As the major (English) trading creditor of the London branch of a troubled bank registered and with its principal operations and headquarters in Switzerland but with other branches in a variety of largely offshore jurisdictions, what insolvency process would you seek to have employed in which jurisdiction in order best to protect your interests? The majority of the bank's assets are in England and you fear that without proper control being exercised they might be dissipated in the impending collapse.

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The European High Yield Association has announced refinements to its proposals to the Treasury on insolvency law reform.

Its original submission in April 2007 identified perceived shortcomings of the Enterprise Act reforms:

". . . the administration procedure has not been widely used in distressed situations and, more generally, statutory processes have been avoided.

We believe this occurs for the following reasons:

• despite the best efforts of those in government and elsewhere, administrations and Company Voluntary Arrangements (CVAs) are still perceived in the UK as reflecting corporate failure rather than rescue, which depresses confidence in the business and enterprise value;
• the ability of suppliers and customers to abandon their contracts with the distressed company if it makes a formal insolvency filing discourages filing, and where filing does ultimately occur, the ability to cancel contracts destroys the value of the business; and
• difficulties in obtaining funding in administration impair the company's ability to trade through the proceeding."

The first point above is uncontroversial; a direct remedy to the second by a simple extension of the administration and small CVA moratoria enjoys the support of the City of London Law Society (here), amongst others; and the third point refers to DIP funding (although some might argue that administration is inimical to the concept of debtor in posession).

Under a heading "Facilitating 'out-of-court' restructurings in the UK" then come three suggestions leading to "a call for a court supervised restructuring process":

• An all-encompassing stay on actions should be available to prevent value destruction as this is currently seen as an inevitable consequence of filing for insolvency in the UK. In other jurisdictions, notably the US and France, contractual termination provisions are not enforceable. The current stay deployed by English law does not go far enough in protecting failing businesses and allows customers and suppliers to terminate contractual relations just when their continued commitment is most crucial to the rescue.
• A framework should be created for fast judicial resolution of valuation disputes in restructurings, short of administration proceedings. This will enable practise and precedent to develop in restructuring valuations, thus providing stakeholders with relative certainty of outcome, whilst avoiding the value loss that arises through administration.
• Creditors or shareholders with no economic interest in the revalued enterprise should not be able to block restructurings or force full insolvency proceedings. A mechanism is needed to deal fully with 'out of the money' claims in restructurings.

It is these lightly sketched but far-reaching proposals that are now refined and extended - and will be considered in a subsequent post.

 

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More food for thought in a post by John Armour on the Credit Slips blog.

I agree with the conclusion that:

"we're going to see a number of the highly leveraged buyouts that run into difficulty winding up in formal bankruptcy proceedings, after a workout has been attempted and failed".

And this may well lead to attempts to reform some European bankruptcy codes.

It will also promote and no doubt extend the migration concept (previously discussed here).

Moving a COMI (centre of main interests) to a jurisdiction where the insolvency regime is more suited to concluding a successful restructuring not only can be done, but can add huge value to the restructuring.

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The register will be launched in September 2007 at the Regional Court in Brno and the Supreme Court in Olomouc before testing is rolled out to other courts. It will contain on-line details of bankruptcy administrators, debtors and their electronic files, according to epractice.eu.

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Late July 2007's market shocks, when the Dow, FTSE and other indices slipped 5% or so on the back of the US sub-prime collapse spreading to prime homeloans and - some feared - into the corporate bond and credit markets, suggested that the wall of cash fuelling the recent credit boom was subsiding.

Such an outcome was not entirely unforseen, as reported here by Reuters in early June in an article highlighting a dramatic switch in worldwide corporate insolvency levels, from a 17% reduction in 2006 to 7% growth in 2007.

The last few days have seen faltering LBOs and a reluctance amongst banks to participate in recently planned syndications. The covenant-lite loan is said to be history and rising interest rates and oil prices encouraged market jitters.

Alongside this, investment banks, turnaround boutiques, lawyers and accountants are busy hiring restructuring talent and experience.

Will there be an insolvency boom? Not in my judgement. But there will be enough of an uptick to keep the skilled, flexible and client-oriented restructuring professional busy.

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Winning the Eurovision Song Contest was only one of Serbia’s European achievements last weekend. They also hosted INSOL Europe’s 3rd Accessing Countries Committee conference, as reported by Economy, the Serbian business news website.

