By Yves BRULARD
Many economic actors chose various methods of leverage buy outs (LMBO, MBO…) to carry out acquisition transactions in times of economic growth, when the cost of acquisitions is high and a high return on investment can be expected.
Without going too far into details about the different varieties of acquisition structures that can be found, typically, a holding would borrow funds in various ways to finance the acquisition. The bank financing the transaction would demand to obtain shares from the acquired corporation as a financial guarantee.
The current and latent financial crisis have obviously altered perspectives of transactional profitability. Some holdings can not afford anymore to pay back borrowings because of circumstancial events or because of the underlying structure of the economy itself. In these conditions, some of the companies of a corporate group-or the entire group itself-sometimes have to seek protection under the insolvency law to find a solution to their insolvency. These financial turmoils are becoming more and more common in the United-States and Europe.
If the following explanations do intend to schematize the various types of LBO transactions undertakable by companies, one must note that acquisition structures can vary as well as the structure of the acquired group itself. These structures can be very complex.
A holding can hold a majority stake at the Board of the Directors and the General Meeting. But it is also possible, and it actually happens quite frequently, to see other types of group structures. In some cases, several structures are interposed between the acquired target and the companies which contribute to paying off the debt (and would have economical or financial interest in case of bankrupcy). These interposing structures either take the form of condominiums or ad hoc structures where strategic assets (treasury, intellectual property…)have been placed. Real estate properties or rights confered by pledged assets would be kept apart to minimize the risk. Some structures resemble future defeasance structures. In other cases, there could be indirect equity stakes or conventions granting the parent company a somewhat effective control on its subsidaries’policies.
This presentation aims to consider how the restructuring of such groups could be operated under both the current 1346/2000 regulation and its admendments as proposed by the Commission and currently debated by State Members
Several theorical and judicial questions will be enumerated and the Commission’s proposal for amendments to the current regulation will be reviewed.
Such an analyse obviously should start by reminding the reader that insolvency laws differ according to each State. Some provide pre-insolvency procedures to help companies restructure and avoid formal insolvency proceedings. In other States, this option is non existent, which compells companies to enter formal liquidation procedures or at least procedures leading to competition between creditors.
The UNCITRAL Model Law on insolvency also allows countries to increase their legal cooperation with the other signatories, and notably with the British and American jurisdictions.
Some legal traditions support the theory of the effective head office rather than the legal head office theory. The theory of the effective head office would allow the gathering of several procedures related to foreign corporations under one same jurisdiction and law.
The international structure of some groups should also be taken into account, as their restructuring would ipso facto depend on foreign juridisdictions and therefore on different legal traditions (anglo-saxon countries such as the United-States or developping countries such as China or Brazil). Nevertheless, dealing with all these aspects and hypotheses would obviously be too extensive for this short presentation.
1) The current 1346/2000 regulation
We selected a recent legal case to serve as a guideline for our presentation. Even though not the most complex or particularly important, this case raised several questions which could illustrate our presentation.
The management of a French listed company had to launch an LBO in order to counter a takeover bid, collecting a relatively important amount of funds from a French and foreign banks consortium.Under the advice of these banks financing the transaction, the executives aimed to counter such a takeover bid by setting up a parent holding company in Belgium to collect the funds. These banks nevertheless demanded pledged shares to remain on a French depositary’s account as a financial guarantee.
The minority shareholder initiated procedures as an attempt to cancel the purchase, and tried to maintain his stake in the company.
The company we have selected as an illustrative case is active in a field particularly affected by any policy changes on corporate structures. The subsidary company’s business model therefore drastically changed with the new presidential regime.
To save the company, a New Money investor had to be participate in the capital. Obviously, this investor’s funds would be conditioned to the maintaining of the parent company’s majority stake in its subsidiary.
The minority shareholder could seize jurisdictions on both French and Belgian territories.
After trying to reach a friendly agreement out of the legal framework, the company had to initiate a formal procedure to seek a friendly agreement with its creditors. As this procedure was not successful either, the company had no choice but to contemplate a transfer under legal control. Meanwhile, its listed subsidiary had to increase capital for the new investor to participate, launch a mandate ad hoc procedure and a conciliation procedure and prepare a financial safegard procedure.
When the transaction was completed, this new investor could pay off the company’s bank debt, exit Belgian insolvency proceedings, restructure the listed subsidiary and erase most risks linked to the operation on the French territory.
