The continuance of the business and the restructuring of debts. The Greek case

Transcription

1 The continuance of the business and the restructuring of debts The Greek case In Greece, rescue and insolvency procedures are governed by the Bankruptcy Code. The Bankruptcy Code envisages that a distressed or bankrupt debtor may be subject to the following procedures: Rehabilitation process or pre bankruptcy procedures of articles 99 and seq., and Post bankruptcy reorganization process of articles 107 and seq. The objective of post bankruptcy proceedings is to repay creditors and, if possible, to rescue and restructure an insolvent companyʹs business. On the contrary, pre bankruptcy procedures aim at the reorganization of the debtorʹs business and its continuation following an agreement with the majority of its creditors. The Bankruptcy Court, which supervises these proceedings, is a three member court of first instance in the geographical region where the debtor has its key establishment. A. PRE BANKRUPTCY PROCEDURES Introductory remarks As stated above, pre bankruptcy procedures are governed by articles 99 and seq., as amended by Law 4013/2011, effective September 15, Note that the transitional provisions of Law 4013/2011, in the framework of opened conciliation proceedings, allow petitioners to choose between carrying on the proceeding under the previously existing conciliation rules and the new 1

2 rehabilitation rules. These provisions form the Chapter 6 of the Bankruptcy Code. Articles 99 and seq. therefore govern (i) the procedure which leads to the conclusion of restructuring agreements that may be ratified by court, (ii) the requirements for opening such proceeding and for ratification of a restructuring agreement, (iii) the appointment of mediators and experts and (iv) in the case of ʺspecial liquidationʺ, the appointment of a ʺspecial liquidatorʺ or administrator of the business as a going concern, a preinsolvency tool which has been reintroduced in the Bankruptcy Code after being abolished in The former conciliation process, abolished in 2011, presented serious inconvenient. Firstly, the conciliation process lacked cram down effect, due to the consensual nature of the agreement. Non consenting creditors were able to maintain their claims unaffected since in order to be ratified a restructuring agreement, among others, could not have adverse impact on non consenting creditors. Furthermore, the Bankruptcy Code in its 2007 version provided for an alternative to restructuring (proceeding of Chapter 7) that involves cram down on minority creditors but which was however available under the condition that the debtor files for bankruptcy. This last condition, together with the strict procedural and substantive requirements of that application, explains that this possibility had rarely been used. Indeed, the submission of an application for bankruptcy generally implies the termination of vital agreements, and it can affect the validity of administrative permits and licenses and, as a consequence, it will be extremely difficult for the debtor to maintain itself as a going concern. In practice, it appears that the conciliation process has generally been used by debtors in order to secure a preliminary order prohibiting its creditors from 2

3 enforcing their claims. The vast majority of the applications aimed in reality to obtain procedural advantages in their negotiations with creditors, or to gain time or even to put assets beyond the reach of creditors. In practice, very few applications have reached the final stage of the ratification of the conciliation agreement. In any case, the massive use to the conciliation process and the fact that it readily lent itself to procedural abuse should be seen as evidence that the Greek rescue legislation, at least prior to its latest overhaul, was defective. In comparison, rescue mechanisms in other countries, such the ʺsauvegardeʺ in France, represent less than 5 % of bankruptcy procedures, a statistic which shows how in these countries bankruptcy law remains mainly a means of liquidation. In Greece the respective percentage was approximately 50 % something that may suggest that bankruptcy liquidation is avoided by interested parties while pre insolvency proceedings are used to put bankruptcy off, but not to seek to rescue or restructure the troubled debtor. Financial situation of an undertakings entering the procedure For the procedure to be opened, the court must be convinced that the specific undertaking is currently in a situation of financial weakness. Indeed, the amended Bankruptcy Code provides that the debtor must be facing ʺa current or an imminent inability of discharging its due and payable pecuniary obligations in a general mannerʺ. The said inability is proven through cash flow projections of the debtor. Following the last amendment of the Bankruptcy Code, article 99 is now only available to debtors that are either in a state of cessation of payments already or that are facing this prospect. This specific provision was amended in the course of the parliamentary deliberations. A previous draft provided indeed 3

4 that, to launch such proceeding, the debtors must be confronted with ʺserious economic problemsʺ. This concept was finally found too vague and therefore likely to facilitate abuse of process that had already been observed. However, the new stricter requirement constitutes a regressive step as it makes the possibility of reaching a restructuring agreement in time and without great loss of value a very remote prospect. It does not abide by the current international trend which tends to guarantee the availability of rescue tools way before the situation of insolvency. Unfortunately the Greek legislator did not take into consideration all the practical aspects of restructuring efforts and the significant delays in the judicial appointment and ratification process. Indeed, a company that is at the point of bankruptcy will not be able to successfully restructure under an article 99 proceeding since in practice it will take at least five months for its application to be heard by the court and at least one more month for the decision to be issued and if the decision involves the commencement of negotiations, an agreement may not be ratified within less than a year from the date of the original application. And of course, in most cases, during that time the company will not be able to obtain any financing, except from shareholder funding, source of funds that most debtors on the brink of insolvency have already used up, it will be extremely difficult for the debtor to survive until the end of the process. The revised Bankruptcy Code contains another possibility, which is rather unusual: undertakings that have ceased payments may still apply to enter pre bankruptcy procedure under the condition that they also file in parallel a bankruptcy petition. Then, the debtorʹs petition and any bankruptcy petitions filed by creditors are suspended during the pre bankruptcy procedures. This combined proceeding constitutes a slight variation of the procedure provided by article 108 of the Bankruptcy Code (in Chapter 7 on the bankruptcy reorganisation proceeding), which provides for the submission of a 4

