COVID-19 spurs countries around the world to expedite reform of restructuring laws

COVID-19 spurs countries around the world to expedite reform of restructuring laws

This article looks at how coronavirus (COVID-19) is causing countries around the world to try to expedite finalisation of new restructuring laws to assist struggling companies during this period of extreme volatility and uncertainty.

We have already seen various company failures around the world attributed to the new coronavirus (COVID-19), including Flybe in the UK, Valeritas Holdings Inc in the US and Hontop Energy (Singapore) Pte Ltd in Singapore (see News Analysis: COVID-19 impact on restructuring and insolvency). We look at various countries which are expediting reforms to their restructuring and insolvency laws to deal with the current crisis, including:

Netherlands—WHOA scheme

Last year, draft proposals for a new type of scheme were submitted to Parliament on 8 July 2019. The draft Bill allows for global restructurings as it features elements of the US chapter 11 (such as a cram down mechanism and moratorium) and the UK scheme of arrangement (such as implementing a plan outside of formal insolvency proceedings).

The Dutch Scheme (the Act on the Confirmation of Private Plans’, otherwise known as WHOA (Wet homologatie onderhands akkoord)) claims to be a state-of-the-art restructuring procedure as it is simple, fast, flexible, reasonable and cost-efficient. It would be a procedure that remains outside of formal insolvency proceedings. It merely facilitates a procedure where the court can be requested to confirm the plan (where a majority can bind a minority within each class) and it can be imposed on dissenting classes (cram down).

One of the flexible elements of the draft Bill is the provision of an option to choose between a public and a confidential procedure. Only the public procedure will be placed on Annex A of the Recast Regulation on Insolvency 2015/848, Regulation (EU), 2015/848 (the Recast Regulation on Insolvency) and (thus) applies only when the centre of main interests (COMI) of the debtor is located in the Netherlands. The confidential procedure will fall outside the Recast Regulation on Insolvency.

We understand that the WHOA is expected to enter into force in January 2021, although lawyers are calling for this to be expedited.
 

Germany—directors’ duty to file

In Germany, directors are normally required to file for insolvency without undue delay and at the latest within three weeks (21 days) after becoming illiquid or over-indebted. It has been reported that the federal government may temporarily suspend this requirement until 30 September 2020 (with the option to extend until 31 March 2021) due to the coronavirus crisis. This would be a welcome reform to allow directors some breathing space to assess all options during this turbulent time and potentially rescue otherwise viable companies. For the suspension to apply, it must be proved that the company’s insolvency is caused by the coronavirus pandemic and that the company has requested state aid or is engaged in serious financing or restructuring negotiations with reasonable prospects of restructuring.

Hong Kong

Currently, Hong Kong does not have any form of rescue procedure available to distressed companies. It has been reported that Hong Kong is reconsidering a new kind of restructuring procedure based on the US chapter 11 process, which has been resurrected in light of the pressures companies face from coronavirus. The Chapter 11-style corporate rescue bill was first discussed in 1996 by the Law Reform Commission, but it is reported that the government plans to finalise its proposal and potentially table a bill during the legislative session beginning in October 2020. We understand that the government intends to consult on the draft bill over the next few months.

UK

The most recent UK corporate insolvency law reform proposals included: a short moratorium—measures to improve transparency and trust by looking at ways to promote better stewardship of large group structures, tackling rogue directors not only after the event but tightening up on governance pre-insolvency—measures to regulate disposals of group companies, to increase recovery of asset powers, including reversal of ‘value extraction’ schemes (including security put in place by rescuers)—and increasing investigatory powers for the Insolvency Service. The proposals also look at a new chapter 11-style restructuring arrangement.

Timing of implementation of the proposed measures is subject to parliamentary time becoming available and had been delayed due to Brexit taking up considerable parliamentary time.

Key takeaways

Obviously any counties under lock down from coronavirus may face logistical issues in making legal reforms if the relevant parliamentary body/law making body/court is running a reduced or skeleton service. However, many insolvency professionals argue that now is the most important time to make those reforms through emergency legislation to rescue otherwise viable companies. It remains to be seen whether the UK and other countries such as Spain (where directors must file for insolvency within 2 months) and France (where directors must file for insolvency within 45 days) can also react quickly to these events (see Practice Note: Table comparing European directors' duties).

 

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.