The whole process required the intervention of Belgian trustees, the supervision of The Court of Trade of Belgium and its delegated judges as well as the supervision of the Court of Trade of Paris, the designation of an ad hoc trustee and the opening of a conciliation procedure. Let’s use the opportunity of this presentation to commend the intervention of the Court of Trade of Neufchâteau which contributed highly to this final agreement, going beyond the limits of the current regulation and anticipating the future regulation as amended by the Commission. These decisions bring honor the Belgian legal system and preserved about 500 direct and 2000 indirect employments.
The French Financial Market Authority has been requested to answer reproaches about the lack of coordination, not only between different jurisdictions under different laws, but also between different branches of law itself (financial law, stock exchange law, insolvency law…)
Ordinary courts might be seized, if they have not been already. They will have to arbitrate potential conflicts between ordinary law principles(corporate law, stock market law) and the insolvency law.
In order to understand what could be the positive outcomes of these new admendments, a brief outline of the difficulties faced under the current regulation 1346/200 should be given.
B) What defines a holding company in an LBO ?
The first one of these difficulties lies in the lack of definition of an acquisition holding company by both the insolvency law and the European law.
Should we consider this holding as a mere acquisition vehicle, or even as an ad hoc entity set up for the only purpose of borrowing funds, which therefore owns assets but does not carry out any economic activity, or should we instead consider that its financial management, shareholding management or the management of its subsidiaries would make it appear as an economic actor in regard to the domestic and European Laws, therefore bringing the debtor into the domestic and european legal framework.?
This question is particularly important in Belgium, as the Belgian Law on the Continuity of Businesses only consents to the transfer of businesses as economic actors. The Court of Trade of Brussels has indeed already rejected petitions concerning a holding company deprived of actual economic activity The company only had assets, in other words shares, to cede Nevertheless, other cases we had to deal with showed the existence of holdings including a true internal administration which not only executed service contracts for various subsidiaries but sometimes even effectively managed them. This type of structure should be recommended, in order to avoid the following debate.
The holding company declared to the Court of Trade of Neufchâteau that its effective control over its subsidiaries, its sophisticated industrial and technical project for modifying its subsidiaries’business models combined with the fact that it executed some of its subsidiaries contracts should qualify as an economic activity. According to the holding company, the minority shareholder’s offer only targeted assets as he did not exercice any control, was not in any position of responsability in the parent company or its subsidiary (and did not intend to be), did not have any industrial or managerial plans as to shareholding management. His offer should therefore not be brought into the Belgian legal framework. An agreement was found, which prevented the Court from arbritrating the issue. However, the decision of the Court of Trade of Brussels demonstrates how the lack of economic activity is a major obstacle to the restructuring of holding companies considered as simple financing vehicles in regard to the domestic law.
The regulation does not define eligible debtors and therefore refers to the domestic insolvency law. Some jurisdictions might accept petitions to open procedures involving an ad hoc entity when others would not.The holding company’s managers are therefore very likely to select a COMI location not only on grounds of the usual fiscal or corportare criterions but also on grounds of the legal capacity to restructure. Banks will obviously tend to favour countries where Debt restructuring is harder to accomplish, whereas the holding’s management would prefer jurisdictions approving this form of restructuring.The management might also chose to relocate its COMI or restructure its assets and activities in order to bring the holding into another legal framework when trying to find a solution to its economic or financial turmoils.
Here lies the difficulty of restructuring holdings considered as distinct debtors from their subsidiaries ( which constitute the core of the group’s economic value). Indeed, Bank debt is often syndicated and usually forms the largest part of the company’s liabilites( if not its totality) which could motivate creditors to vote in favour of formal recovery procedures under the domestic law applicable (PRJ by collective agreement in Belgium, safegard or judicial reorganization procedures in France, Chapter 11 in the USA…)
When collective agreements are impossible, the option of friendly agreements still remains, when they can be reached. In fact, very few debtors manage to find « acceptable or practical» agreements with the creditors concerned. It usually takes the opening of formal procedures to convince both sides that a friendly agreement would be preferrable to a legal procedure or to the effect of a restructuring by transfer or liquidation.
The parent company’s restructuring can actually not be performed without the economic restructuring of one (usually all) of the subsidiaries for economic or legal reasons, as the parent company’s struggle to pay off the acquisition debt usually finds its source in its own subsidiaries’s economic dfficulties.
C) Between corporate interest and group interest
Another difficulty, also illustrated by the case we have previously mentioned, is to assess what is done in favour of the holding’s interest or to protect the interest of the whole group.
