Insolvency legislation: adapting to change

(This article is taken from Private Equity Europe, the pan-European publication from the publishers of unquote")

The bleak economic outlook across Europe coupled with a lack of liquidity in the capital markets has inevitably resulted in a growing number of corporate restructurings. This in turn has highlighted the need to modernise insolvency laws across the continent to facilitate this wave of restructuring activity.

One aspect which has come under particular scrutiny is the concept of forum shopping and interpretation of a Company's "Centre of Main Interest" (COMI). Indeed, there have been several recent cases of companies moving their COMI to a country that offers a more attractive bankruptcy regime.

Restructurings such as Deutsche Nickel and Schefenacker set a precedent by moving their COMI from Germany to the UK in order to utilise a company voluntary arrangement (CVA) to facilitate a cram down of dissenting creditors. Germany is now reviewing its legislation to remove or modify some of the obstacles to a restructuring that have been encouraging debtors to migrate.

However, hastily attempting to change the COMI of a company immediately prior to the instigation of insolvency proceedings increases the risk of the migration being considered by the courts as abusive and the COMI remaining at the original location.

Earlier this year the French Government amended its bankruptcy laws to create the safeguard procedure, a pre-bankruptcy measure inspired by Chapter 11 that allows the debtor a stay of payments relating to its debts and legal action from creditors. The reforms have provided a more attractive and secure legal framework intended to promote greater use of the procedure.

The reforms have further amended the composition and operating rules of creditors' committees and allocated creditor voting rights according to the quantity of debt held rather than the number of debtholders, which has simplified the majority voting rule. A final feature is the establishment of two creditor committees to which the debtor company must submit proposals with a view to reaching agreement on a safeguard plan. One committee comprises financial institutions and the other trade creditors and the management team must work with both to develop the plan in conjunction with the court-appointed administrator.

The moves are seen as positive but also as a missed opportunity for more radical change, such as the ability to provide super priority funding for creditors willing to finance debtor companies. Creditors could also find these reforms unsettling as safeguard is now a more powerful negotiation tool for debtor companies who can seek court protection any time their creditors threaten to accelerate their debt.

However we are unlikely to see a flurry of companies moving COMI to France to access this new armour, since an abusive migration court filing is almost guaranteed. Interestingly, in the case of Re SAS Rover France (a member of the MG Rover Group), where COMI for the French registered company was found in Birmingham, an appeal by the French public prosecutor on public policy grounds was rejected by the French commercial court as the UK administrator had treated French employees exactly as they would have been treated in a French liquidation. This suggests that the benefits designed to protect the interests of employees would not be lost regardless of COMI being relocated.

Italy is also undergoing substantial change in restructuring regulation. It currently operates two insolvency procedures: The "Prodi Law" governs insolvency for smaller debtor companies; whilst the more recent "Marzano Law", hastily issued following Parmalat's financial collapse in 2003, is for larger companies. The country recently amended the latter in order to solve the Alitalia case.

The new law is more flexible, allowing a company in extraordinary administration to keep authorisation and licenses needed to carry out its business whilst in restructuring, and greater freedom in choosing company business units to sell, hence preserving the group's going concern value.

However, as with the "pre-pack" debate in the UK, the new Italian law is considered by some observers to reduce transparency in the sale of assets and lessen the involvement of creditors, hence further weakening their role in a restructuring plan. This is considered a step backward with regard to the route that the legislator began to travel with the Marzano Law.

The significant increase in financial restructurings over the course of the next few years will fully test European insolvency laws and undoubtedly result in further legislative reforms. Indeed, multi-jurisdictional restructuring cases will be fascinating new ground.

Charles Noel-Johnson is a director in Close Brothers European Restructuring & Debt Advisory Group

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