Set‐off under the European insolvency regulation (and English law)

This paper addresses critically the meaning and effect of the set‐off provisions in the European Insolvency Regulation. The Regulation sets out the authority of EU Member States to open insolvency proceedings and provides that, subject to exceptions, the law of the State that opens insolvency proceedings shall apply to those proceedings. Setoff is one such exception for the opening of insolvency proceedings does not affect the rights of creditors to demand the set‐off of their claims against the insolvent debtor. Set‐off is intended to perform a guarantee type function for creditor claims. Nevertheless, the Regulation does not define what is meant by set‐off nor clarify whether set‐off rights under the law of a third country (such as English law) may be relied upon. The paper provides valuable clarification and critical analysis.     

Reconsidering Procedural Consolidation for Multinational Corporate Groups in the Context of the Recast European Insolvency Regulation

Procedural consolidation, as a solution to the rescue of insolvent multinational corporate groups (‘MCGs’), is said to be able to preserve group value for creditors. This article explores the desirability of procedural consolidation in the EU in the light of theories of corporate rescue law, cross‐border insolvency law, multinational enterprises and relevant EU cases with reference to the European Insolvency Regulation. It argues that, based on current cross‐border insolvency rules in the EU, there is an inherent difficulty for procedural consolidation in balancing the goal of preservation of group value and the goal of certainty. The article also considers the new ‘group procedural coordination proceedings’ offered by the Recast European Insolvency Regulation and argues that it may help to supplement the gap left by the procedural consolidation in the EU. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.     

The legal responses of Canada and Poland to international bankruptcy and insolvency with a focus on cross‐border insolvency law

This article discusses and compares the respective legal responses of Canada and Poland to international bankruptcy and insolvency with a focus on cross‐border insolvency law. Specifically, the issues addressed herein concern jurisdiction, recognition of foreign bankruptcy proceedings, and co‐operation with foreign courts and foreign administrators. Notwithstanding some real differences between Canadian and Polish international insolvency proceedings, both legal regimes may be compared, since both countries have adopted many of the principles contained in the UNICTRAL Model Law on Cross‐Border Insolvency. The major impetus behind the changes established by Canada in its bankruptcy and insolvency laws have been the economic realities produced by the North American Free Trade Agreement. Likewise, Poland's accession to the European Union (EU) has been a major catalyst for revising the Polish Insolvency and Restructuring Act. Part II of the said act is entirely devoted to international insolvencies. However, following Poland's adherence to the EU, those sections of the Polish Insolvency and Restructuring Act that deal with international or cross‐border insolvencies will be severely limited or constrained in scope. The article indicates that Poland, the EU and Canada are taking the necessary steps to meet the needs of debtors who would like to restructure in an international setting. Copyright © 2006 John Wiley & Sons, Ltd.     

Insolvency proceedings from a sustainability perspective

Sustainability is a wide concept including environmental, economic, social/culture, and political dimensions. Currently, sustainability research is a rich scientific discipline producing a significant number of research papers. However, sustainability in the context of insolvency proceedings has attracted little research compared with, for example, how much attention corporate social responsibility has received in company law research. This article studies sustainability in the context of liquidation and restructuring proceedings and the preservation of different kinds of resources (natural, manufactured, human, and social capital) in insolvency procedures. The purpose of insolvency proceedings may prevent the full implementation of sustainability. In bankruptcy, the administrator must maximise the selling price for creditor satisfaction, and there are few possibilities to promote sustainability. When facing an acute environmental hazard, in the name of public interest, a bankruptcy estate with assets usually has to act unless the law stipulates that society is responsible for taking care of the problem. In restructuring proceedings, the main purpose is to continue the debtor's business. It depends on the markets how sustainable the debtor company must be to achieve profitability. If becoming a profitable company in a “green” or otherwise sustainable market requires costly efforts, creditors' interests may require the sale of the assets. The author views through sustainability lenses EU Restructuring and insolvency Directive (2019) and finds there is not much of a sustainability approach included.     