An abridged version of a paper on Serbia’s bankruptcy law developments by Jelena Marjanovic, winner of the 2006 Richard Turton Award, is available here (as published in Eurofenix, INSOL Europe’s quarterly journal).

Serbia has the advantage of having developed its bankruptcy law since 2000, incorporating many of the best bits of other insolvency regimes around the world. Making good use of that law is a work in progress.

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Does the appointment of a schwacher vorläufiger Insolvenzverwalter (a “weak” preliminary administrator) under German law normally entail the partial or total divestment of the debtor as set out in Article 1(1) of the European Insolvency Regulation?

I had understood from various German sources that it did not, and that therefore such an appointment would not normally constitute insolvency proceedings under the Regulation. Moreover, this is not an uncommon English view. In Hans Brochier Ltd vs Exner ([2006] EWHC 2594 (Ch)), Warren J found, although the point was not argued, that

"It is common ground [between the parties, one of whom is of course a German administrator] that under German law there is a preliminary appointment. . . . The German proceedings are therefore not open for the purposes of the Regulation”.

In the unreported decision of MG Rover Deutschland GmbH (in administration) (Chancery Division (Birmingham District Registry) 14 August 2006), coincidentally the day before the Brochier hearing, Norris HHJ held that the appointment of a preliminary administrator did not commence (in this case secondary) insolvency proceedings in Germany. Again, this was common ground between the parties, including the German administrator, but was not argued before the court. Allen & Overy’s commentary Duplicate officeholders - too many cooks spoil the broth? notes that the German court had held that the appointment opened preliminary secondary proceedings, a concept for which the Regulation does not provide.

The Eurofood ECJ decision addresses the question of opening of proceedings, but adds to the current debate by interpreting “divestment” (see below, emphasis added):

"52. As the Commission of the European Communities has argued, it is necessary, in order to ensure the effectiveness of the system established by the Regulation, that the recognition principle laid down in the first subparagraph of Article 16(1) of the Regulation, be capable of being applied as soon as possible in the course of the proceedings. The mechanism providing that only one main set of proceedings may be opened, producing its effects in all the Member States in which the Regulation applies, could be seriously disrupted if the courts of those States, hearing applications based on a debtor's insolvency at the same time, could claim concurrent jurisdiction over an extended period.

"53. It is in relation to that objective seeking to ensure the effectiveness of the system established by the Regulation that the concept of 'decision to open insolvency proceedings' must be interpreted.

"54. In those circumstances, a 'decision to open insolvency proceedings' for the purposes of the Regulation must be regarded as including not only a decision which is formally described as an opening decision by the legislation of the Member State of the court that handed it down, but also a decision handed down following an application, based on the debtor's insolvency, seeking the opening of proceedings referred to in Annex A to the Regulation, where that decision involves divestment of the debtor and the appointment of a liquidator referred to in Annex C to the Regulation. Such divestment involves the debtor losing the powers of management which he has over his assets. In such a case, the two characteristic consequences of insolvency proceedings, namely the appointment of a liquidator referred to in Annex C and the divestment of the debtor, have taken effect, and thus all the elements constituting the definition of such proceedings, given in Article 1(1) of the Regulation, are present.”

I have recently heard it suggested that since, when appointing a schwacher vorläufiger Insolvenzverwalter, the German insolvency court will routinely restrict the debtor’s powers to deal with its assets, giving such powers instead to the preliminary administrator, such an appointment will entail at least partial divestment of the assets.

It seems likely to me that the only viable approach to this issue is to consider the German court’s order in each case to ascertain whether there has been the partial or total divestment required by Article 1(1) for insolvency proceedings to have been opened for the purposes of the Regulation, but I would welcome opinions from those who know more about German insolvency law and practice than I do.

Can you answer the question?

Does the appointment of a schwacher vorläufiger Insolvenzverwalter under German law normally entail the partial or total divestment of the debtor as set out in Article 1(1) of the European Insolvency Regulation?

Or these supplementaries?

• Is this a straightforward point depending on the order given by the insolvency court in each case?
• If so, is there a normal scope for such orders, which stops short of divestment?
• Or is it a question of interpretation - does Vermögensbeschlag have the same connotations as divestment?
• And does the Eurofood decision’s clarification of divestment assist in answering the question? 

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For a current guide to insolvency procedures in nine major European jurisdictions, try Clifford Chance's European Insolvency Procedures (2007 Edition).

