How does the EU Restructuring Directive compare to Chapter 11?

On June 26, 2019, the European Parliament and the Council of the European Union published a new EU Restructuring Directive on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (“Directive”).

This is an extraordinary achievement given the existing differences in restructuring regimes across EU Member States.

The Directive applies to all Member States and is intended to create a uniform system throughout the continent to address financial distress, avoid the build-up of non-performing loans, and address distress prior to default, ultimately aimed at reducing the likelihood of formal insolvency proceedings.

The Directive’s primary objectives are to ensure:

(a) viable enterprises and entrepreneurs that are in financial difficulties have access to effective national preventive restructuring frameworks which enable them to continue operating;

(b) over-indebted entrepreneurs can benefit from a full discharge of debt after a reasonable period of time, thereby allowing them a “second chance”; and

(c) the effectiveness of restructuring and insolvency procedures and discharge of debt is improved.

EU Member States are required to implement the Directive by July 17, 2021 (although an extension is possible).

Whilst modeled after Chapter 11 in the United States, the Directive’s framework is arguably more streamlined (and therefore more cost effective) than the Chapter 11 reorganization process because it minimizes judicial intervention. However, it transposes many Chapter 11 concepts including:

  1. Debtors will remain in possession of their property and business.
  2. A restructuring plan must be approved by at least one class of affected voting parties (other than the class of equity-holders or any class of creditors) who would not receive any payment in a liquidation. This rule seeks to make sure that the plan is approved by at least one class of creditors who is “in the money” but will require a valuation of the debtor’s assets as a going concern. This valuation may give rise to expert disputes and is likely to be expensive and time consuming.
  3. Cross-class cram down (with certain elements similar to section 1129(b) of the U.S. Bankruptcy Code) in respect of dissenting classes of capital providers.

Member States may choose between the U.S. style absolute priority rule or opt for a certain “relative priority rule” (the “European Relative Priority Rule”) which means that dissenting voting classes are to be treated at least “as favourably” as any other class of the same rank and “more favourably” than any junior class.

The European Relative Priority Rule is less rigid than the U.S. absolute priority rule and ironically may lead to forum shopping within the EU, which is contrary to the objective of the harmonization of European preventive restructuring frameworks.

To protect senior creditors’ exit rights – and this is different compared to the US system – creditors in a dissenting class must also have the right under the plan to opt for a distribution in cash equal to their share in accordance with their ranking of the liquidation value (cash-out option).

However, unlike Chapter 11, the Directive does not provide for debt financing on a super-priority basis, an absence that some view as a weakness.

Key elements of the Directive include

Early warning and access to information

This is to help companies detect circumstances that could give rise to a likelihood of insolvency much earlier and alert them to the need to act quickly to avoid a formal insolvency.

Preventive restructuring frameworks

In so far as a Member State does not already have such, the Directive provides for the introduction of preventive restructuring framework.

This is to enable a debtor to restructure, with a view to preventing insolvency and ensuring their viability, thereby protecting jobs and business activity. Those frameworks may also be available at the request of creditors and employees’ representatives.

It is not mandatory, but in certain cases and to facilitate negotiations around a restructuring plan, a restructuring practitioner will be appointed.

The Directive envisages that a practitioner will be appointed if the debtor would benefit from a general stay of individual enforcement actions; the restructuring plan needs to be confirmed by means of a cross-class cram-down; the restructuring plan includes measures affecting the rights of workers; or the debtor or its management have acted in a criminal, fraudulent, or detrimental manner in business relations.

Restructuring plans

The Directive requires the plan to include certain elements, including a description of the economic situation, the affected parties and their classes, and the terms of the plan.

Similar to Chapter 11, a restructuring plan may provide for the sale of assets and modifications to the debtor’s capital structure.

Stay of individual enforcement actions

Debtors may benefit from a stay of enforcement actions to support the negotiations of a restructuring plan in a preventive restructuring framework and avoid formal insolvency.

