(curateur) who will be the only personentitled to take any decisions in relationto the assets. The bankruptcy receiver(curateur) is appointed by theLuxembourg commercial court.

As of the day of the opening judgment ofthe bankruptcy proceedings (faillite), allunsecured creditors have to file theirproof of claims (déclaration de créance)with the clerk of the commercial court.Secured creditors may file proof of claimsbut they will only be registered for suchamount which would not have been fullypaid as a result of the enforcement oftheir security interests. There is no fixedduration for the bankruptcy proceedings(faillite), which will in normalcircumstances last until such time as allclaims have been verified, all assets havebeen realised, and distributions havebeen made to the creditors.

Counterparty’s Ability to Exercise Rights ofTermination under aContract with The DebtorThe controlled management procedure(gestion contrôlée) provides in principlefor the freezing of enforcement actionsagainst the debtor during theestablishment and until the adoption ofthe restructuring or liquidation plan orthe rejection of the request. Terminationclauses, declarations of default andsubsequent acceleration are noteffective against the debtor and do notprevent operation of the restructuring or liquidation plan.

Similarly, as from the opening ofbankruptcy proceedings (faillite), allmeasures of execution against thedebtor are suspended. The suspensionof execution measures does howevernot prevent creditors from establishingtheir rights (either by taking conservatorymeasures or by starting court actions),as long as they do not seek execution of their claims.

Under bankruptcy proceedings (faillite),clauses for early termination accelerationand penalty due to the opening of

bankruptcy proceedings are valid andenforceable. Furthermore, the openingof bankruptcy proceedings (faillite)automatically accelerates all debts,which are not yet due (there may be adiscount for any debt not bearinginterest and not due for a term of morethan one year at the date of opening ofbankruptcy proceedings (faillite)).

Security & ProprietaryRightsDuring a controlled managementprocedure (gestion contrôlée), the rightsof secured creditors, privileged or not,are frozen until a final decision has beentaken by the court except in limitedcircumstances where specific lawsmaintain enforceability.

Furthermore, as soon as a controlledmanagement procedure (gestioncontrôlée) has been opened, even if thedebtor keeps his proprietary rights andthe management of its goods andchattels, it needs to be authorised bythe supervising magistrate (juge-commissaire) and, after his appointment,the commissioner for a vast range ofactions relating to its business, likeselling goods (chattels and real estate),borrowing or lending monies, payingcreditors and granting pledges orassignment of claims (the exact scopeof which is determined by the openingjudgment).

Specific provisions of Luxembourg(substantive) law on pledges authorisethe pledgee to continue enforcementregardless of the state of bankruptcy orliquidation, or any moratorium affectingthe pledgor. This provision is howevernot applicable to controlledmanagement procedures.

The law dated 5 August 2005 onfinancial collateral arrangements (the“Financial Collateral Law”) disapplies theprovisions of Luxembourg and foreigninsolvency proceedings (includingcontrolled management (gestioncontrôlée) and bankruptcy proceedings(faillite)), in relation to financial collateralarrangements. This concerns pledges,transfers of ownership for securitypurpose and repurchase agreementsrelating to financial instruments

(including securities, shares, etc.) andclaims (including receivables and bankaccount balances), regardless of thestatus of the parties (i.e., none of themneeds to be a financial institution).

This applies to Luxembourg financialcollateral arrangements but also (subjectto certain additional conditions) toequivalent foreign arrangements.

Reservation of TitleA doubt may arise for contractscontaining a reservation of title clause:bankruptcy law (faillite) has made suchclauses valid and enforceable, but giventhe special scope and aim of thecontrolled management (gestioncontrôlée) procedure, it is doubtfulwhether the same rule will apply or if thespecial claim introduced by that lawwould be considered an enforcementaction which is suspended until the endof the controlled managementproceedings (gestion contrôlée). Furtheranalysis would be required with respectto specific types of contracts.

GuaranteesA bankruptcy receiver (curateur) mayhave an interest in challengingguarantees granted by the insolventcompany (in particular if the guarantee issecured). The first possible route wouldbe to challenge guarantees entered intoduring the hardening period (i.e. theperiod preceding the opening ofbankruptcy proceedings (faillite) by amaximum of six months (and up to tendays in certain circumstances)) if suchguarantee was considered to be agratuitous act or an act at undervalue orif the beneficiary of the guarantee hadknowledge of the guarantor’s stoppageof payments.

Alternatively, the bankruptcy receiver(curateur) might want to challenge aguarantee on (i) the lack of corporatebenefit for the guarantor to grant theguarantee, and (ii) that the guaranteewas granted for the personal benefit ofone of the directors of the guarantor. Insuch case, the granting of the guaranteemay possibly be assimilated to an abuseof corporate assets and, if established,could ultimately lead a court to declarethe guarantee unenforceable.



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Whether or not an abuse of corporateassets, the corporate benefit problemarises and is a question of fact thatneeds to be assessed, by the directors of the guarantor, on a case-by-case basis when entering into the agreement.Luxembourg law does not specify whenthere will be sufficient corporate benefit topermit the granting of a guarantee withinone and the same group. In general, acompany may grant guarantees toanother company belonging to the samegroup if there is some commoneconomic, social or financial benefit withregard to a common group policy. Evenin these circumstances guarantees maynot be granted without economicadvantage nor if they upset the balanceof commitments between the companiesconcerned. In addition guarantees maynot exceed the financial means of theguarantor (often expressed as apercentage of net asset value/funds ofthe company.)

Very often, downstream guarantees areconsidered not to give rise to problems.For upstream and cross-streamguarantees, corporate benefit issuesmay arise. A possible manner to dealwith this could be to require the amountguaranteed to be limited but, dependingon the circumstances, other solutionsmight exist and, also, this solution alonemay not always be sufficient.

Hardening PeriodsSecurity interests may be challenged ifthey are granted during the hardeningperiod (i.e. the period preceding theactual opening of bankruptcyproceedings (faillite) by a maximum ofsix months (and up to ten days incertain circumstances)) preceding theopening of bankruptcy proceedings(faillite) of the grantor (except for securityinterests governed by the FinancialCollateral Law, as stated above). If thesecurity is successfully challenged it isunenforceable. Where security has beenenforced, such enforcement may beundone.

One ground of voidness is the creationof security for pre-existing debt duringthe hardening period (for instance, thecreation of a new mortgage or pledge)by the failed debtor.

Luxembourg law provides for theunwinding of all payments andtransactions for consideration where theparty to the transaction was aware thatthe debtor stopped payments, if theytook place during the hardening period.

Security may also be voided if there wasa fraud on the creditors of the companyregardless of the date.

PriorityThere are complex rules on priority inbankruptcy. It is generally consideredthat certain creditors having generalrights of preference (such as thepreference rights for judiciary fees(including the fees and costs ofreceiver/liquidator), unpaid salaries, andvarious tax, excise and social securitycontributions) may rank ahead ofcreditors having a security interest overcertain assets (in particular if theenforcement is not done by the creditorhimself but by a third party such as thebankruptcy receiver (curateur)).

In relation to pledges, there is a risk thatpreferential creditors may, depending onthe circumstances, rank ahead of apledgee, although this risk can beexcluded in specific circumstances. Thisrisk does not exist in relation to transfersof ownership for security purposes.

Lender LiabilityLenders can be held liable if they havecontinued to lend in circumstanceswhere the debtor is already in asuspension of payments or its financialposition has deteriorated to anirreversible state. The lender is thereforedeemed to be adding to the debtor’sliabilities and reducing the likelihood of it being rescued (in particular if thelender is considered to have created -or allowed to be created – a falseappearance of creditworthiness).Lenders can also be held liable if theyrevoke their commitment to lend funds to a debtor in an unexpected andabusive manner (for instance withoutgiving notice or not sufficient notice) andthereby reducing the likelihood of thedebtor to be able to pursue its businessby getting the necessary financial means.In addition, liability may arise where thelender is acting as shadow director.

Directors’ DutiesDirectors are liable towards thecompany for any wrongdoing ornegligence in the management of thecompany. They are furthermore liabletowards third parties as well as towardsthe company for any losses suffered asa result of a violation of the company’sarticles or company law.

Directors may be criminally liable for anyabuse of corporate interest they mayhave committed (Article 171-1 of thecompany law). Other criminal offencessuch as banqueroute and banqueroutefrauduleuse with respect to actionstaken in the context of or having lead tothe bankruptcy of a company also exist.In particular, directors are obliged to filefor bankruptcy within one month ofcessation of payments.

Bankruptcy proceedings (faillite) may beextended personally to directors having,in particular, made use of the company’sassets for their personal purposes orpursued, for personal reasons, theactivity of a company that inevitablyleads to its bankruptcy.

Recognition of ForeignInsolvency Proceedings Within the EUThe Regulation applies, see first part of this note.

Recognition of foreign insolvencyproceedings outside of the EUAs a general principle foreign insolvencyproceedings regularly opened in anotherstate not being a member state, arerecognised directly without any specificformalities except to the extent suchrecognition would require localenforcement measures, in which caseformal recognition needs to be soughtfrom the Luxembourg courts.

General - InsolvencyProceedingsThere are two types of court-controlledinsolvency proceedings under Belgianlaw, bankruptcy and judicialreorganisation (the Belgian moratoriumprocedure). An insolvent debtor mayalso with the agreement of its creditorsproceed to a voluntary liquidation.

BankruptcyBankruptcy proceedings facilitate theliquidation of the debtor’s assets andthe distribution of the proceeds amongstits creditors. A debtor must (and thecreditors and the public prosecutor may)file for bankruptcy when it hasconsistently stopped paying its debts asthey fall due and no longer has creditavailable to it. A company is declaredbankrupt by a judgment of the court.Upon the declaration of bankruptcy, thedirectors’ powers lapse and a court-appointed liquidator takes control overthe company.

Judicial reorganisationA judicial reorganisation offers creditorprotection and is aimed at savingdistressed economic activity. A debtormay apply for judicial reorganisation if itsbusiness is or will at short term becomethreatened by financial difficulties (adebtor’s business is presumed to beunder threat if its net assets have fallenbelow half of its stated share capital).

The debtor in principle retains itsmanagement powers but it may requestthe appointment of a mediator or court

officer to assist it with the reorganisation.Creditors and other interested partiesmay in case of gross misconductthreatening the continuity of the debtor’sbusiness seek injunctive relief (includingthe appointment of an administrator totake control of the debtor’s business).

Under a judicial reorganisation, thedebtor can make a voluntaryarrangement with one or more of itscreditors, submit a collectivereorganisation plan to a vote of itscreditors, apply for court consent for the sale of all or part of its business, ordo any combination of the foregoing.

Under a collective reorganisation, thedebtor must devise and, if approved bymore than half of the creditors in bothnumber and value, implement areorganisation plan. The plan mayinclude measures to reduce orreschedule liabilities and interestobligations, swap debt into equity, orreduce its headcount. An approvedreorganisation plan binds dissentingcreditors, including secured creditors,provided that the plan provides forpayment of interest on their claims andthat repayment of their claims is notsuspended for more than 24 or, if at theend of the initial suspension the debtorrequests an extension and demonstratesthat the suspended claims will be paid infull, 36 months.

If successfully implemented, the debtoris releases from all debts included in thereorganisation plan.

Voluntary liquidationA voluntary liquidation may be used asan alternative to court-controlledinsolvency proceedings, provided that itis supported by a sufficient consensusamong the creditors. A liquidator isappointed by the shareholders toliquidate the assets of the debtor tosatisfy the creditors’ claims. Thecommercial court must confirm theappointment. Before completion of theliquidation, the liquidator must submitthe proposal for distribution of theproceeds to the commercial court forapproval.

Counterparty’s Ability to Exercise Rights ofTermination under aContract with the DebtorBankruptcyThe existing agreements to which thedebtor is a party are not automaticallyterminated by virtue of the bankruptcy,but:

(a) The counterparty may terminate anagreement with the debtor during abankruptcy if the agreement gives itthe right to do so. An event ofdefault or right of terminationtriggered by an application for ordeclaration of bankruptcy is validand enforceable.

(b) The liquidator has the power toterminate any existing agreement.The counterparty may demand thatthe liquidator make his decision

European Insolvency ProceduresBelgium


36

Key Elements:

n Considers the two main types of insolvency procedure:

n Bankruptcy

n Judicial reorganisation

n Looks at the impact of insolvency on the rights of third parties

n Deals with the challenges that can be made to transactions made within the “suspect period”


n Intra-group transactions

n Recognition of foreign insolvency proceedings outside of the EU

Belgium



37

whether to terminate or continue acontract within fifteen days. If nodecision is taken within that time, theagreement is deemed terminated by the liquidator. If the liquidator decides tocontinue an existing agreement, newlyaccrued payment obligations of thedebtor under the agreement will beaccorded a “super-priority” and will bepaid first out of the proceeds of thebankrupt’s estate.

Judicial reorganisationThe application for, or grant of judicialreorganisation to a debtor does not byitself terminate existing agreements. Infact, the application for or grant ofjudicial reorganisation cannot be thereason for the termination.

A counterparty may also not terminatean existing agreement with a debtorsubject to reorganisation for prior defaultof the debtor, if the debtor cures thedefault within fifteen days of notice bythe counterparty.

The debtor may, by notice to itscounterparty within fourteen days of theopening of the reorganisation, decidenot to perform certain agreements in theinterest of the continuity of its business.Any termination indemnity resulting fromsuch non-performance is in turn subjectto the terms of the reorganisation.

Voluntary liquidationThe commencement of liquidationproceedings does not terminate theexisting agreements of a debtor.Contractual termination by the partiesremains possible, even if the terminationis motivated by the liquidation.

Proprietary Rights Security BankruptcyUpon bankruptcy, all enforcement actionagainst the debtor is suspended, exceptthat notwithstanding the bankruptcy:

(a) Secured creditors (mortgagees,pledgees and holders of floatingcharges) can enforce their securityafter completion of the bankruptcyclaims verification process (this is theprocess where the liquidator checksall submitted claims against thebooks and accounting records of the

debtor). This normally implies forthese creditors a stay of enforcementof about two months. In addition, theliquidator may ask the court tosuspend individual enforcement for a maximum period of one year fromthe bankruptcy judgment, duringwhich time the liquidator himself maysell the assets which are the subjectof the security, if this is in the interestof the bankrupt’s estate, and if thiscourse of action is not detrimental to the secured creditors.

(b) Owners can claim repossession of their goods in the debtor’spossession. This includes lessorswho are thus not subject to a stay of enforcement. Claims forrepossession must be filed prior tothe completion of the bankruptcyclaims verification process, failingwhich the ownership right may belost. Special requirements apply toretention of title clauses.

(c) Security over assets in otherjurisdictions remains enforceable in accordance with local rules.

(d) Contractual set-off arrangementsremain enforceable.

(e) Security over financial instrumentsand cash accounts remainsenforceable.

Rights of enforcement against third partyguarantors or security providers are notaffected by the suspension.

Judicial reorganisationUpon application for reorganisation, allpre-reorganisation liabilities are frozen(but the debtor may still voluntarily paythese liabilities). New liabilities must bepaid by the debtor on their due date andwill be payable ahead of all ordinary and,in special circumstances, securedcreditors, if the debtor subsequentlybecomes bankrupt.

During reorganisation proceedings,parties cannot apply for the bankruptcyor forced liquidation of the debtor.Enforcement action against the debtor,including the recovery by creditor-owners of their assets in the possessionof the debtor, is generally suspended.

By way of exception:

(a) Security over assets in otherjurisdictions remains enforceable in accordance with local rules.

(b) Contractual set-off arrangementsremain enforceable.

(c) Security over receivables, financialinstruments and cash accountsremains enforceable.

Rights of enforcement against third-party guarantors or security providersare not affected by the suspension.Security may be discharged by reasonof a court authorised sale of thedebtor’s business in the context of areorganisation, in which case thesecurity will attach to the proceeds ofthe sale of the relevant assets.

Voluntary liquidationA liquidation does not trigger anyautomatic stay of enforcement. Creditorswill need to refrain voluntarily from takingaction against the debtor in order not tofrustrate a successful liquidation.

Voidable TransactionsBankruptcyThe Belgian bankruptcy law containsvoidable preference rules that challengecertain actions made by or with abankrupt debtor during the pre-bankruptcy suspect period of up to sixmonths. The following actions andpayments are caught by the voidablepreference rules:

(a) Disposals of assets made withoutconsideration, or at a significantundervalue.

(b) Payments made in respect of liabilitiesthat were not yet due and payable.

(c) Payments in kind, unless thepayment in kind is an agreedenforcement method of a financialcollateral arrangement.

(d) All transactions with a counterpartywho had knowledge of theinsolvency of the debtor.

(e) New security granted for pre-existingdebts.

Judicial reorganisationBelgian law protects certain paymentsand transactions made in the context of a judicial reorganisation againstsubsequent insolvency challenge. Theinsolvency rules that disallow paymentsin respect of unmatured debts,payments in kind, and transactions withcounterparties who have knowledge ofthe insolvency of the debtor, aredisapplied.

DirectorsBelgian company law imposes certainduties on the formal directors of acompany by virtue of their office.Generally, officers who do not hold adirectorship must duly perform andexecute their employment contract withthe company but the company law doesnot impose any other specific legalduties on them. Belgian company lawdoes not impose positive duties onshadow directors, but specific liabilitiesattach to shadow directors who as amatter of fact hold managerial power ina company.

As agents of the company, the directorsowe their duties primarily to thecompany. Yet, the improper execution oftheir mandate in certain circumstancesexposes the directors to liability to thirdparties for losses suffered as a result. In principle, any person other than thecompany can be an interested thirdparty, save that a shareholder of thecompany will often not be able to bringan individual claim as a third partybecause his interests are, unless provenotherwise, deemed to be identified withthe interests of the company.

Under Belgian company law, directorshave a duty to act in the best interest of their company and to promote itscorporate object. In particular, directorshave:

(a) A duty of care as director

Directors are liable to their companyfor the improper execution of theirmandate. The requisite standard ofcare and skill is that of a reasonablyprudent and diligent businessperson.The courts have only limited reviewpowers and may not second-guess

business decisions. Only obviouslyunacceptable behaviour can triggerthe directors’ personal liability. Anaction for liability on the basis of abreach of the duty of care can onlybe brought by the company, or thecompany’s liquidator uponinsolvency.

(b) A duty to abide by the company’sstatutes and the company law

Directors are liable to the companyand to third parties on a joint andseveral basis for breaches of thecompany’s statutes or the companylaw. Examples include a violation ofthe publication rules relating tocertain corporate information, abreach of the conflicts of interestrules, a failure to comply with theprocedures applicable to importantlosses of shareholder equity, etc. An action for liability on the basis ofa breach of the statutes or thecompany law can be brought eitherby the company or by third partieswho have incurred a loss as a resultof the breach.

(c) A general duty of care

Like any other person, directors maybe liable in tort for wrongful actswhich cause damage to someone.An action for liability in tort can bebrought by any person who hassuffered a loss as a result of thetortious act, but can only in limitedcircumstances be instituted by aperson who also has a contractualrelationship with the tortfeasingdirector (such as, for instance, thecompany).

(d) Specific liability upon bankruptcy

A specific form of liability applies inthe case of bankruptcy of acompany with insufficient assetsavailable to meet the liabilities. Thedirectors, former directors or shadowdirectors of the bankrupt companymay, if they were grossly negligent ina way that contributed to thebankruptcy, be held personally liablefor all or part of the liabilities of thecompany up to the insufficiency ofthe assets.

(e) Liability for failure to prepare andsubmit proper financial statementsupon bankruptcy

The Belgian bankruptcy law providesthat the liquidator of a bankruptcompany must upon hisappointment proceed with theauditing and correction of thefinancial statements of the company.If no financial statements areavailable, or if substantial correctionsare required, the directors may beheld personally liable for the costs ofpreparing or correcting the financialstatements.

General IssuesIntra-group transactionsThe same duties as set out above mustbe observed in connection with intra-group transactions. In addition, thedirectors should ensure that the intra-group transactions are on arm’s-lengthterms and that intra-group services areremunerated at a normal market price. It should be noted that mandatoryconflicts of interest procedures apply tosituations where a director has a director indirect personal financial interest in aproposed transaction with his company(this could for instance be the case ofdirectors holding an equity participationin the counterparty of the intra-grouptransaction).

Ongoing compliance obligationsDirectors must comply with a number of ongoing obligations, such as to holdregular board meetings, to draw up andpublish annual accounts and to file taxreturns, etc. These obligations give riseto various criminal penalties andpossible civil liability. In difficult times orin the period leading up to insolvency,these obligations often tend to beneglected. Irregularities in respect ofthese obligations may alert thebankruptcy monitoring service of thecommercial court which conductspreventative investigations into financiallytroubled companies.

Obligation to propose liquidation to shareholders meetingBelgian company law requires the boardof directors of a company, when as aresult of losses suffered, net equity falls



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below half of the company’s sharecapital, and again when it falls below a quarter of the share capital, to call ameeting of shareholders which mustdecide whether to continue theoperations of the company or to ceasethe operations and liquidate thecompany. Failure to do so in principletriggers the liability of the directors inrespect of all liabilities that continue toarise or accrue after the date when theshareholders meeting should have beenheld. Furthermore, in case the netassets of the company have fallen belowthe applicable minimum statutory capitalrequirement, any third party will be ableto petition the court for the liquidation ofthe company. This means in practicethat the directors should on a regularbasis assess the net equity position oftheir company.

Recognition of ForeignInsolvency Proceedings Within the EUThe Regulation applies, see the first partof this note.

Recognition of foreign insolvencyproceedings outside of the EUA judgment obtained in foreigninsolvency proceedings that falls outsidethe scope of the Regulation would berecognised and enforced by the courtsof Belgium without review on the meritsand subject to certain conditions, whichmainly require that the recognition orenforcement of the foreign judgmentshould not be a manifest violation ofpublic policy, that the foreign courtsmust have respected the rights of thedefendant, that the foreign judgmentshould be final, and that the assumptionof jurisdiction by the foreign court hasnot breached certain principles ofBelgian law.

Insolvency RegimesThe German Insolvency Code(Insolvenzordnung), which applies to alltypes of company, contains rules on theliquidation as well as the reorganisation of a debtor’s business. In general, theInsolvency Code provides for uniforminsolvency proceedings, which meansthat the commencement of proceedingsdoes not depend upon the type ofproceedings the petitioner intends toinitiate. Whether the debtor is to beliquidated or reorganised will bedetermined by the creditors severalweeks after the petition has been lodged.

The Insolvency Code is based on theconcept of creditor independence. In the course of the proceedings all majordecisions are taken or must at least beapproved by the creditors. In someinstances, however, the insolvency courtmay repeal resolutions passed by thecreditors.

The insolvent company’s business can be reorganised by transferring thevaluable assets to a NewCo which can then be sold with the proceedsdistributed to the creditors. TheInsolvency Code also providescomprehensive rules regarding an“insolvency plan” (Insolvenzplan) throughwhich the company as such can bereorganised if this seems feasible.

The Insolvency Code also allows for themanagement of the distressed companyto continue to manage the company(Eigenverwaltung) under certainconditions. A specific creditors’ trustee isappointed to monitor them in the interestof the creditors. This is comparable todebtor-in-possession proceedings.

German insolvency law does notrecognise insolvency proceedingscovering groups of companies. Ingeneral, insolvency proceedings arecommenced for each companyseparately.

Test for InsolvencyThe Insolvency Code lists three triggerpoints for the commencement ofinsolvency proceedings: illiquidity,impending illiquidity and over-indebtedness.

Illiquidity is defined as the debtor’sinability to honour its paymentobligations (now) due. This is generallyindicated by the fact that the debtor hasceased to make payments. The debtor’silliquidity cannot be presumed if there isonly a temporary delay in payments, forexample, when the debtor’s gap inliquidity can be closed by expectedpayments, new loans or the liquidationof assets within a short period of time(usually no more than two weeks). A petition for the commencement ofinsolvency proceedings on grounds of illiquidity may be made to thecompetent local court (Amtsgericht)either by the insolvent debtor or by acreditor.

Impending illiquidity means that thedebtor will not be able to honourexisting payment obligations when theybecome due. Since this is based on aprognosis, the court may require thedebtor to submit a “liquidity plan”. Apetition on the grounds of impendingilliquidity may only be filed by theinsolvent debtor.

Insolvency proceedings based on over-indebtedness may only be commencedagainst legal entities. The debtor is over-

indebtedness when its assets no longercover its liabilities. This is determined byway of a pre-insolvency balance sheet(Überschuldungsstatus), which mustvalue assets at their present liquidationvalues. Shareholder claims deriving froma loan provided to the debtor or of legalacts corresponding economically to aloan must be taken into account as aliability of the debtor unless theshareholder-creditor has formallysubordinated his claim.

Even if it turns out that on the basis ofthe pre-insolvency balance sheet theassets do no longer cover the liabilities,the company is not over-indebted ifunder the given circumstances acontinuation forecast demonstrates thatthe company’s financial strength issufficient to ensure its economic survivalat least for the current and the followingbusiness year. However, from 1 January2014 on, over-indebtedness will nolonger be excluded per se by a likelycontinuation of the company.

A petition for the commencement ofinsolvency proceedings on grounds of over-indebtedness may be madeeither by the insolvent company or by a creditor.

The court will only make an orderinitiating insolvency proceedings wheresufficient assets are available in the estateto cover the costs of the proceedings.These costs include court fees and theestimated fees and expenses of thepreliminary administrator, theadministrator and the members of thecreditors’ committee. If the debtor’sassets are not sufficient to cover theseestimated costs, the court will dismiss the petition unless an adequate advancepayment in cash is made.

European Insolvency ProceduresGermany


40

Key Elements:

n One type of proceedings, providing for liquidation, reorganisation or sale of the business

n Proceedings divided in preliminary and main phase

n Test for insolvency with regard to illiquidity and over-indebtedness

n Directors’ duty to file for insolvency within three weeks

n Equity replacement and capital maintenance rules

Germany



41

Insolvency proceedingsThere are two distinct periods in thecourse of insolvency proceedings.

The first begins with the filing of thepetition and usually lasts up to threemonths (so-called “PreliminaryProceedings”). The purpose ofPreliminary Proceedings is to allow the court to gather all the informationnecessary to determine if theprerequisites for commencing insolvencyproceedings are met. In general, thefiling of a petition, and thus, thebeginning of Preliminary Proceedings,does not affect the legal relationshipbetween the creditors and the debtorby, i.e. triggering a moratorium. Theinsolvency court may - and will inpractice - however, take any measuresthat appear necessary to protect thedebtor’s estate against any adversechange in the debtor’s position until adecision with respect to the petition hasbeen taken. Those measures usuallyinclude the appointment of a preliminaryadministrator (vorläufigerInsolvenzverwalter) and an orderstipulating that transfers shall only beeffective with the consent of thepreliminary administrator and/or an orderpreventing creditors from executing theirclaims individually into the debtor’sassets (unless immovables areconcerned). The preliminaryadministrator is not allowed to begin the liquidation of the debtor’s businesswithout the court’s prior consent.

Preliminary Proceedings end when acourt order initiating the commencementof the actual insolvency proceedings ismade. An administrator(Insolvenzverwalter) will generally beappointed. The order also leads to ageneral stay of execution with regard tothe claims of all creditors. Creditors maynow only pursue their claims accordingto the provisions governing insolvencyproceedings. In addition, any securityinterest which has been created byexecution within one month prior to the filing of the petition will be void.

The administrator is in charge ofmanaging the debtor’s business andmaking all necessary dispositions withrespect to the estate. However, beforeentering into transactions whichsubstantially affect the estate, he mustobtain the consent of the creditors. The final decision whether to liquidate or reorganise the debtor’s business alsoremains with the creditors. If thecompany is wound up, the administratoris then responsible for distributing theproceeds to the creditors.

The Insolvency Code also contains aseparate section dealing with self-management, or debtor-in-possessionproceedings. If the debtor has appliedfor self-management and it isconsidered that this will not result in anydisadvantage to the creditors, the courtmay order that virtually all responsibilitieswith respect to the estate remain with

the debtor. In this event, the powers ofthe appointed trustee are generallylimited to the supervision of the debtor’seconomic circumstances, the debtor’smanagement and personalexpenditures.

Creditors’ meetings are summoned bythe insolvency court. The court sets adate for a first creditor’s meeting, theinformation hearing (Berichtstermin),usually between six weeks and threemonths after the court order openinginsolvency proceedings. At theinformation hearing, the administratorreports on the debtor’s businesssituation and the causes of insolvency.He also reports on the possibility ofreorganising the debtor’s business bymeans of an insolvency plan. Thecreditors decide whether the debtor’sbusiness is to be terminated orprovisionally continued. The creditorsmay also instruct the administrator toprepare an insolvency plan. Thecreditors may later reverse or amendtheir initial decisions. To adopt aresolution more than 50% by value ofthose creditors voting must be in favour.The court will also set a date for theexamination hearing (Prüfungstermin), atwhich registered claims are examined todetermine their value and rank. Thismeeting takes place between one weekand two months after the date on whichthe period for registering of claimsexpires. The court may decide that theexamination hearing, and the informationhearing will take place together.

Insolvency planUnder the Insolvency Code there is nowa provision for the implementation of aninsolvency plan (Insolvenzplan). Theobjective of such a plan is a solution byconsent, normally involving therestructuring of the existing company,although such a plan may also be usedto liquidate a company.

An insolvency plan can be formulatedand submitted to the insolvency courtby the administrator or the insolventperson. It can be adopted at any stagein the insolvency proceedings. There are few rules regarding the content ofthe plan (it is effectively a “contract”between the parties) although theInsolvency Code does regulate the

formal make-up of such a plan. TheInsolvency Code requires the creditorsto be divided into groups for the sake of the plan. Such creditor groups orclasses can be treated differently by theplan if good grounds exist. Within eachgroup they must be treated equally.

