Corporate groups: bringing insolvency law and corporate law together
Below the text of an editorial, to appear in the first issue of 2018 of European Company Law (a Kluwer Law International journal).
Corporate groups are an ensemble of companies that act in concert. From an economic perspective, they represent one enterprise and an efficient administration of insolvency proceedings related to companies belonging to the same group. Treating them as one could possibly minimize costs and loss of time, minimize losses for creditors, employers and shareholders, and maximise the groups’ value if the group could still be treated as one enterprise. Unfortunately, national insolvency laws applicable in the EU as well as international proposals are based on the central principle of insolvency law, generally being the principle of the 5 one’s: one insolvent debtor, one estate, one insolvency proceeding, one court and one insolvency office holder. How to bring these 5 one’s in line with economic reality?
On a European level the Insolvency Regulation (Recast), since June 2017, contains rules on insolvent corporate groups which means that any amendment requires the European lawmaker to act. In a future revision of the Regulation, but also when implementing national rules for insolvent corporate groups, the following step by step approach is recommended. These steps relate to (i) communication and cooperation between proceedings, (ii) procedural consolidation, and (iii) substantial consolidation.
First, the European and national legislators should ensure that insolvency practitioners and courts are guided by the principles and guidelines set out in the Communication and Cooperation Guidelines for Cross-Border Insolvency Guidelines of 2007 (‘CoCo Guidelines’), the EU Cross-Border Insolvency Court-to-Court Cooperation Principles of 2015 (‘EU JudgeCo Principles’), which include EU Cross-Border Insolvency Court-to-Court Communications Guidelines (‘EU JudgeCo Guidelines’). Communication and cooperation may take any form, including the conclusion of protocols. Such a protocol should include clauses regarding notices, the right of insolvency practitioners, creditors or other stakeholders to appear, access to data and information among insolvency practitioners, communication among committees, asset preservation, claim including specific rules for intercompany claims, submission of a restructuring plan of a liquidation plan, amendment of the protocol and the incorporation of the CoCo Guidelines, the EU JudgeCo Principles and EU JudgeCo Guidelines by reference and form part of this protocol in whatever form they are formally adopted by each court, in whole or in part and with or without modifications, if any, with the addition of a clause providing that where there is any discrepancy between the protocol and these principles and guidelines the protocol shall prevail. In addition, the European and national legislators should mandate courts and insolvency practitioners to communicate and cooperate in international cases that do not fall under the application of the Insolvency Regulation (Recast) providing rules analogous to the CoCo Guidelines, the EU JudgeCo Principles and EU JudgeCo Guidelines. The fact the Insolvency Regulation (Recast) does not apply should not preclude insolvency practitioners and courts in relevant third country jurisdiction from communicating and cooperating with their respective counterparts to the extent that such communication or cooperation is compatible with the national laws of any such third country jurisdiction. Finally, the European and national legislators should ensure the efficiency of group coordination proceedings under the Insolvency Regulation (recast). For the (non-binding) documents mentioned, see http://www.tri-leiden.eu/.
Second, Member States should enable their courts to jointly open insolvency proceedings for several companies belonging to the same group if the court finds that the centre of main interests (COMI) of those companies is located in their Member State. Support should be given to a provision that allows the court located in the COMI (‘COMI court’) of a member participating in group coordination proceedings may authorise the insolvency practitioner appointed to seek: (i) participation and to be heard in a coordinating proceeding taking place in another jurisdiction, (ii) recognition by the coordinating court of the proceeding in the COMI jurisdiction, whilst (iii) the coordinating court can receive such a request for recognition. The European and national legislators should ensure that, while participation in group coordination proceedings is voluntary in principle, the decision not to participate is required to exclude a member from the effects of such proceedings (opt-out). In addition, the COMI court should be allowed to overturn an opt-out of a group member whenever the decision to opt out is not adopted in good faith. Where a high percentage (minimum of 80%) of equally affected members participate in group coordination proceedings, the COMI court should assume that an opt-out was decided in bad faith unless good faith is proven to the court. Solvent members of a group should be allowed to formally participate in group coordination proceedings without such participation implying a submission to the jurisdiction of a court or to the applicability of its insolvency laws. Most importantly, the European and national legislators should ensure that group coordination proceedings can result in a group restructuring or insolvency plan that is binding for all participating members. Creditors and stakeholders of participating group members would be placed in separate classes and vote under the rules according to the applicable national law in their own jurisdiction. Following the vote of the group restructuring or insolvency plan by relevant creditors and stakeholders, each COMI court would confirm the plan if it holds that the plan was accepted according to national law including all its cramdown options. A cross jurisdictional (cross entity) cramdown, however, should not be possible. Finally, under this leg, the insolvency practitioner appointed in the group coordination proceedings (coordinator) should have the right of access to proceedings in each COMI court to be heard on issues related to implementation of the group restructuring plan.
