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An Overview of Global Insolvency Regimes
Mark Broude, Hervé Diogo Amengual, Frank Grell, John Houghton and Jake Redway, Latham & Watkins LLP
INTRODUCTION
The insolvency regime or regimes that may be applicable to a
particular borrower will often be a pivotal issue in work-out or
restructuring transactions, even where the transaction is
intended to be out of court. The applicable laws will determine
when, for example, the directors' duties might change from
being owed to the shareholders to the general body of credi-
tors, and will often determine the point at which insolvency
practitioners can look back at the antecedent transactions in an
attempt to unwind them under the applicable insolvency laws.
They will also provide the backdrop for any negotiations, as
the constituencies will measure any proposed recovery against
the possible results from an in-court insolvency proceeding.
Furthermore, as more and more cross-border financing trans-
actions are being created, understanding the interplay between
multiple insolvency regimes, and how one jurisdiction may
give effect to an insolvency proceeding commenced in anoth-
er jurisdiction, will become increasingly important to the
negotiating dynamics in any attempt to craft an out-of-court
resolution to a "stressed" or "distressed" situation.
Owing to internationalisation and the vast differences
between insolvency regimes throughout jurisdictions, an
overview of each of the regimes will now be provided for cer-
tain key markets throughout Europe and Asia Pacific. The
U.S is taken as a starting point, with a detailed look at
Chapter 11 and Chapter 15.
1. THE UNITED STATES
CHAPTER 11 OVERVIEW
Introduction to Chapter 11
Chapter 11 of the US Bankruptcy Code was created with the
intention of making the corporate reorganisation process as
This article was first published in The Guide to Distressed Debt and Turnaround Investing by Private Equity International
equitable as possible. The main goals of Chapter 11 are to:
1) Rehabilitate financially viable businesses – preserving
operations and saving jobs
2) Ensure equality of distribution of value of the insolvent
company among the insolvent debtor’s similarly-situated
creditors
3) Maximise the value of assets and distributions to creditors
4) Provide discharge from indebtedness and a “fresh start” to
the debtor
5) Provide the debtor with time and ability to restructure bal-
ance sheet and business
These goals point out the primary reasons why a Chapter 11
case is substantially different from a case under chapter 7. In
a case under chapter 7 the debtor’s pre-petition management
is replaced by a chapter 7 trustee whose sole purpose is not
the preservation of the debtor as a going concern but rather
the liquidation of the debtor’s assets for the highest price and
the distribution of the proceeds of sale in strict conformity
with the absolute priority rule. Chapter 7 cases generally
involve businesses that have already ceased operations, and
thus where there is no going concern value to preserve.
Petitions and Automatic Stays
In the US, a bankruptcy case is commenced by filing a peti-
tion, which is a form document listing estimates of the
debtor’s assets and liabilities and indicating its intention to
reorganise (Chapter 11) or liquidate (Chapter 7). Petitions
can be either voluntary or involuntary. As soon as the volun-
tary petition is filed, or an order for relief on an involuntary
petition is entered, an automatic stay is in place.
An automatic stay in the US Bankruptcy Code is a nation-
wide injunction which comes into effect automatically and
instantly upon the filing of the petition or entry of the order
for relief, as the case may be, without regard to affected par-
32 The Guide to Distressed Debt & Turnaround Investing
ties’ notice of bankruptcy filing or opportunity to contest the
imposition of the stay. The purpose of an automatic stay is to
provide a breathing spell for the Debtor in Possession (DIP), so
that the DIP and other parties in interest have time to work out
the debtor’s financial problems and negotiate a plan of action. It
also serves as a buffer from creditors, whose actions could other-
wise potentially destroy the debtor in the creditors’ scramble for
relief.
The automatic stay applies to all of the debtor’s property and
creditors, no matter where they are located. As a practical mat-
ter, it is difficult to enforce the automatic stay (or the US
Bankruptcy Court’s jurisdiction generally) against a creditor that
does not do business, or otherwise have a presence, in the US.
Where a stay of actions by creditors who have no
connection with the United States is important for a debtor,
commencing an additional insolvency proceeding in the appro-
priate jurisdiction may be required. In most situations involving
such creditors, however, debtors frequently seek some authority
from the bankruptcy court to pay foreign creditors (or at least
those with no connection with the United States in the ordinary
course of their business).
Parties in Interest
The US Bankruptcy Code has a very broad definition of “parties
in interest”, who are the parties that have a right to be heard in
a Chapter 11 case. Generally, any creditor (whether the credi-
tor’s claim is fixed, contingent on a future event, disputed or
undisputed) and any stockholder (referred to in the Bankruptcy
Code as an “equity security holder”) has a right to be heard by
the bankruptcy court. Nevertheless, individual creditors or
shareholders generally will only come to court or negotiate with
the debtor on issues affecting them specifically. The rest of the
time, they will rely on the major players in the case to represent
the various constituencies.
The major players in a Chapter 11 case are:
Debtor in Possession (DIP): the debtor itself has fiduciary duties
to all of its creditors and shareholders. The DIP is supposed to
take those actions it believes will maximise the value of the estate
and thereby achieve the greatest return practicable for all con-
stituencies within the bounds of the absolute priority rule.
United States Trustee: is an arm of the US Department of
Justice which oversees the conduct of bankruptcy cases. The
US Trustee is responsible for the administration of most
bankruptcy cases. The US Trustee system was developed to
ensure that bankruptcy judges were freed from holding any
administrative responsibilities for the debtor. The US Trustee
possesses standing to be heard as a party of interest and
enjoys broad immunity for acts taken in its official capacity.
Chapter 11 Trustee: appointed in cases of major fraud or mis-
management. There is no automatic appointment of a
trustee in a Chapter 11 case. If appointed, the trustee may
operate the debtor’s business during the pending Chapter 11
case. Unless a creditor or other party in interest can show that
there has been fraud, gross mismanagement or other malfea-
sance, management will usually remain in place.
Official Committees: it is the norm for a committee of unse-
cured creditors to be formed during Chapter 11 cases. Such
committees are typically composed of the seven unsecured
creditors with the largest unsecured claims who are willing to
serve. The committee has fiduciary duties to all unsecured
creditors, but not to the other constituencies in the case. The
US Trustee may appoint as many additional committees as it
deems appropriate to assure adequate representation of cred-
itors or of equity secure holders. In addition, a court may
(though this is not frequent) direct the United States Trustee
to appoint an official committee of equity holders or of
another constituency that the court determines to merit rep-
resentation through an official committee. An official com-
mittee has broad negotiating powers on behalf of the credi-
tor or shareholder body it is appointed to represent. Each
official committee is generally empowered to employ, at the
expense of the debtor estate, accountants, lawyers and other
professionals to perform services for the committee. These
professional advisors must meet a stringent standard of “dis-
interestedness” in order to serve on the matter. For instance,

