Comparison of Chapter 11 of the United States Bankruptcy Code with

Comparison of Chapter 11 of the United States Bankruptcy Code

with

• The System of Administration in the United Kingdom,• The Rescue Procedure in France,• Insolvency Proceedings in Germany, and• The Extraordinary Administration for Large Insolvent Companies in Italy

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Content

Comparison of Chapter 11 of the United states BankrUptCy Code

with

Page

the system of the administration in the United kingdom 5 A Background 6 B Procedure 8 C Moratorium 10 D LiftingtheStay 11 E Control 1� F Contracts 14 G ProposalstoCreditors 15 H Costs 17 I ExitRoutes 18 J Finances 19 K Summary �0

the resCUe proCedUre in franCe �1 A Background �� B Procedure �� C Moratorium �5 D LiftingtheStay �6 E Control �7 F Contracts �8 G ProposalstoCreditors �9 H Costs �1 I ExitRoutes �� J Finances �� K Summary �4

insolvenCy proCeedings in germany �5 A Background �6 B Procedure �7 C Moratorium �8 D LiftingtheStay �9 E Control 40 F Contracts 41 G ProposalstoCreditors 4� H Costs 44 I ExitRoutes 45 J Finances 46 K Summary 47

the extraordinary administration for large insolvent Companies in italy 49 A Background 50 B Procedure 51 C Moratorium 5� D LiftingtheStay 5� E Control 54 F Contracts 55 G ProposalstoCreditors 56 H Costs 58 I ExitRoutes 59 J Finances 60 K Summary 61

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and the system of administration in the United kingdom

6

a BaCkgroUnd

Chapter 11 - Us Bankruptcy Code

Chapter 11 focuses on preserving reorganization or goingconcernvalueoverliquidationvalue.Asacorollary,Chapter11assumesthatthemostefficaciouswaytoachievethatresultistoretainmanagementandenablemultipleoutcomeseitherthroughaplanofreorganization,aseriesofgoingconcernsalesandevenaliquidatingplan.Chapter11enablesawiderangeofproposalstobeput intoareorganizationplan, in-cludinghavingthecompanyanditsmanagementsurvivetheprocess.Chapter11casesfallintotwogeneralcategories:the“freefall”caseorapre-packagedorpre-negotiatedcase.

Intheformer,relief issoughtunderChapter11oftheBank-ruptcyCodewithouthavinganagreedexitstrategyamongthe company and at least a critical mass or core group ofcreditors.ThelatterischaracterizedbycommencingaChap-ter11casefollowingthedevelopmentofaconsensusontheoutcomeofthecase.Underbothscenarios,Chapter11plansembrace:

1. a“standalone”plan,whichessentiallyconnotesthatthecreditors,securedandunsecured,and,ifapplicable,thecompanyanditsequity-holders,agreeonareorganiza-tionwithouttheinterventionofathirdpartyorasaleofthebusiness,relyinginsteadonwhatmaybetermeda“composition”planunderwhichatleastsomeunsecuredcreditors agree to accept less than 100% payment oragreetotakeacombinationofdebtandequity issuedbythereorganizedcompanyinreturnfortheirclaims;or

�. aplanwhicheffectsasaleofallorsubstantiallyalloftheassetsasagoingconcernanddistributestheconsider-ationorproceedsofsaletothecreditors;

�. aplanwhichreliesuponacapitalinfusionfromaninves-tor;

4. a liquidating plan which sells all of the assets of thecompanyandprovidesforadistributionofproceedstocreditors;

5. a plan which, in part, contemplates a litigation trust topursueandprosecutecausesofactionbelongingtothecompany;or

6. acombinationoftheabove.

Uk administration - schedule B1 of the insolvency act 1986

The concept of administration was conceived by the Insol-vencyAct1986asamethodofensuringthesurvivalof thecompany as a going concern with the benefit of a morato-riuminrespectoftheadministrationdebts.Theaimwastorehabilitatethebusinessofthecompanyandtogiveittimetoreassessitsfutureratherthanleavingittofaceliquidationoradministrativereceivership(theprocessbywhichtheholderof a “floating charge” over the assets of the company canappointareceivertorunandultimatelyselltheassets).TheadministrationprocedurehasrecentlybeenreformedbytheEnterpriseAct�00�.Theykeyreformisthatanadministrativereceivermayonlybeappointedinrespectofcertainspeci-fiedcases:

1. Capitalmarkettransactionsifdebtis,orisexpectedtoexceed£50m;

�. Financeprojectsifdebtisorisexpectedtoexceed£50mandtherearestepinrights;

�. Utilitiesprojects;

4. Publicprivatepartnerships;

5. FinancialMarketsTransactions;and

6. RegisteredSocialLandlords.

Instead,holdersofqualifyingfloatingchargeswillbegiventherighttoobtainanorderfortheappointmentofanadministra-torontheoccurrenceofaneventofdefaultunderthebankingfacilities-usuallyafailuretomeetapaymentdeadlinebutitcouldbeforabreachofanothercovenant.

TheproposalsareconsistentwiththeGovernment’swishtopromotearescuecultureinthefieldofcorporateinsolvency,andwithitspreferenceforinsolvencyproceduresthataimtomaximisethebenefitsforallcreditors,ratherthanforaspe-cificclassofinterest.Theeffectiveabolitionofadministrativereceivershipwillmeanthatholdersoffloatingchargeswillbeencouragedtofocuslessonadisposalofassetsasameanofrecoupingvalue(althoughthisoptionwillbeopentothemun-dertheadministrationprocedure),andmoreonanapproachwhichachievesanoutcomethatbenefitsallstakeholdersinthedebtorcompany.OneoftheGovernment’sparticularaimsistohelpowner-managedcompanieswhereforthosedirec-torssavingthecompanyismuchmoreimportantthansellingtheassetstoanewcompany,forexample.

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reforms under the enterprise act 2002

TheEnterpriseAct�00�becameeffectiveon15September�00�and(amongstotherthings):

1. virtuallyabolishestheconceptofadministrativereceiv-ershipbypreventingholdersoffloatingchargesfromblockingtheappointmentofanadministrator;

�. allowsadministratorstobeappointedoutofcourtbytheholderofaqualifyingfloatingcharge,thedirectorsorthecompany incertaincircumstances. IntheUK,directorscan incurpersonal liability fortradingwhilstinsolvent(“wrongful trading”)andmustfileforaninsol-vencyprocessatthetimethecompanycannotavoidinsolvency. By filing for administration, this gives thedirectors‘breathingspace’freeofcreditorpressuretotrytoputarescueplantogether;

�. emphasisesthatthemainobjectiveofadministrationisrescuingthecompanyasagoingconcern.Onlyifthatprimaryobjectivecannotbeachievedmaytheadmin-istratorthenbreakuporsellthewholeofthebusinessor realise property in order to make a distribution tosecuredorpreferentialcreditors(seelater);and

4. the administrator now owes a duty to protect the in-terests of all creditors - compared to administrativereceivershipwherethereceiverowedaprimarydutytothesecuredlenderwhoappointedhim.

COMMENT

Theobjectiveofbothproceduresisthecreationofbreathingspaceduringwhichthedebtorcompanyisgiventimetofor-mulateplansforareorganization.Chapter11alsohasprovisionswhichenableacompanytostabilizeitsbusinessby,amongotherthings,authorizingtheborrowingof loans,therejectionofexecutorycontracts,andthere-negotiationofunionandretireeobligations.

8

B proCedUre


AtypicalChapter11casebeginswhenthedebtorcompanyvoluntarilyfilesapetitionwithabankruptcycourt,accompa-niedby:

1. alistofcreditors;and

�. asummaryofassetsandliabilities.

Technicallythereisnorequirementof‘insolvency’.Companiesmayhaveanumberofreasons,otherthaninsolvency,tofileforbankruptcyrelief:thecompanyisfacedwithmassivetortliabilities (e.g. Dow Corning when a global settlement withplaintiffsbrokedown),anadverseoutcomeinalitigation(e.g.Texacowhenfacedwithamulti-billiondollardamagesaward),andanticipatedliquidityissues(e.g.anumberofU.S.energycompanies).

But applications must be in ‘good faith’ and with the inten-tionofreorganizationortoeffectaliquidationorsaleofthecompany,andcreditorsmayapplytohavepetitionsdismissedwherethisisnotthecase.Forexample,intheSGLCarbonCorporationcase(�00F.�d154),thecourtdismissedthecom-pany’sChapter11casebecauseofbadfaithdemonstratedbyalackof“reorganization purpose”.

A large company may also be involuntarily pushed into aChapter 11 case if three creditors holding unsecured noncontingentundisputedclaimsaggregatingmorethan$1�,�00file an involuntary petition against the company and if thecompany is“generally not paying [its] debts as such debts become due”Thecompanymaycontestthepetitionandiftheabovestandardisnotmet,mayfilesuitagainstthefilingcreditorsforcostsand/orreasonableattorneysfeesor,iffiledinbadfaith,damages,includingpunitivedamages.

UsuallyitisthecompanynotthecreditorswhofileforChapter11protection(seeSectionE:Controlofthecompany).How-ever,securedlendersmayeffectivelyforceacompanytofileforreliefunderChapter11bythreateningtoenforceliens.


Administrationcanbecommencedoutofcourtbyasecuredcreditorwhoholdsa“qualifying floating charge”,bythecom-pany itself or by its directors. Otherwise general creditorsmustapplytocourt.

Court procedure

Theapplicationmuststatethat:

1. thecompanyisor is likelytobecomeinsolvent(onas-sets/liabilitytestorinabilitytopaydebtsgrounds);AND

�. itisreasonablylikelythatthefollowingcanbeachieved:

• therescueofthecompanyasagoingconcernorasmuchofitsbusinessasis“reasonablypracticable”;or,ifthisisnotpracticable;

• a better result for the company’s creditors as awholethanwouldbelikelyifthecompanyweretobewoundup;or,ifthisisnotpracticable;

• therealisationofthecompany’spropertyonabreak-up basis in order to make a distribution to one ormoresecuredorpreferentialcreditors,but“withoutunnecessarily harming” the interests of unsecuredcreditors.

The application must be supported by a statement fromthe proposed administrator confirming that it is reasonablylikelythatthepurposeoftheadministrationwillbeachieved,providingdetailsofthecompany’sfinancialposition,detailsofcreditors’securityandanyotherrelevantmattersmustbeprovided.

out of Court

The holder of a qualifying floating charge may appoint anadministratoroutofcourtandtheappointmenttakeseffectoncetheholderofafloatingchargehasfiledthenecessarypapersatcourt.Aswiththecourtprocedure,theproposedadministratormustmakeastatementthatthepurposeoftheadministrationisreasonablylikelytobeachieved.

Theadministratormustsatisfyhimself that thefirst twoob-jectives(referredtoabove)arenotpracticable,beforepro-ceedingwiththethirdobjective,namelyrealisingassetsfordistributiontosecuredcreditors.Thecompanyoritsdirectorsmayalsoappointanadministratoroutofcourt.

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Comment

Inthecourtprocedure,theUKcourthasdiscretionastowhethertogranttheadministrationorder.Usingtheoutofcourtroute,theholderofaqualifyingfloatingchargeisentitledtoappointanadministratorasofright,asarethedirectorsandcompanyifthereisnoholderofaqualifyingfloatingchargeortheholderofthequalifyingfloatingchargeconsents.Therearenosimilar“gating”orentryissuesunderChapter11.Thedebtorhasalegalrighttoentertheprocedure,althoughaChapter11casemaybedismissedifthecourtdeterminesthatitwasfiledin“bad faith”.

10

C moratoriUm


Immediatelyuponthefilingofabankruptcypetition,amora-toriumor“automatic stay”staysalllitigationandpreventstheenforcementofjudgementsandofsecuritywithoutleaveofthecourt.1Thisincludesstayingthecontinuationofanyexist-ingactionsthatwerecommencedbeforethefiling.

Apartywhotakesanyactioninviolationoftheautomaticstayriskscontemptofcourtactionsandpenalties.Also,anyactdoneincontraventionofthestayisretroactivelymadevoidorvoidablebythecourt.Thestayiseffectiveduringtheentiretimethecaseispendingbutcreditorsandotherpartiesmaymakemotionstoliftormodifythestay.�

TheBankruptcyCodegivesthedebtortheexclusiverighttoformulateaplanofreorganizationfor1�0daysfromthedateoffiling.This“exclusivity period”canbeextendedifsufficientreasons are established, but no extension can be grantedbeyond18monthsaftertheChapter11filingdate.�Inmostin-stancesthedebtorcompanywillfirsttakeactionstostabilizeitsoperationsandformulateitsbusinessplanandthereafterproceedtoformulateaplanofreorganization.

Comment

CommentatorshavecriticisedChapter11because,intheory,debtorscoulduseitasadelayingtacticindealingswithactualorpotentialcreditorsandopponentsinlitigation.ThepotentialforabuseofthiskindpromptedtheU.S.CongresstoamendtheBankruptcyCodein�005toincludean18month“drop-dead date”forexclusivityinChapter11cases.Thisrelativelyshortleashonadebtor’sexclusivecontrolovertheplanformulationprocessshouldmollifycreditorconcernsregardingroutineandrepeatedextensionsinlargeChapter11cases.Inmostcases,itshouldbenefitallstakeholdersbecausespeedisanessentialelementofasuccessfulreorganization.

Delaycanhaveseverenegativeimpactsuponthedebtor’sbusiness,directors,management,employees,suppliers,customers,and,mostimportantly,itscreditors.Thus,theexclusivityissuerarelybecameanobstacleinlargeU.S.reorganizations,evenbeforethelawwaschangedtocreateafixedoutsidelimitationonextensions.


Themoratoriumtakeseffectfromthedateonwhichanap-plication is made to the court for the appointment of anadministratororwhenthenoticeofappointmentof thead-ministratorisfiledatcourtintheoutofcourtprocedure.Themoratoriumstaysalllitigation,andpreventstheenforcementofjudgementsandofsecuritywithouttheleaveofthecourtortheconsentoftheadministrator.Thisincludesstayingthecontinuationofanypre-existingactions.Therearenoexcep-tionstothismoratorium.