Conflicts of interest,intra‐group financing and procedural coordination of group insolvencies

Modern insolvency law instruments recognise the specificity of enterprise group insolvencies, premised on the existence of close operational and financial links between group members. It is widely accepted that maximisation of insolvency estate value and procedural efficiency depend on coordination of insolvency proceedings opened with respect to group entities. Such coordination is prescribed in the European Insolvency Regulation (recast), the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Enterprise Group Insolvency and the recently reformed German insolvency law. Yet in insolvency, group members retain their own insolvency estates and pools of creditors. This is based on the traditional company law principle of entity shielding. Active communication and cooperation between insolvency practitioners and courts do not sit well with the separate (atomistic) nature of insolvency proceedings, as well as different and oftentimes conflicting interests of creditors in such proceedings. As a result, communication and cooperation may be restricted in a situation of conflicts of interest. This article explores how in the context of group distress the risks arising from conflicts of interest can be controlled and mitigated, while ensuring efficient cross‐border cooperation and communication to the maximum extent possible. It analyses three cutting‐edge coordination mechanisms, namely (a) cross‐border insolvency agreements or protocols, (b) special (group coordination and planning) proceedings and (c) the appointment of a single insolvency practitioner. It concludes that both the likelihood and significance of conflicts of interest correlate with the degree of procedural coordination. Therefore, conflict mitigation tools and strategies need to be tailor‐made and targeted at a specific level and coordination mechanism.     

Natural person ltd.: Towards a unified discharge regime for entrepreneurs and consumers

Personal insolvency proceedings are increasingly fulfilling an economic function, aimed at the rehabilitation of the debtor. The idea of the fresh start and second chance, including an early discharge of residual debts, is an important illustration thereof. Despite the fact that this evolution is noted in all personal insolvency procedures, both with regard to entrepreneurs and consumers, debt discharge used to be easier to justify and more readily granted to entrepreneurs (traders) than to non-entrepreneurs. Clear examples of the discomfort legislators seem to have with discharging unpaid debts of consumers are the EU Member States that differentiate between commercial and consumer insolvency procedures. In addition, the narrative of promoting entrepreneurship is now driving EU insolvency reforms. That (narrow) focus leads Directive 2019/1023/EU to make the same distinction between insolvent individual entrepreneurs and other natural persons, offering the former a full discharge of debt after a reasonable period of time, while providing no mandatory discharge principles for the latter. This means that not all natural persons are equal when it comes to the possibility of having a second chance, despite compelling evidence that shorter discharge periods lead to more productive individuals. The question therefore arises as to whether EU Member States should run separate discharge systems for entrepreneurs and consumers, and whether this is justified in relation to its purpose. Focusing on natural persons in an insolvency context, this article argues that the objectives of providing a fresh start and second chance, by promoting debt discharge, are as relevant for consumer debtors as they are for entrepreneurs.     

What is in a Name? Group Coordination or Consolidation Plan—What is Allowed Under the EIR Recast?

The European Insolvency Regulation Recast allows for group coordination proceedings if insolvency proceedings have been opened against different companies belonging to a single group. Group coordination proceedings imply the drafting of a group coordination plan in order to define an integrated solution to the group's problems. This plan shall not include recommendations as to any consolidation of proceedings or insolvency estates. Against the backdrop of the evolving notion of ‘procedural consolidation’ and the fact the insolvency practitioners and courts concerned have to cooperate and communicate with each other, this prohibition is misplaced and should be interpreted to mean only that main or secondary proceedings opened in a member state cannot be transferred to another jurisdiction. The effective administration of insolvency proceedings of related group companies often demands an integrated solution to the group's problems, which will inevitably lead to some form of consolidation. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd.     

