Dictionary of Insolvency Terms in EU Member States

Latvia to United Kingdom

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TIESISKĀS AIZSARDZĪBAS PROCESS

Legal protection proceedings

Legal protection proceedings are aimed at returning a debtor to solvency, in circumstances where the debtor is already facing financial difficulties or expects to face them in the near future.
Legal protection proceedings apply to companies, registered partnerships and natural persons who are registered as individual merchants but are not applicable to unregistered partnerships or ordinary natural persons.
The court will review the case using the debtor’s address three months before the request was lodged to help reduce the likelihood of debtors changing their registered office address shortly before submitting an application to make it harder for creditors to follow the case or to obtain a more favourable court.
After initiation of the legal protection proceedings case in court, a statutory moratorium begins to take effect. Enforcement of judgments against the debtor is suspended. Contractual penalties and late payment interest cease to accrue. Unsecured creditors are prohibited from initiating insolvency proceedings and secured creditors are prevented from requesting the sale of the pledged property. Creditors, suppliers and service providers are prohibited from terminating agreements or suspending deliveries to the debtor, using the initiation of the legal protection proceedings as the grounds. Most of the aforementioned effects of the moratorium are in force for two months from the initiation of legal protection proceedings. This term may be extended for up to six months, if the majority of the creditors required for approval of the legal protection proceedings plan agree to such an extension. The aforementioned effects of the moratorium can be revoked in certain cases (e.g. if they can cause insolvency of a creditor).
No longer than within two months of when the term of the statutory moratorium has passed, the debtor must draw up a restructuring plan (a legal protection proceedings plan) and obtain approval of the plan from the required majority of its creditors: in the group of secured creditors – by creditors whose main claims in aggregate form two-thirds of the total amount of the claims of secured creditors in the amount of the principal claim; in the group of unsecured creditors – by the creditors whose main claims in aggregate form more than half of the total amount of the main claims of unsecured creditors in the amount of the principal claim. Persons and companies in the same group of companies as the debtor, such as shareholders, do not have the right to vote on the approval of the legal protection proceedings plan.
If the plan is not approved, the court terminates the proceedings and the protection for the debtor provided by the statutory moratorium is revoked.
A supervisory person must issue an opinion on the plan of measures of legal protection proceedings plan prior to its approval by the court. A supervisory person must be appointed to supervise legal protection proceedings further, upon the commencement of proceedings, to supervise the execution of the legal protection proceedings plan, if the cross-class cramdown is applied (mandatory appointment). A supervisory person can be appointed to supervise the execution of the legal protection proceedings plan upon a request by the debtor or creditors (voluntary appointment).
If approved, the plan becomes binding on all creditors, including those who voted against it. The plan must be implemented within two years, but if necessary, by explaining such a necessity in the plan, the implementation of the plan can take up to four years. The implementation can be extended for a further period of two years with the agreement of the majority of the debtor’s creditors (calculated in the same manner, as for the approval of the plan).
During legal protection proceedings the debtor is prohibited from performing any activities that may harm the interests of creditors and is obliged to devote all profits towards implementation of the legal protection proceedings plan. The management of the debtor remains in control of the debtor’s activities and property.
If the debtor fails to implement the legal protection proceedings plan, the court must terminate the legal protection proceedings and commence insolvency proceedings in respect of the debtor.

ĀRPUSTIESAS TIESISKĀS AIZSARDZĪBAS PROCESS

Out-of-court legal protection proceedings

Latvian law distinguishes between ordinary legal protection proceedings (see previous section titled Tiesiskās aizsardzības process/Legal protection proceedings) and out-of-court legal protection proceedings. However, the only material difference is that in out-of-court legal protection proceedings the debtor in financial difficulties agrees the legal protection proceedings plan and the identity of the supervisor with the majority of creditors in advance, prior to making a request to the court to initiate formal proceedings.
The court then merely approves the proposed plan and the elected supervisor.
The plan can then be implemented in accordance with the same rules that apply to legal protection proceedings.

JURIDISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESS

Insolvency proceedings of a legal person

Liquidation proceedings within the scope of which the debtor’s assets are sold/liquidated and the claims of creditors are settled from the proceeds.
Insolvency proceedings are initiated by the court in two stages. First, when the court receives an insolvency application, a court case is opened; however, at this stage, the legal status of the debtor remains unchanged. It is only after the application is considered and the court finds that one of several insolvency criteria is satisfied, that the court declares insolvency proceedings in respect of the debtor.
An application can be made by the company in financial difficulties (the debtor) or a creditor in various circumstances including a failure by the debtor to pay a principal debt exceeding EUR4,268 (if the debtor is a Limited Liability Company (LLC) or Joint Stock Company (JSC)) or EUR2,134 (if the debtor is an entity other than an LLC or JSC, such as a partnership) or where the debtor has failed to perform its obligations for more than two months. The court is entitled to declare insolvency proceedings of its own volition if a debtor has failed properly to implement a legal protection proceedings plan.
Once insolvency proceedings are declared, the court appoints an insolvency administrator to take over the management of the debtor, sell its assets, investigate transactions and settle creditors’ claims.
Secured creditors are prohibited from requesting the sale of pledged assets during the two-month period following the declaration of insolvency proceedings.
Creditors must submit their claims to the insolvency administrator within one month of insolvency proceedings being declared. If that deadline is missed, a creditor can still submit its claim within the extended deadline of six months following the declaration of the insolvency proceedings, but not later than until the day when the plan for settling the claims of creditors has been drawn up by the administrator. Creditors submitting their claims within the said extended deadline will have no voting rights at a creditors’ meeting. After this deadline a limitation period sets in, thereby the creditor loses its claim against the debtor.
Creditors receive regular updates and can object to and appeal certain of the administrator’s proposals and decisions.
Once all the necessary activities within the insolvency proceedings have been performed, including creditors’ claims having been settled, the insolvency administrator seeks the removal of the debtor company from the Commercial Register (the public register of all companies incorporated under Latvian law).

PĀREJA NO JURIDISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESA UZ TIESISKĀS AIZSARDZĪBAS PROCESU

Transition from insolvency proceedings of a legal person to a legal protection proceedings

Latvian law permits insolvency proceedings to be transitioned to legal protection proceedings provided that the majority of creditors agree on a legal protection proceedings plan and none of the specific prohibitions against the transition, which are set out in the law, are applicable (generally, where the debtor has previously failed to adhere to a legal protection proceedings plan).
Once the court has decided to implement the new legal protection proceedings plan, insolvency proceedings are terminated and the debtor’s management regains control of its activities and property.

FIZISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESS

Insolvency proceedings of a natural person

Proceedings within the scope of which the claims of creditors are settled from the property of the debtor (a natural person) and upon completion of which the debtor is released from his/her outstanding obligations.
The insolvency proceedings of a natural person are also applicable to a debtors who is at the same time an owners of an individual enterprise, family enterprise, a farm, or a fisherman’s farm.
With some exceptions, generally, the rules that apply to insolvency proceedings of a legal person also apply to insolvency proceedings of a natural person.
Insolvency proceedings can be initiated by a debtor who has been a taxpayer in Latvia for the previous six months and who is not able to settle current debts of more than EUR5,000 or debts payable within a year of more than EUR10,000, or, alternatively, this person does not have a possibility to settle debt obligations out of which at least one debt obligation is based on an unsettled ancillary obligation or joint obligation between the debtor and a related person, if it exceeds EUR5,000. In some cases, creditors can also initiate insolvency proceedings of a natural person, but only regarding the claims that have arisen from the economic activities of a an individual enterprise, family enterprise, a farm, or a fisherman’s farm.
The proceedings comprise a two-part process: a bankruptcy procedure and a debt discharge procedure.
The bankruptcy procedure is initiated when insolvency proceedings in respect of the natural person are declared whereupon an insolvency administrator is appointed, the debtor loses the right to deal with his/her property and hands it over to the administrator (except for two-thirds of their income and property required to generate income).
In the course of the bankruptcy procedure, the debtor’s property is sold and the proceeds are used to settle creditors’ claims.
It is then followed by a debt discharge procedure in the course of which the debtor follows a plan to settle the creditors’ claims. The length of the debt discharge procedure ranges from six months to three years, depending on the debtor’s ability to settle creditors’ claims.
Once the debtor has fulfilled his/her obligations under the plan, he/she is released from the remaining debts with some exceptions (including compensation in criminal proceedings). If the debtor fails to meet his/her obligations under the plan, the court terminates the insolvency proceedings without releasing the natural person from his/her debts.

FIZISKĀS PERSONAS ATBRĪVOŠANA NO PARĀDSAISTĪBĀM

Discharge of Obligations of a Natural Person

A simplified out-of-court procedure that provides an opportunity for a natural person who is not an entrepreneur or a sole trader to be released from the debts arising from overdue consumer loans.
Low-income consumers whose monetary obligations are below the threshold prescribed by the Insolvency Law as one of the entry criteria for insolvency proceedings of a natural person (please see above) are eligible for this procedure.
A debtor must submit a standard form application to a notary with printouts from the databases of the Bank of Latvia and credit information bureaus indicating the debt obligations enclosed. If there are no obstacles to the procedure, the notary notifies the creditors indicated in the application, bailiffs and the authority in charge of maintaining the Insolvency Register.
If the debtor has performed his duties during the procedure, the main being the duty to take financial literacy courses within six months from the registration of the debtor’s application, and there are no unresolved objections from the creditors, the notary makes a decision on the discharge of obligations.
The debtor has certain obligations and restrictions upon the discharge of obligations, such as the duty to seek employment and prohibition to take new consumer loans.

HIPOTĒKA

KOMERCĶĪLA

Mortgage

Commercial Pledge

In legal protection proceedings, insolvency proceedings and insolvency proceedings of a natural person, a secured creditor is a creditor whose claim is secured by either a commercial pledge or a mortgage.
The proceeds of sale of the pledged or mortgaged asset are used to settle the relevant secured creditor’s claim, in addition to any auction costs, certain other administrative costs, and the remuneration of the insolvency administrator.
Secured creditors are treated differently and separately to unsecured creditors in respect of voting and claims.
Secured creditors are not entitled to request the initiation of insolvency proceedings of a legal person.
During legal protection proceedings, a secured creditor is prohibited from requesting the sale of the pledged assets, except if the court permits such sale in case the secured creditor would suffer material losses from such prohibition.

EU Directive Implementation

The Directive on Restructuring and Insolvency has been implemented in Latvia. Amendments to the Insolvency Law, Civil Procedure Law and the Law On Protection of Employees in case of Insolvency of Employer aimed at transposing the Directive were adopted in March 2023 and are applicable to proceedings initiated starting from 15 September 2023. The main changes are as follows.
Early warning system
Guidelines on the resolution of financial difficulties have been published (available in Latvian). The guidelines contain links and references to various resources that can be used by entrepreneurs as early warning tools.
Prohibition of ipso facto clauses
The amendments introduced a new effect of the statutory moratorium within legal protection proceedings. Pursuant to it, a creditor, another kind of supplier or service provider is prohibited from avoiding from the performance of contracts or from terminating, accelerating or otherwise modifying them in a manner unfavourable to the debtor by using a clause in the contract that provides for such measures related to or resulting from the initiation of legal protection proceedings.
Ability to cram down dissenting classes of creditors
The amendments give rise to the possibility of a legal protection proceedings plan being approved even in the event of disapproval by a group of creditors affected by the legal protection proceedings plan (cross-class cramdown). I.e. if one of the creditors’ groups has rejected the legal protection proceedings plan, the court can still approve the plan, if the following conditions are met:
- the legal protection proceedings plan has been supported by at least one group of creditors, except for one that would not receive any payment or would not retain any shareholding in the event of the evaluation of the debtor as a going concern or the debtor's insolvency proceedings;
- the legal protection proceedings plan ensures that the dissenting group of creditors will be in at least as favourable position as the agreeing group of creditors;
- no group of creditors can receive or retain more than its claim or the full amount of shareholding.

