The EU Adaption of Important Chapter 11 Provisions

In summary

Chapter 11 has been both a model and a vision for the EU restructuring community for the past 20 years. Following the enactment of the EU Restructuring Directive in 2019, many EU member states have moved to implement the Directive. This includes the United Kingdom, the Netherlands, France, Germany and Spain, which have all adopted insolvency and restructuring laws that have many of the same features of Chapter 11. This article compares a number of the new ‘Chapter 11-like’ laws in those countries with their US Bankruptcy Code counterparts.

Discussion points

• EU Restructuring Directive in 2019
• Steps the United Kingdom, Netherlands, France, Germany and Spain have taken to comply
• Specific components of new ‘Chapter 11-like’ laws in those countries

Referenced in this article

• The European Union
• EU Restructuring Directive
• European Regulation on Insolvency Proceedings
• The ‘Dutch Scheme’ (Wet Homologatie Onderhandsakkoord)
• Spanish restructuring plan
• French judicial safeguard
• UK Corporate Insolvency and Governance Act
• US Bankruptcy Code
• Chapter 11
• Debtor-in-possession financing
• The cramdown of classes of claims

Introduction

In July 2019, the Directive on Insolvency, Restructuring and Second Chance (the Directive) came into force in the European Union (EU). The aim of the Directive was to ensure that a statutory restructuring framework was enacted in each EU member state to maximise the chances of restructuring the debts of a company with a viable business rather than being forced into liquidation, which historically has often been the case. EU member states had until summer 2021 to implement the Directive (unless they applied for a one-year extension). At the time of writing, most EU member states have implemented the Directive with very few countries being in final stages of implementation. Although EU member states have a significant degree of flexibility in the implementation, if all aspects are fully embraced, the restructuring framework for countries in the European Union would move substantially closer to the tried and tested Chapter 11 plan available under the US Bankruptcy Code.

Germany and the Netherlands have both been model EU member states, embracing the Directive and introducing new laws well ahead of the deadline. Things kicked off in Germany with the publication on 18 September 2020 by the German Federal Ministry of Justice of draft legislation, including the introduction of the German restructuring plan and the adoption by the Dutch Senate on 6 October 2020 of the long-awaited legislative proposal for the act providing for the introduction of the ‘Dutch scheme’ (Wet Homologatie Onderhandsakkoord (WHOA)). Despite the WHOA having been foreshadowed in the Netherlands for some time prior to its adoption, the German restructuring plan made good time through the legislative process and both the German restructuring plan and the ‘Dutch scheme’ entered into effect on 1 January 2021.

Of course, there has also been much discussion and attention to date on the new legislation regarding restructuring plans enacted in June 2020 by the UK government under the Corporate Insolvency and Governance Act. Importantly, despite the United Kingdom having left the European Union, it has largely modelled its restructuring plan in line with the Directive (of which it was a key driver) to ensure that it remains consistent with cutting-edge EU restructuring regimes.

Spain has historically been a pioneer in the insolvency and restructuring front, with most of the features of the Directive having previously been incorporated into Spanish regulations. On 26 September 2022, additional amendments introduced by Royal Decree-Law 16/2022 of 6 September came into force to fully implement the Directive.

France promulgated Ordinance No. 2021-1193 dated 15 September 2021, which incorporated elements of the Directive not already incorporated in French insolvency law, and the reform became effective on 1 October 2021.

In terms of content, most of the individual domestic regimes have, like the Directive itself, taken significant inspiration from US Chapter 11, but none have exactly replicated it. Instead, all have adapted the Chapter 11 model to best suit their domestic insolvency history to produce:

• a court-sanctioned process;
• debtor-in-possession governance;
• classification of creditors based on similarity of rights (and sometimes interests) for the purposes of voting; and
• an ability to effect a Chapter 11-style cramdown of dissenting creditors in a particular class.

In this article, we will take a comparative look at some (but not all) of the key components of the following, which might be considered by advisers, companies and creditors when initially structuring a deal to determine the most appropriate forum for a restructuring:

• the Chapter 11 process;
• UK restructuring plans;
• the Dutch WHOA;
• the German restructuring plan;
• the French safeguard plan; and
• the Spanish restructuring plan.

What are the gateways to establishing jurisdiction?