Third, the European and national legislators should ensure that a court may approve the substantive consolidation of the estates of jointly administered members of the group or parts of these estates, where (i) the assets and liabilities of all of the respective members have been commingled in a sense that they cannot easily be untangled without severe effort, delays and costs, or (ii) the group structure has been used to deceive creditors. They should also allow a group restructuring or insolvency plan to provide for such a form of consolidation in cross-border cases. Only future can tell that with these incremental corporate law and insolvency law can amalgamate.
Professor emeritus of International Insolvency Law
University of Leiden, The Netherlands
 For explanation and context, see Bob Wessels and Stephan Madaus, Instrument of the European Law Institute - Rescue of Business in Insolvency Law (September 6, 2017). Available at SSRN: https://ssrn.com/abstract=3032309. Forthcoming in a book published by Oxford University Press.
The Netherlands Commercial Court is still in statu nascendi ('launching mid 2018', the site says, see https://www.rechtspraak.nl/English/NCC). There are still some pitfalls, see http://www.bobwessels.nl/blog/2015-12-doc8-in-2017-netherlands-commercial-court-opens-for-large-disputes/. In the meanwhile, thanks to a London counsel of Haynes Boone, we know that a new International Chamber within the Paris Court of Appeal Paris just opened for business, see http://www.haynesboone.com/alerts/international-chamber-of-paris-court-of-appeal
The Chair of Legal Culture of the University of Girona (Spain), professor Jordi Ferrer, is organizing the Evidential Legal Reasoning World Congress. For the organisation of the Chair, see http://catedradeculturajuridica.com/EN/938/paginas/index.html. The congress will be the second congress in the series “Filosofía y Derecho” (Philosophy and Law) from the Spanish publisher Marcial Pons. It will be held in Girona, 6-8 June 2018. During the event presentations will be made by 18 speakers from 4 continents, all of them leading international specialists in the field of evidentiary reasoning in the judicial process. Their presence makes this congress a world reference in the subject of analysis, of special appeal to any jurist, theoretician or legal practitioner. Please consult the conference newsletter, which also contains instructions on how to participate in the call for papers/posters, at http://catedradeculturajuridica.com/EN/1312/congress/ii-conference-of-the-series-filosofia-y-derecho-evidential-legal-reasoning-world-congress.html
CIGI (Centre for International Governance Innovation) and BIICL (British Institute of International and Comparative Law) recently published a paper in the series Brexit: The International Legal Implications | Paper No. 17 — February 2018, under the title 'Cross-border Insolvencies after Brexit: Views from the United Kingdom and Continental Europe'. The paper addresses the main problems arising from the UK's decision to leave the European Union with regard to insolvency proceedings. Issues discussed are the modes of recognition of foreign insolvency proceedings under British law (Section 426 of the Insolvency Act 1986, the UNCITRAL Model Law and the UK variant of the CBIR, covering not fully consistent case law and the British 'joker card' of Common Law) and the likely effect of Brexit (based on 5 variables in the relation UK-EU), the impact of Brexit on forum and law shopping, the reform proposal for British workout procedures and the use of British workout procedures by EU companies. Its authors are Howard P. Morris, Gabriel Moss, Federico M. Mucciarelli and Christoph G. Paulus. The views presented are based on talks the authors gave during a conference held in May 2017.
Brexit is around the corner and it is time to discuss and decide on the best way forward, including the alternatives available for a legal institutional instrument and options for insolvency related procedural and substantial solutions. One hears several times that such a solution should be that the EU would adopt the UNCITRAL Model Law.
Six years ago INSOL Europe has advocated to start with leveling up the Model Law to a Regulation to be adopted by the EU. In a report presented in 2012 Ian Fletcher and I have rejected that idea. Both the nature and the original effect of the Model Law (a template for individual countries, not economic regions), as well as the fact that certain matters already have been included in national legislation of Member States (be they followers of the Model Law or having drafted their own systems) in our opinion would only justify the use of a Directive as the medium for bringing about harmonisation of the laws of the Member States in relation to insolvency proceedings originating in non-EU states (as the situation is post-Brexit). See http://www.verenigingburgerlijkrecht.nl/images/preadvies2012.pdf, para. 183ff.
A 'Model Law' solution - if preferred - must, first, be tested against the present Insolvency Regulation (Recast) (EIR 2015), and, second, take into account new concepts that have not found a place in the Model Law, the text of which now is over 20 years old.
