146. A survey of international regimes has been undertaken to inform the work of the review group. The survey is not intended to be an assessment of the success or otherwise of the insolvency regimes considered. Such a study would be a considerable undertaking given the complex interactions between insolvency law and the economic and social fabric of any country. And given these issues it may not be possible to draw conclusions applicable to the UK even if such a study were undertaken. Therefore the survey has been intentionally limited to providing a factual comparison of the different corporate rescue mechanisms in:

• The US;
• Germany;
• France;
• Australia;
• Ireland;
• Sweden; and
• New Zealand.

These countries were chosen either due to their economic importance, their historical cultural and economic links with the UK, or because they have, relatively recently, undertaken reforms of their insolvency laws.

147. The first point to note is that all the regimes studied have formal rescue mechanisms. That is, each country has introduced laws that recognise that leaving the fate of insolvent companies to the market is likely to lead to sub-optimal outcomes. There are also many similar features to such formal rescue mechanisms: requirements for entry to the rescue process; a moratorium or stay on creditor actions; a process for dealing with the debtor; a process to put together a reorganisation plan; and an exit strategy.

But there are also some key differences. In particular:

• The complexity of the systems;
• How entry to the rescue process is determined, and whether this entry can be vetoed;
• Who runs the rescue process;
• Availability of finance;
• Who determines the final outcome; and
• The powers of secured creditors.

 148. To those not directly involved with the insolvency process, the UK system can appear to be extremely complex. Complexity itself may a positive aspect of the UK system. By their nature companies in financial distress are faced by complex problems. Therefore it is only right that there is a range of sophisticated approaches to determine the best outcome in light of these problems.

149. But it can be a negative feature if complexity results in, for example, management being unaware of the range of options available and therefore not pursuing the most appropriate option. For example, a company might go into voluntary liquidation when greater value could be realised from a CVA.

150. In France and more recently Germany, this problem is addressed by there being a single entry point to the insolvency process. The company is then assessed for the most appropriate outcome. For example in Germany, upon entry a court makes an assessment on the basis of information provided by the debtor on the most appropriate course of action. This could be either the immediate sale or liquidation of the business, or the appointment of an insolvency practitioner to explore the possibility of a rescue / reconstruction.

 151. Entry to the corporate rescue mechanisms in the UK – administrative receivership and administration – requires either a floating charge holder to appoint an administrative receiver or the management or a creditor to petition the court to appoint an administrator. A company can enter administration if the company is, or is likely to become, insolvent. But note that a floating charge holder can unilaterally veto an administration or CVA by appointing an administrative receiver. The reverse cannot happen, i.e. no party can veto the appointment of a receiver.

152. In other regimes entry to the rescue mechanism is by petition to the court with the company either having to be insolvent (e.g. France and Australia), or likely to be insolvent (e.g. Germany and Ireland). The extreme case is the US where entry to Chapter 11 is automatic upon petition and there is no requirement of current or impending insolvency (a creditor can challenge the stay on creditor actions which results, but they must demonstrate that they will be adversely affected by the process. Typically the bias is in favour of the debtor as the value of the company as a going concern (i.e. in Chapter 11) is likely to be greater than the value in liquidation. On presentation of a petition to the court a stay on creditors’ actions is automatic).

 153. The UK rescue mechanism is characterised by a floating charge holder’s ability to veto other forms of rescue. In that sense a floating charge holder largely determines the outcome of any rescue process. If an administration or CVA is pursued this is often because a bank has opted not to appoint a receiver. This has both positive and negative consequences. As Cork noted, administrative receivership (and the existence of the floating charge) represents a quick, efficient and tried and tested process. On the other hand this places considerable control rights in the power of one creditor.

154. In many other regimes there is no equivalent of the floating charge (e.g. in the US, France and Germany), and either the debtor or a court appointed controls the rescue process. In countries where there is a floating charge, recent trends in reform have been to curtail the control rights that it provides (e.g. in Ireland).

155. In the US the debtor retains considerable control within Chapter 11. For example it is only the debtor that can propose a reconstruction plan in the first 120 days, an exclusive right which is usually renewed for further periods. And in both France and Germany an insolvency practitioner is appointed to oversee the process and put together the reconstruction plan. Thus the court and the independent IP exert considerable influence over the final outcome.

156. In Ireland ‘Examinership’, which is effectively administration, was introduced to encourage a more collective approach to corporate rescues. A floating charge exists in Ireland, but its ability to frustrate examinership is limited as an examiner can be appointed within 3 days of the appointment of an administrative receiver, so the appointment of an examiner will veto a receivership.

 157. A critical ingredient of any rescue mechanism is the availability of finance. Without finance a business will often not be able to continue running and hence a rescue/reconstruction will not be viable.

158. Accompanying the introduction of collective agreements as part of recent reforms in other jurisdictions has been the introduction of super priority creditors.

159. For example, In France and Germany all
creditors providing goods and services after commencement of proceedings are priority creditors.

160. In Sweden the debtor can raise super-priority financing subject to the agreement of the overseeing insolvency practitioner; and in Australia super-priority finance is available with the consent of secured creditors (claims against the debtor arising from the continuation of business within administration are generally granted priority.)