A reasonably heavyweight (68 pages) briefing note, it is a useful and digestible reference guide (in English) to procedures in:

• England & Wales
• France
• Luxembourg
• Belgium
• Germany
• Spain
• The Netherlands
• Poland

The note includes an introduction on the European Insolvency Regulation and a brief comparative analysis of insolvency and restructuring trends in Europe.

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Schefenacker reports that its bondholders have agreed today, at a company voluntary arrangement meeting, to take:

• EUR 7.5 million cash;
• 5% of the equity; and
• warrants that could raise the equity to 15%.

The shareholder, Dr Alfred Schefenacker, retains 25% of the equity but has contributed:

• EUR 20 million of new money;
• his personal equity in the Engelmann subsidiary; and
• the cancellation of EUR 100 million of shareholder loans.

Senior creditors now hold 70% of the equity.

The success of the migration now depends on the operational restructuring that Stephen Taylor has been managing during the last few months of stakeholder negotiations - he claims "a solid first quarter performance".

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Eurofenix is INSOL Europe's quarterly journal.

Like insolvencyblog.com(!), it is essential reading for all insolvency practitioners, distressed investors and other relevant professionals who are interested in European insolvency and restructuring. I declare an interest as Eurofenix's editor, so to read the Winter 2007 issue and form your own view, click here.

If you like it, use this form to become a subscriber and receive your personal copy each quarter.

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Schefenacker PLC's creditors' meeting, which was due to have been held on Friday 30 March to cram down €200million of bondholder claims to a 5% equity stake through a Company Voluntary Arrangement, has been adjourned to 4 May, according to the company and as reported by Plastics Industry News. Modifications offering bondholders 15% of the equity and a total of €7.5m in cash will be put to the vote when the meeting reconvenes.

Speculation (see earlier post) that the original proposals, published on 9 February, did not offer enough for bondholders proved correct.

Full details of the modifications - particularly how far Dr Schefenacker, the original shareholder, will be diluted if the bondholders receive 15% - have yet to emerge, but it is clear that bondholders were prepared to risk losing everything in a liquidation rather than settle for 5%.

After a very difficult 6 months, is there light at the end of the Schefenacker tunnel? And is migration becoming a successful and accepted mechanism for restructuring distressed German companies?

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The famous decision on COMI (Centre of Main Interests) and the opening of main insolvency proceedings under the European Insolvency Regulation, which involved an Irish subsidiary of the Italian Parmalat group, is not the easiest to find quickly on the internet, so here's the link:

Eurofood IFSC Ltd, European Court of Justice Case C-341/04, Judgement of the Court (Grand Chamber), 2 May 2006

and here's the preceding Advocate General's Opinion:

Opinion of Advocate General Jacobs, 27 September 2005

For a selection of commentaries, try the following links:

• eir-database.com: Commentary on Case C-341/04
• A&L Goodbody (solicitors for the Irish Provisional Liquidator): Eurofood ECJ Decision - Guidelines on COMI
• Weil, Gotshal & Manges (lawyers acting for the Italian Extraordinary Administrator): European Court of Justice Establishes Approach for Determining Debtor's Center of Main Interests
• Linklaters: Eurofood - the ECJ ruling on the determination of COMI
• Freshfields Bruckhaus Deringer: The Eurofood IFSC Case

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For a useful and accessible summary of the key points of Cypriot insolvency law, see Andreas Neocleous' article here.

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Debtors migrate but creditors forum shop.

Robert Hickmott and Alex Ballman write in Legal Week about how the trio of German cases:

• Deutsche Nickel


• Hans Brochier


• Schefenacker

illustrate the post-Eurofood attitude to COMI (centre of main interests) under the European Insolvency Regulation.

It has been established through cases like Staubitz-Schreiber that debtors can move their COMI, and this facility was used in the Collins & Aikman restructuring and insolvencies.

But forum shopping, where creditors race to their court of choice, is what the European Insolvency Regulation sought to avoid.

With COMI now established as elsewhere than the place of a company's registered office only as a result of factors that are both objective and ascertainable by third parties, such cynical or opportunistic forum shopping by creditors is rightly deprecated.

There are many reasons why a debtor might choose to make use of an alternative insolvency regime by moving its COMI, such as:

• to give UK and US stakeholders comfort that a flexible and familiar (UK) restructuring environment will be available;


• to make use of Insolvenzgeld funding (Germany & Austria);


• to avoid Acquired Rights Directive/TUPE problems with employees (Netherlands);


• to enhance employee protection (France); or


• to use DIP financing (Sweden).

