Restructuring Proceedings Research Articles

Universal Effects of Corporate Restructuring Proceedings: A View from Europe

EU Member States have progressively introduced into their national laws different mechanisms to allow companies to restructure their business at a pre-insolvency stage. The practical application of this new framework has given rise to many legal issues. This paper focuses on one of them: their world-wide effects. Taking the Spanish framework as an example (Section II), Section III explains how this framework fits within the new European Insolvency Regulation (EIR recast) and the 2014 Commission’s Recommendation. Section IV describes the rules that govern the cross-border effectiveness of Spanish pre-insolvency proceedings within the EU. Section V extends this analysis to third countries. And, finally, Section VI draws some conclusions.

Restructuring the European Business Enterprise: the European Commission’s Recommendation on a New Approach to Business Failure and Insolvency

Two events are currently changing the landscape for business restructurings in the European Union: the ‘Restructuring Recommendation’ (RR) of the European Commission, issued in 2014, and the 2015 recast of the European Insolvency Regulation (EIR). In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that the recast EIR and the RR do not dovetail perfectly—a restructuring proceeding as proposed by the RR would not necessarily be within the scope of the recast EIR; we also suggest that, in any case, the EIR is not optimally designed to facilitate restructurings, given its treatment of secured creditors. Regarding the regulatory approach pursued in the RR, the Commission rightly pushes towards harmonisation with respect to Member States’ restructuring regimes—regulatory competition is not a sensible regulatory alternative in this area. However, we criticise both the methodology and scope of the harmonisation proposal of the RR: sketchy minimum harmonisation of restructuring rules leaves huge potential for residual diversity in Member States’ restructuring laws, and the Commission’s narrow focus on restructuring proceedings ignores several aspects of the complicated interaction between the Member States’ formal insolvency laws and the restructuring mechanism proposed. Further, we disagree with the substantive recommendations for Member States’ restructuring laws suggested by the RR: they wrongly require financial difficulties or a likelihood of insolvency as an entry test for the recommended restructuring proceeding, and the process appears susceptible to abuse by sophisticated financial investors—it does not provide for the mandatory appointment of a supervisor and allows significant curtailments of creditor rights without sufficient safeguards in place. Instead, we propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency, provided that it is economically viable and that the filing is not abusive.

Restructuring the European Business Enterprise: The EU Commission Recommendation on a New Approach to Business Failure and Insolvency

Two events are currently changing the landscape for business restructurings in the European Union: the “Restructuring Recommendation” (RR) of the European Commission, issued in 2014, and the 2015 recast of the European Insolvency Regulation (EIR). In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that the recast EIR and the RR do not dovetail perfectly – a restructuring proceeding as proposed by the RR would not necessarily be within the scope of the recast EIR; we also suggest that in any case the EIR is not optimally designed to facilitate restructurings, given its treatment of secured creditors. Regarding the regulatory approach pursued in the RR, the Commission rightly pushes towards harmonisation with respect to Member States’ restructuring regimes – regulatory competition is not a sensible regulatory alternative in this area. However, we criticise both the methodology and scope of the harmonisation proposal of the RR: sketchy minimum harmonisation of restructuring rules leaves huge potential for residual diversity in Member States’ restructuring laws, and the Commission’s narrow focus on restructuring proceedings ignores several aspects of the complicated interaction between the Member States’ formal insolvency laws and the restructuring mechanism proposed. Further, we disagree with the substantive recommendations for Member States’ restructuring laws suggested by the RR: the proposed restructuring rules wrongly require financial difficulties or a likelihood of insolvency as an entry test for the recommended restructuring proceeding, and the process might be abused by sophisticated financial investors as a tool to enrich themselves at the expense of outside creditors and/or the debtor firm – it does not foresee the mandatory appointment of a supervisor, and it allows significant curtailments of creditor rights without sufficient safeguards in place. Instead, we propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency provided that it is economically viable and that the filing is not abusive.

Company Restructuring Pursuant to German Insolvency Law

Coming into force on 1 March 2012, the German Act on the Further Facilitation of the Restructuring of Companies (Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen), in particular in conjunction with the insolvency plan and through what is known as self-administration, serves to align German insolvency law more closely with the restructuring proceedings of Chapter 11 of the US Bankruptcy Code. Insolvency law is no longer primarily about the liquidation of the debtor or insolvent company; instead, the legislature has, through the reform’s main agenda, the insolvency plan procedure (Articles 217 ff. InsO) and selfadministration (Articles 270 ff. InsO), placed the main emphasis on the debtor company in the restructuring process, and has made it possible to effectively organise insolvencies on the basis of creditor autonomy. In addition to the restructuring of the company, it also allows for what is known as the transferred reorganisation of the debtor’s assets, and also liquidation. A subsequent step will involve defining regulations to deal with the issues associated with group insolvency, and considering whether a projected income procedure comparable with the “scheme of arrangement” should be developed. Below, we will examine the changes made to insolvency law to date, and show how boosting creditor autonomy, similar to Chapter 11, makes it possible for the debtor company to be released from its obligations and enable it to make a fresh start.

Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt

An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem.

