Christoph Paulus

1. Thanks to the Directive EU 2019/1023, the member states soon will have a common, harmonized pattern for how out-of-court negotiations will take place: The communication with the creditors will start completely outside the insolvency scenario but everyone in the room will or does know that the debtor has received from the Directive – more precisely: from its transposition into national law – a tool box which helps to overcome hold-out creditors. The mere existence of a preventive framework functions a bit like a baseball bat which unfolds its threatening effect also by its mere existence in the corner.

Accordingly, in all member states those negotiations will proceed step by step: step one is determined by the negotiations as described, step two is the involvement of the court under the preventive framework, and step three might be the recourse to the insolvency system.[1] Insofar it can be said that this Directive has harmonized the member states’ insolvency laws to a considerable degree.

2. Seen from a specific German perspective, another observation appears to be worth mentioning. Germany has had until the enactment of such preventive framework a clear division between business law and insolvency law; unlike Italy, France or the United Kingdom, there was no special preventive insolvency avoidance mechanism available and, thus, no hybrid procedure available.
From this perspective, a certain tendency in the recent insolvency development in Europe (if not worldwide) can be discovered: the traditional insolvency proceeding is pushed back to a degree that the question arises whether this law shall be abolished? This is insofar a highly tricky question as it is generally accepted that insolvency law plays a quintessential role in all economies in taking care of the orderly exit of those actors which are no longer sustainable. This law has the task of cleaning up, as it were, the market and taking care of that unproductive assets are carried to where they productivity can unfold. What if this role is eliminated?
The indications are not only the preventive framework and the abovementioned Directive; in this very Directive the member states are also ordered to introduce effective early warning systems, art. 3. The more effective they are, the less insolvency proceedings will occur. Moreover, the present efforts on the EU level to propel harmonization of the member states’ insolvency laws include the introduction of a separate pre-pack procedure in which all relevant negotiations and results are done before the commencement of an insolvency proceeding; this is needed only for the general applicability of insolvency and the final decision of the court. In a very recent case in Texas, the insolvency proceeding lasted just 17 hours!
This trend implies that the decisive role in the preparation of an insolvency proceeding is to be played by the debtor. The consequence thereof might be that it is the debtor who is setting the course of what is to go into an insolvency proceeding and what not. In the US, a couple of high profile cases – including Johnson & Johnson – have opened the eyes for the implicit risk of such an approach. But in Germany, too, there are cases in which the debtor splits the company into those for the trash can and those determined to survive. It is not unlikely that in such a scenario the interests of the creditors play a subordinated role if any. The question, thus, arises whether the debtor is the right person to decide over what should go through an insolvency proceeding and what not?

1. In the Netherlands, we have the possibility to offer a composition or plan in liquidation proceedings or in so-called suspension of payment proceedings. However, the offering of such plan is exceptional. The most important reason is that our insolvency law is very old and in fact dates back to the nineteenth century and that procedures have not changed much since then. The plan proceedings have not been modernized. One of the most important draw-backs of the plan proceedings is that only unsecured creditors with no priority rights can be impaired by a plan in the sense that a majority of the creditors can bind a minority. In practice such ordinary creditors are out of the money anyway. Most assets are secured, important creditors like the tax authorities and employees have priority rights and many claims are held to constitute administrative costs. This applies for example to remuneration to the government for cleaning up polluted property after the commencement of the insolvency proceedings. On the other hand, until recently, it was easy to accomplish a restructuring by doing a transaction in which the assets were sold to a new entity, which would then be refinanced. Sometimes the business would be sold to an outside buyer. The procedure was simple, it did not require the consent of the creditors, involving voting, confirmation and possible appeals, the bankruptcy trustee only needed to obtain permission from the court. Essentially this was a court directed system. The possibility to use this tool however has been limited somewhat by the judgment of the European Court of Justice in the Smallsteps case,[2] which made it more difficult to dismiss employees in the context of such asset transaction. 

Consequently the Netherlands do not have much experience with plans and therefore the new preventive restructuring plan constitutes a game changer. It is more or less an implementation of the Restructuring Directive. More or less, because actually it was drafted in parallel with the directive and will have to be amended slightly in order to be to fully aligned with the directive. The new restructuring plan can affect the rights of all types of creditors: ordinary, secured and creditors with priority rights. It can also affect the rights of shareholders. However, the rights of employees can’t be changed by the plan. It is possible to restructure the workforce, but this has to happen outside of the plan.