But it will be critical, as the Hans Brochier directors discovered, to get the details of the COMI move right.

The Deutsche Nickel mechanism - conversion to a limited partnership and transfer of the assets and liabilities to the new general partner (in that case an English company) by universal succession - is a specific form of migration that nevertheless requires a COMI to be established in another jurisdiction.

Migration is the acceptable face of forum shopping, and we will see more of it!

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Bondholders may not find 5% of the equity an appealing prospect, but the level of pain to be borne by Schefenacker's existing shareholders is yet to emerge.

The company has announced replacement of €250m 1st and 2nd lien debt and €200m of subordinated bonds with new debt of €305m:

• €25m senior revolving credit
• €170m senior term loan
• €110m mezzanine

Some of the €55m "new money" is said to come from a mezzanine investment from the group's owner, Dr Alfred Schefenacker, who is also transferring minority interests in Schefenacker Engelmann Spiegel GmbH to the group. His shareholding in the group is to be reallocated in part to the senior lenders.

The value of his financial contributions and the extent of his the equity dilution may be enough to make the deal work. The company says it doesn't need bondholder approval, but neither has it yet announced the detail of the restructuring mechanism. . . .

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A version of this article first appeared in Recovery, Autumn 2004.

A little knowledge is a dangerous thing, and I hope this outline doesnít over-encourage practitioners to be too cavalier about exercising powers abroad pursuant to Article 18 of the European Insolvency Regulation!

We are all encountering foreign debtors and creditors more frequently and my aim is to give a quick guide about what to expect when you follow rule number one of cross-border insolvency work: seek specialist advice.

General similarities between insolvency regimes across Europe include the approval by creditors and/or the court of a plan following a moratorium in proceedings equivalent to court-appointed administration. Matters such as notice periods and voting rights vary and the differences are too detailed to cover here. Most jurisdictions also have a solvent liquidation procedure similar to a membersí voluntary liquidation, as well as a court (compulsory) liquidation procedure.

Belgium

Two main procedures:

• Bankruptcy (equivalent to compulsory liquidation)

• Judicial composition (debtorís petition; relatively rare; equivalent to court-appointed administration and incorporating a 6ñ9 month moratorium and a reorganisation plan)

Two other main types of insolvency appointment:

• Provisional liquidator

• Ad hoc representative (a confidential, pre-insolvency appointment, similar to a mandataire ad hoc in France)

Close supervision of the proceedings by the commercial court covering the debtorís registered office.

Germany

A ësingle gatewayí system where filing is mandatory (criminal sanctions for breach)within three weeks of cash flow insolvency; reorganisation filing is possible on grounds of ëimminent illiquidityí.

Provisional administrator on the local court list is appointed on filing; Insolvenzgeld (money for wages) paid by the state to the provisional administrator out of a levy on employers whilst the Insolvenzplan is prepared.

Three main procedures;

• Administration (not common and often leads to liquidation)

• Self-administration (very rare ëGerman Chapter 11í originally intended for small businesses and professional practices, but has been used, with an IP appointed to the main board, in some major restructurings)

• Liquidation

Frequently, the provisional administration is concluded (with the agreement of the secured creditors) with a business and asset sale, leaving the corporate shell to be wound up.

The Amtsgerichte (lower courts), which deal with minor criminal and civil matters including insolvency, have a very procedural system with judges who are generally somewhat younger and less experienced than we might be used to in the High Court and where academic commentaries rather than judicial precedent are followed.

Ireland

Comparatively similar to the UK with a system originating from the English Companies Act 1908, but revised in 1963 and from 1990 to 2001.

Liquidation:

• Voluntary (equivalent to creditorsí voluntary liquidation and similarly the most common procedure)

• Official (equivalent to compulsory liquidation)

• Provisional (which is recognised as liquidation for the purposes of the European Insolvency Regulation)

Receivership (equivalent to administrative receivership).

Examinership (equivalent to court-appointed administration but with a degree of debtor-in-possession).

The courtsí role and involvement is similar to the UK and (unlike all other European jurisdictions) IPs are generally accountants rather than lawyers.

Italy

Based on the Bankruptcy Act 1942; changes are under review.