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1. BankruptcyCodeparagraph�6�(a)

�. BankruptcyCodeparagraph�6�(d)

�. BankruptcyCodeparagraph11�1

11

d lifting the stay


Generally, an affected party can apply to court at any timeafterthefilingofabankruptcypetitionforrelief.Oncesuchamotionismadethestaywillexpireafter�0daysunlesswithinsuchtimeacourtcontinuesthestaypendingafinalhearingorthemovantconsentstosuchcontinuationpendingahear-ing.Thecourtmayterminatethestay,modifyitorsubjectittoconditions.4 Thecourtmay lift thestayforcause,but isgenerallyreluctanttodosoduringtheinitialstagesofaChap-ter11casebecauseofthegeneralpresumptionthatadebtorshouldbegivenachancetoreorganizeandprepareaplan.

Motionstoliftormodifythestayarebasedonthefollowing:

1. a court may lift or modify the stay upon a showing of“cause”,whichincludesthelackofadequateprotectionofaninterestinproperty;or

�. withrespecttopropertysecuringalien,(i)thestaywillbeliftedifthedebtorcompanydoesnothaveequityinsuchpropertyand(ii)suchpropertyisnotnecessarytoaneffectivereorganization.TherearealsospecialrulesforsingleassetrealestatecasesandChapter11debtorswhoareindividuals.Also,theautomaticstaymaynotstayineffectwhenappliedtocertainprotectedcreditors,suchascertainaircraftlessorsandlendersandvessellessorsandmortgagees.Inthiscontext,alackofadequatepro-tectionfocusesonwhetherthecreditorisbeinginjuredbycontinuationofthestaydueto,amongotherthings,adeterioration invalueof itscollateralorconsumptionofcollateralbythecompany.Tocounterthispotentiallynegativeimpactofthestay,adebtorcompanymustpro-videadequateprotection,whichmaytaketheformof:

1. periodic cash payments to cover any depreciationduringthestay;or

�. additionalorreplacementliensorsubstitutesecuritytotheextentofanydeteriorationinvalue,andotherrelief that will amount to ‘indubitable equivalent’, aflexiblyinterpretedconcept.5


Acreditorcanmakeanapplicationtothecourtforthestayontakinglegalactionorenforcingitssecuritytobelifted.Theburdenisonthecreditorconcernedtoshowthattheleaveshouldbegiven.Wheretheapplicantcanshowthatthegiv-ingofleavewouldnotimpedetheadministrationthenleavewillgenerallybegranted.Otherwiseitisabalancingexercisetobecarriedoutbythecourt.

Alternatively, administrators can grant consent to the com-mencement of proceedings against the company. Thesearemoreusuallyactionsbycommerciallandlordstorecoverproperty.

Comment

Bothjurisdictionsshowareluctancetoliftthestayunlesstherearegoodreasonsfordoingso.

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4. BankruptcyCodeparagraph�6�(d)(�)

5. ReAlyulanInterstateCorporation1�BR80�at809

1�

e Control


InChapter11,whethervoluntaryorinvoluntary,thereisapre-sumptionthatcontrolremainswiththedebtor’smanagementthroughtheconceptof“debtor in possession”(“dip”)(subjectto certain safeguards regarding disposal of assets outsidetheordinarycourseofbusiness).Tomanycommentatorsthissmacksofleavingthefoxinchargeofthehenhouse.Never-theless,thereareinstanceswherethedifficultyisduetoexog-enousandunexpectedevents(e.g.Texaco).Moreimportantly,perhaps, is the impression that management provides themosteconomicalandefficientmeanstoreorganizeundertheoversightofthebankruptcycourt,andcreditors’committees.Significantly,manycompanieshirespecialfinancialadvisorsorturnaroundmanagementconsultantstoassistthemintheirrestructuring. Often the creditors, especially the securedcreditors,willconditiontheircooperationonthehiringofsuchanexpertorchiefrestructuringofficer.Suchconsultantsorspecialistsneverthelessremainsresponsibletotheboardofthecompany,thebankruptcycourtandthecreditors.Oftentheywillbeinplaceaspartofanyoutofcourtrestructuring.AlthoughthereisaBankruptcyCodeprovisiontoappointatrustee,suchanappointmentisrareandonlyhappenswherethereissomesuspicionofmisfeasance/fraud/wrongdoing/risktoassets,orbecauseitistheinterestsofcreditors.

Whenthereisadebtorinpossession,apartyininterestmayrequest the appointment of an Examiner to investigate thedebtor’s affairs. Although it is mandatory to grant such re-questwherethedebtorhasunsecured, liquidateddebts inexcessof$5million,thebankruptcycourtmaylimitthescopeof the Examiner’s investigation to guard against a “fishing expedition”.

Assoonasispracticableaftertheorderforrelief,theUnitedStates Trustee (a government official with a duty to protectallcreditors)appointsacreditors’committee,usuallymadeupofthesevenlargestunsecuredcreditorswillingtoserve.6Thesupervisoryroleandpowersofthecommitteearemoreextensivethaninsomejurisdictions,andtheycanincurtheexpenseofattorneysandotheradvisorswithcourtapproval.Suchexpensesarefundedoutoftheestateofthedebtor.7TheUnitedStatesTrusteemayalsoappointothercommitteesasneeded(e.g.aTortClaimantsCommittee,aBondholdersCommittee,etc.).Althoughthecreditors’committeemayem-ployadvisersandmayberemuneratedfromthebankruptcyestate, in smaller cases there may be insufficient financialincentivefortheretobeacommitteeformed.Thisnegatesthepotentially importantrolethecommitteehasinChapter11proceedings.


Control passes to an insolvency practitioner (the adminis-trator)onhisappointment.Thedaytodaymanagementofthecompanyisconductedbytheadministratorwhoactsasagent of the company (and without personal liability). Theadministrator’spowersaresetoutintheInsolvencyAct1986.Theadministratorisalsoan‘officer’ofthecourtandassuchmustactingoodfaith.Thedirectorsowestatutorydutiestoassisttheadministrator.

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6. BankruptcyCodeparagraph110�-110�

7. BankruptcyCodeparagraph110�(a)

1�

Comment

Opiniondivergesoverwhoisbestplacedtorunthecompany(presumingthereisnotmismanagementordishonesty).Itisarguablethatmanyinsolvencycasesarecausedbysomeweaknessinmanagement.Moreover,thehistoricallinkbetweentheinsolvencytothedisplacementofmanagementisverystrong.Thislinkcontinues,inpart,throughtheapplicabilitytoUKofficersanddirectorsoftheconceptofwrongfultradingandcivilliabilityforthedebtsincurredbythecompanyinfinancialdistress,suchthattheUKinsiststhataninsolvencypractitionerbeincontrol.Ironically,theUKhasnotreallyhadexperiencewithsubstantivestandalonereorganizationsandperhapsthenewlegislationwillhighlightwhetheraninsolvencypractitionercanmanageabusinessbacktohealthandreorganization.

However,thealternativeistoidentifythemanagementweaknessandintervenewithexpertadvisorsorhelpwhichinmanywaysmirrortheskillsoftheinsolvencypractitioner.PerhapsthepresumptioninfavourofadebtorinpossessionoperatesasintendedonlyinthecontextoftheintendedlevelofcreditorandcourtoversightinChapter11.ThereisnocomparabledaytodayoversightbythecourtorcreditorsintheUK.Theinsolvencypractitioneristhecreditors’oversight.

IntheUS,debtorinpossessionmanagementcertainlyhasconsiderableincentivetomanagetheoperationsandbusinesswell.Otherwisecreditorswillseektoterminatethedebtor’sexclusiverighttofileaplanandfiletheirownplanormovetoconvertthecasetoaliquidationunderChapter7.

ThelossofcontrolbydirectorsintheUKmayexplainwhyitismuchmorecommonintheUSforthedirectorstofileforChapter11,wheredirectorswillcontinuetoberesponsibletoallconstituents,includingequity,andmayacttomaximizethevaluesforall,includingnegotiatingonbehalfofexistingequity-holders.USdirectorsknowthatfilingforChapter11willsafeguardtheirposition,providethemwiththeexclusiverighttoproposeaplanorsaleofassets,whileprovidingthecompanytheprotectionofChapter11.ItisoftencriticaltotheoutcomethatacompanyseekChapter11reliefearlyenoughtoeffectasensiblereorganizationratherthanconsumeitsbalancesheetandexhaustthepotentialforreorganization.InsomerespectsthepresumptioninfavourofadebtorinpossessionfurthersthereorganizationobjectivebynotpenalizingmanagementforseekingreliefunderChapter11.

ThepotentialforUKdirectorstobepersonallyliableforlossessufferedbycreditorsasaresultofthecompanycontinuingtotradewhileitwasinsolvent(Section�14oftheInsolvencyAct1986)providesanincentivefordirectorstofileforadministration,despitetheirresultinglossofcontrol,asdoingsomayrelievethemofpotentialpersonalliability.

IthasbecomeroutineinlargeChapter11casestoinduceexistingmanagementtoremainwiththecompanythroughoutthecourseofthereorganizationprocessbyofferinggenerouscompensationandseveranceincentives.TheBankruptcyCodewasamendedin�005torestrictsignificantlythecircumstancesunderwhichsuchincentivescanbegranted.Atthisjuncture,itremainstobeseenwhatimpactsuchrestrictionswillhaveontheinclinationofpre-bankruptcymanagementtoremainatthehelmafterthecompanyfilesforChapter11protection.

14

f ContraCts


Thedebtorortrusteemayassumeacontractorleaseevenitifcontainsaclausethatprovidesforterminationintheeventofinsolvency,providedthedebtorcuresanydefault,andifthedebtorhadbeenindefault,providesadequateassuranceoffutureperformancebyitselforitsassignee.Alternatively,thedebtormayrejectanysuchleaseorexecutorycontract,givingrisetobreachasofthepetitionday,leavingthenon-debtorparty to such lease or contract with a prepetition claim forbreach.Certainunsecuredclaims,suchasthoseoflandlordsandexecutives,arelimitedbytheBankruptcyCode.

Thetrusteeorthedebtorinpossessionhasthevaluableabil-ity to extract value from favourable contracts by assumingandthenassigningthesecontractsregardlessofwhetherthecontractsthemselvesprohibitorconditionsuchassignment.

Specialrulesandexceptionsapplytocertainkindsofcon-tracts,includingcollectivebargainingagreementsandintel-lectualpropertyassignments.

Comment

Chapter11providesthedebtorwithwide-rangingandvaluablepowerswithwhichitcandisclaim,adoptorassigncontracts.Thispower,especiallywhencombinedwiththeabilitytosellassetsandborrowmoney,enablesthedebtorinpossessiontoaddressitsbusinessandoperationalissues,includingitsrelationshipwithunionsanditspensions.TheUKadministrationprocedurehasnoequivalent.


Thereisnopowertodisclaimonerouscontractsforanadmin-istrator(unlikealiquidator) intheUK,andthemakingofanadministrationorderdoesnot,of itself, terminateacontractunlessthecontractprovides.

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g proposals to Creditors


Forthefirst1�0daysaftertheorderforreliefonlythedebtor(if there is no trustee) may propose reorganization plans.Thedebtoralsohasanexclusiverightfor180daysfromthepetitiondate inwhichtosolicitacceptancesfromimpairedcreditorsandshareholders.Thecourtmayextendorreducetheexclusivityperiodforcause,butinnocasemorethan18monthsfollowingtheChapter11filingdate.Aftertheendofthisperiodthecreditors’committeeoranyindividualcreditorcanproposeitsownreorganizationplan.

Before solicitation of approval for the plan, the debtor ortrusteemustprepareadisclosurestatementandhaveitap-provedbythecourtascontainingadequateinformation8toallowareasonablehypotheticalcreditor tobeabletocon-sidertheplan.

At least �5 days’ notice of the hearing to consider the dis-closure statement must be given to creditors9. If the courtapprovesthestatementitwillalsofixvotingproceduresandsetaconfirmationhearingdateonatleast�5days’noticetocreditors. As a practical matter once a plan is timely filed,exclusivityislikelytobeextended.Thisismorelikelyifthedisclosure statement has been approved and the plan hasbeensentoutforvote.

Chapter11 requirescreditorstobedesignated intoclassesandforeachclasswhoserightshavebeenimpairedtovoteinfavourbyamajority innumberandtwo-thirds inamountofthoseactuallyvoting10.Theminorityisboundbytheclassvote,providedthattheplanprovidedtoeachcreditor isatleastwhatitwouldhavereceivedinaliquidationofthedebtor.Thisisthe“best interest”test.

The classification of creditors is based upon the premisethatclaimsthataresubstantiallysimilarshouldbeclassifiedtogether.Itiswellestablishedthatsecuredcreditorsholdinglienswithdifferentprioritiesonthesamecollateralaretobeseparatelyclassified.Asageneralruleunsecuredcreditorsareclassifiedinoneclass.Theremay,however,bereasonswhycertainunsecuredcreditorsshouldbetreateddifferently.Somevariationinplantreatment,asamongcreditorshavingaparipassurightagainstthedebtor,ispermitted,providedthatsuchdifferencedoesnot“unfairly discriminate”againstaclassofcreditors.Generally,theclassificationschemeispartofthedebtor’splanproposal. Therehasbeenlitigationre-gardingclassification,primarilyinvolvingthedeficiencyclaimofasecuredcreditor.

ConfirmationofaChapter11planrequiresthattherebecashtopayadministrativeexpensesandmostpriorityclaims,andtomakethecashpaymentsprovidedforintheplan.


Within 8 weeks of the administrator’s appointment (or suchlongerperiodasthecourtorcreditorsmayallow),theadmin-istratormustpresenthisproposalsforachievingthepurposesoftheadministrationtoameetingofcreditors.

Themeetingmayaccept,rejectoracceptwithmodificationstheproposals. Anymodificationsmustbeapprovedbytheadministrator.

Acceptance of the proposals requires a simple majority invalueofthosecreditorspresentandvoting,althoughareso-lutionwillnotbepassedagainstthewishesofamajorityofnon-connectedcreditors.Iftheproposalsareaccepted,withorwithoutmodifications,theadministratormustmanagetheaffairsofthecompanyinaccordancewiththoseproposals.Iftheproposalsarerejected,thenthecourtmaydischargetheadministration,ormakesuchotherorderasitthinksfit.Anadministrationwillexpireafter1�monthsunlessthecreditorsconsenttoanextension(uptoamaximumof6months)orthecourtmakesanorderextendingtheadministration.