161. In other regimes, notably in the US, the availability of finance is encouraged through the provision of Super Priority Financing. The US is probably the most well developed market for super priority financing, but it is available elsewhere.

162. For example; in France and Germany all creditors providing goods and services after commencement of proceedings are priority creditors; and in Australia super-priority finance is available with the consent of secured creditors (claims against the debtor arising from the continuation of business within administration are generally granted priority).

163. In the UK under administrative receivership the outcome of the process – either sale of the business as a going concern or a sale of assets – is determined by the receiver who acts on behalf of the appointing floating charge holder. Under administration the outcome, like the outcome in most rescue mechanisms overseas, is determined by a creditor vote.

164. The voting criteria varies considerably between regimes. Under administration in the UK a simple majority of the creditors present, in terms of value of their claims, is required. In the US a 2/3 majority is required in terms of both value and by number, whereas in Germany it is a simple majority and in Ireland under examinership it requires a majority in number and 75% by value. The important point is that the creditors decide the final outcome. France is an outlier in this respect, as it is the court that decides the final outcome. Note that in some jurisdictions, for example the US and Ireland, the court can in some circumstances, overturn the creditor decision – by the process known (in the US) as ‘cramdown’.

 165. At the risk of oversimplifying, the question of corporate rescue mechanisms boils down to who has the most incentives to maximise the total value of the firm (rather than any specific claims) without violating the contract freely entered into between debtor and creditor. Different countries give different players the lead in corporate rescue mechanisms in the belief that will achieve this objective.

166. New Zealand, Australia, Ireland and Sweden currently give this leading role to the banks (floating charge holders). Banks take decisions on whether to liquidate a firm or allow an attempt at reconstruction. But in each country recent reforms have been introduced to encourage more collective procedures.

167. In the US this role is given to prior management – debtor-in-possession – with an exclusive right (for what is often a lengthy period) to propose a rescue or reconstruction plan. The bankruptcy courts have the final say although the process relies on negotiation between the parties in interest.

168. In France this leading role is given to a third party, the courts, in order that they can decide on the best outcome without any vested interests.

169. The German system attempts to achieve the best outcome by the courts appointing a third party, an insolvency practitioner, to develop any reorganisation plan, but with all creditors ultimately making the decision. This allows the decision to be based on an unbiased assessment of all available information, and by all creditors.

170. In terms of the overall structure of corporate rescue mechanisms and who is given the lead in determining the outcome, the UK is at one end of the spectrum with holders of floating charges potentially having the leading role and at the other end of the spectrum is the US and France where existing management and the courts are the key players. A key problem with both these approaches is that the key player will often not have an incentive to maximise value or pursue the optimal outcome (which may be liquidation). Banks only wish to maximise their own returns. Existing management have an incentive to keep the business going to maintain their livelihood, even if that is not the economically optimal outcome. And courts do not have a vested interest, so other priorities, such as avoiding bad press by maintaining non-viable firms, may take over.

171. Recent reforms in Germany and Ireland attempt to overcome these problems by appointing an impartial third party to gather all the evidence and propose the reconstruction plan, but with creditors making the final decision. The third party ensures that all creditors base their decisions on a full assessment of the information and all creditors make the final decision that ensures that no single creditor decides on the basis of maximising only their own return.

Table: International comparisons of corporate rescue mechanisms

  US Germany France Australia Ireland Sweden New Zealand Insolvency procedures [rescue process considered in bold] Chapter 7 – liquidation Chapter 11 – reconstruction Single gateway Redressement Judiciaire Liquidation Receivership Voluntary Administration

Arrangements and reconstructions (rarely used)

Examinations Receivership Liquidations Private (informal) reorganisation

• Public business reorganisation

Bankruptcy

Receiverships Liquidation Compromise 1. How to enter the process: 1.1 Automatic entry or via petition Automatic upon petition to the court Petition to the court by the debtor or by a creditor Petition to the court Automatic entry or via petition to the court by directors, secured creditor or liquidator Petition to the court Petition to court by the debtor or by a creditor Arrangement between creditors and the company 1.2 Test for insolvency No test Insolvent or pending insolvency [previously only technical insolvency] Technical insolvency Technical insolvency Insolvent or pending insolvency Proof of difficulties in paying debts and a reasonable possibility of the achieving the proposed reorganisation As above 1.3 What remedy exists to set aside the process? Creditor petition to the court     By the court or a creditor vote after the initial 28 day period. A secured creditor with a charge over “substantially the whole of the property of the company” can enforce its security within 10 working days of the appointment of an administrator.   Court decision   2. Who runs the process: 2.1 Who runs the company following the moratoria? Existing management (Debtor in Possession – DIP) though not in all cases DIP overseen by Insolvency Practitioner (IP) DIP Overseen by court appointed IP Administrator (IP) DIP overseen by the Examiner DIP overseen by restructuring expert (IP, although the person need have no specific authorisation / qualification) ad hoc 2.2 Who puts together the re-organisation plan? Exclusive right of the debtor for 120 days then debtor or any creditor IP Judicial Administrator (IP) apponted by the court Administrator appointed by liquidator, secured creditor or by directors with duty of care to all creditors Court appointed Examiner (IP) IP ad hoc 2.3 How is the rescue accepted

• by whom;

b) what (if any) is the voting criteria

• Creditor vote but cramdown possible

b) majority in number adn 2/3 majority by value

• Creditor vote and approved by the court (ie cramdown possible)

b) majority in number and by value

• Court decides

b)
n/a

• Creditor vote;

b) simple majority required by both number and value

• Creditor vote but cramdown possible

b) majority by number and 75% by value

• Creditor vote
• 60% / 75% in both number and amount when unsecured creditors receive > 50% / <50%

ad hoc 3. Moratoria 3.1 What is the initial period of the moratorium, and are there any limitations Indefinate, although creditors can apply to court to execute their security   Maximum 6 months subject to one review 28 day moratorium extendable to 60 63 days (21 days to compile the 1st report, a further 21 days to compile to 2nd report, and 21 days for implementation) extendable by a further 30 days Typically a maximum of 3 months, although this can be extended by a further 3 months at a time up to one year As agreed within the restructuring agreement 3.2 How is it extendable? By application to the court Court approval By application to the court By creditor resolution or by a court order By the court By the court As above In the UK we distinguish between three groups of creditors, ordinary, preferential and secured. Secured creditors are those whose claims against the debtor is secured by reference to some property owned by the debtor and which the secured creditor may arrange to have sold and to be repaid out of the proceeds. All other creditors (other than those whose contract provides some form of security) are unsecured creditors and within this class, the distinction is made between those who are entitled to be paid first =- the preferential creditors – and the rest – the ordinary creditors. 4. Powers of secured creditors 4.1 Are there preferential creditors? What is the order of preference? 1. Secured
2. Admin costs
3.Involuntary petitions
4. Wage claimants (up to $2,000)
5. Certain claims by grain farmers and fishermen
6. Consumer deposits (e.g. with a landlord)
7. Family obligations
8. Employee benefits
9. Taxes
10. Unsecured creditors None. Priority rights of tax authorities, social security authorities, as well as preferred claims of employees for outstanding compensation have been abolished 1. Salaries and sums due to employees
2. Claims arising after commencement of proceedings
3. Secured debts
4. Unsecured debts 1. Secured
2. Admin costs
3. Wages and salaries
4. Injury
5. Unsecured
NB No priority for tax claims 1. Secured
2. Local rates and debts due to the State
3. Wages and salaries
4. Unsecured 1. Government Taxes
2. Employee salary claims
3. Secured by fixed charge
4. Secured by floating charge
5. Costs (auditing etc)
6. Tax claims 1. Admin costs
2. Wages and salaries
3. Goods and services taxes and PAYE deductions owed 4.2 What are the different types of secured creditors Fixed charge

Floating charge (no ability to appoint receiver)
Retention of title

Retention of title

Fixed charge on assets and receivables

Fixed charges

Retention of title

Fixed charges

Floating charges

Retention of title

Fixed charges

Floating charges

Retention of title

Fixed charges

Floating charges

Retention of title

Fixed charges

Floating charges

Retention of title

4.3 What is the position of secured assets in the reconstruction mechanism? No ability to appoint receiver or block Ch11 other than by court petition No ability to block the process once it has started, but if a creditor has a “right of separation” he may assert this entitlement (although the IP can prevent this in certain circumstances) No ability to block process other than by court petition A chargee of the whole or substantially the whole of the company’s property (e.g. floating charge holder) can appoint its own receiver within 10 working days of the appointment of the administrator   No ability to block the process once the petition to start proceedings is granted As agreed in the reorganisation plan 4.4 is super-priority financing available? if so through what mechanism is this facilitated Post-petition financing and supplies can be obtained with priority to the lender Creditors providing goods and services after commencement of proceedings are priority creditors Claims arising after commencement of proceedings are priority claims Super-priority finance is available with the consent of secured creditors. Claims against the debtor arising from continuation of businesses are generally granted priority   Debtor can raise new loans during the reconstruction subject to the approval of the administrator, which are preferential Subject to agreement as part of the reorganisation

The position in the United Kingdom

Insolvency Procedures
[rescue process considered in bold Liquidation

(a) Administration

(b) Administrative Receivership

1. How to enter the process: 1.1 Automatic entry or via petition

• petition to the court
• automatically, on appointment by a creditor whose claim is secured by a floating charge

1.2 Test for insolvency debtor unable to pay its debts indicated by its failing to satisfy a legitimate demand by a creditor, or according to its balance sheet or otherwise shown to the satisfaction of the court 2. Who runs the process: 2.1 Who runs the company following the moraroria?

• Administrator
• Administrative receiver

(both have to be qualified as Insolvency Practitioners)

2.2 Who puts together the re-organisation plan?

• Administrator
• Administrative receiver

2.3 How is the rescue accepted
a) by whom;
b) what (if any) are the voting criteria

• by a simple majority of the creditors present (according to the amount of their claims).

In an administrative receivership, the administrative receiver does not require the creditors’ approval