Three main types of procedure:

• Bankruptcy (equivalent to compulsory liquidation ñ most common)

• Judicial moratorium or ëcontrolled administrationí (debtorís petition; moratorium only; exits are return to full solvency or bankruptcy; limited application; expensive; rare)

• Composition with creditors (some similarities to a company voluntary arrangement; also rare)

Very large companies may use the extraordinary administration procedure (often politically and administratively driven to avoid job losses or economic instability), the best known example of which, Parmalat, involved a tailored variation that was specially enacted ñ the Manzano Decree).

Strong local court involvement in all insolvencies.

Netherlands

Two procedures (system subject to review and may change in future):

• Bankruptcy (equivalent to compulsory liquidation)

• Moratorium (some similarities to courtappointed administration; debtor petitions; can file on prospective insolvency; enterprise run jointly by debtor and administrator; doesnít affect secured and preferential creditors; usually exited by liquidation)

Bankruptcy is often used to achieve a going concern sale of business and assets to overcome the provisions of the acquired rights directive (ie TUPE), which do not apply to Dutch liquidations.

Moratorium is often used as a defence to a bankruptcy petition, over which it takes precedence.

Court involvement is relatively limited after the appointment.

Spain

New law came into effect on 1 September 2004 replacing (for new cases) a variety of 19th and 20th century statutes.

The single framework with a specialist court system has two entry procedures:

• Voluntary (initiated by the debtor on current or imminent insolvency)

• Obligatory (within two months of actual insolvency)

The administration team ñ a lawyer, an accountant and a creditor ñ manage the company, report to the court and prepare a plan leading to:

• Restructuring; or

• Liquidation

The court is closely involved in the appointment, the creditorsí meeting, approving the plan and the procedure generally.

Scotland

A reminder of some of the principal differences between Scots and English insolvency law:

• Brumark and Spectrum Plus have never been an issue in Scotland where there is no fixed charge on book debts

• Court and provisional liquidations are more common than in England ñ the courts deal with petitions and hearings much more quickly

• There is no official receiver in Scotland (although the accountant in bankruptcy has some similar roles, particularly in relation to sequestration ñ ie bankruptcy)

• There are many legal nomenclature and procedural differences due to the general distinctions between Scots and English law

• Personal insolvency is devolved to the Scottish Executive so, unlike the corporate provisions, the personal insolvency provisions of the Enterprise Act do not apply north of the border.

Conclusion

This article hints at some of the differences between European insolvency regimes, most of which are too detailed or too deeply embedded in each countryís culture and legal history to describe briefly. But importantly it also emphasises the overall similarities, particularly amongst those jurisdictions whose insolvency regimes have been subject to recent revision.

In practice, assets and liabilities, profits and losses, and even the fundamentals of doing business may be similar, but local knowledge and local advisers are the key to resolving cross-border insolvency problems. Very often itís not what you know but (in the nicest possible way) who you know that counts.

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Bloomberg.com reports progress in the restructuring.

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A version of this article first appeared in Financier Worldwide Global Restructuring & Insolvency Review 2003

The 21st century has seen the firm establishment of a rescue culture in the UK, exemplified by the growing influence of the Society of Turnaround Professionals and the now familiar corporate insolvency provisions of the Enterprise Act 2002.

The legislative developments have served to lower entry barriers to insolvency proceedings in terms of cost and perception, the latter through reducing the "stigma of bankruptcy". In particular, the statutory objectives of administration, which is firmly established as the jurisdictionís principal non-terminal corporate insolvency procedure, are defined with "rescuing the company as a going concern" as the first priority.

Solutions like those in the case studies below are now easier to implement (if not necessarily to conceive or manage), making it all the more vital to consult an experienced and rescue-oriented insolvency practitioner at an early stage.

In Case Study 1, early realisation that the groupís cost reductions had lagged the industry-wide market collapse was a key factor, enabling the (nevertheless rapid) formulation and execution of a refinancing and balance sheet restructuring plan. Had this company not been caught in time it would have hit the buffers really hard ñ speed of reaction was of the essence.

Case Study 1

Antal International Limited ñ £20m turnover global recruitment business

Problem:

• Dramatic market contraction 2001

Solution:

• Bank debt replaced by invoice financing.


• Invoice financiers would only fund with administrators controlling company.


• Administration (August 2002) allowed more cost cutting and "breathing space".


• Subsequent Company Voluntary Arrangement (October 2002) eliminated excess creditors and restored profitability and cash generation.

Other Features:

• Paramount distinguished (administrator did not automatically adopt employment contracts after 14 days).


• European Insolvency Regulations tested in action.