The adoption of the insolvency plan issubject to the agreement of all creditorgroups. The majority of creditors in eachgroup must consent and these creditorsmust hold more than half of the value ofclaims within the group. In the event that a creditor group does not consent,the plan may still be adopted if theinsolvency court establishes that thedissenting creditors would not be worseoff with the plan than without the planand the dissenting creditors have areasonable share of the economicbenefits of the plan. Once agreed, theinsolvency plan must be confirmed bythe insolvency court to be effective.

The execution and termination of theinsolvency plan takes place according toits own provisions and is not part of thestatutory insolvency proceedings. Afterthe insolvency proceedings areterminated, the debtor recovers thepower to dispose of its assets.

Priority of Payment andPreferential CreditorsUnder German insolvency law, there arefive different types of creditors. Theymay be distinguished by their degree ofparticipation in the insolvencyproceedings, the extent to which theirclaims are secured and the rank of theirclaims within the order of priority.

(a) Creditors with rights to thesegregation of an asset(Aussonderungsrecht), such as inthe case of goods subject toretention of title or (depending on thespecific trust agreement) held by thedebtor as trustee, can separate theseassets from the estate. However, theadministrator has powers to preventa creditor from exercising its right tosegregation of goods subject toretention of title by agreementassuming the executory contract.

(b) Creditors of the estate(Massegläubiger) do not participatein the actual insolvency proceedings,i.e. their claims will neither beregistered nor examined within theproceedings. Claims of creditors ofthe estate include administrator’scosts and liabilities and court costs,liabilities incurred by activities of theadministrator, liabilities resulting fromexecutory contracts that have beenassumed and liabilities arising fromthe unjust enrichment of the estate.

(c) Creditors with a right to separatesatisfaction (Recht zurabgesonderten Befriedigung) arecreditors who participate in theinsolvency proceedings, but at thesame time are secured by collateralthat constitutes part of the estate.The right of separation allows suchsecured creditors to claim theproceeds (in case of the realisationof security over moveable assets inthe possession of the insolvencyadministrator or claims by aninsolvency administrator less certainfees of usually some 9% on theproceeds payable to the estate)generated on the realisation of thecollateral up to the amount of theirsecured claim. Any surplus belongsto the estate.

(d) Insolvency creditors(Insolvenzgläubiger) are unsecuredcreditors who have an establishedclaim against the debtor at the timeof the opening of the insolvencyproceedings. The assets of theestate which remain after the claimsof the creditors of the estate havebeen completely satisfied aredistributed pro rata among allinsolvency creditors. One of themajor reforms of the Insolvency Codewas to include employees and taxauthorities in this group, who hadpreviously enjoyed preferential status.

(e) The claims of subordinatedinsolvency creditors (nachrangigeInsolvenzgläubiger) have the lowestpriority among all claims in theproceedings. They are only satisfiedafter the claims of all insolvencycreditors have been completely

satisfied. Claims of subordinatedinsolvency creditors include claims forreimbursement of a shareholder’s loanor similar claims, and claims for whichsubordination in insolvency proceedingshas been agreed upon between creditorand debtor.

Directors’ LiabilitiesAs soon as the directors of a companyhave reason to believe that the companyis in financial difficulties they are legallyrequired to establish the extent of suchdifficulties and to continue to keep thecompany’s financial situation underreview. In particular, they are obliged toascertain whether the company hasalready lost half of its share capital orwhether grounds exist for openinginsolvency proceedings.

If the company’s equity has beenreduced to half or less of its sharecapital, the directors are required toinform all the company’s shareholdersimmediately. Failure to do this may leadto personal civil liability for the directorsand constitutes a criminal offencepunishable by imprisonment of up tothree years.

If a company is illiquid or over-indebtedthe directors have a duty to file a petitionfor insolvency without undue delay andwithin a maximum of three weeks. Ifattempts to rescue the company duringthe three week period fail, the directorshave to file immediately. Failure to do socan result in criminal sanctions. Inaddition, they may be personally liable to the company and its creditors for anylosses incurred due to the delay in filing.Note that each director is individuallyresponsible for filing the petition.

In the case of impending illiquidity, thedirectors are entitled, but not obliged, tofile a petition for the initiation ofinsolvency proceedings. However, itshould be noted that directors who applyfor insolvency proceedings prematurely(before they have explored all otherpossibilities) risk being personally liable tothe company and its shareholders. Anapplication for insolvency proceedingsbased only on impending illiquidityshould not therefore be filed unless theshareholders, by means of a formal



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shareholders’ resolution, have consentedto the application or issued instructionsto that effect.

Directors who enter into newagreements on behalf of the companywhich the company is unlikely to be ableto fulfil, without informing the other partyof the company’s financial situation, riskbeing held personally liable for anydamages arising. Entering into any suchagreement may also constitute acriminal offence.

In principle, the directors are required to reimburse the company for anypayments which they make to thirdparties out of the company’s assetsafter the company has become over-indebted or illiquid, unless suchpayments would have been made by aprudent businessman in similarcircumstances.

Directors may be liable for paymentsmade to shareholders while thecompany is in financial crisis or if they make dividend payments incontravention of capital maintenancerules under company law. Supply,service or similar agreements will also be carefully scrutinised to ensure theywere made on an “arm’s length” basis.

GuaranteesDownstream guarantees are available in most circumstances. Upstream andcross-stream guarantees are subject to capital maintenance rules undercompany law. To avoid liability risks forits directors, a limited company (GmbH)will normally require documentation tobe drafted so as to limit its obligations toany amount over and above its statutorycapital.

If a public company (AG) grants anupstream or cross-stream guarantee,this may be regarded as a return oncapital in breach of maintenance ofcapital rules even though its statutorycapital remains untouched. An AG canusually only enter into a guarantee on thesame terms as a third party would enterinto such a guarantee (e.g. by being paida market rate fee). A guarantee by an AGto secure acquisition of its own shareswould be generally void under financialassistance provisions.

There is no need for a company to showcorporate benefit when entering into aguarantee.

Lenders’ LiabilityLending to a distressed borrowerGerman case law and legal literature do not consider the granting of a loan to a company in a crisis to be contraryto public policy, if it can be seen as arestructuring loan granted after a carefuland competent assessment of theviability of a restructuring plan. Onlyunder specific circumstances canlenders be held liable for third partydamages incurred as a result of a delay in filing for insolvency(Insolvenzverschleppung), based on the overriding legal principle of violationof moral principles (Sittenwidrigkeit). In order to be held liable the lendersmust have acted in a way which isincompatible with good faith.

Such incompatibility with good faith maybe assumed if new credit is grantedwhich, in the end, does not help toovercome the crisis but only delays thedebtor’s insolvency. In such a case,there is also a risk of criminal liabilitythrough aiding and abetting thedirectors’ delay in filing for insolvency.

If lenders are liable for third partydamages under the above principles,creditors who had existing claimsagainst the company before the grantingof a new loan can be entitled tocompensation equal to the amount bywhich the dividend they receive in thecompany’s insolvency is reduced as aresult of the delay. Creditors whoseclaims arose after the credit was grantedcan be entitled to full compensation.

To avoid the risks described above, thelender will have to examine carefully thechances of a reorganisation of theborrower. A plausible business plan(Sanierungsplan) together with a work-out opinion will be necessary, whichmust demonstrate that the company willbe able to survive in the medium term ifcertain measures are met. Furthermore,a binding commitment by the partiesinvolved in these measures will berequired.

This business plan is usually drawn upby independent accountants. To avoid a risk of becoming liable for exertingharmful influence (e.g. shadowdirectorship), it should normally beensured that the borrower itself appoints the accountant.

As it requires some time to prepare arestructuring plan and obtain an expertopinion on the feasibility of such plan, abridging loan (Überbrückungskredit) to acompany in crisis will not generally beconsidered contrary to public policy.Such a loan will not result in the lenderbeing held liable if it is made in order toprevent illiquidity during the periodrequired for the preparation andexamination of the restructuring plan.However, the purpose of such a loanmust only be to provide bridging financeduring the time required to assess thefeasibility of a restructuring of thecompany. A loan granted only topostpone insolvency and to enable thelender to improve its own position incomparison with other creditors wouldbe considered contrary to public policyand could result in liability for the lender.

Control of borrowerIn general a lender will not be liable vis-à-vis the borrower and/or its othercreditors, provided that the borrowerretains control of its operations.However liability may arise for the lender if:

(a) the lender deprives the borrower’smanagement of its power to act forthe company; or

(b) a person close to the lender (or thelender itself) assumes managementpowers; or

(c) a person close to the lender (or thelender itself) exerts substantialinfluence on the borrower.

In order for liability to arise, the lender’sinfluence must be substantial and,ultimately, comparable to the influence of a shareholder.

Equity-Replacement andCapital Maintenance RulesShareholder loansA shareholder loan (or a legal actcorresponding commercially to a loan)will be generally subordinated to claimsof other creditors by operation of law inthe case of opening of insolvencyproceedings over the company’s assets.This rule does not apply, however, if (i)an existing creditor acquires shares withthe intention to restructure the company(restructuring privilege) or (ii) ashareholder who is not involved in themanagement of the company only holdsa participation of up to 10% of theshares (de minimis privilege).

Any repayment of a shareholder loan (ora legal act corresponding commerciallyto a loan) within a period of one yearprior to the filing of the petition to openinsolvency proceedings is subject toinsolvency avoidance rules. The same is true for collateral provided for ashareholder loan within a period of up to ten years prior to the filing of thepetition to open insolvency proceedings.

Capital maintenance rulesThe nominal share capital for aGesellschaft mit beschränkter Haftung,abbreviated GmbH, the most commoncorporate vehicle in Germany, is set outin its articles of association andregistered in the Commercial Register ofthe company. The share capital must bemaintained as a fund for creditors. Assuch, any payment by the company tothe shareholder may only be made tothe extent that such payment does notimpair the company’s nominal sharecapital. However, there are certainexceptions to this rule: Apart frompayments made under a domination orprofit and loss transfer agreement, theseexceptions also concern payments toshareholders that are covered by arepayment claim in full, which providesfor a sound legal basis for cash poolingschemes in the future.

Accordingly, a disbursement of fundsfrom a company to a shareholder willnot constitute a prohibited disbursementof assets as long as it is made as part ofan ‘asset exchange’ i.e. if the companyhas a fully valid and enforceable claim

for consideration or reimbursement in anamount equivalent to the sum disbursedto the shareholder. Whether such aclaim is enforceable must be assessedin the light of the definition of the term‘fully valid’. Unforeseen developmentsthat have adverse effects on a claimagainst a shareholder or the value ofsuch a claim do not have the effect ofrendering an initially permissibledisbursement illegal. Nonetheless, amanaging director may be heldpersonally liable for not having madeadequate use of existing possibilities to recover such funds in due time.

Moreover, any repayments ofshareholder loans may be subject toinsolvency avoidance rules within certainhardening periods. Payments to theshareholder made in violation of theabove rule have to be reimbursed to thecompany. Similar rules apply to otherincorporated German entities. Paymentsin the above sense are not only cashpayments but also any transactionindirectly causing a contribution to theshareholder that would impair thecompany’s nominal capital.

Furthermore, a shareholder of a GmbHor a public limited company must notabusively deprive the company of theliquidity necessary to continue itsbusiness. Otherwise the shareholder(besides the acting managing director) is liable for all damage arising out of the insolvency.

Antecedent TransactionsTransactions entered into prior to thefiling of insolvency proceedings may besubject to insolvency avoidance ruleswithin certain hardening periods. Withinthese hardening periods, a transactionmay be declared void and unenforceableif it could be considered detrimental toother insolvency creditors. Any of thedebtor’s assets of which the estate hasbeen deprived by means of a voidabletransaction are to be returned to theestate.

For example, the following situations canlead to avoidance, described below withregard to the assignment of security:

(a) Any security given whilst the entity is in a position of illiquidity can be

avoided if the beneficiary knew at the time of the taking of the securitythat the security provider was illiquidor if he had knowledge ofcircumstances that could lead to thisconclusion. In these circumstances, thehardening period is three monthsprior to the filing of a petition for the commencement of insolvencyproceedings.

(b) Security given which the securityprovider was not legally (e.g.contractually) obliged to assign. The hardening period is a minimumof one month, but an extendedhardening period of up to threemonths prior to the filing of a petitionfor the commencement of insolvencyproceedings applies if the security isgiven either at a time when theperson providing the security is in acondition of illiquidity or if thebeneficiary knew that the granting ofthe security would be detrimental toother creditors.

(c) Gratuitously given security: Thirdparty security may be classified ashaving been gratuitously given onthe grounds that the chargor itselfreceives no consideration or derivesno benefit from the securityassignment. The hardening period is four years.

(d) Intentional harming of othercreditors: The security can beavoided if the granting of security by



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the insolvent company was directlydetrimental to creditors and wasperceived to “intentionally harmcreditors” and if the beneficiary hadknowledge of such. The hardeningperiod is ten years.

(e) Taking of security by a person (orentity) with a close relationship to the debtor: Such security could beavoided if the granting of security bythe insolvent company was directlydisadvantageous to creditors, unlessthe beneficiary is able to show thathe was unaware of the debtor’sintention to act in a way that wasdetrimental to other creditors. Thehardening period is two years.

(f) Repayment of shareholder loan: Any repayment of a shareholder loan(or a legal act correspondingcommercially to a loan) within aperiod of one year prior to the filingof the petition to open insolvencyproceedings is subject to insolvencyavoidance rules. The same is true forcollateral provided for a shareholderloan within a period of up to tenyears prior to the filing of the petitionto open insolvency proceedings.

Set-offThe general rule is that set-off whichwas available to a creditor prior to theinitiation of insolvency proceedingsremains available afterwards.

In the case where the creditor holds adebt which came into existence beforethe initiation of insolvency proceedings,but which could not be set-off prior tothe initiation of insolvency proceedings,set-off may become possible duringinsolvency proceedings if certainconditions are met.

However, certain exceptions exist to the general rule. For example, a creditormay not use a claim for set-off that has

been transferred to him from a thirdparty after the initiation of insolvencyproceedings, even if set-off waspreviously available to that third party.Set-off may also generally not beeffected against a claim which has onlyarisen against the creditor after theinitiation of insolvency proceedings.

Further exceptions apply which shouldbe analysed on a case-by-case basis.

Recognition of ForeignInsolvency ProceedingsEuropean UnionUnder the Regulation, the openingjudgment of one member state of theEuropean Union is automaticallyrecognised in Germany and comes into force without the need for priorrecognition judgment of a German court.In general, the law applicable to theseinsolvency proceedings is that of themember state in which insolvencyproceedings were opened.

After the opening of insolvencyproceedings in another member state,German courts will only have thejurisdiction to open territorial insolvencyproceedings in Germany if the debtorpossesses an establishment withinGermany, which will have to beliquidation proceedings restricted to the assets situated in Germany. (See the first part of this note for more details on the Regulation.)

Other statesOn 20 March 2003, a new Germaninternational insolvency law entered intoforce which applies to states outside ofthe scope of the Regulation. It is anautonomous legal domain,fundamentally based on the Regulation’s basis and system.

The opening of a foreign insolvencyproceeding in another state not being a member state of the European Union

is, as a general principle, recogniseddirectly in Germany without any specificformality. This is however not the case,

n when the court which opened theproceedings does not havejurisdiction according to German law,or

n recognition would lead to a resultwhich would be manifestly contraryto essential principles of Germanlaw, in particular its fundamentalrights (Grundrechte).

Although the opening order of a foreigncourt will generally be automaticallyrecognised in Germany, foreign courtorders or security measures rendered inthe recognised insolvency proceedingsof another state may only be executedafter being approved by a German courtto be enforceable in accordance withthe provisions of the German CivilProcedural Code (Zivilprozessordnung).

Creditors may file a petition for thecommencement of separate domesticinsolvency proceedings in Germany, ifthe debtor possesses an establishmentin Germany or owns assets that arelocated in Germany. However, if thedebtor has no establishment inGermany, the application for domesticinsolvency proceedings can only bebased on a special interest of thecreditor to open such separate domesticproceedings, especially if the foreigninsolvency proceeding would be clearlydisadvantageous to the creditorcompared to German insolvencyproceedings.

The Insolvency LawThe Insolvency Law (22/2003) waspublished in Spain on 10 July 2003.

The Insolvency Law encompasses allregulations applicable to Courtinsolvency proceedings, namely“concurso de acreedores,” as opposedto out-of-Court liquidation, which is onlyavailable when the debtor has sufficientassets to meet all its liabilities. The RoyalDecree Law 3/2009, 27 March 2009,has amended the Insolvency Law withrespect to, among other issues,refinancing agreements, equitablesubordination and classification ofguaranteed debts.

General Notes onInsolvency ProceedingsBefore analysing the procedural aspectsand the effects of insolvencyproceedings, the following generalconsiderations should be made.

SubjectThe same insolvency proceedings areapplicable to all persons or entities(excluding Public Administrations, whichmay not become insolvent). Theseproceedings may lead either to therestructuring of the business or to theliquidation of the assets of the debtor.

The Insolvency Law is based uponthe consideration that a company’sinsolvency does not always imply theinsolvency of other companies of the group. However, certain rules try to coordinate the various proceedingsbeing carried out in relation tocompanies pertaining to the samegroup.

Triggering point of insolvency proceedingsA debtor (if a company, its directors) islegally obliged to file for insolvency whenit becomes insolvent, i.e., when it fails tomeet its current outstanding obligations

on a regular basis. This obligation must be fulfilled within two months asfrom when the debtor has or shouldhave become aware of the insolvencysituation. Failure to comply with thisobligation triggers the assumption thatthe insolvency has been negligent (seebelow).

A debtor is entitled to apply forinsolvency when it expects that it willshortly be insolvent. In this sense,insolvency proceedings are available asa type of legal protection that the debtormay request in order to avoid theattachment of its assets by its creditors.

The reform of the Insolvency Law hasallowed the debtor to ask for anadditional three month period to file, in order to allow the discussion of anadvanced proposal for arrangement. In our view, this rule may not extend torefinancings, but may be limited to thediscussions for an advanced proposalfor an arrangement with creditors in thecontext of a company which is actuallyinsolvent (On strict reading of the law itassumes that the insolvency filing shallbe made once the three months periodelapses, whether or not the arrangementis reached).

Costs arising from insolvency proceedingsThe debtor must pay all costs arisingfrom insolvency proceedings. The maincosts are Attorneys’ fees (usually to be paid at the beginning of theproceedings), Court Agent’s fees (a“Procurador,” is a mandatory go-between whose duty is to connect theCourt with the parties, filing writs andreceiving service of Court decisions) and the fees of the insolvency receivers(according to the assets and liabilities).

European Insolvency ProceduresSpain


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Key Elements:

n One single procedure to facilitate restructuring or liquidation

n Security enforcement may be suspended for up to 1 year

n Directors’ duty to file for insolvency within 2 months

n Set off not available after insolvency proceedings commenced

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Procedural AspectsInsolvency proceedings are formallyinitiated when the Court declaresinsolvency, following an application filedeither by the debtor or by its creditors.

ApplicationThe application for insolvencyproceedings may be filed either by thedebtor (if a company, the managingbody -not the shareholders-) or by itscreditors. In the first case, they arenamed “voluntary insolvencyproceedings”; in the second case,“necessary insolvency proceedings”.

When the debtor files the application, it must include several documents(among others, a power of attorney, an explanation of the situation of thecompany, a list of assets and a list ofliabilities, and the accounting books and records).

When a creditor files the application, itmust provide evidence of its debt as wellas of the insolvency situation. The lattermay be proven as follows:

n When certain circumstancesgenerally deemed as evidence ofinsolvency concur (such as failure tomeet obligations with employees ortax liabilities during at least threemonths). In these cases, the debtormay challenge the petition eitherbecause the alleged facts do notconcur or, even if they do, becausethe debtor is not insolvent.

n When enforcement proceedingshave been carried out against thedebtor in which assets have notbeen found to cover the amountclaimed. In this case, the debtorwould have no grounds to challengethe petition.

If the application is dismissed, thecreditor would have to pay thecorresponding legal costs and fees (and eventually damages caused).

Court decision declaring insolvencyWhen the debtor files the application,the Judge shall immediately issue adecision by virtue of which theinsolvency proceedings will be initiated(“auto de declaración de concurso”).

If it feels that the application does notcomply with the legal requirementsbecause the debtor has failed to includethe relevant documents, it will grant aterm in which the debtor must remedysuch deficiency.

When a creditor files the application, the Judge shall hear the debtor beforedeclaring insolvency by means of thereferred Court decision; in themeantime, the Judge may adopt interimmeasures to ensure that the debtor’sassets remain unaltered.

In any event, the following is determinedin the initial Court decision:

n The identity of the receiversappointed by the Court (a lawyer, aneconomist and another economist,appointed by one of the mainordinary creditors -to be elected bythe Judge-). For small insolvencies,the Court may (at its discretion)appoint only one receiver.

Strictly speaking, receivers do notrepresent the creditors but act ascourt auxiliaries, on behalf of thedebtor and are subject to strictliabilities, similar to those affectingdirectors of a company.

n The scope of the restrictions imposedon the debtor. The general rule is that,in the case of voluntary insolvencyproceedings, the court receiverssupervise the company activities,authorising (or failing to authorise) anypayment or transaction. In the case ofcompulsory insolvency proceedings,the debtor would cease to manage itsestate and the court receivers wouldtake control of the company, being incharge of all further decisions.

First stage (determination of assets and liabilities)The objective of the first stage of theinsolvency proceedings is to determinethe assets and liabilities of the debtor,leading to the preparation by the courtreceivers of the inventory and the list ofcreditors, respectively.

The insolvency order contains anexpress request for the creditors tonotify their claims, within a one-monthterm following the publication of the

insolvency declaration in the OfficialGazette, providing originaldocumentation to justify such claims.

Based on the documentation providedby the creditors and that held by thedebtor, the court receivers shall draw up a list of acknowledged creditors andclassify them according to the followingcategories:

n Secured Claims benefiting fromspecial priority, representingattachments on certain assets(basically in rem security). Thesespecial priority claims entail separateproceedings, though subject tocertain restrictions derived from awaiting period that may last up toone year (see below).

These creditors are not subject tothe arrangement (see further below),except if they give their expresssupport by voting in favour of thearrangement. In the event ofliquidation, they shall be the first tocollect payment against the attachedassets.

n Claims benefiting from generalpriority, including the claims of publicauthorities (in general, for half theiramount), certain employee claimsand the claims held by the creditorinitiating the insolvency proceedings,up to a quarter of the amount ofsuch credit.

The holders of general privileges are not affected by the arrangement(if they do not consent) and, in theevent of liquidation, they shall be thefirst to collect payment, in the orderestablished under law.

n Ordinary claims, mainly tradecreditors and lenders (when notsecured or subordinated).

n Subordinated claims, thus classifiedby virtue of an agreement orpursuant to law, including debt heldby related entities: shareholdersowning at least 10% of the sharecapital (5% if a listed company) orgroup companies.

Subordinated creditors are second-level creditors; they may not vote on

an arrangement and have verylimited chances of recovery. Throughthese restrictions, the law tries toencourage the conversion of theirdebt into shares or companyparticipations (consent of existingshareholders would be necessary for this purpose).

When subordination arises from aspecial relationship, the creditor willalso lose any security over assetsbelonging to the debtor.

There are other claims not subject to the insolvency proceedings and that are therefore neither acknowledged nor classified. These include any claims accrued after the insolvencyproceedings (e.g. those entered intoorder to continue the business) as wellas other claims prescribed by law, evenif accrued earlier (i.e. salaries accruingduring the last 30 days before theproceedings are initiated). These claimsare immediately payable, although theInsolvency Law imposes somerestrictions on their enforceability.

Second stage: arrangement or liquidationThe second stage may lead either to anarrangement between the debtor and itscreditors, or to the liquidation of thedebtor’s assets.

As an exception, in certain cases thedebtor may propose in the course of the first stage of the proceedings anadvanced arrangement, or may requestthat the liquidation is anticipated.

n An arrangement (convenio) may beentered into between the debtor andthe majority of the creditors, involvinga delay in payment or a partialcancellation of debts (as a generalrule, with the limit of five years or onehalf of the debts, respectively). Thearrangement is approved with thesupport of half of the ordinarycreditors. However, in certain casessimple majority would be enough.

The proposal for arrangement maybe filed during the first stage of theproceedings (as an “advancedproposal for arrangement”).However, it would not be approved

until the first stage of theproceedings have concluded.

The arrangement is not effective untilthe Court gives its approval: theCourt may refuse to do so whenthere has been a breach of law orwhen the insolvency receivers feelthat the debtor will not be able tofulfil the arrangement. Onceapproved, no further appeals againstthe arrangement are possible.

Although upon approval of thearrangement most effects ofinsolvency proceedings cease, theproceedings do not terminate untilthe terms of the arrangement arecompletely fulfilled.

n In case of liquidation, the debtorceases to manage its assets (if acompany, its directors would ceaseto act). The court receivers liquidatethe debtor’s assets by selling them,in order to distribute the moneyobtained among the creditorsaccording to the rules established by the Insolvency Law (as explainedabove).

Effects of InsolvencyProceedingsThe initial Court decision declaring theinsolvency determines the initiation of theeffects of the insolvency proceedings.The varying effects of the insolvencyproceedings on other Court proceedings,bilateral agreements, obligations andprior transactions are set out below.

Other proceedingsAs a general rule, insolvencyproceedings are not compatible withother enforcement proceedings. Whencompatible, in order to protect theinterests of the debtor and creditors, the Law extends the jurisdiction of the Judge dealing with insolvencyproceedings, who is, in the future, legallyauthorised to handle any enforcementproceedings or interim measuresaffecting the debtor’s assets (whetherbased upon civil, employment oradministrative law).

Arbitration proceedings will continue if they had been initiated before theinsolvency declaration.

In rem securityCreditors holding security “in rem”, that had been traditionally allowed toenforce their claims against the securedasset notwithstanding the initiation ofinsolvency proceedings, are also subjectto certain restrictions in relation tocommencing separate enforcementproceedings (or to continue with suchproceedings, if they had already beencommenced).

When the secured asset is necessary for the debtor’s activities, enforcementby the creditor is subject to a delay forup to a maximum of one year. It meansthat, following the declaration ofinsolvency, enforcement of security willno longer be possible until: (i) anarrangement is approved that does notbind such creditor (this is the generalrule, except if the creditor gives hisapproval to the arrangement) or (ii) oneyear elapses from the date ofdeclaration of insolvency without thearrangement having been approved orthe liquidation stage has been initiated.

If the liquidation stage is initiated beforethe abovementioned one-year term, thecreditor loses the opportunity to enforcethe asset by means of separateenforcement proceedings. In any case,the proceeds would be used to pay thesecured creditor.

Interest and set-offFollowing the initiation of insolvencyproceedings, interest no longer accrues(with the exception of secured creditors).Interest already accrued is considered tobe a subordinated debt.

Set-off is applicable, provided that thelegal requirements have been met beforethe company was declared insolvent.Set-off will no longer be possible afterinsolvency proceedings are initiated.Hedge agreements are subject tospecific regulations, allowing close-outnetting and enforcement of collateral.

Bilateral agreementsThe declaration of insolvency does not,per se, allow the parties to terminate abilateral agreement, notwithstanding whathas been agreed upon by the parties. Inother words, clauses allowing any of theparties to terminate a bilateral agreement



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due to the insolvency of the contractualcounterpart would not be valid.

In principle, the declaration of insolvencydoes not alter the general contractualrules on termination. Therefore, followinga default (either before or afterinsolvency is declared), the other partywould be entitled to terminate theagreement and to receive compensationfor damages caused (depending onwhen the default was committed,compensation will be, respectively, a preor post-insolvency claim).

However, the Insolvency Law states thefollowing exceptions to the generalcontractual rules:

n The Judge may decide to cure aneventual default of the insolvent party,thus re-stating the agreement (as ifthe default had never existed). If thisis the case, outstanding amountsand further payments under theagreement will be post-insolvencyclaims, immediately payable.

n If the Court deems it convenient, the insolvent party will be entitled toterminate the agreement at any time.If this is the case, the counterpartywill receive compensation for suchtermination, to be established by theCourt dealing with the insolvency.

There are specific rules for employmentagreements, mainly affecting dismissals.

Prior Transactions: Claw-backUnder the Insolvency Law there are noprior transactions that automaticallybecome void as a result of initiation ofthe insolvency proceedings.

The court receivers may challenge thosetransactions that could be deemed ashaving “damaged” the debtor’sinterests, provided they have takenplace within two years prior to thedeclaration of insolvency (transactionstaking place earlier than two yearsbefore insolvency has been declared arenot subject to challenge).

Those transactions which shall bereputed as “ordinary course of business”transactions, are not subject to challenge.

Legal presumptions of damage“Damage” does not refer to the intentionof the parties, but to the consequencesof the transaction on the debtor’sinterests.

Damage is deemed to exist, in anyevent, in case of gifts and pre-paymentof obligations becoming matured afterthe declaration of insolvency.

Damage is also deemed to exist, as arebuttable presumption, in the case ofrights in rem that have been created inorder to protect already existingobligations.

Refinancing agreementsUnder the Insolvency Law claw-backregime, the court receivers are allowedto challenge acts and agreementsexecuted in the context of a refinancing:

n Payment of existing obligations whennot yet due and payable is deemedto be detrimental for the insolvencyestate, as a non rebuttablepresumption, when such obligationshad otherwise become due andpayable after the insolvencydeclaration (this may be the casewhen the borrower uses the newfinancing to cancel existingobligations that were not due andpayable or in the case of a debt forasset swap).

n The creation of additional in remsecurity to guarantee existing (nonsecured) obligations or newobligations created in exchange forthe (non secured) existing ones, isdeemed to be detrimental, unlessproved otherwise (which, accordingto case law, is extremely difficult).

n As regards a refinancing, legalpresumptions do not apply, butsome insolvency judges haveconsidered that the fact that theborrower finally becomes insolventwould show that the refinancing wasdetrimental for the insolvency estate.