Regulation of the administrators' profession

Insolvency administrators are admitted to the profession by the Insolvency Control Service (a governmental supervisory authority).
In order to be admitted to the profession, administrators must pass an exam. The administrators must undergo re-examination every five years.
A commission has also been established to deal with disciplinary issues within the profession. In particular, disciplinary cases can be brought for:
- Material violation of the law.
- Material violation of professional ethical standards.
- Regular violations of the law detected by the Insolvency Control Service.
- Abuse of powers detected by the Insolvency Control Service.
- Losses caused to the state, debtor or creditors, if the amount exceeds 20 minimal monthly salaries and this fact has been found in a court ruling that has come into effect.
Disciplinary penalties:
- Remark with or without a fine not exceeding EUR150.
- Reprimand with or without a fine from EUR150 to EUR15,000.
- Removal from the administrator’s profession.
- The Insolvency Control Service is allowed to visit the administrator’s place of business and inspect documents, and can publish data relating to violations by administrators on its website.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

Third country insolvency processes are recognised on the basis of international agreements on mutual legal assistance and/or national norms of private international law, as well as the norms of civil procedure governing the recognition and enforcement of foreign judgments in general. There are no norms of private international law or civil procedure governing the recognition of foreign insolvency proceedings in particular. Customary grounds for the refusal of recognition (eg lack of competence of the foreign court, which gave the ruling, to examine the dispute or conflict with the public policy (ordre public) in Latvia) would apply.

Law stated as of 1 September 2023

Įmonės bankroto procesas ne teismo tvarka

Company bankruptcy proceedings out of court

Out-of-court company bankruptcy proceedings are terminal, aimed at satisfying creditors’ claims from the company’s assets without involving the court.

The regulation of such proceedings is very similar to judicial bankruptcy proceedings (see section titled Įmonės bankroto byla/Company bankruptcy proceedings) with the difference that in out-of-court proceedings all decisions that would made by the court, are made instead by a meeting of the creditors. There are some additional prerequisites: there cannot be any judicial disputes against the company, any active debt recovery or enforcement proceedings, or a tax investigation or tax audit, performed by the State Tax Inspectorate.

A company’s managing director is entitled to call a creditors’ meeting to consider a written proposal for an out-of-court bankruptcy that will specify the identity of the proposed insolvency administrator.

The proposal requires the approval of a majority of 75% (in value) of creditors, and, if approved, the out-of-court bankruptcy commences.

Out-of-court bankruptcy proceedings are becoming more popular in light of the ability of creditors to appoint an insolvency administrator of their choice.

Fizinio asmens bankroto procesas

Natural person bankruptcy process

A procedure, carried out by the court, aimed at providing a fresh start for private individuals.

It can only be initiated by natural persons who are unable to fulfil financial obligations that cumulatively total a sum in excess of 25-times the government-set minimum monthly wage.

The court sets a deadline for creditors to submit claims to a bankruptcy administrator.

The individual must provide the bankruptcy administrator with a draft plan including reasons for their insolvency, anticipated income and amounts required for basic needs, provisions for the sale of assets, and the amounts to be paid to each creditor on (at least) a semi-annual basis throughout the duration of the bankruptcy proceedings.

If a meeting of creditors approves the plan, the bankruptcy administrator submits it to court for approval. The maximum period for implementation of the plan is three years. Assets are sold by the bankruptcy administrator in the order, and within the time frames, set out in the plan. The initial sale price of the assets is approved by the meeting of creditors. Immovable property is sold at auction.

During the course of the bankruptcy proceedings, it is possible for an agreement to be concluded between the individual and any collateral holder in relation to the preservation of the mortgaged (pledged) property. The court is required to consider whether the agreement violates the rights of any other creditors. If the court approves the agreement, the mortgaged (pledged) property will not be sold as part of the process. A secured creditor can request the sale of mortgaged (pledged) assets and satisfaction of its claim (in priority) out of the proceeds of sale.

Sutartinė hipoteka

Sutartinis įkeitimas

Priverstinis įkeitimas/hipoteka

Įkeitimas / hipoteka perduodant įkeistą turtą kreditoriui

Contractual mortgage

Contractual pledge

Statutory mortgage / pledge

Possessory pledge

Creditors may take security over property by way of contractual mortgage (over real estate objects), contractual or possessory pledge (over all other types of property), or statutory mortgage and/or pledge, which will grant the creditor priority against unsecured creditors in any bankruptcy or restructuring proceedings.

If the debtor has been declared bankrupt or is the subject of restructuring, the property encumbered with a mortgage or pledge can be sold by the insolvency administrator.

Secured debts have priority and will be paid from the proceeds of sale of the mortgaged or pledged assets.

EU Directive Implementation

There are proposals for a new, single insolvency procedure to cover matters relating to the restructuring and bankruptcy of legal persons. The proposals include: (i) unification of the professions of bankruptcy and restructuring administrators; (ii) implementation of self-governance and control of administrators; and (iii) implementation of procedures to make insolvency processes more efficient, faster and more orientated towards securing the interests of creditors.

The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.

A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.

An ability to cram down dissenting classes of creditors.

Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.

Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Lithuania

New amendments to the Law on Insolvency of the Legal Entities of the Republic of Lithuania (the Law) transposing provisions of the Directive into Lithuanian law entered into force on 15^thof July 2021.

The main amendments are:

Early warning system

The Lithuanian State Tax Inspectorate (the STI) introduced the Early Warning System, which is operated by the STI and Export Development Agency “Enterprise Lithuania”. STI will regularly assess the financial situation of legal entities and will notify each of the companies that are at a potential risk of insolvency. The notification procedure is done through a web-based electronic “My STI“ tool.

Additional obligations on the CEO

The new amendments introduced the concept of the “likelihood of insolvency” of the legal person. According to the Law, it is a situation where there is a realistic likelihood that the legal person will become insolvent within the next three months. If such situation arises the CEO is obliged to: (a) inform the stakeholders of the legal person and propose a solution for solving financial difficulties; (b) seek protection of the interests of creditors of the legal person; (c) avoid intentional and/or grossly negligent actions that would endanger the viability of the legal person.

Essential executory contract

The amendments introduced a new type of contract, i.e. essential executory contracts. In general, these are contracts that are necessary to ensure the continuity of the legal entity's activities and which, if terminated, would prevent the legal entity from carrying out economic and commercial activities. Until the date of entry into force of the order of the court to approve the restructuring plan, the creditors cannot terminate or modify such contracts. Such prohibition is applied to contracts that were concluded before the date of entry into force of the court order to initiate the restructuring proceedings and whose performance deadlines have not expired. The list of essential executive contracts has to be approved by the court in the court order opening the restructuring proceedings.

Ability to cram down dissenting classes of creditors

The amendments give rise to the possibility of a restructuring plan being approved even in the event of disapproval by groups of creditors affected by the restructuring plan. Such cram down requires half of all votes of creditors in the approving group in addition to the other requirements for a cross-class cram down. A cram down on dissenting shareholders would require a qualified majority, i.e. two thirds of all votes in each of the creditor groups.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

Recognition of third country insolvency processes

The recognition and enforcement of third-country insolvency proceedings are governed by the Code of Civil Procedure of the Republic of Lithuania and the recognition and enforcement of such insolvency proceedings are not automatic in Lithuania. Therefore, an insolvency practitioner of third country proceedings needs to receive a prior endorsement from the competent national court before taking legal action to deal with an insolvent company’s assets in Lithuania.

According to the Code of Civil Procedure, a court decision of a third country cannot be recognized if:

the decision has not come into force according to law of third country;

according to law of the Republic of Lithuania, or provisions of an international treaty, a case is attributed to the exclusive competence of courts of the Republic of Lithuania or courts of a third country;

there has been a default of appearance, if one party was not served with the document which instituted the proceedings (or with an equivalent document) in sufficient time and in such a way that the party to the case had no possibility to arrange a legal defence; and in case a party was incapable – no possibility of an appropriate representation was made;

the court judgment, the recognition of which is sought, is irreconcilable with a judgment of a Lithuanian court given in a dispute between the same parties;

the judgment conflicts with a public order determined in the Constitution of the Republic of Lithuania.

If none of the above-mentioned negative conditions apply, the third country court decision shall be recognized.

With thanks to Kazimieras Karpickis of Sorainen for writing this chapter of the dictionary.

Law stated as at 1 September 2023

GESTION CONTRÔLÉE

Controlled management

[In force until 30 October 2023, after which it will be repelled]

In view of avoiding bankruptcy or immediate cessation of business, a financially distressed company or partnership (but not its creditors) may apply for controlled management in order to: (i) reorganise and restructure its debts and business; and (ii) realise its assets in the best interest of its creditors.
The applicant must: (i) have lost creditworthiness or be in a situation that compromises the proper fulfilment of his/her commitments, (ii) be able to demonstrate that it is possible to recover or protect the business and (iii) not have been declared bankrupt.
The debtor’s management is placed under the control of one or more commissioners (commissaire) appointed by the court, who is in charge of preparing a reorganisation or liquidation plan.
The plan must be approved by more than 50% of creditors representing more than 50% in value of the debtor’s debts, and must also be approved by the court.
If the plan is approved, it binds all creditors who may not enforce guarantees or security interests (with exceptions for financial collateral arrangements and similar foreign law security interests).
During the process, the debtor cannot sell assets, grant security or enter into contracts without the court’s permission.
In practice, only a few applications for controlled management have been granted and most, once opened, are converted into bankruptcy.
Once the procedure is completed, the debtor’s normal operations are resumed.

CONCORDAT PRÉVENTIF DE FAILLITE

Composition with creditors

[In force until 30 October 2023, after which it will be repelled]

A procedure that allows a company or partnership in financial difficulty to enter into an agreement with its creditors in order to avoid bankruptcy. Only the debtor may submit the request to the court.
The request is approved only if the judge assesses that the debtor is honest but unfortunate; any failure to act in good faith leads to bankruptcy.
The judge appoints a delegate judge (juge délégué) to draft a proposed scheme of composition that must be approved by creditors representing 75% in value of the debtor’s outstanding debt and also by the court.
Throughout the procedure, the debtor may not dispose of, or mortgage, any assets or enter into any commitments without the prior authorisation of the delegate judge.
If the plan is approved, creditors may not enforce guarantees or security interests with exceptions for financial collateral arrangements and similar foreign law security interests.
The procedure is rarely used in practice.

Conciliation

Conciliation

[Will enter into force on 1 November 2023]

New out-of court procedure introduced by the law of 7 August 2023 on the reform of bankruptcy law (Law of 7 August 2023), which has implemented the EU Directive on Restructuring and Insolvency.
Can be used either as a standalone process or as a part of the all the other reorganisation measures.
Only upon the debtor's request.
A conciliator (conciliateur d’entreprise) is appointed by the Ministry of Economy for the purpose of facilitating an agreement between the debtor and its creditors.