Some jurisdictions have long been known to be more receptive to or have been used for ‘forum shopping’. The practice of forum shopping has, historically, been driven by the result that a particular process can offer, as well as the specific criteria that must be established for the local courts to accept jurisdiction. An assessment of both factors will feature heavily in the initial deal structuring phase.

One of the many attractions to Chapter 11 has always been the relatively low jurisdictional threshold needed to be established in order to access the process. For foreign companies to qualify as a debtor under the US Bankruptcy Code (and thereby establish jurisdiction), they need only minimal contacts, such as having retainer monies in a bank account in the United States. This administrative hurdle should be readily achievable by any company that is seriously considering a restructuring via Chapter 11. By comparison, while the United Kingdom has long been considered a jurisdiction that is receptive to forum shopping (and indeed one in which it is relatively straightforward to establish jurisdiction), the bar is not quite as low as in the United States. For a non-English company to propose a restructuring plan in the United Kingdom, it must establish that it has a ‘sufficient connection’ to the UK. With respect to what can constitute a ‘sufficient connection’, having the underlying debt documents governed by English law (or indeed changing the governing law of the documents to English law) will be sufficient. In order to establish jurisdiction to access the public version of the WHOA, the Dutch court will have jurisdiction on the grounds of the European Regulation on Insolvency Proceedings (EIR), provided the debtor’s centre of main interests (COMI) is located in the Netherlands. If, however, the debtor’s COMI is outside the European Union (or in Denmark), then Dutch courts can still exercise jurisdiction over the debtor by reference to the Dutch Code of Civil Procedure generally, which includes independent grounds for jurisdiction of the Dutch court, such as close ties with (eg, significant group activities) or an establishment in the Netherlands. By comparison, both the German and Spanish restructuring plans will, in principle, be accessible by German and Spanish companies or non-German and non-Spanish companies that have their COMI in Germany and Spain, respectively.

The French court will have jurisdiction on the grounds of the EIR, provided the debtor’s COMI is located in France similar to the Netherlands’ approach. If the debtor’s COMI is located outside of the European Union, the French court may exercise jurisdiction by reference to general provisions of French law.

What are the criteria for cross-border recognition?

While the initial question of jurisdiction is a key gating item to any restructuring, this should be considered in conjunction with an assessment of the other jurisdictions in which the chosen process will need to be recognised. It is clear that, in order to deliver an effective restructuring, there must be certainty that the chosen process will be recognised in all jurisdictions that the company has assets, operations or creditors in.

Recognition will be a matter of local law and different avenues may be open to establish this. For example, where a country has adopted the UN Model Law on Cross-Border Insolvency (the Model Law), this will enable recognition locally of a Chapter 11 case where the debtor has its COMI or an establishment in the United States. Where this is not the case (eg, because the debtor simply availed itself of the lower jurisdictional threshold) other avenues under domestic law may be possible.

In addition, other domestic restrictions will need to be carefully considered. For example, in the United Kingdom, the rule in Gibbs provides that debt obligations governed by English law can only be discharged by an English process. In cases where this factual matrix presents, it would therefore be necessary to run a parallel UK process (ie, a scheme of arrangement or a restructuring plan) in order to compromise the English law governed debt obligations. While the rule in Gibbs is hugely controversial (see the judicial discourse across borders in the Model Land case), it is still established jurisprudence.

By comparison, if a debtor accesses a UK restructuring plan, recognition is available in countries that have adopted the Model Law, provided the debtor has its COMI or an establishment in the United Kingdom. Again, other avenues to recognition of a UK restructuring plan may also be available, depending on the jurisdiction where such recognition is sought.

In the Netherlands, if a debtor has accessed the WHOA, recognition depends on whether the public version or the private version has been chosen. If the public version is chosen, a scheme that has been sanctioned by the court will be automatically recognised in other EU member states under the EIR. The private version, which is exempt from publication requirements, would not be automatically recognised under the EIR. However, other avenues to recognition such as under the EU Judgments Regulation or based on other national recognition procedures more generally can be explored. Similarly, in Germany, a restructuring plan that has been adopted in the public version of the proceedings will automatically be recognised in other EU member states under the EIR. The position in respect of recognition of the private version of the German restructuring plan by the court is similar to that of the WHOA. In France and Spain, a safeguard plan and a restructuring plan, respectively, that have been sanctioned should benefit from automatic recognition in other EU member states under the EIR.