In this very case, the question was to find out if a restructuring holding had the right to vote at its subsidiary’s General Meeting for an increase in capital allowing a New Money investor to enter the holding. Such a vote would cause a loss of value in shares for minority shareholders who would not support this increase in capital, and potentially also a loss of value of the holding’s shares,which form the creditor’s guarantee. Voting against such a plan would nevertheless have led to the the liquidation of the subsidiary, causing a total loss of the company’s value and employments as well as the end of the economic activity. This shows how the holding’s interests are intrinsequely linked to its subsidiary’s interests and therefore to the group’s interest.
One can easily understand the difficulty of finding a balance between individual and collective interests. Such a balance can not be regulated by the law and must be found by debtors themselves, the appointed trustees and the different jurisdictions. In the case we mentioned, the Belgian insolvency magistrates could have opposed this vote or prevented it by appointing a temporary administrator or by issuing an interlocutory order, but the trustees did not accept this solution. The French interim relief judge could have cancelled or postoned the General Meeting. As for the French insolvency magistrate, he could have supported this General Meeting (as he actually did by approving a conciliation protocol the day before the General Meeting was held, after ending the ad hoc mandate procedure which had prepared for such a recapitalization). The company’s restructuring could therefore have been affected by such contradictory decisions.
Even though the current regulation does not allow formal cooperation between different courts, trustees in charge of main and secondary proceedings ( when a debtor has an establishment located in another country) can cooperate. This does not concern the situation we are currently presenting. As shown in the EUROFOOD case ruled by the Court of Parmes (as well as in other cases heard by British and other European Courts), a court will in fact open as many procedures as there are debtors sharing one same COMI since the regulation does not openly support cooperation between different procedures involving different debtors. But in reality, the same trustees are sometimes appointed and the law allows these trustees to communicate. Sometimes, the cases are heard by the same court, aware of all the procedures. Such a cooperation will nevertheless not be binding on creditors as these remain, in most jurisdictions, creditors of different debtors.
The Belgian Magistrate could not have opened insolvency proceedings for both the parent company and its subsidiary as the French company’s COMI was not considered as located in Belgium.
This lack of cooperation makes a clear arbitrage of the limits between the group’s interest and the subsidiary’s interest most unlikely. The individual and collective interests will therefore always compete when restructuring a group, unless magistrates and professionals find clever solutions, as happened in our illustrative case. Indeed, trustees and magistrates coordinated their activities, allowing each person on each territory to do what could be done to protect the interest of each debtor while taking into account the group’s interest.
The parent company’s bank creditors are often tempted to exercise a pressure through pledged shares, enforcing these pledge shares-or trying to have them enforced-to their own advantage rather than for the global restructuring’s interest. This is even more frequent when the parent company’s bank creditors are distinct from those of the subsidiary, for either direct or indirect reasons (guarantees).
The restructuring of a group of companies can therefore only be achieved when rights of judicial review are provided in order to set a fair and acceptable negociation environment with a balance between the parent company’s funding banks and the subsidiary’s management
D) Locating a company’s economic activity
The Court of Trade of Neufchâteau , counscious of the difficulties which will be discussed throughout this presentation, has applied the current regulation 1346/2000 a very conscientious way while anticipating the new regulation by issuing an injunction against French banks to prevent them from enforcing pledged assets located on the French territory.
This has been done on grounds that a secondary establishment was proven to exist, which could have justifed the opening of secondary proceedings to a French court. For Belgian legal reasons, the Court also had to mandate trustees in the main proceedings to request the opening of secondary proceedings and their immediate suspensions to allow the main proceedings to progress while preventing bankers from enforcing the pledged assets.
This decision raises many questions: can we consider that these subsidiaries acquired by the holding should be considered as an establishment located at the same place as these pledged assets? Can these trustees in the main proceeding request the opening of secondary proceedings to bring these assets under the insolvency regime? Can they also request the suspension of this procedure to prevent these pledged assets from being realized out of the global restructuring framework.?
To the first question, these banks answered that operations aiming to either obtain credit to finance an acquisition or to renegociate these credits as well as shareholding management related operations should not be considered as an establishment according to the regulation 1346/2000. The Court disagreed. The banks exerciced their rights against this decision but could never be heard as an agreement was reached before the Court could rule the issue. If I judge from the current definition of an establishment as given by the regulation 1346/2000, this decision has no reason to be put into question. This rule obviously prevents French banks from using their usual strategy of attempting to relocate the acquisition vehicle away from the pledged assets to ensure the application of the article 5 of the same regulation (which states that the effects of foreign insolvency proceedings would not extend to pledged assets in France.)