SURSIS DE PAIEMENT

Suspension of payments

A procedure for companies or partnerships that face temporary liquidity issues to apply for a suspension of payments to creditors, for a given period of time. The procedure can only be initiated by the debtor.
Throughout the procedure, provided that the debtor pays accruing interest, creditors secured against real estate and assets necessary to carry out the debtor’s business may not enforce their security. The court’s permission is required to dispose of, pledge or mortgage movable or immovable assets, compromise, borrow or receive any sum, make any payment or carry out any administrative act.
This procedure is rarely used in practice.

ACCORD AMIABLE

Voluntary agreement with creditors

[Will enter into force on 1 November 2023]

Reorganization procedure, which can be triggered only by the debtor, by reaching an agreement with one or more creditors in respect of the reorganization of all or part of its assets and activities, including with the assistance of a conciliator.
The agreement is registered (homologué) in court, thus becoming executory on all parties without any further formality and in case of subsequent bankruptcy (faillite), it is protecting from the rules on hardening periods and, if the agreement does not effectively lead to the improvement of the debtor's situation, from recourses of other creditors.
The agreement is confidential and binding only on the creditors parties to it.

Réorganisation judiciaire

Judicial reorganisation

[Will enter into force on 1 November 2023]

Consists of several sub-procedures, which can be triggered by the debtor or (in some cases) by the Public Prosecutor and creditors, by reaching an agreement between the debtor and creditors in respect of the reorganization of all or part of the debtor's assets and activities and which can include the participation of conciliator and the grant of stay in payments.
Can be granted even if at the time of the request or during the procedure the debtor meets the requirements for the opening of bankruptcy.
Active involvement of the court, not only for granting executory force to the parties' agreement, but also for assessing the viability of the measures which will be implemented.
All persons with a legitimate interest may request to access the supporting documentation of the reorganization request at court's clerk office, except for commercially sensitive and personal data aspects.
Court judgment is granted within 15 days from the filing of the reorganization request and in case the court accepts the opening of judicial reorganization, the judgment is published with the Luxembourg Official Gazette (Recueil Electronique des Sociétés et Associations), whereas the debtor must also notify individually its creditors within 14 days.
The court can appoint a judicial officer (mandataire de justice) to work alongside the debtor's management or, in case of mismanagement, replace temporarily the management with a temporary administrator (administrateur provisoire).
During the period between the filing of the request and the court's judgment, (i) the debtor cannot be declared bankrupt, nor can it be subject to judicial dissolution (save limited exceptions) or be subject to administrative dissolution without liquidation and (ii) unsecured creditors are not allowed to cease the debtor's assets. In case the court accepts the reorganisation request, the same applies during the duration of the reorganization, except for the payment of post-reorganization claims which are related to ensuring the continuity of business.

SURSIS DES PAIEMENTS (RÉORGANISATION)

Stay of payments (réorganisation)

Not a standalone procedure, the court may grant it only if it necessary for attempting to reach a voluntary agreement with creditors or automatically in case of a court-imposed reorganization or court ordered transfer of assets (see below).
Initial duration of up to 4 months, which can be prolonged by the court for a maximum of 12 months.

ACCORD COLLECTIF

Court ordered reorganization

The draft reorganization plan is prepared by the debtor and must include several mandatory aspects, including the impact on the rights of creditors (including extensions or debt reduction) and a list of such creditors.
All creditors will be invited to file their claims with the court.
The approval of creditors holding at least 50% of the total amount of claims (for each class of claims, if applicable) is required before the final court approval.
Once approved by court, the reorganization plan is binding and enforceable against non-participating creditors and any third parties. The maximum duration of the reorganization plan is 5 years.
Both creditors and the debtor may request the termination of the plan, if it becomes during its execution that it can no longer be implemented as initially approved.

Transfert par DÉCISION de justice

Court ordered transfer of assets

[Will enter into force on 1 November 2023]

Can be requested by the debtor, but also creditors and the Public Prosecutor, for the purpose of the continuation of activities and business.
A judicial officer (mandataire de justice) appointed by the court will be in charge of the implementation of the transfer.
May concern the totality or only part of the assets but also employees' contracts.
The judicial officer can opt either for a public or a direct sale, but the transfer must be approved by court before being final, with an excerpt of the judgement to be published in the Luxembourg Official Gazette (Recueil Electronique des Sociétés et Associations).

FAILLITE

Bankruptcy

A Luxembourg company or partnership is bankrupt when:

it has ceased paying its debts, ie cessation of payments: the failure to pay a single debt or the simple unwillingness of the debtor to pay, may establish such cessation of payments; and
it is unable to obtain credit from third parties or affiliated undertakings, ie loss of creditworthiness.

If the court considers that these two criteria are met, it will declare the company or partnership bankrupt, open bankruptcy proceedings and appoint a bankruptcy receiver (curateur).
A debtor can be declared bankrupt following: (i) a declaration by the company’s directors or partners; (ii) a request by a creditor; or (iii) on the court’s own motion at the initiative of the Public Prosecutor.
The directors or partners are legally required, within one month of the date on which the above mentioned (cumulative) conditions for bankruptcy (cessation of payments and loss of creditworthiness) are met, to declare the same at the competent court. Failure to do so constitutes a criminal offence.
Once bankruptcy proceedings are opened, the company or partnership is prevented from administering its assets. All payments and transactions by the company after that date are null and void.
The aim of the proceedings is to wind up the entity’s assets in the best interests of the bankruptcy estate.
Secured creditors are not prevented from taking enforcement action during the bankruptcy proceedings.

LIQUIDATION JUDICIAIRE

Judicial liquidation

Judicial liquidation may be requested by the Public Prosecutor in order to liquidate a company that: (i) engages in activities that contravene criminal law; or (ii) contravenes the provisions of the commercial code, the laws of commercial companies, or the provisions governing the business licence in Luxembourg.
The court assesses whether the offences are deemed sufficiently serious to justify the dissolution/liquidation, regardless of the financial situation of the company.
Security interests may still be enforced.

Dissolution administrative sans liquidation

Administrative dissolution without liquidation

New procedure, introduced by the law of 28 October 2022, aimed at creating a simplified dissolution, with lesser costs for the Luxembourg authorities, of empty shell companies.
Can be initiated only upon the request of the Public Prosecutor provided three cumulative conditions are met (1) breach by the relevant company of its legal obligations i.e. filing of accounts, appointment of managers, etc), (2) absence of any employees and (3) absence of any assets.
It is implemented by a representative of the Luxembourg Register of Commerce and Companies, but appeals against its decision can be lodged with the courts.

RÉGIME SPÉCIAL DE LIQUIDATION DU NOTARIAT

Special liquidation regime for notaries

This procedure is only applicable to the liquidation of notaries.

SURENDETTEMENT DES PARTICULIERS

Over-indebtedness of natural persons

A procedure for natural persons providing for the collective settlement of their debts.
It applies to a debtor domiciled in Luxembourg that is manifestly not able to meet all non-professional debts that are due and payable.
The procedure comprises three phases:

A phase that takes place before the Luxembourg Commission of Mediation.
A phase of judicial compromise (redressement judiciaire) that takes place before the court.
A phase of personal recovery, so‑called civil bankruptcy.

For phases (i) and (ii) the judge drafts a financial recovery plan that may lead to: (i) suspension of payments of all or part of the debts; and (ii) reduction of interest rates.
The third phase can only be initiated when the over-indebted debtor is in an irremediably compromised position. The judge decides on disputed claims and pronounces the liquidation of the debtor’s estate.
Creditors’ rights including those of secured creditors may be suspended by the judge during the procedure.

LA RÉALISATION DES SÛRETÉS RÉGIES PAR LA LOI SUR LES CONTRATS DE GARANTIE FINANCIÈRE DU 5 AOÛT 2005

Enforcement of security interests governed by the Luxembourg law on financial collateral arrangements of 5 August 2005

Local and foreign bankruptcy rules do not prevent the granting and the enforcement of Luxembourg security interests (pledges or assignments) governed by the 2005 law.
Enforcement of security interests does not require any prior court order or judgment.
Pledge: pre-enforcement – prior to enforcing a pledge, the exercise of rights attached to the pledged assets is governed by the pledge agreement. Pledge agreements generally provide that the pledgee may exercise the rights attached to the pledged assets upon the occurrence of an enforcement event (contractually agreed by the parties).
Pledge: main enforcement mechanisms – if an enforcement event occurs, the pledgee may:

Appropriate the pledged assets at a price determined before or after the appropriation, pursuant to a valuation method agreed between the parties and set out in the pledge agreement (Appropriation). In addition, the pledgee may elect, at its sole discretion, to appoint another person to which the ownership of the pledged assets will be transferred in lieu of the pledgee.
Sell all or part of the pledged assets in a private transaction on arms’ length terms (conditions commerciales normales, Private Sale).
Sell or cause the sale of any of the pledged assets on the Luxembourg Stock Exchange or any foreign stock exchange, or by public sale.
Request a Luxembourg court to be assigned title to the pledged assets for discharge of all or part of the secured obligations as determined by a court-appointed expert.

If the pledged assets are financial instruments, appropriate such financial instruments:

At the stock exchange price, if such financial instruments are listed on a regulated market.
At the price of the last published net asset value (NAV) if the financial instruments are units or shares of an investment fund calculating and publishing a NAV on a regular basis.
Appropriation and Private Sale are the preferred and most commonly used enforcement methods.
Pledges over bank accounts and receivables are generally enforced by way of a request for payment to the bank account/debtors.

LA RÉALISATION DES HYPOTHÈQUES

Enforcement of mortgages

In order to enforce a mortgage over real estate, the mortgagee must hold an enforceable title (titre exécutoire), generally delivered by the notary, and the deed of mortgage must contain a clause authorising the sale (clause de voie parée) for the mortgagee to be entitled to sell the property (by public auction).
If the mortgagee does not hold such a title, it must obtain a court payment order prior to enforcing the mortgage by way of an attachment (saisie immobilière).
With the enforceable title in hand, the mortgagee asks the notary to proceed to a public auction. The adjudication price will be the highest bid and the proceeds will be paid to the mortgagee (after payment of the notary’s fees and any privileges mandatorily arising by law). Any surplus will be returned to the mortgagor.

EU Directive Implementation

The EU Directive on Restructuring and Insolvency requires Member States to adopt a number of minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The objective of the Directive is to reduce barriers to the free movement of capital and freedom of establishment, which result from differences between national laws and procedures concerning preventive restructuring, insolvency, discharge of debt, and disqualifications. In particular, the Directive aims to ensure access to effective national preventive restructuring frameworks, a second chance for honest insolvent or over-indebted entrepreneurs and an improvement of the effectiveness and shortening the length of restructuring and insolvency procedures.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Luxembourg

The EU Directive has not yet been implemented in Luxembourg.

A draft act no. 6539 (split currently into a draft bill 6539A) introducing a reform of the Luxembourg insolvency law was originally presented to the Luxembourg Parliament on 1 February 2013 and aimed at substantially modifying and modernising Luxembourg insolvency procedures, in particular by introducing various judicial and non-judicial prevention measures. The draft act has been under discussion for many years, and it is likely that such reform will take place in the context of the implementation of this EU Directive. However, it is not clear when such reform will be introduced, as there have been no further developments in respect of the draft act since March 2022.

Implementation date

The implementation date is currently unknown.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

However, the Regulation provides that a Member State may refuse to recognise insolvency proceedings opened in another Member State or to enforce a judgment handed down in the context of such proceedings where the effects of such recognition or enforcement would be manifestly contrary to the State’s public policy, in particular to its fundamental principles or constitutional rights and liberties of the individual.