Who can initiate the process and what are the entry requirements?

The question of whether some form of financial difficulty needs to be shown in order to access a particular regime will also feature in the decision-making process of where to implement a restructuring. Even though, in most cases, companies will be experiencing or anticipating some form of financial difficulty, the evidential threshold (if any) that must be satisfied prior to entry into a process should be analysed carefully.

In the United States, a company need not demonstrate insolvency to commence a Chapter 11 proceeding and, while the company or in limited circumstances, the company’s unsecured creditors, can commence the proceeding,^[1] the company initially has the exclusive right for 120 days to present the plan. In contrast, in the United Kingdom, a restructuring plan can be proposed by the company, a creditor, members or, in the case of an existing insolvency, by an administrator or liquidator. In order to access the restructuring plan, it will be necessary to show that the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern.^[2] The legislative threshold for establishing financial difficulty has been very broadly drafted and to date has been interpreted widely by the courts. In practice, this threshold should not make it difficult for a company that needs to restructure to access a restructuring plan.

In the Netherlands, the list of who can propose a scheme is expansive and, in addition to the company itself, creditors, shareholders or works councils and trade unions can request that the court appoint a restructuring expert who will have the right to propose a scheme. With respect to the financial difficulty criteria, the company does not have to be technically insolvent, but must be in a state in which it is reasonably plausible that it will be unable to pay its debts when due. The procedure is also available when the company foresees that it will be unable to pay its debts when due in the (near) future (eg, within six months or a year). By contrast under the German regime, the company is exclusively entitled to submit a restructuring plan (although those affected have the right to make proposals to amend the plan). The plan itself is available to a company upon the occurrence of imminent illiquidity in the forecast period of (generally) 24 months.

In Spain, the debtor or any affected creditor that has signed onto a restructuring plan can file a request to the court for its sanctioning (homologation). The homologation procedure is available not only when the company is in a situation of present or imminent insolvency (the latter when the debtor foresees its inability to regularly and timely meet its payment obligations within the next three months) but also when it is objectively foreseeable that if a restructuring plan is not reached, the debtor will not be able to regularly meet its payment obligations that fall due within the next two years.

In France, only the debtor can request the opening of a safeguard proceeding. Safeguard is available to a debtor that faces difficulties that it cannot overcome and that is not insolvent. A debtor is insolvent when it is no longer able to pay its outstanding liabilities with its available assets.

Does the process offer a stay on enforcement?

The chances of implementing a successful restructuring are significantly heightened where creditors are prevented from taking enforcement action against the company, thereby allowing it to stabilise and, most importantly in many cases, to continue to trade while working towards implementing the restructuring. In some cases, it will be possible to agree to a consensual standstill with creditors. However, in cases where this is not possible, the presence of a statutory stay can be vital to the success of the process.

Chapter 11 is the only process discussed in this chapter that gives rise to an automatic and wide-ranging stay on enforcement. A statutory injunction known as an ‘automatic stay’ automatically comes into effect on the filing of a Chapter 11 proceeding, which prohibits all actions against the company by creditors, wherever they are located. In practice, due to the wide reach of the US bankruptcy courts, coupled with the fact that many creditors of a company who files for Chapter 11 will also have operations based in the United States, the automatic stay is generally respected worldwide (even in cases where there may not be formal recognition processes in place). By comparison, in the United Kingdom, there is no automatic stay upon the filing of a restructuring plan. However, for eligible companies, the process can be combined with the new freestanding moratorium process (also introduced under the Corporate Insolvency and Governance Act). There are, however, broad exclusions to the type of company that is eligible for the moratorium, including companies that are party to capital market arrangements. In cases where the moratorium is not available, it would be possible to request a stay from the court under the court’s inherent jurisdiction. It has not been common for stays of this nature to be granted in the context of a scheme of arrangement, although, in certain circumstances, short stays have been obtained (and have largely been granted in cases where significant progress had been made in the restructuring). The UK courts have taken the same approach in relation to restructuring plans, where since its introduction, one such stay was granted by the courts (in the case of Virgin Active).