The amendments introduced by RoyalDecree 3/2009 are aimed at reducingthe risk of claw-back under certaincircumstances, thus facilitating certainrefinancing agreements betweenfinancial entities and companies indistress. The drafting of the legislationstill leaves the Judge a certain margin ofdiscretion in order to decide whether thetransaction is challengeable or not.

Pursuant to the new Additional ProvisionFour of the Insolvency Law, a refinancingagreement would not be subject to claw-back if certain conditions are met.

n A refinancing agreement is deemedto be a transaction providing for:

n A “significant” increase of theavailable funds, or

n A novation of the existingobligations (as a result either ofthe extension of the term, or theestablishment of obligations toreplace the existing ones).

n Requirements to be met by such arefinancing deal in order to be asidefrom the claw-back regime are thefollowing:

n Formalities: the agreement isexecuted in a public instrumentenclosing all of the documentsthat justify the fulfilment of therequirements set out below.

n Creditors approval: the agreementis signed by creditors representingat least three fifths of the debtor’sliabilities (including non financialliabilities, e.g. trade creditors) atthe date of the adoption of therefinancing agreement.

n Viability: the agreement respondsto a viability plan that enables thecontinuity of the debtor’s businessin the short and medium term.

n Independent opinion: An expertappointed by the mercantileregistrar of the debtor’s registeredoffice (under the procedure laiddown in the Commercial RegistryRegulations) shall provide a reportwith his technical view on theadequacy of information provided,reasonability and feasibility of theviability plan and proportionality ofthe security taken, taking intoaccount market conditions at thetime of signing the agreement.

Insolvency LiabilityThe declaration of insolvency generallyinvolves an incidental procedure in orderto examine if civil responsibilities arisethat caused or contributed to theinsolvency (“insolvency specificationproceedings”).

Insolvency liability and other sources of liabilityUnder Spanish company law, directorsare liable for damages and for debts:

n For damage caused through actsviolating company law or the

company’s by-laws, or actsundertaken without the necessarydiligence. In cases of insolvency,directors have been found liable fordamage caused, intentionally or bygross negligence, by making certaindecisions (e.g. entering intoagreements) while possessingknowledge of the loss to be causedto third parties as a result of thecompany’s inability to comply with its obligations.

n For future debts, when thecompany’s assets have fallen belowhalf of its share capital and theimbalance has not been remedied(e.g. by means of a capital increaseor reduction) in two months. Thedirectors must take all legal steps to initiate the wind-up and liquidationof the company by calling a generalshareholders’ meeting for thispurpose. If this meeting does notresolve to liquidate the company, the directors must initiate thecompulsory liquidation of thecompany through the Courts.

Under an insolvency scenario, thedirectors are obliged to file for insolvencywithin two months (subject to a furtherthree month extension, as explainedabove) as from the moment in whichthey become aware or should havebecome aware that the company isinsolvent (it is a cash flow test). Shouldthey fail to comply with this obligation,they could face civil liabilities in thecontext of the insolvency specificationproceedings.

Should the compulsory liquidationscenario and the insolvency situationcoincide, the directors would be obligedto file for insolvency proceedings (withinthe referred two months time);otherwise, they would face not only theliability for the company’s debts, butalso the penalties arising from theinsolvency legislation.

Aside from the insolvency proceedings,a criminal claim may be filed against thedirectors of the company, in order toexamine their criminal liabilities. Ingeneral, criminal liabilities would notarise as a result of financial distress

except if the directors have committedcriminal offences in such context, suchas unfair or fraudulent management orfalse accounting.

Insolvency specification proceedingsThe insolvency specification proceedingsare only developed when the insolvencyleads to liquidation or when creditorsaccept a severe delay or cancellation oftheir claims as result of matters beyondthe debtor’s control (more than threeyears’ delay or one third cancellation ofsuch claims, respectively).

Incidental proceedings may lead to theconclusion that insolvency has beeneither the result of matters beyond thedebtor’s control or negligent, accordingto the circumstances prescribed by law(in this regard, the status of theaccounts and compliance with the legalduty to apply for insolvency proceedingsis essential).

n If the insolvency is deemed to benegligent, the directors or thirdparties (as “accomplices”) may beliable to pay damages for the losscaused to creditors as a result oftheir actions.

n In case of negligent insolvencyleading to liquidation, directors of thecompany may also be obliged toface outstanding company debts.The judges enjoys a wide range ofdiscretion. The scope of thisprovision is pending clarification bythe Courts.

Cross-border Insolvencies According to the principles establishedby EC Regulation 1346/2000, the Courtwith jurisdiction over the proceedings isdetermined by the place in which thedebtor carries out its main activities (inprinciple, the registered office). Theseproceedings are considered the“principal insolvency proceedings”.

In addition, insolvency proceedings maybe carried out where the debtor has a“permanent place of business”. These“territorial insolvency proceedings” havea limited scope, only affecting the assetsand creditors located in that country.


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European Insolvency ProceduresThe Netherlands


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Insolvency RegimesBankruptcy and suspension ofpaymentsThe Dutch Bankruptcy Act(“Faillissementswet”, the “Act”) enteredinto force on 1 September 1896 andhas been amended several times since.At present, it contains three types ofproceedings:

(a) bankruptcy (faillissement);

(b) suspension of payments (surseancevan betaling); and

(c) debt reorganisation for naturalpersons (schuldsaneringsregelingnatuurlijke personen).

Special proceedings and provisions forthe insolvency of insurance companiesand credit institutions are provided for inthe “Faillissementswet” in conjunctionwith the Financial Supervision Act (Wetop het Financieel Toezicht).

A substantial revision of the Act is beingprepared by the Insolvency LawCommittee (Commissie Insolventierecht),installed by the Minister of Justice. Adraft for a new Insolvency Act waspublished in November 2007. TheMinister of Justice has granted anyinterested parties a period of time toprovide their comments. The subsequentprocedure is to be determined by theMinister of Justice. At the moment it isuncertain if and when the new InsolvencyAct will be implemented.

BankruptcyBankruptcy is a general attachment on(practically) all of the assets of a debtor,imposed by a judgment of theappropriate District Court (Rechtbank)for the benefit of the insolvent debtor’scollective creditors. The objective of thebankruptcy is to provide for an equitableliquidation and distribution of (theproceeds of) the debtor’s assets amongits creditors. In practice, however,bankruptcy proceedings serve as animportant instrument for thereorganisation and continuation ofbusinesses in financial distress.

According to the Act, bankruptcyproceedings can be opened in respectof any debtor, natural or legal person,regardless of whether he carries on abusiness, practises an independentprofession or not. The Act also providesfor the opening of a bankruptcyproceeding in respect of a commercialpartnership (vennootschap onder firma).A commercial partnership does not havelegal personality, but its partners arejointly and severally liable and its assetsform a separate fund available only forrecourse by the partnership’s creditors.If a bankruptcy proceeding is opened in respect of the partnership,simultaneously bankruptcy proceedingsare opened in respect of the partners.

The Act does not provide for theconsolidation of bankruptcy proceedingsopened in respect of companiesbelonging to the same group. However,

there are some examples of cases inwhich courts have allowed suchconsolidation.

If a bankruptcy proceeding is opened,the debtor loses the right to manageand dispose of his assets with retro-active effect to 00.00 hrs. of the day thebankruptcy order is issued. The courtappoints a receiver who is charged withthe management and realisation of thedebtor’s assets (including by means of a transfer of (part of) the business as agoing concern). The receiver acts underthe general supervision of a supervisoryjudge (rechter-commissaris). For certainacts of the receiver the law requires the (prior) authorisation of thesupervisory judge, e.g. for conductinglegal proceedings and for terminatingemployment and rental contracts.

Suspension of paymentsSuspension of payments is a court-ordered general suspension of adebtor’s payment obligations; itsobjective is to provide an instrument forthe reorganisation and continuation ofviable businesses in financial distress. It is available only at the request of thedebtor and only has effect in respect of ordinary (non-secured and non-preferred) creditors. During the periodfor which the suspension of paymentshas been granted, creditors with non-preferential claims cannot take recoursein respect of the debtor’s assets.

Key Elements:

n Procedures for:

n Bankruptcy

n Suspension of payments

n Priority of payment and preferential creditors


n Lender liability

n Challenging antecedent transactions

n Set-off

The Netherlands

Despite several amendments made overthe years to increase the effectiveness ofthe suspension of payments proceeding(e.g. the liberalisation of the conditionsfor the granting of a suspension ofpayments and the introduction of thepossibility of a composition) it has inpractice never become a satisfactoryinstrument for the reorganisation ofbusinesses in financial distress.Generally, it is nothing more than a firststep towards bankruptcy. Although inrecent times there have been examplesof successful suspension of paymentsproceedings, e.g. the recentreorganisations of Versatel, GTS Europeand UPC, as far as reorganisation ofbusinesses in financial distress isconcerned, the bankruptcy proceedingin practice proves to be a more effectiveinstrument.

Suspension of payments proceedingscan be opened in respect of naturalpersons carrying on a business orpractising an independent professionand juristic persons. The suspension ofpayments may be granted by the courtfor a maximum period of one and a halfyears and may be prolonged at therequest of the debtor (if necessary morethan once) with a maximum of one anda half years.

As a result of the granting of asuspension of payments, the debtor canno longer manage and dispose of itsassets without the co-operation orauthorisation of a court appointedadministrator. Likewise, the administratorcannot act without the co-operation orauthorisation of the debtor. Thesuspension of payments order has retro-active effect to 00.00hrs of the day ithas been issued. In a suspension ofpayments proceeding, the court mayappoint a supervisory judge, whose roleis limited to regulating certain proceduralmatters and advising the administratorupon his request.

Obligation to file for insolvencyThere is no legal obligation for a debtorto file a bankruptcy petition or to applyfor suspension of payments.

The test for insolvency BankruptcyA debtor can be declared bankrupt if it

has ceased to pay its debts. The courthas relatively wide discretionary powersin assessing whether the debtor hasceased to pay its debts. The court mayalready come to such a conclusion ifthere is more than one creditor and atleast one matured debt remains unpaid.Bankruptcy proceedings may also beopened in case of the debtor’sunwillingness to pay, not only in case of its inability to pay. Balance sheetinsolvency is no separate ground for theopening of bankruptcy proceedings.

Suspension of paymentsIf the debtor, according to its application,anticipates that it will not be able tocontinue to meet its liabilities as theybecome due, the court immediatelygrants a provisional suspension ofpayments. The court may not grant thedefinite suspension of payments if (i) aqualified minority of creditors with nonpreferential claims objects, (ii) if there iswell-founded fear that the debtor willprejudice the interests of creditors duringthe period of suspension of payments or(iii) if there is no prospect of the debtorbeing able to satisfy its creditors within acertain period of time. That the debtormust be able to satisfy its creditors doesnot mean that they must be paid in full. Itsuffices that creditors can be satisfied tosome extent, for example by receiving apercentage of their claims within theframework of a composition.

Initiation of insolvency regimesBankruptcyThe debtor, its creditor(s) or the PublicProsecutor (for reasons of publicinterest) may petition for the debtor’sbankruptcy by filing a request to theappropriate District Court. Furthermore,in a number of cases the court canopen a bankruptcy proceeding followinga suspension of payments proceeding.

Suspension of paymentsOnly the debtor itself can apply for asuspension of payments at theappropriate District Court, on thegrounds that the debtor anticipates thatit will not be able to continue to meet itsliabilities as they become due.

Moratorium Both in the bankruptcy and thesuspension of payments proceedings,

the court (and in case of a bankruptcyproceeding: also the supervisory judge)may grant a “cooling down” or “freezing”period (moratorium). During such period,creditors with rights in rem (includingrights of pledge and mortgage) cannotrepossess or foreclose without priorapproval by the court or the supervisoryjudge. The moratorium does not involvean obligation of financiers to continue tofinance the debtor. Furthermore, rightsof creditors against third parties are notaffected by a moratorium.

A moratorium can be ordered for amaximum period of two months, whichcan be extended once by a maximumperiod of two months.

Rules Governing Priority of Payment andPreferential CreditorsBankruptcyIn a bankruptcy, creditors withinsolvency claims are entitled to theproceeds of the realisation of thedebtor’s assets. Costs incurred withinthe framework of the realisation of theassets give rise to claims against thebankrupt estate; these claims have to besatisfied in priority to insolvency claims.Claims against the estate include thereceiver’s salary, fixed by the court onthe basis of a generally accepted hourlyrate, and debts incurred by the receiverin continuing the bankrupt debtor’sbusiness and/or during liquidation.

Often the proceeds of the realisedassets are insufficient to satisfy all claimsagainst the estate. In that case, theclaims against the estate are satisfied inaccordance with the same ranking thatapplies between insolvency claims.

Creditors with a right of pledge ormortgage are, in principle, not affectedby claims against the estate. As ageneral rule, there is no apportionmentof the general realisation costs over theproceeds of the assets subject to a rightof pledge or mortgage.

Unsecured creditors with insolvencyclaims can only enforce their claimsagainst the debtor in the mannerprescribed by the Act, i.e. by submittingtheir claims to the receiver within the



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framework of the claims validationprocedure. Creditors with insolvencyclaims secured by a right of pledge ormortgage, can enforce their rights as if a bankruptcy proceeding had not beenopened.

The law attaches a priority in therealisation proceeds to certaincategories of claims (preferential claims)and determines the ranking of thesepreferential claims. A claim can havepriority in respect of the realisationproceeds of a particular asset (e.g.resulting from a security right or a rightof retention) or in respect of therealisation proceeds of all of the debtor’sassets (e.g. the claims of tax authorities).

As a general rule, preferential claims inrespect of a particular asset have ahigher ranking than preferential claims in respect of all assets.

As to the preferential claims in respect of a particular asset, as a general rule,secured claims have a higher rankingthan other preferential claims in respectof that particular asset. An importantexception to this rule is that, in respectof the proceeds of the realisation ofinventory situated on the debtor’spremises, the tax authorities’ preferentialclaim (in respect of certain taxes) has ahigher ranking than a non-possessoryright of pledge vested in such assets. A further exception to the above rule isthat a right of retention may, in aparticular case, have a higher rankingthan a right of pledge or mortgagevested in the asset concerned.

Creditors can agree to a lower rankingof their claims. A contract between thecreditor and the debtor may stipulatethat the claim of the creditor issubordinated to all or to certain otherclaims of other creditors.

Shareholders have no right to anydistribution of the proceeds within theframework of the proceeding as, underDutch law, they are not creditors.

Suspension of paymentsThe suspension of payments only affectsnon-preferential claims existing at thetime of the opening of the proceeding.During the proceeding, these claims

cannot be enforced against the debtor’sassets and payment of these claims canonly be made to all creditors inproportion to their claims.

Preferential claims (including claimssecured by a right of pledge or mortgage)are not affected by the proceeding andcan, therefore, be enforced against thedebtor’s assets. This also applies toclaims against the estate, i.e. obligationsincurred by the debtor with the co-operation or authorisation of theadministrator after the opening of theproceeding (e.g. in connection with thecontinuation of the debtor’s business).

Other unsecured creditor actions The Dutch Code of Civil Proceedingsprovides for a means of pre-judgmentattachment, which is referred to as a“conservatory attachment” (conservatoirbeslag). With a conservatory attachmenta creditor can secure payment by thedebtor in anticipation of an enforceablejudgment against the debtor. Once theproceedings on the merits result in anenforceable judgment against thedebtor, the conservatory attachmentbecomes an attachment in execution byoperation of law, i.e. the attached assetscan then be executed.

During the period of attachment thetransfer or encumbrance of the attachedgoods by the debtor has no legal effectvis-à-vis the party that levied theattachment, i.e. the party that levied the attachment can proceed with theattachment as if the attached goodswere not transferred or encumbered,unless the purchaser acted in good faithand has acquired possession of theattached goods. Furthermore, thewithdrawal of the goods subject to theattachment will constitute an unlawfulact and a criminal offence.

The nature of the conservatoryattachment can be, amongst others, an attachment by garnishment (i.e.attachment of bank accounts), anattachment of shares or an attachmentof assets or real estate.

As a result of the opening of bankruptcyproceedings in respect of the debtor,pre-bankruptcy attachments by creditorsare lifted by operation of law and

executions of assets included in thebankruptcy proceeding are automaticallyterminated. As a result of the opening ofsuspension of payments proceedings,only existing attachments levied by non-preferred creditors are lifted by operationof law; executions of assets included inthe proceedings are not terminated butsuspended.

Scope for majority voting and/or cram down of minority creditorsBankruptcyA bankruptcy proceeding does notalways lead to the liquidation of thedebtor’s assets. The proceeding mayalso result in the reorganisation of debtsby means of a composition. Acomposition can only be proposed bythe debtor and, upon approval andconfirmation by the court, only bindscreditors with non-preferential claims(ordinary, non-secured and non-preferred creditors). Creditors withpreferential claims are not bound by a composition.

Only creditors with non-preferentialclaims have the right to vote on theproposed composition. A compositionneeds the approval of a normal majorityof the (conditionally) admitted creditorswith non-preferential claims,representing at least half of the totalamount of (conditionally) admitted non-preferential claims.

Upon request by the debtor or thereceiver, the supervisory judge candecide to hold the proposedcomposition as approved, if (i) 3/4 of the (conditionally) admitted creditorsapproved the composition and (ii) therejection of the composition is causedby one or more creditors that, taking allcircumstances in consideration - especially the percentage of its claimthat such creditor would receive in casethe estate is liquidated and distributed -reasonably could not have voted againstthe composition.

Suspension of paymentsIn a suspension of payments the debtoralso has the option of proposing acomposition. A composition only bindsthe creditors with non-preferentialclaims. The regulation of this

composition (grosso modo) correspondswith the regulation of the composition ina bankruptcy proceeding.

Courts’ responsiveness to creditors BankruptcyThe court may appoint a creditors’committee, which in practice, however,is exceptional. If a creditors’ committeehas been appointed, the receiver isobliged to provide it with all requestedinformation concerning the bankruptcy.In certain cases, the receiver is obligedto seek the advice of the creditors’committee. The receiver, however, is not bound by the committee’s advice.

The Act also provides for meetings ofcreditors to be convened. With regard to certain matters, the law prescribes ameeting of creditors. Decisionsconcerning the admission of claimsmust for example be taken in a meetingof creditors, as well as the decision tocontinue the company’s business if acomposition has not been offered or has been rejected.

Creditors may submit a petition to thesupervisory judge requesting thesupervisory judge to order the receivereither to perform certain acts or torefrain from performing certain intendedacts. Furthermore, a creditor mayrequest the court to dismiss the receiver.

Suspension of paymentsThe influence of creditors in theproceeding is limited. The court isobliged to hear their views whendeciding whether or not to definitivelygrant the suspension of payments; whena certain number of creditors objects,the suspension of payments cannot begranted definitively. Any creditor canrequest the court to dismiss anadministrator. Furthermore, any creditorcan request the court to take themeasures necessary to protect theinterests of the creditors. Creditors mayalso request the court to terminate thesuspension of payments.

In contrast with a bankruptcyproceeding, creditors do not have theoption to request the supervisory judgeto order the administrator to perform orrefrain from performing certain acts.

DirectorsThe law imposes duties on the followingpersons:

(a) Managing Directors (bestuurders);and

(b) Supervisory Directors(commissarissen).

Directors’ dutiesThe Managing Directors’ duties areowed to the company on the basis ofthe Dutch Civil Code (“DCC”) and thearticles of association of such companyand, as can be derived from such duties owed to the company, to theshareholders and the employees of such company. Furthermore, duties are,to some extent, owed by the ManagingDirectors to certain third parties, inparticular creditors and counterparties of the company.

The DCC states, in general wording, that “each Managing Director is requiredproperly to execute the tasks entrustedto him”. The DCC does not specificallyset out which Managing Director’s duties exist under Dutch law. Specifictasks include (amongst others) takingdecisions to manage the business,reporting and advising the generalmeeting of shareholders, keeping financialinformation up to date, filing annualreports and accounts and representingthe company in respect of third parties.

Insolvency considerations for directorsThe insolvency considerations that existfor Managing (and Supervisory) Directorswould relate to any liability that suchDirectors might incur. Under Dutch law,the following categories of liability ofManaging (and Supervisory) Directorscan be distinguished:

Director’s liability towards thecompanyThis form of liability results frommismanagement (onbehoorlijk bestuur).“Mismanagement” is to be defined as aseriously imputable failure to perform thetask entrusted to the Managing Director.Such a claim will have to be instigatedby the company, or by the receiver inbankruptcy.

The criteria for establishingmismanagement depends to a largeextent on specific circumstances. Ingeneral, however, the reproach to bemade against the Managing Directorsneeds to be very serious indeed. Inorder for a Managing Director to be held liable, he must have acted as nosensible Managing Director would haveacted under the same circumstances.

For instance, taking substantial financialrisks on behalf of a company is notnecessarily considered mismanagement.It is taking unnecessary, or unnecessarilylarge financial risks that might constitutemismanagement. Conversely, it is nottaking great business risks in itself, but



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doing so without proper preparation orresearch, or engaging in financialtransactions that by far exceed thefinancial capacities of the company thatleads to liability.

The liability for mismanagement is inprinciple a collective liability; it attachesto all Managing Directors regardless ofwho actually took part in the improperact or omission. If a matter falls withinthe field of competence of more thanone Managing Director, each of them isjointly and severally liable, except anyManaging Director who can prove thatthe act or omission was not attributableto him and that he did not neglect totake measures to avert theconsequences of such act or omission.

Managing Directors are only rarely heldliable by the company formismanagement. Usually the ManagingDirectors are protected against this formof liability by a discharge concerning themanagement activities of the precedingyear granted by the general meeting ofshareholders when it adopts the annualaccounts for that year. Such discharge,however, only covers facts that aredisclosed in the annual accounts orhave been reported to the generalmeeting of shareholders before theannual accounts were adopted. The(board of) Managing Directors maytherefore still be held liable for facts theydid not disclose in the annual accountsor in the general meeting preceding theadoption of the annual accounts and thegranting of the discharge. Moreover, adischarge granted by the generalmeeting of shareholders does notprevent the commencement of a claimin bankruptcy (see below).

Supervisory Directors may face liabilitywhen they fail to initiate steps againstManaging Directors of the company,who are mismanaging, or fail to takemeasures when the (business of the)company is in disarray.

Directors’ liability towards third partiesAnnual accountsManaging Directors are jointly andseverally liable for loss suffered by thirdparties as a result of misrepresentationconcerning the company’s condition inthe annual accounts, Managing

Directors’ report or interim figurespublished by the company. A ManagingDirector can exonerate himself byproving that he was not to blame for the relevant misrepresentation.

If the annual accounts misrepresent thefinancial condition of the company, theSupervisory Directors are jointly andseverally liable with the ManagingDirectors for any damage suffered bythird parties as a result thereof. Again, aSupervisory Director who proves that hewas not to blame for any failure in hissupervisory duties shall not be liable.

Pre-incorporation contractsAny person or legal entity acting in thename and on behalf of a companywhich is in the course of beingincorporated will be liable for theperformance of any obligationsundertaken (unless expressly stipulatedotherwise) until the company ratifies theact concerned after its incorporation.

The person or entity concerned will bejointly and severally liable with thecompany for damage if after ratificationof the act by the company, the companyis unable to perform its obligationspursuant thereto and the person whocontracted on behalf of the companycould reasonably have known that thecompany could not perform suchobligations. There is a presumption ofknowledge if the company is declaredbankrupt within one year of itsincorporation.

RegistrationAfter incorporation of a company, itsManaging Directors are jointly andseverally liable for any legal acts bywhich the company is bound as long asits paid-up capital does not amount tothe minimum share capital prescribed by law, the required minimum proportionof its issued share capital has not beenpaid up or the company has not beenduly registered with the CommercialRegister.

TortManaging Directors acting within thescope of their management activitiesmay in certain exceptionalcircumstances also be held liable in tort. Normally, a Managing Director is

deemed to act in the context of hisregular duties and responsibilities, evenif financially detrimental to third parties.In other words, the mere fact that aManaging Director takes action thatcauses financial harm to third parties is insufficient to create personal liabilityin tort towards these third parties. Onlyin circumstances where the ManagingDirector can be seriously reproached,i.e. where he is personally at fault, will he be exposed to liability.

This, inter alia, is the case where, at the time the company enters into anagreement with a third party, theManaging Director knew (or should haveknown) that the company would not beable to meet its obligations in duecourse, and no recourse would beavailable to compensate for the resultingdamages suffered by the other party.Liability in tort could also arise where aManaging Director wilfully prevents thecompany from performing its obligationstowards a third party, when it isotherwise able to do so. Also, financialdistributions to shareholders in violationof statutory requirements can lead toliability.

Liability following bankruptcyGeneral In the event of a company’s bankruptcy,the Managing (and Supervisory)Directors will be jointly and severallyliable for all debts remaining unpaid afterrealisation of the company’s assets, ifthey have manifestly neglected toperform their duties properly and this isan important cause (but not necessarilythe only cause) of the company’sbankruptcy.

“Manifestly neglecting to perform theirduties properly” should be interpreted as the making of a serious mistakewhich goes well beyond the limits ofacceptable risk in the ordinary course of the business concerned.

Manifest improper performance is to beproven by the receiver. If, however, theManaging Directors have not compliedwith their obligations to keep thecompany’s books or to publish theannual accounts on time, they aredeemed (without proof of the contrarybeing allowed) to have neglected to

perform their duties properly. In addition,it is then assumed (but proof to thecontrary is allowed in this respect) thatsuch performance constitutes animportant cause of the bankruptcy.

The above-mentioned liability iscollectively borne by the ManagingDirectors. The Managing andSupervisory Directors are jointly andseverally liable for management andsupervision of the company respectively.A discharge granted by the generalmeeting of shareholders to theManaging and/or Supervisory Directorsdoes not prevent the commencement ofa claim as set out above. However, anindividual Managing or SupervisoryDirector may exonerate himself from thisliability by proving that the act oromission was not attributable to him andthat he did not neglect to take measuresto avert the consequences of such actor omission. Finally, a Managing orSupervisory Director can only be heldliable for manifest improper performancemade in the period of three years priorto the bankruptcy of the company. Forthe avoidance of doubt, such period ofthree years does not apply to liabilitytowards the company (see above in thegeneral part of this section) and liabilityfollowing tort (see above in tort section).

Liability towards tax and social security authorities Legislation allows for the personalliability of Managing Directors for certaintaxes (i.e. wage withholding tax andvalue added tax), social securitypremiums and compulsory pensionpremiums, in the case of “obviousmismanagement”. If the ManagingDirectors have failed to notify the taxauthorities that the company is unable topay its debts on account of these taxesor premiums, immediately after suchinability arises, statute provides thatmismanagement is deemed to haveoccurred. In general, the remarks made regarding liability in the case of a company’s bankruptcy apply here (see above).

Lender LiabilityA lender could be held liable as ashadow director under Dutch law if itwould have to be deemed to havedetermined company policy as if it were

a director. Whilst this is theoreticallypossible, there is no case law in which a lender is indeed held liable on thisground. This scenario is generallyconsidered unlikely in relation to a bankor other lender.

Exceptional circumstances could giverise to claims by other creditors or bythe receiver in the bankruptcy of thecompany vis-à-vis the lenders, based on tort. Whether or not the lenders’conduct can be qualified as unlawfuldepends on all circumstances of thecase concerned. Based on case law ofthe Dutch Supreme Court, the lenders’conduct can be regarded as unlawfulespecially if the lenders have obtainedsecurity over all (or a substantial part) of the debtor’s assets, have participatedin the keeping up of a semblance ofcreditworthiness of the debtor and havenot sufficiently taken into account theinterests of other creditors whoserecourse possibilities have beendiminished or have become illusive as a result thereof.

If the lenders’ conduct would fall withinthe scope of the statutory provisions onvoidable preference (see section below),this also could give rise to a claim in tortof the debtor’s creditors whose recoursepossibilities have been diminished as aresult thereof, or to a claim in tort of thereceiver in the bankruptcy of the debtor.A claim in tort can be used as analternative for an action based onvoidable preference.

Voidable PreferenceUnder Netherlands law, if certainrequirements are met, the receiver (or,outside bankruptcy, any creditor) has theright to nullify a transaction entered intoby the insolvent debtor with a third partyon the basis of article 42 of the Act:voidable preference (actio Pauliana). The consequences of this are that thereceiver can take recourse against therelevant assets as if the voidedtransaction had not taken place, for atmost an amount equivalent to the actualdisadvantage to other creditors.

Voluntary transactionsThe following requirements have to bemet to ensure a successful challenge ofa transaction entered into by the debtor

on a voluntary basis (i.e. in the absenceof a legal or contractual obligation):

(a) the transaction was prejudicial to therecourse possibilities of the debtor’screditors; and

(b) both the debtor and its contractingparty knew or ought to have knownat the time of the transaction thatsuch prejudicial effect would arise. Ifthe debtor receives no considerationfor the transaction, only theknowledge of the debtor itself needsto be proven. The Supreme Courthas ruled that it is not sufficient forthe receiver (or, outside insolvency,any creditor) bringing the actioPauliana to argue that thecontracting parties knew or ought to have known of the possibility thatthe transaction could be prejudicialto the debtor’s creditors.

The burden of proof of the abovementioned elements rests upon thereceiver, although a reversal in respect ofthe “knowledge” requirement is providedin law if the voluntary transaction tookplace less than one year before thedebtor was declared bankrupt in respectof certain categories of “suspect”transactions listed in the Act.

Such suspect transactions include, interalia: (i) transactions by the debtor whichare conducted at an “undervalue”, (ii)transactions between the debtor and agroup company, (iii) transactionsbetween the debtor and a legal entitywhere the same legal entity holds(directly or indirectly) at least 50% of theissued share capital both in the debtorand the legal entity, and (iv) the paying of or the granting of security for a non-matured debt.