Recognition of third country insolvency processes

Luxembourg private international law adheres to the principle of unity and universality of bankruptcy pursuant to which there can only be one court which should have jurisdiction over the bankruptcy procedure for a given debtor and the opening of a proceeding against a debtor excludes the opening of another proceeding against the same debtor in another jurisdiction. The existence and recognition of a foreign bankruptcy proceeding would therefore preclude the opening of another proceeding against the same debtor in Luxembourg.

Measures adopted during foreign insolvency proceedings (which claim an exterritorial effect) would be recognised in principle in Luxembourg save if they are contrary to the Luxembourg international public order rules. Luxembourg law recognises that the foreign law applicable to insolvency proceedings (lex concursus) also governs related aspects such as the capacity and assets of the debtor, suspension of payments and stay of enforcement, determination of the debtor’s debts and the filing of claims against the bankruptcy estate, enforceability of security interests during bankruptcy and legal consequences of the end of bankruptcy proceedings. Contrary to the approach of the EU Regulation on Insolvency Proceedings, Luxembourg law does not automatically reject the application of foreign bankruptcy laws to assets located in Luxembourg. While some foreign process measures are recognized without any local formality, any enforcement measures in Luxembourg require an exequatur.

The international public order exception to the recognition of foreign bankruptcy proceedings applies to aspects such as mandatory jurisdiction of Luxembourg courts (eg for bankruptcy proceedings against debtors which have their main establishment in Luxembourg) and does not allow, among other things, the recognition of foreign measures providing for the extinction of any rights of creditors which did not file their claim within the legally prescribed periods or the prohibition or the loss of any right of individual pursuit by creditors against the bankruptcy estate at the end of the bankruptcy proceedings.

Contact: Xavier Guzman

Law stated as of 11 October 2023

Arrangament jew kompromess ma’ kredituri

Compromise or arrangement with creditors and members

Can be proposed between a company and its creditors (or any class of creditors) or between the company and its members (or any class of them), and the court may, following an application filed by the company, any creditor or member (as the case may be) or, if the company is undergoing winding up, by the liquidator, order that a meeting of the creditors or of the members (or any class of creditors or members), as the case may be, be called. Alternatively, the company or any creditor may, with the sanction of not less than two-thirds of the creditors or class of creditors, seek the appointment of a mediator and where appointed, shall organise a meeting of the creditors (or class of creditors) for the purpose of facilitating negotiations to reach a compromise or arrangement.
If a majority in number representing two-thirds in value of the creditors or members (or any class thereof) as the case may be, present and voting (either in person or by proxy) at the meeting summoned by order of the court, agree to any compromise or arrangement, if sanctioned by the court, the compromise or arrangement shall be binding on all creditors (or class of creditors) or members (or class of members) and on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.
Where the proposed arrangement or compromise has been referred to mediation, if all the creditors execute a written agreement containing a compromise or arrangement, such arrangement shall be binding on all creditors and also on the company (or liquidator in the case that company is being wound up).
There is no moratorium or stay at the initial approval stage.
Once approved by crediommonly used when a company is in financial distress as a way of facilitating its financial recovery. However, a scheme of arrangement or compromise may also be proposed by a liquidator.
The scheme itself can propose a stay that will come into effect if the scheme is approved by the requisite majorities and sanctioned by the court.
This restructuring procedure does not apply to partnerships or individuals (solely to companies).

Procedura biex kumpannija tirkupra

Company recovery procedure

Where a company is unable to pay its debts or is imminently likely to become unable to pay its debts, a company recovery application may be made to the court requesting that the company be placed under the company recovery procedure and that a special controller is appointed to take over, manage and administer the business of the company under conditions to be set by the court. The request may be made either by the company following an extraordinary resolution, by the directors (provided the Board has first convened a special general meeting of the shareholders pursuant to Article 329A of the Companies Act and the shareholders have not themselves passed a resolution for company recovery), or creditors representing more than half in value of the company’s creditors or by more than half in value of the creditors of a particular class.
The court may only accede to the application if: (i) it is satisfied that the company is, or is imminently likely to become, unable to pay its debts; and (ii) it considers that the making of the order would be likely to achieve either the survival of the company as a viable going concern (in whole or in part), or the sanctioning of a compromise or arrangement between the company and any of its creditors or members. Special additional considerations apply if the company in question is licensed or authorised under Maltese law to carry out regulated activities.
The court is required to decide on the request for a company recovery within not more than 40 working days from the filing of the application.
If the court issues a company recovery order, it will appoint a special controller for a period not exceeding 12 months. (extendable by up to a further 12 months).
Following the application (unless dismissed by the court) and during the company recovery procedure a stay prevents action against the company or its assets including provision that no steps may be taken to enforce any security over property of the company or to repossess goods under any hire-purchase agreement except with the leave of the court.
While the order is in force, the directors’ powers are suspended and the special controller manages the company’s activities, business and property, unless the consent of the special controller has been obtained.
The special controller must submit reports to the court and may ask the court to terminate the procedure if they feel that it serves no purpose or if they feel that the company can settle its debts and continue as a viable going concern.
No later than 2 months from appointment, the Special Controller is to provide an initial report determining whether there is a reasonable expectation of the company’s recovery and continuation as a viable going concern, in whole or in part.
At the end of the period of appointment, the Special Controller must submit a final report to the court. If they think the company can continue as a viable going concern (in whole or in part), they must attach a detailed recovery plan that, if accepted by the court, binds all parties, including any dissenting creditors.
At the end of the procedure, the company is either wound up or continues in existence, as determined by the court.

Xoljiment U STRALĊ KONSEGWENZJALI

Dissolution and Consequential Winding Up

Shareholders may resolve to dissolve and consequently wind up a company either by means of court proceedings or voluntarily by passing an extraordinary resolution. They are not required to disclose the reasons for their decision.
A resolution to dissolve the company may be passed at any time, regardless of the solvency of the company.
A company may also be dissolved and wound up by court order if the company’s business has been suspended for an uninterrupted period of 24 months, or if it is unable to pay its debts.
In addition to the above, a company shall be dissolved and wound by the court in the following cases:

It should be noted that the law does provide some grace periods during which any of the above situations can be rectified in good time thereby avoiding a course of court winding up.

Hatra ta’ amministratur provvizorju

Appointment of a provisional liquidator

Not a standalone procedure: a court-appointed official may be appointed at any time following the filing of a winding-up application until such time as the court either makes a winding-up order or dismisses the winding-up application, with powers and functions relating to the administration of the estate or business of a company.

Stralċ volontarju mill-membri jew mill-kredituri

Members' or creditors' voluntary winding up

A members’ winding up is a solvent winding up procedure that requires the directors of the company to make a declaration to the effect that following an inquiry into the affairs of the company, the company will be able to pay its debts in full within a maximum of 12 months from the date of dissolution as specified in the resolution.
This declaration is known as a Declaration of Solvency and has no effect at law unless it is made within the month immediately preceding the date of the passing of the resolution for the company’s dissolution and is delivered to the Malta Business Registry supported by a statement of the company’s assets and liabilities made up to a date not earlier than the date of the declaration by more than 3 months.
A director who makes a declaration of solvency without having reasonable grounds to conclude that the company would be capable of paying off its debts within the stipulated time-frame shall be guilty of an offence and liable on conviction to a substantial fine or term of imprisonment or both.
A winding up in respect of which a declaration of solvency has been registered under the requirements of the Companies Act is referred to as a "members’ voluntary winding up" whereas if no such declaration is produced, the winding up procedure would be referred to as a "creditors voluntary winding up".
Where a members’ voluntary winding up is concerned, usually the liquidator is appointed by means of an extraordinary resolution by the shareholders (typically in the same instrument resolving to dissolve and liquidate the company). If for whatever reason a liquidator is not appointed by the shareholders, an application to court for the appointment of a liquidator would be necessary.
In the case of a creditors’ voluntary winding up, a meeting of the creditors of the company is summoned primarily for the purpose of appointing a liquidator, During such meeting, the creditors are expected to pass a resolution to nominate the liquidator.
In the case of a voluntary winding up, the company is required to cease, as from the date of dissolution (as stated in the resolution) carrying on its business except so far as may be required to successfully wind up the company’s affairs in an orderly manner.
Upon the appointment of a liquidator, all of the powers of the company directors and company secretary cease, except as otherwise provided in the law.
Title to the company’s assets remains vested in the company.
Subject to the provisions of the Act and any other law regulating matters of priority or ranking, the property of a company is, on its winding up, applied in satisfaction of its liabilities pari passu. A secured creditor has a right of preference over other creditors.
A voluntary winding-up order does not give rise to an automatic stay on proceedings; however, the liquidator may apply to the court for such a stay.

Stralċ mill-qorti

Winding up by the court

A terminal process, typically commenced by an unpaid creditor, although it may also be commenced by the company, a shareholder, director, debenture-holder or a contributory.
The presentation of a winding-up petition (the rikors għal stralċ) alone does not give rise to an automatic stay of proceedings. However, at any time after the filing of the winding-up petition, but before the making of a winding-up order (ordni għal stralċ), it is possible for the company, or any creditor or contributory to apply to the court to request a stay of judicial proceedings pending against the company.
When a winding up order is made or a provisional administrator appointed by the court, no action or proceedings against the company or its property may be commenced or instituted without special leave of the court.

Falliment f’każ ta’ kummerċjant

Bankruptcy of a trader

For the purpose of the bankruptcy rules under the Commercial Code (Chapter 13 Laws of Malta) the term "Trader" is defined as "any person who, by profession, exercises acts of trade in his own name".
Partnerships en nom collectif (a partnership formed by two or more partners, which has its obligations guaranteed by the unlimited and joint and several liability of its partners) and en commandite (a partnership where the obligations are guaranteed by the unlimited and joint and several liability of its general partners, and by the limited liability of its limited partners) may be rehabilitated in accordance with the provisions on bankruptcy of a trader under the commercial code.
As a general rule, where a trader suspends payment of their debts, they are held to be in a state of bankruptcy. The trader makes a declaration that must be filed at court together with their commercial books and documents. A creditor may also apply to court for a judgment confirming the debtor’s state of bankruptcy (stat ta’ falliment).
From the date of the trader’s declaration, or delivery of the court’s judgment, the bankrupt trader is dispossessed of the administration of their property. Debts that have not yet fallen due become demandable upon the making of the declaration of bankruptcy.
The court appoints curators to administer the bankrupt’s estate. Perishable goods must be sold by auction and non-perishable goods cannot be sold by the curators until a scheme of arrangement is agreed.
A meeting of creditors takes place in the presence of a judge on a day and time to be fixed by the court. Every creditor is required to present an application for admission of its debt and produce any documents in support of its claim. The court will deliver a decree stating which debts have been admitted. If the decree is not challenged within eight days following the publication of a notice in the government gazette, the decree is deemed to have been accepted.
Creditors whose claims have been admitted are summoned to a further meeting before the judge. The bankrupt trader proposes the terms of a composition and creditors are given at least eight days to consider the proposal. In order for the composition to be approved, a majority in number, and three-quarters in value of those creditors whose claims have been admitted must vote in favour of the proposal.