Indalex: Priority of Provincial Deemed Trusts in a CCAA Restructuring

On February 1, 2013, Supreme Court of Canada (“SCC” or “Court”) released its much awaited decision, Sun Indalex Finance, LLC et al. v. United Steelworkers et al. The case involved a company, Indalex, that was pursuing restructuring proceedings under the Companies’ Creditors Arrangement Act. Prior to its restructuring, Indalex had been failing to meet its employer contribution obligations to the company’s pension plan and when the pension plan was wound up, there was a deficiency in the funds. During its restructuring, Indalex obtained debtor-in-possession (“DIP”) financing to fund its operations and when it subsequently sold its business, the proceeds of the sale were not enough to pay its creditors. The members of the pension plan claimed that the shortfall in the pension plan entitled them to a super-priority, such that their claim would be paid before the DIP lenders.There were two main findings by the Court. With regard to the deemed trust, the Court was split but it upheld the finding of the Ontario Court of Appeal that a deemed trust had arisen under the Pension Benefits Act in favour of the pension holders for the wind-up deficiency payments. However, the SCC overturned the Ontario Court of Appeal in its finding of the priority of the deemed trust, unanimously maintaining that the deemed trust would not be granted super-priority over the DIP lenders.The Court also unanimously agreed with the Ontario Court of Appeal in its findings on the existence of a fiduciary duty owed by Indalex as administrator of the pension plans, and on Indalex’s breach of that duty. A majority of the Court, disagreed, however, with the Ontario Court of Appeal’s remedy for that breach, finding that the imposition of a constructive trust was not appropriate.This comment will address two issues arising from the decision. First, the priority afforded to the DIP lender over the pensioners has caused considerable disappointment. Pensioners and other creditors are vulnerable against DIP lenders and it can seem considerably unfair and unjust. The priority afforded by the Court, however, is arguably ultimately justified when the reasons for DIP priority are articulated. Second, the priority of DIP lenders over deemed trusts will be examined, and the way the doctrine of federal paramountcy can operate between provincial legislation and the CCAA will be addressed.

Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt

An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem.

Lead Trump or Risk Losing? A Comparison of Bidding Procedures for the Acquisition of a Business in Canadian and U.S. Restructuring Proceedings

The goal for any debtor selling business assets in restructuring proceedings is to maximize realization. The process by which the assets are sold certainly contributes to the debtor9s success in achieving this goal. In Canada, sales processes have generally been based on a close-bid system in which a winning bid is chosen privately and then recommended for court approval. In the US, a two-step process is used in which a “stalking horse” bid is accepted on the condition that it will be later subject to an open judicial auction. Once the auction is complete, the debtor will seek court approval of a sale to the winning bidder. In this paper, we examine which process best achieves the debtor9s goal of maximum realization for its assets. <b>TOPICS:</b>Private equity, developed, financial crises and financial market history, portfolio construction

Financing investments in renewable energy : the impacts of policy design

The costs of electric power projects utilizing renewable energy technologies (RETs) are highly sensitive to financing terms. Consequently, as the electricity industry is restructured and new renewables policies are created, it is important for policymakers to consider the impacts of renewables policy design on RET financing. This paper reviews the power plant financing process for renewable energy projects, estimates the impact of financing terms on levelized energy costs, and provides insights to policymakers on the important nexus between renewables policy design and financing. We review five case studies of renewable energy policies, and find that one of the key reasons that RET policies are not more effective is that project development and financing processes are frequently ignored or misunderstood when designing and implementing renewable energy policies. The case studies specifically show that policies that do not provide long-term stability or that have negative secondary impacts on investment decisions will increase financing costs, sometimes dramatically reducing the effectiveness of the program. Within U.S. electricity restructuring proceedings, new renewable energy policies are being created, and restructuring itself is changing the way RETs are financed. As these new policies are created and implemented, it is essential that policymakers acknowledge the financing difficulties faced by renewables developers and pay special attention to the impacts of renewables policy design on financing. As shown in this paper, a renewables policy that is carefully designed can reduce renewable energy costs dramatically by providing revenue certainty that will, in turn, reduce financing risk premiums.

Renewable energy policy and electricity restructuring: a California case study

Many countries are in the process of deregulating and restructuring their electric power industries. Although the introduction of retail competition may have negative impacts on the development of renewable energy, a number of countries are establishing new programs to support these clean energy technologies. In the United States, debate has centered on three primary renewables support mechanisms: (1) the renewables portfolio standard; (2) programs funded by an electricity distribution surcharge; and (3) voluntary renewable energy purchases by electricity customers via green power marketing. California provides a good case study of the design of renewables support programs within industry restructuring because policymakers considered all three of these options during the state’s restructuring proceedings. Moreover, many of the same policy options, design issues, and political conflicts that have arisen in California are likely to recur in other states and countries. Some of the most important lessons from the California experience include: (1) renewable energy and environmental advocates must clearly articulate the need and rationale for continued support of renewables; (2) cost containment and competitive neutrality concerns must be addressed head on; (3) combinations of policies are likely to be far more effective than any single renewables policy; and (4) the effectiveness of renewable energy policies developed during the restructuring process will be strongly linked to their duration and stability.

Assessing Transition-Cost Strategies: A Case Study

Restructuring the US electricity industry has become the nation's central energy issue for the 1990s. Restructuring proposals focus on more competitive market structures for generation and the integration of transmission within those structures. The proposed move to more competitive generation markets will expose utility costs that are above those experienced by alternative suppliers. Debate about these above-market, or transition, costs (e.g., their size, who will pay for them and how) has played a prominent role in restructuring proceedings. This paper presents results from a project to assess systematically strategies to address transition costs that will be exposed by restructuring the electricity industry.