to meet this standard, the advisor must not be a creditor of
the debtor, meaning that claims for fees to be paid before a
case is settled would disqualify the advisor from service.
Agent Bank(s)/Steering Committee: a secured bank group that
generally does not constitute an “official” committee. The
Agent bank and a handful of other banks with large stakes
in the credit will usually negotiate on behalf of the entire
group of creditors and, although they cannot bind the entire
group, they can help build consensus. The bank group rep-
resents only the interests of its members; it does not have
any obligations to other creditor constituencies.
Judicial System: The US has two levels of judicial oversight
for Chapter 11 cases, the US Bankruptcy Court and the
District Court or Bankruptcy Appellate Panel. The
Bankruptcy Judge does not enjoy life tenure once appoint-
ed, unlike most federal US judges. The District Court and
the Bankruptcy Appellate Panel provide alternate routes
of appeal from bankruptcy courts in many US jurisdic-
tions.
Securities and Exchange Commission: has a nearly unlimited right
to be heard in Chapter 11 cases, but may not appeal any ruling,
order or decree entered in the case. This right applies even if the
debtor has no publicly registered securities and is not otherwise
subject to SEC jurisdiction; however, as a practical matter the
SEC does not become actively involved in cases where no SEC
jurisdiction is otherwise implicated.
Property Definition under Chapter 11
Under Chapter 11, property of the estate is defined as “all legal
or equitable interests of the debtor in property as of the com-
mencement of the case”. This includes property owned by the
debtor, collateral, leased property, property in possession of the
debtor and the debtor’s property in the possession of a third
party, as well as any proceeds, rent or other profits borne from
the debtor’s property. A debtor can use, sell or lease its property
in the ordinary course of its business without special court
authorisation during Chapter 11 proceedings. Any use, sale or
An Overview of Global Insolvency Regimes 33
lease out of the ordinary course requires court approval, which is
sought by motion, usually on at least 20 days’ notice.
Cash Collateral
Cash collateral is defined as the cash and cash equivalents in
possession of the estate, including any proceeds, product, off-
spring, rents or profits of the estate, but solely to the extent that
such cash or equivalents are subject to a valid, perfected security
interest. A DIP or a Trustee is limited in its use of cash collat-
eral. It cannot use cash as collateral unless the secured creditor
consents or the Bankruptcy Court authorises its use on the
grounds that “adequate protection” is provided.
The Chapter 11 Claims Process
There are two types of claims that can be filed under Chapter
11: secured claims and unsecured claims. A secured claim is a
claim by a creditor that is secured by assets of the debtor in the
event of non-payment. An unsecured claim is a claim, the pay-
ment of which is not backed by the debtor's collateral or a lien
on property of the debtor.
Any claims must be filed by the court-established “bar date” and
claimants must file proof of claim asserting their entitlement to
payment. The only exception is where the debtor, in its sched-
ule of assets and liabilities that it is required to file with the
bankruptcy court early in its case, schedules a given creditor’s
claim in an amount with which that creditor agrees, and the
schedule does not list that claim as contingent, unliquidated or
disputed – in that situation the creditor is not required to file a
proof of claim (though it may be advisable to file the proof of
claim even in that circumstance).
Any party in interest has the right to object to any proof of
claim filed. Usually the bankruptcy court will adjudicate
the validity of the disputed claim, but sometimes it will
allow the claim to be litigated in another (non-bankruptcy)
court. The other court would determine whether the debtor
is liable on the claim and the amount of the liability, but the
claimant would then have to seek payment through the
bankruptcy process.
34 The Guide to Distressed Debt & Turnaround Investing
Where a debtor has a dispute with a non-debtor and reaches
an agreement to resolve that dispute (which may involve liti-
gation claims as well as any other claim that either party asserts
against the other), then the settlement must be approved by
the bankruptcy court. The standard for approving a settlement
is that the settlement must fall anywhere within the “range of
reasonableness”.
Oversecured creditors are entitled to post-petition interest up to
the value of the collateral – whether the security interest was cre-
ated by an agreement or by statute. Unsecured or undersecured
creditors’ claims for “unmatured interest” (also called post-peti-
tion interest) are disallowed under the US Bankruptcy Code.
Certain pre-petition claims are given priority over other claims
according to the statue. There are 10 statutory priorities, includ-
ing pre-petition wage and employee benefits up to $10,000 per
employee for cases filed after October 17, 2005 and up to $4,000
per employee for cases filed before that time. In addition, pre-
petition tax claims (unless stale) are a priority claim.
In the post-petition phase, administrative expense claims and
necessary costs and expenses for preserving the debtor’s estate
constitute priority claims. These claims require a transaction
with the estate or a tangible benefit to the estate.
Executory Contracts and Unexpired Leases
A DIP or trustee can reject a contract or a lease upon showing
that rejection is in its business judgment. Rejection does not
equate with avoidance or termination of the contract. Instead,
rejection constitutes a breach of the contract that relates back to
the date immediately preceding the petition-filing date. This
allows the debtor to pay the damages for this breach of contract
with “bankruptcy dollars” as an unsecured claim against the
estate.
A DIP can also assume the contract, which turns the contract
between the debtor and the contracting party into a contract
between the bankruptcy estate and the party. The DIP or the
trustee has the right to assume a beneficial contract even
where a default exists, as long as assumption of the defaulted
contract is conditioned upon 1) cure or adequate assurance of
prompt cure; 2) compensation for actual pecuniary damages
from default or adequate assurance of prompt compensation;
and 3) adequate assurance of future performance under the
assumed contract or lease. Some defaults do not count for
these purposes, however. If the DIP or trustee assumes a
contract or lease and later breaches the assumed agreement,
damages will be assessed as an administrative expense claim
because the contract is a transaction with the estate.
The Plan Process
The goal of a Chapter 11 case is to reorganise the debtor pur-
suant to a plan of reorganisation. At the outset of a Chapter
11 case, the debtor has the exclusive right to propose a plan
of reorganisation. That initial exclusivity right lasts for 120
days, but may be extended by the court for “cause”, but not
beyond 18 months in cases filed after October 17, 2005.
After expiration of the debtor’s exclusive period, any party in
interest can file a plan.
Confirming a plan of reorganisation presupposes negotiating
the plan in good faith with sufficient constituencies to max-
imise the chances of successful confirmation. Generally, the
debtor would negotiate plan terms with a representative of its
significant secured lenders, official committees, exit financing
sources (both investors and lenders) and any other entity that
has a unique and critical claim against the debtor. The plan
must comply with the Bankruptcy Code requirements for
plan content and the proponents must comply with the rules
for solicitation of votes and confirmation.
Classification: The plan must divide the claims and interests
to be addressed by the plan into classes, and specify the
treatment for each class in conformity with the absolute pri-
ority rule (subject to any agreement to the contrary). The
absolute priority rule dictates that no junior class can receive
distributions until the senior classes have been paid in full.
The classes generally include: Secured Claims;
Administrative Claims; Priority Prepetition Claims;

General Unsecured Claims (including trade, nonpriority
employee claims, contract/lease rejection claims, any “defi-
ciency” claims); Contractually Subordinated Claims;
Statutorily Subordinated Claims (claims for damages arising
out of the purchase or sale of a security); and Equity (includ-
ing rights to additional equity).
Disclosure and Solicitation: Any holder of a claim (debt)
against or interest (equity) in the debtor who will not
receive everything it would be entitled to under applicable
nonbankruptcy law is “impaired” and therefore entitled to
vote to accept or reject the plan. A plan proponent may
only solicit votes on a plan if it has provided a court-
approved disclosure statement to the parties whose votes
are being solicited. A disclosure statement must contain
“adequate information” of a kind that will allow a hypo-
thetical investor typical of the class being solicited to make
an informed judgment about the plan. Normally, a hearing
on the adequacy of a disclosure statement is held on a
month’s notice; the court will set the deadline for ballots on
the plan and date of the confirmation hearing when it
approves the disclosure statement. Generally, a month’s
notice of the confirmation hearing is required, but the time
period may be shortened or lengthened depending on the
size and complexity of the case and the number of parties
entitled to vote on the plan.
Plan Acceptance. For a plan to be confirmed, the court must
find that each class of claims and interests that is entitled to
vote has accepted the plan or that the plan can be “crammed
down,” or confirmed over the objection of a dissenting class
of claims. Acceptance by a class of claims requires accept-
ance by 2/3 in amount and more than half of claims in the
class that actually vote on the plan. Acceptance by a class of
interests requires acceptance by holders of 2/3 in amount of
the interests in the class that actually vote on the plan. A
class that is not “impaired” is deemed to accept without a
vote. A class that receives nothing under the plan is deemed
to reject the plan without a vote (and must be “crammed
down”). At least one impaired class of claims (not including
An Overview of Global Insolvency Regimes 35
the votes of insiders) must vote to accept the plan, or the
court cannot confirm the plan.
Other Confirmation Requirements include:
(a) plan must be “feasible”— the court must find that confir-
mation is not likely to be followed by the need for further
reorganisation or liquidation;
(b) except to the extent that a particular claim holder has
agreed to different (less favourable) treatment of its claim,
administrative (post-petition) claims must be paid in cash in
full on the effective date (or when they are due);
(c) priority claims must receive over time payments equal to
the value of the allowed amount of the claim (if the class has
accepted) or (if the class has not accepted) must be paid in
cash in full on the effective date;
(d) priority tax claims must be paid in full within 6 years; and
(e) each holder of a claim or interest in an impaired class
must have accepted the plan or will receive (or retain) at least
as much under the plan as it would in a Chapter 7 liquida-
tion (the “best interests test”).
In a “cram down”, the court may confirm the plan over the
rejection of one or more classes if the plan (1) does not
discriminate unfairly with respect to the dissenting class
(which in general means that similarly situated classes
receive similar treatment) and (2) is “fair and equitable”
with respect to the dissenting class (which generally
requires (i) with respect to a class of secured claims, it
must receive distributions with a present value equal to the
value of its interest in its collateral and (ii) with respect to
a class of unsecured creditors that either that class receive
property (payments, securities, other assets) with a present
value equal to the allowed amount of its claim (or fixed
liquidation preference of its interest), or no junior class is
receiving anything under the plan).
Effect of Confirming a Plan
Once a plan is confirmed, it must be “consummated”,
which means that the closing of the transactions called for
under the plan takes place and distributions are made in
36 The Guide to Distressed Debt & Turnaround Investing
accordance with the plan terms. The date on which the
plan is substantially consummated is referred to as the
“effective date”.
Confirmation and consummation of a plan results in a dis-
charge of all pre-petition claims against the debtor. The
discharge means that the reorganised debtor is not respon-
sible for paying such claims under their original terms;
rather it is only responsible for treating the claims in
accordance with the plan: if the plan says the claims get
paid in full, they get paid in full, but if the plan says they
get 10 cents on the dollar in notes or it says they get noth-
ing, then that is all the holders of the claims are entitled
to receive from the reorganised debtor.
CHAPTER 15 OVERVIEW
Chapter 15 of the US Bankruptcy Code was signed into
US law on April 20, 2005. It deals with the recognition in
US courts of foreign bankruptcy or insolvency proceedings
and replaces Section 304 of the Bankruptcy Code in cases
commenced more than 180 days after the date of enact-
ment (October 17, 2005).
Chapter 15 is taken from the Model Law on Cross Border
Insolvency prepared by the United Nations Commission
on International Trade Law. It is principally intended to
provide a coherent procedural framework for co-operating
with foreign courts in the management of the United
States assets of a debtor involved in insolvency proceed-
ings overseas. An insolvency representative appointed by
a foreign court may petition for recognition of the foreign
proceeding in a US Bankruptcy Court. Temporary reme-
dies are available prior to the approval of the petition.
After the foreign proceeding is recognised, the remedies
available will depend on whether the US court determines
that the foreign proceeding is a main or a non-main pro-
ceeding. If a proceeding is determined to be a main pro-
ceeding, the foreign representative will have greater rights
and remedies at his or her disposal. A proceeding is consid-
ered a main proceeding if brought where the debtor’s centre
of main interests lies – a location presumed to exist in the
country in which the debtor is incorporated or registered.
Filing of a Petition – Eligibility
New Section 1515 permits a foreign representative, such
as a court-appointed administrator, to seek recognition of
the foreign proceeding in the US by filing a petition for
recognition. In order to obtain recognition of the foreign
proceeding, it must merely be shown that a “foreign pro-
ceeding” has been commenced and that the petitioner is a
“foreign representative”.
Chapter 15 changes the definitions of “foreign proceed-
ing” and “foreign representative” as previously interpreted
by courts in proceedings under Section 304 of the
Bankruptcy Code. Although the change to the definition
of “foreign representative” is not particularly significant,
the definition of “foreign proceeding” is expanded. Under
Section 304, three aspects of the definition of a foreign
proceeding were required before ancillary proceedings
were recognised:
(1) the foreign proceeding must have been considered as a
“proceeding;”
(2) the proceeding must have been conducted for the pur-
pose of liquidation, debt adjustment, discharge or reorgan-
isation; and
(3) the proceeding must have been pending in a foreign
country where the debtor’s domicile, residence, principal
place of business or assets were located.
Along with the enactment of Chapter 15, the definition of
“Foreign Proceeding” was amended in three ways. First section
101(23) of the Code was amended to define a foreign proceed-
ing as a “proceeding in a foreign country, including an interim
proceeding, under a law relating to insolvency or adjustment of
debt in which proceeding the assets and affairs of the debtor are
subject to control or supervision by a foreign court”. This rep-
resents an expansion of the prior definition, which had pro-