The second question was to find out if the trustees in main proceedings were in capacity to request the opening of secondary proceedings in France in order to counter this article 5. Such a procedure would prevent creditors from enforcing out of an insolvency regime pledged assets located in this country. The Court allowed it. This authorization was not really put into question by banks, and could actually not really be when there is indeed an establishment located on a foreign ground. The trustees appointed by a court must nevertheless be legally in capacity to do so in regard to domestic laws.As the Belgian domestic law does not provide such capacity, the Court had to grant the trustee with exceptional rights.
The third question was to know if trustees could request the suspension of such a procedure in order to put the realization of assets by the French bank on hold. The NORTEL Case ruled by the Court of Trade of Nanterre seems to go in favor of this theory This corporation, listed on both Toronto and New-York stock exchanges, owned about 177 subsidiaries throughout the world and employed 32 000 persons, with a total turnover of 12 billion dollars. In order to cut insolvency risks, the corporation opened (after negociations) several insolvency proceedings:Chapter 11 in the USA, a similiar procedure in Canada and the United- Kingdoms (under the regulation 1346/2000 as several European subsidiaries were involved, including one French company). On January 14, 2009, a London magistrate opened main proceedings for the 19 European subsidiaries, including this French subsidiary which employed 747 persons and had a turnover of 258 million euros. The recovery plans for this company included social plans complying with the French domestic law and the continuity of the economic activity. Maintaining this economic activity was a complex process as most of the French subsidiary’s intellectual property rights were owned by the American or Canadian parent company. Moreover, this subsidiary was also executing a major 200 million dollars worth contract as a Public-private partnership with the SNCF. The company had liabilities of $2.9 billion dollars, a customer account of 31 million dollars and a claim on a British pension fund of 2,4 billion dollars. The British liquidators first carried on the exploitation of the French subsidiary, without requesting the opening of secondary proceedings. But as this company was likely to end up being deficitial during main proceedings and that social plans could bring employees to claim their money, these liquidators had to contemplate a liquidation, i.e. secondary proceedings, in order to obtain French closure funds. Indeed, In France and Belgium, closure funds can only be obtained in case of liquidation.
Before opening secondary proceedings, a legal procedure allowed them to negociate an agreement with the future French appointed trustees and the competent court. The two French liquidators appointed by the Court of Versailles on May 28, 2009 then immediately signed a convention with all legal representatives and trustees of the European subsidiaries, the British trustees (themselves having agreements with other subsidiaries’ trustees in the world), stating that the only solution was to keep exploitating the corporation until the completion of the cession of property rights, which could only occur in the United-States.
The Court of Versailles accepted to suspend the liquidation procedure, as allowed by the regulation, and even authorized a partial suspension which allowed liquididators to keep working. This decision was rather extraordinary, as it resembled opening main proceedings in France after opening secondary proceedings in England. The continuity of the exploitation, despite the difficulties it raised, had positive effects. Two social plans could be organised. The collective request of all the trustees to the competent courts, and in particular to the French court, made possible a global cession of the group’s assets. On February 26, 2010, The Court of Trade of Versailles approved the request for liquidation suspension. Under the 30th of March Act, the liquidators could transfer the French subsidiary’s assets to other acquiring corporations in the world. The effects of this agreement were extremely positive. Indeed, the situation was tough before the second proceedings were opened. The social plan contemplated 450 job cuts. Trade unions were opposing several money transfers to the United-Kingdoms and threatened to block these transfers. The subsidiary did not have sufficient funds to pay wages and a 20 million euro tax credit had been blocked by the French tax authorities. The French closure fund, which initially refused to cover wages payment, agreed to do after the insolvency agreement was reached, confident on gaining money back on the sales of assets. The liquidators concerned were supported by their jurisdiction and did not fear taking risks.
The main question is therefore to know if the regulation would permit opposing the opening of such secondary proceedings or suspending them The current international doctrine, influenced by the case Collins&Aikman, claims that the regulation allows suspension.
E) Negotiating and/ or imposing
Another question raised by this illustrative case is to know what kind of insolvency procedures can be used to restructure an LBO holding or a group acquired through an LBO.