5 bankruptcy application together with a reorganisation plan. As far as the debtor is concerned, because the combined application under article 99 has the advantage that negotiation of the restructuring plan does not involve a bankruptcy declaration, the procedure can be considered a practical improvement. The perception is of course different from the creditors perspective, especially the secured creditors, and it may be seen as a retrogressive step, since new debts will burden the debtor, for many of them with statutory preference, i.e. that shall be satisfied before of secured and other non preferred creditors. As a consequence, Chapter 7 post bankruptcy proceeding appears to be superfluous. The rescuing solutions The revised Chapter 6 of the Bankruptcy Code on rehabilitation establishes a new process for dealing with imminent bankruptcy through negotiated restructuring which is far more ambitious than the previous conciliation procedure. Indeed, it provides for several solutions aiming at the undertaking rescue. Firstly, in application of article 106b of the Bankruptcy Code, the debtor may obtain the ratification of a restructuring agreement that has been agreed with the necessary qualified majority of creditors without judicial assistance or protection. Only the ratification of this agreement demands a judicial intervention. Therefore a debtor, in case it is getting closer to insolvency, may quickly negotiate a restructuring agreement and submit it to the court for ratification. This possibility is probably the best one under the revised Bankruptcy Code. Of course, in practice, due to the current situation in Greek courts, the ratification of the said agreement will take at least 6 months and as a consequence, the protection and privileges that are linked to the ratification will be delayed. However, while the ratification is pending, parties may 5

6 reasonably expect to receive provisional protection by a standstill order, although that is a matter of discretion for the court. The second solution provided by the revised Bankruptcy Code is to submit an application for the opening of negotiations with creditors. If the debtor chooses this option it may seek the appointment of a mediator to facilitate negotiations while the court as well, at its own initiative, may appoint a mediator. Otherwise, negotiations may be done with the creditors as a group, through a committee formed for that purpose, or on a bilateral basis between the debtor and the necessary qualified majority creditors. The preliminary measures A key element of the pre insolvency practice is the grant of a preliminary moratorium order which is provided by article 103 of the Bankruptcy Code. Indeed the Bankruptcy Court (or its President) which receives the application to open an article 99 proceeding, has the authority to issue a preliminary injunction, at any time after the date of the application and until the closure of the proceeding, which prohibits in whole or in part individual enforcement actions against the debtorʹs property. This injunction applies to claims born until the date of the application, but the judge can in special cases extend the effect of the injunction to later claims. The judge can also order any additional measure that may be necessary to avoid the diminution of the value of the debtorʹs property. Article 103 states as well that an automatic consequence of the issue of a preliminary order prohibiting individual enforcement actions is that debtor is not permitted to dispose of its real estate, equipment and fittings. Article 103 also provides that if there is a serious business or social reason, the injunction may be extended and cover guarantors or other co debtors of the 6

7 debtor. However, there is no indication as to what may be considered as a serious social or business reason for such extension of the protection. An example however could be the application to companies within the same group that are interdependent from a business perspective. The interdiction of disposal of debtorʹs real property and facilities mentioned above is the most important innovation brought by the amendment law to provisional measures. In practice, there were several cases where the debtor, which had been granted protection from individual enforcement actions, proceeded to dispose of substantial assets and that is why this interdiction has been added. However the addition appears to be articulated in a rigid manner. It may therefore create difficulties as, for instance, in the case where a nearly insolvent or insolvent entity which is expecting reaching and/or ratifying an agreement, and which has no access to third party financing or shareholder financing, generates insufficient funds from its own operations. In such case, asset disposal may be the only way to generate the necessary cash in order to complete and then obtain the ratification of a restructuring agreement. Therefore, the prohibition of asset disposal, without taking into consideration the impact on the debtor s prospects of survival, may be an additional obstacle to its rescue and revival. This issue of asset disposal should rather be addressed by the judge issuing the preliminary order. The content of the restructuring agreement Article 106e of the Bankruptcy Code provides that the object of a restructuring agreement may be any regulation measures of the debtor s assets and liabilities. Examples of such regulations are set by this provision, and are as follows: 7