A Glimpse into the Future: Cross‐border Judicial Cooperation in Insolvency Cases in the European Union

After 2 years of study, discussion and consultation, in February 2015, the EU Cross‐Border Insolvency Court‐to‐Court Cooperation Principles were published. The EU Cross‐Border Insolvency Court‐to‐Court Cooperation Principles (‘EU JudgeCo Principles’) contain 26 principles. The EU JudgeCo Principles aim to strengthen efficient and effective communication between courts in EU Member States in insolvency cases with cross‐border effects. The EU JudgeCo Principles, in short, include principles on their non‐binding status and their objectives, case management of courts and the equal treatment of creditors, and principles about the judicial decisions itself, on the reasoning and for instance on providing a stay or moratorium. Several principles relate to the course of the proceedings, such as notifications and authentication of documents, and the last principles concern the outcome of judicial cooperation, for instance, cross‐border sales, assistance to a reorganisation or rules for binding creditors to an international reorganisation plan. The Principles include 18 EU Cross‐Border Insolvency Court‐to‐Court Communications Guidelines (‘EU JudgeCo Guidelines’). These EU JudgeCo Guidelines aim to facilitate communications in practice, in individual cross‐border cases. The EU JudgeCo Principles try to overcome present obstacles for courts in EU Member States such as formalistic and detailed national procedural law, concerns about a judge's impartiality, uneasiness with the use of certain legal concepts and terms, and, evidently, language. Presently, court‐to‐court communication between judges in insolvency matters in the EU, especially on the continent, is limited to only a few cases. In the near future, judicial cooperation and communication will be a cornerstone in the efficient and effective administration of insolvency cases within the EU. The EU JudgeCo Principles will then certainly serve as a significant guide. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd     

Cross-border insolvency law in India: Are the principles of comity of courts and inherent common law jurisdiction relevant?

Deliberations are in the final stages for enacting a cross-border insolvency law in India based on the UNCITRAL Model Law on Cross Border Insolvency 1997 (‘Model Law’). The cross-border insolvency regime in India will provide an avenue for recognising foreign insolvency proceedings in India. Although it is a matter of time before India adopts the Model Law, it is important to examine whether there remains an independent basis in addition to the Model Law for recognising and providing assistance to cross-border insolvency proceedings in India. This is crucial on account of the following reasons: first, the Model Law does not provide that it is the exclusive pathway for foreign creditors to seek remedies under domestic law. The Model Law, as reflected in Article 7, was intended by its drafters to be an additional gateway to those provided under local laws. The proposed Indian law in Article 5 of Draft Part Z of the Insolvency and Bankruptcy Code 2016 also does not depart expressly from this principle. Second, there may be instances where neither the ‘Centre of Main Interests’ nor an establishment of a corporate debtor is situated in India; therefore, assistance and cooperation in respect of such cross-border insolvency proceeding can only be based on the inherent common law jurisdiction, if available. Third, the cross-border insolvency framework in India will be premised on the requirement for reciprocity and, therefore, countries that do not meet the reciprocity requirement may find it beneficial if such an independent basis for recognition exists in India. This article argues that foreign representatives should be encouraged to explore the possibility of seeking assistance from the commercial courts in India under the common law principles governing cross-border insolvency and that the courts in India should be open to this possibility.     

Reconsidering the Shareholder's Role in Corporate Reorganisations under Insolvency Law

A corporate reorganisation under insolvency law is commonly achieved by virtue of a reorganisation plan that provides for the distribution and sacrifice of value among all stakeholders in an insolvent company. Although the creditors' right to vote on such plans and to participate in the wealth distribution according to such plans is universally accepted, the role of old equity in a corporate reorganisation remains a topic that jurisdictions all over the world define very differently. This article first explores possible approaches to shareholders' treatment under insolvency law and supports their inclusion in insolvency proceedings that pursue corporate reorganisations. It then argues that equity interest should not solely be treated according to its economic value and consequently that no absolute priority rule should be applied against them as such treatment would ignore the fundamental difference between liquidation and reorganisation. Finally, it proposes a new cram‐down rule for a class of equity holders. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd.     