According to the regulation 1346/2000, a friendly agreement procedure is not considered as an insolvency procedure as it does not include disvestments and the appointment of trustees. Let’s remember the comments that I have previously made in other presentations about judicidial reorganizations by collective agreements slipping out of the regulation 1346/2000 framework. If the transfer under legal control is indeed covered by the regulation, some doubts are permitted when legal representatives are only competent to organize the transfer of the company’s activities instead of the totality of its patrimony and when the article 40 allows a company to cancel the procedure, as happened in our illustrative case.
The Belgian domestic law, as do foreign laws, provide other options The parent company could request to cancel the legal procedure after reaching a debt purchase agreement with banks (with a significant discount), putting an end to the minority shareholder’s attempts of acquiring the holding’s shares. An imperium procedure could be avoided, which would have compelled the company to chose between creditor agreements or liquidation.
The existence of hybrid procedures(procedures started under the former regulation 1346/2000 and continued under the legal framework of procedures commonly admitted as being collective and involving disvestments), has been the cause of heated debates between authors. Should these procedures be integrated into the regulation despite their confidential aspects and the fact that they are the consequence of a friendly agreement, or should they be integrated on grounds that they have an impact on creditors or could have an impact if a formal procedure was ever to be initiated under the regulation 1346/2000 ?
In our illustrative case, the French ad hoc mandatory negociated with the banks, the investor and the minority shareholder. The conciliation judge issued an order the day before the General Meeting, which allowed this General Meeting to bed held without too much contestation from the minority shareholder. The Belgian legal representatives permitted the exit from a collective procedure through parallel negociations related to debt purchase. The regulation 1346/2000 does not apply to these « confidential » procedures or « hybrid » procedures. Nevertheless, such procedures are not forbidden.
Seeing the complexity of some structures, trying to find a balance between the group’s interests and the creditors involves taking into account the different domestic insolvency laws applicable to each structure, finding a balance between negociating and imposing, confidentiality and publicity, between actions and reactions and considering anything that could allow each debtor to figure out what would be in his interest seing the economic and financial conditions, and what would happen if an agreement was not found.
This « game » is not deprived of consequences. The lack of adequate legal framework, could bring by one or several creditors to question the accountability of managers, trustees or even the Court.
F) Between responsibility and coordination
The illustrative case also highlights the risks that the company’s director or trustees can be faced with. In most LBO cases, the parent company’s directors are partly or fully represented or present in their subsidiary’s boards of directors. This potential conflict of interest, may it be of moral or legal nature (covered by law), regulated as it is the case in France(for example by regulated conventions) or unregulated, strictly regulated or even sometimes penally sanctionned, will in any case often put into question the directors, trustees or Courts accountability.
When the restructuring is led by independent trustees appointed by the Court, such a conflict of interest has less chances to happen. But in many restructurings, the debtor remains the « owner » of his business and the directors more or less organise the restructuring. This form of restructuring is called «debtor in possession» in the United-States and is way more efficient. Who knows better than the management the constraints of a restructuring or can elaborate a real restructuring plan to satisfy the creditors’ claims ? But the risk of a conflict of interest is higher as noone can tell wether the interests to satisfy are those of the creditors, those of the group’s structures, or those of the management. The courts should therefore increase their control. In some states, a director, appointed by the company, could almost appear as having a fiduciary duty of acting in the interest of the creditors In other states, his responsibility is limited to actions defined by the ordinary law.
Let’s praise the recent decision of the President of the Court of Trade of Charleroi. As the company’s former managers were the only ones able to suggest a proper restructuring,the Court decided to designate them as trustees in order to increase their responsibilities, conferring them with a quasi fiduciary duty.
However, what would indeed happen if minority shareholders or creditors filed a complaint or launched civil poceedings to prevent the group’s restructuring ? A judge is likely to approve this request as magistrates of different countries could never solve issues related to the different structures and jurisdictions.
No opportunity of either suggesting a global restructuration plan and/or appearing before the same court as another debtor to request cooperation and assistance or injunctions against a creditor is given to each trustee of each structure or the « debtor in possession » when he is the director of a near autonomous corporation of a group.
The «debtor in possession» or the trustee of the corporation most influent economically or financially could therefore try to impose by force or with cynism a form of restructuring going against the interests of the creditors and particularly those of the banks. A certain form of competition imposing coordination is therefore necessary to protect individual interests and the groups’ interest.