vided that a foreign proceeding means a “proceeding,
whether judicial or administrative”. Courts had interpreted
this to mean that an insolvency or debt restructuring that
was not supervised by a court did not qualify as a proceed-
ing and was therefore not entitled to recognition under
Section 304.
Second, section 101(23) of the Bankruptcy Code was amend-
ed to require that the foreign proceeding takes place “under a
law relating to insolvency or the adjustment of debts”. The ref-
erence to a relevant insolvency law did not appear in the prior
definition, which instead required that the proceeding was for
the purpose of “liquidating an estate, adjusting debts by com-
position, extension, or discharge, or effecting a reorganisation”.
It would appear that, by requiring only a relationship to insol-
vency laws, the new definition is broader than the earlier defi-
nition with its enumerated purposes.
Third, Section 101(23) of the Code was amended by remov-
ing the requirement that the foreign proceeding be com-
menced in a foreign country where “the debtor’s domicile,
residence, principal place of business, or principal assets are
located”. The amended definition merely requires that the
proceeding be commenced in a foreign country. Even if a
court were to find that the particular jurisdiction was neither
the debtor’s domicile nor the location of its principal assets,
it would not preclude recognition of a foreign proceeding.
However, it would affect the determination as to whether
the foreign proceeding should be considered a foreign main
proceeding or a foreign non-main proceeding, as well as
other rights and remedies.
Finally, Section 101(24) of the Bankruptcy Code was
amended to elaborate on the definition of a foreign repre-
sentative, without significantly changing the substance of
the definition. Therefore, it is now made clear that a foreign
representative is an individual “authorised in a foreign pro-
ceeding to administer the reorganisation or the liquidation
of the debtor’s assets or to act as a representative of such for-
eign proceeding”.
An Overview of Global Insolvency Regimes 37
In addition, the evidentiary requirements for recognition of
foreign proceedings have been simplified. New Section 1516
provides that a certified copy of the decision commencing the
foreign proceeding indicating on its face that such proceed-
ing is a foreign proceeding and that the representative is a
foreign representative allows the court to presume that such
assertions are true.
Effects of Filing - Temporary Remedies Available
A representative of a foreign proceeding will be able to obtain
remedies more immediately under Chapter 15 than under
Section 304. Under new Section 1519(a), temporary reme-
dies are available upon application by the foreign representa-
tive until the petition for recognition of the foreign proceed-
ing has been decided by the court, so long as such remedies
are “urgently needed to protect the assets of the debtor or the
interests of the creditors…” Under Section 1519(a)(1), these
provisional remedies can include:
(1) staying of execution against the debtors assets;
(2) entrusting the debtor’s United States assets to the foreign
representative;
(3) suspension of the right to transfer assets of the debtor;
(4) provision for examination of witnesses and collection of
information concerning assets and liabilities; and
(5) the granting of additional relief excluding relief related to
avoidance actions.
All of these remedies were available under former Section
304, either directly in the statute or as a result of case law.
However, Section 1519 makes these remedies available
upon request before the petition is approved, whether or
not the underlying application for recognition is contro-
verted. Thus, Chapter 15 provides for provisional reme-
dies that the representative of a foreign proceeding can
request based simply upon the filing of a petition for
recognition.
Section 1506 permits the court to deny relief if it would be
“manifestly contrary to the public policy of the United
States”. The ability of the court to grant or terminate
38 The Guide to Distressed Debt & Turnaround Investing
relief is also modified by Section 1522(a), which requires
that the court ensure that “the interests of the creditors
and other interested entities, including the debtor, are suf-
ficiently protected”.
Effects of Recognition – Remedies Available in any
Proceeding
If a foreign proceeding is recognised by the US Bankruptcy
Court, any temporary remedy granted pursuant to proposed
Section 1519 is automatically extended under new Section
1521. In addition, the court may stay the commencement or
continuation of any action concerning the debtor’s assets, rights,
obligations or liabilities. As with temporary relief available
under Section 1519, the court is empowered to grant “addition-
al relief ”. These powers are not without limits, however. Section
1521 provides for specific limitations on available relief. For
example, under Section 1521(d), the regulatory or police actions
of a governmental unit may not be stayed and Section 1521(f )
provides that the set-off of specified financial transactions can-
not be stayed.
The remedies available to the foreign representative also exclude
the avoidance of transfers at the time of commencement in gen-
eral and the avoidance of preferential and fraudulent transfers in
particular. In order to obtain a remedy on such grounds, the for-
eign representative would be required to commence a full
Chapter 11 case, which he/she is empowered to do pursuant to
Section 1511.
The nature of the further remedies available to the representa-
tive of a foreign proceeding will vary depending on whether the
court finds the foreign proceeding to be a main or non-main for-
eign proceeding. Although remedies under Section 1521 are
generally available in the case of any recognised foreign proceed-
ing, in granting permanent relief, Chapter 15 draws a distinction
between “main” and “non-main” proceedings.
Section 1502(4) defines a foreign main proceeding as a pro-
ceeding in country where “the debtor has the centre of its main
interests”, and Section 1516 states that, “in the absence of evi-
dence to the contrary”, the location of the debtor’s registered
office is the centre of its main interests. It is not clear how this
presumption will be applied in the context of an organisation
with multiple registered offices, but courts may be persuaded to
rely on interpretations of the same phrase found in the
European Union’s Regulation on Cross-Border Insolvencies
(the EU Reg.). In the end, the determination may come down
to a factual inquiry which leaves some potential for conflicting
results. For example, in the 2003 Daisytek case, a United
Kingdom judge ruled that the debtor’s centre of main interests
was in the United Kingdom despite the fact that the company’s
German subsidiaries had their registered offices in Germany.
A foreign non-main proceeding is defined in Section 1502(5) as
a proceeding “pending in a country where the debtor has an
establishment”. Section 1502(2) goes on to define an establish-
ment as “any place of operations where the debtor carries out a
non-transitory economic activity”, similar to the definition of
the term “establishment” used in the EU Reg.
To the extent that the US Bankruptcy Court determines that a
foreign proceeding is non-main, the relief granted under Section
1521 would be subject to the requirement that the court is sat-
isfied “that the relief relates to assets that, under the law of the
United States, should be administered in the foreign non-main
proceeding or concerns information required in that proceed-
ing”. Furthermore, the determination that the foreign proceed-
ing is main or non-main is also relevant to the extent that the
foreign representative seeks to commence a full Chapter 11 case
in order to avoid preferential or fraudulent transfers. The for-
eign representative of a foreign proceeding (main or non-main)
would have standing to commence a full Chapter 11 case pur-
suant to Section 1511, but is entitled to commence a voluntary
case only if the foreign proceeding is main. If the foreign pro-
ceeding is non-main, the representative would only be able to
commence an involuntary case.
Effects of Recognition – Automatic Remedies in Main Proceedings
The representative of a foreign proceeding is afforded more
remedies under new Chapter 15. Under new Section 1520,