In the Netherlands, under the WHOA, an automatic stay does not come into being, although the debtor does have the ability to request the court to allow a stay for a maximum of four months, with the possibility of an extension for up to a maximum of eight months in total. When granted, the stay prevents all parties from claiming or taking recourse against the company’s assets, unless they have court consent. Similarly, under the German restructuring plan, the company may apply to the court for a moratorium on foreclosure and enforcement. If granted, the moratorium will initially last for three months with the possibility of being extended for up to eight months.

In Spain, the debtor can notify the court of the existence of (or the intention to start immediately) negotiations with its creditors to agree a restructuring plan. The effects of such notification include the automatic stay of any enforcement over assets or rights necessary for the debtor’s business activity. Additionally, at the debtor’s request, the relevant court can also impose (1) the stay of enforcement over any assets of the debtor or against one or several creditors or classes of creditors; and (2) the stay of enforcement of guarantees or security interests granted by another group company (with evidence that enforcement could lead to the insolvency of both the guarantor (or security provider) and debtor). This moratorium does not apply to financial collateral security. The enforcement stay will initially last for three months but can be extended to up to six months at the request of the debtor and creditors representing at least 50 per cent of the debt that would be affected by the restructuring plan.

In France, safeguard gives rise to an automatic stay on enforcement that prevents creditors from taking certain enforcement actions aimed at obtaining payment of certain claims or at seizing assets.

What is the impact on operations?

In many cases, the ability of the company to continue to trade through a restructuring will be closely linked to whether it is possible to obtain protection against counterparties terminating contracts on the grounds that the debtor has proposed a restructuring (ipso facto clauses).

The United States provides companies with broad protection against ipso facto clauses. The US automatic stay renders most contractual provisions entitling a counterparty to terminate unenforceable. Only those entities that have filed for Chapter 11 are protected – so there may be cross-defaults in other group entities who have not filed. In the United Kingdom, counterparties supplying goods or services will be prevented from terminating the contract when a court summons a meeting relating to a compromise or arrangement under the restructuring plan. Similar to the United States, only those entities that have filed are protected, and this may also result in possible cross-defaults in other group entities where no protection is granted.

In the Netherlands, upon commencement of the procedure whereby the debtor proposes a scheme, ipso facto clauses remain inoperative. In addition, it is possible to apply for a targeted stay against one or more suppliers; for example, to prevent a lessor from repossessing machinery that the debtor needs in order to continue to trade during the restructuring. Under the German restructuring regime, if the debtor has applied to the court for a moratorium, ipso facto clauses are also invalid. In the United States, ipso facto clauses are ineffective upon the filing of an insolvency petition. Similarly, in Spain, if the debtor has notified the court of the existence of negotiations with its creditors regarding a potential restructuring plan or of its intention to start them immediately, ipso facto clauses are ineffective. In France, upon the opening of a safeguard proceeding, ipso facto clauses are invalid.

Is debtor-in-possession financing available?

For many companies, entering a restructuring process where forecast liquidity to completion is tight, the ability to introduce and access alternative financing during the process will be key.

In the United States, debtor-in-possession (DIP) financing is permissible with court approval in Chapter 11 in order to continue to operate the business and pay the costs of the restructuring process. Superpriority claim status and liens can be granted to DIP lenders provided the court is satisfied that:

• the debtor cannot obtain such financing on less-burdensome terms; and
• non-consenting prepetition secured lenders that are primed are ‘adequately protected’.

In practice, the requirement to ensure that prepetition secured lenders are adequately protected means that they cannot be primed without receiving replacement liens or in circumstances where there is a significant equity cushion. In reality, this usually means, where DIP financing is pursued in Chapter 11 proceedings, it is often provided by the existing lenders (or a subset of the existing lenders) who in effect prime themselves by putting in place a priority facility. By contrast, in the United Kingdom, there are no provisions for priority financing to be introduced after a company has filed for a restructuring plan - although the restructuring plan itself can and indeed is often used to arrange and implement new super priority funding. DIP loans are often essential to allow the debtor to bridge to the plan of reorganisation process although the trend in the US is to planned pre-packaged bankruptcies, which in some cases are confirmed in a matter of weeks or days. That also reduces the need to incur extensive DIP loans since the debtor is not in a Chapter 11 proceeding for any significant length of time.