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8. BankruptcyCodeparagraph11�5(a)(1)

9. BR�00�(b)

10. BankruptcyCodeparagraph11�6(c)

16

Only those creditors who are going to have their rights im-paired(modified)bytheplancanvote.Oncethevotinghastakenplacethecourtwillconsiderwhetherornottoconfirmtheplaninthelightofthevotes.Ifthereisadissentingclassofclaimsandatleastoneclassofimpairedclaimsthathasaccepted the plan, the plan proponent may neverthelessrequestconfirmationoftheplaniftheplanconformstothe“absolute priority”ruleandis“fair and equitable”withrespectto the dissenting class and all junior classes of claims andinterests.Whenthecourtconfirmsaplaninsuchacaseitisknownasa“cramdown”.

Withrespecttoaclassofunsecuredcreditors,aplanisfairandequitableonlyif(i)suchclassreceivesfullvalueforitsclaims or (ii) no junior class receives or retains any value.Hence,absentfullsatisfactionofaclassofdissentingunse-curedclaims,therecanbenovaluedistributedorretainedbyanyjuniorclaimorinterest.Anovotebyaclassofunsecuredcreditorsusuallymeanswipingoutequity.

Once the plan is confirmed it binds all creditors and thepropertyvestsinthedebtorcompanyclearofallprepetitionclaims(andsubjecttoanyofthetermsoftheplan11).Whereadebtorisunabletoconfirmaplan,theChapter11casemaybedismissedorconvertedtoaChapter7case.12

Comment

Inbothjurisdictionssomelevelofcreditorconsentisrequiredtotheproposals.TheUSvotingrequirementsaremuchmorecomplex,andcourtapprovalisrequired.Thescopeoftheplanhoweverisverybroadandcanalsoaddresssettlementsoflitigation,assetsales,rejectionofcontracts,etc.Chapter11alsohasprovisionswhichintegratesecuritiesandinsolvencylaws.Theseprovisionspermitdebtorstoissuepublicsecuritiesunderaplan,subjecttocertainexceptions,thatareexemptfromtheregistrationprocessuponissuanceandsubsequentsale.IntheUS,taxlawsarealsointegratedwithChapter11.Thisprovidesanabilitytomonetizetaxbenefits.InsomerespectsthisresultcanbecapturedintheUKthroughanadministrationfollowedbyaschemeofarrangement

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11. BankruptcyCodeparagraph1141

1�. BankruptcyCodeparagraph11�1(b)(c)

17

h Costs


TheUSsystemrequirescourtinvolvementandtheassociatedhighcoststhisbrings.Thecreditors’committeemayalsoap-pointadviserswhomayberemuneratedfromtheestateofthedebtor.ThepotentialexpenseoftenencouragesconstituentstotrytoreachaconsensusoutsideofChapter11andcom-mencethecaseasapre-negotiatedorprepackagedChapter11case.


Therearegreatercostsincurredinusinganinsolvencyprac-titioner(andhis/her“team”)(intheUK),ratherthantheexist-ingmanagementofthecompany(intheUS).Thecompany’screditorsandmemberswillalsoineffectpayforthe‘learningcurve’ of the insolvency practitioner in managing the busi-ness.

Comment

Atatimewhenthecompanyissufferingseverefinancialproblems,thelegalandothercostsassociatedwiththeattemptedrescueusingtheavailablelegalprovisionsshouldnotsuffocatethecompanyfurtherandpreventsurvival.

Inbothcasesthecostsinvolvedmeanthatsmallcompaniesmaynotbeabletoattemptarescue.

18

i exit roUtes


Plan confirmation discharges the debtor’s pre-existing ob-ligationstounsecuredandsecuredcreditorsotherthanasprovidedforintheplan,irrespectiveofwhethertheyactuallyaccepteditthemselves.

IncaseswhereaplanisnotconfirmeditisusualforthecourttoorderconversiontoChapter7bankruptcyproceedings.13However,asthereisnoinsolvencyrequirementunderChapter11,failuretoconfirmaplanwillnotnecessarilyleadtoliqui-dation.Thereisnoprohibitionagainstre-filingforChapter11(except if the debtor is an individual, in which case certainrestrictions apply). This istrue even ifacase isdismissed,oreven ifacaseendswithaconfirmedplan. ThesecondChapter11case,or‘Chapter��’asitissometimescalled,isnotunusual.


UndertheInsolvencyAct1986thereareanumberofwaysinwhichtheadministrationcanceasetohaveeffect:

1. effluxionoftimeafteroneyear,unlessextended;

�. onadministrator’sapplicationwherethepurposeoftheadministration has been achieved, in which case theadministratorwillseektoexittheadministrationthroughaschemeofarrangementorcompanyvoluntaryarrange-mentifthereareremainingassetsfordistribution.Ifnot,theadministratorwillplacethecompanyintoliquidationordissolution;or

�. onadministrator’sapplicationifheconsidersthatthepur-poseoftheadministrationcannotbeachievedinwhichcasethecompanyisplaceddirectlyintoliquidation.

_______________

1�. BankruptcyCodeparagraph111�

19

J finanCes


The Bankruptcy Code gives lenders incentives to providefinance to the debtor (called ‘Debtor in Possession’ or ‘DIP Financing’).Thelendermaybegivenalienoverassetsthatarenotpledgedtootherlenders.Thecourtmayalsoautho-rizelienssuperiortocertainpriorityclaimsinthebankruptcyprocessorevengrantnewseniorliensoncollateralalreadypledgedtoanotherparty,subjecttoensuringthattheexist-inglenderhas“adequate protection”forthevalueofitspre-bankruptcyliens.


The company is more likely to continue to look to its exist-inglendersorotherfinanceprovidersforcontinuedsupport.Whilstanadministratorhasthepowertoborrowandencum-berassets,nospecialpriorityisgiventopost-administrationlenders.

Comment

Chapter11fundingismoreadvancedandimaginativethanintheUK.Withouttheintroductionofequivalentprovisionsgoverningprioritylending,itisquestionablewhetherthenewreformswillleadtomorecorporaterescues.

�0

k sUmmary


No court discretion over order for relief under Chapter 11 -legalrightofthedebtor.

Easeofaccesstotheprocedure.

Technically,althoughnopartyhasvetopowers,theprohibitiononusingcashcollateralwithouttheconsentofthelienholderorcourtapprovalgivesanundersecuredcreditorwithliensoncurrentassetssignificantleverageinChapter11casesthoughthenegotiationofthe“cash collateral”order.

ImpositionofbroadautomaticstayuponthefilingofaChap-ter 11 petition, lasting until confirmation of a plan, gives thedebtorvirtualassuranceofastayforatleasttheperiodthatthedebtorhastheexclusiverighttofileaplan,i.e.1�0days.

Thedebtorremainsinpossession.

Courtapprovalisrequiredforanyactionoutsidetheordinarycourseofbusiness:salesofassets,assumptionorrejectionofcontracts,borrowingmoney,etc.

Debtorgivenexclusiveperiodof1�0days(asitmaybeex-tendedforcause)tonegotiateplanwithcreditors.

Powerto‘cherry-pick’contractsandleases.

Planacceptedbyclassvoteandmaybeconfirmedbythecourt uponrequest ofaplanproponent provided that(i)atleastoneclassofimpairedcreditorsvotesyes;(ii)theplanis“fairandequitable”toanydissentingandjuniorclasses;(iii)provideseachcreditorat leastwhat itwouldhavereceivedinliquidation;(iv)isfeasible;and(v)meetstheotherrequire-mentsofaplanandChapter11.

Anapprovedplanbindsallcreditorsandequityholders.


Canappointoutofcourtorthroughcourt,inwhichcaseitisinthecourt’sdiscretiontograntanadministrationorder.

Moratoriumtriggeredonfilingofapplication(courtroute)orfilingofappointmentdocuments(outofcourtroute).

Insolvencypractitioner(usuallyanaccountant)appointedtomanagecompany.

Lossofcontrolbydirectors.

Onceinadministrationthecompany’sbusinessisconductedalmostentirelyoutsidecourtsupervision.

Costs.

Proposals accepted when majority of creditors vote in fa-vour.

Administratormanagesthecompanyinaccordancewiththeapprovedproposals.

Comment

IntheUSthereisarobustmarketforsecuritiesissuedbytroubledcompanies,aswellasforbankdebtoftroubledcompanies.Thereare“distressed investors”activeinthedebtsandsecuritiesoffinanciallytroubledcompanies,includingcompaniesinChapter11.Thelevelanddurationofthismarketconfirmsthatdistressedinvestorsprovideliquidityandoptionalitytobanksandparbuyersofsecurities,aswellastradecreditors.Infact,theycreateamoreefficientmarketplacefordistressedsecuritiesanddebtwhileprovidingflexibilitytodebtorsandcreditors,alike.Often,distressedinvestorsseekrecoveryinexcessoftheirinvestment,usuallyatafractionoffaceorparvalue.DistressedinvestorshavepositivelyinfluencedtheChapter11process.Theyoftenbringflexibilityandcreativitytotheprocessthatimprovesthecompositionorextensionofdebts.Theyalsobringtimepressureandmarketsensitivitytotheprocess,therebycreatingproperincentivesforallparties.However,everyconstitu-enthasadifferentconceptof“success”.Forsome,thetradingvalueofthereorganizedsecuritiesisafocus.Forothers,itistheprospectforcontinuingbusinessoritistheadventofahealthyborroweroremployer.

EmpiricalevidencebasedonallChapter11casesfiledintheUSmaybemisleadingbecauseitincludesnumeroussmall,closely-heldcompanieswhichwereessentiallyinliquidationatthetimeoffiling(so-called‘deadonarrival’companies).Hence,certainstatisticsthatsuggesttheoverwhelmingmajorityofUScasesendinaliquidation,maynotreflecttheChapter11experienceofthefinancialinstitutionsoverall.Theirexposureisoftenconcentratedinlargecompaniesandthelikelihoodofaconfirmedplanisgreaterinsuchcases.

�1


and the resCUe proCedUre in franCe

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5. a plan which, in part, contemplates a litigation trust topursueandprosecutecausesofactionbelongingtothecompany


the rescue procedure, france

TheRescueProcedureisoneofthemajorbreakthroughsoftheRescueActdated�6July�005,whichcameintoforceon1January�006andreformedthetreatmentofbusinessesindifficultiesunderFrenchLaw.Itaimstohelpdistressedcom-panies to overcome their difficulties thanks to a procedurewhich imposes a court supervision which is lighter than intraditionalproceedingssuchasaJudicialRestructuring(“re-dressement judiciaire”)oraJudicialLiquidation(“liquidation judiciaire”)proceedings.

According to the Rescue Act, the purpose of the RescueProcedure,whichcanonlybetriggeredwhen“there exists a serious likelihood of saving the business”,is“to facilitate the reorganization of the business in order to allow the continua-tion of the economic activity, the maintenance of employment and the continuation of activities”.Indeed,theRescueProce-dureismeanttofavor,atanearlystageofdifficulties,amoreconsensualrestructuringthaninthecontext ofatraditionalrestructuringprocedure,whilestillprovidingforastayofpre-insolvencyjudgements,actionsandpayments.

Oncestarted,theRescueProcedureshouldleadtotheprepa-rationbythemanagementofthedebtorofaplancalledtheRescuePlan(“plan de sauvegarde”).Aftertheplanhasbeenproposedtothecreditorsandvotedonthecourtadoptsit.

TheRescueProcedurenormallyprovidesforareductionofthedebtsofthecompanyandapaymentoftheuncancelledportion ofthe liabilities overtheduration oftheplan,whichcanbeaslongastenyears.Inaddition,varioussharecapitalandliabilityrestructuring(suchasdebttoequityswaps, in-comingnewinvestors,etc.)canbebuiltintotheplan.

Comment

TheobjectiveofbothChapter11andtheRescueProcedureisthecreationofabreathingspaceduringwhichthedebtorcom-panyisgiventimetoformulateplansforreorganization.

��

B proCedUre








UsuallyitisthecompanynotthecreditorswhofileforChapter11protection(seeSectione:Controlofthecompany).How-ever,securedlendersmayeffectivelyforceacompanytofileforreliefunderChapter11bythreateningtoenforceliens.


ConditionstomeettobeeligiblefortheRescueProcedure:

1. Conditionsrelatingtothelegalformofthedebtor:

Exceptforbanksandinsurancescompanies,virtuallyallentitiescarryingoutabusinessactivitycanbesubjecttotheRescueProcedureregardlessoftheirlegalform.

Therefore:

(1) private lawentities,suchascompaniesorpartner-ships;

(�) merchants;

(�) craftsmen;

(4) farmers;or

(5) individualsrunninganindependentprofessionalac-tivity(suchasphysicians,attorneys,accountants…);

canallrequesttheapplicationoftheRescueProcedure.

However, any debtor already subject to Rescue Proce-dure,judicialrestructuringorliquidationproceedingscannotbeeligibletoanewRescueProcedure,iftheopera-tionsandtheplaninstitutedbysuchproceedingshavenotbeenterminatedorclosed.

�. Conditionsrelatingtothefinancialconditionofthedebt-or:

TheRescueProcedureisavailabletodebtorsfacingdif-ficultiesthattheyareunabletoovercomeontheirownorthatwouldleadtoacessation des paiements,character-izedasastateofaffairswhenthedebtorisnotabletopayitsmatureddebtswithitsavailableassets.Howevereligibledebtorsmustnotbeincessation des paiementswhenfilingapetitionforaRescueProcedure.

Filingofthepetition:

ThedebtormustfileapetitionbeforetheCommercialCourt(“tribunal de Commerce”)ifitconductsacommercialactiv-ityorbeforetheCivilCourt (“TribunaldeGrandeInstance”)inothercases. Theprocedure canonlybe initiated bythemanagement of the debtor which is facing difficulties. Inotherwords,theRescueProcedureisonlyavailablebywayofvoluntarypetitionfiledbythedebtor,andcannotbestartedbycreditors.

ThecourtshallissueanorderofficiallyopeningtheprocedureafterhavingheardordulysummonedtoafirsthearingintheJudge’s chamber (“Chambre du Conseil”), the debtor, therepresentativesofthework’scouncil(ifabsent,theemployee’sdelegates) and any person that the court deems useful tohear.

Thecourtwillthenappointanadministrator(“administrateur”)whose mission is to supervise the company’s managementandajudicialagent(“mandataire judiciaire”)whowillactonbehalfofthecreditorsandrepresenttheirinterests.

TheRescueProcedurebeginswithasix-monthobservationperiod (“période d’observation”), during the early part ofwhichanassessmentismadebytheadministratorastothefinancial,economicandemploymentsituationofthedebtorfor the purpose of determining whether or not the debtorcanberescued.Wherenecessary,thecourtcanextendtheobservationperiodupto18monthsinorderforthedebtortofinalizeandimplementtheRescueProcedure.

