In June 2019, INSOL International released its ‘Ethical Principles for Insolvency Professionals’. Ethics is about the values that should be lived and worked by and respected by all insolvency professionals while interacting with creditors, judges, consumers of the debtor, its board or shareholders. Ethics is nothing scary, a threatening term for being wary for all types of misconduct and liabilities. No, ethics is the result of the view that the rightness of certain actions should be based on rules of behavior. These rules flow from norms with regard to professional conduct. Working according to clear, consistent ethical principles is an important component for delivering quality work, for the benefit of those whose interests are to be served as well as the community at large. In the INSOL Ethical Principles six principles have been put forward, involving (i) integrity, (ii) objectivity, independence and impartiality, (iii) professional/technical competence, (iv) professional behaviour, (v) remuneration and (vi) practice management (involving six specified policies). Each Principle is accompanied by a commentary, explaining its intention and providing certain examples of the Principles, as well as the meaning of several terms used, for which a Glossary is added. The commentary and glossary are helpful sources putting more flesh on the bones of the Principles. My Leiden colleague Gert-Jan Boon and I will be discussing these Principle in more detail in one of the coming issues of Global Restructuring Review, under the title 'The Ethical IP'.
With the INSOL Ethical Principles INSOL International - we believe for the first time - touches on the core of the profession, which is a laudable initiative. Although not mentioned as such, the Principles may assist also national legislators, especially those in Europe, when revising existing or drafting future rules. As my colleague and I discussed earlier (see http://www.bobwessels.nl/blog/2019-06-doc1-soft-law-instrumentst-in-insolvency-restructuring-law/) the last two decades, professional and ethical principles and recommendations have undergone a great development. They now make an important contribution to the highly desirable professionalization of IPs, judges, regulators and, for that matter, legislators. This was also emphasized in the recently adopted EU Directive on restructuring and insolvency 2019/1023. This new Directive recommends the adoption of codes of conduct by practitioners. Therefore, also the Principles of INSOL may be a relevant source for practice.
In Europe, in a 2017 report to the European Law Institute (ELI) it has been recommended (http://www.bobwessels.nl/blog/2017-09-doc3-eli-business-rescue-report-published/) that European and national legislators should set professional and ethical standards for insolvency practitioners and ensure that the relevant professional bodies are consulted and involved in the creation of such standards and that they take into account best practices for appropriately regulated professional parties as set out in principles and guidelines on regulation of the restructuring and insolvency profession developed or adopted by European and international non-governmental organisations active in the area of restructuring and insolvency. Such standards should at least contain rules on licensing and registration, supervision and discipline, qualification and training, an appointment system, work standards during administration, legal powers and duties, remuneration, reporting and communication and ethical working standards (including rules on conflict of interests and a complaint procedure). For the full 400-pages report, see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3032309.
The INSOL Ethical Principles do not cover all these subjects. Guidance will be needed too when dealing with the role of an IP acting on specific legislative duties, e.g. relating to privacy, anti-fraud and anti money laundering, with his role regarding assets of financial transactions based on innovative technologies (crypto- and PSD2-payments) and when looking for an answer for the position of a debtor in possession (DIP), its role in an IP-like function and its rights and duties under national corporate law.
One of the greatest dangers for soft law principles on paper, is that paper is patient, but gets out of date in this fast changing world by the (let's say:) year. That is an unwelcome receipt for the new guest in the house of soft law, as soft law constantly needs updating and improvement. It also serves as a workable tool demonstrating that the profession can keep up its own pants and takes its professional responsibility seriously and learns from inevitable mistakes. In this way, the INSOL Ethical Principles too can continue to make a dynamic and positive contribution to reflect on the intrinsic values and behaviour of IPs, and contribute to the profession’s confidence and respect, not only of the courts and of the creditors and debtors, but also of the general public.
IPs, positively, know that a companies' restructuring is a continuous process. The same applies to the profession's ethics too.
In the matter of Syncreon Group B.V. (and ors) the English High Court on 31 July 2019 ( EWHC 2068 (Ch)) (see my blog of yesterday at http://www.bobwessels.nl/blog/2019-08-doc1-scheme-of-arrangement-does-english-court-has-jurisdiction-re-dutch-b.v/) a final matter for Falk J to decide relates to the question who will act as the foreign representative. The parties requested the judge to include in the order to be given a declaration that an officer of the Scheme of Arrangement companies was their appointed 'foreign representative' for the purposes of any proceedings commenced in the United States under Chapter 15 or in Canada under the Canadian Companies' Creditors Arrangement Act. In general, I would submit that where Syncreon is a Dutch company the question whether a person is validly appointed to act for the company will be governed by the law of the place of the company’s incorporation, i.e. Dutch law. Has, in the case at hand, the person in question been validly appointed by the directors of the Dutch company to represent it and act as its agent in seeking relief available to a foreign representative? Falk J shares the view of Snowden J expressed in Re Noble Group Ltd  EWHC 2911 (Ch), at . A person appointed by the company in relation to the a Scheme does not have the status of an office-holder under the English Insolvency Act 1986, nor that of an officer of the English court. A court will not intend in any way to prejudge the question of whether such person qualify as a 'foreign representative' under Chapter 15 or the CCAA. This is entirely a matter for those foreign courts.