In the Netherlands, emergency funding (including related security) required during the restructuring efforts that is approved by the court is protected from avoidance actions based on fraudulent preference. While this presents the possibility of introducing new financing on a protected basis, it may prove challenging for a debtor to access this if all its collateral is already secured on existing financing. The position is similar in Germany where the restructuring plan may also cover the provision of new financing where, on the basis of the plan, this is necessary to finance the restructuring. Such financing, as well as any security provided in respect thereof, is in principle excluded from clawback in a subsequent insolvency and privileged with regard to lender liability. However, this privilege only applies to the granting of new financing and pertaining security, but not to its repayment. Extensions and deferrals of existing loans are not covered by the term ‘new financing’ and therefore do not qualify for the aforementioned privileges.

In Spain, interim financing (that is made available during the negotiations of a restructuring plan to ensure the continuity of the business or to preserve value) and new financing (that is made available in accordance with the restructuring plan) have priority over certain other debts, with half of such financing ranking as debts against the insolvency estate (in broad terms, ranking alongside the insolvency receiver’s fees and ordinary course of business-related costs to maintain the business activity during the insolvency proceedings) and the other half ranking as generally privileged debt. New money and interim financing will be also protected against claw-back actions, unless it is evidenced that they were granted with fraudulent intent. The above-mentioned ranking upgrade and protection against claw-back only apply (1) when the liabilities affected by the restructuring plan represent at least 51 per cent of the total liabilities; and (2) the restructuring plan has been court-sanctioned (homologation).

To protect new or interim financing granted by specially related parties, the total liabilities affected by the restructuring plan, excluding the financing granted by specially related parties, must represent more than 60 per cent of the total liabilities.

French safeguard does not provide for a specific DIP financing regime, but emergency funding can be provided during the proceeding and be secured on available assets with the consent of the supervisory judge. New money provided as part of the court-approved safeguard plan may benefit from the ‘post money privilege’, providing a protection against ‘hardening period’ risks (this privilege may also be given to emergency funding made available during the proceeding).

What is the effect on group guarantors?

The structure of most, if not all, corporate groups will include the provision of cross-­guarantees by fellow group companies in respect of the underlying primary debt obligations. In this scenario, it will not suffice to merely compromise the underlying debt if the ability to claim against fellow group companies remains. The ability to release group guarantee claims is therefore a key factor that will be considered prior to choosing an appropriate restructuring forum.

Chapter 11 does not provide for the release of group guarantees given in support of the obligations of a debtor who has filed for Chapter 11, unless that guarantor also files for Chapter 11 and the plan provides for such release. In cases where there are several group guarantors that require a release, each guarantor needs to file for Chapter 11. Indeed, individual filings may also be necessary in any event for those companies to benefit from the other protections and benefits afforded by Chapter 11, such as the automatic stay and the ability to obtain DIP financing. This particular factor can add complexity (as well as time and cost) to a Chapter 11 restructuring and is something that should be considered when evaluating the efficiency of the various processes at the outset of a restructuring. By comparison, in the United Kingdom, the restructuring plan can release group guarantees without the guarantor proposing a restructuring plan in circumstances where the guarantees are closely connected to the primary obligations being compromised under the restructuring plan.

In the Netherlands, the WHOA provides that it is possible for group guarantees issued by members of the same group as the company who proposed the scheme to be compromised if certain requirements are met. This can result in a surety or joint obligor being released from liability where they cannot be claimed against in respect of the underlying debt. By comparison, while the German restructuring plan can also be used to compromise third-party security granted by affiliated group companies (within the meaning of the German Stock Corporate Act), affected creditors will need to receive adequate compensation for such impairment.

In Spain, the notification of restructuring plan negotiations allows the debtor to request the court to stay the enforcement of guarantees or security interest granted by another group company if that enforcement could lead to the insolvency of both the guarantor (or security provider) and debtor. Additionally,the effects of a restructuring plan of a given company can be extended to guarantees or security interest granted by another group company that is not part of it.