recognition of a foreign main proceeding triggers certain auto-
matic remedies. In particular, recognition of a foreign
proceeding will trigger the automatic stay of Section 362.
This would mean that no judicial proceeding against the
foreign debtor can be commenced or continued in the US
to the extent that the cause of action arose before the com-
mencement of the ancillary case under Chapter 15.
Section 362 would also prevent enforcement of judg-
ments, liens and set-offs obtained before the commence-
ment of the case, as well as other acts to obtain control of
the property of the debtor’s estate.
It should be noted that Section 1520(4)(b) explicitly permits
the commencement of “an individual action or proceeding in
a foreign country to the extent necessary to preserve a claim
against the debtor”. Thus, creditors of a foreign debtor would
retain a limited right to proceed against the company in the
jurisdiction where the foreign proceeding is pending and
elsewhere. The date of effectiveness of the automatic stay is
likely to be the date of recognition of the foreign proceeding
(excluding any period of interim relief ). Therefore, actions
that were or could have been commenced prior to the filing
of the petition for recognition of the foreign proceeding will
be stayed, and the date of commencement of the foreign pro-
ceeding itself will not be pertinent to the application of the
automatic stay.
Section 1520 also provides certain other automatic remedies
and protections. First, the foreign representative in a foreign
proceeding would have the ability to use, sell or lease the cash
collateral (including cash equivalents) of the foreign debtor
upon notice and hearing or upon consent of the secured party
pursuant to Section 363 of the Code. Second, pursuant to
Section 549, a foreign representative would also be able to
avoid transfers of property of the estate occurring “post-
recognition”. Third, pursuant to Section 552, any property
acquired by the foreign debtor (that is within the territorial
jurisdiction of the United States) would be free from any
security interests that existed before the commencement of
the ancillary case.
An Overview of Global Insolvency Regimes 39
Next follows an overview of insolvency laws outside the US
and review of major markets.
2. EUROPE
CENTRE OF MAIN INTEREST
On May 31, 2002, the EU Regulation on Insolvency
Proceedings (the EU Regulation) came into force in all
EU jurisdictions except Denmark. Its aim was to intro-
duce uniform conflict of laws rules for insolvency pro-
ceedings and connected judgments. In broad terms, the
EU Regulation provides that the main insolvency pro-
ceedings are to be opened in the EU Member State where
the debtor has its “centre of main interests” (COMI).
Main proceedings have universal scope and encompass all
of the debtor’s assets and affect all creditors, wherever
located.
COMI has become the main judicial focus in the applica-
tion of the EU Regulation. The Regulation states that it
is presumed to be the company’s place of incorporation
and should be ascertainable by third parties. The EU
Regulation was intended to avoid forum shopping but it is
apparent from judicial interpretation that the courts are
prepared to apply main proceedings to groups of compa-
nies, even when these are not incorporated within the EU.
Once main proceedings are opened in one EU state, sec-
ondary proceedings may be opened in another.
Secondary proceedings may be opened in any state where
the debtor has an “establishment”, i.e., “the place where
debtor carries out a non-transitory economic activity with
human means and goods”. These proceedings can only be
liquidation or winding up proceedings and are limited to
realisation of the debtor’s assets within that jurisdiction.
Given the universal effect of opening main proceedings,
in many cases this has resulted in “a race to the courts” to
open main proceedings. If a judge can be convinced at an
40 The Guide to Distressed Debt & Turnaround Investing
ex parte hearing that the COMI of a company is in your
country, then you can establish main proceedings that
take precedence everywhere in the EU.
3. UNITED KINGDOM
Introduction – The Enterprise Act of 2002
In the UK, the restructuring process was brought marginal-
ly closer to that of the Chapter 11 process in the US
through the enactment of the Enterprise Act of 2002. The
principal effect of the Enterprise Act is the elimination of
the ability of a holder of a floating charge created after
September 15, 2003 to appoint an administrative receiver,
whose duties run solely to the charge holder, or to dispose
of an insolvent company’s assets subject to the charge for
the benefit of the charge holder. Instead, the charge holder
will be required to commence an administration by
appointing an administrator whose duties will run to all
creditors.
Directors’ Duties
The directors of a UK company have substantially greater
flexibility than their counterparts in countries such as
France and Germany to allow an insolvent UK company to
attempt to achieve an out-of-court restructuring. There is
no absolute deadline by which the directors of an insolvent
UK company are required to cause the company to com-
mence an insolvency proceeding. A director who allows a
company to continue trading operating outside of any
insolvency proceeding when he or she knows, or should
know, that there is no prospect of avoiding an insolvent liq-
uidation, risks personal liability for the company’s debts
incurred at that time and thereafter under the theory of
“wrongful trading”.
The director can escape such liability by demonstrating that
he or she took every reasonable step that should have been
taken under the circumstances to avoid or minimise loss to
creditors. In addition, continuing support from a compa-
ny’s creditor group whilst a restructuring is being effected
may entitle directors to conclude there is a reasonable
prospect of avoiding an insolvent liquidation. Moreover,
there is no criminal liability for wrongful trading in the UK,
although the offending director may be disqualified from
acting as a director or other manager of a company for a
period of time. This flexibility provides a better opportuni-
ty for achieving out-of-court restructurings than is often
provided elsewhere in Europe.
UK Procedures Generally
In addition to liquidation (of which there are three kinds),
there are basically two kinds of formal insolvency proceedings
commonly used for UK companies. One of these, the admin-
istrative receivership, will become less common over time and
will eventually disappear entirely as a result of the aforemen-
tioned Enterprise Act provision (but for certain limited excep-
tions in the capital markets and structured finance contexts).
An administrative receiver appointed by the floating charge
holder completely displaces management, but it can – and
often does – temporarily continue the operations of a com-
pany. However, an administrative receivership cannot be
used to effectuate a restructuring. Instead, the administrative
receiver will simply sell the assets of the company as soon as
reasonably possible – as part of a going concern if feasible,
piecemeal if not – for the benefit of the charge holder.
Administration
The closest parallel to a Chapter 11 proceeding in the UK is
administration. As a result of the Enterprise Act, administra-
tion is becoming the major corporate bankruptcy procedure in
the UK. An administration may be commenced in-court or
out-of-court. The company, its directors or a creditor, includ-
ing a secured creditor, may apply to the court for the appoint-
ment of an administrator if the company is insolvent or likely
to become insolvent. The company, its directors or the hold-
er of a floating charge on all or substantially all of the compa-
ny’s assets may also appoint an administrator out-of-court.
If the appointment of an administrator is sought by a party
other than the floating charge holder, whether in-court or

