Restructuring an international group of companies in Europe continues to be challenging. While companies can transact business freely across European borders, coordination between the stakeholders involved in a cross-border restructuring has proved to be difficult. The cross-border restructuring of a corporate group is often complicated by a multitude of individual liquidation proceedings spread throughout the various countries in which the group is active. This is often the result of differing legislation enacted by various EU Member States in which debtors may be active; conflicting interests between debtors and/or court-appointed "insolvency practitioners" (generally, accountants licensed to render services in connection with, among other things, liquidations, company voluntary arrangements, administration, receiverships, and bankruptcies) in group insolvency proceedings; or a lack of communication among stakeholders.
The EU legislature has responded to these concerns with a revised version of the EU Insolvency Regulation (Regulation (EU) 2015/848 on insolvency proceedings; the "Revised IR"), which enters into force on June 26, 2017. After 15 years of service, the European Commission thought it time to retire the original EU Insolvency Regulation (Regulation (EC) 1346/2000 on insolvency proceedings; the "Original IR") and mark a new chapter in integrating its Member States' procedural insolvency frameworks. One of the main features of the Revised IR is new Chapter V on "Insolvency Proceedings of Members of a Group of Companies." This chapter contains new rules designed to promote cross-border cooperation and coordination between courts and insolvency practitioners in insolvency proceedings concerning group companies in Europe.
Below we summarize the provisions of Chapter V and briefly explain why we believe they will enhance the ability to restructure groups successfully.
Changes Regarding Corporate Groups Under the Revised IR
At the outset, it is important to recognize that—as was the case with the Original IR—the Revised IR: (i) regulates only intra-community matters; and (ii) does not impact the individual EU Member States' national (material) insolvency laws. Like the Original IR, the Revised IR governs the legal implications of insolvency proceedings only within the EU. This intra-community effect has two main consequences: (a) the Revised IR applies only if the debtor's center of main interests ("COMI") is located in a Member State; and (b) the Revised IR generally does not provide for the legal implications of insolvency proceedings regarding parties from non-EU Member States.
The Revised IR continues to provide rules governing jurisdiction, applicable law, recognition, and disclosure of information to creditors. As mentioned above, newly added Chapter V sets forth rules governing cooperation and coordination in group insolvency proceedings.
A fundamental principle underpinning the provisions of Chapter V is that cooperation and coordination should not run counter to the interests of creditors in each of the insolvency proceedings involved. Cooperation and coordination should be aimed at finding a solution that will leverage synergies across the group, to the benefit of all stakeholders.
The new provisions: (i) obligate insolvency practitioners of individual group companies, as well as courts presiding over group company insolvency proceedings, to cooperate and coordinate with each other; (ii) permit an insolvency practitioner, under certain circumstances, to request the stay of any act in furtherance of the realization of a group company's assets in an insolvency proceeding with respect to another group company; and (iii) provide for the commencement of group coordination proceedings, with the appointment of a group "coordinator." We briefly address these provisions below.
Cooperation and Coordination Between Insolvency Practitioners and Courts
Cooperation and coordination are mandatory not only between insolvency practitioners of group companies and between the courts that have opened the respective insolvency proceedings separately, but also collectively between insolvency practitioners and the courts. From June 26, 2017, onward, insolvency practitioners and courts must share information and try to agree on protocols regarding a coordinated approach to the insolvency proceedings. In addition, insolvency practitioners of group companies are obligated to consider whether it is possible to coordinate the administration and supervision of the group companies' affairs. If so, they must implement such coordination.
The Revised IR also imposes an obligation on insolvency practitioners to consider at the outset whether the group members (or the group members' debts) can be restructured and to coordinate the proposal and negotiation of a cross-border restructuring plan if possible. Insolvency practitioners may appear before foreign courts that have opened insolvency proceedings regarding group companies.
