2017 will bring important new restructuring and insolvency legislation. The recast Council Regulation on Insolvency Proceedings will enter into force in June, imposing a duty on member states to publish details of insolvency proceedings. It also provides possibilities for handling insolvency proceedings of company groups more effectively. The regulation is self-executing and will be fully applicable in the Netherlands. Another significant development in 2017 is that the Dutch parliament is expected to adopt the Continuity of Companies Act I, leading to its entry into force in the autumn. This act introduces pre-packed asset sale restructurings in the Netherlands, enabling companies to silently prepare a restart prior to entering into insolvency proceedings.
European Insolvency Regulation
The approved recast of the European Insolvency Regulation (EIR Recast) will enter into force on 26 June 2017. It will apply to all insolvency proceedings opened from that date onwards.
The existing European Insolvency Regulation (EIR) was revised because it had a few shortcomings, such as: inadequate international jurisdiction provisions allowing for undesirable forum shopping, the exclusion of pre-insolvency proceedings, and the lack of provisions for group company insolvencies. As part of the revision, the following changes have taken place: the scope of the EIR Recast has extended to pre-insolvency proceedings, the insolvency practitioner in the main proceedings has greater powers with regard to secondary proceedings, a duty is imposed on member states to provide information on insolvency proceedings, and there are new provisions on the coordination of insolvencies of company groups.
International jurisdiction – COMI
The competence of a member state's courts to open insolvency proceedings is linked to the centre of main interest (COMI) of the debtor concerned. Under both the EIR and the EIR Recast, a debtor company's COMI is presumed to be the place of its registered office. This presumption can be used for forum shopping: companies shift their registered office from one member state to another in order to restructure in the jurisdiction that provides them with the most favourable outcome. Under the EIR Recast this is still possible, but the presumption does not apply if a COMI shift has taken place within three months prior to the request for the opening of the insolvency proceedings.
New in the EIR Recast is the inclusion of pre-insolvency proceedings. 19 new proceedings have been added to the exhaustive list of all proceedings to which the EIR Recast applies. The Netherlands does not yet have any pre-insolvency proceedings within the scope of the EIR Recast. If the Continuity of Companies Act II, which introduces an extrajudicial compulsory composition into Dutch law, were to enter into force, this composition will probably be subject to the scope of the EIR Recast.
The insolvency proceeding opened in the member state where a company's COMI is situated is the main process. In addition, insolvency proceedings can be opened in another member state where the company has an establishment. Under the EIR Recast, the secondary process no longer needs to be liquidation proceedings. Further, a court may refuse to open secondary proceedings if this is not necessary to protect the general interest of the local creditors. The insolvency practitioner appointed in the main proceedings has great influence on the secondary proceedings request. First, the insolvency practitioner needs to be notified of the request to open secondary proceedings and has to be heard on the request. Also, the insolvency practitioner can request the opening of a different kind of secondary proceedings. He can ask for a stay of the opening of the proceedings if a stay has been granted in the main proceedings. Finally, the insolvency practitioner or debtor in possession can prevent the opening of secondary proceedings by giving a unilateral undertaking to treat the local creditors as though secondary proceedings have been opened.
Information and publication
Under the existing EIR, the opening of insolvency proceedings does not have to be published in other member states. The EIR Recast, however, does require this publication. The mandatory information that needs to be published must be available to the public free of charge; for access to additional information, a reasonable fee can be charged. The mandatory information includes the date and type of insolvency proceedings that have been opened, the contact details of both the company and the insolvency practitioner, and the time limit for lodging claims. The implementation and interconnection of the insolvency registers of the member states has to be completed by June 2019.
Cross-border communication and cooperation
The EIR Recast provides for more possibilities for cross-border communication and cooperation between insolvency practitioners and courts. The existing EIR contains a duty for the insolvency practitioners in both the main proceedings and the secondary proceedings to communicate relevant information to each other. The EIR Recast adds an obligation for courts to cooperate with one another, and for courts and insolvency practitioners to do so as well. Further, the EIR Recast gives more weight to the main proceedings, by granting the insolvency practitioner in the main proceedings the power to intervene in secondary proceedings. If the law of the member state where the secondary proceedings have been opened allows for them to be closed without liquidation by way of a restructuring plan, a composition or a comparable measure, the insolvency practitioner in the main proceedings has the power to propose such a measure.
Group coordination proceedings
Finally, the EIR Recast intends to make insolvency proceedings of group companies more effective. It introduces a duty for insolvency practitioners appointed in proceedings concerning a member of a group of companies to cooperate with each other. Also, it provides for group coordination proceedings. An insolvency practitioner can request the opening of these proceedings. If the request is granted, a coordinator is appointed. It is the responsibility of the coordinator to coordinate the separate insolvency proceedings of the group members.
The EIR Recast does provide for some material changes, but it mostly codifies the case law (primarily of the European Court of Justice) that has been developed over the last sixteen years. We expect the EIR Recast to provide companies with more insight into the insolvency proceedings of their business relations and to make the handling of insolvency proceedings of group companies more effective. Hopefully, this will bring down the costs of insolvency proceedings, thus increasing the recovery rate of claims against companies that have become insolvent. This could consequently give an impulse to cross-border business activities.
Continuity of Companies Act I
The Continuity of Companies Act I (CCA I) introduces the concept of a pre-packed restructuring into Dutch law.
Before filing for bankruptcy, the company requests the court to appoint the person who would be the trustee if the company entered into bankruptcy. This person is referred to as 'intended trustee'. The intended trustee is given the opportunity to gain information regarding the company and its business. Meanwhile, under close observation by the intended trustee, the company prepares for a restart.
The appointment of the intended trustee is not published.
Therefore, the pre-pack procedure takes place unknown to third
parties, such as creditors.
After a few days, the company files for bankruptcy. The intended trustee is appointed as actual trustee and the restart by way of asset sale is effected and completed. The main purpose of this pre-packed method of restarting a company is to prevent the loss in value that usually takes place when a company faces financial distress.
The Second Chamber of the Dutch Parliament has ratified the CCA I, and it is expected to be discussed and voted on by the First Chamber in the first half of 2017. We anticipate the CCA I to enter into force in the autumn of 2017. The European Court of Justice is expected to issue its judgment about the non-automatic transfer of employees to the buyer of the assets in a pre-pack in the course of 2017. If that judgment is favourable to employees and trade unions, the First Chamber may decide to shelve the bill.
Continuity of Companies Act II
A draft for a Continuity of Companies Act II (CCA II) introduces the concept of a voluntary creditors arrangement into Dutch law. Under the CCA II, an arrangement can be confirmed by the court and become binding on all creditors (and even shareholders) affected by the composition plan, irrespective of whether they voted in favour of the arrangement, or against it. The government circulated a draft document in 2014 for consultation and the – substantively – revised draft is expected to be presented to the Second Chamber of the Dutch Parliament in the first half of 2017.
The legislature wishes to present an instrument that contains the advantages of the US's Chapter 11 and the English Scheme of Arrangement, but lacks the disadvantages. The draft bill is based on a proposal presented by our partners Ruud Hermans and Reinout Vriesendorp a couple of years ago.
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