out-of-court, the floating charge holder is entitled to advance
notice and is given the ability to appoint its own choice as
administrator. However, the duties of the administrator will
run to all creditors, unlike those of an administrative receiver,
which run exclusively to the appointing charge holder. Under
law, the administrator must be a “licensed insolvency practi-
tioner”, most of whom come from the large accounting firms.
Once appointed, the administrator basically displaces the
company’s directors and assumes broad executive authority
and powers. Significantly, the Enterprise Act did not provide
for the retention in an administration of the insolvent com-
pany’s management (i.e., for a DIP). Under a court approved
protocol, it is possible that the administrator may leave much
of the day-to-day management decisions to existing manage-
ment under the administrator’s supervision; however, the
administrator retains the ultimate executive authority.
The administrator is charged with attempting to realise as
quickly, efficiently and reasonably as possible, the following
goals in order of priority:
1) the rescue of the company (or of its operations) as a going
concern,
2) the achievement of a better realisation on the company’s
assets than would be obtained in a liquidation, and
3) if 1 or 2 is not reasonably practical, the realisation on assets
for the benefit of secured or preferential creditors.
Once an administrator is appointed, a broad automatic stay
on creditor enforcement actions will come into effect. Once
a notice of intention to appoint an administrator is given to
qualifying floating charge holders, an interim stay is effective
until such times as the administrator is actually appointed,
affording immediate protection for the company.
An administration will proceed with minimal court involve-
ment. In particular, the administrator has the power to sell the
company’s business without court review of the sale process or
court approval of the sale. The administrator is empowered to
sell the company’s assets free and clear of the interests of a
charge holder but has a duty to account to the charge holder for
An Overview of Global Insolvency Regimes 41
the value of the collateral sold. More than 50 percent in value of
the creditors must be present in person or by proxy at the initial
meeting of creditors and must approve the administrator’s pro-
posal for dealing with the company, and this requirement leads
to extensive consultation between the administrator and the
creditors beforehand. While a creditor’s committee may be
formed, it will have no ongoing power to control the adminis-
trator or the direction of the administration other than indirect-
ly through its power to approve the administrator’s fees (which
can also be approved by the court). A reorganisation ends 12
months after it is commenced unless it is extended by the con-
sent of the creditors or by the court.
Administration Exit
While restructurings can be, and occasionally are, accomplished
in an administration through a “company voluntary arrange-
ment” or “scheme of arrangement”, the more likely outcome by
far will be either the going-concern sale on a relatively acceler-
ated basis or the piecemeal liquidation of the debtor’s assets.
Within administrations, these sales and liquidations are com-
mon, and restructurings uncommon, for several reasons. To
begin with, if the administrator can meet the first two goals of
an administration by selling the assets of the company as a
going-concern at a price in excess of liquidation values, then that
will be the safest, and therefore preferred, course for the admin-
istrator to take in most cases, regardless of the fact that certain
creditors might prefer that the administrator attempt a restruc-
turing. Moreover, an administrator who attempts to achieve a
restructuring will be faced with numerous practical problems.
The automatic stay or moratorium does not prevent non-debtor
parties from exercising their right to contractual set-off. Unlike
in the US and certain other countries, the administrator lacks
the ability to assume, or to assume and assign, an executory con-
tract if the non-debtor party has the contractual right to termi-
nate the contract (including as a result of the commencement of
the administration) or to withhold its consent to the assignment
of the contract. Similarly, the administrator does not have the
right to reject unprofitable or otherwise burdensome executory
contracts. A moratorium or administration itself does not pre-
42 The Guide to Distressed Debt & Turnaround Investing
vent the termination of contracts, as often administration is
deemed to be an event of default and so an administrator may
have to negotiate with important suppliers/ customers to enable
him to continue trading.
No Direct Equivalent to DIP Financing; but Priority
Lending Possible
Moreover, neither the Enterprise Act nor prior existing UK
law makes any specific provision for the US-style DIP
lending. While lending to a company in administration is
theoretically possible, the lender will be provided with
nothing like the protections and security a DIP lender
would enjoy in Chapter 11. The new loans will be subject
to fixed charges and receivable assignments (factoring).
While the administrator is empowered to grant the new
lender liens on unencumbered assets, he or she has no abil-
ity to provide the lender with the benefit of a priming lien
over a fixed charge, and the administrator’s ability to obtain
court approval to override existing negative pledges without
the consent of the pledge is limited. The new loans will
enjoy priority over existing floating charges if the adminis-
trator accepts personal liability for the loans; however, the
administrator will generally be reluctant to accept such lia-
bility, and even if he or she accepts such liability, the new
loans, except to the extent secured by unencumbered assets,
will share priority with other contractual obligations of the
company incurred during the administration.
As a result, US DIP-style lending will be impossible, except
perhaps in the occasional case where the debtor has substan-
tial unencumbered assets that are free of a negative pledge.
While it is not uncommon for the existing lender or lending
group to continue to finance a company in administration,
such financing is purely defensive and generally done solely
for the purpose of preserving going-concern value pending a
sale of the assets by the administrator as a going concern.
Schemes of Arrangement and CVAs
Notwithstanding these limitations, in-court restructurings,
including debt-for-equity “swaps”, are possible in the UK
through company voluntary arrangements (CVAs) or
schemes of arrangement (Schemes). A CVA is a restructur-
ing arrangement between a company and its creditors pur-
suant to which the creditors agree to accept discounted pay-
ments on their claims, which can be made over time, as an
alternative to receiving less than they would likely receive in
a liquidation. While a CVA can be implemented out-of
court, a CVA is typically effectuated as part of an administra-
tion because a CVA does not provide for a moratorium on
creditor enforcement actions (except for very small compa-
nies). Like an administration, a CVA has the advantage of
requiring minimal court involvement. If creditors holding at
least 50 percent in value of all creditor claims, and 75 percent
or more in value of the claims of creditors actually voting (in
person or by proxy) at a meeting held for the purpose of vot-
ing on the proposed CVA, vote in favour of the proposed
CVA, then the CVA is binding on all creditors who received
notice. Court approval of a CVA is not required. However,
the utility of the CVA is limited by the fact that it cannot
bind secured creditors without their consent.
A Scheme is also a statutory compromise between a company
and its creditors, and like a CVA can be combined with an
administration. Unlike CVAs, however, Schemes are court-
intensive procedures which are more difficult and expensive to
implement. Also unlike in a CVA, where all creditors vote as
part of a single class, creditors in a Scheme will vote in sepa-
rate classes of creditors holding common interests. If a major-
ity in number of creditors holding 75 percent or more in value
in a class of creditors agree to support a Scheme, then once
approved by the court the Scheme becomes binding on all
creditors of that class, regardless of whether or not they had
notice of the Scheme. However, like a CVA, a Scheme can-
not be used to bind secured creditors without their consent.
Formerly, Schemes had an advantage over CVAs in that CVAs
could not be used to bind creditors who did not have notice of
the meeting at which the vote on the CVA was held. However,
due to a change in the law made effective as of January 1, 2003,
a CVA approved by the requisite creditor vote will also be

binding on all creditors who did not receive notice, although
such creditors will have the right to challenge the CVA in
court within 28 days of becoming aware that the meeting has
taken place. Given the relative advantages and disadvantages
between CVAs and Schemes, the trend is towards using CVAs
more and Schemes less.
Out of Court Restructurings now Becoming the Norm
As a result of the many practical difficulties involved in trying
to achieve an in-court restructuring in the UK, consensual out-
of-court restructurings, are the preferred approach whenever
practical. This preference is supported by the general under-
standing that the commencement of an administration may be
destructive of value, particularly in certain industries such as
telecom. Notwithstanding the difficulties in effectuating a
restructuring in the UK through an in-court process, a large
and active market has developed in the UK for the trading
of both senior loans and bonds. Buyers in this market include
hedge funds and other distressed debt traders, many of which
are US-based and including those who purchase distressed
debt with an eye to potentially acquiring equity in debt-for-
equity restructurings. These different holders are typically
represented on both bank group steering committees and ad
hoc bondholder committees in large restructurings.
4. FRANCE
Introduction
The successful work-out or restructuring of loans and other
debts owed by a French company is largely dependent upon
how quickly the parties recognise the problem and how
quickly they can achieve a consensual resolution prior to the
commencement of formal insolvency proceedings. Several
factors make both quick identification of the need for a
restructuring and prompt implementation of the restructuring
imperative.
Under French law, a company must file for bankruptcy relief
within 45 days of it first becoming insolvent on a cash flow
basis (i.e., upon it becoming unable to meet its debts, as they
An Overview of Global Insolvency Regimes 43
become due, with its available assets) or its management sub-
jects itself to civil sanctions. Upon a company's insolvency, any
creditor, the commercial court or the public prosecutor may
also properly commence an involuntary bankruptcy proceed-
ing against it. In addition, as from 1 January 1,2006, compa-
nies experiencing difficulties which they cannot overcome and
which lead to their becoming insolvent on a cash-flow basis
are entitled (but not required) to commence certain voluntary
bankruptcy proceedings known as safeguard proceedings. The
bankruptcy court may look back up to 18 months prior to the
date on which it opens the bankruptcy proceedings to deter-
mine, if such is the case, at what date during that period the
company became insolvent.
Directors’ Duties and Lender Liability
The borrower's directors and managers can all incur liabili-
ty if the borrower is allowed to continue transacting busi-
ness once it has become insolvent on a cash flow basis, with-
out (i) filing for bankruptcy within the prescribed 45 day
period or (ii) requesting the opening of conciliation proceed-
ings (see below). The managers and directors would then
subject themselves to civil liability, including liability for
some or all of the company's debts, a prohibition against
managing, directing or controlling any other company for a
maximum of fifteen years, and a prohibition, for a maximum
of five years, of holding any public office.
A bank which knowingly continues to lend to an insolvent
French company, thereby creating or contributing to the
illusion that the insolvent company is credit-worthy, sub-
jects itself to potential liability if such continued lending
were to be deemed to be a fraud of third party rights, if
the bank were deemed to have actively participated in the
borrower's management or if the security interests taken
to secure the lending were deemed to be disproportionate.
Formal Processes
Three forms of formal bankruptcy proceedings exist in
France:
1) the safeguard, the objective of which is to help in the
44 The Guide to Distressed Debt & Turnaround Investing