�4

Indeed,themaingoaloftheobservationperiodistoascertainwhetherthedebtor is likelytobesuccessfullyrestructured,and,whenthat isthecase,thedebtor, incollaborationwiththe administrator, must create a Rescue Plan which will besubmittedtoacreditors’voteforapproval.

ThisRescuePlanisveryflexibleandmaycontainprovisionsdealingwith:

1. theemployeesand,asthecasemaybe,areductionintheworkforce;

�. amendmentstotheby-lawsofthedebtor;

�. thegrantingofadditionaladvancesandfacilitiesbythirdpartiesand/orshareholders;

4. debt-equityconversions;

5. write-offofclaims;

6. thesaleofoneorseveralactivities;

7. somemodificationtothesharecapital;

8. thereschedulingandreductionsofcertaindebts;or

9. alock-upofsomeofthedebtor’sassets.

�5

C moratoriUm


Immediatelyuponthefilingofabankruptcypetition,amora-toriumor“automaticstay”staysalllitigationandpreventstheenforcementofjudgementsandofsecuritywithoutleaveofthecourt.14Thisincludesstayingthecontinuationofanyex-istingactionsthatwerecommencedbeforethefiling.

Apartywhotakesanyactioninviolationoftheautomaticstayriskscontemptofcourtactionsandpenalties.Also,anyactdoneincontraventionofthestayisretroactivelymadevoidorvoidablebythecourt.Thestayiseffectiveduringtheentiretimethecaseispendingbutcreditorsandotherpartiesmaymakemotionstoliftormodifythestay.15

TheBankruptcyCodegivesthedebtortheexclusiverighttoformulateaplanofreorganizationfor1�0daysfromthedateoffiling.This“exclusivityperiod”canbeextendedifsufficientreasons are established, but no extension can be grantedbeyond18monthsaftertheChapter11filingdate.16Inmostinstancesthedebtorcompanywillfirsttakeactionstostabilizeitsoperationsandformulateitsbusinessplanandthereafterproceedtoformulateaplanofreorganization.


DuringaRescueProcedure,allpre-petitioncreditorsaresub-jecttoastayresultinginaprohibitioninpursuinganyclaimsorinitiatinganylegalactionsagainstthedebtor.

Thedebtorisprohibitedfrompayingpre-petitionreceivablesandcreditors.

However,notwithstandingthestay,receivableswhicharose(i)aftertheopeningoftheprocedureand(ii)eitherasacom-pensationforservicessuppliedtothedebtorforthepurposesofitsoperationsorwhicharenecessaryforthepurposesoftheprocedureortheobservationperiod,willbepaidonma-turity.Thoseareindeednecessaryforthedebtortocontinueitsoperationsduringtheobservationperiodandsafeguarditschancetorestructuresuccessfully.

Itshouldbenotedthatthestay,however,willnotpreventtheset-offofpre-petitionandpost-petitionliabilitiesas longastheyaredeemedtobeconnectedtoeachother(“créances connexes”).

Comment

Thestayofallpre-petitionclaimsisvitaltoasuccessfulRescueProcedure.Indeed,thepurposeoftheRescueProcedureistogivethedebtora“breathingspace”duringthetimeitisencounteringdifficulties.

_______________


15. BankruptcyCodeparagraph�6�(d)

15. BankruptcyCodeparagraph11�1

�6

d lifting the stay


Generally, an affected party can apply to court at any timeafterthefilingofabankruptcypetitionforrelief.Oncesuchamotionismadethestaywillexpireafter�0daysunlesswithinsuchtimeacourtcontinuesthestaypendingafinalhearingorthemovantconsentstosuchcontinuationpendingahear-ing.Thecourtmayterminatethestay,modifyitorsubjectittoconditions.17 Thecourtmaylift thestayforcause,but isgenerallyreluctanttodosoduringtheinitialstagesofaChap-ter11casebecauseofthegeneralpresumptionthatadebtorshouldbegivenachancetoreorganizeandprepareaplan.


1. a court may lift or modify the stay upon a showing of“cause”,whichincludesthelackofadequateprotectionofaninterestinproperty,or

�. withrespecttopropertysecuringalien,(i)thestaywillbeliftedifthedebtorcompanydoesnothaveequityinsuchpropertyand(ii)suchpropertyisnotnecessarytoaneffectivereorganization.TherearealsospecialrulesforsingleassetrealestatecasesandChapter11debtorswho are individuals. Also, Further, the automatic staymaynotstayineffectwhenappliedtocertainprotectedcreditors,suchascertainaircraftlessorsandlendersandvessellessorsandmortgagees.Inthiscontext,alackofadequateprotectionfocusesonwhetherthecreditorisbeinginjuredbycontinuationofthestaydueto,amongother things, a deterioration in value of its collateral orconsumption of collateral by the company. To counterthispotentiallynegativeimpactofthestay,adebtorcom-panymustprovideadequateprotection,whichmaytaketheformof

�. periodiccashpaymentstocoveranydepreciationduringthestay;

4. additionalorreplacementliensorsubstitutesecuritytotheextentofanydeteriorationinvalue,andotherreliefthatwillamountto‘indubitableequivalent’,aflexiblyinter-pretedconcept.18


French Law does not provide for any lifting of the stay asall creditors must be treated equally as a matter of publicpolicy.

_______________

17. BankruptcyCodeparagraph�6�(d)(�)


�7

e Control


InChapter11,whethervoluntaryorinvoluntary,thereisapre-sumptionthatcontrolremainswiththedebtor’smanagementthroughtheconceptof“debtor in possession”(“dip”)(subjectto certain safeguards regarding disposal of assets outsidetheordinarycourseofbusiness).Tomanycommentatorsthissmacksofleavingthefoxinchargeofthehenhouse.Never-theless,thereareinstanceswherethedifficultyisduetoexog-enousandunexpectedevents(e.g.Texaco).Moreimportantly,perhaps, is the impression that management provides themosteconomicalandefficientmeanstoreorganizeundertheoversightofthebankruptcycourt,andcreditors’committees.Significantly,manycompanieshirespecialfinancialadvisorsorturnaroundmanagementconsultantstoassistthemintheirrestructuring. Often the creditors, especially the securedcreditors,willconditiontheircooperation.onthehiringofsuchanexpertorchiefrestructuringofficer.Suchconsultantsorspecialistsneverthelessremainsresponsibletotheboardofthecompany,thebankruptcycourtandthecreditors.Oftentheywillbeinplaceaspartofanyoutofcourtrestructuring.AlthoughthereisaBankruptcyCodeprovisiontoappointatrustee,suchanappointmentisrareandonlyhappenswherethereissomesuspicionofmisfeasance/fraud/wrongdoing/risktoassets,orbecauseitistheinterestsofcreditors.


Assoonasispracticableaftertheorderforrelief,theUnitedStates Trustee (a government official with a duty to protectallcreditors)appointsacreditors’committee,usuallymadeupofthesevenlargestunsecuredcreditorswillingtoserve.19Thesupervisoryroleandpowersofthecommitteearemoreextensivethaninsomejurisdictions,andtheycanincurtheexpenseofattorneysandotheradvisorswithcourtapproval.Suchexpensesarefundedoutoftheestateofthedebtor.�0TheUnitedStatesTrusteemayalsoappointothercommitteesasneeded(e.g.aTortClaimantsCommittee,aBondholdersCommittee,etc.).Althoughthecreditors’committeemayem-ployadvisersandmayberemuneratedfromthebankruptcyestate, in smaller cases there may be insufficient financialincentivefortheretobeacommitteeformed.Thisnegatesthepotentially importantrolethecommitteehasinChapter11proceedings.


Themanagementwillremaininpossessionandwillthereforecontinuetoactonbehalfofthedebtor.Thecourtappointedadministratorwillonlyhavelimitedauthorityinmostcases(su-pervisionroleonly)butmay,incertaininstances,berequestedbythecourtand/orthemanagementtoassistthedebtorinallorsomeofthemanagementoperations(insuchacase,boththesignaturesoftheadministratorandthemanagementwillbenecessarytobindthecompany).

Comment

TheprincipleunderwhichthemanagementofthedebtorstaysinpossessionisoneofthemajorfeaturesoftheRescueAct.SincetheRescueProcedurecanonlybeinitiatedbyavoluntarypetitionofthedebtor,themanagementshouldbeencouragedtohaverecoursetothenewRescueProcedureandrestructurethedebtorearlierbybeinggenerallyincontroloftheentireprocedureratherthanbeingdisplaced.

_______________


�0. BankruptcyCodeparagraph110�(a)

�8

f ContraCts


Thedebtorortrusteemayassumeacontractorleaseevenitifcontainsaclausethatprovidesforterminationintheeventofinsolvency,providedthedebtorcuresanydefault,andifthedebtorhadbeenindefault,providesadequateassuranceoffutureperformancebyitselforitsassignee.Alternatively,thedebtormayrejectanysuchleaseorexecutorycontract,givingrisetobreachasofthepetitionday,leavingthenon-debtorpartytosuchleaseorcontractwithaprepetitionclaimforbreach.Certainunsecuredclaims,suchasthoseofland-lordsandexecutives,arelimitedbytheBankruptcyCode.




Theadministratorisentitledtodecidewhetherornotthecon-tractsenteredintobythedebtorbeforetheRescueProcedureshouldbeassumedorrejected.Iftheadministratorelectstoassume contracts, he must ascertain beforehand that thedebtor’soperationswillgeneratesufficientcashtopayanyamountsthereunderastheybecamedue.

If theadministratorhasnotgivenhisopiniononacontract,thecontractshallbeautomaticallyterminatedonceaformalnoticehasbeensenttotheadministratorbytheco-contract-ingpartyandhasremainedunansweredforonemonth.

Specialrulesandexceptionsapplytocertainkindsofcon-tractsincludingworkandleasecontracts.

Comment

TheRescueProcedureoffersthedebtorinpossessionawide-rangeofvaluablepowersandprerogativesallaimedatfacilitatingtheearlyrestructuringofthedebtor.

�9





At least �5 days notice of the hearing to consider the dis-closurestatementmustbegiventocreditors22. Ifthecourtapprovesthestatementitwillalsofixvotingproceduresandsetaconfirmationhearingdateonatleast�5daysnoticetocreditors. As a practical matter once a plan is timely filed,exclusivityislikelytobeextended.Thisismorelikelyifthedisclosure statement has been approved and the plan hasbeensentoutforvote.

Chapter11 requirescreditorstobedesignated intoclassesandforeachclasswhoserightshavebeenimpairedtovoteinfavourbyamajority innumberandtwo-thirds inamountofthoseactuallyvoting23.Theminorityisboundbytheclassvote,providedthattheplanprovidedtoeachcreditoratleastwhatitwouldhavereceivedinaliquidationofthedebtor.Thisisthe“best interest”test.




Withina�0-dayperiodafterthebeginningoftheprocedure,andifthedebtorhasnetsalesexceedingEUR�0millionoremploysmorethan150employees,theadministratorhastosetuptwocreditors’committeestowhichtheRescuePlanwillbesubmittedforapproval.

The first committee is composed of credit institutions thathavelentmoneytothedebtor.

The second committee is composed of the main suppliersofthedebtor.Onlysupplierswhosereceivablesexceed5%oftheaggregateamountofthedebtor’sliabilitiesshouldbemembersofthecommitteeunlesstheadministrator,whohasthe option to allow other suppliers below this threshold tojointhecommittee,hasdecidedtodosoinordertogivetherestructuringabroaderbasis.

The Rescue Plan has to be submitted to both committeeswithintwomonthsoftheircreation,suchperiodbeingrenew-ablefortwoadditionalmonthsattherequestofthedebtorortheadministrator.Oncesubmitted,theplanmustbeap-provedorrejectedbythecommitteeswithina�0-dayperiodbyamajorityatleastequaltothetwothirdsoftheaggregateamountofthedebtor’sindebtednessandtwothirdsofeachcommittees’members.

Should the plan be rejected or the committees fail to votewithintheabove-mentioned�0-dayperiod,theplanwillhavetobesubmittedtothecreditorsonanindividualbasis.

_______________

�1. BankruptcyCodeparagraph11�5(a)(1)

��. BR�00�(b)

��. BankruptcyCodeparagraph11�6(c)

�0



Oncetheplanisconfirmeditbindsallcreditorsandtheprop-erty re vests in the debtor company clear of all prepetitionclaims(andsubjecttoanyofthetermsoftheplan�4).Whereadebtorisunabletoconfirmaplan,theChapter11casemaybedismissedorconvertedtoachapter7case.�5

Comment

Inthesejurisdictions,somelevelofcreditorconsentisrequiredfortheproposals.

_______________

�4. BankruptcyCodeparagraph1141

�5. BankruptcyCodeparagraph111�(b)(c)

�1

h Costs


TheUSsystemrequirescourtinvolvementandtheassociatedhigh costs this brings. The creditors’ committee may alsoappointadvisersthatmayberemuneratedfromtheestateofthebankruptcy. TheexpensepotentialoftensuggeststhatconstituentstrytoreachaconsensusoutsideofChapter11andcommencethecaseasapre-negotiatedorprepackagedChapter11case.


TheFrenchRescueProcedurerequiresalightcourtinvolve-mentandtheassociatedcostsshouldthereforebelimited.

ADecreeofDecember��006providesthattheadministra-tor’sfeescannotexceedEUR100,000andthejudicialagent’sfeescannotexceedEUR75,000.

��

i exit roUtes


Plan confirmation discharges the debtor’s pre-existing obli-gations to unsecured and secured claimants other than asprovidedforintheplan,irrespectiveofwhethertheyactuallyaccepteditthemselves.

IncaseswhereaplanisnotconfirmeditisusualforthecourttoorderconversiontoChapter7bankruptcyproceedings.�6However,asthereisnoinsolvencyrequirementunderChapter11,failuretoconfirmaplanwillnotnecessarilyleadtoliqui-dation.Thereisnoprohibitionagainstre-filingforChapter11(except if the debtor is an individual, in which case certainrestrictions apply). This istrue even ifacase isdismissed,oreven ifacaseendswithaconfirmedplan. ThesecondChapter11case,or‘chapter��’asitissometimescalled,isnotunusual.


IftheRescueProcedurefails,thecourtmayeither:

1. orderthedisposalofpartofthebusiness;

�. openaRestructuringProcedureofthedebtor;or

�. ifthedebtorisnotviable,aLiquidationProcedure.