2. The new legislation went into effect early 2021 and so far there have been approximately 40 cases. The modest number of cases is due to the fact that many companies have been able to survive because of the state subsidies in relation to the corona pandemic. Nevertheless, although the number of cases has not been very large so far, it seems safe to say that the new plan procedure is working well.

The plan proceedings can either be public proceedings or confidential proceedings. Public proceedings have been submitted for inclusion in Annex A to the Insolvency Regulation. With respect to proceedings that will fall within the scope of the Insolvency Regulation, the court will only have jurisdiction if the COMI or an establishment of the debtor is located in the Netherlands. With respect to confidential proceedings the court has jurisdiction if there is a sufficient connection with the Netherlands. The same applies if the proceedings are public proceedings, but the COMI is located outside the European Union, because also in that case the proceedings do not fall within the scope of the Insolvency Regulation.

The plan may concern a part of the creditors only. Contrary to German law, the Dutch statute does not contain provisions about criteria for determining which creditors will be included, and which will not be included. The debtor, or the restructuring expert, is free to make his own determination, but in the end the decision on inclusion must be a fair one.

Finally, as a preliminary comment, it may be useful to note that the Netherlands have chosen the rule of absolute priority as a criterion for cross-class cram-down, but an exception is allowed if there are good reasons for such exception and provided that the interest of relevant creditors or shareholders, as the case may be, are not harmed.

Robert van Galen

The directive provides for the possibility to appoint a restructuring expert. Under the Dutch implementation the restructuring expert can be appointed first of all at the initiative of the debtor. In the absence of a restructuring expert, the debtor will offer the restructuring plan, if a restructuring expert has been appointed, it will be the restructuring expert who negotiates and offers the plan. The creditors, shareholders and employee representatives may also ask the court to appoint a restructuring expert even if no proceedings have been opened so far, which appointment will then mark the opening of the plan proceedings. Although the restructuring expert is not appointed at the initiative of the court, the experience so far is, that if the debtor opens proceedings and makes any request in relation thereto, such as a request for a stay, the courts encourage the debtor to apply for such appointment.

To begin with the obvious: The German Preventive Restructuring Statute has explicit rules on what is called “Restrukturierungsbeauftragter” (restructuring commissioner). Speaking now as a member of the expert group that was supporting the Commission in drafting the Directive EU 2019/1023, this is regretful. Since in the beginning of those deliberations in January 2016, the envisaged idea was to create an instrument that help the 99% of the European enterprises and entrepreneurs that qualify as micro, small and medium-sized companies (MSMEs) to get around an insolvency proceeding. For that purpose, a procedure was supposed to be created that is cheap, fast and with as little as possible court intervention. Needless to point out that such an instrument would have been extremely helpful for the overwhelming majority of European businesses; but it is also needless to say that it would not have generated much of an income chance for restructuring advisers.
Accordingly, the mere existence of the restructuring commissioner in the German law lays bare the success of lobbying. Artt. 73 to 83 StaRUG provide detailed rules about this office holder’s appointment, tasks, and remuneration. Regarding appointment, a distinction is drawn: in certain cases it is mandatory for the court to appoint a restructuring commissioner – for instance, when and if the submitted plan (or the draft of it) indicates the infringement of the rights of small and medium-sized enterprises, or when it is foreseeable that the voting on the plan will include a need for the use of the cross-class cram-down mechanism. In other cases, it is up to the debtor to ask the court to appoint a restructuring commissioner; such a request might be in place when the debtor wants to demonstrate the integrity of the restructuring attempt.

Regarding the tasks, they differ to some degree between the obligatory and the voluntary appointment. But they have in common, that the restructuring commissioner is designed more as a monitor over the legality of the proceeding and as an informant of the court. So this person is less equipped with rights to initiate anything on his own. Here, it seems to me, is a great difference to the Dutch example. 

