Secondary Insolvency Research Articles

Parallel Reorganizations under the Recast European Insolvency Regulation – A Hypothetical Case Study

This article aims to explore the implications of the repeal, through the recast European Insolvency Regulation 2015/848, of the rules in Article 3(3) and Article 27 of the original EIR which required that secondary insolvency proceedings take the form of a liquidation (winding-up). The article's goal is to start to develop an understanding of what will – and what will not – be feasible within the new regulatory framework laid down for non-liquidation secondary proceedings under the Recast EIR. In doing so, the article analyses the new EU regime in the setting of a notional experiment – a hypothetical corporate debtor who wishes to reorganize in parallel proceedings in the Czech Republic, where it is incorporated and where its COMI is, and in the Slovak Republic, where it has its only establishment. The article therefore tests the key variables of parallel non-liquidations conducted under the Recast EIR not in the abstract but in the context of real-life rules on reorganizations contained in insolvency codes of Member State which have both adopted relatively modern provisions on reorganizations, broadly modelled on the U.S. Chapter 11 template. Based on the outcomes of the notional experiment, the article concludes that in principle, the Recast EIR provides EU debtors with a feasible cross-border platform to reorganize in more than one Member State, provided that the insolvency laws of the Member States involved show a reasonable degree of convergence.

Parallel Reorganizations under the Recast European Insolvency Regulation – Selected EU Law Issues

AbstractThe Recast European Insolvency Regulation (EIR) (Regulation 2015/848) repealed the rules in Articles 3(3) and 27 of the original EIR (Regulation 1346/2000) that required that secondary insolvency proceedings take the form of a liquidation (winding‐up). As a result, European debtors may now attempt to resolve their cross‐border insolvencies via parallel reorganization proceedings conducted both in the Member State of the debtor's centre of main interest and in one or more Member States in which the debtor possesses an establishment. This article aims to take account of the principal rules of the Recast EIR which, in addition to the national laws of the Member States involved, will regulate such attempts. Upon the review of these selected rules, the article concludes that, in principle, the Recast EIR provides EU debtors with a feasible cross‐border platform to reorganize in more than one Member State in parallel. However, the article finds that a particular rule central to the system of cross‐border insolvency under the EIR, namely, Article 45, which allows the multiple filing of claims in all proceedings conducted in respect of the debtor, has the potential to frustrate attempts at parallel reorganizations. This is particularly so where the cross‐filing rule combines with Member State law that is rigid as regards plan approval by creditor classes or minimum payouts to certain classes. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.

International insolvency proceedings – desired directions of change and implementation

The unification of European insolvency law has been achieved via UNICITRAL model solutions, but also by way of European Parliament and Council Regulation No. 2015/848 regarding insolvency proceedings (recast version), and national legislation; in the case of Poland, this was the Law on Insolvency and Reorganisation of 28 February 2003. Insolvency law thus regulated leads to a great simplification in the application of its norms, and also contributes to their standardisation. Therefore, it should be possible to resolve insolvency proceedings in a similar way regardless of the EU member state and the legal system in operation there. Very simply, these regulations operate under the assumption that the failing debtor is operating in two or more member countries. However, in extreme cases, this kind of proceedings can also be applied when the debtor holds assets in only one of the countries in question. With such a structure there are two essentially complementary proceedings, in the form of the main foreign insolvency proceedings and secondary insolvency proceedings, and also territorial proceedings. The aim of the study is to show the mutual relations between the particular types of proceedings and arrangements, and which of them and in what order they should be carried out in order to conduct insolvency proceedings effectively. Against this background the international aspect has proved highly important, indicating that these proceedings are guaranteed for courts or bodies acting and issuing decisions, whose scope and timing play a crucial role in the selection of one of the aforementioned types of proceedings in order to effectively satisfy the creditor claiming repayment from the failing debtor.

The European Insolvency Regulation and the UNCITRAL Model Law on Cross‐Border Insolvency

AbstractThis article compares the Recast European Insolvency Regulation of 2015 with the UNCITRAL Model Law on Cross‐Border Insolvency of 1997, focussed on their scope of application, international jurisdiction and the coordination of main and secondary proceedings. The scopes of both catalogues of norms and their rules on coordination of main and secondary insolvency proceedings reflect one another. However, the Recast EIR makes a significantly greater contribution to the unification of law and is also more fully differentiated and more precise, even if this comes at a price, namely, limited flexibility. The UNCITRAL Model Law made an important contribution to the harmonisation of international insolvency law but requires now modernisation. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.