Case Study 2 was a relatively healthy core business being turned around successfully. However, the reverse premium that would have been required to effect a trade sale of the two most seriously underperforming subsidiaries would have brought it down. Selling the subsidiary businesses and assets as going concerns through a formal insolvency process was anathema to the incumbent management, but we showed them the value of an insolvency tool in the right hands. Here it both avoided a potentially terminal cash drain and protected the core business from the likely counter-claims of group-wide customers if the subsidiariesí businesses had not continued.

Case Study 2

£10m turnover engineering business
Problem:

• Restructured 2000


• Ongoing turnaround


• 2 subsidiaries draining cash.

Solution:

• Subsidiariesí administrative receivership (October 2002).


• Going concern sales of their businesses and assets.


• Remaining group freed of cost, risk and contingent liabilities.

Other Features:

• Group pension fund issues required preparation for parent company administration to precipitate commercial settlement on the steps of the Court.

Case Study 3 is the most innovative. The cash-rich quoted shell with a positive balance sheet had contingent liabilities that the Court was persuaded (unlike in Colt Telecom) were more likely than not to render the company unable to pay its debts as they fell due. However, the very use of a formal insolvency procedure prompted the crystallisation of many of those contingencies, yielding significant benefits to shareholders. The administration exit was the return of control to its directors, when the company's shares were relisted at 6 times the price at which they had been suspended.

Case Study 3

PNC Telecom plc ñ £60m turnover AIM-listed former mobile retail and fixed line telephone company.
Problem:

• Contingencies remaining after sale of operating businesses/subsidiaries precluded use of the shell as a vehicle for a reverse takeover or distribution to shareholders via a membersí voluntary liquidation.

Solution:

• Administration order (June 2003) prompted landlords to accept replacement obligations from the business purchaser and enabled litigation contingencies to be reduced.

Other Features:

• s236 Insolvency Act applications allowed the administrator to obtain information about the companyís affairs more quickly and cheaply than could the turnaround managers.

In each of these cases a turnaround manager not well-versed in the benefits of formal insolvency procedures might have continued to "think positive", avoiding insolvency at the risk of missing the opportunity of a successful rescue. I believe that a balanced mix of turnaround and insolvency skills and an ability to innovate are most likely to deliver optimal solutions to the stakeholders of companies in financial distress.

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The 21st century has seen the firm establishment of a rescue culture in the UK, exemplified by the successful establishment of the Society of Turnaround Professionals and the coming into force of the corporate insolvency provisions of the Enterprise Act 2002 in September 2003.

The legislative changes have served to lower entry barriers to insolvency proceedings in terms of cost and perception, the latter through reducing the "stigma of bankruptcy". In particular, the statutory objectives of administration, which has been re-established as the jurisdictionís principal non-terminal insolvency procedure, are now defined with "rescuing the company as a going concern" as the first priority. Solutions like those in the case studies below will now be easier to implement (if not necessarily to conceive or manage), making it all the more vital to consult an experienced and rescue-oriented insolvency practitioner at an early stage. Each case study is factual and I was the administrator and/or the company's advisor.

In Case Study 1, early realisation that the groupís cost reductions had lagged the industry-wide market collapse was a key factor, enabling the (nevertheless rapid) formulation and execution of a refinancing and balance sheet restructuring plan. Had this company not been caught in time it would have hit the buffers really hard ñ speed of reaction was of the essence.

Case Study 2 was a relatively healthy core business being turned around successfully. However, the reverse premium that would have been required to effect a trade sale of the two most seriously underperforming subsidiaries would have brought it down. Selling the subsidiary businesses and assets as going concerns through a formal insolvency process was anathema to the incumbent management, but we showed them the value of an insolvency tool in the right hands. Here it both avoided a potentially terminal cash drain and protected the core business from the likely counter-claims of group-wide customers if the subsidiariesí businesses had not continued.

Case Study 3 is the most innovative. The cash-rich quoted shell with a positive balance sheet had contingent liabilities that the Court was persuaded (unlike in Colt Telecom) were more likely than not to render the company unable to pay its debts as they fell due. However, the very use of a formal insolvency procedure prompted the crystallisation of many of those contingencies such that there was a value to shareholders - the shares were relisted on return of the company to the directors at six time the price at which they were suspended on administration.