If, during the implementation of the Rescue Procedure, thedebtorfailstomeetitsobligationsasprovidedforundertheRescue Procedure or becomes unable to pay its debts astheyfalldue(“cessation des paiements”),thecourtmayexofficio,orattherequestofthecreditors,oronapplicationofthepublicprosecutorortheofficerinchargeofsupervisingtheperformanceoftheplan,terminatetheplanandopenajudicialrestructuringorliquidationprocedureiftheconditionsofsuchaprocedurearefulfilled.

Themaximumdurationoftheplanislimitedto10years.

��

J finanCes


The Bankrutcy Code gives lenders incentives to providefinance to the debtor (called Debtor in Possession or DIPFinancing).Thelendermaybegivenalienoverassetsthatarenotpledgedtootherlenders.Thecourtmayalsoautho-rizelienssuperiortocertainpriorityclaimsinthebankruptcyprocessorevengrantnewseniorliensoncollateralalreadypledgedtoanotherparty,subjecttoensuringthattheexist-inglenderhas“adequate protection”forthevalueofitspre-bankruptcyliens.


FrenchLawgrantsaspecialprivilegetothecreditorswhosereceivablesarose(i)aftertheopeningoftheprocedureand(ii)eitherasacompensationforservicessuppliedtothedebt-orforthepurposesofitsoperationsorwhicharenecessaryforthepurposesoftheprocedureortheobservationperiod.Ifsuchcreditorsarenotpaid,theyaregrantedapriorityrank-ingforpaymentwhichranksthemafterthepaymentoftheemployees,thelegalcostsandexpensesandtheconciliationprivilege (“privilege de conciliation”)benefiting tocreditorswho have brought new money to the company during theconciliation proceedings, another early stage restructuringprocess.

�4

k sUmmary


1. NocourtdiscretionoverorderforreliefunderChapter11-legalrightofthedebtor.

�. Easeofaccesstotheprocedure.

�. Technically,althoughnopartyhasvetopowers,thepro-hibitiononusingcashcollateralwithouttheconsentofthelienholderorcourtapprovalgivesanundersecuredcreditorwithliensoncurrentassetssignificantleverageinChapter11casesthoughthenegotiationofthe“cash collateral”order.

4. Imposition of broad automatic stay upon the filing of aChapter 11 petition, lasting until confirmation of a plan,givesthedebtorvirtualassuranceofastayforat leasttheperiodthatthedebtorhastheexclusiverighttofileaplan,i.e.1�0days.

5. Thedebtorremainsinpossession.

6. Courtapprovalisrequiredforanyactionoutsidetheor-dinarycourseofbusiness:salesofassets,assumptionorrejectionofcontracts,borrowingmoney,etc.

7. Debtorgivenexclusiveperiodof1�0days(asitmaybeextendedforcause)tonegotiateplanwithcreditors.

8. Powerto‘cherry-pick’contractsandleases.

9. Planacceptedbyclassvoteandmaybeconfirmedbythe court upon request of a plan proponent providedthat(i)atleastoneclassofimpairedcreditorsvotesyes;(ii)theplanis“fair and equitable”toanydissentingandjuniorclasses;(iii)provideseachcreditoratleastwhatitwouldhavereceivedinliquidation;(iv)isfeasible;and(v)meetstheotherrequirementsofaplanandChapter11.

10. Anapprovedplanbindsallcreditorsandequityholders.


1. AdebtoriseligibleforaRescueProcedureonlyifitisnotinsolvent(“cessation des paiements”)but isfacingdif-ficultieslikelytoresultinsuchcessation des paiements.

�. Theprocedurecanonlybeinitiatedbythedebtor.

�. Themanagementremainsinpossession.

4. An automatic stay applies except for creditors whosereceivablesarose(i)aftertheopeningoftheprocedureand (ii) either as a compensation for services suppliedtothedebtorforthepurposesofitsoperationsorwhicharenecessaryforthepurposesoftheprocedureortheobservationperiod.

5. The Rescue Plan is subject to the main creditors’approval.

6. TheRescuePlancanlastaslongas10years.

Comment

Thecourt’sdecisiontoopentheRescueProcedure ismadepublicthroughseveralofficialpublications. The judgement isrecordedinthepublictraderegistryinthejurisdictionofwhichthedebtorhasitsregisteredofficeandintheBODACC(alegalannouncementspublication).PriortotheopeningofaRescueProcedurethedebtormustbearinmindthattheprocedureisnotconfidential,whichmaysignificantlyalteritscreditworthiness.

�5


and insolvenCy proCeedings in germany

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5. a plan which, in part, contemplates a litigation trust topursueandprosecutecausesofactionbelongingtothecompany

acombinationoftheabove.

insolvency proceedings, germany

Insolvencyproceedings(Insolvenzverfahren)pursuanttotheGerman Insolvency Code are the only judicial proceedingsavailableinGermanyforthebankruptcyofcompanies.TheInsolvencyCodecameintoforceon1January1999andre-placed the three separate legislative regimes previously inforce,theBankruptcyAct(Konkursordnung)andtheCompo-sitionAct(Vergleichsordnung)fordebtorssituatedinformerWestGermanyandtheJointExecutionAct(Gesamtvollstreck-ungsordnung)fordebtorslocatedinformerEastGermany.

Theaimofinsolvencyproceedingsisnottoprotectthecor-porate debtor from its creditors, but to maximize the insol-vencydividendpayabletothecreditors.Toachievethisaim,proceedings may be directed either at a liquidation of thecompany’sbusinessoratareorganizationofthecompanyit-selfbymeansofaplanofrestructuring(Insolvenzplan).Intheeventofaliquidation,thecompany’sbusinessoperationsmaybesoldasagoingconcerntoaninvestororthebusinessmaybewoundupandtheindividualassetssold.TheproceedsofsuchsalesarethenturnedouttothecreditorsinaccordancewiththeregulationslaiddownintheInsolvencyCode.Thelawassumesthatthecreditorsthemselvesareinthebestpositiontodecideonhowtheinsolvent’sassetsmaybeutilizedmostefficientlytosatisfytheirclaimstothelargestextentpossible.Itisthereforethecreditorsthemselveswhocandetermineasagroupthedirectionoftheinsolvencyproceedings.

Usually,insolventlargerbusinessesaresoldasagoingcon-cernbymeansofanassetdealtoaninvestor(übertragende Sanierung). Abetterpurchasepriceisusuallyobtainedforthecreditorsifthebusinessasawholeissoldtoaninvestor.Valueisdestroyediftheindividualassetsofthebusinessaresold since usually only liquidation values can be obtained.Thecreditorswillnormallyonlychoosetowindupthebusi-nessifitcannotbesoldasagoingconcerntoaninvestororrestructuredbymeansofaplanofrestructuring.

Alternativelythecreditorsmayagreeonaplanofrestructuringforthecompany.Suchplanmayprovideformeasurestocuretheinsolvencyofthecompanyandtoallowthecompanytocontinueitsbusiness.Aplanofrestructuringcanalsoprovideforaliquidation,althoughthiscanusuallybeachievedmoreeasilywithoutaplan.

Comment

Apurchaseofthedebtor’sbusinessasagoingconcernininsolvencyproceedingscanprovideanumberofadvantagestoaninvestorwhencomparedtoanordinaryacquisitionoutsideofinsolvency.Ingeneral,thedebtsofthebusinessareleftbehindwiththeinsolvententity.Sincetheinsolvencyadministratorhasextensivepowerstorejectcontractsunfulfilledasoftheopen-ingdate,contractsthattheinvestorwantstoassumeforbusinessreasonsarefrequentlyre-negotiatedandmorefavourabletermsagreedon.Mostimportantly,whileemployeesare,inprinciple,assumedbythepurchaserbyoperationoflaw,insolvencyprovidestheopportunitytorestructuretheworkforceandtonegotiatetermswithtradeunionsthatwouldnotbepossibleinanacquisitionoutsideofinsolvency.

Theplanofrestructuring,whichmaybeusedtorestructuretheinsolventcompanyitselfisafairlynewinstrument,whichwasonlyestablishedbytheInsolvencyCode.Thestructureofproceedingsforplansofrestructuringhasbeeninfluencedsignifi-cantlybyChapter11.Inpractice,plansofrestructuringhavebeenusedinrelativelysmallnumberofcasessofar.Amongthose,however,werelargeproceedingsthatattractedtheattentionofthemedia(Herlitz,IhrPlatz),andwhichmayserveasmodelsinthefuture.

�7

B proCedUre










Insolvencyproceedingscommenceuponanapplicationoftheinsolventcompanyoracreditortotheinsolvencycourt(Insol-venzgericht).Insolvencyproceedingsmayonlycommenceifoneofthefollowinggroundsfortheopeningofproceedings(Eröffnungsgrund)hasoccurred:

1. The insolvent company is unable to meet its paymentobligationsthathavebecomedueandpayable(illiquid-ity,Zahlungsunfähigkeit). This isusuallythecase if theinsolvent company has suspended payments on morethanatemporarybasis.

�. The insolvent company will be unable to meet existingpaymentobligationsasandwhentheyfalldue(imminent illiquidity, drohende Zahlungsunfähigkeit).

�. Finally,insolvencyproceedingscanbecommencedwithrespecttocompanies(includingpartnerships)iftheyare“overindebted”.Theinsolventcompanyisoverindebtedifitsliabilitiesexceedthevalueofitsassets.Thisisnotagroundforopeninginsolvencyproceedingswithrespecttocertainpartnerships.

Ifthecompanyisilliquidoroverindebted,thecompany’sman-agementisobligatedtofileaninsolvencyapplicationwithinamaximumperiodofthreeweeks.Aviolationofsuchdutymayhavesevereconsequences,includingcriminalprosecution.

In case of imminent illiquidity only the company’s manage-ment,notacreditor,mayfilefortheopeningofproceedings.This contributes to an early opening of the insolvency pro-cedureandincreasesthechancesofareorganizationoftheinsolventcompany.

For the period of time from the filing of the insolvency ap-plicationtothecourt’sopeningdecision,bywhichinsolvencyproceedings are formally commenced, so-called openingproceedings(Eröffnungsverfahren),theinsolvencycourtmayimplement all measures that are necessary to secure theinsolventcompany’sestate.Thecourtusuallyappointsanin-teriminsolvencyadministrator(vorläufiger Insolvenzverwalter)who will assist the insolvency court in establishing whetherproceedingscanbeopened.Inaddition,theinsolvencycourtcan order that the management of the insolvent companymustnot,ormayonlywiththeconsentoftheinterimadmin-istrator,disposeofanyassets.

Evenifoneoftheabovegroundsfortheopeningofproceed-ings is established, the insolvency court has to reject theinsolvencyapplicationifthevalueoftheinsolventcompany’sassets is not sufficient to cover the expected costs of theproceedings. It will not reject the application if a creditorprovidessufficientfundstocoverthecosts.

If theconditionsfortheopeningof insolvencyproceedingshave been met, the insolvency court will pass an openingdecision(Eröffnungsbeschluss)andthusformallycommenceinsolvencyproceedings.

Initsopeningdecisiontheinsolvencycourtappointsaninsol-vencyadministrator(Insolvenzverwalter)totakechargeoftheinsolventcompany’sestate.Usuallytheinterimadministratorisappointedasinsolvencyadministrator.

Comment

TheopeningofinsolvencyproceedingspursuanttotheGermanInsolvencyCoderequiresthatagroundfortheopeningofproceedingsexists.Suchreasonsareilliquidity,overindebtednessandimminentilliquidity.Whileincaseofilliquidityandover-indebtednessboththecompany’smanagementaswellasthecreditorscanfileaninsolvencyapplication(andmanagementfrequentlyhasanobligationtodoso),onlythecompany’smanagementitselfhasaright(notanobligation)tofileanapplicationbasedonimminentilliquidity.

�8

C moratoriUm


Immediatelyuponthefilingofabankruptcypetition,amora-toriumor“automatic stay”staysalllitigationandpreventstheenforcementofjudgementsandofsecuritywithoutleaveofthecourt.�7Thisincludesstayingthecontinuationofanyexist-ingactionsthatwerecommencedbeforethefiling.

Apartywhotakesanyactioninviolationoftheautomaticstayriskscontemptofcourtactionsandpenalties.Also,anyactdoneincontraventionofthestayisretroactivelymadevoidorvoidablebythecourt.Thestayiseffectiveduringtheentiretimethecaseispendingbutcreditorsandotherpartiesmaymakemotionstoliftormodifythestay.�8

TheBankruptcyCodegivesthedebtortheexclusiverighttoformulateaplanofreorganizationfor1�0daysfromthedateoffiling.This“exclusivity period”canbeextendedifsufficientreasons are established, but no extension can be grantedbeyond18monthsaftertheChapter11filingdate.�9Inmostin-stancesthedebtorcompanywillfirsttakeactionstostabilizeitsoperationsandformulateitsbusinessplanandthereafterproceedtoformulateaplanofreorganization.


Tosecuretheinsolventcompany’sassetsduringtheopeningproceedingstheinsolvencycourtusuallyimplementsatem-porarystayofdebtenforcementwithrespecttotheinsolventcompany’s movables. The temporary stay also covers theenforcementofsecurityinterests.Asregardstheinsolvent’simmovableassets,atemporarystaymaynotbeorderedbythe insolvency court, butonly bythecourt incharge oftheenforcementproceedings(Vollstreckungsgericht).Itrequiresanapplicationoftheinteriminsolvencyadministrator.

Upon the opening of insolvency proceedings, there is anautomaticstayofdebtenforcementfortheordinarycreditors(Insolvenzgläubiger).Allpendinglegaldisputeswillbesus-pended.Theinsolvencyadministratorcancontinueallsuitswheretheinsolventcompanyistheplaintiffandcertainsuitswheretheinsolventcompanyisthedefendant.Withrespectto security interests over movables, the right to realizationusuallyrestswiththe insolvencyadministrator,whowillpayouttherealizationproceedstothesecuredcreditors(abson-derungsberechtigte Gläubiger)afterdeductionofcostsandacontributiontotheestate.Withregardtosecurityinterestsover the insolvent company’s immovable assets, the insol-vencyadministratormayagainapplyforatemporarystayatthecourtinchargeoftheenforcementproceedings.

Comment

ThestayofdebtenforcementpursuanttotheGermanInsolvencyCodedoesnotaimatgivingtheinsolventcompany“breathing space”,butitspurposeistoensureajustdistributionoftheinsolvent’sestateandtoavoidtheprematuresaleofassetsthatarenecessaryforthecontinuationofbusinessoperations,sothattheinsolventcompany’sassetsmaybeutilizedinthebestpossiblemanner.