Involuntary transactions (transactionspursuant to a pre-existing statutory orcontractual obligation)On the basis of article 47 of the Act, the receiver also has the power to nullifyany transaction performed by the debtorpursuant to a pre-existing statutory orcontractual obligation in the event that:

(a) the counterparty knew that a petitionfor the debtor’s bankruptcy hadbeen filed with the court; or



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(b) the transaction resulted fromconcerted action of the debtor andits counterparty aimed at preferringthe latter to the detriment of thedebtor’s other creditors.

“Hardening” period The power to invoke the actio Paulianaas discussed above is not limited totransactions executed within a certainperiod before the commencement of the bankruptcy proceeding. There is noreal “hardening period” for the relevanttransactions. Voidable preference has alimitation period of three years from thedate on which the receiver discoveredthe detrimental effect of the transaction.

Recharacterisation/Liability for Debts atSubsidiary LevelRecharacterisationIntra-group loan transactions are, for civillaw purposes, generally not susceptibleto recharacterisation. However,payments under such loans by thecompany may be challenged by thereceiver (or, outside bankruptcy, anycreditor) in the same manner asdiscussed in the sections above whichconsider voidable preference and tort.

Liability for the debts of a subsidiary GeneralNormally, a shareholder is not liable fordebts of the company in which it holdsshares, other than through the paid-upshare capital (to the extent not yet paidup) in respect of shares held by it.However, there are exceptions to thisprinciple. Many of the issues dealt withbelow depend significantly upon factualcircumstances.

Specific IssuesAssumed unityIn a situation of assumed unity(vereenzelviging), the legal distinctionbetween two separate corporate entities(such as the shareholder of a companyand the company itself) will be ignoredand the corporate entity and itsshareholder will be deemed to be oneand the same person. This may result ina sharing of liabilities (i.e. both are liable)and making available the joint assets asobjects of recourse (i.e. the assets ofboth are available for recourse).

If such unity is assumed, liability isnecessarily shared. This situation ishowever rarely held to be applicable.The concept of assumed unity is strictlybased on case law. In principle, thecreditor will have to show that thecorporate identity of a company wasabused to the detriment of that creditoror creditors in general.

Breakthrough of liability (piercing the corporate veil)GeneralLiability of another entity can also occurwithout the assumption of unity (set out above). The “sharing of liabilities” is then called “breakthrough of liability”(doorbraak van aansprakelijkheid) or“piercing the corporate veil”.

A shareholder may be held jointly liablewith the debtor-company for (part of) aspecific claim of a creditor on suchdebtor company. Such a breakthroughcan occur as a consequence of tort(onrechtmatige daad) of the parentcompany, or on limited other grounds as explained below.

The creditor, in this situation, does nothave to prove that the distinction ofidentity of the companies is abused (seeabove), but instead has to prove that atort has been committed. This can bebased on, among other things, a “dutyof care” on the part of the parentcompany. This duty of care arises whenthe parent company is actively involvedin (in fact: has taken over) the (financial)management of the subsidiary and theparent company knows or should haveknown that its involvement with thedebtor’s management would prejudicecreditors’ rights. If such (active)involvement is established, and anumber of additional conditions are met, liability may exist regarding actsdetrimental to the subsidiary’s creditors.Additional circumstances could be:

n unreasonably substantialdistribution(s) of profits/dividends to the sole shareholder;

n selective payment of the shareholderas a creditor; or

n creating comfort on the part of thecreditors or business partners of thecompany, which causes them to

continue delivering goods to thecompany, which remain unpaid, etc.

A claim against a parent company fordebts of a subsidiary would thereforenormally involve a claim in tort. Any suchliability would co-exist with that of thesubsidiary company.

Tort: semblance of creditworthinessTort may arise because of the creationby the parent company of an unjustifiedsemblance of creditworthiness of thesubsidiary. This could for instance be thecase when all (or a substantial part of)assets in the subsidiary have beentransferred to itself, thereby making thesubsidiary insolvent for any claims fromnew creditors, who entered intotransactions with the company on thebasis of that (assumed)creditworthiness. In such cases, tort can be established particularly when theparent company has (i) factual controland (ii) knew or should have known thatthe new creditors would be prejudicedbecause of an absence of recourse.

Tort: asset-strippingTort may be established when the parentcompany has acquired basically all theassets of a subsidiary. Tort can alsoarise when a company has madeirregular dividend distributions orpayments to the parent company, whenthe parent company, based on factualindications, “should have reckoned withthe serious possibility that the subsidiarywould experience such a shortage thatother creditors would be prejudiced”.

Set-offSet-off outside bankruptcyOutside bankruptcy, two parties that areeach others’ mutual creditor and debtorcan, by means of a declaration to theother party, in principle set off theirmutual claims up to the amount whichthey have in common. The followingrequirements will then apply:

(a) the parties have to be mutualcreditor and debtor to each other;

(b) the claims should correspond toeach other (i.e. the debtor shouldhave the right to settle its debt withits claim);

(c) the party invoking set-off is entitledto pay its debt (e.g. the debt hasmatured or may be prepaid); and

(d) the counter-claim of the partyinvoking set-off is enforceable.

These requirements, however, are of a non-mandatory nature: parties mayagree otherwise.

Set-off in bankruptcyUnder the Act, the creditor of an insolventdebtor may invoke its right of set-offprovided that his claim and his debt:

(a) date from before the date of theinsolvency; or

(b) result from (one or more)transactions entered into with theinsolvent debtor prior to the date of insolvency.

The requirements under (a) or (b) applyto both the claim and the debt. In otherwords: the cross claims must have pre-insolvency roots. Because the Actpresupposes that each creditor of aninsolvent debtor may regard his debt assecurity for the payment of his claim, itmay be assumed that all contractualset-off arrangements can be enforcedagainst a receiver, provided that theclaim and counter-claim have a pre-insolvency basis. The same applieswhen the insolvent party is insuspension of payments.

Payments credited to a bank account of the bank’s insolvent client after thebankruptcy date do not reduce thatclient’s indebtedness to the bank,unless the bank had a right of pledgeover the

client’s claim vis-à-vis a third party,which was paid into the client’s bankaccount. The same applies if the bank,prior to the client’s insolvency, knew thatthe bankruptcy of its client was to beexpected at the time of crediting thebank account.

Neither the court nor the receiver isrequired by law to apply set-off exofficio, i.e. the creditor of the bankruptcompany is required to invoke set-offitself in order for set-off to operate.

Recognition of ForeignInsolvency ProceedingsWithin the scope of the EU Insolvency RegulationUnder the Regulation recognition in the Netherlands of foreign insolvencyproceedings (listed in the Regulation)would be automatic.

Outside the scope of the EU Insolvency RegulationTo what extent foreign insolvencyproceedings of debtors incorporatedoutside the European Union (or inDenmark) are recognised in TheNetherlands, is unclear. It appears from Supreme Court case law, saveinternational treaty provisions to thecontrary, that foreign insolvencyproceedings, in principle, only haveterritorial effect.

This means, first of all, that the foreigngeneral attachment of the insolventdebtor’s assets (or similar effects, suchas the transfer of the estate to a receiverin bankruptcy) does not include theassets of the debtor that are situated in The Netherlands. Furthermore, in

principle the legal effects of insolvencyproceedings commenced under foreigninsolvency laws cannot be invoked inThe Netherlands.

Although international insolvency law of The Netherlands is based on theterritorial effect of foreign insolvencyproceedings, this does not mean thatthese proceedings do not receive anyrecognition at all. The foreign receiverhas locus standi in The Netherlands. The powers granted to a liquidator bythe foreign lex concursus shouldtherefore in principle be recognised inThe Netherlands. Also in other respectsforeign insolvencies can have legalconsequences in The Netherlands. It could be argued that the legalconsequences created by the foreigninsolvency law can be recognised in TheNetherlands, as long as (i) they are notclosely connected with the fact that theforeign insolvency must be regarded asa general attachment on the insolventdebtor’s assets for the benefit of all hiscreditors, and (ii) this does not lead tounsatisfied creditors no longer havingrecourse in respect of assets of theinsolvent debtor that are situated in The Netherlands.

One of the main principles of internationalinsolvency law of The Netherlands is that, as far as insolvency proceedingscommenced in The Netherlands areconcerned, The Netherlands proceedingshave “universal effect”, which (inter alia)means that they aspire to comprise allassets of the insolvent debtor, includingthose situated abroad.



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Insolvency RegimesUnder the Bankruptcy and RecoveryLaw dated 28 February 2003 there is a single bankruptcy proceeding(postepowanie upadlosciowe) carriedout by the court, whereby twoinsolvency options are available: (i) theliquidation of the bankrupt estate andpro rata distribution of proceeds to thecreditors pursuant to the statutory orderof priority of claims, or (ii) preserving thedebtor’s business through acomposition arrangement, which issubject to creditors’ approval in a voteand final approval by the court.

In addition, there is a separate recoveryproceeding (postepowanie naprawcze).The procedure is simplified and isbasically carried out by the debtor itself(out-of-court, although subject to certaincontrolling powers of the court). Its aimis to provide a framework for the debtorto reach a composition arrangementwith its creditors.

Starting from 31 March 2009 not only an “entrepreneur” (i.e. a natural person,legal person or partnership, which in itsown name carries out business activity)but also a consumer (i.e. a naturalperson not carrying out business activity)can be declared bankrupt. Anentrepreneur is obliged to file a petitionfor the commencement of bankruptcyproceedings within two weeks of thedate that a reason for its bankruptcydeclaration occurred (i.e., either thesolvency test or the balance sheet testwas passed). The same duty applies toeach representative of a debtor who is a legal person or an entity having legalcapacity without being a legal person. A consumer may apply for bankruptcyonly if he/she became insolvent due to

exceptional circumstances out of theconsumer’s control.

The recovery proceeding is optional, i.e.the debtor who anticipates its insolvencyin the future but still remains solvent hasthe right (but not a duty) to commencethe proceedings.

Recent amendments to theBankruptcy and Recovery LawThe Bankruptcy and Recovery Law has been recently amended. Theamendments entered into force on 2 May 2009. The most importantchanges include the following:

(i) the liquidity test now refers topecuniary obligations only (before it related to non-pecuniary claims as well);

(ii) the unsecured claims to be satisfiedout of the proceeds of liquidation aregrouped into five categories (i.e. onemore group has been created);

(iii) composition now affects securedclaims to the extent that the claimsare not covered by the value ofcollateral, or the relevant securedcreditor agrees to be affected by the composition;

(iv) for the purposes of voting oncomposition proposals, the judgecommissioner is able to refrain fromdividing creditors into groups. In thiscase, the terms of the proposedcomposition are the same for allcreditors (unless a creditor agrees toless favourable terms) and thecomposition is deemed accepted ifvoted for by a majority of creditorshaving together at least two-thirds ofthe total amount of claims authorised

to vote. If the creditors are dividedinto groups, the composition isdeemed to be accepted if voted forby the majority of creditors in eachgroup having at least two-thirds ofthe total amount of claims authorisedto vote in that group. However, thecomposition can be “crammeddown” (i.e. is deemed concluded ifthere is no required majority in oneor more of the groups of creditors),provided that: (i) a majority ofcreditors from each of the othergroups having two-thirds of the totalamount of claims authorised to votehave accepted the composition, and(ii) the creditors from the dissentinggroup(s) would be satisfied throughthe composition to an extent whichis not less favourable than in thecase of liquidation;

(v) recovery proceedings are availablealso for insolvent debtors whosedebts do not exceed 10% of theoverall value of the assets and areoverdue for not more than threemonths;

(vi) a security assignment and securitytransfer of ownership are treated thesame as pledges (at the moment,assets encumbered with these formsof security are effectively excludedfrom the bankruptcy estate).

Test for InsolvencyLiquidity testThe insolvency test is passed if thedebtor does not perform its pecuniaryobligations as they fall due.

Balance sheet testThe balance sheet test is passed if the debtor’s total obligations exceed

Key Elements:

n Single bankruptcy proceeding

n Separate recovery proceeding

n Ranking of claims


n Antecedent transactions

Poland



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the value of total assets (even if theobligations are being performed on atimely basis).

To become “insolvent”, a corporatedebtor must satisfy either the (i) liquiditytest; or (ii) the balance sheet test. Withrespect to other debtors (especially, sole traders and consumers), only theliquidity test applies.

Bankruptcy ProceedingsBankruptcy proceedings in relation to an entrepreneur are initiated eithervoluntarily (i.e. through filing by thedebtor) or involuntarily (i.e. through filingby any creditor). The court decides after a hearing whether the tests forcommencement (described above) havebeen met. A petitioning debtor must,and a petitioning creditor can, indicate in the bankruptcy petition whether itapplies for bankruptcy with acomposition option or liquidation.

If it is sufficiently substantiated thatthrough the composition the creditorswould be satisfied to a greater extentthan in the case of liquidation, the courtwill declare bankruptcy with acomposition option. However, thecomposition option will not be allowed if, due to the debtor’s behaviour to date,there is no certainty that the compositionwill be achieved (unless the compositionproposals provide for a liquidation plan).In addition, if an initial creditors’ meetingwas convened and adopted a resolutionas to the method of conducting theproceedings (i.e. composition orliquidation), the court should respect suchresolution unless it is contrary to the law.

During the proceedings the court is ableto change its original decision in respectof the applicable bankruptcy option andaccordingly switch from the compositionoption to liquidation or vice versa. Sucha decision can only be made if groundsjustifying the alternative option havebecome apparent in the course of theproceedings.

Recovery ProceedingsIt is the debtor (and not the court) whocommences the recovery proceedingsby way of notice filed with the court.Therefore, creditors and shareholders

do not have the right to apply for theopening of recovery proceedings.

The debtor’s notice of commencementof the proceedings should containadministrative details regarding thedebtor and should indicate andsubstantiate circumstances justifying thenotice. The notice should be attachedwith a recovery plan.

The court may prohibit the proceedingsfrom being commenced within fourteendays of the debtor’s filing. The court canonly prohibit recovery proceedings if thestatutory conditions for thecommencement are not met, the noticeof commencement or attachments donot comply with applicablerequirements, or the representations orinformation set out in the documentsfiled is not true.

MoratoriumA moratorium applies in relation to each of the aforementioned insolvencyregimes. However, the bankruptcy witha composition option does not affect the rights of secured creditors who canenforce their security interest to satisfysecured claims. The court maytemporarily suspend the enforcement,but for not more than three months.

Priorities Priority of unsecured claimsUnsecured claims are grouped into five categories to be satisfied out of the proceeds of liquidation in thefollowing order:

(i) costs of bankruptcy proceedings;the following claims due after thedeclaration of bankruptcy: alimonyclaims, pensions due ascompensation for causing a disease,inability to work, disability or deathand claims due as a result of theconversion of life usufruct into lifeannuity; claims stemming from unjustenrichment of the bankrupt estate;claims under executory contractswhose performance was demandedby the bankruptcy officer; claimsoriginated by the acts of thebankruptcy officer; claims generatedby the bankrupt’s acts for which thecourt supervisor’s permission was

not necessary or carried out with the court supervisor’s permission;

(ii) the following claims due before the declaration of bankruptcy:employment claims, farmers’ claims under contracts of delivery of products from their own farm,alimony claims, pensions due ascompensation for causing a disease,inability to work, disability or deathand claims due as a result of theconversion of life usufruct into lifeannuity; social insurancecontributions payable on behalf ofemployees (together with interestand costs of execution) for the lasttwo years prior to the bankruptcy;

(iii) tax liabilities, other public chargesand other social insurancecontributions, together with interestand costs of execution;

(iv) other claims that do not fall into thefifth category, together with interestfor the year preceding thedeclaration of bankruptcy, togetherwith contractual damages, costs oflitigation and execution; and

(v) interest that does not fall into thehigher categories (to be paid out inthe order in which the principal sumsshould be satisfied); fines imposedby the courts and administrativeauthorities; claims in respect ofdonations and legacies.

A claim (receivable) against the debtoracquired by way of assignment orendorsement after the declaration ofbankruptcy will be satisfied under thethird category, unless it is to be satisfiedin the fourth category. This does notapply to claims resulting from acts of the bankruptcy officer or acts of thebankrupt carried out with the courtsupervisor’s permission.

Secured CreditorsClaims secured in rem, i.e. by way ofmortgage, pledge, registered pledge,treasury pledge and maritime mortgage,are dealt with separately from unsecuredclaims. The Bankruptcy and RecoveryLaw does not give a secured creditorcontrol over the realisation of the



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encumbered assets, but it does adopt a clear and sensible approach torealisations. It provides for a separatedistribution of proceeds realised from the sale of the encumbered assets. The sale proceeds, after deduction of thecosts of sale and capped costs of thebankruptcy proceedings, are distributedto the secured creditors according totheir respective priorities. But, in the caseof security over real property or ships(mortgage), the following claims will havepriority over the mortgagee’s claim: (i)alimony claims due after the declarationof bankruptcy; (ii) claims of theemployees who performed their work on the real property or ship for the last 3 months preceding the sale (but notmore than three times the minimumguaranteed salary); and (iii) pensions dueas compensation for causing a disease,injury or death as well as annuitiesresulting from the conversion of lifeusufruct into life annuity, due after thedeclaration of bankruptcy.

Where an asset (a moveable, areceivable or a property right, or acollection thereof) has been encumberedwith a registered pledge comprising acontractual option to satisfy the securedclaim by taking-over the encumberedasset or by way of its sale, the pledgeewill still be able to exercise thesecontractual options (subject to certainexceptions). Accordingly, such assetswill be liquidated, at the pledgee’soption, through the pledgee taking overtitle to the assets or through a sale.

Security assignment and securitytransfer of ownership are treated thesame as pledges and the securedcreditors have no right to claim theencumbered assets to be excluded from the bankruptcy estate.

If the proceeds of liquidation ofencumbered assets are not sufficient tosatisfy the relevant secured claims in full, the remaining portion of the securedclaims will be satisfied pari passu withunsecured claims from liquidation of thebankrupt estate.

Creditors who hold claims secured onthe debtor’s assets located abroad byway of mortgage or entry in a registercannot participate in bankruptcy

distributions. Such claims will be allowedonly if the creditor submits evidence thatforeign security has been de-registered(released).

DirectorsUnder Polish law, fiduciary duties areimposed only on de jure directors, i.e. (in the case of companies) members ofthe management board. De factodirectors (i.e. those to whom certainmanagement powers are delegated) willbe responsible only within the scope of their contract with the company (usually,framed as employment contract). Theconcept of “shadow directors” is notrecognised by Polish law, although onecannot exclude that a person whoindeed controls the managers of thecompany may be held liable fordamages it has caused, based on the principle of fault.

In relation to the duty to file a bankruptcypetition, the Bankruptcy and RecoveryLaw sets out a list of persons obliged todo it, e.g. with regard to legal personsand other organisational entities - it isany person authorised to represent themindividually or jointly with other persons;with regard to partnerships - it is anypartner; with regard to an entity beingsubject to non-bankrupt liquidation - it isany liquidator. The duty to file a petitionapplies to each representative of adebtor who is a legal person or an entityhaving legal capacity without being alegal person. For companies, this appliesto each member of the managementboard (i.e. de jure directors).

Management duties and potential liabilitiesMembers of the management boardowe fiduciary duties to the companyitself and can be held liable to it foreither breach of law or the company’scharter. They can also become liable to the shareholders and third parties(contractors, suppliers, employees, etc.)based on the principle of fault (which is present not only if there is an actualintent to cause harm but also in thecase of negligence). In certaincircumstances, members of themanagement board can also be subject to criminal liability.

If the members of the managementboard fail to file the petition for abankruptcy, contrary to the duty to doso, then they are liable to the creditorsfor any damages incurred by their failureto file. In limited liability companies, theirliability goes even further as they arealso liable for all debts of the company if enforcement against the company’sassets has proven unsuccessful.Furthermore, they may also be subjectto criminal liability (imprisonment for upto 1 year) and be deprived of the right torun a business, act as a representativeof entrepreneurs and/or sit on thesupervisory boards of companies andco-operatives.

Under Polish law, members of themanagement board have only statutoryduties (stemming from generallyapplicable laws) and contractual duties(stemming from the relevant contractunder which they perform the duties).

Insolvency issues for directorsWrongful or fraudulent trading triggerscivil liability and, in certain circumstances,may also lead to criminal liability. If such facts are established, the court will not allow the management board to keep control over the assets as a“debtor in possession” even if the testsfor composition are substantiated.Following the declaration of bankruptcy,the bankruptcy officer will be able to take an action for compensation against them if, as a result of wrongful or fraudulent trading, the company hassuffered damage.

The directors are criminally liable fortransactions considered commerciallyreckless and leading to bankruptcy, as well as for preferential treatment of certain creditors in the event of anupcoming bankruptcy. Notably, for the purposes of the balance sheet test,one should take into account not onlymature obligations but also knownand/or foreseeable future obligations.

Lender LiabilityThe notion of lenders’ liability for theborrower’s debts (construed on thebasis of “shadow director” or similarconcepts) has not been recognised inthe legislation, legal doctrine or courtpractice in Poland. A lender who

controls and directs the debtor’sbusiness can be found liable for thedebtor’s debts based on the generalprinciple of fault. To date, the concept of controlling/directing lenders’ liabilityfor the borrower’s debts has never been successfully claimed in Poland.

Creditor GroupingVoting procedure applies to a number of decisions, but the two most importantare the determination of applicablemode of the proceedings (liquidation or composition) and, in the case ofcomposition, the approval of thecomposition plan. For the purpose ofvoting on the composition plan, thejudge-commissioner may classify thecreditors into the following groups: (i)employment, (ii) claims secured in rem;(iii) creditors who are shareholders; and(iv) other claims (which may be split intofurther groups). The judge-commissioneris, however, able to refrain from dividingcreditors into groups.

If the creditors are not grouped, theterms of the proposed compositionshould be the same for all creditors(unless a creditor agrees to lessfavourable terms) and the composition is deemed accepted if voted for by the majority of creditors jointly holding atleast two-thirds of the total amount ofclaims authorised to vote.

If the creditors are grouped, thecomposition is deemed to be acceptedif voted for by the majority of creditors in each group having at least two-thirdsof the total amount of claims authorisedto vote in that group. However, thecomposition can be “crammed down”(i.e. is deemed concluded if there is norequired majority in one or more of thegroups of creditors), provided that: (i) the majority of creditors from each of the other groups having two-thirds ofthe total amount of claims authorised to vote have accepted the composition,and (ii) the creditors from the dissentinggroup(s) would be satisfied through the composition to an extent which isnot less favourable than in the case ofliquidation.

The composition binds all creditorswhose claims are subject to

composition, save for those whoseclaims have been deliberately keptundisclosed by the debtor and whohave not participated in theproceedings.

Dissenting creditors can appeal againstthe court decision approving thecomposition. The appeal can be basedon either procedural or substantivegrounds; the most significant objectionbeing that the composition is notcompliant with the law (but, notably, thelaw does not limit the scope of availableworkouts, provided that their terms mustbe identical in relation to each creditor in the same group) or that its terms areblatantly detrimental to creditors whovoted against it and filed pleas.

The aforementioned bankruptcyproceedings aim to enhance thepreservation of companies, thereforethe courts are often quite favourable tothe debtors. However, the position ofcreditors has been significantly improvedunder the Bankruptcy and Recovery Lawin comparison to the previous regime.For example, an initial creditors’ meetingmay choose the method of conductingthe proceeding (i.e. composition orbankruptcy) and this choice is bindingupon the court. The creditors can alsoimpose their own composition plan(which may even comprise a liquidationplan) on the debtor.

Antecedent TransactionsAll gratuitous transactions performed bythe debtor within one year before thebankruptcy filing are ineffective. Thesame applies to transactions where avalue received by the debtor isconsiderably less than the value of thedebtor’s performance, i.e. transactions at an undervalue.

The repayment of a debt prior to itsmaturity date or the establishment of asecurity interest in order to secure such a debt will not be effective, if made within two months preceding the day ofthe bankruptcy filing. The creditor mayrequest that the repayment or theprovision of security be declared effectiveon the basis that he had no knowledgeabout the existence of grounds for thedeclaration of bankruptcy.

Transactions with related parties(relatives or affiliated companies) areineffective if made within six monthsbefore the bankruptcy filing (even ifmade at arms length and on fair market terms).

The judge-commissioner may alsodeclare as ineffective the establishmentby the debtor of a security interest inrem (including pledge and mortgage) as security for a third party’s debt if thedebtor has obtained in return no valueor inadequate value. Irrespective of thevalue received, the judge-commissionerwill declare ineffective any securityinterest to secure a debt of a relatedparty. In these cases, the “hardening”period is one year.

The bankruptcy officer may also file anaction with the civil court in order todeclare any other transaction ineffectiveif it was made to the creditor’sdetriment, based on the general “actioPauliana” (in which case the “hardening”period can be up to five years). Atransaction will be declared ineffectiveon this basis if:

(i) the transaction was detrimental tocreditors, i.e. the debtor, as a resultof the transaction, became insolvent(or, if it was already insolvent,became insolvent to a greaterextent);

(ii) the debtor was aware of thedetrimental effect on the position of creditors; and

(iii) the other contracting party wasaware of the detrimental effect or, acting diligently, could have become aware of the detrimentaleffect (awareness is presumed if the contracting party was in a close commercial relationship with the debtor).

In general, all transactions concludedwithin a hardening period describedabove are captured by the relevanthardening periods notwithstanding the debtor’s intention.

There are two exceptions. Firstly, if thedebt was repaid prior to its maturitydate, or security was given to secure



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immature debt, the creditor may rebutthe challenge if it proves that at themoment of accepting the repayment or security he was not aware of theexistence of the grounds for adeclaration of bankruptcy. Secondly,with regard to “actio Pauliana” described above, the creditor may alsorebut the challenge if the creditor canprove that they could not have becomeaware of the detrimental effect.

RecharacterisationA shareholder’s claim in respect of aloan granted to its subsidiary companyshall be treated as a contribution to thecompany’s share capital if the companyis declared bankrupt within two years ofthe date the loan agreement beingentered into.

All transactions with related parties areineffective if made within six monthsbefore the bankruptcy filing (irrespectiveof whether any value was provided).

The parent company cannot be liable for the debts of a subsidiary.

Set-offSet-off is inadmissible if the creditor hasacquired its claim by way of assignmentor endorsement after the declaration ofbankruptcy or within the last yearpreceding the declaration of bankruptcyif such creditor knew of reasons, whichmay have led to the eventual bankruptcy.

In the case of bankruptcy with thecomposition option, as long as theproceedings are not discontinued,completed or switched to the liquidationoption, set-off is inadmissible if thecreditor has become the bankrupt’sdebtor after the declaration ofbankruptcy, or (while being thebankrupt’s debtor) has acquired a claim against the bankrupt by way ofassignment or endorsement after thedeclaration of bankruptcy. However, thislimitation does not apply if the creditorhas acquired the claim as a result ofsubrogation, i.e. by way of paying off thebankrupt’s debt for which it had beenpersonally liable (e.g. as guarantor) orwith certain assets (e.g. as pledgee),provided that the liability for thebankrupt’s debt originated before anapplication for bankruptcy was filed.

A creditor who wishes to exercise theright of set-off must make a declarationto that effect no later than at the point of filing of its proof of claim and suchdeclaration should be attached thereto.

In the case of bankruptcy with theliquidation option, set-off is possible only if both debts existed at the time of declaration of bankruptcy, even ifpayment of one of them was not due.The creditor’s debt will be fixed at theaggregate amount whereas thebankrupt’s debt will be fixed as theprincipal sum with no interest as fromthe date of declaration of bankruptcy. If the bankrupt’s non-interest-bearingdebt did not fall due on the date ofdeclaration of bankruptcy, the amount to be set-off will be the sum reduced by statutory interest (at a rate notexceeding six per cent per annum),running from the date of declaration of bankruptcy until the payment date,but not for more than two years.

Recognition of ForeignInsolvency ProceedingsThe comments below do not apply toinsolvencies within the EU, which arerecognised pursuant to the Regulation.

The Bankruptcy and Recovery Lawdeals with the recognition of foreigninsolvency proceedings in line with theUNCITRAL Model Law on Cross-BorderInsolvency.

The recognition of foreign insolvencyproceedings does not prevent the Polishcourt from opening parallel bankruptcyproceedings in Poland (provided that ifthe foreign insolvency proceedings arerecognised as the main proceedings, the proceedings in Poland will have thestatus of secondary proceedings andcan relate only to the debtor’s assetslocated in Poland).

The debtor does not have to run abusiness in Poland in order to be eligible for bankruptcy proceedings. It is sufficient if the debtor’s assets (notnecessarily organised as an enterprise)are located in Poland. The debtor mustpossess bankruptcy capacity, i.e. mustbe capable of acting in a courtproceeding and be an “entrepreneur”within the meaning ascribed to this termby the Bankruptcy and Recovery Law.

Polish Courts will recognise only thoseforeign proceedings that meet thestatutory definition, which covers “anycourt or administrative proceedingscarried out abroad the subject of whichis joint enforcement of claims against aninsolvent debtor, where the assets andmatters of the debtor are surrendered to the control or management of aforeign court for the purpose of theirrestructuring or liquidation”.

Recognition proceedings can only beinstigated upon a motion by a foreignadministrator. The Polish court will issue

an order on the recognition if the Polishcourts have no exclusive jurisdiction, therecognition would not conflict with thebasic principles of legal order in Poland,and the motion for recognition meetsformal requirements. The order onrecognition will indicate whether therecognised proceedings are main orsecondary proceedings.

The recognition of foreign insolvencyproceedings comprises the recognitionof decisions relating to the appointment,dismissal and change of anadministrator, and decisions relating tothe conduct of the foreign proceedings,their suspension or completion.Furthermore, the Polish court can alsodecide on the enforceability in Poland of foreign executory documents issuedin the course of the foreign proceedings(e.g. a list of claims, a composition orsimilar documents), provided that suchexecutory documents are enforceable inthe state where they were issued andrelate to a matter that is not subject tothe exclusive jurisdiction of the Polishcourts, and their enforcement would notconflict with the basic principles of legalorder in Poland.