Preparation of Virtual Secondary Insolvency Proceedings Under the Recast EIR

This paper analyses the issue of dealing with the new virtual secondary insolvency proceedings according to Article 36 EIR (recast). Currently, it appears the most urgent question for insolvency practitioners (IP) is the preparation of such virtual proceedings. As the undertaking requires comprehensive preparation, also in order to avoid personal liability pursuant to Article 36(10) EIR, the article outlines first steps for preparation. If these first steps fail, the undertaking does not even reach the next step: the proposal and approval. Hence, on the one hand the IP must take the preparation seriously; on the other hand, the court should grant appropriate time for the preparation if requested by the IP pursuant to Article 38(3) EIR mutatis mutandis.

Review of Regulation (EU) 848/2015 on insolvency proceedings

One of the imperfections of EU Regulation on Insolvency Proceedings no. 1346/2000 as of 31st May 2000 was provisions relating to determining the jurisdiction of courts. These provisions were imprecise and led to numerous difficulties in practice. EU Regulation on Insolvency Proceedings no. 2015/848 as of 20th May 2015, in its provisions regulates this issue in more details and more precisely. In this respect, the new Regulation paid special attention to prevention of abusive forum shopping i.e. preventing the competent court and governing law to be based in a way that a litigant relocates their seat on purpose within a short period of time before the opening of the insolvency proceedings. Furthermore, the new Regulation more comprehensively determines the court jurisdiction when acting in the main insolvency proceedings. Thus, a court that is responsible for opening the main insolvency proceedings is the court of the member state on whose territory the centre of main debtor's interests is located, while the court responsible for opening the secondary insolvency proceedings is the court of the member state on whose territory the debtor performed their activities on the day of opening the insolvency proceedings i.e. within the period of 3 months before the opening of the insolvency proceedings. The new Regulation devotes special attention to defining the Centre of Main Interests or COMI, since the precise definition of this issue is important for determining the jurisdiction of the court in the main insolvency proceedings.

Performance Comparison of Multiple Discriminant Analysis and Logit Models in Bankruptcy Prediction

(ProQuest: ... denotes formulae omitted.)IntroductionThe outset of the global financial crisis is considered to be the year 2008, when the subprime crisis bubble in the United States bursted. Since then, we have observed to a much greater extent business cycle fluctuations resulting in numerous macroeconomic and microeconomic imbalances. Since companies are thought to be the economic subjects operating within the macroeconomic area, they are also affected by the abovementioned imbalances.Because of the interconnectedness across national economies, Slovak companies also have been experiencing financial difficulties. Often, companies encounter a problem of unpaid bills, secondary insolvency, low law inforcement etc. These deficiences are easily transferred onto other companies. Such a tendency is also reffered to as contagion or knockon effect. Likewise, it should be noted here that bankruptcy law in Slovakia often prefers the debtors' interests over those of creditors. A clear evidence is provided by the well-known instances as Vahostav or Doprastav. Occasionally, there can be a situation when financially distressed company receive investment aid from the state or governmnet bodies. To avoid this type of situation, it is reasonable to have some early warning system capable of timely prediction of such situations.Over the decades starting from the 1960s up to this point, there have been developed several early warning systems aiming at timely prediction of impeding companies' financial difficulties. It is possible to group them into various categories. In the study by Taffler and Agarwal (2008), these models are divided into two groups: (i) accounting-based models; (ii) market-based models. An application of market-based models in Slovakia is restricted by the underdeveloped capital market. Therefore, in the process of bankruptcy prediction model development, application of accounting-based models is suggested. The use of accounting prediction methods has certain drawbacks, as indicated by the abovementioned authors, including the following: (i) accounting statements present past performance of a firm and may or may not be informative in predicting the future, (ii) conservatism and historical cost accounting mean that true asset values may be very different from the recorded book values, (iii) accounting numbers are subject to manipulation by management, and in addition, (iv) accounting statements are prepared on a going-concern basis. In spite of these limitations, it was confirmed that accounting-based models are not inferior in comparison to market-based models.Even though application of bankruptcy prediction models is widely spread in Western advanced economies, it has become the fast growing research area in case of transitional economies, including countries of Central and Eastern Europe. Such a growing interest may result from several considerations, e.g. (i) financial institutions under Basel II guidelines are allowed to use their own internal ratings to assess the risk parameters of loan applicants; (ii) joining the EU structures, companies may take the opportunity to receive subsidy. In attempting to distunguish between well-established companies from distressed ones, failure prediction models are used; (iii) expanded activities of private equity financial groups. Specifically, its objective is to find potential company to invest in, merge or acquire. Prediction models may also serve as additonal tools in investors' decision-making.The focus in this study is on bankruptcy prediction model development based on two various statistical methods as applied to Slovakia. These includes both logistic regression function as well as multiple discriminant function under which we may find financial ratios best distinguishing among healthy and unhealthy companies. Thus, the main objective of this study is to compare the performance of the two proposed bankruptcy prediction models on a sample of selected firms operating in Slovak economic environment. …