Requesting a Stay Regarding Assets of Another Group Company
An insolvency practitioner of a group company may request the stay of any act to realize assets in an insolvency proceeding of another group company if the insolvency practitioners of the group companies have collectively proposed a cross-border restructuring plan for the benefit of the group's creditors and if a stay is required to ensure the implementation of the plan.
Group Coordination Proceedings
The Revised IR also provides for the commencement of "group coordination proceedings" in which a coordinator is appointed for group insolvency proceedings. The coordinator cannot be one of the insolvency practitioners of the group companies, since he or she represents the interests of the group as a whole. The coordinator's mandate is to coordinate the insolvency proceedings of the group companies and to propose an integrated approach to the resolution of the group members' insolvencies (e.g., a plan regarding the sale of the entire group). The coordinator may participate in the insolvency proceedings of the group companies by, for example, attending creditors' meetings. The coordinator may also request a stay of insolvency proceedings commenced for any of the group companies, provided that he or she has proposed a group coordination plan and that a stay is required to ensure its implementation.
A group coordination proceeding is a voluntary proceeding commenced upon the request of an insolvency practitioner of one of the group companies. Insolvency practitioners of other group companies may opt out. Moreover, even if they agree to group coordination proceedings, insolvency practitioners may refuse to follow, in full or in part, any recommendation made by the group coordinator or in the group coordination plan.
Other Procedures Designed to Simplify Group Restructurings
Other procedures promoting effective group insolvency proceedings have also been developed in cross-border restructuring practice. For instance, in some countries, the courts allow substantive consolidation of companies within a group, allowing one insolvency practitioner and/or the debtor to liquidate or restructure all of the group's assets and liabilities as though only one entity existed. Moreover, some courts have sanctioned a "group COMI"—a single jurisdiction designated by the court for all of the group companies' insolvency proceedings—even when some of the group companies are established in another country. The EU legislature has stated that stakeholders can still utilize such procedures in cross-border restructurings if permitted in any particular case.
Benefits of the Revised IR
We anticipate that stakeholders in cross-border restructurings of EU groups will benefit from the provisions of new Chapter V in several ways.
First, in preparing for cross-border restructuring proceedings, the courts' obligation to cooperate can assist the debtor in coordinating the commencement of insolvency or pre-insolvency proceedings. This could prove useful, for instance, in a cross-border prepackaged sale of the group's assets, where timing is crucial. Because the insolvency practitioners of group companies are obligated to examine a coordinated restructuring at group level and to implement the restructuring if possible, having a restructuring plan prepared when insolvency or pre-insolvency proceedings are commenced should expedite the insolvency practitioners' consideration of a group level restructuring.
Second, if one of the group members' insolvency practitioners is unwilling to cooperate on a group level and/or on a going concern sale of the assets, the stakeholders now have several options. These include: (i) commencing group coordination proceedings, although a recalcitrant insolvency practitioner cannot be forced to take part in such proceedings; or (ii) requesting the stay of a sale of group company assets located in one or more jurisdictions. Stakeholders may also petition a foreign court to instruct a foreign insolvency practitioner to act in the group's interest, provided that the laws of the Member State in question permit this remedy and that it is in the interest of local creditors.
Third, the courts' obligation to cooperate and coordinate may streamline creditor voting, voting procedures, and other procedural issues across all jurisdictions concerned, allowing, for example, group companies to harmonize, and may coordinate the timing of key events in a groupwide debt restructuring by means of a creditors' composition.
A Step Forward
We anticipate that new Chapter V will have a positive impact on the success rate of EU cross-border restructurings. Whenever possible, insolvency practitioners and courts will be obligated to coordinate group insolvency proceedings and focus on group restructurings, rather than on fragmented local liquidations. If insolvency practitioners are reluctant to cooperate in a group restructuring, their foreign counterparts have the ability to intervene in the interests of the group's creditors. The ability of insolvency practitioners to appear before the courts of other EU Member States in which group insolvency proceedings have been commenced will likely encourage insolvency practitioners to be more engaging with their foreign counterparts than was previously the practice under the Original IR regime.