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�7. BankruptcyCodeparagraph�6�(a)

�8. BankruptcyCodeparagraph�6�(d)

�9. BankruptcyCodeparagraph11�1

�9

d lifting the stay


Generally, an affected party can apply to court at any timeafterthefilingofabankruptcypetitionforrelief.Oncesuchamotionismadethestaywillexpireafter�0daysunlesswithinsuchtimeacourtcontinuesthestaypendingafinalhearingorthemovantconsentstosuchcontinuationpendingahear-ing.Thecourtmayterminatethestay,modifyitorsubjectittoconditions.�0Thecourtmayliftthestayforcause,butisgenerallyreluctanttodosoduringtheinitialstagesofaChap-ter11casebecauseofthegeneralpresumptionthatadebtorshouldbegivenachancetoreorganizeandprepareaplan.





4. additionalorreplacementliensorsubstitutesecuritytotheextentofanydeteriorationinvalue,andotherreliefthatwillamountto‘indubitableequivalent’,aflexiblyinter-pretedconcept.�1


Thecreditorscannothavethegeneralstayofdebtenforce-ment lifted, except for a temporary stay with regard to theinsolventcompany’simmovableassets.Asregardsthelatter,acreditormayapplyforthestaytobeliftedifitisnolongernecessary,forexample,ifthestayisnolongerrequiredtoal-lowtheinsolventcompany’sassetstobeutilizedinthebestpossiblemanner.

Securedcreditorsmaydemandpaymentofinterestifthere-alizationoftheirsecurityinterestsisdelayedduetothestay.Iftherespectiveassetsareusedfortheinsolvencyestatetheinsolvencyadministratoralsohastocompensatethesecuredcreditorsforalossinvalue.Similarrightsofthecreditorsex-istinthecaseofatemporarystayofdebtenforcementwithregardtoimmovableassets.

Comment

Thecreditorsininsolvencyproceedingsusuallydonothavearighttohavethegeneralstayofdebtenforcementlifted,asthiswouldnotbeinlinewiththepurposeofproceedings,whichistoensureajustdistributionoftheinsolvencyestateandtoavoidtheprematuresaleofassetsthatarenecessaryforthecontinuationofbusinessoperations.

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�0. BankruptcyCodeparagraph�6�(d)(�)

�1. ReAlyulanInterstateCorporation1�BR80�at809

40

e Control


InChapter11,whethervoluntaryorinvoluntary,thereisapre-sumptionthatcontrolremainswiththedebtor’smanagementthroughtheconceptof“debtor in possession”(“dip”)(subjectto certain safeguards regarding disposal of assets outsidetheordinarycourseofbusiness).Tomanycommentatorsthissmacksofleavingthefoxinchargeofthehenhouse.Never-theless,thereareinstanceswherethedifficultyisduetoexog-enousandunexpectedevents(e.g.Texaco).Moreimportantly,perhaps, is the impression that management provides themosteconomicalandefficientmeanstoreorganizeundertheoversightofthebankruptcycourt,andcreditors’committees.Significantly,manycompanieshirespecialfinancialadvisorsorturnaroundmanagementconsultantstoassistthemintheirrestructuring. Often the creditors, especially the securedcreditors,willconditiontheircooperation.onthehiringofsuchanexpertorchiefrestructuringofficer.Suchconsultantsorspecialistsneverthelessremainsresponsibletotheboardofthecompany,thebankruptcycourtandthecreditors.Oftentheywillbeinplaceaspartofanyoutofcourtrestructuring.AlthoughthereisaBankruptcyCodeprovisiontoappointatrustee,suchanappointmentisrareandonlyhappenswherethereissomesuspicionofmisfeasance/fraud/wrongdoing/risktoassets,orbecauseitistheinterestsofcreditors.


Assoonasispracticableaftertheorderforrelief,theUnitedStates Trustee (a government official with a duty to protectallcreditors)appointsacreditors’committee,usuallymadeupofthesevenlargestunsecuredcreditorswillingtoserve.��Thesupervisoryroleandpowersofthecommitteearemoreextensivethaninsomejurisdictions,andtheycanincurtheexpenseofattorneysandotheradvisorswithcourtapproval.Suchexpensesarefundedoutoftheestateofthedebtor.��TheUnitedStatesTrusteemayalsoappointothercommitteesasneeded(e.g.aTortClaimantsCommittee,aBondholdersCommittee,etc.).Althoughthecreditors’committeemayem-ployadvisersandmayberemuneratedfromthebankruptcyestate, in smaller cases there may be insufficient financialincentivefortheretobeacommitteeformed.Thisnegatesthepotentially importantrolethecommitteehasinChapter11proceedings.


Asmentioned,fortheperiodoftimefromthefilingofthein-solvencyapplicationtotheopeningdecision,theinsolvencycourt usually appoints an interim insolvency administrator.Thecompany’smanagementwillrequiretheconsentoftheinteriminsolvencyadministratortotransferanyassets.Eventhoughthemanagementisnotremovedfromoffice, it is, inpractice,theinteriminsolvencyadministratorwhoisinchargeofthecompany’sbusiness.

Initsopeningdecisiontheinsolvencycourtthennormallyap-pointsaninsolvencyadministrator.Thisisusuallythesameperson who was appointed as interim administrator. Theadministrator is in charge of the business and responsibleforitsmanagementgoingforward,thustakingcontrolawayfromthecompany’smanagers.Theinsolvencyadministratorisanaturalperson,appropriatelyqualifiedandindependentofthecreditorsandtheinsolventcompany.Heisthecentralpersoninadministeringtheinsolventcompanyininsolvencyproceedings.

While an administrator is appointed in the vast majority ofcases, the Insolvency Code allows for the company’s man-agement to apply for self-administration (Eigenverwaltung),meaningthatthedebtor is left inpossessionandismerelysupervisedbyacreditors’trustee(Sachwalter).Thecourtmayonlyleavethedebtorinpossessionifitisconvincedthatthiswillnotdisadvantagecreditors.Inpractice,thecourtshavebeen very reluctant to pass an order of self-administration.Theviewiswidelyheldthatmanagementwhichwasnotabletoavert insolvencyinthefirstplacecanhardlybedeemedcapable of coping with the crisis, once proceedings havecommenced.However,therehasbeenself-administrationinsomeofthespectacularinsolvencycasesoftherecentpastinvolving groups of companies with international activities.ThemostprominentexampleisKirchMedia.

Comment

Despitetheinsolvencycourts’reluctancetoallowself-administrationitcanbeexpectedthatthenumberofcaseswherethedebtorisleftinpossessionwillincrease.Theapproachhasprovedvaluableinlargeandcomplexinsolvenciesinvolvinggroupsofcompanies,sincethespecificrestructuringexpertiseofareorganizationspecialistappointedtotheboardjustpriortoinsol-vencyiscombinedwiththeknowledgeandexperienceofexistingmanagement.

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��. BankruptcyCodeparagraph110�-11�

��. BankruptcyCodeparagraph110�(a)

41

f ContraCts


Thedebtorortrusteemayassumeacontractorleaseevenitifcontainsaclausethatprovidesforterminationintheeventofinsolvency,providedthedebtorcuresanydefault,andifthedebtorhadbeenindefault,providesadequateassuranceoffutureperformancebyitselforitsassignee.Alternatively,thedebtormayrejectanysuchleaseorexecutorycontract,givingrisetobreachasofthepetitionday,leavingthenon-debtorpartytosuchleaseorcontractwithaprepetitionclaimforbreach.Certainunsecuredclaims,suchasthoseofland-lordsandexecutives,arelimitedbytheBC.




The insolvency administrator can choose to assume or re-jectareciprocalagreementthathasnot,ornotcompletely,beenfulfilledbyeitherparty.Ifhedoesso,hecandemandperformancefromtheotherparty.Ifhechoosestorejectanagreement,theotherpartymayclaimdamagesasanordinarycreditor.Theadministrator’srighttorejectanagreementdoesnotextendtotheinsolventcompany’srentalandleaseagree-mentswithrespecttoimmovablepropertyorpremises.Thesewillcontinuetobeineffect.Thisappliesalsotosuchrentalorleaseagreementswhichtheinsolventcompanyenteredintoaslessorwithrespecttoobjectsthathavebeentransferredforsecuritypurposestothirdpartieswhofinancedtheacqui-sitionorproductionthereof.Ascompensationforhavingtoperformforaninsolventcompany,thereciprocalclaimoftheinsolvent’scounter-partywillbeprivileged.Afterthefilingoftheinsolvencyapplication,alessormaynotterminaterentalandleaseagreementswiththeinsolventcompanybyreasonof a payment default from the time before the filing of theinsolvencyapplication.

Comment

Theinsolvencyadministrator’srighttorejectcontractsthatwerenotfulfilledasofthedateoftheopeningdecisionoftenallowshimtorenegotiatecontractsandagreeonmorefavourableterms,whichinturncanmakethedebtor’sbusinessmoreattractiveforaninvestororcontributetoareorganizationoftheinsolventcompanyitselfbymeansofaplanofrestructuring.

4�










Thecreditorsdetermineattheinformationhearing(Berichts-termin)thecoursethatinsolvencyproceedingsshouldtake.Theinformationhearingisusuallyconvenedbytheinsolvencycourtwithinsixweeks,andatthelatestwithinthreemonths,of the opening of insolvency proceedings. As mentionedabove,thecreditorswillhavetodecidebetweenasaleoftheinsolventcompany’sbusinessasagoingconcernorawind-ing-up,unlessaplanofrestructuringisproposed.Creditorswillfrequentlyfollowtheadministrator’srecommendation.Inorderforthecreditorstomakeadecision,aresolutionrequir-ingamajority(calculatedonthebasisofsumsofclaims)ofthecreditorsvotingatthehearingmustbepassed.

Onlytheinsolvencyadministratororthecompany’smanage-ment may propose a plan of restructuring. However, thecreditors may instruct the insolvency administrator duringthe information hearing to draw up a plan of restructuring.Managementcansubmitaproposalasapre-packagedplanuponfilingforinsolvency.Therearefewrulesaboutthecon-tentsofaplanofrestructuring,asitcanbefreelyarrangedandincludeallprovisionsthatcouldbemadeinanindividualcontract;thesecaninclude,interalia,waiversanddeferralsofclaimsaswellaslimitationsofsecurityrights.

Aplanofrestructuring usuallyprovidesforareorganizationof the insolvent company. The creditors are divided intogroupsaccordingtotheirlegalposition.TheInsolvencyCodeprovides that at least the following groups are established:securedcreditors,iftheirrightsareaffected;ordinarycredi-tors;andthedifferentrankinggroupsofsubordinatedcredi-tors(nachrangige Insolvenzgläubiger),iftheirclaimsarenotdeemedtobewaived.Inaddition,theplanofrestructuringcanprovideforafurtherdivisionofthegroupsofcreditorsofthesamelegalpositionaccordingtotheireconomicinterests.Asvotingontheadoptionoftheplanofrestructuringisdonewithinthesegroups,thedeterminationofthecreditors’groupswillinfluencewhethertheplanofrestructuringisadopted.

Intheeventthataplanofrestructuringisproposed,theinsol-vencycourtwillcallacreditors’assemblyforahearingduringwhich the plan of restructuring and the voting rights of thecreditors(includingthedivisionintogroups)willbediscussed.Thevotingontheplanofrestructuringwillfollowthisdiscus-sion(eitherinthesamehearingoraseparatelaterhearing).Thecreditorsvote intheirrespectivegroupsontheplanofrestructuring. The plan will only be accepted if all groupsagree.Ineachgroupthemajorityofcreditorsmustconsent(byheadcount)andthesumoftheirclaimsmustconstitutemorethanhalfofthesumoftheclaimsofcreditorsvotinginthisgroup.Theplanwillbeadoptedwithouttheconsentofagroupofcreditorsifthemajorityofgroupshaveagreedandtheinsolvencycourtestablishesthatthecreditorsofthenon-consentinggrouparenotdisadvantagedbytheplan,ascom-paredtotheirpositionwithouttheplan,andthattheyhaveareasonableshareintheeconomicoutcomeoftheplan.

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�4. BankruptcyCodeparagraph11�5(a)(1)

�5. BR�00�(b)

�6. BankruptcyCodeparagraph11�6(c)

4�



Oncetheplanisconfirmeditbindsallcreditorsandtheprop-erty re vests in the debtor company clear of all prepetitionclaims(andsubjecttoanyofthetermsoftheplan�7).Whereadebtorisunabletoconfirmaplan,theChapter11casemaybedismissedorconvertedtoachapter7case.�8

Comment

Ininsolvencyproceedingsthecreditorsdeterminethecoursethatinsolvencyproceedingsshouldtake,althoughtheywilloftenfollowtherecommendationoftheinsolvencyadministrator.Aplanofrestructuringmaybepresentedonlybytheinsolvencyadministratororthecompany’smanagement,howeverthecreditorsmayinstructtheinsolvencyadministratortodrawupaplanofrestructuring.Thecompany’smanagementcansubmitaproposalasapre-packagedplanuponfilingforinsolvency.

Ifthecreditorsconsenttotheplan,itwillbeconfirmedbytheinsolvencycourtandthenbecomeeffective.Theinsolvencycourtwillterminateinsolvencyproceedingsandthedifferentgroupsofcreditorswillbepaidasprovidedfor intheplan.The plan can also provide for post-approval supervision ofthecompanybytheinsolvencyadministratorifitisintendedthat management not regain total control of its affairs im-mediately.

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�7. BankruptcyCodeparagraph1141

�8. BankruptcyCodeparagraph111�(b)(c)

44

h Costs




Thecostsofinsolvencyproceedingsincludethecourt’sfeesas well as the remuneration and expenses of the interiminsolvency administrator, the insolvency administrator andthe members of the creditors’ committee. The costs of in-solvency proceedings are difficult to estimate in advance,as the insolvency court has a certain scope of discretionwithregardtotheinsolvencyadministrator’sfees.Generallyspeaking,theinsolvencyadministratorispaidacertainfrac-tionoftheinsolventcompany’sassets,butthisfractionmaythenbeincreasedordecreasedbythecourt,dependingonthecomplexityofthespecificcase.Thecostsofinsolvencyproceedingsarepaidoutoftheinsolventcompany’sassetswithpriorityovertheclaimsofordinarycreditors.