Christoph Paulus

What I have said before about the success of lobbying, deserves underlining when the annulment of contracts is in question. Even though foreseen in the original draft of the StaRUG, it is not contained in the statute that entered into force on January 1, 2021. Rumor has it that it was the influence of the German insolvency administrators’ association which caused the legislator to eliminate that option. Allegedly, the argument had been that this takes too much away from the tool box of the ordinary insolvency proceeding. Anyway, whatever the reason was: the German law does not offer the option to annul contracts before the commencement of a regular insolvency proceeding. 
As a consequence of deleting this possibility, arguments were heard that this would lead many German companies to forum shop and to make use of the Dutch WHOA. I will come back to this below at E.

Robert van Galen

Yes, the Dutch rules differ from the German system. In the Netherlands, both the debtor and the expert can negotiate with other parties to terminate the contract.

To give an example, if there is a leasing or rental agreement, which is not beneficial to the debtor, there may be a renegotiation of the rent. The other party does not have to agree with the changes, but if the parties do not come to an agreement, there is a possibility of termination. The termination date will be three months after the confirmation of the restructuring plan or earlier, as determined by the court. In case of such termination, the other party may be entitled to compensation for the loss of earnings. However, this claim for damages can be included in the plan, which may mean that the other party only will receive a percentage as stipulated under the plan of its claim for damages. Obviously, this possibility strengthens the ability of the debtor or expert to negotiate new terms for the agreement as an alternative for termination.

Robert van Galen

I will now  move on to another theme, namely the so-called preliminary questions. Generally speaking the structure of the plan proceedings is, that first the debtor or the restructuring expert offers a plan to the creditors and/or shareholders, next the creditors and/or shareholders vote on the plan and finally the court decides whether it will confirm the plan. This means that the court may refuse to confirm the plan after the voting has taken place, for example because the ranking order has not been respected, because no adequate information was given to the creditors or because the debtor did take a wrong decision on whether a disputed creditor was allowed to vote.  However, a particular feature of the Dutch system is, that the plan can only be presented once and therefore if confirmation is not granted, the debtor cannot offer a new restructuring plan to its creditors and shareholders for the next three years.

Because the debtor has only one chance to get it right it is very important that, once there has been a vote, the debtor obtains confirmation indeed. The statute contains a provision which should serve to avoid disaster, making it is possible to ask the court to rule on issues which are relevant for the confirmation, prior to the vote. For example, the debtor may ask the court to rule whether the information provided to the creditors is adequate. Only the debtor and the restructuring expert can submit such questions to the court prior to the vote, the creditors cannot. The court must hear all the parties in interest and its ruling will be binding on all the parties that have been given the opportunity to be heard. The parties that are bound by the decision can no longer raise objections against confirmation of the plan on the basis of the issue that has been decided in the preliminary questions procedure. Moreover, there is a rule that if a creditor is aware of an objection it may have against the confirmation of the plan once it has been voted on, it must timely inform the debtor or the restructuring expert of its objections in order to enable them to raise preliminary questions with the court, if they think these objections may constitute a threat. If the creditor does not timely raise the objection, it will not be allowed to do so during the confirmation hearing

One of these plan proceedings concerned the football club of The Hague, ADO. A restructuring plan had been submitted to the creditors and the shareholders, which entailed that the shareholders would be wiped out. In the letter submitting the plan to them, ADO’s restructuring expert wrote: “if you have an objection you must inform us thereof it within two weeks, so that we can submit preliminary questions with respect to such objection to the court, if we think that that is useful. In the absence of you informing us of such objections within these two weeks, we will consider your objections to be too late.” By putting the creditors and shareholders on notice in this way, it would become more difficult for creditors or shareholders to come up with objections closer to or after the voting. In Germany the system of preliminary questions it is a bit different and I hope Christoph will now explain to us how it works in Germany.

I certainly will. Pursuant to sec. 47 StaRUG, the debtor is entitled to have a pre-check on any question which is relevant for the confirmation of a restructuring plan – unless the debtor has anyway the intent to have the confirmation performed under the provided judiciary confirmation tool pursuant to sec. 60 et seq. StaRUG. The answer shall be given within two weeks but it is not explicitly stated that it should be binding. So, there seems to be just another difference to the Dutch law which is elegantly working with subtle pressures. However, in practice it might turn out that the difference of the binding effect is lesser than it appears to be in writing.