In the matter of Syncreon Group B.V. (and ors) the English High Court on 31 July 2019 ( EWHC 2068 (Ch)) presented its written reasons for granting an application by Syncreon Group to convene meetings of certain classes of creditors for the purpose of considering a scheme of arrangement. Syncreon Group is a private limited company incorporated under the laws of the Netherlands, and the other applicant, Syncreon UK, is a company incorporated in England and Wales. Both are held directly or indirectly by Syncreon Group Holdings BV (Parent). The group headed by the Parent is the Group. It carries on the business of specialised contract logistics in the automotive and technology industry, having dealings etc in USA, Canada, the Netherlands, Ireland and Germany, and considers itself significantly over-leveraged and unlikely to be able to continue in business without restructuring its debt. The likely alternatives are enforcement action leading to an accelerated sale or piecemeal insolvency procedures. The Schemes form a key part of the proposed restructuring and the court solves several matters related to the classes of creditors. Has the court jurisdiction? Syncreon UK is both incorporated and has its centre of main interests (COMI) in England and Wales. So here exercising jurisdiction is appropriate. Syncreon Group, however, is Dutch incorporated and does not have an English COMI. In such a case the English judicial approach is that the court has a "sufficient connection" with the jurisdiction (refering to Lehman Bros International (Europe) (in admin)  BCC 115 at . The steps to take in practice are now rather clear, being (i) that Syncreon Group relies on the documents now being governed by English law, and (ii) that the parties having contractually submitted to the jurisdiction of the English courts. As to (i) the fact that the Parent Credit Facility (PCF) and Note documentation is governed by English law, and that the parties have submitted to the jurisdiction of the English courts, does provide a sufficient connection with the English jurisdiction. The courts is helpful by providing the basis for its argumentation: Re Vietnam Shipbuilding Industry Groups  EWHC 2476 (Ch) at  and , whilst the change to the governing law is expressly contemplated by Article 3(2) of the Rome I Regulation (593/2008), and there being no objection in principle to such a change under English law: Mauritius Commercial Bank Ltd v Hestia Holdings Ltd  EWHC 1328 (Comm) at . As to (ii) the court explains that there have been a number of cases where governing law clauses have been changed with a view to creating a sufficient connection with the English jurisdiction for the purposes of a scheme of arrangement. Also here, the step taken is clear (and limited): 'Whether that fact makes any difference to the court's decision is a matter for the judge considering whether to sanction the Schemes, and not a matter for determination at this stage. For present purposes I will limit my comments to noting two points. First, the motivation behind the change to the governing law and jurisdiction clauses was explained to PCF lenders and Noteholders when the changes were sought. Secondly, the Group has received advice that the changes to the governing law and jurisdiction provisions will be respected ..., and that the Schemes should be recognised in the US, Canada and the Netherlands. Indeed, in the case of the US and Canada recognition is a condition of the restructuring. Although there are also significant operations in Ireland and Germany, it is anticipated that those jurisdictions will follow the EU principles referred to in the Dutch advice, and accordingly will be recognised there as well. In Re Magyar Telecom BV  EWHC 3800 (Ch) David Richards J (as he then was) considered that the question of sufficient connection was closely related to the question of whether the scheme would have a substantial effect (paragraph 21). In these circumstances I am satisfied that there are no "roadblock" issues which make it obvious that the court has no jurisdiction or should otherwise refuse to exercise its discretion to sanction the Schemes, and accordingly that it is appropriate to permit the proposed Scheme meetings to be convened.' To be continued.
Legislative developments in the Netherlands
The Dutch Bankruptcy Act (DBA) first entered into force in 1896. Over the first 100 years amendments were made over the years, the rules governing bankruptcy liquidation fundamentally remained the same. In 1998 special rules to deal with debt restructuring of natural persons have been included.
Early 2000, eight years after the entry into force of the New Civil Code, an attempt was made to revise the rather ineffective procedure of postponement of payment (surseance van betaling). The Commissions plans in 2007 were in general welcomed in by insolvency practitioners and by courts, however were not prioritized in politics.
Some 6-7 years voices became louder that the DBA needed a revision, especially to create a functional procedure re restructuring of near to insolvent, but viable businesses. This ultimately led to the launch of the legislative program ‘Recalibration of Bankruptcy Law’ (Herijking Faillissementsrecht) in 2012.
The legislative program aims to improve Dutch insolvency law by way of three main pillars or focuses: (i) combatting insolvency fraud; (ii) introduction of the ability to restructure companies; and (iii) generally modernisation of Dutch bankruptcy law.
First pillar: insolvency fraud
With regard to insolvency fraud, two bills entered into force on 1 July 2016. The first bill increases the possibility to use criminal law in cases of insolvency fraud. The second bill concerns the disqualification of directors for five years if they manifestly improperly performed their tasks during a period of three years before the insolvency.
A third and final bill in the pillar’s context focusses on the strengthening of the position of IPs, especially regarding fraud alert duties into force on 1 July 2017.