Grounds for Refusal of Recognition of (Quasi‐) Annex Judgements in the Recast European Insolvency Regulation

Insolvency‐related (annex) actions and judgements fall within the scope of the Recast European Insolvency Regulation (‘Recast EIR’). That instrument both determines international jurisdiction regarding annex actions and sets up a simplified recognition system for annex judgements. However, tension between the Recast EIR's provisions on jurisdiction and recognition arises when a court of a state different from the state of insolvency erroneously assumes jurisdiction for annex actions. Such ‘quasi‐annex’ judgements rendered by foreign courts erroneously assuming jurisdiction threaten the integrity of the insolvency proceedings. Besides, the quasi‐annex judgements may violate the effectiveness and efficiency of the insolvency proceedings as well as the principle of legal certainty. In this article, it is argued that even the current legal framework may offer some ways to avoid the recognition of such quasi‐annex judgements. First, the scope of the public policy exception may be extended in order to protect the integrity of the insolvency proceedings from the quasi‐annex judgements rendered by foreign courts erroneously assuming jurisdiction. Second, it may be argued that quasi‐annex judgements do not equal real annex judgements and therefore do not enjoy the automatic recognition system provided by the Recast EIR. At the same time, their close connection to the insolvency proceedings – disregarded by the forum erroneously assuming jurisdiction – may exclude quasi‐annex judgements from the scope of the Brussels Ibis Regulation, as well. As a consequence, those quasi‐annex judgements may fall within the gap between the two regulations, meaning that no European instrument instructs the courts of the member state addressed to recognise quasi‐annex judgements. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.     

Are Bangladesh,India and Pakistan Ready to Adopt the UNCITRAL Model Law on Cross‐Border Insolvency?

The development of business laws in key markets has not kept pace with the exponential growth of foreign investment they have experienced. Countries such as Brazil, Russia and China either do not consider the issue of cross‐border insolvency in their legislation or they explicitly provide for a ‘territorialist’ approach to cross‐border insolvency proceedings, whereby each country grabs local assets for the benefit of local creditors, with little consideration of foreign proceedings. This has led to uncoordinated, expensive attempts at cross‐border reorganisation. The UNCITRAL Model Law on Cross‐Border Insolvency (1997) was adopted with the objective of modernising international insolvency regimes and enhancing cross‐border cooperation. In its 19 years of existence, it has been adopted by 41 countries in a total of 43 jurisdictions but by none of the BRIC states or the ‘Next‐11’ nations of Bangladesh and Pakistan. While it has entered into policy‐level discussion in China, India and Russia, it would seem that there is still scepticism regarding the efficacy and suitability of the Model Law for adoption into their national systems. This paper seeks to establish whether the Model Law can adequately plug, what Steven Kargman calls, ‘the glaring gap in the international insolvency architecture’, looking particularly at the context of the South Asian states of India, Bangladesh and Pakistan. It will question whether its adoption will improve the ability of these jurisdictions to handle the challenges of cross‐border insolvencies, especially in light of their existing legal landscape, their market policy objectives and the existing alternatives available to the Model Law. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd.     

Jurisdiction concerning annex actions in the context of the insolvency and Brussels Ibis regulations

The legislation of the European Union has addressed the private international law aspects of civil and commercial matters and those of insolvency cases separately. While the Brussels Ibis Regulation (and its predecessors) focuses on “classic” civil of commercial cases, insolvency proceedings are subject to the (recast) Insolvency Regulation. However, the close interference between the two related areas of law—commercial and insolvency—results in a category of cases that are commercial and contentious in nature, and so they would tend to gravitate towards the Brussels regime, but yet they are so closely connected to the insolvency proceedings that justifies a special approach. This article focuses on the question of international jurisdiction regarding these “annex actions” in the context of the EU law. It will attempt to explore the historical roots of the current provisions and the evolution of both the European legislation and the relevant case law. The examination of this progression provides a better understanding of the current legislation and answers some questions apparently left open in the recast Insolvency Regulation.     