In each of these cases a turnaround manager not well-versed in the benefits of formal insolvency procedures might have continued to "think positive", avoiding insolvency at the risk of missing the opportunity of a successful rescue. I believe that a balanced mix of turnaround and insolvency skills and an ability to innovate are most likely to deliver optimal solutions to the stakeholders of companies in financial distress.

• Case Study 1

Antal International Limited ñ £20m turnover global recruitment business
Problem: Dramatic market contraction
Solution: Bank debt replaced by invoice financing. Invoice financiers would only fund with administrators controlling company. Administration allowed more cost cutting and "breathing space". Subsequent Company Voluntary Arrangement eliminated excess creditors and restored profitability and cash generation.
Other Features: Paramount distinguished (administrator did not automatically adopt employment contracts after 14 days). European Insolvency Regulations tested in action.

• Case Study 2

£10m turnover engineering business
Problem: Restructured, ongoing turnaround, 2 subsidiaries draining cash.
Solution: Subsidiariesí administrative receivership. Going concern sales of their businesses and assets. Remaining group freed of cost, risk and contingent liabilities.
Other Features: Group pension fund issues required preparation for parent company administration to precipitate commercial settlement on the steps of the Court.

• Case Study 3

PNC Telecom plc ñ £60m turnover AIM-listed former mobile retail and fixed line telephone company.
Problem: Contingencies remaining after sale of operating businesses/subsidiaries precluded use of the shell as a vehicle for a reverse takeover or distribution to shareholders via a membersí voluntary liquidation.
Solution: Administration order prompted landlords to accept replacement obligations from the business purchaser and enabled litigation contingencies to be reduced. Administration ended after 7 months and company relisted at 6 times the price at which the shares were suspended on the date of administration.
Other Features: s236 Insolvency Act applications allowed the administrator to obtain information about the companyís affairs more quickly and cheaply than could the turnaround managers.

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Although he describes Judge Drain's decision in In re SPhinX Ltd as pragmatic and commercial, Chris Mallon of Weil, Gotshal & Manges uses the case in an article entitled:

Bankruptcy Blunder

to illustrate his view that the uncertainty inherent in the Model Law makes credit-risk assessment very difficult and encourages forum shopping (and he expresses similar concern about the European Insolvency Regulation).

I think the benefits of legislation encouraging cooperation between insolvency regimes far outweigh the risks of forum shopping. Of course parties will seek to gain advantage from any perceived uncertainty and some courts may react less predictably than others, but the COMI concept and its interpretation is becoming familiar to most practitioners.

Certainly in Europe the debate has moved beyond COMI to considering how to manage cooperation between main and secondary proceedings, particularly in relation to creditors' rights to claim in either or both, or whether secondary proceedings are better avoided altogether by recognition of creditors' local rights in main proceedings.

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I review Dr Eberhard Braun's book "Commentary on the German Insolvency Code" in the Winter 2007 issue of Eurofenix - and below. The book, which Bob Wessels has also reviewed (here), has contributions from some 20 authors from Schultze & Braun.

Dr Braun's impressive volume is written in English and runs to almost 3,000 paragraphs of commentary over some 600 pages, 95% of which are devoted to commentary on the Insolvency Code, section by section. It also contains a bibliography with around 700 entries.

What the reader should remember is that this is a book written from a German perspective. It quite rightly does not feel the need to stress the aspects of civil law jurisdiction that may be less familiar to English readers, for example. Rather, it helps non-German readers to understand and appreciate how German insolvency works.

Above all, however, it is a practical book where "abstract legal issues are not addressed" and a worthy addition to European practitioners' bookshelves.

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Schefenacker AG, the €930m turnover automotive parts group manufacturing rear-view mirrors with 7,900 employees in 33 locations worldwide, which was founded in Esslingen (near Stuttgart), Germany in 1935, has become Schefenacker PLC with a registered office in Portsmouth, UK. (Were some reports of the company moving to Brighton a mis-translation of Britain?)

In a move redolent of the Deutsche Nickel restructuring in 2004/05, the owner of this typical Mittelstand family business, Dr Alfred Schefenacker, is likely to be diluted to below 4%, with the majority of the equity passing to bondholders in a debt for equity swap. German debt for equity deals are rare and don't often go below 10% equity retention, but greater dilution is the norm in the UK.

Binding all creditors with a 75% majority vote is posible in the UK through a Company Voluntary Arrangement or a s425 Companies Act 1985 Sceme of Arrangement, whereas in Germany a small minority could hold out. This stage of the deal has not yet been reached, but is expected to be thrashed out between the 90% of creditors said to be based in London.