8 modifications of the terms of debtor s liabilities, such as the extension of time of performance, the interest rate, the replacement of interest payment by the right to participate in undertaking profits, the conversion of debts into bonds, whether or not convertible into issuer equity, or the subordination of current creditors in favor of new creditors; debt for equity swap, in combination or not with a reduction of the debtorʹs share capital; regulation of the relations between creditors and equity holders i.e among other creditor priority, management matters, agreements as to the transfer of stock such as rights of first refusal; write offs or write downs of claims; partial disposals of debtor assets; the appointment of a third party to operate the debtorʹs business, e.g. the lease of the business facilities and assets; the transfer of the business in whole or in parts to a third party; the suspension of individual enforcement actions against the debtor for a certain period after the agreementʹs ratification (which cannot bind non consenting creditors for more than 3 months); the appointment of a person to supervise the implementation of the terms of the ratified agreement, and the designation of its powers and authority in that capacity; and since the vote of Law 4072/2012, the payment of additional amounts settling debts in case the financial situation of the debtor improves, the 8

9 conditions of this payment being precisely determined in the agreement. If the debtor fails to abide by the terms of the agreement, it does not result automatically in its termination, but the parties have been granted the possibility to specify in the agreement itself that the failure to comply constitutes an event of default, which enables creditors to terminate the agreement at their discretion. The agreement may also include other conditions such as the prior termination of outstanding agreements that are considered adverse to the interests of the debtor. The provisions of the Bankruptcy Code also specify that an agreement which is submitted for ratification may operate among its signatories even prior to such ratification, if so stated. Finally, the restructuring agreement has to be accompanied by a business plan. This plan determines the steps and goals of the undertaking for the near future. The plan is separate from the overall agreement, so the consent of the majority of creditors may reasonably be expected to operate as a protection against overstated or unrealistic assumptions or projections. The conclusion of the rehabilitation rescue plan The rehabilitation process is concluded with the restructuring agreement reached between the debtor and its creditors following the convocation of the creditorsʹ assembly. This assembly is in quorum if attended by creditors representing at least 50% of the debtorʹs debts. In order to pass a resolution on the acceptance of the rescue agreement a double threshold is set, i.e. the agreement must be approved: by creditors representing 60% of the debts of the participants in the assembly; and 9

10 by creditors representing 40% of the secured debts of the participants in the assembly. Then, the creditorʹs assembly appoints its representative, who will countersign the agreement with the debtor. However, if the debtor reaches an agreement with creditors representing at least 60% of the debts and 40% of secured debts, then the agreement is concluded without the convocation of the creditor s assembly. After its conclusion, the agreement will be ratified by the Bankruptcy Court and it will be then binding upon all creditors, including non consenting creditors. Provided the above double thresholds are met, the debtor can also conclude the agreement and file it with the Bankruptcy Court for ratification prior to the initiation of the rehabilitation process. B. POST BANKRUPTCY REORGANIZATION PROCEDURES A restructuring plan is a bankruptcy procedure. This means that it presupposes the declaration of the debtor as bankrupt. This purpose of this procedure is to help the debtor restore its credibility and viability, and continue its operations beyond bankruptcy. In practice, there are only a few restructuring agreements recorded due to creditorsʹ reluctance to consent to them. A petition with the Bankruptcy Court for a restructuring plan (article 108 of the Bankruptcy Code) may be filed by: the debtor itself, either as part of its bankruptcy petition or as a separate petition, within four months of its declaration as bankrupt, although the Bankruptcy Court may prolong this period for no more than 3 months; or the administrator of a bankrupt estate, within 3 months of the 10

11 debtorʹs filing window having lapsed. Once the court approves a restructuring plan, creditors have to approve it within 3 months. This consent implies that the plan is approved by creditors representing at least 60% of all the debtorʹs debts, including 40% of secured claims. If the creditors consent to a restructuring plan, the administrator, together with the interested party or parties, present it to the court for ratification. The ratified restructuring plan has the following effects: it binds all secured and unsecured creditors, irrespective of whether they approved it or not; bankruptcy proceedings end; the debtor can start running its business again, unless the plan provides otherwise (indeed the court may give a third party the right to run the business instead); unless the relevant creditor objects, claims against the debtorʹs guarantors and co debtors are reduced in proportion to the debt reduction proposed under the restructuring plan; creditors cannot take individual enforcement measures against the debtor. Transactions affected by a company that subsequently becomes insolvent Before the declaration of bankruptcy proceedings on the debtor, with respect to transactions which the debtor has carried out with a third party, creditors can ask to be put back in the position in which they would have been if a transaction had not been earned out, but only if all the following conditions are met (articles 939 and seq. of the Greek Civil Code): The transaction was carried out with the intention of prejudicing creditors; The transaction caused the debtor s insolvency; and 11

12 The third party beneficiary knew the transaction was being carried out in order to prejudice creditors. Furthermore, if the transaction was carried out for no consideration, the third party will be liable irrespective of whether it acted or not in good faith. The transaction can be set aside whether or not it took place within the suspect period (i.e. the period following the debtorʹs cessation of payments). During bankruptcy proceedings, an administrator may revoke transactions which both: took place within the suspect period, and are detrimental to creditors. Finally, the administrator must revoke the following transactions: The donations made by the debtor unless this was given out of social courtesy (e.g. a tip) or as part of a moral or legal obligation; The payments of debts which are not due yet; The payments of due debts by means other than cash; and The provision of security to formerly existing claims. 12