On the day of recognition, by operationof law the court actions relating to thedebtor’s assets are stayed, and thedebtor is deprived of the right to manageand dispose of its assets (unless therecognised proceedings contemplate acomposition and the debtor has retainedpossession of its assets).

The effects of any bankruptcy declarationissued abroad and recognised in Polandas to the assets located in Poland andas to the obligations that have originatedor are to be performed in Poland, are subject to Polish law. In addition, the ineffectiveness and avoidance of the debtor’s transactions relating to theassets located in Poland will also besubject to Polish law.



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European Insolvency ProceduresThe Czech Republic


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IntroductionAs of 1 January 2008, the CzechRepublic completely overhauled itsinsolvency law, replacing its Bankruptcyand Composition Act of 1991 with anew Insolvency Act (Act No.182/2006Coll., the “IA”). The legislative processleading to the new codification was longand difficult, but one can say with areasonable degree of confidence that,quibbles aside, it has resulted in amodern insolvency law regime forcorporate debtors. The IA alsointroduces discharge proceedingsavailable to not-for-profit organisationsand individuals but this area of the law,although interesting, is beyond thescope of this publication. In July 2009,the IA underwent the first set ofsubstantive amendments (promulgatedas Act No. 217/2009 Coll., the “2009Amendments”), aimed at easing theimpact of the economic downturn onbusinesses and households.

Insolvency andRestructuring ProcessesUnder the IA, there are two main typesof proceedings available to corporatedebtors: liquidation (konkurs), i.e. a saleof the estate (piecemeal or as a going-concern) with satisfaction of creditorsthrough distribution of the proceeds,and reorganisation (reorganizace), i.e. anon-liquidation reorganisation measure,typically a re-capitalisation, based on areorganisation plan approved bycreditors and the court.

In theory, the proceedings under theInsolvency Act start as unitary with ageneral phase meant to determineinsolvency and the method of itsresolution (i.e. liquidation or

reorganisation). In actual fact, themajority of corporate debtors willproceed straight into liquidation, uponcourt determination of their insolvency.This is because reorganisation (unlesspre-approved by the majority of securedand unsecured creditors) is availableonly to debtors who meet a certainthreshold, being either minimum annualsales of CZK 100m (approximately €4m)or minimum staff of 100 full-timeemployees. Based on data on thedebtor population under the previousbankruptcy regime in the years 1991 to2004, this would apply to 8-9% of alldebtors. Thus far, some 20reorganisation attempts have beenallowed since January 2008, with lessthan 10 reorganisation plans havingbeen successfully confirmed.

An important procedural change wasintroduced by the 2009 Amendmentswith respect to proceedings relating togroups of companies. As a rule, theinsolvency court will now appoint thesame trustee for all debtors who belongto the same corporate group. Inconnection with the previous rule, ifsuch appointment results in potentialconflict between the affiliatedcompanies, the court will appoint aseparate ad hoc trustee to deal with theparticular conflicting situation. A relatedamendment to the Act on Courts andJudges will achieve the concentration ofinsolvency cases of debtors belongingto the same corporate group before thesame insolvency judge.

These amendments should greatlyfacilitate more effective management ofproceedings with respect to relatedcompanies. At the same time, it shouldbe noted that, although these

amendments are useful, they really onlyremedy inaction on the part of thejudiciary – Czech insolvency courts couldeasily have arranged matters to thiseffect without Parliament’s intervention.

LiquidationIn liquidation, a trustee will displacemanagement, gather the assets, list and verify liabilities (both subject to thepossible adjustment via adversaryproceedings where ownership of assetsor amount or rank of claims is disputed),convert the assets into cash through asale (piecemeal or going concern) anddistribute the cash to creditors in anorder of priorities that follows, subject to certain exemptions, the ranking ofclaims under non-insolvency law.

Reorganisation The reorganisation provisions wereheavily inspired by Chapter 11 of theU.S. Bankruptcy Code, but withsignificant departures from this modelespecially as regards the entry intoreorganisation (see the “threshold test”above and the creditors’ right todetermine the type of proceedings,described further below in this section).

In reorganisation, the debtor’smanagement will remain in control, beingmonitored by a trustee and a creditors’committee and will, upon the courtallowing a reorganisation attempt throughan initial ruling, propose and negotiate aplan, while the company’s businesscontinues. Shareholders will be strippedof their voting control with one exception- they will keep the right to elect themanagement. Creditors will be able topre-empt the court’s decision on whethera reorganisation attempt should be

Key Elements:

n Reorganisation procedures available since January 2008

n Increase in creditor control

n Automatic stay applies

n Set-off is allowed subject to limitations

n Netting arrangements work

The Czech Republic

allowed through a vote, however, suchdecision must be approved either by asignificant majority across classes (90%of all claims present or represented) or byboth secured and unsecured creditorsvoting separately (in each of these groupsthrough a simple majority of claimspresent or represented). If creditorsdecide that the debtor’s business shouldbe liquidated, the court will convert theproceedings into liquidation, in spite ofthe debtor meeting the size test,described above. If the creditors agreewith the reorganisation plan (or, in relationto a debtor who meets the size test, donot agree but fail to obtain the requisitemajority of votes against the debtor’sproposal), the court will allow areorganisation attempt if it is satisfied thatreorganisation is proposed in good faith.

This decision will have to be taken within three months of the debtor being declared insolvent by the court.Management will then have anexclusivity period of 120 days (which thecourt may extend by up to another 120days) to submit a proposal of a plan tothe court, together with a disclosurereport. Upon the court’s approval of thereport, but not earlier than after 15 daysfrom the report being published, acreditors’ meeting will vote on the plan.The plan may propose any lawfulmeasure of resolution of the company’sinsolvency - the IA allows flexibility in this respect. Creditors will vote on theplan by classes; a majority in the

number of creditors and by amount ofclaims in each class is needed for theplan to be approved. Creditors will beplaced in classes according to criteriaproposed in the plan, however, eachsecured creditor will always be in a classof its own, as will be the company’sshareholders.

Creditors whose claims are not affectedby the plan will be deemed to haveapproved the plan. As regardsclassification of other claims, claimsgrouped in any one class must besubstantially the same as regards theirlegal rights and their commercial nature.A plan approved by all classes will beconfirmed by the court subject toseveral tests, most importantly legalityand good faith, and minimum pay-outtest on individual rather than class basis(in U.S. bankruptcy law, this would becalled the “best interest” test), being thelikely pay-out in a liquidation.

The court may also confirm a plan notapproved by all classes (the so-called“cram-down”) but only if at least oneaffected class distinct from theshareholders voted in favour of the planand if the plan (i) leaves the securityinterests of secured creditors substantiallyunaltered and pays to secured creditorsthe net present value of their collateral, asdetermined by an expert valuer, and (ii)adheres to the “absolute priority rule” withrespect to other classes, meaning thatthe opposing unsecured creditor class

must either be paid in full or no classjunior to its claims may receive any payout under the plan, which may entailwiping out the current equity andreplacing it with new registered capital.

Upon confirmation, the pre-confirmationclaims will be extinguished and replacedby new claims as determined in theplan. Also, assets will be freed from pre-confirmation encumbrances. Theproceedings will not be terminated upon confirmation. They move into the “performance” phase in whichmanagement will remain in control butwill still be monitored by the trustee andthe creditors’ committee. If the plan isperformed as confirmed, the court willclose the proceedings. If the plan is not performed the court will convert the proceedings into liquidation wherecreditors claims are at the levelpreviously agreed in the plan.

The 2009 Amendments changed severalrules directly related to reorganisation.Firstly, the pre-approval requirements forthe filing of a pre-packaged plan (i.e. aplan pre-agreed between the debtor andthe creditors in order to accelerate theproceedings by effectively merging thecourt’s order finding the companyinsolvent with its order allowing anreorganisation attempt) have been eased.Instead of the approval of all creditorclasses required previously, the 2009Amendments only require the approval bythe majority of claims of secured andunsecured creditors. Secondly, the 2009Amendments also allow creditors to takeaway the debtor’s exclusive right topropose a reorganization plan.Interestingly, this decision can be takenby the vote of a simple majority of claimspresent or represented, without anydistinction between secured andunsecured creditors. Finally, the 2009Amendments banned set-off duringreorganisation proceedings (see moreunder “Set-off” below).

Impact on Third Party RightsAn insolvency petition will be registeredby the insolvency court and published inan on-line publicly accessible insolvencyregister within two hours of the filing.Upon the publication, the enforcement



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of creditors claims (secured as well asunsecured) becomes subject to anautomatic stay. In liquidation, the stay is de facto limited through a rule thatallows the secured creditor to issueinstructions to the insolvency trustee asregards the realisation of the collateral.

The court may reverse these instructionsonly where they would prejudice thecommon interest of all creditors on thehighest possible realisation of the estate.In reorganisation, enforcement ofcreditors claims (including securedcreditors claims) will be subject to thestay throughout the reorganisationproceedings. The mitigating factors are the creditors’ right to preclude areorganisation attempt and take awaythe debtor’s exclusive right to propose aplan (as explained above) and thedebtor’s obligation to pay interest to thesecured creditors at contract rate fromthe value of their collateral asdetermined by an external valuer. Afailure to meet these payments wouldmean a conversion to liquidation.

Unlike in some other jurisdictions, theautomatic stay does not extend to shieldexecutory contracts from termination bythe debtor’s counterparty. These aresubject to (rather unclear) rules inliquidation - essentially, the trustee willbe able to assume or reject anexecutory contract but if he does neitherwithin 15 days from the court’s decisionthat the proceedings will be liquidationproceedings, the contract will bedeemed to be rejected. The maindifficulty with this rule, in addition to theinadequate length of the period given tothe trustee, is the fact that the IA effectsrejection on a rescission only basiswhich, under Czech law, puts the partiesback in their original position.

The counterparty’s claim for rescissionwill rank as an administrative priorityclaim. This solution is very disruptive (not least to general pre-commencementcreditors who will be subordinated tothis claim) and seems out of line withrules dealing with executory contracts in other jurisdictions. In reorganisation,executory contracts are arguably notregulated at all, although the IA containsa provision that could possibly beinterpreted as a prohibition of ipso facto

clauses. The law in relation to executorycontracts is arguably the leastsuccessful part of the IA and one musthope that the legislator will addressthese issues in the near future.

Priority Ranking of CreditorsWith certain exceptions, the IA respectsthe ranking of claims under pre-insolvency law, i.e. it respects both thepriority of secured claims and thesubordination of junior claims.

With respect to secured claims, thepriority is absolute in liquidation, save for capped deductions for the costs ofmaintenance and sale of the collateral(these should not amount to more than9 or (depending on the reading of thelaw) 11% of the gross proceeds of therealisation of the collateral. In areorganisation, secured creditors may,under certain circumstances, have tosuffer a dilution as a consequence ofpost-commencement finance claimswhich may rank pari passu with pre-commencement secured claims. Butthis would only be so where (i) the post-commencement financing was providedfollowing the court’s approval of thereorganisation attempt and infurtherance of the goals of thereorganisation, (ii) the relevant financingcontract was approved by the creditorscommittee and (iii) the secured creditordid not make use of the right of firstrefusal, granted by the IA, to provide thepost-commencement financing itself.

Unsecured claims will be subject tosecured pre-commencement claims,administrative (i.e. post-commencement)claims as well as certain preferred pre-commencement claims, most notablyunpaid wages and other employee claimsback and to personal injury claims.

Subordinated claims will be paid subjectto the terms of their contractualsubordination. The IA did not introduceequitable subordination of shareholderor other connected party claims.

Directors’ DutiesThese can be grouped into duties relatingto the opening of the proceedings andduties that directors have in theproceedings where they remain in control.

The former duties mainly include thedirectors’ duty to file for thecommencement of proceedings withoutdelay after the directors have determined,or should have determined, that thecompany is insolvent. Insolvency istested both on the cash-flow basis (i.e.the company’s ability to meet currentdebts) and the balance sheet (i.e. themarket value of the company’s assetsagainst the total amount of its liabilities).This duty is subject to very stringentliability for damages - directors who arein default of the duty will be liable tocreditors for damages whose amountwill be presumed to be equal to thedifference between their proven claimsand the insolvency dividend. Importantly,chiefly out of concern that the prevailingasset price volatility and uncertainty ofvaluations may force debtors to file forinsolvency even in cases where the filingwould be unsubstantiated in times ofmore stable asset valuations, the 2009Amendments removed the debtor’s (anddirectors’) duty to file on the grounds ofthe balance sheet test. However, thisrelaxation is temporary - the rule willrevert to its original wording at the endof 2011.

The latter duties can be described asthe fiduciary duties to the creditorssimilar to those applicable to theinsolvency trustee. The directors whoremain in control of the company willhave to act diligently and will be obligedto put the creditors’ interests first.

Lender LiabilityAs a matter of fact, lender liability lawdoes not exist in the Czech Republic but there are statutory provisions (mostnotably rules on shadow directorship)which could be used to make a creditorwho substantially influences thecompany’s actions liable to the companyand indirectly its shareholders. There are,however, no reported higher instancecourt cases of these rules having beenused, let alone used against creditors, so the actual legal position under Czechlaw is difficult to gauge.

Challenging AntecedentTransactionsThe IA allows the insolvency trustee (butnot the debtor’s management) to sue in

order to avoid antecedent transactionsthat can be shown to constitute apreference, an undervalue or a transferwith actual fraudulent intent. The trusteemay bring the action within one year fromthe opening of insolvency proceedings.The standard claw-back period is oneyear for preferences and undervalues andfive years for transactions with actualfraudulent intent. For preferences andundervalues, the trustee must show thatthe debtor was either insolvent orbecame insolvent as the result of thetransaction. For transactions withconnected parties, the claw-back periodfor preferences and undervalues isextended to three years and the debtor’sinsolvency will be presumed.

Set-offThe IA has substantially liberalisedinsolvent set-off which was fullyprecluded under the previousBankruptcy and Composition Act. Underthe IA in its original version, a creditorcould set off its mutual claims vis-à-visthe debtor provided that the substantiveconditions for the set-off were met priorto the date of determination of the typeof bankruptcy proceedings. For allpractical purposes, this means that acreditor will be entitled to off set pre-commencement claims although acreditor must formally prove its claimand pay any net sums due to thedebtor. Also, a creditor was not beentitled to the set-off if he knew of thedebtor’s insolvency when he acquiredhis claim.

The 2009 Amendments tightened therules on set-off significantly. Theybanned set-off after a court orderdeclaring a moratorium (a specialprotective measure which the court may,with the approval of majority of creditors’claims, order for up to 3 months priorto, or following, the opening of theproceedings) and after the filing of anapplication for reorganisation. Theinsolvency court will be entitled to grantexemptions from the ban. Furthermore,upon the application by a party ininterest and where this is not contrary tothe common interest of creditors, theinsolvency court will have the power toban set-off in other procedural phasesas well, albeit only in specific cases andfor specified periods of time.

While the restriction after a court-ordered moratorium may be of limiteduse given that the court may onlydeclare a moratorium with the priorapproval of the majority of creditors, therestriction kicking in as of the filing of anapplication for reorganisation may helpprotect the cash-flow of those debtorswho are eligible for reorganisation underthe IA’s size test described above.

GuaranteesGuarantees of creditors’ claims are notaffected by the debtor’s insolvency - i.e.the guarantor will pay the creditoroutside the insolvency proceedings and will become subrogated into thecreditor’s procedural position.

The problem with guarantees in Czechlaw does not come from bankruptcy lawbut rather from Czech corporate lawwhich contains highly confused rules on intra-group guarantees. In principle,these rules require all intra-groupguarantees to be valued by a court-appointed valuer. If the valuation resultsin a positive number, the beneficiarymust pay a fee to the guarantor. Undercertain conditions, the guarantee mayalso need to be approved by theguarantor’s general meeting. It isproposed that these rules will besubstantially changed in the near future.

Also, another peculiarity with respect toguarantees (and security in general) thatone needs to bear in mind is that Czechcorporate law prohibits financialassistance not only to joint-stockcompanies (akciová spolecnost) but alsoto limited liability companies (spolecnosts rucením omezeným). This is notproposed to change in 2008 when theamendments to European financialassistance rules in the SecondCompany Law Directive are proposed tobe implemented in Czech law, althoughthe prohibition will likely be relaxed,similarly to the relaxation with respect tojoint-stock companies as it follows fromthe amended Second Company LawDirective.

New Money LendingNew loans made to the insolvencytrustee in liquidation will have priorityover general creditors but not secured

creditors. In a reorganisation, thesituation is somewhat more complicated.As was mentioned in the section on“Priority Ranking of Creditors”, securedcreditors may, under certaincircumstances, have to suffer a dilutionby new loans made after thecommencement of the reorganisationproceedings which may rank pari passuwith pre-commencement securedclaims. But this would only be so where(i) the post-commencement financingwas provided following the court’sapproval of the reorganisation attemptand in furtherance of the goals of thereorganisation, (ii) the relevant financingcontract was approved by the creditorscommittee and (iii) the secured creditordid not use the right of first refusal,granted by the IA, to provide the post-commencement financing himself.

Interestingly, in the course of thedeliberations of the 2009 Amendments,a proposal for easing the rules on post-commencement financing wasdiscussed and eventually dropped.Essentially, the proposed changes wouldhave allowed the debtor to raise newfinance with the preferential ranking asdescribed above already upon thedeclaration of insolvency and would havereplaced the creditors committeeapproval with an approval by the court.That proposal met with fierce oppositionfrom the banking sector whoseargument that the amendments wouldopen the door to abuse and thus makesecured credit less available to solventcompanies in the first place prevailed inthe Parliamentary deliberations, leavingthe rules as described above.

Recognition of ForeignProceedingsWith respect to European Unioncountries (other than Denmark), theRegulation applies to proceedingsopened after 1 May 2004 when theCzech Republic acceded to the EU.Unfortunately, the IA contains no ruleson cross-border proceedings outsidethe EU so there will be significantuncertainty on this point, which isunlikely to be amended any time soon.



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European Insolvency ProceduresSlovakia

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IntroductionThe current insolvency law of the SlovakRepublic is based on the Act onBankruptcy and Restructuring (Act No.7/2005 Coll., the “Bankruptcy Act”)which came into effect in the SlovakRepublic as of 1 January 2006,replacing the Act on Bankruptcy andCompensation (Act No. 411/2004 Coll.)

The Bankruptcy Act also provides fordischarge proceedings available tonatural persons, but this area of the lawis beyond the scope of this publication.

Bankruptcy andRestructuring ProcessesUnder the Bankruptcy Act, there are two main types of proceedings availableto corporate debtors: bankruptcy (in Slovak konkurz), i.e. a sale of theestate (piecemeal or as a going-concern) with satisfaction of creditorsthrough distribution of the proceeds,and restructuring (in Slovakreštrukturalizácia), i.e. reconstruction of the right-hand side of the debtor’sbalance sheet, based on a restructuringplan approved by creditors and thecourt.

In bankruptcy, a trustee will displaceexisting management, gather the assets,list and verify liabilities (both subject tothe possible adjustment via adversaryproceedings where ownership of assetsor amount or rank of claims is disputed),convert the assets in cash through asale (piecemeal or going concern) anddistribute the cash to creditors in anorder of priorities that follows, subject to certain exemptions, the ranking ofclaims under non-insolvency law.

In reorganization, the debtor’smanagement will remain in control, being

monitored by a trustee and the court.Upon the court allowing a reorganizationattempt through an initial ruling based onthe restructuring report prepared by thetrustee (see below), the debtor or thetrustee attempt to propose and negotiatea restructuring plan, while the company’sbusiness is being carried on.

If a debtor is threatened by insolvency or is insolvent, the debtor or thecreditor/creditors (subject to the debtor’sconsent) may authorize a trustee toprepare a restructuring report on whetherthe debtor fulfills conditions for itsrestructuring. Authorizing the preparationof a restructuring report, however, doesnot obviate a debtor’s duty to file forbankruptcy in a timely manner.

Provided that the trustee in itsrestructuring report recommended therestructuring attempt, the court will allow it. The management (or in the

event the restructuring is initiated by the creditor, the trustee) will then have90 days (which the creditor’s meetingmay extend up to another 60 days) tosubmit a proposal of a plan to thecreditor’s meeting.

The creditors’ meeting will vote on theplan within 15 days from the plan beingsubmitted to it. The plan may proposeany lawful measure of resolution of thecompany’s insolvency as the BankruptcyAct allows flexibility in this respect.

Creditors will be placed in classes,according to criteria proposed in theplan. The plan will usually provide for aclass of secured and unsecured claims,as well as a class of shareholders’claims. These classes can be alsodivided into separate classes, in order to group together the claims which aresubstantially the same as regards theirlegal rights and their commercial nature.

Key Elements:

n Single process for bankruptcy and restructuring

n Trustee recommendation required for restructuring

n Automatic stay prevents security enforcement

n Set-off allowed

The Slovak Republic


Creditors will vote on the plan byclasses; a majority by number ofcreditors and by amount of claims ineach class combined with the approvalof the simple majority of votes (based on the amount of their claims) of thepresent creditors is needed for the planto be approved. Creditors whose claimsare not impaired by the plan will bedeemed to have approved the plan.

If the creditor’s meeting approved theplan, the plan is submitted for finalconfirmation to the court. A planapproved by the creditor’s meeting willbe confirmed by the court subject toseveral tests, most importantly, from thepoint of view of legality, the best interest(being the likely pay out in bankruptcy).The court may also substitute theapproval of the plan by a particular classof claims if (i) the relevant plan will notbe noticeably worse in the position ofsuch class, (ii) a majority of the classesvoted in favour of the plan by therequired majority, and (iii) the presentcreditors with a simple majority of votes(counted based on the amount of theirclaims) voted in favour of plan too.

If the court rejects the plan, it willdiscontinue the restructuring proceedingand declare bankruptcy over debtor’assets. If the court confirms the plan, it will simultaneously rule on termination of the restructuring. The plan becomeseffective upon publication of the courtresolution on confirmation of the plan inthe Commercial Gazette.

Unless otherwise provided for in theplan, the plan will not affect the rights ofcreditors to recover their original claimsagainst co-debtors and guarantors ofthe debtor, nor will it affect the rights ofcreditors to satisfy their original securedclaims from the assets of third parties.

Impact on Third Party RightsBankruptcyUpon publication of the court resolutionon declaration of bankruptcy in theCommercial Gazette, the enforcementand/or execution proceedings of thecreditors’ claims already existing arestayed. Moreover, no enforcement of thesecurity interest over the assets of the

debtor securing the debtor’s obligationscan be commenced.

Unlike in some other jurisdictions, theautomatic stay does not extend to thetermination of executory contracts.These are subject to (rather unclear)explicit rules in liquidation - essentially,the trustee will be able to assume orreject an executory contract providedthat the relevant contract is entered intofor indefinite period, the trustee has todo so within 2 months from the court’sdecision or such shorter period asprescribed by such contract. The maindifficulty with this rule is the fact that theBankruptcy Act effects rejection throughthe institution of rescission which, underSlovak law, results in the obligation toreturn performance previously renderedunder the contract. Although thecounterparty’s return claim will rank asan administrative priority claim, thissolution is still very disruptive (not leastto general pre-commencement creditorswho will be subordinated to this claim)and seems out of line with rules dealingwith executory contracts in otherjurisdictions. Whereas in reorganization,executory contracts are arguably notregulated at all.

In bankruptcy, the stay of theproceedings, as described above, is defacto limited through a rule that allowsthe secured creditor to issue bindinginstructions to the bankruptcy trustee asregards the realisation of the collateral.The court may reverse such bindinginstructions only where they wouldprejudice the justified claims of the otherrelevant creditors on or the rules ofrealisation of the estate prescribed bythe Bankruptcy Act.

Upon commencement of therestructuring proceedings, withdrawal ofa contractual party from a contractentered into with the debtor for reasonsof debtor’s delay with fulfilling itsobligation under such contract whichbecame due prior to commencement ofthe restructuring proceeding would beconsidered invalid. In addition, thecontractual arrangements allowing aparty to withdraw from a contract forreasons of commencement ofrestructuring proceeding or bankruptcyare also considered invalid.

Priority Ranking of CreditorsWith certain exceptions, the BankruptcyAct respects the ranking of claims as it follows from non-insolvency law, i.e. it respects both the priority of securedclaims and the juniority of subordinatedclaims.

With respect to secured claims, thepriority is absolute in bankruptcy, savefor the costs of maintenance and sale of the collateral.

In bankruptcy, unsecured claims will besubject to secured pre-commencementclaims, administrative (i.e. post-commencement) claims as well ascertain preferred post-commencementclaims, most notably unpaid wages andother employee claims, taxes, andcustoms. In restructuring, the post-commencement claims, trustee’s wagesand non-monetary claims are considered“preferential claims”. Preferential claimsare not applied in the restructuringproceeding and remain unaffected bycommencement of the restructuringproceedings. Should bankruptcy bedeclared during the restructuringproceedings, the preferential claimswhich arose in connection with therunning of a debtor’s business during the restructuring will be satisfied in their unsecured part from the generalbankruptcy estate prior to otherunsecured claims.

Subordinated claims will be paid subjectto the terms of their contractualsubordination. The Bankruptcy Act doesnot provide for equitable subordinationof shareholder or other insider debtclaims.

Directors’ DutiesThese can be grouped into general dutiesof directors to avoid insolvency of thedebtor, duties relating to the opening ofthe proceedings and duties that directorshave in the restructuring proceedingswhere they remain in control.

The former duties include the directors’duty to file for the commencement ofbankruptcy proceedings within 30 daysafter the directors have determined, orshould have determined, that the



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company is insolvent. Insolvency istested both on the cash-flow basis (i.e.the company’s ability to meet currentpayables) and the balance sheet (i.e. themarket value of the company’s assetsagainst the total amount of its dueliabilities). This duty is subject to verystringent liability for damages - directorswho are in default of the duty will beliable to creditors for damages whoseamount will be presumed to representthe amount of the claim that remainedunsatisfied after the bankruptcyproceedings were terminated orcancelled on the grounds of insufficientassets of the debtor.

The directors who remain in controlduring the restructuring proceeding, are obliged to act so that they do notdiminish the value of the assets of thedebtor and do not circumvent thesuccess of the restructuring process.

Challenging AntecedentTransactionsThe Bankruptcy Act allows theinsolvency trustee or the creditors to sueto avoid antecedent transactions thatcan be shown to constitute apreference, an undervalue or a transferwith actual fraudulent intent. Trustee andthe creditors may bring the action within6 months from the declaration ofbankruptcy by the court. The standardclaw-back period is one year forpreferences and undervalues and fiveyears for transactions with actual

fraudulent intent. For preferences andundervalues, the trustee and/or thecreditor must show that the debtor waseither insolvent or became insolvent asthe result of the transaction. Fortransactions with connected parties, theclaw-back period for preferences andundervalues is extended to three yearsand the debtor’s insolvency will bepresumed.

Set-offUnder the Bankruptcy Act, it is notpossible to set off a claim against anentity that arose prior to declaration ofbankruptcy of such entity against aclaim of such an entity that arosefollowing such a declaration. In addition,a claim not applied for in the bankruptcyas prescribed by law, a duly appliedclaim acquired by transfer afterdeclaration of bankruptcy, and a claimacquired by an antecedent legal actcannot be set off against the debtor’sclaims. Set-off of any other claims isallowed in bankruptcy. Moreover, claimsthat have to be applied in therestructuring (e.g. monetary claimsarising prior to the commencement ofrestructuring proceedings) cannot be setoff against the debtor after thecommencement of the restructuringproceedings.

GuaranteesGuarantees of creditor’s claims are not affected by the debtor’s insolvency,i.e. the guarantor will pay the creditor

outside the insolvency proceeding andwill subrogate into the creditor’sprocedural position, unless, in case ofrestructuring, the restructuring planstates otherwise.

New Money LendingThe Bankruptcy Act does not specificallydeal with new money lending in case ofbankruptcy proceedings. The new loansmade to the debtor during restructuringproceedings, will, in case of declaringbankruptcy, have priority over generalcreditors but not the secured creditors.

Recognition of ForeignProceedingsWith respect to European Unioncountries and the signatories of the EEA Agreement, the EIR applies toproceedings opened after 1 May 2004when the Slovak Republic acceded tothe EU.

Cross-border proceedings outside theEU are subject to the rules in therelevant bilateral agreement if in place,or if not in place, the principle ofreciprocity with respect toacknowledgement of foreign judgementson bankruptcy and/or restructuring.

1. The Agreement on the European Economic Area dated 2 May 1992.2. The Council Regulation No. 1346/2000 on insolvency proceedings dated 29 May 2000.

Concept of Insolvencyunder the Insolvency LawPursuant to the provisions of theRomanian law on the insolvencyproceeding No. 85/2006 as amendedand effective (the “Insolvency Law”), a debtor is “insolvent” if it does not have sufficient available monetary fundsfor the payment of its uncontested,quantifiable and outstanding debts.Actual insolvency is presumed where the debtor has not paid a debt within 90 days of its due date. A debtor willalso be held to be insolvent if it can beproved that the debtor is unable to payits debts in the near future from availablemonetary funds (imminent insolvency).

The Insolvency Law provides for twotypes of insolvency proceeding:

(i) a general insolvency proceedingapplicable to certain categories ofdebtors which are (or will imminentlybe) insolvent (e.g. companies,Economic Interest Groups or anyother private law entities performingeconomic activities); and

(ii) a simplified insolvency proceedingapplicable to other categories ofdebtors (e.g. individuals, traders,family associations or certaincategories of companies such ascompanies which do not have anyassets or are not able to produceaccounting documents).

Commencement of theProceedingThe insolvency proceeding is started by filing a petition with the competentcourt. The petition can be filed by the

debtor, by the creditors, or by certainpersons or institutions expresslyprovided by law (e.g. the NationalSecurities Commission, the NationalBank of Romania, the Commission for the Supervision of Insurance).

(i) The debtor

Mandatory filingThe insolvent debtor is compelled bylaw to file a petition of insolvency incase of actual insolvency, within 30days from the moment it becomesinsolvent.

The debtor may disregard this rule if:

a) he is engaged in out-of-courtnegotiations to restructure itsdebts; or

b) insolvency occurs during thecourse of negotiationsconducted in the context of anad-hoc mandate or judicialmoratorium (concordatpreventiv) procedure, providedthat there are strongindications that the results ofthe negotiations are likely toresult in an out of courtagreement being reachedwithin a short period of time.

Under these two circumstances thedebtor acting in good faith should file for insolvency within 5 days of thenegotiations' failure.

Optional filingThe insolvent debtor may also file apetition for opening the insolvencyproceeding in case of imminentinsolvency.

(ii) The creditors

The petition for opening insolvencyproceeding may also be filed by anycreditor who has an uncontestedclaim against the debtor which isquantifiable and has become due,but which has not been paid formore than 90 days. The value of theclaim must be minimum RON45,000. This RON 45,000 minimumclaim should be the net valueresulting from offsetting the creditor'sand the debtor's claims against eachother.

(iii) Other persons or institutions

Other persons or institutions, suchas the National Bank of Romaniaand the Commission for theSupervision of Insurances, maybegin the insolvency proceeding inrespect of entities under theirsupervision and control.

Simplified ProcedureUnder the simplified insolvencyproceeding, the debtor falling under thecategories provided by the InsolvencyLaw will directly enter into liquidationproceedings, either upon the opening of the insolvency proceeding, or after an observation period of a maximum 50 days.

Consequences ofCommencing InsolvencyProceedingAfter considering the insolvency petition,the syndic judge may decide to openeither (i) general insolvency proceeding(and appoint a judicial administrator) or

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Key Elements:

n The effects of insolvency proceeding on the rights of secured creditors

n Guarantees

n Ranking of creditors’ claims

n Lender liability issues


n Recognition of foreign proceedings

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(ii) simplified insolvency proceeding (and appoint a temporary liquidator).

Any acts, operations and paymentsperformed by the debtor after theproceeding is commenced are null andvoid, unless authorised by the syndicjudge or expressly provided by the law.Thus, the law provides that during theobservation period (i.e. the periodbetween the opening of the insolvencyproceeding and the date of theconfirmation of the reorganization planor of the entering into bankruptcy, as the case may be), the debtor maycontinue its current activities and makepayments to the known creditors withinthe common terms of exercising thecurrent activity, either under thesupervision of the judicial administrator(if the debtor maintains the right ofadministration of its business) or underthe management of the judicialadministrator (if the debtor loses theright of administration of its business).The right of administration of thebusiness consists of the right to managethe activity, the assets and to dispose of such assets - including those assetsacquired subsequent to the opening ofthe proceeding.

On the commencement of insolvencyproceeding, the debtor loses the right of administration of its business, unlessthe debtor has declared, in certaincases, the intention to reorganise.

The right of administration terminates de jure on the date the bankruptcyproceeding is commenced.

Commencement of insolvencyproceeding is notified to all creditors, as well as to the debtor and to the Trade Registry. The notification will statea term of maximum 45 days withinwhich creditors should submit claims inthe insolvency proceeding. The judicialadministrator examines these claims todetermine their legitimacy, exact valueand priority. The outcome of suchexamination is recorded in a preliminarytable of claims registered with thecompetent court. The debtor, thecreditors and any other interestedperson may challenge such preliminarytable in court. The preliminary table ofclaims is finalised and registered with

the competent court after all suchchallenges are settled.

The syndic judge may designate acommittee of 3-5 creditors from amongthe largest of the secured claims, thestate/public authority creditors who areowed duties, taxes, contributions, finesand other sums (budgetary claims), andunsecured claims. If, due to the smallnumber of creditors, the syndic judgedoes not consider the designation of acreditors’ committee to be necessary,certain attributions of such committeemay be exercised by the creditors’meeting.

This committee can be replaced by acommittee of 3 or 5 creditors designatedby the creditors’ meeting from those with the largest secured, budgetary and unsecured claims out of the first 20 creditors willing to participate in thecommittee. The creditors’ committee will, amongst other matters, analyse the debtor’s situation and makerecommendations to the creditors’meeting regarding the continuation of the debtor’s activity and the proposedplans of reorganisation, report to thecreditors’ meeting on the judicialadministrator’s or the liquidator’s activity,request the annulment of any detrimentaltransactions made by the debtor.

Judicial reorganisation Following the commencement ofinsolvency proceeding, any creditor, thedebtor or the judicial administrator hasthe option (upon meeting certain termsand conditions) to request a judicialreorganisation of the insolvent debtor.Judicial reorganisation is a procedurethat facilitates the reorganisation of thedebtor’s business in order to allowpayment of its debts according to a planof reorganisation, which may provide thefollowing options: (i) the operationaland/or financial restructuring of thedebtor; and/or (ii) the corporaterestructuring by amending the sharecapital structure; and/or (iii) the reductionof the business by liquidation of certainassets. The plan is submitted forapproval to the creditors and confirmedby the court. Should the syndic judgeapprove the plan, the reorganisationprocedure may not last more than threeyears starting with the date of the

confirmation. This period may beextended with a period of maximum oneyear upon the recommendation of thejudicial administrator, after the expiry of a term of at least 18 months from theconfirmation of the plan, if the proposalis approved by at least two thirds of thecreditors with outstanding debts as atthat date.

During the reorganisation, the debtorshall manage its activity under thesupervision of the judicial administratorand in accordance with the plan ofreorganisation, until the syndic judgedecides that either (i) the insolvencyproceeding is terminated and the debtorresumes its normal commercial activity,or (ii) the reorganisation is terminatedand the debtor enters into liquidation(i.e. where the reorganisation plan wasunsuccessful).

Liquidation If no plan of reorganisation wasproposed or approved or if the plan was unsuccessful, or if the judicialadministrator recommends liquidationand the creditors approve it, the syndicjudge may order the winding-up of thedebtor, the liquidation of its assets andthe distribution of the proceeds thereof.

ChallengesFraudulent transactions An insolvency official (i.e. the judicialadministrator or liquidator) maychallenge the following types of actsperformed prior to the opening of theinsolvency proceeding:

(i) donations provided during the 3years preceding the commencementof the insolvency proceeding,(except for humanitarian donations);

(ii) transactions at an undervalue,entered into during the 3 yearspreceding the commencement of insolvency proceeding;

(iii) transactions intended to evadespecific assets of the debtor fromother creditors or to harm the rights of such creditors, executedduring the 3 years preceding thecommencement of insolvencyproceeding;

(iv) the transfer of ownership rights to a specific creditor made in order todischarge a previous debt due tosuch creditor, if executed during the120 days period preceding thecommencement of the proceeding ifthe amount that such creditor wouldhave obtained in a liquidation of thedebtor would have been lower thanthe value of such transfer;

(v) the creation or perfection of securityin favour of an unsecured claim,during the 120 days periodpreceding the commencement of the proceedings;

(vi) prepayments of debt made within 120days preceding the commencementof proceeding, if the due date of suchdebts would have occurred at a dateafter the commencement of theproceeding;

The latter three transactions cannotbe annulled provided that:

(a) they are entered into in goodfaith following an agreementwith the creditors;

(b) the agreement with thecreditors is concluded as a result of out of courtnegotiations for therestructuring of the debtor'sdebts; and

(c) the agreement should be ofnature to lead, in a reasonablemanner, to the financial redressof the debtor and should nothave as purpose the prejudiceand/or discrimination of othercreditors.

These exceptions apply also in caseof acts concluded within the judicialmoratorium and ad-hoc mandatelegal procedure; and

(vii) transfer or undertaking of obligationsmade by the debtor during the 2years preceding the opening of theinsolvency proceeding with theintention to conceal or delay theinsolvency or to defraud natural or fictitious persons who werecreditors on the date of transfer

of operations with derivative financialinstruments, including the close outof a netting contract concluded onthe basis of a qualified financialcontract, or who became creditorsat a subsequent date.

Disadvantageous transactionsThe following transactions, concludedwithin the 3 years period preceding theopening of the insolvency proceedingmay also be cancelled if these aredetrimental to creditors:

(i) in relation to company’s transactionsbetween the debtor and ashareholder holding at least 20% ofthe capital or 20% of the votingrights, where the debtor is a limitedliability company;

(ii) in relation to an Economic InterestGroup, transactions with a memberor director;

(iii) in relation to the company’stransactions between the debtor anda shareholder holding at least 20%of the debtor’s shares or 20% of thevoting rights, where the debtor is ajoint stock company;

(iv) transactions with a director, manageror member of the supervisory bodiesof the debtor, where the debtor is ajoint stock company or a limitedliability company;

(v) transactions with any person,holding a dominant position over the debtor or its business;

(vi) transactions with a co-owner over a common asset.

The insolvency official may challenge theabove transactions within one year fromthe expiry date of the term during whichthe report on the debtor’s insolvencystatus has to be drafted by theinsolvency official, but not later than 16months from the commencement of theinsolvency proceeding. If the insolvencyofficial fails to take action to challengeany of the above-mentionedtransactions, the creditors’ committeemay also challenge these transactionsbefore the court. However, no suchclaim may be brought against thesetransactions if performed by the debtorin the ordinary course of its business.

Pending Contracts The Insolvency Law provides for thegeneral rule that ongoing contractsentered into by the insolvent debtors are deemed to be maintained when the insolvency proceeding is opened. Also, any contractual provisions whichprovide for termination of such ongoingcontracts for the reason of insolvencyproceeding being opened against aparty are null.



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In order to maximise the value of thedebtor’s assets, the insolvency officialmay unilaterally terminate any contract,any unexpired lease or other long termcontracts, to the extent that suchcontract has not been performedentirely, or substantially by all the partiesinvolved. The insolvency official mustreply within 30 days to a notice from acounterparty requesting the insolvencyofficial to terminate the contract; if theinsolvency official fails to reply to suchrequest, he shall not be able to requireperformance under the respectivecontract, which will be deemedunilaterally terminated.

If a contract is terminated unilaterally by the insolvency official either expresslyor due to failure to reply to thecounterparty’s notice, the contractormay file a claim for damages against the debtor.

During the observation period the judicial administrator can amend thecredit contracts so as to ensureequivalence of future performance.

Where a contract provides for periodicpayments from the debtor, themaintenance of the contract does notmake the insolvency officer liable to pay sums due under the contract whichrelate to periods prior to the opening ofthe proceeding.

Security EnforcementAs a rule, starting with the opening of the proceeding, all judicial andextrajudicial actions and theenforcement actions for the recovery of debts from the insolvent debtor aresuspended.

In some cases (e.g. when the asset isnot material for the success of theproposed reorganisation plan, or theasset belongs to a larger operationalsystem and its independent sale wouldnot affect the value of the system), asecured creditor can make a requestthat the court cancels such suspensionwith respect to that asset, provided that(i) the taxes, stamp duties and otherexpenses determined by the sale of theassets are paid and (ii) the provisionsapplicable to the realisation of assets are observed.

In liquidation proceedings, the proceedsof a charged asset will be applieddirectly to reduce the secured debt.

GuaranteesRomanian law allows downstream andupstream guarantees in mostcircumstances, provided that thecorporate benefit of the transaction tothe guarantor can be established. Due tothe fact that companies are establishedfor the purpose of obtaining profit,corporate benefit has to be establishedin all situations. Although downstreamguarantees are generally valid, in certainsituations upstream guarantees could beconsidered null and void if corporatebenefit cannot be established.

According to Romanian Companies’ Law no. 31/1990, certain restrictionsapply to guarantees provided to directorsof companies. For example, a companyis prohibited from granting a guarantee inrespect of obligations of its directors orhis relatives. Also, the prohibitions applywhere the beneficiary of the guarantee isa company where the spouse or therelatives of the director of the guarantoris a director or owns more than 20% ofthe share capital.

Under Romanian Companies’ Law no. 31/1990, a company cannot grantany advance of money, lend its ownmoney or charge its own property forthe purpose of a third party subscribingor purchasing its shares. A guaranteeprovided by a company to a third party which uses the guarantee inconnection with the subscription orpurchase of shares of such company is considered to be null and void. It isgenerally thought that this restrictionapplies only to joint stock companies(S.A.), but there is a view that such restrictions could be held also to apply to private limited liabilitycompanies (S.R.L.).

The Insolvency Law provides for thenullity of any transaction which isprejudicial to other creditors, enteredinto during the 3 years preceding thecommencement of insolvencyproceeding with, amongst others, the following persons:

a) a shareholder holding at least 20%of the share capital or 20% of thevoting rights in the general meetingof the shareholders of a limitedliability company;

b) a member or a director, when thedebtor is part of a Economic InterestGroup;

c) a shareholder holding at least 20%of the debtor’s shares or 20% of thevoting rights in the general meetingof the shareholders of a joint stockcompany;

d) a director, a manager or a memberof the supervisory bodies of thedebtor, where the debtor is a jointstock company of a limited liabilitycompany; and

e) any other person holding a dominantposition in respect of the debtor orits business.

Payment PrioritiesAccording to the Insolvency Law, theproceeds of realisation of the securedassets are to be distributed to thesecured creditors (for the satisfaction of the principal amount, the interest,penalties and any other costs), afterpayment of the taxes, stamp duties andany other expenses determined amongothers by the sale of such assets. Out ofthe secured claims, the claims incurredduring the insolvency procedure, as partof the implementation of a reorganisationplan shall be paid in priority to thesecured claims incurred before theproceedings have been opened.

If the proceeds of enforcement areinsufficient for the full repayment of thesecured debt, such creditors will betreated as unsecured for the remainingpart of the debt and will be satisfiedaccording to the general orderapplicable for the other types of claim.

A secured creditor is entitled to take part in the distribution of any proceedsmade prior to the realisation of the assetsecuring its claim, provided that anyamounts received will be subsequentlysubtracted from the proceeds ofrealisation of the secured asset.

In liquidation, the general order ofpayment of unsecured debts is asfollows:

a) taxes, stamp duties and otherexpenses incurred in connection with the insolvency proceeding;

b) employment claims;

c) loans granted after the opening ofthe insolvency proceeding, togetherwith interest and expenses, andother receivables resulted from thecontinuation of the debtor's activity,after the opening of the insolvencyproceeding;

d) budgetary claims;

e) (where applicable) amounts duepursuant to alimony obligations, childsupport or subsistence receivables;

f) (where applicable) certain amountsfor the subsistence of the debtor and his family, when the debtor isnatural person;

g) claims by certain types of creditorssuch as banks, landlords, suppliersof goods and services;

h) other unsecured debts; and

i) subordinated debts, in the followingorder:

(i) loans granted by an associate ora shareholder holding at least10% of the share capital or of thevoting rights, or by a member ofthe Economic Interest Group; and

(ii) gratuitous acts.

Payments towards creditors having thesame rank will be made proportionally. Adebt from a certain class, as listed above,will be paid only after complete paymentof the debts in the superior class.

The following amounts will be set asidein case of partial payments:

a) proportional amounts owed tocreditors with contingent claims;

b) proportional amounts owed to bondholders who have not presented theoriginals for payment;

c) proportional amounts for claimsadmitted provisionally; and

d) amounts to cover future expenses in respect of debtor’s assets.

Directors’ DutiesThe insolvent debtor is compelled by lawto file a petition of insolvency in case ofactual insolvency, within 30 days fromthe occurrence of the insolvency. Pleaserefer to section “Commencement of theProceeding” for relevant exceptions.

At the judicial administrator orliquidator’s request, the court maydecide that some of the debts should be paid by the members of themanagement / and / or supervisorybodies of the debtor personally or byany other party who has contributed tothe debtor’s insolvency and has beeninvolved in the following activities:

a) using the assets or loans granted tothe debtor for their personal use orfor that of a third party;

b) performing commercial activities intheir personal interest, in the name ofthe debtor;

c) continuing, in their personal interest,an activity which was clearly leadingthe debtor to cessation of payments;

d) false accounting, concealment ofaccounting records or failing toobserve the legal requirements inrespect of accounting;

e) embezzling or hiding debtor’sassets, or falsely increasing thedebtor’s debt;

f) using ruinous methods to procurefunds in order to postpone thecessation of payments; or

g) paying or deciding to pay withpriority a creditor and to the



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detriment of the other creditors inthe month prior to cessation ofpayments.

In the latter case, the legalrepresentative of the debtor shall not be held liable provided that:

(a) payments are in good faithfollowing an agreement withthe creditors;

(b) the agreement with thecreditors is concluded as a result of out of courtnegotiations for therestructuring of the debtor'sdebts; and

(c) the agreement should be ofnature to lead, in a reasonablemanner, to the financial redressof the debtor and should nothave as purpose the prejudiceand/or discrimination of othercreditors.

These exceptions apply also incase of acts concluded withinthe judicial moratorium and ad-hoc mandate

Also the law establishes that certaincriminal acts of the directors arepunishable with imprisonment.

Lender LiabilityAlthough Romanian law does not usethe concept of “shadow director” or “de facto director”, the Insolvency Lawprovides that the court may decide that part of the debt be paid by anyperson who caused the debtor’sinsolvency through certain actions, as listed above. It could be consideredthat this provision would include aperson exerting powers as a de facto

director. The Romanian law does notregulate the situation when the lender isin the position of being able to influencethe management of the company.

Pursuant to the Insolvency Law, certaintypes of transaction may be challengedwhen falling under the definition offraudulent or disadvantageoustransactions, including transactions withany party, holding a dominant position inrespect of the debtor or its business, ortransactions entered into by the debtorduring the 2 years preceding the openingof the insolvency proceeding with theintention to conceal the insolvency ordelay the onset of insolvency proceeding.

The Romanian Civil Code provides for acertain type of judicial action to be usedby a general creditor in order to challengea transaction entered into by the debtorwhich has the effect of prejudicing othercreditors (actiune revocatorie).

New Money LendingLoans granted after the commencementof the insolvency procedure, and otherdebts incurred due to the continuationof the debtor’s activity after thecommencement of the insolvencyprocedure have priority over certain pre-insolvency debts.

Recognition of ForeignInsolvency ProceedingLaw no. 637/2002 on PrivateInternational Law Relations in theContext of Insolvency Proceeding as amended (the “Cross BorderInsolvency Law”) implements inRomania the UNCITRAL Model Law onCross-Border Insolvency made in 1997and has been in force since 1 July 2003.Additionally, the European CouncilRegulation No. 1346/2000 on insolvencyproceedings is directly applicable in

Romania since Romania’s accession tothe European Union on 1 January 2007.

Other relevant EU directives have alsobeen implemented through separatelegislation, in particular:

a) Law no. 503/ 2004 on financialrecovery and bankruptcy ofinsurance undertakings implementsin Romania the provisions ofDirective 2001/17/EC of theEuropean Parliament and of theCouncil of 19 March 2001 on thereorganisation and winding-up ofinsurance undertakings, and

b) Government Ordinance no.10/2004on judicial reorganisation procedureand bankruptcy of credit institutions,as amended, implements theDirective 2001/24/EC of theEuropean Parliament and of theCouncil of 4 April 2001 on thereorganisation and winding up ofcredit institutions

Guidelines for Out-of-CourtRestructuringFinally, it is worth mentioning that agroup of representatives of the Ministryof Justice, the National Bank ofRomania and the Ministry of PublicFinance have drafted a set of guidelinesfor out-of-court restructuringprocedures. The guidelines applicable to debtors, creditors and the relevantpublic institutions and deal withconcepts such as standstill periods,enforcement moratorium, informationflow and transparency, confidentiality,reorganisation plan, new monies, etc.

Once finalised and approved, theguidelines (which are indicative and notcompulsory) shall be published on theaforementioned authorities' websites.

IntroductionThe insolvency legislation in Ukraine may be divided into two types:

n Legislation regulating insolvencyproceedings against banks.

This is based on the Banks AndBanking Activity Law dated 7December 2000 and a number ofresolutions passed by the Board of the National Bank of Ukraine.

n Legislation regulating insolvencyproceedings against debtors who are not banks.

This is based on two legislative acts:

n The�Insolvency�Law�(the Law of Ukraine “On Reinstatement of Solvency of the Debtor orDeclaring it Bankrupt”) dated 14 May 1992 and significantlyamended in 1999, which is theprincipal law on insolvencyproceedings in Ukraine againstdebtors who are not banks.

n The�Commercial�Proceedings

Code dated 6 November 1991and significantly amended in2001, which regulates differentcourt procedures within insolvencyproceedings and is applicable if the Insolvency Law does notcontain specific provisions on a particular issue.

In addition, numerous limitations andrestrictions are set out with respect to thecommencement and course of insolvencyproceedings against certain types of

debtors including for example, state-owned companies, significant enterprisesemploying more than 5,000 employees,certain financial institutions (stockbrokers,insurances companies, fund managers),and energy companies.

The courts (primarily, the Supreme Courtof Ukraine and the High CommercialCourt of Ukraine) have significantinfluence on the application of insolvencylegislation and how it is interpretatedduring their consideration of specificinsolvency proceedings or by providinggeneral clarifications as a part ofsummarizing and analyzing the insolvencycourt practice.

LimitationsThis note only discusses insolvencyproceedings applicable to debtorsregistered in Ukraine. It does not discussinsolvency proceedings against banks orthe companies listed above in detail.However, the main procedural and otherdifferences applicable to insolvencyproceedings against banks and stateproperty companies are briefly outlinedat the end of this note.

Commencement ofInsolvency ProceedingsInsolvency petition by the debtorVoluntary petitionInsolvency legislation in Ukraine providesthe debtor with a right to file aninsolvency petition with the court uponcertain grounds. It also sets out anumber of circumstances where thedebtor is obliged to apply to the courtfor commencement of insolvency

proceedings against itself.

Compulsory petitionThe debtor must initiate insolvencyproceedings within one month of any ofthe following circumstances occurring:

n If fulfilment by the debtor of itsobligations to one or more creditorswould result in the debtor being unable to satisfy the claims of its other creditors;

n if an authorised governing body (in most cases - the shareholders’meeting) of the debtor decides to file for an insolvency proceeding; or

n if during a liquidation procedure, whichhas been initiated outside insolvencyproceedings (i.e. voluntary liquidation),the debtor is unable to satisfy theclaims of all of its creditors.

Insolvency petition by a creditorAny creditor, including authorizedgovernmental agencies (e.g. state tax authorities and state customsauthorities) is entitled to initiateinsolvency proceedings.

Unless otherwise specified by law, a creditor who intends to initiateinsolvency proceedings must have an unpaid monetary claim, which is:

n Equal to or exceeds the equivalent of approximately USD 33,500;

n Indisputable (a claim will be deemed to be indisputable if it is supported byofficial enforcement documentation(e.g. a court decision) or settlement

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Key Elements:

n How to commence insolvency proceedings in Ukraine

n The 3 main stages of insolvency proceedings

n Challenging transactions during insolvency proceedings

n Liability for insolvency and actions during insolvency

n Insolvency implications against banks

n Insolvency implications against state-owned companies

n Insolvency implications against foreign debtors

Ukraine


documents pursuant to which thedebtor’s money must be debited bylaw); and

n Not satisfied within 3 months from the date when a claim became dueand payable.

The Stages of InsolvencyProceedings Property administrationThis first stage of insolvencyproceedings serves to prevent thedebtor’s assets from unreasonabledisposal and establishes control overthem before the creditors’ committeedecides (with the court’s subsequentapproval) the debtor’s fate (e.g., whetherto rehabilitate or liquidate the debtor).

The above involves the following steps:

Appointment of property administratorIn most cases the property administratoris a licensed independent entrepreneurwho administers the property on thebasis of a court ruling. Usually, the courtapproves the petitioning creditor’s (i.e.,the one that files an insolvency petition)nomination for property administrator.

Role of the property administratorThe role of the property administrator is to preserve the debtor’s assets fromunreasonable use and disposal, toidentify the debtor’s creditors and toconvene the first creditors’ meeting.

Moratorium and restrictions onpaymentsThe initiation of insolvency proceedingsby a Ukrainian court normally triggers amoratorium on the satisfaction of certaincreditors’ claims.

During the moratorium period:

n the debtor will be prevented fromsatisfying claims and from enteringinto arrangements aimed at securingthe claims which have become duebefore the date of the initiation ofinsolvency proceedings;

n enforcement (including theenforcement of security) against thedebtor’s assets shall be suspendedirrespective of whether or not theobligation has matured. However,

recently (in December 2009) theSupreme Court of Ukraine clarifiedthat secured creditors who aremortgagees are not prevented fromenforcing their mortgages duringinsolvency proceedings. Suchposition has not been widely andconsistently implemented in practiceyet; and

n no default interest or any otherpenalties or sanctions for breachingthe monetary obligations may beapplied.

The moratorium will continue until theend of the insolvency proceedings.Technically, the moratorium does notapply to payments which become dueafter the initiation of insolvencyproceedings. After the initiation ofinsolvency proceedings, the debtor may,subject to various approval processes,be allowed to make contractualpayments if the contract is notaccelerated before the initiation ofinsolvency proceedings. However, inpractical terms, if the debtor refuses tomake contractual payments after theinsolvency proceedings have beeninitiated, no enforcement against thedebtor is possible because, asmentioned above, the enforcement willbe suspended during the moratorium.

The moratorium does not apply to: (i)payments which become due upon orafter the initiation of bankruptcy

proceedings; (ii) payments to creditorsapproved under the rehabilitation plan;(iii) payments made as a part of anyliquidation proceedings in relation to thedebtor; (iv) payments of salary, alimony,authorial remuneration and damagesawarded for death or personal injuryclaims; and (v) set-off by creditors.

Restrictions on transactionsThe property administration managerThe property administration managerdoes not normally replace the CEO orother management of the debtor.However, if the CEO breaches the law,the court may, upon the application ofthe creditors’ committee, remove theCEO from office and temporarily appointa property administration manager asthe CEO. During the propertyadministration phase, the debtor’s CEOrequires the property administrator’sprior consent to enter into the followingcontracts: (i) any disposal of real estate;(ii) granting or taking loans (credits),issuing sureties, guarantees, executingassignment agreements, entering intotrust arrangements; and (iii) significantcontracts (i.e., whereby the contractualamounts exceed one percent of poolvalue of the debtor’s assets).

Termination of property administrationThe property administration stageterminates with a court ruling made in asubstantive court hearing. According tothe time frame set out in the law, this

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hearing should be held not later than 7months of the filing of the insolvencypetition with the court. However, inpractice such period is quite often notfollowed. The court ruling should bebased on the decision of the creditors’committee and include one of thefollowing conclusions:

n Initiation of rehabilitation proceedingsagainst the debtor;

n Initiation of liquidation proceedingsagainst the debtor; or

n Termination of insolvency proceedingsagainst the debtor.

Rehabilitation proceedingsOnce the property administrationproceedings end, the creditors’committee is authorized to apply to thecourt for initiation of rehabilitationproceedings. The latter is a system ofmeasures aiming to reinstate thedebtor’s solvency.

This stage involves the following steps:

Proposal for rehabilitationThe law does not set out anyrequirements regarding the content ofthe application to initiate rehabilitationproceedings.

Appointment of the rehabilitation managerThe creditors’ committee approves thecandidate for the rehabilitation managerand files the relevant application with thecourt. Once the court has given it’sruling, the rehabilitation manager beginsthe debtor’s rehabilitation. The creditors(including lenders) may not be directlyinvolved in the management of thedebtor because the rehabilitationmanager is solely responsible for this.However, the creditor’s committee has aright to approve any significant contractswhich the rehabilitation manager intendsto enter into.

Powers of the rehabilitation managerThe rehabilitation manager shoulddevelop the rehabilitation plan, obtainconsent for it from the creditors and fileit with the court for approval. Therehabilitation manager supersedes thedebtor’s CEO and is responsible forcarrying out the rehabilitation plan. The

powers of the rehabilitation manageralso include producing an inventory thedebtor’s assets, collecting thereceivables, unilateral termination ofagreements and challenging antecedenttransactions entered into by the debtor.

Within three months of thecommencement of the debtor’srehabilitation, the rehabilitation managermay unilaterally refuse to perform thedebtor’s contracts which were concludedbefore the date of commencement ofinsolvency proceedings provided that:

n The fulfilment of such contract wouldcause damage to the debtor;

n The contract is a long-term contract(i.e. exceeds one year) or is sostructured that the debtor receivesbenefits from a long-term perspective;

n Fulfilment of the contract wouldprevent the restoration of the debtor’ssolvency.

The law is not clear as to whether all ofthese conditions or any of them must befulfilled in order for the rehabilitationmanager to be able to refuse to performa contract. In 2009, the Supreme Courtof Ukraine clarified that one condition forrefusal would be sufficient. However, weare aware of several court cases that arenot consistent on this issue and it isgenerally not clear how these provisionsshould apply.

Rehabilitation planUkrainian insolvency law encourages the creditors’ committee to come upwith an action plan to rehabilitate thedebtor. The rehabilitation plan must beapproved by the court and may last forup to 12 months (although the courtmay extend it for a further six months).

The main options for a “rehabilitationplan” are as follows: (i) the restructuringof the debtor; (ii) change of businessactivities of the debtor; (iii) termination of unprofitable production; (iv) temporarysuspension of payments or deferral ofpayments as well as forgiveness of debt in respect of which an amicableagreement must be concluded; (v)collection of receivables; (vi) restructuringthe debtor’s assets; (vii) selling thedebtor’s assets; (viii) assignment of

debts to the investors; (ix) discharge of debtor’s employees who will not beengaged in the realization of therehabilitation plan; (x) performance of the debtor’s duties by third persons; and (xi) exchange of the creditors’ claimsfor debtor’s assets or debtor’s equity.

Restrictions on paymentsUpon commencement of rehabilitationproceedings the moratorium onsatisfaction of creditors’ claims remainseffective. However, it has no effect uponthe recovery of claims under therehabilitation plan. Only the court thathears the insolvency proceedings mayrestrict the disposal of the debtor’sassets (as well imposing other limitations)provided that such limitations do notobstruct the rehabilitation of the debtor.

Restrictions on transactionsOnly the rehabilitation manager isauthorized to enter into agreements onbehalf of the debtor during therehabilitation proceedings. However,when it comes to the conclusion ofconsiderable contracts and/or contractswith affiliated persons, the prior approvalof the creditors’ committee is required.

Termination of rehabilitationproceedingsThe rehabilitation proceedings mayeither be converted into liquidationproceedings or be terminated. In thelatter case, the debtor’s solvency isdeemed reinstated.

Transition to liquidation proceedingsIf fulfilment of the rehabilitation plan hasnot actually reinstated the debtor’ssolvency, the court, upon the applicationof the creditors’ committee, makes aruling declaring the debtor bankrupt andinitiates the debtor’s liquidation.

Liquidation proceedingsLiquidation normally should last for oneyear, subject to a potential extension ofup to six months. It involves thefollowing steps:

Appointment of a liquidation managerUpon the application of the creditors’committee, the court, while initiating the liquidation proceedings, will alsoapprove the appointment of theliquidation manager.



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Powers of the liquidation managerThe main role of the liquidation manageris to collect the debtor’s assets and toagree and pay the claims according tothe statutory rankings.

In the main, the liquidation manager isentitled to:

n Sell the debtor’s non-monetaryassets;

n Dismiss the debtor’s managementand employees;

n Enter into an amicable settlement on behalf of the debtor; and

n Request the court to invalidateagreements entered into by thedebtor.

Restrictions on paymentsUpon commencement of liquidationproceedings:

n The business activity of the debtorwill be terminated;

n All monetary obligations owed by thedebtor will become due and payable;

n Commercial sanctions in respect ofthe defaults in obligations may nolonger be imposed on the debtor;and

n All seizures of the debtor’s assetswill be cancelled and no new onesmay be imposed.

Liquidation poolAt the liquidation stage, the debtor’sentire assets are included in the pool ofassets that comprises its bankruptcyestate. Creditors’ claims are to be metduring insolvency proceedings only inmonetary form. If the pool includes non-monetary assets, then a liquidationmanager must sell them and use theproceeds for satisfying such claims.

Closing of accountsAt the liquidation stage, all but one ofthe debtor’s bank accounts are closed,and the balances are transferred to thatsingle account.

RankingsIn the event that the court declares thedebtor bankrupt, proceeds realized from

the sale of its assets in the course ofliquidation proceedings will be distributedin the following order of priority:

(i) claims secured by apledge/mortgage of the relevantassets (but only to the extent of theproceeds realised through theenforcement of such security);

(ii) claims for paying employees’ salariesfor the three-month period beforeinsolvency proceedings were initiatedby the court, other payments due to the employees and expensesincurred in connection withinsolvency proceedings;

(iii) claims for taxes;

(iv) unsecured creditors’ claims;

(v) claims of the employees to receivetheir contributions to the sharecapital of the debtor; and

(vi) any other claims (in particular,penalty sums and other sanctionpayments).

Lenders providing new monies to thedebtor during insolvency proceedings donot have any special priority or specialranking under the Insolvency Law.

Termination of liquidationLiquidation proceedings normally endwith removal of the debtor from theCompanies’ Register.

Amicable settlement The creditors may elect to enter into an amicable settlement with the debtor,pursuant to which they agree to deferpayments, allow payments byinstalments and/or to forgive the debt. In general, this settlement may bereached at any stage of the insolvencyproceedings and becomes effectiveupon its approval by the court (and suchapproval by the court is a ground toterminate the insolvency proceedings).

Challenging TransactionsDuring InsolvencyProceedingsUnder the laws of Ukraine, transactionsentered into by a debtor prior to

commencement of insolvencyproceedings can be challenged(invalidated) on a number of grounds.

Void and voidable transactionsThe Civil Code of Ukraine provides that a transaction can be classified asinvalid if it is either a “void” or “voidable”transaction. Once a transactionbecomes invalid, it may no longer createlegal rights and obligations and results in a reciprocal restitution. A voidtransaction is invalid by operation of lawfrom the outset and does not requireany court decision on its invalidation. In contrast, a voidable transaction canbe declared invalid only by a court. For example, the latter includestransactions of legal entities madebeyond their powers, fraudulenttransactions and transactions enteredinto under duress. The limitation periodfor implementing the consequences of a void transaction is ten years from thedate the void transaction wascommenced. For voidable transactions,the limitation period is three years and a claim seeking a declaration of aninvalid transaction must be filed withinthe shorter of: (i) the date the transactionoccurred; and (ii) the date on which the claimant knew or should haveknown of the circumstances serving as grounds for invalidating the transaction.

Voidable transactions under the Insolvency LawFollowing commencement of insolvencyproceedings, under the Insolvency Law,a court-appointed insolvency managerwill be entitled to challenge transactionsand decisions of the debtor at any stage of insolvency proceedings on the general grounds for invalidation set out in the civil legislation. However,for rehabilitation and liquidationproceedings, special provisions of theInsolvency Law entitle the rehabilitationmanager and the liquidation managerrespectively, on the specific groundsdescribed below, to challenge thetransactions entered into by the debtor both before and after thecommencement of insolvencyproceedings. Since no special limitationperiods are envisaged with respect to these powers of the court-appointedinsolvency manager, the general


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principles of the Civil Code with respectto limitation periods of voidabletransactions will apply.

Invalidation claim by the rehabilitation managerDuring the rehabilitation period, therehabilitation manager may apply to the court to challenge an agreement if:

n The relevant agreement has beenexecuted with an “affiliated person”(the definition of an “affiliated person”includes a legal entity in which thedebtor, managers or accountants ofthe debtor, or relatives thereof, areparticipants), as a result of whichcreditors of the debtor have incurred or may incur losses; or

n The relevant agreement is executedwith a particular creditor or any otherperson in the period preceding sixmonths the court decision on initiationof the rehabilitation of the debtor andsuch agreement either:

n Establishes preferential treatment ofone creditor as compared to the othercreditors, or

n Contemplates cashing out ordistributing assets of the debtor to one of its shareholders, in connectionwith the shareholder’s withdrawal from the debtor.

Invalidation claim by the liquidation managerIn the course of liquidation, theliquidation manager can apply to thecourt to challenge an agreement if:

n Fulfilment of the agreement wouldcause damage to the debtor;

n The agreement is a long-termagreement (i.e. exceeds one year) oris structured in a way that the debtorreceives benefits in the long-termperspective; or

n Fulfilment of the agreement wouldprevent the restoration of thedebtor’s solvency. Is this possible in an insolvent liquidation.

Liability for Bankruptcy andActions During BankruptcyShareholders’ civil liability forinsolvency (bankruptcy)The general principle of Ukrainian law is that shareholders (participants) of acompany will not bear liability for thedebts of the company unless otherwisestipulated by law and/or theconstitutional documents of thecompany. The same rule applies toinsolvency proceedings.

However, under the UkrainianCommercial Code, if, due to acts or

omissions of the holding company (asdescribed below), the debtor is foundinsolvent and declared bankrupt, theholding company will be secondarilyliable for the obligations of the bankruptcompany. The law is not clear as towhether this provision of the CommercialCode applies to foreign holdingcompanies. The Commercial Codedefines the holding company as an open joint-stock company that ownsshares issued by, at least, two or morecompanies (except for shares of state-owned companies).

The Commercial Code further refers to a separate Ukrainian law on holdingcompanies (the “Holding CompanyLaw”) which provides that an open jointstock company may qualify as a holdingcompany provided that: (a) the block of shares controlled by the holdingcompany exceeds 50% of all the issuedshares; or (b) the holding company hassome other decisive influence over thebusiness activity of the controlledcompany. The Holding Company Lawapplies only to Ukrainian companies. It might be argued that the secondaryliability for holding companies appliesonly to Ukrainian holding companies. We believe, however, that there is a risk that a court may apply thesecondary liability rule to a foreigncompany that meets the criteria for a holding company under theCommercial Code. This issue has notyet been tested in court practice.

Criminal liability for insolvency(bankruptcy)The Criminal Code of Ukraine providesfor criminal liability (fine of up to approx.USD 6,500 or custodial restraint of up to 3 years) of individuals (including themanagement and directors of thecompany) for the following offences:

n Fraudulent�bankruptcy, i.e. when thefounder (participant, shareholder) orthe official of the company as well asthe individual entrepreneur knowinglymakes an official statement about thefinancial insolvency and suchstatement causes gross materialdamages to the creditors or the State.

n Deliberate�bankruptcy, i.e. when thefounder (participant, shareholder) or



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the official of the company knowinglyperforms actions that have resulted inthe financial insolvency of the companyand caused gross material damage tothe creditors or the State.

n Concealing�permanent�insolvency,i.e. when the founder (participant,shareholder) or the official of thecompany knowingly conceals, bymeans of applying false information,the company’s financial insolvency and this causes gross materialdamages to the creditor.

n Illegal�actions�during�bankruptcy, i.e. when the founder (participant,shareholder) or the official of thecompany against which the insolvencyproceedings are commenced by thecourt, knowingly conceals the property,information on property, illegallytransfers the property or disposes of it as well as forges, conceals ordestructs the documents of company’sbusiness activity and such illegalactions causes gross material damage.

Insolvency ImplicationsAgainst the State andMunicipal PropertyCompaniesThe Ukrainian insolvency law applies toall the legal entities and individuals, withthe exception of treasury enterprises. It also provides for several restrictionsin relation to the insolvency proceedingsagainst the State companies orcompanies where the State has asignificant participatory interest.

A municipal enterprise may be immunefrom the insolvency proceedings,provided that the municipal counciladopts (at a plenary meeting) anindividual decision that provisions of theInsolvency Law will not be applicable tosuch municipal enterprise.

Furthermore, until 1 January 2013 theInsolvency Law is not applicable tomining enterprises in which the Stateholds at least 25 % of the authorisedshare capital. The law prohibits initiatingliquidation proceedings against suchcompanies because sale of the debtor’sassets would be the only way to satisfycreditor claims in the course ofliquidation.

Please also note that pursuant to theLaw On Moratorium Over Enforced SaleOf Property dated 29 November 2001, it is not permitted to enforce againstcertain assets owned by companies inwhich the State holds at least 25 % ofshare capital. Such assets include realestate and other fixed assets involved inthe production activities of the debtor.

Insolvency ImplicationsAgainst Foreign DebtorsThe Insolvency Law applies only toUkrainian legal entities, i.e. the oneshaving its registered address within theterritory of Ukraine. Ukrainian bankruptcycourts will decline to assert theirjurisdiction over foreign debtors ininsolvency matters. In relation topotential secondary liability of a foreignholding company, please refer to section

“Shareholders’ civil liability for insolvency(bankruptcy)”above.

Ukraine has neither incorporatedUNCITRAL Model Law on Cross-BorderInsolvency nor enacted any other similar regulations which wouldeffectively provide for a possibility ofcommencement of ancillary insolvencyproceedings against foreign debtor in Ukraine.

However, foreign court judgments(including judgments of foreign insolvencycourts) may be recognised in the Ukraine:(a) if there is a relevant internationalagreement between the respectiveforeign jurisdiction and Ukraine (no suchagreement exists between Ukraine andthe UK. However, Ukraine has such treatywith the Russian Federation and someother republics of the former USSR); or(b) based on the reciprocity principle witha foreign jurisdiction (i.e., in the absenceof the relevant agreement, Ukraine willrecognise court judgments of theparticular foreign jurisdiction if Ukrainiancourt judgments are recognised in suchjurisdiction). From February 2010,Ukrainian procedural legislation presumesthat “in the absence of the relevantinternational agreement, a reciprocityexists unless proved otherwise”. We notethat the described provisions have not yetbeen tested in practice.


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IntroductionIn Hungary, the relevant provisions onbankruptcy and liquidation proceedings,i.e. applicable in the event a company isinsolvent or is in financial difficulties isregulated by the Act XLIL of 1991 onBankruptcy and Liquidation Proceedings(the “Bankruptcy Act”). The insolvencyof credit institutions and insurancecompanies is addressed in separatelaws the analysis of which is beyond thescope of this note. Please note that asubstantially amended Bankruptcy Acthas been passed by the parliament in2009 and the new provisions of theBankruptcy Act entered into force as of1st September 2009.

Liquidation and Bankruptcy(reorganisation)ProceedingsUnder Hungarian law, liquidationproceedings are proceedings initiated bya creditor of the company or by thedebtor company itself, in a situationwhere the company is, or is consideredby its creditor to be, insolvent and unableto perform its financial obligations. Theliquidation proceedings end by thedissolution of the debtor company withthe sale proceeds of the debtor’s assetsdistributed among its creditors inaccordance with the waterfall set out inthe Bankruptcy Act. In bankruptcy(reorganisation) proceedings the debtorrequests relief from its financialobligations temporarily in an attempt toseek a composition agreement with itscreditors. The goal of the bankruptcyprocedure is to reorganise the debtorcompany in order to enable it to continueits business operation.

Bankruptcy proceedings have up torecently been rarely applied for bycompanies in Hungary (a number ofreasons can be identified e.g. applicationof a burdensome voting test; rathershort moratorium period insufficient forthe reorganisation of a company).Although the recent amendments weremade to the applicable legislation inparticular with the purpose of facilitatingthe increased use of this technique vis-à-vis liquidation proceedings, accordingto the statistics the number ofbankruptcy proceedings initiated sincethe implementation of the reform hasremained very low.

Liquidation proceedings are typicallylengthy (the liquidation of a companymay last for up to two years), formal andexpensive with an uncertain outcome forthe creditors with often the majority ofthem receiving nothing. Uncertaintiesalso arise from the different practices ofthe liquidators. As indicated above, thenew provisions of the Bankruptcy Actentered into force less than a year ago,consequently it is still uncertain whetherthey will resolve the difficulties ofliquidation proceedings and ensure thatthe new system operates in a moreefficient and more creditor-friendly way.

Bankruptcy(reorganisation)Proceedings (csődeljárás)Summar yIn bankruptcy proceedings, creditorsmay compromise their rights (forexample, by extending the repaymentdate, write-off a part of their claims,converting some of it to equity, orconverting cash pay interest into PIK interest). Bankruptcy proceedings

are designed to arrange for thereorganisation of an insolvent company(or a company in financial difficulties)with the consent of most of its creditorsby granting it a moratorium (resulting in the temporary suspension of itspayment obligations with a view toreorganising its debt in a way that willenable it to continue its businessoperations as a going concern). Thecomposition scheme will be compulsoryfor, and could be enforced against allcreditors of the debtor company, even if not all of the creditors have consentedto it, subject to the necessary ratio ofcreditors consenting to suchcomposition scheme.

Creditors and the debtor company arefree to agree on, and formulate the termsof, the composition agreement. Inparticular, but not limited to, creditors orthird persons have the right to (a) assumethe debts of the company; (b) acquirecertain assets of the company, and/or (c)guarantee the liabilities of the company.

However, it has to be carefully consideredwhen formulating the compositionagreement, that it may not contain lessfavourable conditions in respect of thenon-consenting creditors than to thecreditors granting consent to theagreement (however, it does not meanthat it has to contain the same conditionsfor all creditors).

Overview of the ProcedureThe managing directors of the debtorcompany as well as a creditor of thedebtor company are entitled to filepetition for bankruptcy proceedings at court. A creditor is entitled to initiatebankruptcy proceedings if he would be also entitled to initiate liquidation

European Insolvency ProceduresHungary


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Key Elements:

n Court assisted liquidation proceedings

n Bankruptcy proceedings based on a composition agreement

n Civil and criminal law liability issues

n Recognition of foreign procedures within and outside the EU

n A reform of the Bankruptcy Act has been recently implemented

Hungary


proceedings, however he opts forseeking satisfaction of his claims by theway of bankruptcy proceedings. It isimportant to note that the creditor couldfile petition for bankruptcy proceedingsonly if both (i) the debtor company and(ii) the shareholders’/members’ meetingconsent to it, i.e. only with thecooperation of the debtor company.

It is not a precondition that the companyfiling petition for bankruptcy proceedingsis insolvent.

Commencement of bankruptcy proceedingsA bankruptcy proceeding may be initiated(a) by the debtor company itself or (b) bya creditor of the debtor company.

(a) Upon filing a petition for bankruptcyproceedings at court by themanaging directors of the debtorcompany, a temporary paymentmoratorium is automatically grantedto the company by the court (i.e. novoting test is applied). The decisionof the court is published within 1business day of the petitionsubmission on the website of theCompany Gazette. Within 5business days of receiving thepetition, the court examines thepetition whether it complies with theformality requirements set out in theBankruptcy Act. If the petition hasnot been provided in the requiredform and subsequently the debtorcompany fails to provide therequisite supplementary submissionwithin 5 business days of it beingrequested by the court, the courtmay reject the petition. The day thecourt publishes its decree approvingthe petition (the “Decree”) isconsidered as the commencementdate of the bankruptcy proceedings.

(b) In cases where a creditor files forbankruptcy proceedings to beinitiated against a debtor company,the court also has a 5-business daydeadline to review the petition andissue a supplementary submissionrequest if the petition does notcomply with the relevant formalityrequirements. Upon receipt of theappropriate creditor petition which is satisfactory to the court in bothform and substance, the petition is

delivered to the debtor company by the court within 5 business days.The debtor company is obliged tosubmit certain additional documentsto the court and declare, amongothers, whether it acknowledges orcontest the claim of the creditorwithin 15 days. Should the debtorcompany contest the claim orevidence its repayment or fail toprovide the requested documents,the court will reject the petition of the creditor. Otherwise, upon theexpiry of the 15 days deadline thecourt issues its Decree on thecommencement of the bankruptcyproceedings and arranges for thepublication of the Decree in theCompany Gazette.

In the Decree, the court (i) confirms the moratorium and (ii) appoints anadministrator (the “Administrator”).

Moratorium(a) The moratorium begins from the

date of the Decree and lasts for atleast 90 days and maximum 365days. In case of the debtorcompany initiated bankruptcyproceedings referred to in point (a)above this means that the temporarypayment moratorium is convertedinto a “normal” moratorium.Extension of the moratorium may beavailable: (i) for an additional 180days if a simple majority of thesecured creditors (by reference tothe value of their claims) and asimple majority of the unsecuredcreditors (by reference to the value of their claims) give their consentthereto; or (ii) for 365 days if 75% of the secured creditors (by value of their claims) and 75% of theunsecured creditors (by value of theirclaims) give their consent thereto.

(b) During the period of the moratorium,

(i) the company is prohibited fromperforming any of the paymentobligations, which existed at thetime of the commencement ofthe bankruptcy proceedings -with a few exceptions regardingsalaries, VAT and social securitypayments and repayment ofamounts erroneously transferredto the company’s accounts;

however, the creditors’ claimsshall earn interest;

(ii) the performance of any of thecompany’s payment obligation is subject to the Administrator’scountersignature;

(iii) the creditors cannot set off any of their claims against the debtorcompany;

(iv) no prompt collection right can beexercised by any of the creditorsin respect of the company’s bankaccounts;

(v) the execution proceedings ofmoney claims against thecompany shall be suspended;

(vi) the secured creditors are notentitled to enforce any securityinterest created for their benefit;

(vii) the debtor company may onlyassume further obligations(including debt obligations) withthe Administrator’s prior writtenconsent;

(viii) the agreements concluded withthe company cannot beterminated for the reason that thecompany is not paying its debt as they fall due during the courseof the moratorium; furthermore

(ix) the legal consequencesassociated with any non-performance or late performanceof money payment obligationsshall not apply.

(c) Creditors have to report (i) theirexisting claims to the debtorcompany and the Administratorwithin 30 days of publication of the Decree, and (ii) their claimsarising after the commencement of the bankruptcy procedure within 3 business days of publication of the Decree.

Administrator(a) The court designates a professional,

independent Administrator. TheAdministrator has the power tomonitor the company’s businessactivities to protect the creditors’


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interests (please refer to its rightsindicated in point (e) under title“Moratorium” above). He is entitledto confirm the company’s newobligations, provided that suchobligations are necessary for thecompany’s reasonable operation and the conclusion of thecomposition scheme.

(b) The debtor company and theAdministrator are in charge of theregistration and classification of thecreditors’ claims.

(c) The Administrator shall take part inthe negotiations of a reorganisationprogramme and of the compositionproposal. The Administrator has toconsent to the compositionagreement as well.

(d) The Administrator has the right to (i) challenge any contract enteredinto without its prior consent orcountersignature and (ii) initiate anyproceedings for the reimbursementof any amounts paid by the companycontrary to the prohibitions set out inthe Bankruptcy Act (please refer topoint (e) under title “Moratorium”above).

(e) The fee of the administrator is 1% of the value of the assets of thecompany.

Creditors’ meeting on composition agreement(a) Within 45 days of the commencement

of the bankruptcy procedure, thecompany has to arrange a meetingto negotiate a compositionagreement to which all knowncreditors and the Administrator shallbe invited by delivering a compositionproposal and the programme aimedto restore (preserve) solvency.

(b) At the creditors’ meeting on theconclusion of the compositionagreement each creditor (i) havingreported its claim within the deadlineset out in point (f) under title“Moratorium”; (ii) having paid theapplicable registration fees; (iii)whose claim have been registered as acknowledged or not contestedclaims and (iv) the amount of such

acknowledged or not contestedclaim is HUF 100,000 (approx. EUR370) or less than HUF 100,000(approx. EUR 370) is entitled to onevote. Classes of creditors areconstrued on the basis of beingsecured or non-secured creditors.

However, claims (i) where thebeneficiary of which is a creditorbeing the sole member of the debtorcompany or a creditor with majorityinfluence in the debtor company or acreditor forming a “recognised” or a“de facto” group of companies underAct IV of 2006 on BusinessAssociations (the “Companies Act”)with the debtor company; and (ii)arising from an assumption of debtby the debtor company less than180 days before filing for bankruptcyor the beneficiary of which is acreditor to whom the debtorcompany assigned any of its claimsless than 180 days before filing forbankruptcy, can be taken intoaccount only up to 25% of theamount of the relevant claim whencalculating the number of votes.

(c) According to the voting testapplicable in respect of thecomposition scheme, suchcomposition scheme is achieved if (i) a simple majority of the secured creditors and (ii) a simplemajority of the unsecured creditorsgive their consent thereto.

The composition agreementIf a composition agreement is concludedwith the consent of the proportion of the creditors specified above, thecomposition agreement shall also applyto non-consenting creditors who areotherwise entitled to participate in thecomposition agreement, or failed to take part in the conclusion of thecomposition agreement in spite ofhaving been properly notified in relationto the creditors’ meeting. Under thecomposition agreement the creditors or third parties have the right, amongstothers to assume the debts of thecompany; acquire certain assets of thecompany, and/or guarantee the liabilitiesof the company. The compositionagreement may not contain lessfavourable conditions in respect of the

non-consenting creditors than to thecreditors granting consent to theagreement.

Closing of the bankruptcy procedureThe managing directors of the companyhave to notify the court on the result ofthe negotiations on the compositionagreement within 5 business days of thecreditors’ meeting, or in case of extensionof the moratorium 45 days before theexpiry date thereof at the latest.

(a) If no agreement has been reached or such agreement does not complywith the applicable provisions of the Bankruptcy Act, the court willestablish the insolvency of thecompany ex officio, i.e. in case offailure of the bankruptcy procedure, it will automatically turn intoliquidation proceedings.

(b) If the composition agreementcomplies with the provisions of theBankruptcy Act, the court shallconfirm it and discharge thebankruptcy proceedings by decree.Although it is not stipulated explicitlyin the applicable legal norms, on the basis of recent case law it can be concluded that once the decree of the court becomes final and non-appealable, the creditors willhave the right to challenge thecomposition agreement only, if there was a mistake, deceit orduress, or the contractual terms were manifestly disproportionate.

(c) Upon the publication of the decreesreferred to in points (a) and (b) above,the moratorium is terminated.

Liquidation Proceedings(felszámolási eljárás)SummaryPursuant to the Bankruptcy Act,liquidation proceedings will becommenced if the competent courtestablishes that the company, againstwhich a request for liquidation has beensubmitted, is insolvent. Under Hungarianinsolvency law a cash-flow test isapplied in determining whether acompany is insolvent, i.e. no balancesheet test applies. The court declares a company insolvent if any of thefollowing conditions applies:



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(a) the debtor company failed tocomply, within 15 days from the duedate, with a contractual obligationwhich obligation was not challengedor was explicitly acknowledged bythe debtor company and the debtorcompany did not pay its debtsfollowing the respective paymentnotice by the creditor; or

(b) the debtor company failed to pay itsdebts based on a final and bindingjudicial decision within the deadlineset forth therein; or

(c) the enforcement procedure againstthe debtor company has proven tobe unsuccessful; or

(d) the debtor company failed to complywith its obligations set forth in thecomposition agreement concludedduring a bankruptcy procedure; or

(e) the court has terminated thebankruptcy procedure; or

(f) in the procedure initiated by thedebtor company or the receiver (the person responsible for thewinding-up procedure, i.e. thesolvent dissolution (végelszámolás))the amount of the company’s debts exceeds the value of itsassets, or the company could not (or it is foreseeable that it will not)repay its debts when due, and the members/shareholders of thecompany do not undertake toprovide funds for the payment ofsuch debts when they become due.

The liquidation proceedings could beinitiated by a creditor or by the debtorcompany against itself. Directors of thecompany have no mandatory duty to filefor liquidation proceedings. However,directors of a limited liability company ora company limited by shares arerequired to convene a shareholders’ /members’ meeting according to theCompanies Act “without delay”, whenthey learn that (i) the company faces thepossibility of becoming insolvent, and/or(ii) the company is unable to meet itspayment obligations; and/or (iii) theassets of the company are worth lessthan its liabilities. In case of limitedliability companies such members’

meeting has to be also convened if theamount of the company’s equitydecreases below 50% of the registeredcapital of the company due to its losses.In case of companies limited by sharessuch percentage is 75% of theregistered capital, furthermore the samemechanism applies if the company’sequity decreases below HUF 5,000,000(approx. EUR 17,000). At the meetingthe members / shareholders may decide(amongst other things) to wind up thecompany by commencing liquidationproceedings.

Overview of the ProcedureIf any of the conditions listed aboveapplies, the court orders liquidationwithin 60 days of receipt of the requestto commence liquidation proceedings byissuing a court decree. The liquidationorder is published in the CompaniesGazette when it becomes final and non-appealable. The date of the publicationof such an order is the commencementdate of the liquidation proceedings.

LiquidatorIn the court decree, the court alsoappoints a liquidator from the official listof liquidators. It is important to note thatthe concept of an administrative receiver(an official acting on behalf of thesecured creditor and enforcing security)does not exist under Hungarian law.

Claims of creditorsCreditors are required to report theirclaims to the liquidator within 40 daysfrom publication of the liquidation orderin the Companies Gazette. Duringliquidation, all creditors’ claims are to be satisfied to the extent possible and inthe order prescribed by the BankruptcyAct. In the event a creditor fails to reportits claim within the 40-day period, it may report the same to the liquidatorwithin 180 days from publication of theliquidation order. These latter claimsshall be satisfied if sufficient fundsremain following the settlement of thedebts recorded within 40 days of thedate of the publication of the order ofthe liquidation proceedings. Any claimreported after the 180-day period will beautomatically rejected by the liquidator.

Upon reporting the claim, the creditor is required to pay to a specific bank

account a so-called registration fee,which is currently set at 1% of theamount claimed and a maximum of HUF 200,000 (approx. EUR 740). Theregistration fee paid by a creditor isconsidered as the claim of such creditoragainst the debtor company and isranked under item (f) (i.e. “other claims”)in the sequence described under title“Ranking of creditors’ claim” below.

Creditors’ CommitteeFor the purpose of establishing acreditors’ committee, the liquidator shallconvene all registered creditors within 75 days following the date of publicationof the order of liquidation. At least one-third of the creditors (by number), havingat least one-third of the aggregate ofregistered claims (by value) may form acommittee the “Creditors’ Committee”)at or after meeting of the creditorsconvened by the liquidator. Theliquidator shall inform the Creditors’Committee at its request of the financialstatus of the debtor within 15 days ofsuch request. The Creditors’ Committeehas limited rights to control the activityof the liquidator. Furthermore, if thecompany intends to continue itsactivities in the course of the liquidation,the liquidator has to acquire the consentof the Creditors’ Committee to do this.

Direct enforcement of claims of secured creditors’A secured creditor cannot enforce itssecurity if liquidation proceedings havebeen initiated, save for a securitydeposit (a financial collateral underdirective 2002/47/EC of the EuropeanParliament and of the Council of 6 June2002 on financial collateralarrangements implemented in Hungary,used to encumber debt and equitysecurities, and money), which providesdirect enforceability, i.e. if the securitydeposit is enforced by the securedcreditor within three months from thecommencement date of the liquidationproceedings, then the deposited assetwill not form part of the insolvency poolof the insolvent company.

Ranking of the creditors’ claimOn liquidation, mortgages, fixed andfloating charges and other pledges have preferential ranking. In case ofmortgages and fixed (as opposed


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to floating) charges, if such securityinterests were created before thecommencement date of the liquidationproceedings, the liquidator will onlydeduct the costs of (i) the safe-keepingand (ii) the sale of the charged asset, aswell as (iii) the statutory fee of theliquidator from the purchase priceobtained from the sale of the chargedasset. The remaining amount will beused promptly after the sale for thesatisfaction of the claims secured by the charges in question (i.e. thoseproceeds shall transfer to the securedcreditor(s)). In case of floating charges,50% of such proceeds shall beimmediately transferred to the creditorbeing beneficiary of the floating charge. The remaining half will form part of the insolvency estate of the debtorcompany, therefore the outstandingclaim of the creditor being beneficiary of the floating charge will be satisfied inaccordance with the sequence below.