French law does not provide for the release of group guarantees. The release of group guarantees requires the starting of a restructuring proceeding in respect of each guarantor (and the adaptation of a restructuring plan at the level of each guarantor). The release of a guarantor under a restructuring plan approved by a non-French court can be recognised in France under the general regime applicable to the recognition of foreign judgements.

What level of support is needed to implement, and is there an ability to bind dissenting creditors or to implement a cramdown of other classes of creditors?

One of the first questions (if not the first question) that will be considered when assessing where to base a restructuring will be the level of support required in order to approve the proposed restructuring. The relevant consent thresholds and the presence (or absence) of a numerosity test may have a significant influence in the decision-making process. Indeed, where there is expected to be material resistance from dissenting classes of creditors, the ability to implement a cramdown (together with the conditions required in order to do so) will be key to the viability of the proposed restructuring. In order for a Chapter 11 plan to be approved, the company must obtain the support of a majority in number and two-thirds in amount of such impaired class of creditors voting on the plan in order for that creditor class to accept the plan. If, however, the requisite levels of support are not received from each impaired classes, the plan may still be confirmed via cramdown, provided that

• at least one impaired (non-insider) class votes in favour;
• the plan does not discriminate unfairly towards each impaired class that has voted against it;
• the plan is fair and equitable to the dissenting class; and
• dissenting creditors will receive more under the plan than they would in a liquidation (the ‘best interests of creditors test’).

With respect to what is deemed fair and equitable to the dissenting classes, for secured creditors, the entitlement to receive either cash payments equal to the value of their collateral or the indubitable equivalent of their claims and collateral will satisfy this test. Critically, secured creditors cannot be compelled to accept equity in the reorganised company over their objection even in a cramdown. For unsecured creditors, the plan must ensure that they recover in full before any more junior class of claims or interests receives any recovery (the ‘absolute-priority rule’).

By comparison in the United Kingdom, the restructuring plan has not replicated the numerosity test that exists in respect of a UK scheme of arrangement. Instead, for a restructuring plan to be approved by any given class, 75 per cent in value of creditors or members voting must vote in favour. Like a Chapter 11, there is now also an ability to impose a cramdown of dissenting classes in order to deliver the restructuring plan. This will be possible where the UK court is satisfied that none of the members of the dissenting class would be any worse off than in the event of the most likely relevant alternative scenario, as determined by the court, if the restructuring plan is not sanctioned, and the restructuring plan has been accepted by a class who would receive a payment or has a genuine economic interest in the company in the event of the relevant alternative. Importantly, the absolute priority rule is not a condition to imposing a cramdown of classes under a UK restructuring plan (a fact specifically acknowledged recently by the English courts in the case of Re Houst), meaning that it is theoretically possible to impose a form of ‘cram up’, where value is given to junior creditors having impaired more senior creditors. While we have not (yet) seen a cram up and, ultimately, whether this is in fact possible will be a matter for judicial determination, what we have seen in Re Houst is a restructuring plan that provided for a different priority ranking than would have been the case in an insolvency. There, the court sanctioned a restructuring plan where unsecured creditors received a dividend under the plan when they would have received nothing in the relevant insolvency alternative and, conversely, the English tax authorities (higher ranking) received a smaller proportional benefit from the plan.

In the Netherlands, a class of creditors accepts a plan if the group of creditors who vote in favour of it represents at least two-thirds in value of the total value of claims of those who voted within that class (no numerosity test). In the case of shareholders, that group needs to represent at least two-thirds of the issued capital of those who voted within that class (no numerosity test). Cramdown of classes is also possible and a debtor can request confirmation of a scheme by the court if at least one ‘in the money’ class has voted in favour. While the absolute-priority rule has not been included in the Netherlands, a slightly adapted version of it provides creditors or shareholders who voted against the scheme and who are also part of a class who voted against it with a ground of objection before the court. If raised, the court can refuse to sanction the scheme if the reorganisation value of the company is not allocated among the classes in accordance with their statutory ranking. In addition, if raised by a creditor or shareholder who voted against the plan before the court (irrespective of whether they are part of a class that voted against the scheme), it will also be necessary for a scheme to satisfy the best interests of creditors test (ie, that the creditors or shareholders are not receiving less under the scheme than they would in a liquidation).

