Insolvency Law and Multinational Groups

Theories, Solutions and Recommendations for Business Failure

Daoning Zhang

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000497298
• Edition: 1
• Topic: Derecho
• Subtopic: Derecho de sociedades

The insolvency of multinational corporate groups creates a compelling challenge to the commercial world.

As many medium and large-sized companies are multinational companies with operations in different countries, it is important to provide appropriate solutions for the insolvency of these key market players. This book provides a comprehensive overview of the cross-border insolvency theories, practical solutions and regulatory solutions for the insolvency of multinational corporate groups. Whilst the book recognises certain merits of these solutions, it also reveals the limitations and uncertainty caused by them. An analysis of the provisions and tools relating to cross-border insolvency of multinational corporate groups in the new EU Regulation on insolvency proceedings 2015, the UNCITRAL Model Law on cross-border insolvency, the Directive on preventive restructuring frameworks and the Bank Recovery and Resolution Directive 2014, along with a study of directors' duties, are included in this book. This book focuses on the insolvency and rescue of non-financial corporate groups. However, it is also important to recognise the similarities and differences between corporate insolvency regimes and bank resolution regimes. In particular, lessons learnt from bank resolution practices may be useful for non-financial corporate groups.

This book aims to provide an in-depth examination of the existing solutions for the insolvency of multinational corporate groups. It also aims to view cross-border insolvency of corporate groups within a broad context where all relevant regimes and theories interact with each other. Therefore, directors' duties in the vicinity of insolvency, preventive insolvency proceedings, procedural consolidation, international cooperative frameworks and bank resolution regimes are considered together. This book may appeal to academics, students and practitioners within the areas of corporate law, cross-border insolvency law and financial law.

1 Introduction

Background and the value of this study

European countries’ slow economic growth rates and a record number of insolvency cases have made the EU Commission call for a reform of insolvency laws at both the national and the EU level, with an aim to mitigate further losses to creditors and stakeholders. The EU Commission’s current political priority is to promote economic recovery and sustainable growth as well as a higher investment rate and the preservation of employment, as listed in the Europe 2020 strategy for jobs and growth. To achieve this task, the EU believes that a rescue-friendly culture of insolvency law will help to facilitate economic recovery.¹ As part of the new Europe 2020 strategies, a new EU Regulation on insolvency proceedings (EIR Recast),² focusing on the tasks of saving the economically healthy but financially distressed business, has come into force.³ The European Commission believes that the benefits of business rescue include, among other things, maximization of assets, higher recovery rate to creditors and saved jobs.⁴ Also, the EIR Recast unprecedentedly provides a new mechanism for the rescue of groups of companies: the group coordination proceedings.⁵ This may be seen as a milestone, which reveals that the European Commission has acknowledged the necessity of rescuing cross-border groups of companies.

1 Commission staff working document executive summary of the impact assessment – ­accompanying the document-commission recommendation on a new approach to business failure and insolvency SWD (2014) 62 final, p. 2.

2 Regulation (EU) 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency proceedings (EIR Recast 2015).

3 Ibid., Recital 10.

4 The Commission has acknowledged that the benefits of business rescue, among other things, including maximization of assets, preservation of goodwill and know-how), higher recovery rates for creditors (e.g. average French liquidation proceedings recovery rate 31% vs rescue proceedings recovery rate 96%) and saving jobs. The main policy is aimed at encouraging economic growth. The commission staff working document impact assessment, accompanying the document Revision of Regulation (EC) No. 1346/2000 on insolvency proceedings SWD(2012) 416 final, p. 7, p. 11, are available at ec.europa.eu/justice/civil/files/insolvency-ia_en.pdf.

5 EIR Recast 2015, Chapter V, Section 2.

The scope of new EU Regulation on insolvency proceedings has also been expanded; it now encompasses a variety of rescue-oriented proceedings of member states.⁶ Many member states recently updated and reformed their insolvency law to facilitate corporate rescue. In the UK, the Cork Report first stressed the rescue culture and elucidated that the aim of rescue should consider a broader scope of interests.⁷ The Enterprise Act 2002 placed corporate rescue as the foremost goal for administrators to fulfil. On 22 September 2011, the Spanish Congress passed the reform of insolvency law, which provides pre-insolvency solutions that aim to prevent insolvency.⁸ Germany introduced its reformed insolvency procedures – ‘ESUG’ – on 1 March 2012 for the purpose of pursuing stable economic policy and preserving jobs, thus benefiting the public.⁹ France also approved a deep reform to its insolvency law, which encompasses the pre-insolvency proceedings, accelerated financial safeguard proceedings, safeguard proceedings and restructuring proceedings.¹⁰ All these examples imply that the EU has entered an era of corporate rescue at both the EU and the national level.