reorganisation of the company in order to, in the follow-
ing order:
a. allow the company to continue trading,
b. preserve employment,
c. settle the company's liabilities;
2) the judicial reorganisation, the objectives of which are
to, in the following order:
a. allow the company to continue trading,
b. preserve employment,
c. settle the company's liabilities; and
3) the judicial liquidation, the objective of which is the
termination of the business or the realization of the com-
pany's estate by one or more sales.
The company requests, and the bankruptcy court determines,
at the outset of the case, which proceeding shall be opened.
A safeguard can subsequently be converted into a judicial
reorganization or a judicial liquidation and a judicial reorgan-
ization can subsequently be converted into a judicial liquida-
tion. Once a bankruptcy case is opened, a broad automatic
stay will be imposed and a presiding judge will be appointed.
A judicial administrator, in reorganisation cases, and a judi-
cial liquidator, in liquidation cases, will also be appointed.
The bankruptcy court will decide whether the judicial
administrator, who is charged with preserving the debtor's
business will supervise, assist (the most common scenario) or
completely replace (except in a safeguard where the adminis-
trator may not replace management) the debtor's existing
management. The judicial liquidator, on the other hand, has
powers the effect of which is that he essentially replaces the
debtor's management.
If judicial reorganisation or judicial liquidation proceed-
ings are opened, a number of agreements entered into by cred-
itors with the debtor may be voided. If any of the above
three bankruptcy proceedings are opened, creditors would
be exposed to liability in the event of either (i) fraud, (ii)
clear participation in the management of the debtor or if
the guarantees taken as security for financing granted by
them are disproportionate.
Limited Creditor Rights
The rights and role of creditors in a French bankruptcy pro-
ceedings differ from those of creditors in a Chapter 11 case
in the US. With the exception of committees of EU
licensed credit institutions and of major suppliers (i.e. those
whose claim on the company is at least equal to five per cent
of all of the company's liabilities to its suppliers1) that are
mandatory in larger companies and may be authorized by
the bankruptcy judge in others at the request of the debtor
or the judicial administrator, there are no creditors’ commit-
tees, the judicial administrator has no specific duties to
creditors, and creditors can neither propose nor vote on any
plan of reorganisation. A bankruptcy official will be
appointed in respect of creditor claims, but his role is essen-
tially to consult with the debtor and the judicial administra-
tor and to communicate with individual creditors with
respect to determining the allowance of pre-bankruptcy
claims.
On the other hand, the presiding judge in a French bank-
ruptcy has extremely broad powers, both judicially and in
the administration of the debtor’s business, as compared to
a bankruptcy judge in the United States; he must, for exam-
ple, approve any decision to terminate employees. One of
the principal responsibilities of the judicial administrator is
to submit a report to the court containing a recommenda-
tion between the following:

1Within these committees, it is possible to forgive or defer debt payments virtually without limitation subject to ultimate bankruptcy court approval as indicated two sentences below.
Contrary to the US there is no cram down: the credit institutions committee and the major suppliers committee must approve the plan that is proposed to them by the debtor in iden-
tical term at a simple majority in number representing two-thirds of the debt of the relevant committee in value, but their vote only binds the minority members of their committee.
Moreover, the bankruptcy court must also consider that the plan agreed by the committees is "protective enough of the interests of all creditors" before approving this plan. Creditors
that are not members of one of the two above committees, or members of the above committees in the event that the committees fail to agree on a plan in identical terms, are consulted
individually (see the section entitled "No "Cramdown Equivalent").

1) that the restructured business be continued by the debtor,
either with no change in ownership or with the issuance of
additional shares,
2) that the business be sold as a going concern, in whole or
in part, or
3) that the business be liquidated pursuant to a judicial liq-
uidation.
However, the bankruptcy court is not bound by the judicial
administrator's recommendation in making the decision as
to the debtor’s fate among the above possibilities.
Likely Exit from French Insolvency Process
While a restructuring or reorganisation is possible under
formal bankruptcy proceedings, the likely outcome, until 1
January 2006 when the safeguard proceedings first became
available, for a French company that became the subject of
a bankruptcy case was either the going-concern sale or
piecemeal liquidation of its assets. It was generally believed
that in excess of 90 percent of French corporate bankrupt-
cies ended in such a sale or liquidation rather than in a suc-
cessful restructuring of the debtor.
Sales and liquidations were common, and restructurings
through bankruptcy proceedings uncommon, for several
reasons. To begin with, until 1 January of this year, a com-
pany could not legally commence a bankruptcy proceeding
until it was already insolvent on a cash flow basis. As a
result, a financially distressed but not yet insolvent compa-
ny was precluded from using reorganisation proactively to
effectuate a restructuring that would enable it to avoid
insolvency. In addition, a judicial reorganisation could not
last longer than 20 months, not necessarily a great deal of
time for a large, complex organisation to develop a plan of
reorganisation.
No DIP Equivalent
US-style “offensive” or “fresh” DIP lending is generally
impractical because such loans granted in bankruptcy pro-
ceedings rank junior in right of payment to certain employ-
An Overview of Global Insolvency Regimes 45
ee claims and to administrative claims and rank only pari
passu with certain other claims and because negative pledges
may not be overridden without the pledgee’s consent.
No “Cramdown” Equivalent: Hinders Debt for Equity Exit
Moreover, nothing like “cram down” exists in a judicial
reorganisation. The absence of such a mechanism means that it
is impossible both to subject existing shareholders to a debt-for-
equity “swap”restructuring against their will and to compel cred-
itors to accept any treatment of their claims less favourable than
payment in full of the face amount of their claims over a period
which does not exceed 10 years (subject to the developments
above relating to creditors members of one of the two creditor
committees). Accordingly, while a company in a safeguard or a
judicial reorganisation can be “rescued” by a plan of reorganisa-
tion that provides the company with new capital via the issuance
of new equity interests (with the consent of the existing equity
holders) or debt, safeguard or judicial reorganisation provide no
effective way to de-leverage a company’s debt structure or to
cancel its “out of the money” equity interests.
Limited Opportunities for Distressed Investors?
These limitations, coupled with the fact that creditors could not
propose or even vote on a plan of reorganisation (which was
modified by the introduction of credit committees for EU
licensed credit institutions and major suppliers as of 1 January of
this year, see above developments), meant that no secondary
market developed for the trading of bonds or loans to be used by
parties, such as hedge funds, interested in acquiring distressed
debt as a means to acquiring a controlling equity interest in a
company through a bankruptcy reorganisation. The develop-
ment of such a secondary market was also impeded by prohibi-
tions and limitations imposed by French law on the ability of
institutions – other than French banks or European banks hold-
ing the so-called European Passport – to acquire debts owed by
French companies that are not yet due and payable.
Out of Court Solutions
Given the limited utility of French insolvency proceedings in
effectuating restructurings, consensual restructurings negoti-
46 The Guide to Distressed Debt & Turnaround Investing
ated privately between a company, its equity holders and its
creditors out-of-court and prior to the company’s insolvency
were, and are likely to remain, commonly regarded as the
best solution for a financially distressed company for which
a restructuring is feasible. French law also provides for two
court-assisted, to a lesser or greater extent, proceedings
(the mandat ad hoc and the conciliation) designed to help a
company achieve a consensual restructuring and thereby
avoid bankruptcy. Both of these proceedings are conduct-
ed on a confidential basis and feature the appointment by
the court of an insolvency professional to assist the compa-
ny in its attempt to reach a consensual restructuring.
The mandat ad hoc proceedings can only take place in the
absence of the subject company’s insolvency, and the con-
ciliation can only take place if the company has not been
insolvent for more than 45 days, again emphasizing the
importance of quickly identifying the need for, and pro-
ceeding to implement, a restructuring.
Both the mandat ad hoc and the conciliation are confiden-
tial and require that the debtor request that the commer-
cial court appoint a professional, a mandataire ad hoc or a
conciliateur depending on the proceeding, to help the com-
pany find a consensual restructuring (the mandataire ad
hoc or the conciliateur are generally chosen among the
licensed administrateurs judiciaries). Once this profession-
al is appointed, the restructuring is consensual, even
though, in a conciliation, the court may impose a two year
moratorium and a reduction of their contractual interest
to the then prevailing French "legal interest rate" on dis-
senting creditors that would not agree on a consensual
restructuring.
The absence of insolvency implied by the existence of a
mandat ad hoc reduces, for participating creditors, the risk:
(a) that their agreements with the debtor be subsequently
voided, and
(b) that they incur a liability for having provided credit to
the debtor as it provides them with a good faith argument
that, to their knowledge, the debtor was in good standing,
albeit experiencing financial difficulties.
The conciliation proceeding (procédure de conciliation) is the
only proceeding that provides post conciliation lenders or
suppliers providing new money or new goods/services neces-
sary for the continued operation and the survival of the busi-
ness a priority right of payment if the conciliation agreement
is approved by the commercial court in a public judgment.
Pursuant to this priority right of payment such new
money/goods/services are paid before any claims born prior
to the opening of the conciliation proceedings and, in the
event that a safeguard, judicial reorganisation or judicial liq-
uidations proceedings are subsequently opened, prior to any
claim subject to such proceedings, with the exception of cer-
tain employee claims and the administrative expenses relat-
ing to such proceedings. In addition, if the commercial court
approves the conciliation agreement, the agreements made in
these proceedings are no longer exposed to the risk of being
voided if subsequent bankruptcy proceedings are opened and
the risk that creditors party to such agreements incur a liabil-
ity for having provided credit to the debtor is removed, save
manifest fraud in both cases.
5. GERMANY
Introduction
Recent developments in German law have brought the
German bankruptcy process somewhat closer to the
Chapter 11 process in the US and make a restructuring
effectuated through an in-court insolvency proceeding more
of a possibility in Germany than in, for example, France.
Nevertheless, out-of-court restructurings, where possible,
are still the preferred approach. Once again, certain factors
make both the prompt identification of the need for a
restructuring and the prompt implementation of the restruc-
turing, in each case before the company becomes insolvent,
very important.