Further incentives for the choice of mechanism include the German "21-day rule" where German management face criminal sanctions if they fail to file for insolvency within 21 days of the company being unable to pay its debts as they fall due. The more flexible UK test - a reasonable prospect of avoiding insolvent liquidation - and the absence of criminality facilitates consensual restructurings like this one.

Another factor is the bondholders' perception that they have more control or influence in the UK system, which is less dependent on court involvement than Germany.

The group's recent history involved the acquisition of Britax Vision Systems in 2000, which resulted in too heavy a debt burden. Refinancing in 2005 put some €400m in hedge funds' hands. Q3 2006 figures were below target and on 19 October 2006 the company announced the appointment of Dr Burghard Knolle of AT Kearney as CRO/COO. At that time Hedgeco.net reported bonds trading at 30% and loans at 85%.

On 12 December 2006 the company announced the appointment of Stephen J. Taylor of Alix Partners as CRO

Reuters reports an estimated enterprise value of €200m, based on a conservative distressed multiple of four times a projected EBITDA of €50m (down from €78m in 2005). €50m of senior debt and €155m of second-lien debt is expected to be paid back.

Who else is involved? (sources: Legal Week, Global Turnaround)
Company advisers:

• Freitag & Co


• Allen & Overy - David Frauman, Mark Sterling

Senior Lenders (GE):

• Freshfields - Ken Baird, Lars Westpfahl


• Deloitte

Deutsche Bank (senior & second lien):

• Latham & Watkins - John Houghton, Frank Grell

Second Lien Holders:

• Houlihan Lokey - Peter Marshall, Joe Swanson


• Cadwalader - Andrew Wilkinson, James Douglas

Bondholders:

• Bingham McCutchen - James Roome


• Close Bros - Matthew Prest

OEMs:

• Clifford Chance - Mark Hyde, Kolja von Bismarck

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A secondary liquidator has to tell all the debtor's creditors about the secondary proceedings and must pass to the main liquidator details of any creditors the main liquidator may not know about, so that the main liquidator can notify them of the main proceedings.

For example, a Hungarian liquidator (appointed in territorial proceedings) learns that a German liquidator has previously been appointed in main proceedings. The Hungarian liquidator must inform all creditors in Hungary and elsewhere of the secondary Hungarian proceedings and moreover he or she must provide all creditorsí details to the main German liquidator pursuant to Article 31(1) European Insolvency Regulation

. . . shall immediately communicate any information which may be relevant to the other proceedings. . .î.

The German liquidator will then ìknowî (Article 40) all the creditors and be obliged to notify them of the main proceedings.

In fact, I see risk to both liquidators from aggrieved creditors if this is not done properly. Since creditors are entitled to claim in either or both proceedings, any creditor who received notice of neither could pursue the Hungarian liquidator if he or she failed to give notice of the Hungarian proceedings or, whether or not such notice was given, if the Hungarian liquidator had failed to give the creditorís details to the German liquidator thereby preventing the latter from giving notice of the main proceedings to the creditor in question.

Similarly, the German liquidator would be at risk if he failed to enquire of the Hungarian liquidator about all creditors or if he failed to act on information provided by the Hungarian liquidator.

Since a main liquidator is much more likely to take the steps required of the German liquidator, I think it is the secondary liquidator who is in practice at greater risk because he or she has to take steps that may come a little less naturally.

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The reach of territorial and secondary proceedings is restricted, but I think it important to note that the restriction is partial. In relation to non-main proceedings and the territory in which they were opened:

The effect of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter Member State.

(Article 3(2), European Insolvency Regulation).

I think the key phrase is "the assets of the debtor situated in the territory".

Article 3(2) does not refer to "the establishment situated in the territory", so the territorial or secondary liquidator is a liquidator of the debtor (albeit able to deal only with certain assets but responsible to all the debtor's creditors). Neither does Article 3(2) say "the assets and the liabilities of the debtor situated in the territory", so it is not simply a local insolvency under local law: foreign creditors are accorded rights by the Regulation.

One thing I have sensed in reported cases of secondary proceedings is that the secondary liquidator has seen himself as acting for (even as a champion of) the local creditors. To my mind this is fundamentally wrong, particularly given the rights of creditors to claim in any proceedings by Articles 39 and 32(1). Such liquidators should beware of litigation against them personally from creditors from other jurisdictions, or even from the main liquidator.

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