The 2007–2008 world financial crisis pushed many countries into recession. The collapse of financial corporate groups during the crisis included, but was not limited to, some big names: Lehman Brothers and Northern Rock. The most recent financial distress faced by many Italian banks also draws attention to the importance of financial corporate groups and the effectiveness of bank resolution regimes. Therefore, parallel to the development of non-financial corporate insolvency law in the EU, the recent Bank Recovery and Resolution Directive (BRRD),¹¹ together with Single Resolution Mechanism Regulation,¹² in response to the Financial Stability Board and Basel Committee’s recommendations, set up financial resolution tools at the EU level. In particular, both legislations contain resolution rules for financial corporate groups.

6 EIR Recast 2015, Article 1.

7 Report of the Review Committee on Insolvency Law and Practice (1982) Cmnd 8558, p. 204.

8 Bernardino Muñiz, ‘New restructuring regime in Spain’ (2012) Eurofenix Spring, p. 1.

9 The new features, among other things, include a three-month cap on the time limit, which aims to urge that a viable restructuring plan of a financially distressed company could be submitted early by the debtor. Also, interim protection order may be made by the court to prevent creditors from interrupting the restructuring plan during such a period. Gerret Höher, ‘ESUG: German for ‘Modernising Bankruptcy Law’ (2012) Eurofenix Spring, p. 19.

10 Jean-Luc Vallens, ‘Reforms planned in France’ (2014) Eurofenix Spring, p. 26.

11 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council Text with EEA relevance.

12 Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund, and amending Regulation (EU) No. 1093/2010.

Undoubtedly, both non-financial corporate groups and financial corporate groups play important roles in the commercial world. On the macro level, the insolvency of large corporate groups has a far-reaching impact on the European economy. Large corporate groups account for 30% of the jobs in the EU and 41% of the gross added value.¹³ Financial groups, such as banks, directly supply money to the real economy and provide a payment system for everyone. On the micro level, large multinational European corporate groups typically operate through the network of subsidiaries¹⁴; thus, when parent companies or subsidiaries face financial difficulties, the other companies in the same group may also suffer.¹⁵ This shows that it is important to have desirable group solutions. A classic example is the insolvency of KPNQwest N.V.,¹⁶ which has subsidiaries in many member states. As a telecom company, the value of the whole business relies on the integration of its underground cables in different member states. Due to lack of cross-border insolvency solutions, in KPNQwest N.V., multiple insolvency proceedings were inevitable, and therefore the value of the whole business was dissipated. This shows that it is important to provide cross-border insolvency solutions for multinational corporate groups (MCGs).

This book sets the EU Regulation on insolvency proceedings (EIR Recast) as the main target of study.¹⁷ One particular feature of this Regulation is that it introduced a new ‘group coordination proceeding’ that is the first type of proceeding concerning cross-border cooperation in the area of insolvency law of MCGs.¹⁸ Resolution theories and tools for financial corporate groups will be examined at the end of this book. This study does not aim to provide a comprehensive analysis of all relevant bank resolution rules. It simply aims to provide a better understanding of both areas of rules through a comparison of theories and tools for corporate insolvency law and financial institution resolution.

13 Commission staff working document executive summary of the impact assessment – ­accompanying the document-commission recommendation on a new approach to business failure and insolvency SWD(2014) 61 final, p. 20.

14 Ibid., p. 20.

15 Commission staff working document executive summary of the impact assessment – ­accompanying the document-commission recommendation on a new approach to business failure and insolvency SWD(2014) 62 final, p. 2.