Comment

Thecostsinvolvedwithinsolvencyproceedingsmaymakeanoutofcourtrestructuringseemmorefavourableinsomecases.However,sincethemanagementisfrequentlyobligatedtofileaninsolvencyapplicationwithinaperiodofthreeweeksoncethecompanyhasbecomeinsolvent,anoutofcourtrestructuringwilloftenrequirethatanexistingilliquidityoroverindebtedessiscuredfirst,forexamplebywayofasubordinationofclaimsorabridgefinancing.

45

i exit roUtes



IncaseswhereaplanisnotconfirmeditisusualforthecourttoorderconversiontoChapter7bankruptcyproceedings.�9However,asthereisnoinsolvencyrequirementunderChapter11,failuretoconfirmaplanwillnotnecessarilyleadtoliqui-dation.Thereisnoprohibitionagainstre-filingforChapter11(except if the debtor is an individual, in which case certainrestrictions apply). This istrue even ifacase isdismissed,oreven ifacaseendswithaconfirmedplan. ThesecondChapter11case,or‘chapter��’asitissometimescalled,isnotunusual.


Insolvency proceedings are terminated by the insolvencycourt once the insolvency administrator has realized theassetsof the insolventestateandafinaldistributionoftheproceedstothecreditorshasbeenmade,unlessaplanofrestructuringhasbeenproposed.

Inthecaseofaplanofrestructuring,theinsolvencycourtwillterminate insolvencyproceedingsoncetheplanhasbeenconfirmed.Thedifferentgroupsofcreditorswillbepaidasprovidedforintheplan.Theexecutionandperformanceofthe plan of restructuring is not part of the insolvency pro-ceedings.

Insolvency proceedings usually last between two to threeyears. There is no fixed time limit, though, so proceedingsmaytakelongeror-inparticular,incaseofapre-packagedplanofrestructuring-maycompleteinashortertime.

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�9. BankruptcyCodeparagraph111�

46

J finanCes


The Bankruptcy Code gives lenders incentives to providefinance to the debtor (called Debtor in Possession or DIPFinancing).Thelendermaybegivenalienoverassetsthatarenotpledgedtootherlenders.Thecourtmayalsoautho-rizelienssuperiortocertainpriorityclaimsinthebankruptcyprocessorevengrantnewseniorliensoncollateralalreadypledgedtoanotherparty,subjecttoensuringthattheexist-inglenderhas“adequate protection”forthevalueofitspre-bankruptcyliens.


Iftheinsolvencyadministratorborrowsmoneytocontinuethecompany’s business operations, the respective creditor willbeapreferredcreditor(Massegläubiger),whoseclaimwillbesatisfiedbeforetheclaimsoftheordinaryinsolvencycredi-tors.Thesamecanusuallybeachievedforacredittakenupbyan interiminsolvencyadministrator. Regardlessofsuchprioritythereisasubstantialriskforthecreditorwhograntsaloantotheinsolvencyadministratorthattheassetsofthein-solventcompanydonotsufficetosatisfythepreferredclaims.Thereisnosuper-prioritylendinginthesensethatthelenderwould also rank prior to other preferred creditors, such as,forexample,landlordswiththeirclaimsforthetimeaftertheopeningofproceedings.Forthisreason,creditorswillofteninsistonthegrantingofsecurityinterests.

Comment

Tobeabletocontinuetheinsolventcompany’sbusinessitisoftentheinteriminsolvencyadministratorwhohastotrytoobtainnewfinancingimmediately.Inthisregard,thepersonoftheadministrator,hisreputationandhiscontactswiththebanksarecrucial.

47

k sUmmary


1. NocourtdiscretionoverorderforreliefunderChapter11-legalrightofthedebtor.

�. Easeofaccesstotheprocedure.

�. Technically,althoughnopartyhasvetopowers,thepro-hibitiononusingcashcollateralwithouttheconsentofthelienholderorcourtapprovalgivesanundersecuredcreditorwithliensoncurrentassetssignificantleverageinChapter11casesthoughthenegotiationofthe“cash collateral”order.

4. Imposition of broad automatic stay upon the filing of aChapter 11 petition, lasting until confirmation of a plan,givesthedebtorvirtualassuranceofastayforat leasttheperiodthatthedebtorhastheexclusiverighttofileaplan,i.e.1�0days.

5. Thedebtorremainsinpossession.

6. Courtapprovalisrequiredforanyactionoutsidetheor-dinarycourseofbusiness:salesofassets,assumptionorrejectionofcontracts,borrowingmoney,etc.

7. Debtorgivenexclusiveperiodof1�0days(asitmaybeextendedforcause)tonegotiateplanwithcreditors.

8. Powerto‘cherry-pick’contractsandleases.

9. Planacceptedbyclassvoteandmaybeconfirmedbythe court upon request of a plan proponent providedthat(i)atleastoneclassofimpairedcreditorsvotesyes;(ii)theplanis“fair and equitable”toanydissentingandjuniorclasses;(iii)provideseachcreditoratleastwhatitwouldhavereceivedinliquidation;(iv)isfeasible;and(v)meetstheotherrequirementsofaplanandChapter11.

10 Anapprovedplanbindsallcreditorsandequityholders.


1. Insolvencyproceedingsmaybedirectedeitherataliqui-dationofthecompany’sbusinessoratareorganizationofthecompanybywayofaplanofrestructuring.Aliq-uidationmayoccurbymeansofasaleofthecompany’sbusinessasagoingconcernorasawinding-up.

�. Thecreditorsasagroupdeterminethedirectionofinsol-vencyproceedings.

�. Asaleofthecompany’sbusinessasagoingconcernisstillthemostcommonwaytorescueabusinessininsol-vency proceedings. Plans of restructuring seem to bebecomingmoreimportant,though.

4. Theopeningofinsolvencyproceedingsrequiresthatthecompany is illiquid or overindebted or that illiquidity isimminent.Incaseofilliquidityoroverindebtednessman-agementusuallyhastofilewithinthreeweeks.

5. For the period of time from the filing of an insolvencyapplicationtotheopeningdecisionthecourtusuallyap-pointsaninteriminsolvencyadministrator.

6. In the opening decision an insolvency administrator isnormally appointed by the insolvency court, who is inchargeofmanagingthecompany.Thecourtmayalsoleavethedebtorinpossession.

48

49


and the extraordinary administration for

large insolvent Companies in italy

50

a BaCkgroUnd








5. a plan which, in part, contemplates a litigation trust topursueandprosecutecausesofactionbelongingtothecompany;or


extraordinary administration, italy

Extraordinary administration aims to facilitate the financialrestructuring of a troubled company. However, bankruptcyisthemostcommoninsolvencyproceedinginItaly,inrecentyears the extraordinary administration procedure has beenincreasinglyavailedofbyleadingItaliancorporategroups.

In1979theItalianGovernment introducedtheextraordinaryadministrationforlargeinsolventcompanies,ortheso-called“Prodi Law”,anadministrative-drivenrestructuringprocedureaimedatsatisfyingcreditors’claims,protectingthebusinessactivityofthecompanyandemployees’interests.

In 1999 the extraordinary administration was amended bytheLegislativeDecreeNo.�70/1999inthenewextraordinaryadministrationforlargeinsolventcompaniesortheso-called“Prodi bis Law”, as the Prodi Law was in conflict with Euro-peanUnion’sprohibitionsagainstStateaids. TheProdibisLawamendedtheproceduresforlargeinsolventcompaniesbygrantinggovernment-appointedadministratorsadditionalpowerstosavetroubledcompaniesbypreservingthebusi-ness as a going concern. The procedure is implementedthroughadebtrestructuringplanwithamaximumdurationoftwoyears,orthroughaplanforsaleofthebusinessasagoingconcernwithamaximumdurationofoneyear.

Inthewakeofrecentfinancialcrisis thathitsomeof Italy’sleadingcorporategroupstheDecree-Law�47/�00�,ratifiedbyLaw�9/�004(amendedbyDecree-Law�81/�004ratifiedbyLaw6/�005)orthesocalled“Marzano Law”orthe“Parmalat Decree”partiallyamendedandsupplementedtheextraordi-naryadministrationproceduresetoutintheProdibisLaw.

Accordingtothenewprovisions,insolventcompaniesmeetingcertainrequirementsmayapplytotheMinisterofProductiveActivities(the“minister”)forimmediateadmissiontotheex-traordinaryadministrationprocedureandfortheappointmentofanextraordinaryadministrator.

Inparticular,theProdibisLawappliestocompanieswithatleast�00employeesanddebtsequallingatleasttwo-thirdsof the total balance sheet assets and revenues in the pre-cedingfinancialyear;whiletheMarzanoLawappliesonlytocompanieswith,individuallyorasawhole(withreferencetoacorporategroupestablishedintheprecedingyear),atleast500employeesintheprecedingyearandtotaldebts-includ-ingthosearisingfromtheissuanceofguarantees-ofatleastEUR�00million.

TheextraordinaryadministrationproceduresetoutinthePro-dibisLawisthedefaultprocedurewhichisgenerallyappliedtomajorinsolventcompaniesunlessspecificallysupersededbytheMarzanoLaw.

Inthecourseofthisdocumentwewillmakereferencetotheextraordinary administration as the procedure regulated bytheProdibisLawasamendedbytheMarzanoLaw.

51

B proCedUre






But applications must be in ‘good faith’ and with the inten-tionofreorganizationortoeffectaliquidationorsaleofthecompany,andcreditorsmayapplytohavepetitionsdismissedwherethisisnotthecase.Forexample,intheSGLCarbonCorporationcase(�00F.�d154),thecourtdismissedthecom-pany’sChapter11casebecauseofbadfaithdemonstratedbyalackof“reorganizationpurpose”.




AcompanywhichmeetstherequirementsmustapplytotheMinister of Productive Activities for immediate admissionto the procedure and the appointment of an extraordinaryadministrator,whileatthesametimefilingapetitionwiththebankruptcycourtinordertoconfirmitsinsolventstatus.ItistheMinister,ratherthanthebankruptcycourt,thathaschiefresponsibilityforsupervisingtheprocedure;thebankruptcycourt is requested only to confirm the company’s insolventstatusandtoverifythelawfulnessofproceedingwithrespecttotheverification ofclaims. Incontrast, incaseofextraor-dinaryadministrationunderProdibisLaw,theadmissionofthecompanytotheprocedureisdeclaredbythebankruptcycourtofthelocalityinwhichthecompanyhasitsregisteredofficeandfollowstheissuanceofaninsolvencydeclarationbythesamebankruptcycourt.

The Minister will issue a decree immediately admitting thecompanytotheextraordinaryadministrationprocedureandwillappointanextraordinaryadministrator.Followingtheap-pointmentoftheextraordinaryadministratorandthenotifica-tiontothebankruptcycourt,thebankruptcycourtwilldeclarethe company insolvent, on the basis of a report preparedby the extraordinary administrator within 60 days from theMinister’sdecree(further60daysmaybeallowed)showingthebalancesheetofthecompanyandvariousotherfinancialinformation.

If a company is admitted to the procedure, other insolventcompaniesinthesamecorporategroupmayalsoparticipate,even if they do not satisfy the relevant requirements. Theextraordinaryadministratoralsohas60daysfromthedecreetorequestthattheMinisteradmitothergroupcompaniestotheprocedure.

Theextraordinaryadministrationisbasedontheimplementa-tionofatwo-yearreorganizationplanaimedatthecompany’seconomic and financial restructuring and subject to theMinister’sapproval.Incontrast,incaseofextraordinaryad-ministrationunderProdibisLaw,theprocedureiscarriedoutthroughaone-yearbusinesscontinuationplan,providingforthedivestitureofthesubjectcompany’sassetasoneormoregoingconcerns.

Within180daysfromhisappointment,theextraordinaryad-ministratorisrequestedtofiletherestructuringplanwiththeMinister,aswellastolodgebeforethebankruptcycourtare-portcontainingadescriptionofthecausesofthecompany’sinsolvency,togetherwithalistoftherelevantcreditors.

TheMinistermayformallyauthorizearestructuringplanwithin�0 days of filing. However, if the Minister does not issue aformalauthorizationwithin90daysofsubmission,theplanisdeemedapproved.

5�

C moratoriUm


Immediatelyuponthefilingofabankruptcypetition,amora-toriumor“automatic stay”staysalllitigationandpreventstheenforcementofjudgementsandofsecuritywithoutleaveofthecourt.40Thisincludesstayingthecontinuationofanyexist-ingactionsthatwerecommencedbeforethefiling.

Apartywhotakesanyactioninviolationoftheautomaticstayriskscontemptofcourtactionsandpenalties.Also,anyactdoneincontraventionofthestayisretroactivelymadevoidorvoidablebythecourt.Thestayiseffectiveduringtheentiretimethecaseispendingbutcreditorsandotherpartiesmaymakemotionstoliftormodifythestay.41

TheBankruptcyCodegivesthedebtortheexclusiverighttoformulateaplanofreorganizationfor1�0daysfromthedateoffiling.This“exclusivity period”canbeextendedifsufficientreasons are established, but no extension can be grantedbeyond18monthsaftertheChapter11filingdate.4�Inmostin-stancesthedebtorcompanywillfirsttakeactionstostabilizeitsoperationsandformulateitsbusinessplanandthereafterproceedtoformulateaplanofreorganization.


From the time of admission to extraordinary administration,creditorsofthecompanymaynotinitiateorcontinueanyin-dividualenforcementactionswithrespecttotheirclaims.

_______________


41. BankruptcyCodeparagraph�6�(d)

4�. BankruptcyCodeparagraph11�1

5�

d lifting the stay


Generally, an affected party can apply to court at any timeafterthefilingofabankruptcypetitionforrelief.Oncesuchamotionismadethestaywillexpireafter�0daysunlesswithinsuchtimeacourtcontinuesthestaypendingafinalhearingorthemovantconsentstosuchcontinuationpendingahear-ing.Thecourtmayterminatethestay,modifyitorsubjectittoconditions.4�Thecourtmayliftthestayforcause,but isgenerallyreluctanttodosoduringtheinitialstagesofaChap-ter11casebecauseofthegeneralpresumptionthatadebtorshouldbegivenachancetoreorganizeandprepareaplan.





4. additionalorreplacementliensorsubstitutesecuritytotheextentofanydeteriorationinvalue,andotherreliefthatwillamountto‘indubitableequivalent’,aflexiblyinter-pretedconcept.44


Upon the admission of the company to the procedure ofextraordinary administration the actions of both securedand unsecured creditors are automatically stayed withoutexception.