Xoljiment ta’ socjetajiet f’isem kollettiv u socjeta in akkomandita

Dissolution of partnerships en nom collectif and en commandite

Partnerships en nom collectif (a partnership formed by two or more partners, which has its obligations guaranteed by the unlimited and joint and several liability of its partners) and en commandite (a partnership where the obligations are guaranteed by the unlimited and joint and several liability of its general partners, and by the limited liability of its limited partners) may be dissolved voluntarily by common accord of the partners, or by court order if the partnership is adjudged to be bankrupt or if, in the court’s opinion, sufficient grounds exist to warrant its dissolution.

Ipoteki
talba ta’ bejgh ta’ immobli jew il-hwejjeg mobbli mghobbija b’ipoteka

Hypothecs
Demand sale of immovable or movable charged with hypothec

Essentially, a hypothec is a right over property for the security of a debt.
Hypothecs can be sub-divided into three broad groups:
The ability to take enforcement action in respect of a debt requires the existence of an executive title, a list of which is set out in the code of organisation and civil procedure (chapter 12 of the laws of Malta).
Once an executive title has been obtained (and however so obtained), lenders can apply for the charged assets to be sold by judicial auction:

Rahan ta’ mobbli
Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Pledge of movables
Enforcement of pledge by judicial sale and appropriation

A pledge is defined in the Maltese civil code as a "contract created as a security for an obligation". A pledge may be given either by the debtor himself or by a third party for the debtor (eg a surety). Ownership of the asset is not transferred by the creation of the pledge and is retained by the pledgor.
The Maltese civil code draws a distinction between assets pledged which are: (i) movables (other than debts); and (ii) debts.
In the case of movables, the pledgee may only realise the pledged movable by means of a judicial sale by auction. Any covenant allowing appropriation, or disposal in any other manner, is null and void.
However, if the pledged property is a debt and the debt secured by the pledge is due, the creditor/pledgee is entitled to retain from any payments received in respect of the pledged debt an amount sufficient to satisfy its rights.
Under the general rules of the civil code, the only situation in which the law permits appropriation is where the asset pledged is a debt, as the debt is already quantified and liquidated, and there is no risk that abuse will occur. Any surplus should be paid to the pledgor. This method of enforcement is subject to the sanction of the court.

Enforcement of pledge over shares

In the case of a pledge of shares, if the debtor defaults, the pledgee is entitled to enforce the pledge by either:

Rahan ta’ mobbli
Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Pledge of movables
Enforcement of pledge by judicial sale and appropriation

The pledgee can only sell or appropriate those shares needed to repay the debt. All other shares must be released to the pledgor.

Enforcement in relation to pledged shares may also be sought in accordance with the provisions of the Financial Collateral Arrangements Regulations (S.l. 459.01) (FC) that provide for a more creditor-friendly approach to enforcement. Under the FC, enforcement must accord with the terms of the pledge agreement and may be effected by way of sale or appropriation of the shares or receivables, offsetting their value against, or applying their value in discharge of, the secured obligations.
If the pledgor defaults on an agreement secured by a pledge of a bank account, then all rights over the account that are vested in the pledgor are terminated and vest in the pledgee, who can then exercise all rights and remedies previously possessed by the pledgor. This includes, without limitation, applying any balance held in the account on the date of enforcement against the secured obligations. Under the FC, on the occurrence of a specified event, the pledgee can realise pledged cash or the contents of a pledged bank account by offsetting it against, or applying it in discharge of, the secured obligations.

Garanzija

Suretyship

A form of guarantee given by a third party. A suretyship contracted for a principle obligation, in general terms, extends to all accessories of the debt.
In the case of a simple suretyship, the lender can only enforce its rights against the surety after attempting to enforce its rights against the principal debtor and finding that the estate of the principal debtor is insufficient to settle the debt. In the case of a joint and several suretyship (which is generally the default scenario in commercial transactions) the agreement usually entitles the lender to enforce its rights against the surety and the principal debtor at the same time, or to enforce against the surety without first enforcing its rights against the principal debtor.
A surety who has paid the debt is subrogated, by operation of law, to all the rights of the creditor against the principal debtor, and has a right of relief against the principal debtor (whether or not the suretyship was created with the consent or knowledge of the principal debtor).

Jedd Biex Izomm F’idejh Il-Hwejjeg

Right of retention

A lien is a right that entitles a party to retain assets in their possession pending payment of a debt owed. Liens occur more commonly in commercial transactions, typically when goods are being supplied, repaired or transported.
The civil code sets out various rights of retention. For example, in relation to the law of mandate, the mandatory is entitled to the right of retention against their mandator as long as they are not paid what is due to them under the mandate.

TRUSTS TA’ Garanzija

Security Trust

Security may be created in favour of a security trustee for the benefit of creditors (whether present or future) by either constituting security in favour of the trustee in the manner provided for by law relating to the particular security, or, by settling property in favour of the trustee under written terms governing the security trust.
The security trustee shall have the power to file any legal proceedings necessary for the enforcement of the security but shall not be subject to any of the obligations of the creditors unless expressly agreed to in writing.

Fuq garanzija bi trasferiment ta’ titolu

Infurzar tad-drittijiet

Security by title transfer

Security by title transfer is a contract pursuant to which the debtor, or a third party for the debtor, transfers or assigns movable assets to a creditor to secure a present or future obligation.

Enforcement of rights

In the event of a default, the creditor is, upon giving notice in writing to the debtor (and the transferor of property by way of security, if different) entitled to realise the property transferred by sale, or by setting off or netting its value, and applying the same in discharge of the secured obligations. Set-off or netting is only permitted if it has been expressly agreed to in the agreement between the parties. Where a creditor exercises their rights as aforesaid, they must exercise such rights in a commercially reasonable manner, will be bound by fiduciary obligations in that regard and will be bound to account to the debtor as to the value used for such enforcement.

EU Directive

Implementation in Malta

The EU Directive on Restructuring and Insolvency¹ has been implemented into Maltese law by means of Act XXIV of 2022, the Pre-Insolvency Act (Chapter 631 of the Laws of Malta), as well as the Insolvency Practitioners Act, Act XXV of 2022 (Chapter 632 of the Laws of Malta), and the Commercial Code (Amendment) Act, Act XXIII of 2022, each of which partially transposed the Directive.

Implementation date

Each of the three Acts came into force on the 23rd of December, 2022.

Att ta‘ Qabel L-Insolvenza

Pre-Insolvency Act

The Pre-Insolvency Act regulates, inter alia:

the introduction of early warning tools available to debtors in order to enable them to detect circumstances that could give rise to a likelihood of insolvency;
the introduction of the obligation of the official of the debtor (being the director of the debtor company, partner of the debtor partnership, or any person vested with the administration or representation of the debtor)to convene a meeting upon becoming aware of the likelihood of insolvency to review the debtor’s position and determine the next steps to be taken;
the introduction of the preventive restructuring procedure, which may be entered into by the debtor upon the successful application being made to the Court as endorsed by an insolvency practitioner and which may take three different forms:
- the standard preventive restructuring procedure,
- the pre-formulated preventive restructuring procedure and
- the pre-approved preventive restructuring procedure;
the normal activities of the debtor during the course of a preventive restructuring procedure;
the treatment of affected parties in classes and the equal treatment of such affected parties;
the protection of new and interim financing; and
the stay of individual enforcement actions in the case of the standard preventive restructuring procedure.

Below are definitions of some key terms within the Act.

Partijiet affettwati

Affected parties

Affected parties means creditors, equity holders or employees, whose claims or interests are, or may be, directly affected by a restructuring plan.

Test tal-aħjar interess tal-kredituri

Best-interest-of-creditors-test

The best-interest-of-creditors test means a test that is satisfied if the Court is reasonably satisfied that no dissenting creditor would be worse off, under the specific restructuring plan, than such a creditor would be if the normal ranking of liquidation priorities were applied, or in the event of the next-best-alternative scenario, if the restructuring plan were not confirmed.

Debitur

Debtor

Debtor, under the Pre-Insolvency Act, means any natural person carrying out a trade, business, craft or profession in or from within Malta, or any legal organisation in terms of the Second Schedule to the Civil Code, including, but not being limited to, any commercial partnership formed and registered under the Companies Act, and expressly excludes:

insurance or reinsurance undertakings as defined in points (1) and (4) of Article 13 of Directive 2009/138/EC;
credit institutions as defined in points (1) and (4) of Article 13 of Directive 2009/138/EC;
investment firms or collective investment undertakings as defined in points (2) and (7) of Article 4(1) of Regulation (EU) No. 575/2013;
central counter parties as defined in point (1) of Article 2 of Regulation (EU) No. 648/2012;
central securities depositories as defined in point (1) of Article 2(1) of Regulation (EU) No. 909/2014;
other financial institutions and entities listed in the first sub-paragraph of Article 1(1) of Directive 2014/59/EU;
public bodies under national law; and
natural persons in respect of debts not incurred in the carrying out of a trade, business, craft or profession.

Uffiċjal tad-debitur

Official of the debtor

Official of the debtor means:

in relation to a debtor being a company or a limited liability company, any director or other personcarrying out substantially the same functions in relation to the direction of the company as those carried out by a director;
in relation to a debtor being a commercial partnership, any partner in whom the administration and representation of the partnership is vested;
in relation to a debtor being a legal organisation not mentioned in paragraphs (a) or (b) above, any personwho, whether alone or with others, is designated by the constitutive documents of the legal organisation or any other instrument, decision, order or arrangement binding on the legal organisation, as being vested with the administration and representation thereof:

Provided that where the debtor is a natural person, any reference to the officials of the debtor shall be construed as referring to the debtor himself.

Ristrutturar

Restructuring

Restructuring means the implementation of any measures aimed at preserving or restoring the debtor's economic viability, that may include changing the composition, conditions or structure of a debtor's assets and liabilities or any other part of the debtor's financial structure, sales of assets or parts of the business, the sale of the business as a going concern, as well as any necessary operational changes, or any combination of such elements.

Għodod ta‘ twissija bikrija

Early warning tools

Early warning tools are tools intended to enable debtors to detect circumstances that could give rise to a likelihood of insolvency, as prescribed by the Minister by means of regulations on the advice of the Insolvency and Receivership Service within the Malta Business Registry.

Rikors ta‘ ristrutturar preventiv

Preventive restructuring application

A preventive restructuring application is an application made by the debtor or officials of the debtor to the Civil Code (Commercial Section), requesting it to place the debtor under a preventive restructuring procedure. The application must be endorsed by an insolvency practitioner and must indicate the type of preventive restructuring procedure requested. The application may only be made provided that the debtor:

has reasonable prospects of viability;
has not become liable for the payment of a debt that has remained unsatisfied after 24 weeks from the enforcement of an executive title; and
has not previously been admitted to preventive restructuring procedures in the three years preceding the date of the application.

Proċeduri ta‘ ristrutturar preventiv

Preventive restructuring procedures

There are three types of preventive restructuring procedures:

standard preventive restructuring procedure;
pre-formulated preventive restructuring procedure; and
pre-approved preventive restructuring procedure.

The standard preventive restructuring procedure is for the formulation of a restructuring plan to be submitted for adoption by the affected parties. The pre-formulated preventive restructuring procedure is for the submission of a restructuring plan for the adoption by the affected parties. The pre-approved preventive restructuring procedure is for the confirmation of a restructuring plan that has already attained the necessary approval for adoption by the affected parties.

During the course of a preventive restructuring procedure, the debtor is prohibited from:

terminating the employment of any employees on the basis of redundancy;
selling, disposing of or encumbering by providing as security any assets or property of the debtor; or
entering into any long-term commitment (long-term being a term longer than 6 months).