2) The future regulation 1346/2000
A) The new regulation
The Commission’s proposal issued on December 12 2012 , if approved, would make the regulation 1346/2000 applicable to corporate groups , including LBO acquisition structures. National judges, with the support of the Court of Justice of the European Union, already allowed a jurisdiction to initiate different procedures for several debtors sharing one same COMI. This regulation goes even further. Several theories were proposed to the Commission as to which regime should be applicable: a leading trustee who would more or less rule over other trustees, a unique restructuring plan similar to the Chapter 11 plan, a procedure initiated at the location of the « ultimate parent » , the appointment of a « coordinating » trustee…The Commission, after hearing the experts, chose to protect the legal person’s autonomy and its patrimony, which forms the creditors’ guarantee, by proposing certain tools supposed to reinforce the efficiency of group’s management. I shall now detail these tools and briefly criticize them, as much as the short format of this presentation allows me to.
B) Defining the COMI
The commission erased the possibility for companies to play-or even need to play-on the location of the COMI . This seems to make it more difficult for companies to centralize procedures when restructuring a group. The « Head Fonctions » test, elaborated after the INTEREDIL judgement is now used to determine wether several main proceedings concerning one COMI can be opened by a Judge. From now on, the jurisdiction will also need to verify ex officio its competency , base its decision on reasonable facts and warn the third parties concerned so as to let them exercise their rights. If on the conceptual level, this sounds reasonable, one might fear that it would make decentralized procedures even more complex, raising the issue of the uncertaincy and lenght of judicial reviews. Nevertheless, by forcing the different debtors’ trustees and courts to cooperate and by granting these trustees broader powers, the Commission allowed the partial return of the official head office theory , without completely erasing the possiblity to centralize procedures . In this context, one can easily understand that proposals to clarify the status of «COMI» transfers have not been heard.
C) The extension of the types procedures covered
The first paragraph of the Article 1 of the regulation has erased all references to disvestments and insolvency. The reference to «collective procedures» has nevertheless been maintained. The article precised that such procedures, which find their source in insolvency laws, could concern recovery plans, judicial reorganizations,liquidations as well as debt adjustments . This seems prima facie quite surprising. Does this term «collective» designate an equitable situation protecting the interests of all the creditors or only one or several of them ? What about conventional or confidential procedures, often launched prior to formal procedures ?
The same paragraph states that all the procedures covered by the regulation will be listed in the future Act and then by the Commission itself in order to put an end to the judicial unsecurity resulting from states’ national practices . The Commission nevertheless stated its wish to maintain a certain flexibility as to the « collective » characteristics of procedures by declaring that « semi collective » procedures would be covered as well. The regulation will for instance cover the French sauvegarde proceedings and financial sauvegarde proceedings, which aren’t true collective procedures.
The explanatory memorandum precises that confidential procedures, .ie. debtors initiating confidential negociations with one or several creditors to reach an agreement, would not be covered. The Commission would, according to me, struggle to acknowledge their effects due to their contractual and confidential nature. In contrario, these same procedures could also be covered by the regulation when publicised. We all know this situation : a Belgian friendly agreement, started confidentially is followed by the opening of a formal PRJ procedure. This is an example of an hybrid procedure, one being confidential, the other being public.
Here lies a contradiction, as the Commission further mentions « interim »procedures .The explanatory memorandum clearly targets pre-insolvency procedures. The third recital clearly mentions pre-insolvency procedures, hybrid or not hybrid, including those leaving the existing management in place . Nevertheless, the terms used in articles and Recitals lack clarity. The term « interim » seems rather negative as it would not take into accounts cases where a formal procedure would take place after an interim procedure. But more than anything else, judging from the definition of the term « collective » by the Commission, one might wonder if the proposal will simply regulate a few pre-insolvency procedures, which also often require negociation and confidentiality to succeed.
D) The definition of a corporate group
The cooperation mentioned in the article 42b that we have previously mentioned only concerns procedures involving members of a group of companies. The Commission, to define this notion of « parent company » , refers to the Parent-Subsidiary Directive. According to this directive, a parent company should either hold a majority stake in its subsidiary, have the capacity as a shareholder to appoint most members in the subsidiary’s organs or have the ability of exercise strong influence over one or several of its subsidiaries through conventions .
But this definition is far from being clear either. One might fear that the interposition of several structures between the parent company and its subsidiary would exclude the group from this definition, even though these subsidiaries should definitely be taken into account when restructuring a company. In another presentation, I explain how it would have been possible to determine a number of criterions to assess when the independance of a company seems questionable, while avoiding the French confusion or simulation criterions.