16 Different functions of operations and assets of KPNQwest group are located in different European member states. M. Natasha Labovitz and Jessica I. Basil, ‘How Will New Chapter 15 Affect Multinational Restructurings?’ (2005) New York Law Journal, p. 2; Robert Van Galen, ‘The European Insolvency Regulation and Groups of Companies’ (2003) INSOL Europe Annual Congress, Cork, Ireland, pp. 16–18.

17 The new EU regulation on insolvency proceedings, which was drafted in 2015 and came into effect in 2017, introduces a group coordination proceeding for group insolvency. EIR Recast embodies cross-border insolvency law in the EU, which is designed to allocate insolvency law jurisdiction and choice of law, and set recognition and enforcement rules among member states.

18 Gerard McCormack, ‘Something Old, Something New: Recasting the European Insolvency Regulation’ (2016) The Modern Law Review 79(1) 102–146.

The author is aware of the Brexit incidence, but how much impact it will have on the EU remains to be seen. If the UK leaves the EU, it may mean that EIR Recast will not be applicable to the UK unless there is a new agreement between the UK and the EU.¹⁹ As the cross-border insolvency solutions of MCGs are important to both the UK and the EU, it would be desirable to see an agreement with similar functions being drafted.

This section has introduced the importance of cross-border corporate groups against a broad background. The next section will analyse the main issues and difficulties in liquidating or rescuing MCGs.

Issues and difficulties of MCG insolvency and resolution

Cross-border insolvency of MCGs²⁰ is a relatively new research topic, and it is the point where private international law, insolvency law, bank resolution and multinational enterprises theories meet. Academics and insolvency practitioners propose and design either theoretical solutions or pragmatic solutions for the insolvency or rescue of MCGs. It is argued that solutions for non-financial cross-border insolvency of MCGs may include private/hybrid legal solutions,²¹ substantive consolidation, procedural consolidation and procedural cooperation.²² For financial corporate groups whose collapse may lead to systemic risks, a separate set of rules, termed ‘resolution rules’, are applied.

19 One main effect following Brexit may be that the insolvency proceedings that are opened in the UK will not enjoy automatic recognition by other courts of EU member states. Chris Birch and Victoria Procter, ‘Brexit – implications for the UK restructuring and insolvency market’ 2016, at www.eversheds.com/documents/services/commercial/Brexit-implications-for-UK-restructuring-and-insolvency-market.pdf, p. 4; Ken Baird et al., ‘Brexit: What Does It Mean for Restructuring and Insolvency?’ 2016, at www.law.ox.ac.uk/business-law-blog/blog/2016/07/brexit-what-does-it-mean-restructuring-and-insolvency; another is that EIR Recast introduces a group coordination proceeding as a framework for MNCs. The UK may not be able to use this coordination framework after Brexit. All these may make the UK less popular as a restructuring and insolvency jurisdiction than before.

20 MCGs are the main research target in this thesis. It means a group of companies that conduct business in more than one member state in the EU. The thesis chose corporate groups as the target because companies have their independent legal status, which creates particular challenges in cases of cross-border insolvency law. Each member company may have its own creditors and assets; each subsidiary may be subject to a different insolvency jurisdiction. This thesis aims to deal with these issues.

21 Private solutions rely on contracts; creditors and debtors may renegotiate a new deal, such as a debt waiver, to avoid triggering insolvency proceedings. Hybrid legal solutions are a combination of private solutions and legal solutions, such as pre-pack sale of business.

22 Robert van Galen, ‘Insolvent groups of companies in cross border cases and rescue plan’ (2012) Report to the Netherlands Association for Comparative and International Insolvency Law.

Arguably, non-financial and financial corporate groups face similar difficulties when it comes to cross-border insolvency and rescue, which will be examined below.

The first difficulty is that most of the national and cross-border insolvency law regimes focus on individual entities rather than corporate groups. Without a well-developed framework for corporate groups, the success of rescue and insolvency of MCGs depends only on the effectiveness of ad hoc solutions provided by insolvency practitioners. The problem is that one cannot predict the result of insolvency of a cross-border corporate group; neither can one be sure whether the value of a group can be preserved in non-financial corporate group cases nor whether a systemic risk can be controlled in financial corporate group cases.

The second difficulty comes from unharmonized insolvency law in different member states. This issue is twofold. First, different values and laws make it ...