Something Old, Something New: Recasting the European Insolvency Regulation

This paper critically evaluates the recasting of the European Insolvency Regulation ‐ Regulation (EU) 2015/848 ‐ in the context of the EU Europe 2020 growth strategy. According to the Council of Ministers, through the protection of creditors and the survival of business, the new legislation should contribute to the preservation of employment in these challenging times. The paper argues that worthwhile improvements have been made by extending the scope of the regulation; clarifying and confirming contentious areas of interpretation; smoothing the inter‐relationship between main and secondary insolvency proceedings and improving information flows. But the overall effect is to enhance complexity. The recast Regulation carries the whiff of political compromise and, at times, seems to point in different directions at the same time.

DEFAULT RISK OF THE CONSTRUCTION COMPANIES IN RELATION TO THEIR FINANCIAL CONDITION

The construction industry is highly sensitive on economic cycle. So, construction companies have experienced hard times in the crisis period. The aim of the article is to identify, compare and evaluate financial position of companies with different payment habits in the Czech construction industry in the period 2008 – 2012 using individual data and suitable statistical methods (Kolmogorov-Smirnov test at the significance level of α = 0.05). The article also focuses on evaluation of the default risk coming from construction companies. The overall financial condition is analyzed through prediction models IN05 and Altman’s Z Score for emerging markets. Financial ratios of profitability, productivity, liquidity, indebtedness and turnover evaluate separately each area of financial situation. Based on the sample of 3 438 construction companies, the results show that payment habits increase with higher profitability (short-term and long-term), higher liquidity, lower debt ratio and higher liability turnover. Payment habits of construction companies could be better. Frequency analysis shows that 84.12 % of construction companies have proper, above-average or average payment habits with no later than 30 days delay in settlement of debt after maturity. However, 11 % of solvent companies have poor payments habits. Such companies are risky for their suppliers with respect to the secondary insolvency phenomenon.

Management of Receivables in SMEs in the Czech Republic

1. Introduction Small and medium business is a specific and most important area of every national economy. Management of small and medium enterprises in comparison with the large companies shows specific features that arise from the nature, characteristics and conditions, in which SMEs operate. Although there is no consensus among the experts as to whether these specifics are a sufficient basis for the formulation of specific principles and methods 3 the practice of these firms confirms that the management of them takes some new features and elements, must solve problems that in the sphere of large companies do not occur or are rather exceptional. Most of the theoretical knowledge of the principles, procedures, methods and management tools have been defined based on the experience and management activities in terms of big companies (which is characterized for example by high frequency and repetitiveness of activities funded and staffing and space for the application of relatively sophisticated methods and procedures, etc.). Application of these findings in terms of SMEs can bring substantially different effects, different questions, because the conditions for SMEs may not provide sufficient space for effective use. Analysis of management practices of SMEs and its thorough comparison of management processes in large companies can help define specific features that this area takes in these companies and add to general knowledge about effective tool for their application in terms of these firms. The urgency of this task is increased not only in extreme situations, such as the current financial crisis and economic recession, but is a necessary part of the process of economic transformation in Central and Eastern European countries as well as can extend the theoretical knowledge. The area of management of receivables is an important part of the companies' management system, on which depends the success of the company, whose importance increases in difficult conditions due to reduced demand for products and services, lack of available funds and other phenomena accompanying the recession. Especially SMEs are more than the large companies hit of lack of funds as a result of inadequate management of this area. As a result of insufficiently treated system of relationships with customers, companies can got into of secondary insolvency and other problems resulting in adjudging insolvency proceedings. This threat is documented, among other things, by development of the number of insolvency actions in the Czech Republic in recent four years--see Table 1. Except for a slight decrease in the last year is the increase in insolvency proceedings very fast--in all the years more than half of the state in the previous year. Good management of receivables does not mean management of receivables only in the situation of late payment or default to pay. It means creation of a whole system of commercial relationships management so that to prevent maximally the risk of late or default payments together with optimizing of the costs for this area management, and on the other hand to facilitate the ability to pay own payables in time. The ability to pay own payables is, as a rule, influenced by more facts (e.g. reduced demand on the market, increased prices, unavailability of resources); in spite of that fact, however, it is possible to consider development of secondary insolvency of SMEs in recent years to be namely the result of late or default payment of receivables by debtors, and therefore we can assume of insufficient attention paid to management of receivables. The solution of course does not mean that the company will not have any funds bound in receivables--absence of offered commercial credits would probably reduce its competitiveness. The whole system of receivables management should be directed to timely payment of as large part of receivables as possible, and to keeping the costs related with receivables management (i. …