Ordni ta‘ ristrutturar preventiv

Preventive restructuring order

The Civil Court (Commercial Section) may issue a preventive restructuring order on the hearing of the preventive restructuring application (which hearing shall take place within 30 days from the filing of the application), if it is satisfied that the content of the order is sufficient, that the type of preventive restructuring is suitable to the circumstances of the debtor and that, in the case of an application for a standard or pre-formulated preventive restructuring procedure, the issuing of the order would be likely to facilitate the confirmation of a restructuring plan and enable the debtor to restructure with a view to preventing insolvency.

The effect of a preventive restructuring order is that for the period starting from the filing of the application until the termination of the order:

any obligation incumbent on the debtor to make an application for the opening of proceedings that may result in a judgement declaring the bankruptcy, dissolution or winding up of the debtor shall be suspended,
any act or proceedings that may result in a judgement declaring the bankruptcy, dissolution or winding up of the debtor shall be stayed; and
no new act or proceedings that may result in a judgement declaring the bankruptcy, the dissolution or the winding up of the debtor shall be taken or commenced against the debtor.

Pjan ta‘ ristrutturar

Restructuring plan

A restructuring plan is to be formulated during or prior to the preventive restructuring procedure (depending on the type of procedure at hand) by the officials of the debtor in consultation with the insolvency practitioner and in accordance with the requirements of the Second Schedule of the Act. A restructuring plan may also be prepared by a creditor of the debtor and submitted to the insolvency practitioner for the consideration of the debtor.

A restructuring plan may be submitted by the insolvency practitioner for adoption by the affected parties, subject to the agreement of the debtor.

A restructuring plan shall contain:

the claims which are ranked by the insolvency practitioner;
the salient details of the debtor;
a statement of the debtor’s assets and liabilities at the time of the filing of the restructuring plan;
a description of the economic situation of the debtor;
a reasoned statement on how the restructuring plan has a reasonable prospect of preventing the insolvency of the debtor;
a list of the affected parties;
the classes into which the affected parties have been grouped;
the details of creditors and claims thereof which have been excluded from the restructuring plan (where applicable);
the salient details of the insolvency practitioner; and
the manner in which the restructuring plan proposes to restructure the debtor’s business.

Pretensjonijiet li jistgħu jiffurmaw parti minn pjan ta’ ristrutturar

Claims that may form part of a restructuring plan

Claims that may form part of a restructuring plan are claims, whether secured or unsecured, that are lawfully enforceable against the debtor at the time of the submission of the restructuring plan and arise from:

contractual arrangements;
shares, equity or other ownership rights in the debtor;
taxes due by the debtor in Malta; or
any other claims that the Court may, upon application of the interested creditor, order to be included.

The following claims may not form part of a restructuring plan:

wages due by the debtor and constituting a privileged claim over the assets of the debtor;
civil debts due by the debtor exclusively by way of damages in tort; and
any fine due by the debtor.

Il-gradwazzjoni tal-pretensjonijiet

Ranking of claims

The ranking of claims takes place during the standard preventive restructuring procedure. The insolvency practitioner shall examine the assets, liabilities and affairs of the debtor and rank all claims against the debtor, present or future, certain or contingent, ascertained or which may be due in damages, by reference to the priority and ranking of their debts in accordance with the law being in force at the time. After the ranking of claims and no later than 30 days from the appointment of the insolvency practitioner, the ranking of claims must be presented to the creditors of the debtor in a meeting convened by the insolvency practitioner. The ranking of claims is subject to the scrutiny of the creditors andto the objection of any affected party.

Att dwar il-Prattikanti fl-Insolvenza

Insolvency Practitioners Act

The Insolvency Practitioners Act regulates, inter alia:

the eligibility for authorisation of a person to act as an insolvency practitioner;
the authorisation for a person to act as an insolvency practitioner;
registered firms;
the competent authority (being the Insolvency and Receivership Service within the Malta Business Registry), together withits functions and powers;
the register of insolvency practitioners;
the conduct of insolvency practitioners, including their obligations and liability in the case of breaches of such duties; and
administrative penalties in the case of breaches.

L-Att tal-2022 li jemenda l-Kodiċi tal-Kummerċ

Commercial Code (Amendment) Act

The Commercial Code (Amendment) Act is an Act which amends the Commercial Code, Chapter 13 of the Laws of Malta, which regulates trade. Substantial amendments were put in place, particularly in Title III – ‚Of Bankruptcy‘, to implement the provisions of Directive 2019/1023 therein.

Below are some definitions of key terms within the Act.

L-istat tal-falliment

State of bankruptcy

Every trader who, having regard also to his contingent and prospective liabilities, is unable to pay his commercial debts, shall suspend the payment of all his debts, and shall, upon the suspension thereof, be in a state of bankruptcy.

Kummerċjant

Trader

The term ‚trader’ means any person who, by profession, exercises acts of trade in his own name, and includes any commercial partnership, provided that for the purposes of Part III of the Code (‚Of Bankruptcy‘), the term ‚trader‘ shall also include any other natural or legal person, in respect of commercial debts for which such person is, or becomes, liable, whether as principal debtor or otherwise.

Dejn kummerċjali

Commercial debt

Commercial debt means any liability incurred by any person, whether as principal debtor or otherwise, insofar as that liability was incurred, or otherwise arises as a result of any liability which was originally incurred in the course of, in connection with, or for the purposes of, the exercise of any trade, business, craft or profession by the original debtor, and any other liabilities as the Minister responsible for the Malta Business Registry may by regulations prescribe.

Dejn personali

Personal debt

Personal debt means any liability incurred by any person, whether as principal debtor or otherwise, which is not a commercial debt.

Dejn

Debt

Debt, when used alone, means any liability incurred by any person, whether as principal debtor or otherwise, and whether a commercial debt or a personal debt.

Dikjarazzjoni ta’ falliment

Declaration of bankruptcy

Every trader shall, upon the suspension of its payments, file a declaration of bankruptcy in the Civil Court (Commercial Section) containing:

the trader’s name and identification;
the nature of the trade, business, craft or profession in respect of which the debts have been incurred;
the name and particulars of the trader’s creditors;
the value and nature of the trader’s debts and the security, if any, enjoyed by the respective creditors; and
such other information as the Minister may, by notice, prescribe.

Trustee tal-falliment

Bankruptcy trustee

A bankruptcy trustee is an insolvency practitioner who is authorised to act as a bankruptcy trustee by the Insolvency and Receivership Service within the Malta Business Registry. The bankruptcy trustee is deemed to be an officer of the court.

Patrimonju tal-falliment

Bankruptcy estate

All debts owed by the bankrupt become due and payable by the bankruptcy estate as vested in the bankruptcy trustee.

The bankruptcy estate includes all sums due to the bankrupt, including any amounts derived in connection with the sale of perishables, sale of non-perishable assets and the continuation of the business by the bankruptcy trustee.

Reġistru tad-djun

Debt register

A debt register is presented by the bankruptcy trustee during a meeting of creditors and includes the bankrupt’s debts, organised into commercial and personal debts, having regard to the quality and nature of such debts and the manner in which they arose or were incurred.

The debt register is comprised of:

the value of each debt;
the name and address of the creditor to whom each debt pertains;
the date on which each debt arose;
the bankruptcy trustee’s classification of each debt as a commercial or personal debt;
the cause and nature of any preference or security, if any, attaching to each debt; and
the manner in which all of the bankrupt’s debts shall rank according to law.

Ftehim dwar id-djun

Debt agreement

A debt agreement is proposed by the bankruptcy trustee during a meeting of the creditors after the publication of the debt register for the settlement of the claims of the creditors out of the bankruptcy estate, which terms have been agreed to by the bankrupt.

Ordni dwar il-falliment

Bankruptcy order

A bankruptcy order is presented by the bankruptcy trustee to the court in the event that the bankrupt:

communicates his intention to proceed with a bankruptcy without a debt agreement; or
does not provide his consent to the proposed terms of a debt agreement; or
in the event that the proposed terms are not confirmed by the creditors and leave has not been granted for the proposal of fresh terms in accordance with the Act; or
if the proposed terms have not been confirmed by the court in accordance with the Act.

The contents of the bankruptcy order differ according to whether the bankrupt is a legal or natural person.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings² applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

Recognition of third country insolvency-related judgements or orders would be sought primarily under the rules contained in the Code of Organisation and Civil Procedure (the "COCP") regulating the enforcement of foreign judgements. As a default rule, any judgement delivered by a competent court outside Malta and constituting a res judicata may be enforced by the competent court in Malta upon an application containing a demand that the enforcement of such judgement be ordered

The foreign judgement seeking recognition must be final and definitive. Furthermore, it must not fall foul of any one of the procedural barriers to enforcement contemplated under the COCP. Recognition of a foreign res judicata judgements would be declined by a court in Malta where:

the judgement is one that may be set aside on any of the grounds contemplated for the institution of a new trial (eg where the judgement is based on evidence which subsequently turns out to be false etc.);
in the case of a judgement by default, if the parties were not contumacious according the foreign law in question; and
if the judgment contains any disposition contrary to public policy or to the internal public law of Malta.

Specifically, in the case of judgements delivered by a superior court in the United Kingdom, recognition and enforcement could also be possible under the British Judgements (Reciprocal Enforcement) Act provided that the UK judgement is one which satisfies the particular definition of "judgement" under the aforementioned Act. In this case, a "judgement" is defined as "any judgement or order given or made by a court in any civil or commercial proceedings, whether before or after the passing of this Act, whereby any sum of money is made payable."

Recognition of foreign insolvency processes

Malta is not amongst the handful of EU Member States who have adopted, as part of their domestic insolvency legislation, the UNCITRAL Model Law on Cross-Border Insolvency.

Prior to Brexit, the legal basis for the cross-border recognition of scheme of arrangements relied upon was the Brussels Recast Regulation. Since the Brussels Recast Regulation no longer applies to the UK, recognition of UK schemes of arrangement in Malta would need to satisfy the Maltese domestic rules on recognition previously explained.

With thanks to Andrew Muscat and Mikiel Calleja of MamoTCV Advocates for writing this chapter of the dictionary.

Law stated as of 6 February 2023

_{[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.

[2] Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).}

Surseance van betaling

Suspension of payments

A court-ordered procedure for companies and natural persons that conduct an independent profession of business, commenced at the debtor’s request when they anticipate they will be unable to continue to pay debts as they fall due.

The debtor may choose to present a draft restructuring plan when it files for the suspension of payments order or at a later date.

The court grants a preliminary suspension of payments immediately after the request has been filed. Approximately two months later, creditors will vote to decide whether the suspension of payments becomes permanent – for a maximum period of one and a half years, renewable at the end of each term.

The procedure is aimed at implementing a restructuring or reorganisation agreement with unsecured creditors. The court-selected and court-appointed administrator and the debtor (or its directors or partners respectively) must act collectively.

Secured creditors are generally not affected by these proceedings and may continue to enforce their security over secured assets. However, a moratorium for a maximum period of four months may be declared, during which enforcement by a secured creditor is not permitted (unless the supervisory judge has authorised such enforcement).

Suspension of payments may be (immediately) converted into bankruptcy if the administrator determines that the debtor has insufficient means to continue its business and ultimately (partly via composition or wholly) to pay its creditors.