_______________

4�. BankruptcyCodeparagraph�6�(d)(�)


54

_______________


46. BankruptcyCodeparagraph110�(a)

e Control


InChapter11,whethervoluntaryorinvoluntary,thereisapre-sumptionthatcontrolremainswiththedebtor’smanagementthroughtheconceptof“debtor in possession”(“dip”)(subjectto certain safeguards regarding disposal of assets outsidetheordinarycourseofbusiness).Tomanycommentatorsthissmacksofleavingthefoxinchargeofthehenhouse.Never-theless,thereareinstanceswherethedifficultyisduetoexog-enousandunexpectedevents(e.g.Texaco).Moreimportantly,perhaps, is the impression that management provides themosteconomicalandefficientmeanstoreorganizeundertheoversightofthebankruptcycourt,andcreditors’committees.Significantly,manycompanieshirespecialfinancialadvisorsorturnaroundmanagementconsultantstoassistthemintheirrestructuring. Often the creditors, especially the securedcreditors,willconditiontheircooperation.onthehiringofsuchanexpertorchiefrestructuringofficer.Suchconsultantsorspecialistsneverthelessremainsresponsibletotheboardofthecompany,thebankruptcycourtandthecreditors.Oftentheywillbeinplaceaspartofanyoutofcourtrestructuring.AlthoughthereisaBankrutpcyCodeprovisiontoappointatrustee,suchanappointmentisrareandonlyhappenswherethereissomesuspicionofmisfeasance/fraud/wrongdoing/risktoassets,orbecauseitistheinterestsofcreditors.


Assoonasispracticableaftertheorderforrelief,theUnitedStates Trustee (a government official with a duty to protectallcreditors)appointsacreditors’committee,usuallymadeupofthesevenlargestunsecuredcreditorswillingtoserve.45

Thesupervisoryroleandpowersofthecommitteearemoreextensivethaninsomejurisdictions,andtheycanincurtheexpenseofattorneysandotheradvisorswithcourtapproval.Suchexpensesarefundedoutoftheestateofthedebtor.46TheUnitedStatesTrusteemayalsoappointothercommitteesasneeded(e.g.aTortClaimantsCommittee,aBondholdersCommittee,etc.).Althoughthecreditors’committeemayem-ployadvisersandmayberemuneratedfromthebankruptcyestate, in smaller cases there may be insufficient financialincentivefortheretobeacommitteeformed.Thisnegatesthepotentially importantrolethecommitteehasinChapter11proceedings.


Upon appointment, the extraordinary administrator takespossession of, and control over, the subject company’s as-sets. However, certain transactions must be authorized bytheMinister.Debtsincurredinconnectionwiththecontinua-tionofthecompany’sbusinessaresatisfiedwithpriorityoverexistingclaims.

TheMarzanoLawenablestheextraordinaryadministrator:

1. to initiateclaw-backactions forthebenefitofcreditorsduring the implementation of a restructuring plan. Incontrast, in case of extraordinary administration underProdibisLaw,claw-backactionsarepossibleonlywhereasaleplanisestablished;

�. uponauthorizationoftheMinister,toenterintotransac-tionsforthesaleorutilizationofassetsofthecompany,totheextentthatsuchtransactionsareinstrumentaltotherestructuring(salesmustbelimitedtonon-coreassets);

�. untiltheauthorizationoftherestructuringplan,torequesttheMinistertoauthorizethecarryingoutoftransactionsnecessarytosafeguardthecontinuedbusinessactivityofthegroup.

Comment

LegalframeworksinItalycontrastsharplywiththeChapter11framework,whichemphasizestheroleofmanagement,ratherthanadministrators,indevelopingconsensualrestructuringplans,andgrantstoseparatecreditorsandstakeholdersthelegalrighttoappealandcontestmanagement-drivenplans.

55

f ContraCts


Thedebtorortrusteemayassumeacontractorleaseevenitifcontainsaclausethatprovidesforterminationintheeventofinsolvency,providedthedebtorcuresanydefault,andifthedebtorhadbeenindefault,providesadequateassuranceoffutureperformancebyitselforitsassignee.Alternatively,thedebtormayrejectanysuchleaseorexecutorycontract,givingrisetobreachasofthepetitionday,leavingthenon-debtorpartytosuchleaseorcontractwithaprepetitionclaimforbreach.Certainunsecuredclaims,suchasthoseofland-lordsandexecutives,arelimitedbytheBankruptcyCode.




Ingeneral, theextraordinaryadministratormayelecttoter-minate any outstanding contract, other than employmentcontractsorleasecontracts(ifthecompanyisthelessor).Iftheextraordinaryadministratorelectstocontinueacontract,thecompanywillhavetoperformthecontractinaccordancewithitsterms,includingpayingtheentireconsiderationduetoitscounter-party.

56










Therestructuringplanmustindicate,interalia,thosebusinessactivitiestobecontinuedandthosetobedismissed,theeco-nomicandfinancialforecastsconnectedwiththerestructuringprocess,themethodsforcoveringfinancialrequirements,thepossiblerecapitalizationplan,aswellasthetimingandmeth-odsforthesettlementofcreditors’claims,whetherthroughplansaimedatreschedulingthecompany’sobligationsorbymeansofacompositionwiththecreditors.

TherestructuringplanissubjecttotheapprovaloftheMin-ister. Should the Minister reject the restructuring plan, theextraordinaryadministratorisstillentitledtoasktheMinistertoapproveaplanbasedonthedisposalofthecompany’sas-sets;otherwisetheextraordinaryadministrationisconvertedintoabankruptcyprocedure.

Arelevant innovationintroducedbytheMarzanoLawistheprovisionofanewformofcomposition(Concordato)withthecreditorsaspartoftherestructuringplan.Inparticular,thecompositionmayprovidefor:

1. thesubdivisionofcreditorsintodifferentclasses,accord-ingtotheirlegalpriorities;

�. different treatment for creditors belonging to differentclasses;

�. satisfaction of creditors’ claims through any technicalor legalmeans, includingthroughassumptionofdebts,mergerorothercorporatetransactions,andissuanceofstockorbonds,includingbondsconvertibleintosharesorotherfinancialand/ordebtinstruments;

4. thetransferoftheassetsoftheinsolventcompanytoacontractingparty(Assuntore).Thecreditors,orcompa-nies inwhich they haveholdings, mayalsoactascon-tractingparty,aswellascompaniesestablishedadhocbytheextraordinary administrator, whosesharesaretobeallocatedtothecreditors.Thecompositionmayalsoprovide for the transfer to the contracting party of theclaw-backactions.

Thecompositionisapprovedifitispassedbycreditorsrep-resentingthemajorityofclaimsadmittedtovote;iftherearedifferentclassesofcreditors,thecompositionisapprovedifitispassedbythevoteofcreditorsrepresentingthemajorityofcreditorsadmittedineachclass.Creditorswhodonotdelivertheirvotebythedeadlinefixedbythejudge,willbedeemedtovoteinfavourofthecomposition.

Thebankruptcycourtmayapprovethecompositionnotwith-standingthatthemajorityinoneormoreclassesofcreditorshavenotvotedinfavourofthecomposition,if(i)themajorityoftheclassesvotedinfavourofthecomposition,and(ii)thebankruptcycourtbelievesthatthecreditorswhobelongtothedissentingclasseswill receiveadistributionwhich isatleastasfavourableasthroughanyotherfeasiblealternative.Onceapprovedbytherequestedmajoritiesandratifiedbythebankruptcycourt,thecompositionisbindingalsoondissent-ingandnonvotingcreditors.

_______________

50. BankruptcyCodeparagraph1141

51. BankruptcyCodeparagraph111�(b)(c)

57



Oncetheplanisconfirmeditbindsallcreditorsandtheprop-erty re vests in the debtor company clear of all prepetitionclaims(andsubjecttoanyofthetermsoftheplan50).Whereadebtorisunabletoconfirmaplan,theChapter11casemaybedismissedorconvertedtoachapter7case.51

Comment

Notwithstandingaclearshift inthecompositionofcreditorsoverthelastseveralyears,theinsolvencycultureinItaly,evenwiththeeventoftheMarzanoLaw,continuestolimittheabilityofmanagementtoorchestrateconsensualrestructuringwithcreditors.UnlikeChapter11,theMarzanoLawremainsamanagement-displacingandadministration-drivenframeworkwherecreditorsareonlyconsultedasawhole.

58

H Costs




Theamountofpaymentduetotheextraordinaryadministratorisdeterminedaccordingtotherulessetoutinaministerialdecree,butitisacompany’sresponsibility.

59

i exit roUtes



IncaseswhereaplanisnotconfirmeditisusualforthecourttoorderconversiontoChapter7bankruptcyproceedings.5�However,asthereisnoinsolvencyrequirementunderChapter11,failuretoconfirmaplanwillnotnecessarilyleadtoliqui-dation.Thereisnoprohibitionagainstre-filingforChapter11(except if the debtor is an individual, in which case certainrestrictions apply). This istrue even ifacase isdismissed,oreven ifacaseendswithaconfirmedplan. ThesecondChapter11case,or‘chapter��’asitissometimescalled,isnotunusual.


At any time during the extraordinary administration, thebankruptcycourt,exofficioorupontheextraordinaryadmin-istrator’srequest,mayconverttheproceedingsintoordinarybankruptcy proceedings if the extraordinary administrationcannolongerbeusefullycarriedout. Theconversionmayalsobeorderedafterthecompletionoftherestructuringplanifthesubjectcompanyhasnotbeenrestoredtosolvency.

Inaddition,thebankruptcycourtmayterminatetheextraordi-naryadministrationintheeventthat:

Nocreditorhasfiledclaimswithinthedeadlinessetforthintheinsolvencydeclaration;

Thejudgementrelatingtoacompositionprocedurebecomesdefinitive;

Thecompanyhasbeenrestoredtosolvencyasprovidedforintherestructuringplan.

_______________

5�. BankruptcyCodeparagraph111�

60

J finanCes


The Bankruptcy Code gives lenders incentives to providefinance to the debtor (called Debtor in Possession or DIPFinancing).Thelendermaybegivenalienoverassetsthatarenotpledgedtootherlenders.Thecourtmayalsoautho-rizelienssuperiortocertainpriorityclaimsinthebankruptcyprocessorevengrantnewseniorliensoncollateralalreadypledgedtoanotherparty,subjecttoensuringthattheexist-inglenderhas“adequate protection”forthevalueofitspre-bankruptcyliens.


Lendersprovidingnewmoneyhavestatutorypriorityandtheirclaimswillbesettledonaprioritybasisaslongsuchclaims:

1. relate to acts performed after the declaration of insol-vency;

�. qualify as costs and expenses incurred in the continu-ationofbusinessactivitiesandthemanagementofthecompany’sassets.

61

k sUmmary


NocourtdiscretionoverorderforreliefunderChapter11-le-galrightofthedebtor.

Easeofaccesstotheprocedure.

Technically,althoughnopartyhasvetopowers,theprohibitiononusingcashcollateralwithouttheconsentofthelienholderorcourtapprovalgivesanundersecuredcreditorwithliensoncurrentassetssignificantleverageinChapter11casesthoughthenegotiationofthe“cash collateral”order.

ImpositionofbroadautomaticstayuponthefilingofaChap-ter 11 petition, lasting until confirmation of a plan, gives thedebtorvirtualassuranceofastayforatleasttheperiodthatthedebtorhastheexclusiverighttofileaplan,i.e.1�0days.

Thedebtorremainsinpossession.

Courtapprovalisrequiredforanyactionoutsidetheordinarycourseofbusiness:salesofassets,assumptionorrejectionofcontracts,borrowingmoney,etc.

Debtorgivenexclusiveperiodof1�0days(asitmaybeex-tendedforcause)tonegotiateplanwithcreditors.

Powerto‘cherry-pick’contractsandleases.

Planacceptedbyclassvoteandmaybeconfirmedbythecourt uponrequest ofaplanproponent provided that(i)atleastoneclassofimpairedcreditorsvotesyes;(ii)theplanis“fairandequitable”toanydissentingandjuniorclasses;(iii)provideseachcreditorat leastwhat itwouldhavereceivedinliquidation;(iv)isfeasible;and(v)meetstheotherrequire-mentsofaplanandChapter11.

Anapprovedplanbindsallcreditorsandequityholders.


TheExtraordinaryAdministration istheinsolvencyproceed-ing intended to assist major companies to restructure theirbusiness.ThedefaultprocedurewhichisgenerallyappliedtomajorinsolventcompaniesisprovidedbytheProdibisLawunlessspecificallysupersededbytherecentmodificationsin-troducedbytheMarzanoLawapplicabletolargercompaniesthatsatisfythefollowingcriteria:

1. atleast500employeesintheprecedingyear;

�. totaldebts,includingthosearisingfromtheissuanceofguarantees,ofatleastEUR�00million.

ThemainfeaturesofthemodifiedregimeintroducedbytheMarzanoLawwithrespecttotheProdibisLaware:

1. the absence of an interim judicial stage, which is re-placedbyanimmediateadmissiontotheextraordinaryadministrationandtheappointmentofanextraordinaryadministrator;

�. thepoweroftheextraordinaryadministratortoconducturgentdisposalsortakeanystepsnecessarytoprotectthecontinuityofthegroup’sactivitiesatanystagebeforeorafterMinister’sapprovaloftherestructuringplan;

�. theemphasisonarestructuringandreorganizationofthecompanyratherthanabreak-upofitsbusiness;

4. theextensionofpowersoftheextraordinaryadministra-torintentonachievingtherestructuringplantoreversetransactionsandrecoverassets,powerswhichare,undertheProdibisLawregime,onlyavailableinthecontextofadisposalplan.

DespiteitsadhocdevelopmentinresponsetotheParmalatcollapse,theMarzanoLawrepresentsarealsteptowardsre-habilitativeinsolvencysolutionsfordistressedcompanies.Itappearstoheraldanewapproachthatfocusesoncorporatereorganizationandrestructuringratherthanliquidationofthedebtor’s assets. In particular, the possibility to provide forarrangementsthroughcomposition is important. Composi-tionallowsfortheswiftsatisfactionofcreditors’claimwithoutanyneedforalengthyinsolvencyprocedure,whichisalwaysdetrimentaltothedebtor’sbusiness,itsvalueonthemarketandthecreditors’interests.ThisimprovementbringstheItal-ian legislation further into the line with the most advancedinsolvencyregimes.

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Documents

Comparison of Chapter 11 of the United States Bankruptcy Code with