Art. 68 establishes the duties of the IP (‘curator’). His legal task is to manage and settle the estate. In 2017 a new paragraph 2 has been added: ‘The insolvency practitioner: a. examines in the management and settlement of the bankrupt estate whether there are any irregularities that have caused the bankruptcy, at least in part, complicating the liquidation of the bankrupt estate or have increased the deficit in the bankruptcy; b. informs the supervisory judge about this confidentially; and c. shall, if he or the supervisory judge deems it necessary, report or report irregularities to the competent authorities.’
Evidently in debate is how to reconcile the task to manage and administer the estate for the benefit of the collective group of the creditors and the specific task – for the general public interest – to report irregularities.
Second pillar: corporate restructuring
In 2013 the Dutch government introduced the first draft bill regarding the second focus of the aforementioned program, the draft Bill on Continuity of Undertakings I. This draft bill aims to regulate the pre-pack (Dutch variant of the English instrument) as it has developed in practice since 2011. The Bill should not take away its advantages, still granting restructuring practitioners sufficient leeway to apply the pre-pack to very different cases. The draft bill went to Dutch Parliament but was halted after the publication of the opinion of the attorney-general to the ECJ in the Estro case. A few weeks later followed the CJEU 22 June 2017, C-126/16, ECLI:EU:C:2017:489. The Court of Justice of the EU held (in short) that Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, and in particular Article 5(1) thereof, must be interpreted as meaning ‘… that the protection of workers guaranteed by Articles 3 and 4 of that directive applies in a situation, such as that at issue in the main proceedings, in which the transfer of an undertaking takes place following a declaration of insolvency and in the context of a ‘pre-pack’ where that ‘pre-pack’ is prepared before the declaration of insolvency and put into effect immediately after that declaration, and, in particular, a court-appointed prospective insolvency administrator investigates the possibilities for continuation of the activities of that undertaking by a third party and prepares for acts which must be carried out shortly after the insolvency to enable such continuation and, moreover, it is irrelevant in that regard that the ‘pre-pack’ is also aimed at maximising the proceeds of the transfer for all the creditors of the undertaking in question.’
Only in June 2019 a consultation of the Ministry has been published asking for view how to deal with employee protection in pre-insolvency situations.
In 5 September 2017, a draft bill named the ‘Act on the Confirmation of a Private Restructuring Plan in order to Prevent Bankruptcy’ was presented. This draft bill introduces a statutory framework for a pre-insolvency restructuring similar to the UK scheme of arrangements. Although the exact timing for implementation of these and other proposals remains uncertain, the draft bills show a clear trend in the Netherlands towards a more rescue-friendly environment and a more competitive formal insolvency law regime within Europe.
Finally, the third pillar: modernization
On 1 January 2019, the Modernisation of Bankruptcy Procedure Act (MBPA) (in Dutch: Wet Modernisering Faillissementsprocedure) entered into force. This act, which will apply to bankruptcies opened on or after 1 January 2019, is aimed at updating Dutch bankruptcy law to bring it more in line with modern practice.
The MBPA implements measures aimed at achieving four distinctive goals: (i) increased digitalisation and transparency increased digitalisation and transparency, (ii) increasing the speed of the bankruptcy procedure, (iii) providing for a more made-to-measure procedure; and (iv) increased specialisation and expertise. The latter goal has led to the possibility of a supervisory judge to appoint an expert – at the costs of the estate – to support the judge in cases that require particular expertise and the possibility for the appointment of more than one supervisory judge in a bankruptcy liquidation case.
Other pending possible future legislation are considered for the following topics: (i) consumers and (pre-paid) gift cards, (ii) secured rights in insolvency (hardly influenced by insolvency; ideas for paying IPs because of the many asset-less estates, (iii) security rights for loans given by a shareholder. The latter is normally subordinated, but its position is secured by other means, (iv) insolvency and privatised institutions (e.g. schools; hospitals)
Finally, to assist the Ministry a ‘Committee on Insolvency Law’ has been established for four years. Its chairman being prof. Michael Veder.
International cooperation between courts
The Netherlands takes into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international associations active in the area of insolvency law, and in particular the relevant guidelines prepared by UNCITRAL. For the European Union best practices have resulted in EU Cross-border Insolvency Court-to-Court Cooperation Principles and Guidelines (also ‘JudgeCo’ Principles and Guidelines. In October 2016 the Judicial Insolvency Network held its inaugural conference in Singapore, which concluded with the issuance of a set of guidelines titled ‘Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters’ also known as the JIN Guidelines. The JIN Guidelines address key aspects of and the modalities for communication and cooperation amongst courts, insolvency representatives and other parties involved in cross-border insolvency proceedings, including the conduct of joint hearings. On 1 May 2019 the District Court Midden-Nederland adopted its version of these JIN Guidelines.
This is a 5 minute impression provided in June in Cologne during tha annual meeting of International Experience on Exchange of Insolvency Law (IEEI) https://www.insolvenzrecht.jura.uni-koeln.de/16370.html
IEEI-members – From Bob Wessels – July 2019