Opening of Insolvency Proceedings pursuant to Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings

Insolvency proceedings opened in a EU Member State where the provisions of the Regulation apply include: 1) main insolvency proceedings, 2) territorial insolvency proceedings (secondary or independent proceedings). The main insolvency proceedings are opened in the Member State where the debtor has the centre of his/her main interests(COMI). The effects of the territorial insolvency proceedings are limited to the state in which such proceedings were opened. Territorial insolvency proceedings acquire specific features where they are opened after the opening of the main insolvency proceedings thereby becoming secondary insolvency proceedings. The most important point which characterizes secondary insolvency proceedings is that the opening of these proceedings imposes restrictions on the main insolvency proceedings. The universal effects of the latter become therefore limited. A conclusion can be drawn that the Regulation rests on a premise that there exists only one insolvency as a social and economic phenomenon, and this insolvency needs to be treated as a whole. The Council Regulation is based on the principle of automatic recognition of judgments concerning the opening, conduct, and closure of insolvency proceedings and judgments handed down in direct connection with such insolvency proceedings. There is a potential risk of a jurisdiction conflict if the courts of two or more Member States claim to have jurisdiction over the case. Conflicts of jurisdiction stem from different interpretations of the COMI in the practice of courts of individual Member States. To avoid it the Council Regulation should regulate the matter relating to the ex officio examination by the courts of Member States the existence of international jurisdiction in a given case as provided for in the provisions of said Regulation. Furthermore, there is a need for a provision requiring a clear specification in the judgement of the type of insolvency proceedings opened. It should be also considered whether filing an application for the opening of insolvency proceedings in one of the Member States, provided that the application refers to the main insolvency proceedings, is an obstacle to recognising such an application filed later in another Member State. The Regulation should adopt a rule that jurisdiction existing at the time of filing an application for the opening of insolvency proceedings is retained even if the grounds for such jurisdiction have been changed or removed.

Avoid the Choice or Choose to Avoid? The European Framework for Choice of Avoidance Law and the Quest to Make it Sensible

In this paper, I propose a novel interpretation of rules for choice of law respect to avoidance actions under EC Regulation on Insolvency Proceedings. Further to an outline of statutory framework and its interaction rules on jurisdiction I focus on safe harbor rule, which protects a from avoidance under law of main proceedings if law governing such does not enable avoidance. The traditional interpretation of the law governing transaction in this provision designates law chosen by parties or regular choice­ of­ law rules. Instead, I propose that it be interpreted as referring to law with closest connection to transaction. I argue for a similar analysis in allocating avoidance actions among main and secondary insolvency proceedings.The proposed interpretation leads to a proper framework for addressing choice of avoidance law; it is practicable and is not trivial. On this basis, I propose three new rules related to choice of avoidance law: a rule for choice of applicable fraudulent conveyance law out of insolvency proceedings, a rule giving trustee in main proceedings standing to bring non­-insolvency fraudulent conveyance actions, and a rule expanding safe harbor provision to laws of non­member states.