Faillissement

Bankruptcy/Liquidation/Winding up

A court-ordered procedure for companies and natural persons that can be commenced at the request of the debtor or any of its creditors.

The court will make an order if it is satisfied that the debtor has ceased paying its debts. With retrospective effect from midnight on the date of the bankruptcy order, directors of the debtor company are no longer entitled to dispose of the debtor’s assets, provide security over the debtor’s assets, pay its creditors or enter into any agreements. All such rights transfer to the court-selected and court-appointed insolvency practitioner who then takes control of the entity.

The insolvency practitioner has a wide range of powers including selling assets or continuing the debtor’s business (if it is in creditors’ interests to do so).

Secured creditors are generally not affected and may continue to enforce their security over secured assets. However, a moratorium for a maximum period of four months may be declared, during which enforcement by a secured creditor is not permitted (unless authorised by the supervisory judge). Furthermore, the insolvency practitioner may set a reasonable deadline for enforcement by a secured creditor, after which the secured creditor’s authority to enforce will lapse and the insolvency practitioner is simultaneously authorised to claim the secured assets and sell them. Upon such sale by the insolvency practitioner, the secured creditor will be entitled to the proceeds after deduction of the bankruptcy costs (which are usually substantial). This usually results in the secured creditor receiving a substantially smaller return (if any) on its outstanding claim.

Wet Schuldsanering Natuurlijke Personen

Debt restructuring for natural persons

A court-ordered procedure commenced at the request of a debtor who cannot pay their debts as they fall due.

Only the court-selected and court-appointed administrator is entitled to dispose of assets that belong to the restructuring estate.

The procedure is intended to provide a "clean slate," pursuant to which, claims that could not be paid out of available assets are no longer enforceable.
Secured creditors are generally not affected and may continue to enforce their security over secured assets.

However, a moratorium for a maximum period of four months may be declared, during which enforcement by a secured creditor is not permitted (unless authorised by the supervisory judge). Furthermore, the administrator may set a reasonable deadline for enforcement by a secured creditor, after which the secured creditor’s authority to enforce will lapse.

Executeren van een hypotheekrecht

Enforcing rights under a mortgage

Appropriation is prohibited under Dutch law. Therefore, a secured creditor will need to enforce its rights as mortgagee by means of a sale of the collateral. The general rule is that collateral is sold at a public auction according to local customs and applicable standard terms and conditions.

It is possible for alternative procedures to be used such as a court-approved private sale. The court will usually allow the use of such an alternative procedure if the proceeds of the private sale are likely to be higher than if the collateral were sold at public auction.

Executeren van een pandrecht op vorderingen

Enforcing rights under a pledge over receivables

The most common way to enforce a right of pledge over receivables is by notifying the relevant contract debtor that the receivable has been pledged.

Following such notice, the contract debtor is obliged to pay the relevant pledged receivable to the secured creditor instead of the pledgor, i.e. the secured creditor can directly collect the relevant receivable. Alternatively, the receivables may be sold by the secured creditor to a third party by: (i) public auction; (ii) a court-approved private sale; or (iii) a private sale with the consent of the pledgor.

Executeren van een pandrecht op goederen

Enforcing rights under a pledge over assets

Appropriation is prohibited under Dutch law. Therefore, a secured creditor will need to enforce its right of pledge by means of a sale of the secured assets. Such sale may be effected by means of: (i) public auction; (ii) a court-approved private sale to either the secured creditor or a third party; or (iii) a private sale to a third party with the consent of the pledgor.

Upon request of the secured creditor, the court will usually order the use of such an alternative procedure if the proceeds of the private sale are likely to be higher than if the collateral were sold at public auction.

EU Directive Implementation

The EU Directive on Restructuring and Insolvency^[1] (the "Directive") requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to inter alia the free flow of capital and freedom of establishment which result in differences between national laws and procedures concerning preventive restructuring, insolvency, discharge of debt, and disqualifications and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.

A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.

An ability to cram down dissenting classes of creditors.

Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.

Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

EU Directive Implementation

On 17 July 2022, the deadline expired for all Member States to bring their domestic legislation in line with the Directive. On 1 January 2021 the Wet Homologatie Onderhands Akkoord (the Dutch scheme of arrangement, hereafter referred to as "WHOA"), came into force in the Netherlands which serves as an implementation of a part of the Directive, relating to the preventive restructuring framework. According to the explanatory memorandum to the legislative proposal for the amendment of the Dutch Bankruptcy Act (the "Legislative Proposal") in connection with the implementation of the Directive, the WHOA has been aligned with the Directive as much as possible.

The WHOA has concepts similar to UK Schemes of Arrangement and US Chapter 11 procedure. It has introduced two new composition procedures (dual-track approach) in the Dutch Bankruptcy Act: a private (confidential) composition procedure outside bankruptcy and a public (non-confidential) composition procedure outside bankruptcy. This has given debtors access to a preventive restructuring framework, in accordance with the requirements of the Directive. Some key characteristics of the WHOA are:

The procedure is conducted outside of formal bankruptcy procedures.

Both a cram-down as well as a cross class cram-down are possible.

All sizes of enterprises (including SMEs subject to certain additional provisions) may use the procedure.

It is a debtor-in-possession procedure.

The involvement of the court is limited.

Furthermore, with respect to the other elements of the Directive regarding the remission scheme for entrepreneurs, the Debt Restructuring (Natural Persons) Act (Wet Schuldsanering Natuurlijke Personen, hereafter referred to as "WSNP") already provides for a comparable scheme. As a result of the Legislative Proposal, a limited number of amendments have been made to the WHOA and the WSNP in order to perfect the transposition of the aforesaid elements of the Directive.

EU Directive Implementation

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings (the "Regulation")^[2] applies to all EU Member States except for Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency proceedings

In the event that an insolvency procedure has been opened in a third country, this procedure is capable of being recognised in the Netherlands under certain conditions. In the event that there is no treaty between this third country and the Netherlands arranging for the recognition of insolvency procedures, we have to rely more often on general rules of Dutch international private law to etermine the consequences attributed to such insolvency proceedings. This means that assets of the bankrupt foreign company located in the Netherlands do not automatically fall within the scope of the bankrupt estate, as a result whereof individual creditors can continue to take recourse against those assets in the Netherlands, within the framework of the case law of the Dutch Supreme Court.

Recognition of foreign insolvency proceedings

According to Dutch case law, foreign court decisions are eligible for recognition in the Netherlands only if (i) the jurisdiction of the foreign court is based on a ground that is acceptable under international standards, (ii) the foreign proceedings were conducted with due observance of the principles of due process of law and (iii) the foreign judgment is not in violation of Dutch public policy.

These conditions intend to prevent a foreign judicial decision from being enforced in the Netherlands that, in its creation or content, is in conflict with principles and values that are regarded as fundamental in the Dutch legal system. In assessing whether these conditions are fulfilled, the principle of mutual trust in the administration of justice in the third country, which underlies international arrangements and treaties on the recognition and enforcement of foreign judgments, does not apply.

Provided that the foreign judgment is not contrary to Dutch public policy, and in the absence of insolvency proceedings against the debtor in the Netherlands, a foreign insolvency practitioner can perform acts of administration and disposal with respect to assets situated in the Netherlands – including alienation of the assets and transfer of the proceeds into the foreign bankruptcy estate – provided that the insolvency practitioner is empowered to do so under its own lex concursus. However, any attachments in the Netherlands by individual creditors levied up to the moment of transfer must be respected. A foreign insolvency practitioner can act in the Netherlands without a prior court decision, exequatur or court recognition of the foreign proceedings, provided that the lex concursus allows for such actions.

Contact: Marc Molhuysen

Law stated as of 1 September 2023

Postępowanie o zatwierdzenie układu

Proceedings for the approval of an arrangement

An out-of-court process for a company that is insolvent or threatened by insolvency.
The debtor, whose disputed claims must not exceed 15% of total claims appoints a qualified restructuringsupervisor to assist in drawing up a restructuring plan/ arrangement proposal. Once a restructuring plan/arrangement proposal has been made, the restructuring supervisor has a duty to announce the arranegement in the dedicated IT system - the National Debt Register
The proposal is circulated to creditors and adpoted if it is supported by at least 50% of the creditors entitled to vite on the arrangement that hold at least two thirds of the total value of claims if the threshholds are met, the debotor files a petitino with the court for approval of the arrangement (which is the only element of court supervision).
The regulations on the proceedings for the approval of an arrangement implemented as of 1.12.2021 constitute the implementation of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
From 1 December 2021, the debtor can use two varieties of the proceedings for approval on an arrangement. The first is where a notice of an arrangement day determination is made, which provides special protection for the debtor against its creditors. The second is when no announcement is made which results in no restrictions being placed on the debtor's own management of assets but the debtor is not afforded any protection in terms of creditor action.
The company can continue to trade as a going concern during implementation of the procedure.

Przyspieszone postępowanie układowe

Accelerated arrangement proceedings

A process with greater court involvement than the above postępowanie w przedmiocie zatwierdzenia, available for an insolvent company or one threatened by insolvency whose disputed claims must not exceed 15% of total claims.
Typically, on opening proceedings, the court appoints a court supervisor whose consent is required for all actions outside the company’s ordinary administration.
Voting on the debtor’s proposal takes place at a court-convened creditors’ meeting after approval by the court of the creditors entitled to vote using a simplified procedure. The arrangement is adopted if it is supported by at least 50% of creditors holding at least two-thirds of the total value of voting claims.
On approval, enforcement proceedings concerning claims covered by the arrangement are suspended but creditors that fall outside of the arrangement are still able to enforce their rights.
Secured claims are not compromised by the arrangement to the extent they are covered by the value of the secured asset and, unless secured creditors agree to compromise their enforcement rights, they may commence enforcement proceedings in respect of secured assets.
The company can continue to trade as a going concern during implementation of the procedure.

Postępowanie układowe

Arrangement proceedings

A process with greater court involvement than the approval of an arrangement process, available for an insolvent company or one threatened by insolvency that disputes more than 15% of total claims against it.
Typically, on opening the proceedings, the court appoints a court supervisor whose consent is required for all actions outside the company’s ordinary administration.
Voting on the debtor’s proposal takes place at a court-convened creditors’ meeting after approval by the court of the creditors entitled to vote. The court considers the creditors in a more detailed procedure compared to that in accelerated arrangement proceedings, and creditors are entitled to file objections.
The arrangement is adopted if it is supported by at least 50% of creditors holding at least two-thirds of the total value of voting claims.
On approval of the arrangement, enforcement proceedings concerning claims covered by the arrangement are suspended but creditors that fall outside of the arrangement are still able to enforce their rights.
Secured claims are not compromised by the arrangement to the extent they are covered by the value of the secured asset and, unless secured creditors agree to compromise their enforcement rights, they may commence enforcement proceedings in respect of secured assets.
The company can continue to trade as a going concern during implementation of the procedure.

Postępowanie sanacyjne

Rehabilitation proceedings

A process commenced by a debtor or creditor’s petition against an insolvent company or one threatened by insolvency. The procedure is most appropriate where the restructuring of debts is not sufficient and a thorough restructuring of the debtor’s business is required.
Typically, on opening the proceedings, the court appoints an administrator to take over the business.
Voting on the debtor’s proposal takes place at a court-convened creditors’ meeting after approval by the court of the creditors entitled to vote. The court considers the creditors in a more detailed procedure compared to that in accelerated arrangement proceedings.
The arrangement is adopted if it is supported by at least 50% of creditors holding at least twothirds of the total value of voting claims.
On the opening of the proceedings, all enforcement proceedings concerning claims covered by the arrangement as well as those not covered by the arrangement are suspended.
The company can continue trading as a going concern during implementation of the procedure.

