New Initiatives for Pre-Insolvency Restructurings
→ Wolfgang Höller
→ Miriam Simsa
In financial distressed situations, waiting until the last minute is not a smart idea. Still, insolvency laws do not provide for pre-insolvency restructurings.
Current legal framework for pre-insolvency restructurings
When a company is in financial distress, it is essential that an orderly restructuring process be initiated as soon as possible. The longer the directors of a company wait to address the issues and to start negotiations with the financial creditors, the less likely is a successful turn-around.
In cases where there are several financial creditors involved, the crucial question is how to set up an efficient process for the negotiations between the company and the financial creditors, and how to convince all financial creditors to participate in the process.
Austrian law does not provide for a legal framework for pre-insolvency restructuring negotiations. The proceedings available under the Austrian Insolvency Code (Insolvenzordnung) may be initiated only in case of insolvency or imminent illiquidity of the relevant company. The Austrian Company Reorganisation Act (Unternehmensreorganisationsgesetz), despite its promising name, does not contain an adequate process, as it provides neither for the participation of the financial creditors nor for a preliminary moratorium or other measures granting protection to the creditor.
Absent a statutory process, the creditor itself has to coordinate the financial creditors and set up a process to manage the restructuring. Instead of focusing on the operational and financial turn-around, the management of the company is thus often preoccupied with managing the restructuring process.
The most crucial questions in out-of-court restructurings are usually whether all financial creditors can be persuaded to participate in the negotiations and abstain from enforcement actions, and whether the financial creditors accept to be bound by a majority vote. Until all financial creditors have agreed not to enforce against the assets of the company and to be bound by a majority decision, each financial creditor can obstruct the whole restructuring.
These issues are not confined to Austria. All through Europe debtors face similar challenges. National rules within the EU offer different solutions.1 While some jurisdictions offer legal frameworks for pre-insolvency proceedings, in other jurisdictions major players have issued non-binding guidelines for restructuring processes. Examples include the “Principles for Debt Restructuring” issued by the Slovenian national bank and the “Restructuring Guidelines” issued by major Austrian banks in cooperation with Schoenherr. So far, these initiatives have been limited to single countries, leaving the region with a multitude of different legal and non-legal frameworks.
However, two recent developments may address different challenges companies face in pre-insolvency restructurings.
At a workshop of the EBRD-supported Vienna 2 Initiative that took place in Vienna on 23 September 2014, major banks active in the CESEE region called for guidelines for out-of-court restructurings for the whole region. They agreed to team up and implement non-binding guidelines to make cross-border restructurings more manageable. This may be the first step towards a long-overdue, coherent, non-binding framework for restructurings in the region.
The Recommendation by the European Commission
In addition, the European Commission has published a recommendation (Recommendation) calling for the implementation of a legal framework for efficient pre-insolvency restructurings.2 According to the Recommendation, national legislators should provide for out-of-court restructuring proceedings available to debtors who are likely to become insolvent. The objective of such proceedings should be avoiding insolvency rather than just dealing with an existing insolvency. The proceedings should be binding for all creditors, provide for majority decisions of the creditors and contain an option for a temporary stay of enforcement actions.
To facilitate the granting of additional financing, the Recommendation asks for such financing to be exempt from possible voidance or similar claims. The proceedings should be conducted mainly out-of-court, keeping cost and administrative burden at a minimum. Where necessary, the court should be allowed to appoint a mediator or supervisor to ensure successful negotiations and to safeguard the legitimate interests of creditors and other interested parties.
The pre-insolvency restructuring framework outlined in the Recommendation addresses the most pressing issues in each out-of-court restructuring. Implementing such a framework into national law could be a valuable contribution towards more successful pre-insolvency restructurings.
Pre-Insolvency proceedings as a way to prepare large-scale insolvencies?
The timely involvement of a court-appointed supervisor could have another substantial advantage as it could be used to prepare large-scale insolvencies before insolvency proceedings open. Recent examples have shown that such a tool is sorely needed.
Currently there is no possibility under Austrian law to coordinate the preparation of insolvency proceedings with the court or the insolvency administrator before such proceedings open. Thus, at the beginning of insolvency proceedings, valuable time is lost while the insolvency administrator is familiarising himself with the business of the debtor. This delay can be quite costly for the creditors as it may ruin a potentially viable business of the debtor.
Even though the Recommendation is not legally binding, there are plenty of reasons why the Austrian legislator should seize the opportunity to review the current legislation and implement an efficient and practicable legal framework for pre-insolvency restructuring proceedings. The new law should be accompanied by a common understanding of the major banks on how to handle out-of-court restructurings to make such processes more efficient and more successful.