The effectiveness and efficiency of corporate insolvency law—part two

Little empirical research has been done in the Netherlands (or internationally) into the effect of corporate insolvency proceedings. The Dutch legislature has made several attempts in the past decades to revise the current Dutch Bankruptcy Act (Faillissementswet) of 1893, while almost nothing is known about the effectiveness and efficiency of the Dutch corporate insolvency law. I have studied the effectiveness of the current Dutch insolvency law and of European Directive 2001/23/EC which is incorporated in this law, on the basis of theoretical and large‐scale empirical research. The study concerned all 4167 of the corporate insolvencies that ended in 2004. In the first part of this Article (International Insolvency Review, Volume 17, 3, Winter 2008, pp. 189–209), the research results showed that the Dutch Bankruptcy Act achieved the goals set on it only to a limited degree and that the informal restructuring procedure is of great social importance. In this second part, I concentrate on the conditions imposed by European Directive 2001/23/EC on the European national legislatures to protect employees' rights: automatic transfer of employment contracts in the event of transfers as part of insolvency proceedings, together with measures to prevent misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this European Directive. The study shows that, in the Netherlands, not applying automatic transfer of employment contracts when an undertaking or business is transferred as part of an insolvency proceeding does not result in large‐scale misuse of insolvency law. It appears that automatic transfer of employment contracts outside insolvency proceedings can actually impede the informal restructuring of financially unsound companies. These surprising results are interesting for corporate insolvency proceedings worldwide. Copyright © 2009 John Wiley & Sons, Ltd.     

Towards adoption of the United Nations Commission on International Trade Law Model Law on cross‐border insolvency in Kenya

Kenyan Insolvency Bill has been in the Kenyan government website since 2010. The analysis of the Bill reveals that if it were to be passed into law, it will have significant implications for the Kenyan insolvency legal regime. The regime which is currently in use is based on the law that was inherited from the colonial administration. This review article focusses on the potential implication that the Bill is, if it were to be passed into law, likely to have for cross‐border insolvency reform and proceedings. The analysis is informed by the international insolvency benchmarks, particularly the United Nations Commission on International Trade Law Model Law on cross‐border insolvency and the emerging trends of its adoption in various countries including in sub‐Saharan Africa. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd     

Dutch corporate insolvency law: On the brink of a revolution?

The Dutch Bankruptcy Code (DBC) has not changed fundamentally over the more than 110 years of its existence, at least as far as corporate insolvency proceedings are concerned. On 1 November 2007, however, a committee of insolvency experts presented a draft for an entirely new code to the Ministry of Justice. Whether this new code will gain the force of law and whether this will happen within the near future remains uncertain but the proposals will in any event dominate discussions on insolvency law in the Netherlands for the foreseeable future. The main goal behind many of the proposals is improving the ability to successfully restructure companies that experience financial difficulties. To this end the proposals include various measures that would weaken the position of (secured) creditors. The proposals include widening the scope of the cooling-off period during which secured creditors are unable to enforce their security by granting the administrator a right of use of assets subject to security interests. The ability to rely on early termination clauses in contracts is also reduced during the cooling-off period. The position of secured creditors is further weakened by a proposal to grant the right to sell assets that are subject to security interests to the administrator if he continues the business. Under the current bankruptcy code, secured creditors can largely ignore insolvency proceedings, there is no general stay on enforcement and, early termination clauses in contracts are generally thought to be valid and enforceable during insolvency proceedings. Although banks have already argued that weakening the position of secured creditors will limit the ability to restructure companies, it seems safe to assume that the relatively comfortable position that secured creditors currently enjoy during insolvency proceedings in the Netherlands will be under fire due to the proposals for a new bankruptcy code. Copyright © 2008 John Wiley & Sons, Ltd.     