Directors 'Duties and Lender Liability
Under German law, the managing director of a company is
required to file a petition for the commencement of insolven-
cy proceedings without undue delay, but no later than three
weeks, after the company has become insolvent on either a cash
flow or balance sheet basis. Moreover, the full three-week peri-
od may only be utilised if the directors are making a legitimate
effort to achieve an out-of-court restructuring. In case of an
insolvency on a cash flow basis, the only way that this three-
week period can be extended is if all of the creditors explicitly
agree to an extension of the dates on which payments to them
are due; this is not necessarily possible in an insolvency on a bal-
ance sheet basis.
A creditor can also file a petition for the commencement of an
involuntary bankruptcy proceeding against a German company.
However, in doing so, the creditor needs to establish not only its
claim, but also the debtor’s inability to satisfy such claim when
due. This most often requires attempts to enforce the claim
which in turn requires a judgement on the existence of such
claim. Therefore, creditors’ filings are rarely seen in Germany.
Moreover, banks mostly do not take that ultimate step against
their clients for reputational, but also liability issues as a wrong-
ful creditors’ filing could make the creditor liable for damages
caused by that (which may be severe). Instead creditors mostly
“remind”management of their duties if they want to achieve a fil-
ing.
A managing director of an insolvent company who fails to file a
petition for the commencement of an insolvency proceeding
within the required time period will be subject to personal civil
liability for such things as the company’s social security pay-
ments, withholding tax obligations and value added tax obliga-
tions and to criminal liability, including imprisonment. An unse-
cured lender who obtains collateral security from a borrower that
is insolvent or where insolvency (on a cash flow basis) is immi-
nent might subject itself not only to avoidance of the security as
a preference but (admittedly only under special circumstances)
also to potential criminal prosecution for requesting and accept-
ing preferential treatment.
An Overview of Global Insolvency Regimes 47
Moreover, a new loan extended by an existing lender in
its borrower’s crisis might be found to be extended in
violation of good morals, causing not only any security to be
invalidated, but also putting the lender at risk of being liable
to third party creditors who have relied on the borrower’s
continued existence. To avoid such lender liability, before
extending credit to an existing borrower in distress, lenders
seek (mostly third party) opinions on the merits of such bor-
rower’s restructuring plan.
The Effect of Filing in Germany
The filing of an insolvency proceeding in Germany com-
mences a "provisional administration" period, mostly lasting
three months, in which a provisional administrator is
appointed by the presiding court to secure the debtor's assets,
to analyze the debtor's economic situation and continuing
viability and to make a recommendation to the presiding
court as to whether an insolvency proceeding should be for-
mally opened. The administrator will usually be a lawyer
from a firm specializing in insolvency practice. During this
provisional administration period, the debtor is protected by
a moratorium on creditor enforcement actions and the
debtor's management will usually remain in place; however,
management's acts will typically need to be approved by the
provisional administrator. If an out-of-court restructuring
can be achieved during this provisional administration peri-
od, the formal opening of the insolvency proceeding can be
mooted.
At the end of the provisional administration period the pro-
visional administrator will recommend that the court either
formally open the insolvency proceeding or drop the case. If
the case is dropped, individual creditors will be free to
enforce their rights and the debtor’s assets. A court will only
formally open an insolvency proceeding if it finds that the
debtor is insolvent and if it is satisfied that the debtor has
sufficient unencumbered assets to provide for the payment of
the costs of the proceeding. The stated objective of any
German insolvency proceeding is the maximum realisation
on the company’s assets for the benefit of the creditors.
48 The Guide to Distressed Debt & Turnaround Investing
“Debtor in Possession” Possible
A company may request that its management continue in place
under the supervision of a creditor’s trustee during the penden-
cy of the insolvency proceeding. This request will be grant-
ed by the court unless the court determines that such self-
management will unduly delay the proceedings or otherwise
disadvantage the creditors, but if the insolvency proceeding
resulted from an involuntary filing by a creditor, the consent
of that creditor will also be required.
The Role of Creditors
An administrator in a German insolvency proceeding will
perform his or her duties with very little court supervision.
On the other hand, creditors have a significant role to play.
Creditors, for example, can replace the court-appointed
administrator with their own choice for administrator at the
mandatory first meeting of the creditors following the formal
opening of the insolvency proceeding. While a creditors’
committee is not mandatory, one is regularly appointed in
larger cases. Such creditors’ committee has the power to
decide on the most significant actions by the insolvency
administrator such as sale of relevant assets or starting or
continuing major lawsuits. The creditors’ committee decides
by simple majority of heads, it is appointed by a majority vote
in the creditors’ meeting (determined on the amounts of
claims, not on the number of creditors). If a restructuring
plan is proposed in the insolvency proceeding, creditors will
be able to vote on whether that plan should be adopted, and
while creditors cannot generally give binding instructions to
the administrator, they can collectively instruct the adminis-
trator to propose a restructuring plan.
Restructuring Plans
The new German insolvency law, adopted in 1999, provides
the opportunity to propose a restructuring plan, a corporate
rehabilitation alternative to the two traditional outcomes of a
German bankruptcy: the sale of the company’s assets as a
going concern and the piecemeal liquidation of the compa-
ny’s assets. A company seeking to take advantage of this new
ability to do an in-court restructuring can now file for bank-
ruptcy relief upon a showing that its cash flow insolvency is
imminent rather than actual. The continued operations of the
business may be financed by loans enjoying a priority of right
in repayment over pre-petition unsecured claims, and such
loans may even be secured by unencumbered assets. The
restructuring plan can be proposed by the company, the
administrator or by the administrator acting on the instruc-
tions of the creditors. A “pre-packaged” restructuring plan is
even possible. Theoretically, restructuring plans are unlimit-
ed in scope. In addition to providing for the company’s con-
tinuing existence, a restructuring plan can, for example, pro-
vide for a reduction in the debtor’s indebtedness, for the sale
of the company’s assets, in whole or in part, and for the ter-
mination of unprofitable activities.
If a restructuring plan is proposed, creditors will be organised
into “groups” (such as trade creditors, bank creditors and
secured creditors) for the purpose of voting on whether the
restructuring plan should be approved. A simple majority in
number of holders and of the total amount of claims in a
creditor group is sufficient to constitute the approval of that
group. The restructuring plan must also be approved by the
court. A “cram down” is possible, as the court can approve the
plan over the rejection of a creditor group if a majority of the
groups have accepted the plan and if the court is satisfied that
the dissenting creditors will receive at least as much under
the plan than they would in a liquidation.
Since 2002, in-court restructurings have become more com-
mon in Germany. Nevertheless, as an insolvency proceeding
in Germany is still more likely to end with the going concern
sale or piecemeal liquidation of the debtor's assets than with
a restructuring, in-court restructurings are still generally nei-
ther the debtor’s nor the creditors’ first choice.
While “DIP-style” lending is a theoretical possibility, a
German debtor lacks the ability to provide a DIP lender with
a “priming lien” with priority over pre-petition secured inter-
ests, cannot override negative pledges without the pledgee’s
consent (which however only results in a breach of such neg-