In Germany, the adoption of a restructuring plan requires that 75 per cent in value of the voting rights in each class (and not only of those participating) vote in favour in order to approve the plan. Similar to other jurisdictions, the restructuring plan also allows for a cramdown of classes, subject to certain conditions, namely:

• the dissenting class is not any worse off than it would have been in an alternative scenario without the plan;
• the dissenting class received adequate participation in the economic value distributed under the plan by those affected by it; and
• the majority of the voting classes have approved the plan (however, this majority must not be exclusively shareholder and subordinated creditor classes).

The absolute priority rule applies, although an exception is provided for in situations where shareholders retain economic value, provided that their participation is necessary for the continuation of the company (so that the added value of the plan can be achieved) or that the impairment of the rights of creditors is minor, such as in the case of a mere 18-month deferral of the due dates of their claims.

In Spain, a restructuring plan must be approved by each class of creditors by a majority of two-thirds in value per class (other than the secured creditors class, where a majority of three-quarters in value is required) plus (if it affects the rights of equity holders and the debtor is not in actual or imminent insolvency), by the equity holders that are legally liable for the corporate debts (if any) or otherwise by the general shareholders meeting.

As in Germany and the Netherlands, cross-class cramdown is also possible if: (1) the restructuring plan has been approved by a simple majority of classes, provided that within such majority there is at least one class of claims that within insolvency proceedings would have ranked as special or general privileged claims; or (2) the restructuring plan has been approved by at least one in-the-money class (this requires a report from the restructuring expert on the value of the debtor as a going concern). The absolute priority rule and the best interest of creditors test also apply in Spain, with some exceptions.

In France, a safeguard plan must be approved by each class of ‘affected parties’ by a majority of two-thirds in value of those who voted. To adopt a plan, the court must verify, inter alia, equality of treatment within the same class, satisfaction of the ‘best interest’ test and that the interests of affected parties are sufficiently protected. Cross-class cramdown is available if a majority of classes (including a secured class or one senior to an unsecured class) or at least one class ‘in the money’ (other than a class of shareholders or holders of equity securities) supports the plan and if the ‘absolute priority rule’ test is satisfied (exceptions available).

Shareholders can only be crammed down through dilution if they are ‘out of the money’ but will benefit from a priority right.

One can certainly see how the different levels of approval required in order to implement the various restructuring processes in each jurisdiction, coupled with the different conditions that must be satisfied in order to cramdown other classes, could influence the decision-making process of where to base a restructuring.

Conclusion: increased menu options can provide food for thought

The introduction of new restructuring tools by the United Kingdom, the Netherlands, France, Germany and Spain (each of which are capable of delivering a restructuring in a similar (but not identical) manner to Chapter 11) is an important development for the EU restructuring community. This should provide increased optionality when considering pre-insolvency business rescue procedures. In both the Netherlands and the UK the new tools have already been used widely. While in the Netherlands, at the time of writing, the WHOA has been mostly used by small to medium-sized enterprises, in the UK it is the opposite and larger scale companies have used the restructuring plan. To date, there have been 10 restructuring plans sanctioned by the court, including for a foreign (ie, non-UK) company (Smile Telecoms). Out of the sanctioned restructuring plans, five have utilised the cross-class cramdown. In France and Germany, by contrast, things have got off to a slower start and, at the time of writing, there are only very few pending restructuring cases. In Spain, court-sanctioned refinancing agreements have been widely used over recent years by larger companies. However, at the time of writing, the new and much more powerful restructuring plan has yet to become available (provisions regarding the new restructuring plan came into force on 26 September 2022), so it remains untested.

Developing a consistent line of sensible judicial authority will play a significant part in the Netherlands and Germany promoting themselves as jurisdictions to seriously consider when planning a cross-border restructuring. One of the key questions will be whether those courts will be as receptive to forum shopping as the United States and United Kingdom courts have shown themselves to be.

While Chapter 11 still has the most global reach and is the most tried and tested of these processes (with over 40 years of jurisprudence), closely followed by the United Kingdom (which has an established track record of implementing cross-border restructurings), the new UK, Dutch, French, German and Spanish restructuring tools can certainly provide some viable alternatives to Chapter 11, particularly where these processes are capable of being implemented on a less costly basis or where there is a significant nexus to those jurisdictions that warrant a non-US process.

Notes