The commission states that there should be « proper » cooperation between several debtors’trustees, as extensive and obligatory as the cooperation between the trustees of one debtor’s main and secondary proceedings is supposed to be .
If I judge from the current text, it does not seem to be the case. One can note a difference between the terms used in point 3.1.5, which introduces « an obligation to coordinate insolvency proceedings relating to different members of the same group of companies by obliging the liquidators and the courts involved to cooperate with each other in a similar way as this is proposed in the context of main and secondary proceedings » and the terms used in Recital 20a, which states :«These proceedings should be properly coordinated.The various liquidators and the courts involved should therefore be under the same obligation to cooperate and communicate with each other as those involved in main and secondary proceedings relating to the same debtor.» What used to be obligatory has become conditional. This difference can also be noticed when comparing article 42b and article 31. By comparing these two articles, one can deduce that there are two extra restrictions on principes, rather important, maybe even fundamental prerequisites:this coordination must facilitate efficient administration of proceedings and must not raise conflicts of interests. There is nevertheless a major difference between the two types of procedures. Indeed, when the procedure only involves one debtor, the main proceedings’ trustee and the secondary proceedings trustees find themselves in a hierarchical position. But this would not happen in procedures involving different debtors, as the Commission rejected integrating propositions related to the determination of a leading trustee and only considered the possibility for trustees to grant one of their counterparts with broader powers such as managing the group or coordinating actions . The decision lies in the trustees’hands and and therefore depends on their agreement. The Commission did not clearly officially admit the existence of « coordinating » or « mediating » trustees as some jurisdictions did.
F) Between competition and coordination
The article 42d seems to demonstrate the Commission’s will to « facilitate » European recovery plans by creating a situation of competition between the trustees concerned, which should stimulate cooperation.
Each trustee can indeed be heard or participate in other group member’s proceedings , request the suspension of the proceedings opened for one or all members of the group , propose rescue plans for all or some of the members of the groups , request additional rescue measures , including the conversion of proceedings.This context can lead to the chaotic coexistence of pre-insolvency procedures, rescue plans and liquidation . The only solution to solve this issue is to give trustees the possibility to cooperate. Maybe should we force trustees to consult each others before acting and grant jurisdiction the possibility to chose a « mediating » trustee in case of disagreement.
G) Coordination between courts
Understanding that such a coordination could only be achieved with a true cooperation between courts, the Commission has introduced such a cooperation. This is a revolutionay move.
However, I will discuss in a future presentation, with the support of lawyers, magistrates, university teachers, trustees and a prosecutor, how the domestic law can constitute an obstacle to this cooperation , as a comparison with the cooperation exisiting between countries which signed the Model Law. Many obstacles prevent courts and trustees from cooperating : let’s mention the rights of the defence in case of direct cooperation between courts, public policy rules related to the judicial organization and procedures, the confidentiality of certain types of informations, the possibility to homologuate protocols which would modify-or are likely to modify- the rules of repartition between ranks and priviledges, would produce rescindible acts or mass claims or would put into question responsibilites in case of future bankruptcy. The huge diversity of bodies to consult adds to the complexity of the process (creditors’committee, competition authorities, creditors..). I believe that the regulation should have clearly allowed judges to bypass certain national law rules in order to uniformize the regulation.
H) The secondary proceedings
The major obstacle to the cooperation between courts and even trustees will remain the «territorial reflex»of protecting either local creditors or social-economic interests .
In this connection, the Commission has produced a new and useful uniformized law rule. The institution prevented these territorialist approaches of the regulation by restricting the possiblity to open secondary proceedings when the local creditors’interests are sufficiently protected and by allowing the main proceedings’trustee to commit to treating the local creditors as they would have been if secondary proceedings had been opened, at the expense of the main creditors. Another remarkable progress is the fact that secondary proceedings do not necessarily need to be liquidative anymore and can there take three different forms. The proposal suggests that the Judge opening the secondary proceedings chose the most appropriate form of procedure.
The Commission has nevertheless missed the chance to integrate INSOL’s test into the chapter 55, as INSOL requested. This test, integrated in the Chapter 11 and used in anglo saxon countries, aims to assess the utility of the solutions proposed to creditors (accepted or rejected). INSOL suggested rescue plans voted by the majority of creditors be rejected by the court when unfair to one or several creditors or shareholders, when the creditor or shareholder obtains less value than he would have if the plan had been not been voted, when the execution of the plan is too uncertain or when the repartition between the categories of creditors and different debtors was unfair. The introduction of such a test would have been useful for jurisdiction to be able to make European laws prevail over national obstacles and territorial practices .