ative pledges without the DIP loan or the security granted
for it being affected) and cannot borrow money without the
consent of the creditors assembly or the creditors’ committee.
As a result, in practice the financing necessary to enable a
debtor to attempt to propose a restructuring only comes from
existing creditors who support such attempt.
Limited Moratorium
Although there is a continuing moratorium on certain creditor
actions during the pendency of an insolvency proceeding, once
the formal proceeding has been commenced there are significant
exceptions to this moratorium; for example, creditors with real
estate security can foreclose on their collateral and factors can
proceed to collect receivables assigned to them.
No Debt for Equity Exit Without Shareholder Consent
Finally, a restructuring plan cannot be used to achieve a debt-
for-equity “swap” restructuring without the consent of the
company’s existing shareholders (although this impediment
can sometimes be overcome via an auction of the debtor’s
shares if the shares are pledged to a lender with such lender
bidding its claims in the auction, and thereby acquiring the
shares itself ). It should be noted that debt-for-equity swap
transactions with German corporate entities are subject to
restrictions under mandatory German company law, in
particular, the issuance of new shares in consideration of a
release of debt requires an audit of the company by an
independent auditor appointed by the competent court,
which must evidence that the (released) claim of the cred-
itor is fully valuable and enforceable, before new shares are
issued and the nominal capital of the corporation is
increased accordingly. Thus, the creditor needs to make
sure that the value of the claims to be contributed is not
over-estimated.
The Distressed Investing Market in Germany
Growingly, a secondary market develops in Germany for
the trading of bonds and loans that can be used by parties,
such as hedge funds, interested in acquiring distressed
debt as a means to acquiring a controlling interest in a
An Overview of Global Insolvency Regimes 49
company through a bankruptcy restructuring. The devel-
opment of such a secondary market has been delayed for
some time by the fact that German banks do not normal-
ly sell their loans to third parties because of the close his-
torical relationships between German banks and their
borrowers, and bank secrecy, confidentiality and data pro-
tection issues that would likely arise if the loan was sold
without the borrower’s consent. This has changed as solu-
tions were found to cope with bank secrecy, confidentiali-
ty and data protection issues.
Consensual restructurings negotiated privately between a com-
pany, its equity holders and its creditors out-of-court and prior
to the company's insolvency are commonly regarded as the best
solution for a financially distressed company for which a restruc-
turing is feasible. Due to heightened concerns about lender lia-
bility, however, German banks in recent years have become
somewhat less likely than in times past to participate in restruc-
turings that involve additional funding obligations and the tak-
ing of equity and more likely to enforce their security (which
opens the door for foreign institutions to step in as new lenders).
6. EAST ASIA
Most jurisdictions in East Asia present challenges to the reali-
sation of value from troubled enterprises different than those in
Europe and the United States. Although each jurisdiction has
its own particularities, there are a number of common attrib-
utes.
• Despite the variety of social systems and economies, there
generally is a preference for out-of-court consensual solu-
tions. Governments are reluctant to support foreign credi-
tors’ use of domestic courts to enforce claims against domes-
tic obligors. Domestic creditors in East Asia prefer “tradi-
tional” solutions.
• Large business groups in East Asia enjoy considerable politi-
cal influence. If government support is not available on
acceptable terms, governments are likely to suggest “bro-
kered” solutions, sometimes involving combinations with
other, healthier domestic groups.
50 The Guide to Distressed Debt & Turnaround Investing
• There is little transparency. Public companies usually are con-
trolled by families or groups which use cross-holdings to
maintain effective control with the public float reflecting only
a minority interest. Related party transactions can mean the
control over the key asset such as land or inputs are main-
tained indirectly by the principal shareholders and revenues
diverted by marketing or distribution channels controlled by
the ultimate majority shareholders.
• Domestic banks and finance companies may act on the basis of
more than purely commercial considerations either to impede
or support solutions offered by foreign creditors.
• Domestic insolvency statutes often are of little practical signif-
icance. Black letter statute can be important but selective
enforcement often is the pertinent aspect.
China has a relatively new and untested body of insolvency
law. Reflecting China’s move towards a market-based economy
and its tendency to adopt reforms only after a number of iso-
lated “test cases” have demonstrated the implications, China is
consciously experimenting. In the right social and political
context, China has permitted foreign expertise to participate
and commercial discipline to prevail. In other contexts, only
state mandated solutions have been permitted.
Although concepts like an “automatic stay” and “DIP financ-
ing” can be discussed, they have little practical meaning in the
current context. Even when relatively sophisticated approach-
es to Non Performing Loans and asset recovery models have
been adopted, the political realities have set in leading to effec-
tive deadlocks.
In contrast, Indonesia has had insolvency legislation since the
Dutch colonial period. Although it is invoked occasionally for
minor domestic cases, the number of cases involving cross-
border claims can be counted on one hand. Except one case in
which the Bakrie Group chose to adopt a form of “pre-pack-
aged” solution, foreign creditors have generally been blocked
on procedural or other grounds. Courts are widely perceived
as corrupt and ineffective. As a result, obligors have little need
for an “automatic stay” and “consensual” solutions are the rule.
Malaysia and Taiwan present examples of court systems
that can work and legislation which can permit of quick
solutions on bases readily recognisable to Anglo-
American and continental European creditors. Again,
however, the political context can be decisive. If the gov-
ernment considers a court solution appropriate, the courts
can be quick and effective. Otherwise, a consensual solu-
tion may be encouraged.
Two recent cross-border insolvencies demonstrate the
realities which can be fairly typical in the region.
Asia Pulp and Paper is the largest emerging market insol-
vency. A parent private limited company incorporated in
Singapore issued registered bonds and privately placed
bonds in the Asia, North America and European capital
markets on the strength of substantial Indonesian and
Chinese sub-holding company and operating company
revenues. Such Indonesian and Chinese entities also
incurred substantial indebtedness. Singapore declined to
accept jurisdiction over any insolvency proceeding on the
basis that most assets were located in Indonesia and
China. This view was adopted notwithstanding the diver-
sion from commonly controlled Singapore listed public
companies of amounts equal to more than one billion
United States dollars. Left to Chinese and Indonesian
courts for their remedies, creditors have accepted or are
accepting a “traditional” solution which leaves the share-
holders in control of the group.
In contrast, the Swiss cement conglomerate, Holcim, suc-
ceeded in acquiring control of one of Indonesia’s largest
public cement producers on an out-of-court basis on terms
negotiated with that company’s creditors and principal
shareholders. Having revealed that approximately two
hundred fifty million United States dollars carried on the
books of PT Semen Cibinong as cash did not, in fact, rep-
resent cash, the principal shareholders apparently deter-
mined that their negotiations either with the Indonesian
Bank Restructuring Agency in respect of other outstand-
 An Overview of Global Insolvency Regimes 51

ing obligations would benefit from a sale a portion of the
proceeds of which would be paid to that agency. Having
acquired strategic stakes in the debt of PT Semen Cibinong
on the secondary market, Holcim was able to negotiate terms
ultimately acceptable to all parties for both the restructuring
of the company’s debt and the acquisition of a controlling
stake in its equity.
IN SUMMARY
As many restructurings now touch upon more than one
market, it is no longer sufficient to just have the knowledge
of insolvency laws in one jurisdiction. In particular, as we
have just explained, the differences in global insolvency laws
are boundless which leads to widespread confusion, with
most companies having subsidiaries and investors spread
throughout the globe. It is hoped that this overview provides
some clarity into the differentiators of just some of the key
markets and to the legal meaning of insolvency. n
turings as Eurotunnel, Gate Gourmet, Jarvis and British Energy. He is recog-
nised as an expert in his practice by Legal 500, Chambers and IFLR 1000.
Mark Broude
Mark Broude has extensive experience in business reorganization, creditors’ rights,
representation of unsecured creditors committees and bank finance working. Mr.
Broude also represents bondholders and debtors, including the Trump hotels and
casinos. Mr. Broude is representing the Official Committee of Unsecured
Creditors in the bankruptcy cases of Delphi, Inc. He is recognized as an expert in
his practice by Chambers.
Jake Redway
Jake Redway acted for the creditors committees in restructuring the obligations of
the Republic of Colombia as well as the principal shareholders of several
Indonesian banks in reaching settlements with the Indonesian Bank
Restructuring Agency. Jake also acted for Holcim Ltd in the acquisition and
restructuring of PT Semen Cibinong.

Hervé Diogo Amengual

Hervé Diogo Amengual advises the various French and international parties
involved in business reorganizations, corporate rescue and recovery (the compa-
ny, its managers or shareholders, lenders or other creditors, prospective pur-
chasers), whether out-of-court or in bankruptcy proceedings. He is known for
working on major restructurings such as Eurotunnel, KPNQwest and
Infogrames. He is recognised as an expert in his practice by Chambers and IFLR
1000.

Frank Grell
Frank Grell specialises in advising banks, note holders, insolvency practitioners
and companies on all areas of German insolvency, restructuring and distressed
debt. He is known for working on such high profile restructurings as AGIV Real
Estate, Callahan Kabel NRW, Deutsche Steinzeug, Kiekert, Peguform,
Schefenacker, TMD Friction, Vivanco Gruppe and Walter Bau.

John Houghton
John Houghton specialises in advising banks, note holders, insolvency practition-
ers and companies on all areas of insolvency, reconstructions, corporate rescues and
general corporate recovery. He is known for working on such high profile restruc-