Rights in rem,Article 5 and the EC Insolvency Regulation: an English perspective

The treatment of security interests is central to any insolvency régime, national or transnational. Under Article 5 of the EC Regulation on Insolvency Proceedings (E.C. 1346/2000) extensive protection is given to a security interest—or right in rem—over assets of the debtor situate in a Member State other than one in which insolvency proceedings have been opened. The absence, thus far, of any significant body of European case law on Article 5, allows commentators to put forward a range of views on how Article 5 ought to be applied. This article aims to examine the scope of Article 5 protection both conceptually and in terms of illustrations drawn largely from English insolvency law and practice. Particular attention is given to the following issues: what is meant by the ‘opening of insolvency proceedings’ with reference to Article 5; when a liquidator may pay off the holder of a right in rem; whether the rules under the Regulation for determining the situs of an asset alter the English common law position; whether Article 5 prohibits the discharge of an underlying debt by way of a restructuring plan; the position of unsecured creditors who attempt to acquire rights in rem prior to the opening of insolvency proceedings; and whether the English court's equitable jurisdiction to enforce a charge which does not comply with the lex situs, survives the coming into force of the Regulation. Through the discussion of these topics, this article seeks to identify an approach to the interpretation of Article 5 which is consistent not only across the wide range of issues identified but also with the broad policy objectives underlying the treatment of in rem rights in the Regulation. Copyright © 2006 John Wiley & Sons, Ltd.     

Bridge over Troubled Water: The Revised Insolvency Regulation

The EU legislature has used the last two and a half years to negotiate a modernised framework for cross‐border insolvencies largely outside the spotlight of public debate. The revised Insolvency Regulation introduces new rules on secondary proceedings and innovative provisions on insolvency proceedings for groups of companies. Some parts of the final reform package were not originally envisaged by the European Commission, and it was the European Parliament and the Council that, in an unusual display of unity, agreed on more ambitious steps than the EU executive had proposed. However, not all that glitters is gold. The legislature missed the opportunity to clarify the concept of Centre of Main Interest, and it is still for the courts to establish international jurisdiction on the basis of rather vague criteria. It will soon be time to give life to the rules and ensure that cross‐border insolvencies are conducted more effectively than they are today. The new rules entered into force on 25 June 2015 and apply from 26 June 2017. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd     

Does pre‐packed bankruptcy create value? An empirical study of postbankruptcy employment retention in The Netherlands

In recent years, there has been growing interest in whether pre‐packed bankruptcy can be a mechanism through which firms facing imminent insolvency can preserve value. Although an extensive body of literature exists on “pre‐packs,” whether such techniques really preserve value remains ambiguous. By analysing bankruptcy proceedings filed with Dutch courts in the period 2012–2018 through the lenses of real options and debt overhang theory, we examined employment retention postbankruptcy as a consequence of the type of bankruptcy proceeding (pre‐packed bankruptcy and conventional bankruptcy) and the severity of prebankruptcy financial distress. The results show that in the Netherlands, a pre‐packed bankruptcy, when compared with a conventional bankruptcy proceeding, positively impacts employment retention rates after bankruptcy. The severity of financial distress before bankruptcy does not affect employment retention rates postbankruptcy. This implies that despite the amount of resource slack, the preservation of employee value is better served under a pre‐packed bankruptcy than a conventional bankruptcy proceeding. This finding is important for insolvency practice, as up to 22 June 2017, employee rights in the Netherlands (including redundancy) were not considered to be automatically transferred to the firm acquiring the bankrupt debtor's assets when a pre‐packed bankruptcy was applied. Implications for insolvency regulation and practice are discussed.     

‘Brexit’ and International Insolvency Beyond the Realm of Mutual Trust

The outcome of the referendum held in the UK in June 2016 is of far‐reaching and unpredictable consequences. This article focuses on the particular field of international insolvency with a view to identifying some of them, all arising out of the fact that the UK will be leaving the EU area of justice and the strong cooperation based on mutual trust between member states. This will make UK–EU insolvency cases clearly less efficient and effective. The consequences of Brexit could be mitigated by the already existing coordination among the international instruments dealing with these matters, in particular the European Insolvency Regulation and the UNCITRAL Model Law on Cross‐Border Insolvency. However, not all EU member states have in place rules dealing with these issues as regards to third states. In order to lessen the impact of Brexit in this sensitive area of law, the implementation of the Model Law in order to deal with extra‐EU cross‐border insolvency could be of avail. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd