7th Annual Meeting - Beirut, 13 - Aman Union · 7th Annual Meeting - Beirut, 13 –15 ... companies in financial distress whether for reorganization or administration and ... AU 7th

Credit Insurance Claims & Recovery Management

7th Annual Meeting - Beirut, 13 – 15 November 2016

Corporate Bankruptcy, Rescue, and Restructuring

Survey of sample Bankruptcy Regimes of Aman Union Member States

Agenda

Definitions and Scope

Regimes & Regulatory Frameworks

Declaration of Bankruptcy

Bankruptcy Administration

Rescue Schemes

Secured Creditors

Director Liability

Important Developments

AU 7th Annual Meeting, Beirut Nov. 2016.

Definitions and Scope

• The definitions of “Bankruptcy” and “Insolvency” vary among jurisdictions and legal systems.

• The term “Bankruptcy” is used in this presentation to refer to the judicial processes applied to

companies in financial distress whether for reorganization or administration and liquidation.

• Only processes relating to limited liability commercial corporate persons are examined in this

presentation.


From Distress to Liquidation or Reorganisation

Financial Distress

•Events leading to bankruptcy

Declaration of Bankruptcy.

•Court decision to bankrupt debtor.

Administration

•Managing the bankruptcy by trustee

Termination and Closure

•End of bankruptcy and liquidation of debtor.

Financial Distress

•Events leading to bankruptcy

Court Mandated Conciliation

•Court decision to allow the debtor to suspend payments.

Restructuring and Compositions

•Debtor’s management is monitored by courts.

Restructuring is complete.

•Debtor resumes normal operations.


Regimes & Regulatory Frameworks

• Acts and laws specific to bankruptcy.

– Indonesia’s Law No. 37 of 2004 concerning Bankruptcy and Suspension of Payments.

– Saudi Arabian Regulation No. 129 of 1416H on Preventive Accords.

– United Arab Emirates Bankruptcy Law to be announced shortly.

• Bankruptcy provisions within commercial laws.

– Algeria’s Commercial Law of 1975 (Book III)

– Egypt’s Commerce law No. 17 of 1999 (Chapter V)

– Kuwait’s Commerce Law No. 68 of 1980 (Book IV)

• Provisions to windup non-paying companies within company laws.

– Malaysia’s Companies Act of 1965 Parts VII to X.


Basic Conditions for Corporate Bankruptcy Petition

• “Every trader whose financial affairs are disrupted, and [as a consequence thereof] stopped

paying their commercial debt can be declared bankrupt” (Art. 555 of Kuwaiti Commerce Law

68 of 1980).

• “A debtor having two or more creditors and failing to pay at least one debt which has matured

and became payable, shall be declared bankrupt through a Court decision, either at his own

petition or at the request of one or more of his creditors.” (Art. 2 of Indonesian Law 37 of

2004).


Tests for Corporate Bankruptcy Petition

• Unpaid proven and uncontested matured debt.

– Final verdicts or [ratified] arbitral awards.

– Commercial papers.

– Unconditional acknowledgments.

• Debtor stopped payment of debt due to financial distress.

• Concursus Creditorum [some jurisdictions].


Who can petition courts for bankruptcy?

• The debtor (voluntary bankruptcy).

• One or more creditors.

• Public prosecutor.

• General public / unrelated parties [some jurisdictions].


DECLARATION OF BANKRUPTCY

Declaration of Bankruptcy

• Only courts have the power to declare a debtor bankrupt.

• Procedures and competent forums to petition vary among member states.

• Generally, petitions to declare a debtor bankrupt:

– Are filed in front of special courts / tribunals or regular national courts.

– The procedures are not confrontational in nature (e.g. unlike litigation).

– The aim is to prove the debtor’s inability to meet their financial obligations.

– The result is having courts assume control over the debtor’s assets.


Consequences of Bankruptcy on Debtors

• Removal of control from the hands of management (persons or boards) and replacing them

with court-appointed administrator (curator, trustee, receiver).

• Review and potentially vitiate recently concluded contracts.

• Preservation and survey of assets.

• Potential liquidation of the debtor.


Consequences of Bankruptcy on Creditors & Others

• Judicial formation of [unsecured] creditor groups comprising both preferred and ordinary

creditors. Secured creditors are excluded.

• Termination of on-going proceedings against the bankrupt debtor.

• Unsecured creditors can no longer commence legal action against the bankrupt debtor.

Secured creditors may still do so.


Consequences of Bankruptcy on Creditors & Others

• Future-due debts become immediately due.

• Accrual of interest is stopped.

• Certain transactions (including settlement agreements) are reviewed and possibly vitiated /

annulled.


Creditor Ranking

• Creditors are typically ranked as follows:

1. Preferred Creditors – such as courts, employees, tax authorities, etc.

2. Secured Creditors – such as mortgagees and other security holders.

3. Ordinary (unsecured) Creditors – ordinary suppliers and commercial creditors.

4. Shareholders – not a creditor group, but stakeholders in the bankruptcy nonetheless.

• There is a slight variation in the treatment of preferred and secured creditors.

– Some circumstances allow Secured Creditors higher priority than Preferred Creditors.

• Some jurisdictions rank debts within a particular class of creditors (e.g. Malaysian

Companies Act. 1965 Art. 292).


Bankruptcy Declaration Case Studies

Suspension of Payment Does not Always Lead to

Bankruptcy

• Case background:

– Jurisdiction: Dubai, UAE

– Applicable statutes: UAE Federal Commercial Transactions Law No. 18 of 1993 Book V “Bankruptcy and Compositions”, Chapter I “Bankruptcy”, Section I “Declaration of Bankruptcy”.

– Case number: 343/1997

• Decision of the supreme court “The debtor’s suspension of payment was not due to financial distress, but was due to judicial procedures that resulted in placing all of the [debtor’s] assets under the supervision of the enforcement judge. […] Even though suspension of payment is considered evidence against the debtor, […] such suspension of payment may be due to excuses /events that may have occurred [to the debtor] while still having the ability to pay [their debts].

Interpreting the facts surrounding the suspension of payment which may lead to declaring the debtor bankrupt […] is exclusively the [authority] of the competent court.”


BANKRUPTCY ADMINISTRATION


• Courts appoint designated administrators (trustees, curators, receivers) responsible to

manage the bankrupt estate to the benefit of creditors.

• The administrator surveys the bankrupt’s assets and liabilities.

• All creditors (whether secured or unsecured) must register their claims with the administrator

within a set time limit.

• Unsecured creditors failing to register their claims risk losing the opportunity to receive a

portion of the estate.



• The administrators attempt to operate in a manner that maximizes returns to creditors.

• The debtor’s assets and receivables are recovered from third parties by the administrators.

• Assets are liquidated to satisfy the demands of creditors (in accordance with their ranking).

• The bankruptcy administration is concluded upon the completion of asset disposal and

liquidation of the debtor.


RESCUE SCHEMES

Alternatives to bankruptcy and liquidations

Preventive Accords vs Bankruptcy Administration

Preventive Accords

• The debtor’s management remains

in control of the company.

• The debtor’s management has to

report to court-appointed experts or

administrators on their plan to

rescue the company.


• The administrator (curator)

becomes in control of the company.

• The administrator is operating the

company with to the benefit of the

creditors and with the aim of

eventual cessation of business.


Restructuring & Composition with Creditors

• Provisions relating to Preventive Accords, normally allow for:

– Composition with creditors (partial write-off).

– Debt rescheduling and restructuring (including provision of security).

• Judicial Restructuring & Compositions generally require consent of creditors; voting in favour

by at least 66% of registered debt is required in some jurisdictions.


Preventive Accords under Saudi Arabian

Regulations

Preventive Accords

• “Each trader [whether natural or corporate person] whose financial standing is disrupted to an extent which causes concern about their ability to pay their debt, may request the amicable accords with their creditors from the competent committees within the chambers of commerce and industry, pursuant to the rules and regulations specified in the executive regulations”. (Art. 1 of the Saudi Arabian Regulation No. 129 of 1416H on Preventive

Accords)

• All surveyed jurisdictions have statutes entitling financially distressed companies to legally

suspend payments.


SECURED CREDITORS

The Secured Creditors

• Secured creditors are creditors with mortgages, pledges, or other forms of security as

collateral for their credit.

• All jurisdictions prioritise repayments to secured creditors.

• Securing credit is critical to increase the chances of successful repayment in the event of

bankruptcy.


Mortgages – A Common Method for Securing Credit

• Mortgages and pledges are the most common forms of security over assets.

• Apply to both movable and immovable assets.

• May be expensive to register, manage, and enforce.

• Formal and substantive validity vary widely among jurisdictions.


Alternative Approaches to Securing Credit

• Retention of Title and Hire-Purchase Arrangements.

– Not directly enforceable in most jurisdictions.

– May require registration or notarisation.

– Some scholars question the sharia compliance of ROT.

• Trusts, Security Agents, SPVs, and comparable structures.

– Expensive to setup and operate.


The Pledge Contract under Iranian Law

The Pledge Contract Under Iranian Law

• The Pledge contract is a “named” contract, specified and regulated by the Iranian Civil Code.

Art. 771 of the Iranian Civil Code states “Pledge is a contract in which the debtor submits and delivers property as collateral to the creditor.[…]”

• Pledge agreements are irrevocable by the pledger, but revocable by the pledgee (Art. 787).

• Automatic passing of property from the pledger to the pledgee is prohibited, despite default events or the expiration of time limits.

• Any form of time stipulation in the pledge agreement renders the agreement null and void.

• Physical handover and possession of the pledged property to the pledgee is mandatory (Art. 772)


Retention of Title Under Saudi Arabian

Regulations

RoT under Saudi Arabian Regulations

• Retention of title clauses are invalid and unenforceable under Saudi Arabian regulations.

• Title and the rights of its transfer is integral to the definition of a “sale transaction” under

Saudi Arabian regulations and jurisprudence. Therefore, selling while retaining title of the

sold property contradicts the core essence of the sale transaction.

• Hire-purchase agreements are commonly used substitutes, allowing the vendor to lease the

asset for a defined period, then transfer title at the end of the lease period (subject to

conditions being met).


DIRECTOR LIABILITY

Director Liability

• All surveyed bankruptcy regimes have provisions relating to director liability.

• Directors can be held liable if:

– Negligence or fraud contributed to the bankruptcy of the company.

– Assets cover 20% of less of the liabilities (e.g. Art. 684 KWT).


IMPORTANT DEVELOPMENTS

Cultural Shift from Anti to Pro-Debtor

• Noticeable cultural shift throughout the region to “Pro-Debtor” culture.

• Both the Kingdom of Saudi Arabia and the United Arab Emirates are revising existing

insolvency regulations / laws and implementing new ones.

• New laws and regulations aim at assisting distressed companies by allowing them the

opportunity to reorganize and restructure in order to meet their financial obligations.


Summary and Recommendations

• Corporate bankruptcy regimes vary significantly among jurisdictions; yet important

commonalities exist.

• Use commercial papers, or unconditional acknowledgments for undisputed evidence of debt

to expedite the path to bankrupting debtors in default.

• Seek appropriate security for extended credit.

– Mortgages and pledges.

– Retention of Title / Hire-purchase arrangements.

– Trusts, Security Agents, SPVs, etc.

Variations (and therefore pitfalls) exist amount surveyed jurisdictions, therefore seeking case-

specific advice is important.


Credit Insurance Claims & Recovery Management

Ahmed Madkour

[email protected]

Thank You

Documents

7th Annual Meeting - Beirut, 13 - Aman Union · 7th Annual Meeting - Beirut, 13 –15 ... companies in financial distress whether for reorganization or administration and ... AU 7th