Other types of security, such asguarantees, surety and securityassignments do not have suchpreferential ranking and consequentlythe beneficiaries of such security will beranked under item (f) “other claims” asset out below. Creditors’ claims will besatisfied in the following order:

(a) costs of liquidation (e.g. unpaidwages, taxes and employercontribution obligations, winding up costs and liquidators’ fees);

(b) claims secured by floating chargesup to the value of the encumberedasset, if such security interests werecreated before the starting date ofthe liquidation procedure (if notcovered already by the 50% of theproceeds, see above);

(c) alimonies, life-annuity payments,compensation benefits, supplementsto mining earnings payable, etc;

(d) (with the exception of claims basedon bonds) other claims from privateindividuals not originating fromeconomic activities (in particular,claims resulting from insufficientperformance or compensation fordamages, also including guaranteeobligations ordinarily expected in

the given trade, calculated by theliquidator), claims of small and microcompanies as well as small-scaleagricultural producers;

(e) social insurance debts and overdueprivate pension fund membershipfees, taxes and public debtscollectable as taxes, as well as waterand sewage connection charges;

(f) other claims;

(g) irrespective of the time and groundsof occurrence, default interest andlate charges, as well as surchargesand debts;

(h) (with the exception of claims forwages the amount of which is lessthan two times the amount of theminimum salary and than six monthaverage salary) claims of (1) themember (shareholder) of thecompany having majority influence,(2) the manager of the company, (3)a leading employee of the company,(4) the close relatives and/or thecohabite of the persons referred to inpoints (1)-(3), (5) another companyunder the major influence of thecompany, (6) as well as claimsoutstanding under the contracts ofthe company without a consideration.

Selling the assets of the companyThe liquidator will dispose of thecompany’s assets through public salesat the highest price that can be obtainedon the market. The liquidator must affectthe sale by way of tender or auction.Unless otherwise provided for by theCreditors’ Committee, the sale shall becommenced within 100 days ofpublication of the liquidation.

Right to challenge Any creditor of an insolvent company orthe liquidator has the right to challengetransactions concluded by suchinsolvent company which is of a typefalling under any of the criteria set outunder subparagraphs (a)-(c) below. Thepersons referred to above have the rightto challenge such transactions within 90days from the date of becoming awareof the existence of such transactions,but in any event within 1 year from thedate of publication of a court order

relating to the commencement of theliquidation proceedings. The types oftransactions open to challenge are thefollowing:

(a) Contracts concluded or legaldeclarations made by the insolventcompany within five years of thedate preceding the date when acompetent court received a petitionfor the initiation of liquidationproceedings or at any timethereafter, if such contract or legaldeclaration resulted in the decreasein the value of the insolventcompany’s assets, and the intent of the insolvent company was todefraud any or all of the creditors,and the contracting party, orbeneficiary of the legal declarationhad or should have had knowledgeof such intent;

(b) Contracts concluded or legaldeclarations made by the insolventcompany within two years of thedate preceding the date when acompetent court received a petitionfor the initiation of liquidationproceedings or at any timethereafter, if the subject matter ofsuch contract or legal declaration is (A) a free asset transfer by theinsolvent company; (B) anundertaking by the insolventcompany in respect of its assets for no consideration; or (C) anarrangement resulting in evidentlydisproportional benefit in value to the contracting party;

(c) Contracts concluded or legaldeclarations made by the insolventcompany within ninety days of thedate preceding the date when acompetent court received a petitionfor the initiation of liquidationproceedings or at any timethereafter, if the subject matter ofsuch contract or legal declaration is to grant preference to any onecreditor, in particular an amendmentof an existing contract for the benefitof such creditor, or provision ofcollateral to an unsecured creditor.

The liquidator, acting on behalf of theinsolvent company, is entitled to seek torecover within the time periods referred



88


to in paragraph (a) above, any servicerendered by the insolvent companywithin 60 days of the date preceding the date when a competent courtreceived a petition for the initiation ofliquidation proceedings or at any timethereafter, if the provision of such serviceresulted in a preference to any onecreditor and was not made in its normalcourse of business. In particularpayment of a debt prior to its originalmaturity is considered as grantingpreference a creditor.

If the insolvent company does notreceive compensation for the provisionof a guarantee, the creditors or liquidatorof the insolvent company may contestthe guarantee agreement if it wasconcluded within one year prior to thecommencement of the liquidationproceedings.

Composition schemeDuring the liquidation proceedings thecompany and its creditors are entitled toenter into a composition scheme, inorder to restore solvency. The court,within 60 days of the request of thedebtor, has to hold a hearing, where thedebtor, the creditors and the liquidatorhave to be invited. The debtor has toprepare a composition proposal and areorganisation plan in advance to thehearing.

Under the composition agreement thecreditors and the debtor may agree onthe sequence of satisfying the claims,amendments of the maturity date of theclaims, release of a certain portion of thedebts of the company, and any otherfactors that are deemed essential by thecompany and the creditors for thepurpose of restoring the company’ssolvency.

The creditors have to vote in classes, as specified under title “Ranking of thecreditors’ claim” above. Creditors inclasses (a) and (c) are not entitled tovote. The beneficiaries of anypledge/charge/mortgage are alsoentitled to vote in respect of thecomposition scheme until their claimsare satisfied. The calculation method ofvoting rights is intended to mirror themethod applicable on bankruptcy, i.e.creditors whose claims are of the

amount of HUF 100,000 (approx. EUR370) or less than HUF 100,000 (approx.EUR 370) are entitled to one vote.Consent to the composition schemeshall be considered being granted if (1)more than half of the creditors (bynumber) in each class agree, providedthat (2) the aggregate of the claims ofcreditors giving consent is equal orexceeds (by value) two-thirds of theclaims of all creditors entitled to vote.

If the solvency of the company has beenrestored and the composition agreementcomplies with the provisions of the law,the court shall discharge the liquidationproceedings by decree.

Closing the liquidation procedureAt the end of liquidation or at latest atthe end of the second year from thestarting date of liquidation, the liquidatormust prepare the final insolvencybalance sheet and other documents anddeliver them to the court.

The court shall distribute the insolvencybalance sheet and the proposal for thedistribution of assets to the creditorswithin 30 days of receipt. Any creditormay raise an objection in writingconcerning the insolvency balance sheetor the proposal for the distribution ofassets within 30 days of the date ofreceipt. Failure to observe this time limitshall constitute forfeiture of rights. Thecourt will set a date for hearing to whichthe creditor(s) raising the objection andthe liquidator shall be summoned. Thecourt shall resolve whether to sustain orreject the objection after the hearing.The court’s decision for the rejection ofthe objection cannot be appealed.

Liability issuesThe Companies Act provides that if the management of a company can (orshould) reasonably foresee that thecompany is likely to become insolvent (a situation is considered of having thepossibility of becoming insolvent, whenthe directors of the company were orshould have been able to foresee thatthe company will not be able to satisfyits existing liabilities as they fall due), thedirectors/management are under anobligation to prioritise the interests ofcreditors, therefore they are personallyliable for those claims of the creditors

which were not satisfied in the course of the liquidation proceedings. Under the Companies Act, directors have tomanage the company with due care anddiligence, as generally expected frompersons in similar positions and givepriority to the interests of the company.This general rule is superseded whenthe company is faced with the possibilityof becoming insolvent, in which case the director has to give priority to thecreditors’ interest.

Pursuant to the Bankruptcy Act anycreditor or the liquidator of a companymay bring an action in the course of theliquidation proceedings in order torequest the court to establish that theformer directors of the insolventcompany failed to properly prioritise therights of creditors. This action could befiled only in respect of those directorswho were in office (i) during the period ofthree years prior to the commencementof liquidation proceedings and (ii) afterthe point in time at which it wasreasonably foreseeable that insolvencycould occur - i.e. the point in time atwhich the duties of the directorsbecome duties to prioritise the interestsof creditors. The creditors or theliquidator have to prove that the failureby the directors to properly prioritise theinterests of creditors resulted in adepreciation of assets of the insolventcompany and thus there is a directcausal link between the damage thecreditors suffered and the improperactions/decisions of the directors.

The creditors of the company becomeentitled to claim that the companyprovides them with a security interestcapable of being expressed in monetaryterms in order to ensure the satisfactionof the creditors’ claims, e.g. a certainamount of money to be held in escrowby the relevant court or a financialinstitution, securities, bank guarantee,etc. In cases where the liquidationproceedings haven been successfullycompleted, such security interest isdistributed among the creditors inaccordance with the creditors’ waterfallgenerally applicable. The member of thecompany having majority influence isobliged to pay to the creditors suchmonetary security interest as a surety in case the company fails to do so.


89

In case the insolvency estate of thedebtor company is not sufficient for thesatisfaction of the creditors’ claims, thecreditors or the liquidator may sue thedebtor company’s former director andrequest the court to oblige him to paythe creditors’ claims to the extent theclaims are not satisfied.

The Bankruptcy Act also establishesliability for shadow directors on thesame basis. In this context theBankruptcy Act extends the definition of“director” to any person who had actualinfluence on the decision making of thedirectors of the insolvent company.Determining whether a person orpersons is considered to be a shadowdirector(s) on the basis of the above is inthe competence of the court and theBankruptcy Act does not set out anyclear guidelines as to when the testwould be met.

Several articles of the Act IV of 1978 onCriminal Law (the “Criminal Code”)establish criminal liability in relation toliquidation and/or bankruptcyproceedings. An executive officer of acompany (i) violating his reporting,bookkeeping, auditing, inventory orother obligation to provide requiredinformation in accordance with theAccounting Act, the Bankruptcy Act orany other applicable laws and therebyimpeding transparency of thecompany’s financial situation (violation ofaccounting regulation); (ii) diminishingthe value of the company’s assets bye.g. by hiding, damaging, destroying anyof the assets, concluding fictitioustransactions or by any means contraryto prudent management after the pointin time when insolvency of the companyis foreseeable and thereby hindering thecompany’s creditors from obtainingsatisfaction of debt out of its assets(bankruptcy crime); (iii) concealing thecompany’s assets and thereby hinderingthe company’s creditors from obtainingsatisfaction of debt out of its assets(concealment of assets); (iv) deceivingthe members of the company byproviding incorrect data and informationconcerning the financial position of thecompany or hiding such data (illegalconduct of an executive officer of thecompany); (v) concealing the whole or

any part of the company’s equity capital(concealment of equity capital); or (vi)assisting in hiding relevant data inconnection with the company or anauthorised representative of thecompany and thereby ensuring that thecompany or the authorised signatorycannot be located (failure to comply witheconomic data supplying obligation) maybe held criminally liable by Hungariancourts.

Out of the specific, rather liquidationand/or bankruptcy related crimesdescribed above, the Criminal Codecontains general provisions regardingsuch crimes as fraud or misappropriationwhich might be also of relevance in ananalysis dealing with the criminal liabilityof executive officers of a company incase of a bankruptcy or liquidationscenario.

According to other provisions of theBankruptcy Act liability of holdingcompanies could be also established incertain cases within an insolvencyscenario. In respect of the liquidation ofa company under control by a “qualifiedmajority” under the Bankruptcy Act (forthis purpose a holding companypossessing at least 75 per cent of votingrights, either directly or indirectly), or inrespect of a single member company,the controlling party or the sole membercould be held responsible for thecompany’s liabilities to the extent theinsolvency estate did not cover suchliabilities. Any such liability would bedetermined by a court only if creditorswere able to demonstrate that themember or controlling party had actualinfluence on the decision making of theinsolvent company and carried out apermanently detrimental business policy.

Recognition of ForeignProceedingsWithin the European UnionThe Council Regulation (EC) No1346/2000 of 29 May on liquidationproceedings (the “InsolvencyRegulation”) has entered into force inHungary as of 1st May 2004 whenHungary joined the European Union.Under the Insolvency Regulation,recognition of foreign liquidation

proceedings listed in the InsolvencyRegulation would be automatic.

Furthermore, Council Regulation (EC)No. 44/2001 of 22 December 2000 (the“Enforcement Regulation”) is alsoapplicable in Hungary. Therefore if a typeof procedure governed by the law of amember state which, because of itscomplex or ambiguous nature, cannotbe unequivocally held to be under thescope of the Insolvency Regulation islikely to be also recognised byHungarian courts on the basis of theEnforcement Regulation (e.g. scheme of arrangement).

Outside the European UnionRegarding recognition of foreignproceedings against debtor companieswhose centre of main interest is outsidethe European Union, the provisions of the Law-Decree 13 of 1979 onPrivate International Law (the “PrivateInternational Law Act”) apply. Pursuantto the Private International Law Act anyfinal and non-appealable decision issued by a foreign court in a matterover which Hungarian courts do nothave exclusive jurisdiction is recognisedand enforceable in Hungary.

Special provisions apply in the eventliquidation proceedings or other similarprocedure are initiated against a foreigncompany having its registered seatoutside the European Union and havinga branch incorporated in Hungary. TheHungarian branch may be involved inliquidation proceedings initiated againstthe foreign parent company abroad onlyif any international treaty provides so orreciprocity is applicable between the twocountries. If no such international treatyor reciprocity is applicable, the relevantHungarian court orders liquidation of thebranch ex officio.

In the event the foreign parent companybecomes insolvent in connection with itsbusiness activities carried out through itsHungarian branch and no internationaltreaty or reciprocity is applicable in therelation of the two countries in respectof liquidation proceedings, creditors mayrequest liquidation of the branch fromthe relevant Hungarian court.



90

European Insolvency ProceduresAutomatic Stay and Rescue Procedures

91England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

Yes, in administration.

Exceptions for secured

creditors (who may

enforce security with

leave or consent).

Mandat ad hoc and

conciliation procedures do

not feature an automatic

stay, but deferral of

payment may be granted

for up to 2 years in respect

of individual creditors.

Safeguard, rehabilitation

and liquidation

proceedings feature an

automatic stay in respect

of payment of debts

originating prior to the

commencement of the

proceedings and

commencement of legal

actions.

During preliminary

proceedings, a provisional

stay of execution may be

ordered by the insolvency

court.

After the opening of

insolvency proceedings

with the exception of

claims assigned for security

purposes and assets in the

possession of the

administrator, enforcement

of security is possible –

unless prohibited by court

order (if the assets are

required to continue the

debtor’s business; in such

cases interest and

compensation for loss in

value is to be paid to the

secured creditor).

Yes.

In “Concordato Preventivo”

(Composition with

Creditors) and “Accordo

di Ristrutturazione”

(Restructuring Agreement),

2 yrs maximum.

Security (other than

pledges, which can be

enforced according to their

terms) cannot be enforced.

Enforcement of security

suffers delay up to 1 year.

Initially for 2 months. May

be extended for further 2

months, secured creditors

may enforce unless

enforcement prohibited by

court order.

In liquidation proceedings

the court may grant a 30

day standstill period upon

the request of the debtor

company before the

commencement date of

the liquidation.

In bankruptcy

(reorganisation)

proceedings no automatic

standstill period applies;

a certain percentage of

creditors has to give its

consent to the moratorium.

The length of the

moratorium is 60 to 120

days, extendable once by

a maximum of 60 days.

The granting of an

automatic moratorium by

the court to the company

filing for bankruptcy

(reorganisation) procedure

is proposed in imminent

reforms.

Insolvency and Restructuring Trends in Europe: Automatic Stay and Rescue Procedures?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine

Yes, during the controlled

management procedure

until a final decision is

taken by the court.

Yes, during judicial

composition, payments are

suspended for a period of

6 months for a temporary

moratorium (which can be

extended to 9 months.).

A definitive moratorium

can last up to 3 years.

Yes, for up to 3 months.

Bankruptcy with a

composition option and

recovery proceedings do

not affect the rights of

secured creditors who

can enforce their claims.

Yes, stay kicks in upon

the filing of the insolvency

petition, applies to both

unsecured and secured

creditors. In reorganisation,

the stay is not limited in

time, but, save for very

large debtors

commencement of

reorganisation is subject

to creditor approval.

Also secured creditors

are protected by interest

payments on the value

of their security.

Yes, during restructuring

including the enforcement

of security.

Yes, during judicial

reorganisation, a secured

creditor can request that

the stay be cancelled if the

assets are not crucial to

the success of the plan.

Yes, moratorium on

claims, enforcement of

security and interest until

the end of the insolvency

proceedings.

The Supreme Court of

Ukraine has recently

confirmed the possibility

of enforcement of a

mortgage during

insolvency.


England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

Yes, schemes under Part

26 of Companies Act 2006

require majority in number

of creditors, three quarters

in value of claims.

Yes, for Company

Voluntary Arrangements

the proposal for

restructuring needs to be

approved by more than

half in value of the

shareholders and more

than three quarters in

value of the creditors.

Yes, as regards members

of creditors’ committees

and bondholders, subject

to majority votes by

creditors’ committees

representing not less than

two thirds of the debt, and

to the required majorities in

bondholders’ assemblies.

Insolvency plan must be

approved by majority of

creditors in each class who

must hold more than half of

the claims in value in each

class. Court can override if

non-concurring group

would be worse off without

the plan.

Yes, composition with

creditors must be

approved by majority of

classes of voting creditors

In Restructuring

Agreement: 60% of

creditors by value.

Yes, an arrangement

may be entered into with

creditors based upon a

vote by the majority of

creditors.

Yes, a composition needs

the approval of a normal

majority of creditors

representing at least half of

the total amount of claims.

“Cram down” of creditors

is possible. If a

composition agreement

was concluded either in

liquidation or bankruptcy

(reorganisation)

proceedings, with the

consent of the required

proportion of creditors,

the composition

agreement has to also

apply to non-consenting

creditors.

Insolvency and Restructuring Trends in Europe: Cram Down of Creditors?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine

Yes, controlled

management requires

adherence of a majority of

creditors in number and

more than half in value to

the restructuring plan or

the draft plan relating to

the realisation and

distribution of assets. Pre

insolvency composition

arrangements require

consent of a majority in

number of creditors and

three quarters in value.

A recovery plan must be

approved by more than

half in number and value

of all the creditors. It must

also be approved by the

court.

A composition plan must

be accepted by a majority

of each group of creditors

whose claims amount to

two thirds in value of those

entitled to vote. The judge-

commissioner can in the

event of each group not

voting in favour, approve

the plan if the majority of

groups approve it and any

dissenting groups are no

worse off than in a

liquidation.

Yes, in a reorganisation a

majority in number and by

amount of claims in each

class is needed to

approve. The Court may

also confirm the

reorganisation plan subject

to specific criteria being

met.

Yes, in a restructuring a

majority by number and by

amount of claims in each

class is needed to approve

a restructuring plan, the

Court may also confirm

the plan subject to specific

criteria being met.

Yes, in a judicial

reorganisation a majority

by number and amount of

creditors in each class is

needed to approve a

reorganisation. This is also

subject to the approval of

the Court.

“Cram down” of creditors

is possible. Creditors must

approve the rehabilitation

plan by a simple majority

and then it must be

approved by the Court.

However secured

creditors’ claims may not

be forgiven or written off

without the consent of

each relevant secured

creditor.

European Insolvency ProceduresCram Down of Creditors


92

European Insolvency ProceduresPosition of Management


93England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

Effectively displaced,

unless otherwise agreed

by Administrator.

Administrator selected by

the company or secured

creditor.

Man

dat

ad h

ocand

conciliation procedures:

management stays in

possession, assisted by

a court-appointed officer

in order to facilitate the

restructuring of the

liabilities.

Safeguard Proceedings:

management stays in

possession.

Rehabilitation Proceedings:

appointment of a judicial

administrator, who either

assists or replaces

management.

Judicial Liquidation:

the liquidator replaces

the management.

Usually management:

(1) continues to manage

business during the

preliminary proceedings

subject to the consent

of the preliminary

administrator;

(2) is displaced by court

appointed receiver after

the opening of insolvency

proceedings

However the court may:

(1) during preliminary

proceedings order the

transfer of management

to the preliminary

administrator;

(2) upon the debtor’s

request, order the opening

of debtor-in-possession

like proceedings with the

management continuing

to manage the business

under supervision of a

specific creditors’ trustee.

Effectively displaced by

court appointed receiver.

In cases of voluntary

insolvency, the receivers

supervise the directors’

decisions. In case of

compulsory insolvency, the

management is effectively

displaced by receivers.

Effectively displaced

by court appointed

administrator.

In case of liquidation

proceedings, the

management are

effectively displaced by

court appointed liquidator.

In the course of a

bankruptcy (reorganisation)

procedure, the

management retain their

powers, however receive

assistance from the court

appointed administrator.

In winding up procedure,

a receiver appointed by

the company replaces the

former management.

Insolvency and Restructuring Trends in Europe: Position of Management?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine

During the first phase of

controlled management,

the directors remain in

place, but actions are

supervised by magistrate

appointed by the court.

In the second phase a

“commissaire” is

appointed that supervises

management in

accordance with the

mandate of the court. In

bankruptcy proceedings

a “curateur” displaces

management.

Management retain

their powers during the

observation period of

the judicial composition

process but receive

assistance from court

appointed

commissioner(s).

In bankruptcy proceedings

the management is

effectively displaced by

a court appointed

bankruptcy officer (save

for bankruptcy carried out

for composition, where

“debtor in possession”

is optional). In recovery

proceedings the

management remains

(subject to certain

controlling powers of

the court-appointed

supervisor).

In a reorganisation, the

debtor’s management

remains in control, but is

monitored by a court

appointed trustee and

creditors’ committee.

In a restructuring, the

debtor’s management

remains in control, but

is monitored by a trustee

and the court.

In a judicial reorganisation,

the debtor’s management

remains in control under

the supervision of the

judicial administrator.

Management remains

in place during property

administrations stage.

On rehabilitation the

rehabilitation manager

replaces management.

During liquidation the

management is dismissed

and the liquidator takes

over the management of

the debtor.

England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

Yes, for breaches of

duties, wrongful trading

and fraudulent trading

(ss212-214 IA 1986).

Yes, in case of faults of

management having

contributed to the

insufficiency of assets or

the company’s insolvency;

also in case of fraud, etc.

Yes, for failure to file for

insolvency, for any

payments made to third

parties after the company

becomes insolvent and

for any new agreements

which the company is

unable to fulfil.

Yes, for breaches of duty

and failure to preserve the

company’s value if that

failure results in a loss to

creditors.

Criminal liability of directors

in case of:

ndistracted, disguised

or voluntarily lost the

assets

ntaken imprudent

actions to delay

the declaration of

bankruptcy

ndisguised its financial

distress or its

insolvency state in

order to obtain

financing.

When insolvency has been

considered as negligent,

and provided that they

have contributed to

provoke the insolvency.

Yes, for mismanagement,

fraud or if they have

contributed to company’s

insolvency.

Directors are liable for

breach of statutory and

contractual duties, breach

of the company’s deed of

foundation and any of the

members’ / shareholders’

resolutions in accordance

with the relevant rules of

the Hungarian civil law.

Liability of former directors

and shadow directors is

established by the

Bankruptcy Act in case

they failed to properly

prioritise the rights of

creditors. Criminal law

sanctions exist for certain

acts, e.g. violation of

accounting regulation,

bankruptcy crime,

concealment of

assets, etc.

Insolvency and Restructuring Trends in Europe: Personal Liability of Directors?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine

Yes, for any wrongdoing or

negligence under general

corporate law. Criminal

liability in respect of certain

actions which have lead to

the insolvency (including

lack of declaration,

wrongful or fraudulent

trading) other sanctions

include extension of liability

for some or all debts

incurred.

Yes, if grossly negligent in

a way that contributes to

the bankruptcy.


fiduciary duties,

contractual duties or

statutory duties. Wrongful

or fraudulent trading

triggers civil liabilities and

may in certain

circumstances lead to

criminal liability. Directors

are criminally liable for

preferential treatment of

creditors.


fiduciary duties owed to

creditors while in office

after commencement and

for damages caused to

creditors by delay in filing

an insolvency petition.

Yes, for breaches

of fiduciary duties,

diminishing value of

assets and circumventing

the success of the

restructuring process.


fiduciary and statutory

duties and where directors

have contributed to the

debtor’s insolvency.

Criminal sanctions exist

for certain acts.

Yes criminal liability for

fraudulent, deliberate

bankruptcy, concealing

insolvency and illegal

actions before or during

bankruptcy.

European Insolvency ProceduresPersonal Liability of Directors


94

European Insolvency ProceduresTime Limits for Filing


95England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

No express time limit for

filing for insolvency but

failure to do so which

results in a loss may give

rise to action against

directors personally.

Obligation to file within 45

days of the company being

unable to pay its debt as

they fall due.

Obligation to file

immediately upon company

being unable to pay its

debts currently due or over

indebtedness occurring;

filing may be postponed for

up to 21 days if reasonable

expectations exist that

insolvency can be

overcome.







Obligation to file within

2 months of when the

debtor has or should

have become aware of

its insolvency. Failure to

comply assumes that

bankruptcy is carried out

negligently.








filing. In bankruptcy

(reorganisation) procedure,

the company has to notify

the court of the result of

the creditors’ meeting

within 3 days.

Insolvency and Restructuring Trends in Europe: Time Limits for Filing?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine


1 month of company

having stopped making

payments.

Directors must file within

1 month of it being unable

to pay its debts.


2 weeks of insolvency

(unable to pay debts as

they fall due or debts

exceed assets).

No express time limit but

must file without delay

after they have determined

the company is insolvent,

insolvency is defined

objectively including

express time periods of

default with payment.


days after the directors

have determined that the

company is insolvent.


days from the date that it

is aware that it is or will

become insolvent.

Within one month of being

unable to satisfy claims.

England & Wales

France

Germany

Italy

Spain

The Netherlands

Hungary

Enterprise Act 2002.

Emphasis on rescue

culture, curtailed rights

of secured creditors to

appoint administrative

receiver.

Banking Act 2009

introduced special

administration and

insolvency procedure

for banks.

New law came into force

in January 2006.

Reforms on 15 February

2009.

New insolvency laws of

1999 with elements similar

to Chapter 11 proceedings

New autonomous

international insolvency law

rules in force since May

2003 which apply outside

the scope of the EU

Insolvency Regulation.

Recent reforms introduced

on 1 November 2008 by

the Act of modernisation

of the Limited Liability

Company Law and the

Prevention of Abuse.

New insolvency laws

introduced in February

2004 to cater for

rehabilitation of large

businesses.

Continuing reforms.

Latest amendments

Legislative Decree No 134

of 2008.

New laws on insolvency

published 10 July 2003

came into effect on 1

September 2004.

Royal Decree 3/2009

amending insolvency law

with regard to refinancings,

equitable subordination

and clarification of

guaranteed debts.

Substantial revisions

proposed.

Extensive revision of the

Bankruptcy Act is

proposed. The Bankruptcy

Act amendment bill has

been filed with the

Parliament at the end of

March 2009 and its main

purpose is to simplify and

make more effective the

bankruptcy (reorganisation)

procedure. The provisions

of the Companies Act

relating to directors’

liabilities are also to be

amended and stricter

provisions are to be

implemented.

Insolvency and Restructuring Trends in Europe: New Reforms?

Luxembourg

Belgium

Poland

The Czech Republic

Slovakia

Romania

Ukraine

No substantial revisions

proposed.

Recent reforms.

Reforms: Bankruptcy

and Recovery Law 2003.

Recent reforms:

31 March 2009.

Recent Reforms:

Insolvency Act No

182/2006 Coll. Effective

since 1 January 2008.

More reforms due 2009.

Recent Reforms:

Bankruptcy and

Restructuring Act No

7/2005 Coll. Effective

since 1 January 2006.

Recent Reforms:

Insolvency Law

No 85/2006.

No recent substantial

revisions.

However, a completely

new law is being drafted

by the working group of

judges, insolvency

practitioners and experts

including Clifford Chance

Ukraine.

European Insolvency ProceduresNew Reforms


96

European Insolvency ProceduresClifford Chance Contacts

97

Clifford Chance ContactsUK

Michael BrayTel: +44 20 7006 [email protected]

Adrian CohenTel: +44 20 7006 [email protected]

Nicholas FromeTel: +44 20 7006 [email protected]

Philip HertzTel: +44 20 7006 [email protected]

Mark HydeTel: +44 20 7006 [email protected]

John MacLennanTel: +44 20 7006 [email protected]

Alistair McGillivrayTel: +44 20 7006 [email protected]

Gabrielle RuizTel: +44 20 7006 [email protected]

David SteinbergTel: +44 20 7006 [email protected]

Iain WhiteTel: +44 20 7006 [email protected]

France

Reinhard DammannTel: +33 1 44 05 [email protected]

Christian LachezeTel: +33 1 44 05 [email protected]

Italy

Lia CampioneTel +39 02 80634 [email protected]

Carlo Felice GiampaolinoTel +39 02 806 341carlofelice [email protected]

Fabio GuastadisegniTel +39 02 80634 [email protected]

Luxembourg

Steve JacobyTel: +35 2 48 50 [email protected]

Marc MehlenTel: +35 2 48 50 [email protected]

Belgium

Yves HerinckxTel: +32 2533 [email protected]

Germany

Stefan SaxTel: +49 69 7199 [email protected]



Spain

Alberto ManzanaresTel: +34 91 590 [email protected]

Iñigo VilloriaTel +34 91 590 [email protected]

The Netherlands

Erwin BosTel: +31 611 396 [email protected]

Ilse van GasterenTel: +31 20 711 [email protected]

Jelle HoflandTel: +31 20 711 [email protected]

Jereon OuwehandTel: +31 655 798 [email protected]

Poland

Jan ZdzienickiTel +48 22 429 [email protected]

The Czech Republic and Slovakia

Vlad PetrusTel +420 222 555 [email protected]

Romania

Daniel BadeaTel +40 21 211 [email protected]

Ukraine

Olexiy SoshenkoTel: +38 044 390 [email protected]

Hungary

Gabor Felsen Tel: +361 429 1 [email protected]

Richard LockTel: +361 429 1 [email protected]

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European Insolvency Procedures


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© Clifford Chance LLP, August 2010.

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Registered office: 10 Upper Bank Street, London E14 5JJ.

We use the word ‘partner’ to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications.

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European Insolvency Procedures - 2010 Edition

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