Matters to take care of relate to (i) inconsistency with the EIR 2015 (e.g. non-equal treatment of tax claims), (ii) the uncertain exclusion of certain proceedings relating to financial institutions (reference is made to a CIGI-BIICL paper (nr. 11 in the same series, written by Dorothy Livingston), (iii) a well-thought through provision regarding the relation between the EIR, the 'Model Law' and existing international treaties and agreements, and (iv) the inclusion of an interpretation provision which is not unproblematic in its application, given the purposive, sometimes autonomous interpretation which has to be given to EU-matters, as well as the fact that the originally intended 'unity' of terms (such as the bothersome 'COMI') only a few years after enactments have resulted in 'diversity' in several jurisdictions all over the world (note that the Cross-border paper signals aligning apporaches in this matter).
A 'Model Law' must be modernised. I have addressed this issue a few monthe ago, suggesting that a 'Model Law' also should include rules on applicable law (the ones contained in the Legislative Guide are not nuanced enough), provisions on data protection, group insolvency provisions, registration of insolvency decisions, the main insolvency practitioner’s power to give a unilateral undertaking (in order to prevent opening of proceedings in another state), professional and ethical rules for insolvency practitioners or rules for recognition of for instance decisions on director’s disqualification. See http://www.bobwessels.nl/blog/2017-11-doc7-some-remarks-on-the-model-law/.
Let's not confuse the dress rehearsal for the real thing. Put in place the institutional instrument first, with a framework of some bare key provisions. The hot potato (jurisdiction of the CJEU) should in this tier 1 instrument be a given. This part also could also cover other third countries. Then work jointly further in a EU-UK context to fill the topics mentioned. In addition, one of these could be the creation of a specific EU-UK court.
On December 4, 2017, the U.S. Bankruptcy Court for the Southern District of New York had to decide about a petition to recognise Dutch insolvency proceedings launched by an affiliate of Brazilian telecoms company Oi. The petition was brought by the insolvency trustee of Oi Brasil Holdings Coöperatief U.A. (Coop), a Netherlands incorporated subsidiary of a Brazilian parent company Oi S.A. The petition contains the request to recognise these proceedings in the Netherlands as a foreign main proceeding, and to terminate or modify the court’s prior recognition under Chapter 15 U.S. Bankruptcy Code of Brazilian bankruptcy proceedings in relation to Oi. These proceedings include the Dutch Coop. Aurelius Capital Management, and other creditors in the international bondholder committee, supported the petition. Together these parties are called ‘Movants’. The relief requested is opposed by the debtors that previously received recognition of the Brazilian bankruptcy proceedings in the New York Court. These debtors are joined by a separate group of Oi Group creditors (the ‘Steering Committee’). These parties are called Objectors. The Court decides on the parties’ competing views of the applicable legal standard for evaluating the Dutch petition and Coop’s centre of main interest (COMI). The Movants urge the Court to conduct a de novo review of Coop’s COMI under Section 1517(a) U.S. Bankruptcy Code as of the date this petition was filed. On the other hand, the Objectors advocate reviewing this case under Section 1517(d) U.S. Bankruptcy Code, which looks at whether a prior COMI determination should be terminated or modified because it was incorrect in the first instance or based on events that occurred after that recognition.
The Court finds that Section 1517(d) provides the appropriate standard.
Subsequently, the Court considers whether the doctrines of judicial estoppel and comity apply in this case: should the Court conduct its own determination of COMI under Chapter 15 or should it defer to prior rulings made by the Dutch courts. The Court concludes that judicial estoppel and comity should not apply here, one reason being the differences between the legal question before it and the one decided by the Dutch courts.
Finally, the Court evaluates the two prongs of Section 1517(d) for terminating or modifying a prior recognition. The first of these prongs directs the Court to determine whether the grounds for granting recognition were lacking. The Court examines the record before the Court at the time it recognized Coop’s COMI as Brazil. The Court determines that it should not modify or terminate recognition under the first prong in Section 1517(d). The second prong in Section 1517(d) examines whether the grounds of recognition have ceased to exist. The Court examines whether events after the prior recognition have changed Coop’s COMI from Brazil to the Netherlands. The Court concludes that this second prong has not been met and considers the economic reality of the special purpose nature of Coop, the expectations of creditors, the limitations on the Dutch Insolvency Trustee presented by the proceedings in Brazil, and allegations of impropriety against creditor hedge fund Aurelius. Aurelius’ actions are inconsistent with the trend in international insolvency law in the light of present draft rules from the UNCITRAL working group studying cross border insolvencies of multinational enterprise groups of the kind at issue in this case. Its actions here are at odds with the focus of this draft legislation on cooperation, value maximization and enterprise preservation.
In a 120 pages decision, the Court’s findings of fact and conclusions of law are presented. I have commented the case in the Dutch case law review JOR 2018/57, in English. The commentary is attached.