The initial duration of a stay is limited to a maximum period of no more than four months.

Discharge of debt

The Directive sets out conditions that would enable over-indebted entrepreneurs to enter a procedure that would lead to a full discharge of their debt after a maximum period of 3 years, thereby giving them a “second chance”.

Efficient processes

The Directive also seeks to reduce the length and costs of restructuring procedures, supporting the aim of the Directive to increase the efficiency of restructuring procedures.

Comment

For a number of Member States the Directive will see an overhaul of existing restructuring processes and procedures, for others the concepts and aims of the Directive are in line with existing procedures and will therefore be more familiar.

Unless extended, all EU member states should have implemented the new provisions by 17 July 2021 and once in the new rules will provide a more uniform approach to restructuring in the EU.

CVA challenges by landlords – the latest news

The hair salon Regis announced recently that the company has entered administration. The news might not come as a surprise because the chain, prior to the company’s administration, was subject to a company voluntary arrangement (“CVA”) whose validity was challenged by landlords.

The joint administrator of Regis commented: “trading challenges, coupled with the uncertainty caused by the legal challenge, have necessitated the need for an administration appointment”.

The appointment of administrators means that the legal challenge to the CVA is at an end. Landlords had challenged the terms of the CVA as unfair, with some landlords’ rent payments purportedly being cut by up to 100%.

Following the decision earlier this year in connection with the Debenhams CVA, when the Court confirmed that a CVA cannot compromise a landlord’s right to forfeit (see our previous blog post discussing the practical impact of that) we had hoped that the Regis case would provide further guidance on the ability of a CVA to compromise landlord claims.

Whilst the landlords claims against Regis are now at an end, this may not be the last time a landlord brings such a case given that retail trading conditions remain difficult.

Those challenging conditions have also meant that landlords are taking a different approach to managing property costs and our blog post last week takes a look at the position from both the landlords’ and tenants’ perspective.

Up in Smoke: More Cannabis Companies Get Shut Out of Bankruptcy

Marijuana Cannabis Leafs

In another loss for the cannabis industry, a district court recently affirmed the dismissal of chapter 11 petitions filed by companies that sold product used by both state-licensed marijuana growers and non-marijuana growers.  The district court’s decision in Way to Grow, Inc. demonstrates that the door that was opened by the Ninth Circuit in Garvin v. Cook Invs. NW, 922 F.3d 1031 (2019) to cannabis companies was at best only partially opened.

We have written about the facts underlying the Way to Grow case in prior posts.  To summarize, Way to Grow, Inc. and two affiliated companies sold indoor hydroponic and gardening-related supplies. The debtors’ expansion plans were tied to the cannabis industry, although the debtors also had customers using the hydroponic products to grow other crops.  A secured creditor moved to dismiss the cases, arguing that the debtors should be barred from bankruptcy relief because their business violated the Controlled Substances Act, 21 U.S.C. § 801, et seq. (the “CSA”).

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What does the HMRC loan review mean for directors of insolvent businesses?

The Government announced an independent review of HMRCs loan charge in September 2019.  In this blog we consider the effect of the review on directors who have or are settling claims with HMRC and highlight that the review does not impact on potential claims against directors of insolvent businesses.

Regardless of the outcome of the review, employee benefit trusts (“EBT”) which are not legitimate, are still tax avoidance schemes.

If former directors of insolvent companies have acted in breach of duty, causing loss to the company as a consequence of the EBT, they may still be personally liable to the insolvent estate.

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Insolvency practitioners could be personally liable to the tune of £1 million

Dealing with pensions in insolvency can be challenging for insolvency practitioners (“IPs”) and the Pension Scheme Bill (“Bill”) presents another.

Whilst a prudent insolvent practitioner should not be unduly alarmed, s114 of the Bill inserts a new section 80B into the Pensions Act 2004 which gives the Pensions Regulator (tPR) power to issue insolvency practitioners with a fine of up to £1 million.