I) Insolvency protocols
But as Reinhard DAMMAN rightly said, the Commission’s proposal is more of a consensual model than an authoritary one. This is appreciable, and I support these protocols in line with the UNCITRAL approach .
However,let’s not forget that this cooperation still depends on the different actors’ willingness. The ingenuity of various jurisdictions could be praised: the Court of Trade of Neufchâteau , which allowed the opening and suspension of secondary proceedings in order to prevent creditors from applicating the chapter 5 of the regulation to realize pledged assets located on foreign territories and therefore abroad from the effects of main proceedings, the Court of Trade of Nanterres and its innovative suspension in the NORTEL CASE as well as its adequate interpretation in the EMTECH case, the president of the Court of Trade of Charleroi, who granted a «debtor in possession » with the status of legal representative, providing him with a sort of fiduciary duty to the creditors. The courts, by coordinating procedures, allowed the establishment of «secondary synthetic proceedings» .to satisfy local creditors . The Commission should nevertheless have been clearer as to the contents of these protocols in order to create a uniform a law rule to be integrated in the domestic law.
The new regulation 1346/2000 will obviously facilitate the restructuring of LBO acquisition structures, if this proposal is ever homologated in its current form by State Members and the Parliament. If we judge from what has leaked from the Commission, State Members have not requested any major modification to this text. The Parliament seems to have no objection either, if we rely on the content of its indicative report given to the Commission. One can therefore reasonably expect this proposal to be homologated in its current form.
Some major innovations brought by the new regulation as to the restructuring of LBO structures include :
– Cooperation between jurisdictions will be the common rule, including in case of procedures involving different debtors or several jurisdictions. Protocols such as those applied in judgements based on the UNCITRAL Model Law, and notably by the Court of Luxembourg in the BCCI case will help solving issues related to coordination between different procedures and the common administration of the parent company and subisidiary’s situations, may these subsidiaries be to cede (in a context of restructuring) or to liquidate.
– The regulation limits the possibility for companies to play on the location of their COMI. The effective control of the COMI’s location by jurisdictions and the risk of creditors taking judicial review actions will deter corporations from risking to be put into question by a creditor and make them prefer the opening of seperate procedures at the location of each susbidiary’s legal head office, as doing so does not prevent a global restructuring anymore.
– The trustees in all proceedings will be able to suggest global rescue plans and courts will have to find the best solutions to restructure the group. This would also be favorable to banks, as these banks could suggest to restructure companies still valuable and capable of contributing more or less to the valorization of pledged assets or their repayment ability.
– Ambiguities related to pre-insolvency proceedings limit their use in group restructuring. The regulation nevertheless constitute a real progress as some interim procedures will now be covered. We are yet to see which procedures will remain on the Commission’s list, but it is nevertheless possible to consider some restructuring procedures to be fully efficient as they would be made out of media or creditor pressure.
– The fact that the Commission did not modify the extension of the Article 5 is not criticizable, as it aimed to maintain bank’s capacity to finance such transactions.
– The extension of judges’ prerogatives as to the organization of procedures is desirable. The new regulation would certainly have allowed the Court of Trade of Neufchâteau to be even stricter as to prevent bankers from making an abusive application of chapter 5.
– The introduction of the possibility for judges to reject the opening of secondary proceedings for dissatisfied local creditors when the main trustee offered local creditors an indemnisation similar to the one they would have received under secondary proceedings is revolutionary. Another revolutionary progress is the fact that secondary proceedings must not necessarily be liquidative anymore and that recovery plans, judicial reorganization and pre-insolvency proceedings may now be combined with liquidation procedures. Trustees can even request the conversion of such procedures. The court will have to select the most appropriate one. The time when local creditors, sometimes public creditors, could demand the liquidation of a structure without taking into account that this procedure could constitute a prejudice for the main creditors on insufficient groups is now over.
To conclude, it is necessary to precise that an LBO structure should now take into account the insolvency law, which facilitate the exit from an LBO in case of economic difficulties. The short format of this presentation obviously does not allow us to go futher into details as to which conclusion should be taken from this general presentations. Each company remains free to make its own choices.