First of all, if the confirming court discovers a procedural mistake or a material deficiency in the submitted plan, it will delay confirmation and give the debtor a time limit to correct this. Moreover, there is the abovementioned exception of the admissibility when and if a judicial confirmation is planned anyway. In such a case – i.e. when the court knows that the plan will be submitted anyway for the official confirmation – a pre-check will not be done by the court. Thus, a second engagement with the question posed to the court earlier can arise only in rare cases – for instance, when and if a complaint is brought to the court about the validity of the voting or so. Under the German system of court competence, it is almost excluded that this question is brought to the initial restructuring court so that the question of binding does not come up. But even if there were particular circumstances, under which this original court is confronted again with its own previous answer, the general constitutional rules on reliability on statements given by public authorities prevent this court from deviating from its previous answer without solid and well-founded reasons.

Accordingly, even though there is no right of the debtor to insist on the answer of the pre-check, it is hard for any court to come up with a surprising new answer.

Christoph Paulus

We all know – at the latest from the Brexit – that an eminent advantage of the European judicial room is the automatic recognition of most of the court decisions among the member states. Instead of an expensive and long-lasting procedure in the course of which possibly two or three courts examine whether or not this particular foreign proceeding can be recognized in this jurisdiction, we have now an automatism.
The German legislator was aware of this advantage (and of the respective plans in the Netherlands) when drafting the StaRUG and decided accordingly to offer two options for the plan proceeding under the new law. The one not explicitly mentioned is the secret – better: open – one which is, however, not public. The other one is the public one which is explicitly regulated in sec. 84 et seq. StaRUG and which shall become enlisted in Annex A of the European Insolvency Regulation EU 2015/848 (EIR). The public notification is indispensable pursuant to art. 24 EIR and comes to the prize of publicity which might not be in the interest of the debtor. So, a balance needs to be struck when the applicability of the EIR in the particular case would be an advantage. Since then, one would have all the advantages of automatic recognition pursuant of artt. 19 et seq. EIR – plus possibly further advantages resulting from the applicability of this Regulation.
However, particularly in relation to the Dutch WHOA a caveat needs to be made. As noted above (sub C 2), when the German legislator enacted the StaRUG without offering the option on contracts annulment, critics immediately said that this is a push towards forum shopping; since they would now recommend their clients to go to the Netherlands where the WHOA contains this very option. The often used example in this context was a warehouse chain which went into an insolvency proceeding primarily because of the high rents it had to pay for the leased premises. It was argued that this insolvency could have been avoided when and if an option would have existed outside of an insolvency proceeding to reschedule these contracts.
However, a closer look to this particular case might unveil that forum shopping in the Netherlands would not do the job either – at least not in all cases.[3] Since when and if the annulment of lease contracts is at stake, German law is to be applied in all relevant cases, cf. Artt. 11 EIR, 24 Brussels Ia-Regulation, sec. 29a ZPO (German Civil Procedure Code). All these instruments follow the widespread rule that all legal affairs around real estate is governed by the lex loci.

Robert van Galen

I would like to make a few comments in this respect. One is that the interaction between insolvency law and restructuring plans is in fact a very complicated matter under the Directive. One wonders, for example, whether the terminations of these real estate contracts can be regulated under Dutch law. The other question is whether it is a matter of applicable law, or of the court that has jurisdiction over these kinds of matters; I think that Article 11 of the Insolvency Regulation is rather complicated and therefore it could happen that there are disputes, precisely in relation to these aspects.
I mentioned that in the Netherlands we have the possibility of having confidential plans in which case there is no COMI requirement, as these confidential plans are not included in Annex A of the Insolvency Regulation. It seems therefore that, for example, if the COMI is located in Italy it would be possible to open confidential proceedings in the Netherlands, provided there is a sufficient connection. At the same time, if proceedings are also initiated in Italy, and they are main proceedings under the Insolvency Regulation, the Italian trustee will have powers that override what is decided in the Netherlands. These kinds of issues may also arise in relation to proceedings opened outside the European Union, e.g. in England, because in general all proceedings that do not occur in the COMI can lead to these problems.
My opinion is that it is preferable to open proceedings only in the COMI, or in an establishment, 
precisely because it avoids having these kinds of issues.