A significant amount, and payable personally! Continue Reading

How do you manage property portfolio costs?

Retail remains a challenging market but there are a number of ways retailers can proactively manage their property portfolio costs to address those challenges.

In our video partners Prew Lumley and John Alderton consider practical options for tenants when negotiating with landlords, including recent trends with Company Voluntary Arrangements.

Thinking smart and being proactive may help avoid financial pressure.

Watch the full video on our website.

No Right, No Power, No Claim: Anti-Assignment Provision Voids Claim Trader’s Proof of Claim

Road Stop Sign

On September 11, 2019, the Delaware district court affirmed the bankruptcy court’s decision to expunge a proof of claim filed by a claims trader in the Woodbridge Group of Companies, LLC bankruptcy case.  The court’s holding was based on three primary legal conclusions:  (1) the anti‑assignment provisions in the underlying loan agreements and promissory notes were enforceable under Delaware law; (2) the debtors’ pre-petition breach of the loan agreements did not bar the debtors from relying on the anti-assignment provisions; and (3) the Uniform Commercial Code (“UCC”) did not render the anti-assignment provisions unenforceable.  This decision could have a major impact on the claims trading business and should be closely examined and analyzed by claims traders.

I.  Background

Prior to the petition date, the debtors executed three promissory notes and loan agreements in favor of Elissa and Joseph Berlinger, each of which contained anti-assignment provisions.  Specifically, the provisions held that none of the documents could be assigned without the debtors’ written consent and that any assignment without the debtors’ consent would be null and void.  Approximately two months after the debtors filed their voluntary petitions, Contrarian Funds, LLC (“Contrarian”) purchased the notes and loan agreements, executed a transfer of claim agreement and filed a transfer notice in the bankruptcy cases.  Approximately two weeks later, Contrarian filed a proof of claim in the amount of the outstanding notes.  Soon thereafter, the debtors filed an objection to Contrarian’s claim, which was sustained by the bankruptcy court without prejudice to the right of the Berlingers to file a proof of claim related to the notes.  Contrarian timely appealed the decision to the district court.

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Thomas Cook – the financial impact of failure beyond the holidaymakers

Since the news of Thomas Cook’s demise a lot of focus has been on its travel customers. But beyond repatriating stranded holiday makers, the impact of large scale insolvencies such as Thomas Cook, Carillion and British Steel can be far reaching.

Those relying on the likes of Thomas Cook for business may also face financial distress as the impact of its insolvency ripples down the supply chain.  Potentially impacting suppliers of goods and services, those who relied on Thomas Cook’s business outside of the UK, employees and landlords.

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The court confirms that landlords have the right to forfeit a lease if its tenant enters a CVA. What practical impact does this have on landlord claims?

Can a CVA bind a landlord in respect of future rents? Is the landlord a creditor in respect of future rent? What about the right to forfeit; can a CVA modify that right? Is compromising rent under a CVA automatically unfair to landlords when other trade creditors are paid in full?

These were some of the points considered by the Court in determining whether the Debenhams’ CVA (which had been challenged by landlords) should fail.

One point of particular interest is whether reducing rents below market value in a CVA is automatically unfair to landlords?

We consider the answer to these questions and the implication for (i) landlords; (ii) corporates considering a CVA and (iii) practitioners following the ruling in the Debenhams case last week.

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What caused the collapse of Thomas Cook?

Thomas Cook is the latest holiday company and high street retailer to hit the headlines with its collapse into liquidation. It comes at a huge cost to the Government and Civil Aviation Authority who bear the cost of repatriating an estimated 150,000 holidaymakers. In addition, over 22,000 worldwide jobs are now at risk and there is highly likely to be a knock-on effect for companies that have been suppliers to Thomas Cook and quite possibly into Thomas Cook’s non-UK operations.

Was its failure caused by failing to adapt to change?

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