The restructuring market is living in a period where three major events are occurring simultaneously: the transposition into national law by the EU member states of Directive (EU) 2019/1023 on preventive restructuring frameworks (the Directive), Brexit and the covid-19 pandemic.
At the time of writing, Europe, the Middle East and Africa (EMEA) are facing a second wave of the pandemic. Many European countries were particularly reactive during the first wave in spring 2020, providing financial support to businesses, implementing temporary national reforms to suspend debtors’ duty to file for insolvency and correlated debtor’s liability and granting debtors moratorium. Those temporary measures led to record low numbers of insolvencies in many countries in the second and third quarters of 2020.
While the impacts of the covid-19 pandemic for the global economy continue and are expected to continue in 2021, many experts expect a major reversal of the trend regarding business insolvencies, with a significant increase in business insolvencies expected in 2021.
In this context, the implementation of preventive restructuring frameworks in national insolvency laws is even more critical for most countries.
This edition of the Europe, Middle East and Africa Restructuring Review provides a general overview of domestic insolvency regimes, highlighting the reforms recently adopted or soon to be adopted to implement preventive restructuring frameworks in several jurisdictions in the EMEA. It also includes an article that specifically focuses on the aviation industry, which has been severely affected by the covid-19 pandemic and is cross-border by nature, and the potential impact of the interpretation of the Cape Town Treaty signed in 2001 on the likelihood of aviation-related debtors (airlines and leasing companies) forum shopping into England and Wales.
Is the pandemic accelerating the implementation of preventive restructuring frameworks in the EMEA?
The Directive was adopted on 20 June 2019, which marks the starting point for the two-year period during which the EU member states must transpose it into national law.
The covid-19 pandemic emerged in the midst of the transposition period. In certain jurisdictions, and considering the anticipated increased need for an efficient toolbox to restructure distressed companies, the pandemic acted as a catalyst for the adoption of new insolvency regimes.
Spain passed a new Recast Insolvency Act in May 2020, after four years of discussions on the draft, although some amendments are still required to fully transpose the Directive. In the Netherlands, the senate of the Dutch parliament passed the Act on confirmation of private restructuring plans in October 2020. In France, the temporary provisions adopted by the Executive Order of 20 May 2020 have introduced a new money privilege in the context of safeguard proceedings, which is considered as one of the amendments of French insolvency law required by the transposition of the Directive. The temporary measures put in place by the Portuguese government have introduced some of the principles of the Directive through the combination of special revitalisation proceedings and the extrajudicial recovery process, which is available more broadly to companies facing difficulties in the context of the temporary measures put in place to face the effects of the covid-19 pandemic on businesses.
Outside the European Union, the onset of the covid-19 pandemic in the first quarter of 2020 ensured that reform of the English insolvency frameworks, for which the government started consultation in 2016, returned to the top of the legislative agenda. The Corporate Insolvency and Governance Bill was published on 20 May 2020 and passed quickly through the legislative process, enabling its entry into force a few weeks later.
The Gulf states, already severely impacted by declining oil revenues over the past years, did not wait for the covid-19 pandemic to strengthen their regularity frameworks to provide modern, flexible procedures to restructure underperforming businesses. Their new regulations, adopted between 2016 and 2018, have been largely inspired by Chapter 11 of the US Bankruptcy Code (Chapter 11).
Brexit and the Directive: the end of the supremacy of the scheme of arrangement?
Although not considered as insolvency proceedings listed in Annex A of the EU Regulation on insolvency proceedings, the English scheme of arrangement has been widely used by European debtors over the past 15 years to implement financial restructurings. The member states started reacting in a rather dispersed manner, from the mid-2000s, as they amended their national insolvency regimes on several occasions. The lack of coordination between the member states in amending their insolvency regimes, combined with the analysis made by the European Commission that the differences between the different insolvency regimes were an obstacle to the free movement of capital, led the European Commission to propose a first draft of the Directive in November 2016.
The Directive that was finally adopted by the European Commission on 20 June 2019 is largely inspired by Chapter 11, with the introduction of cross-class cramdown, homogeneous classes of creditors and absolute priority rule, among other things.
Owing to Brexit, the United Kingdom is outside the scope of the Directive. In this context, several countries, such as the Netherlands and Ireland, have communicated very early that they could become the preferred jurisdiction for cross-border restructuring.
In this context, the Corporate Insolvency and Governance Act (CIGA), which came into force on 26 June 2020, appears as an answer to the risk of a loss of competitiveness of the scheme of arrangement for major cross-border financial restructuring. It introduced the restructuring plan, which is similar to schemes of arrangement on many aspects but with some significant developments that are included in the Directive, such as cross-class cramdown and the absence of the majority in number requirement to vote in favour of the plan within each class of creditors. The competitiveness of this ‘super scheme’ for cross-border restructuring will also depend on the likelihood of recognition of the plan in other jurisdictions, which remains uncertain in this context post-Brexit.
Regardless of the situation on the recognition of plans adopted through either schemes of arrangement or the CIGA, the transposition in the EU member states of identical rules, inspired by Chapter 11, such as homogenous classes of creditors, cross-class cramdown, debtor-in-possession financing, priority rule and creditors’ best interests, will reduce the distinction between the restructuring regimes. Cultural differences will, however, remain, most likely through different approaches in case law. It would, therefore, be interesting to observe in the coming years whether the combination of Brexit and the transposition of the Directive will put an end to forum shopping.
There is no doubt that the quality and efficiency of national restructuring frameworks (either preventive restructuring or insolvency law) will be key for countries to face the consequences of the covid-19 pandemic on their economies in the long-term.
In the context of a crisis such as covid-19, what are the best interests of creditors?
The article on the Cape Town Convention in the aviation industry is particularly interesting. Designed to facilitate asset-based financing, the protection of creditors offered against cramdown may not be in the best interests of the dissenting creditors if the sole alternative solution for them is to repossess the aircraft.
In the context of the covid-19 pandemic, governments pay, and will continue to pay, attention to the best way to preserve the continuity of businesses and avoid a significant increase of unemployment. Considering the impact of the pandemic on the assets’ value, the best interests of creditors may not be to prevent the adoption of restructuring plan. It may explain the approval by almost all secured and unsecured creditors of the restructuring plans of Nordic Aviation Capital (through a scheme of arrangement) and Virgin Atlantic (through the CIGA).
As readers will discover, this is an interesting period, and many aspects of the laws regarding insolvency and pre-insolvency are expected to be further refined and enhanced to meet the needs of debtors, creditors and others.