Układ częściowy

Partial arrangement

A procedure involving an arrangement with specific creditors (eg secured creditors) provided they are selected by reference to objective factors.
This is not a separate restructuring procedure but may be utilised within proceedings for the approval of the arrangement, or accelerated arrangement proceedings.
Secured creditors may be included in the arrangement without their consent provided they are to be fully satisfied or are likely to recover no less than they would receive on enforcement of their rights.

Postępowanie upadłościowe

Bankruptcy proceedings/ Insolvency proceedings

A process involving the liquidation of the debtor’s assets and the cessation of its business.
Commenced by a debtor or creditor’s petition declaring bankruptcy.
The court will open bankruptcy proceedings if the debtor is insolvent. There are two tests of insolvency. The balance sheet test considers whether a company’s liabilities (excluding future liabilities, contingent liabilities and shareholder loans) are greater than the value of its assets. Using this approach, a company is insolvent if the value of its assets is less than the amount of its liabilities and this state of affairs has persisted for a continuous period of 24 months. The cash flow test considers whether a company is able to pay its debts as and when they become due. There is a legal presumption that a debtor is insolvent when it is in default for over three months, but this may be rebutted.
If approved, the court appoints a trustee to take over the management of the debtor’s business, realise its assets and distribute the proceeds to creditors in the statutory order.
Secured creditors are satisfied by the trustee from the price obtained from the realisation of the secured asset less the costs of realisation and other costs of the bankruptcy proceedings in an amount no higher than one-tenth of the sum realised from the secured asset.
No enforcement proceedings, even by secured creditors, may be conducted or initiated during the bankruptcy proceedings.

Przygotowana likwidacja / pre-pack

Pre-packaged insolvency/pre-pack

The court declares bankruptcy and approves the terms of a sale agreement (attached to the petition) for the sale of the whole or a substantial part of the debtor’s business.
The sale agreement must contain, at least, details of the price, the purchaser and a valuation report prepared by a court-certified expert.
The court will typically approve the petition and sale agreement if the proposed price exceeds the estimated realisations in a liquidation after deducting estimated costs.
The main differences in comparison to standard bankruptcy proceedings include an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the filing for bankruptcy and the conclusion of the sale agreement shortly after approving the bankruptcy petition, both of which result in the quicker satisfaction of creditors and much shorter bankruptcy proceedings.

Upadłość osób fizycznych nieprowadzących działalności gospodarczej, upadłość konsumencka

Consumer bankruptcy

A procedure similar to standard bankruptcy proceedings for insolvent natural persons (consumers) who are not engaged in business activity.
A trustee is appointed, prepares an inventory and list of claims, and then liquidates the debtor’s assets.
Secured creditors are satisfied by the trustee from the realisation of their encumbered assets less the costs of realisation of the asset and other costs of the bankruptcy proceedings, in an amount no higher than one-tenth of the sum realised from the secured asset. However, if the trustee sells an encumbered residential property, there may also be deducted from the proceeds of realising the security, a sum for the debtor to rent an alternative residential property for 12 or even 24 months.
No enforcement proceedings may be conducted or initiated during the course of bankruptcy proceedings.

Zasady ogólne

General provisions

Generally, enforcement is carried out through court enforcement proceedings.
Court enforcement proceedings may only be commenced on the basis of an enforcement title together with an „enforcement clause“ – a court deed that includes a court statement that the writ entitles the security holder to execution and, if necessary, defines its scope.
Under Polish law an enforcement title may, among others, take the form of a notary deed, under which the debtor voluntarily submits to enforcement, or a court judgment.
Usually, the creditor files an application with the enforcement officer or the court, setting out the debtor’s asset against which such enforcement proceedings should be carried out.
Most commonly, the enforcement officer will seize and sell certain of the debtor’s assets. Under certain conditions, the creditor may request the court to place part of the debtor’s business in receivership (zarząd przymusowy) and satisfy creditor’s claim from the profits of the enterprise.

Egzekucja hipoteki

Enforcement of mortgages

A mortgage can only be enforced through court proceedings commenced on the basis of an enforcement title together with an „enforcement clause“ – a court deed that includes a court statement that the writ may be executed and, if necessary, defines its scope.
Under Polish law an enforcement title may, among others, take the form of a notary deed, under which the debtor voluntarily submits to enforcement (in financing transactions, lenders usually require that debtors provide a declaration of voluntary submission to enforcement) or a court judgment.

Egzekucja zastawu zwykłego

Enforcement of civil pledges

A civil pledge can only be enforced through court proceedings.
Court enforcement proceedings may only be commenced on the basis of an enforcement title together with an „enforcement clause“ – a court deed that includes a court statement that the writ may be executed and, if necessary, defines its scope.
Under Polish law an enforcement title may, among others, take the form of a notary deed, under which the debtor voluntarily submits to enforcement (in financing transactions, lenders usually require that debtors provide a declaration of voluntary submission to enforcement) or a court judgment.

Egzekucja zastawu finansowego

Enforcement of financial pledges

Financial pledges may be enforced through either court enforcement proceedings or, if the pledge agreement so provides, one of the out-of-court enforcement methods listed in the act on financial collateral.
Such methods include the creditor taking over the pledged asset for an agreed value to be applied to satisfy the secured claim, and the right of the creditor to sell the pledged asset and to satisfy its claim from the sale proceeds.

Egzekucja zastawu rejestrowego

Enforcement of registered pledges

Registered pledges may be enforced through either court enforcement proceedings or, if the pledge agreement so provides, one of the out-of-court enforcement methods listed in the act on registered pledges. Such methods include:

The creditor taking over the pledged asset for an agreed value to be applied to satisfy the secured claim.
An extrajudicial sale of the asset by a notary public or an enforcement officer.
Appointment of a special receiver and the creditor’s claim being satisfied from the profits of the enterprise (only if there is a registered pledge over a set of assets).
The creditor being entitled to satisfy its claim from the profits from lease of the enterprise (only if there is a registered pledge over a set of assets).

Implementacja Dyrektywy EU 2019/1023

Directive (EU) 2019/1023 Implementation

The EU Directive on Restructuring and Insolvency^{^[1]} requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

In Poland, the reform of the insolvency and restructuring law which entered into force in January 2016 already takes account of the changes required by the Directive. For example, Polish restructuring law already includes such features as: flexible preventive restructuring frameworks, the prohibition of ipso facto clauses, a moratorium on enforcement (including secured claims and preferential creditors), the debtor being in control of its assets and the day-to-day operation of its business, the right of a debtor to submit a restructuring plan, etc.

Moreover, the regulations on the proceedings for the approval of an arrangement implemented as of 1 December 2021 constitute the implementation of other preventive de-formalised restructuring instruments as envisaged under the EU Directive 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks,

EU Directive Implementation

As explained above, part of the Directive has already been implemented. However, a number of its requirements are still to be implemented. Draft Act amending the Act - Restructuring Law and the Act - Insolvency Law which aims to transpose into the Polish legal order Directive (EU) 2019/1023) introduces fundamental changes to the protection against enforcement offered to the debtor in restructuring proceedings. The draft legislation harmonises the rules applicable to the different types of restructuring proceedings in order to ensure, in line with the will of the EU Directive, that the negotiation phase of the restructuring plan takes place while enforcement actions are suspended. Consequently, during the four months from the date of the commencement of the restructuring proceedings, the enforcement against the debtor are suspended and no new enforcements can be initiated against the debtor. At the debtor's request, the protection may be extended by the judge-commissioner up to 12 months. The draft Act is in the legislative process and it is expected to be accepted by the Council of Ministers in the third/fourth quoter of 2023. The process of the implementation is delayed as the deadline for it expired on 17 July 2022.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings^{^[2]} applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Contact: Mariusz Hyla and Magdalena Dec

Law stated as of 11 October 2023

Processo Especial de Revitalização (PER)

Special revitalisation procedure

A court-supervised procedure to restructure debtors in financial difficulty or at imminent risk of insolvency via the approval by creditors of a recovery plan.
Initiated by petition evidencing the debtor’s financial difficulties/imminent insolvency, after which the court appoints a Provisory Judicial Administrator (Administrador Judicial Provisório).
It can also be initiated by the presentation of an extrajudicial recovery agreement, signed by the company and its creditors representing at least the voting majorities foreseen by law. In that respect, it is mandatory to present a proposal for a ranking of creditors within the several categories foreseen by law.
It is possible to attach several PER proceedings together when they relate to entities within the same group of businesses and to appoint a common Provisory Judicial Administrator to all the proceedings.
The request for such attachment can only be made before the commencement of the negotiation phase.
During this revitalisation procedure, in contrast to insolvency proceedings, the debtor’s management remains in office and is only required to seek permission from the Provisory Judicial Administrator in order to perform "particularly relevant acts."
An initial negotiation phase must be concluded within two months and may be extended only once for one month, on agreement between the debtor and the Provisory Judicial Administrator.
For a maximum period of four months, any pending judicial proceedings directed at the recovery of debts will be suspended and no new proceedings with a similar purpose may be initiated. Any pending or subsequent insolvency proceedings, where the insolvency of the company has not yet been declared, will also be stayed during the revitalisation procedure.
In certain circumstances, this period of four months may be extended for one additional month.
Once the recovery plan is approved and registered, the debtor’s debts will be subject only to the terms and conditions foreseen in the plan.
If the recovery plan is not approved, the law sets out two alternatives: (i) if the debtor has become insolvent, the Provisory Judicial Administrator must inform the Court and the company is notified to respond within five days; or (ii) if the debtor is not insolvent, the Provisory Judicial Administrator applies to terminate the PER.
If the company challenges its insolvency (as referred in (i) above), the Court determines the termination of the PER.
If the company does not challenge it, the companyis declared insolvent by the Court within 3 business days and the PER is attached to the insolvency proceedings.

Regime Extrajudicial de Recuperação de Empresas (RERE)

Extrajudicial company recovery proceeding

Created to substitute the previous Sistema de Recuperação de Empresas por Via Extrajudicial (SIREVE), which was revoked.
An out-of-court restructuring tool conducted by the Institute of Assistance to Small and Medium sized Companies and Innovation (IAPMEI) that grants a debtor (companies and sole traders) in economic and financial distress permission to engage in negotiations with its creditors to reach a voluntary, bespoke and confidential agreement.
If certain legal requirements are met, the extrajudicial agreement may have the same effect as if it was approved in the context of a Processo Especial de Revitalização (PER).
The restructuring agreement immediately suspends all enforcement proceedings for debt collection and insolvency applications against the debtor.
The debtor remains in control of the company and its assets.
A RERE restructuring agreement only binds creditors who have participated in and signed the agreement.

Processo de Insolvência

Insolvency procedure

A company is deemed insolvent when it is unable to pay overdue debts and when its liabilities materially exceed its assets.
If the court decides to declare that the debtor is insolvent, it will appoint an Insolvency Administrator (Administrador de Insolvência), establish a deadline for filing creditor claims and schedule a general meeting of creditors.
If proceedings are initiated by the debtor, the petition may ask for its management to retain control of its assets, provided there is a committed intention to present an Insolvency Plan (for restructuring or controlled liquidation), which must be approved by the court.
A judicial declaration of insolvency: (i) transfers the power to manage and dispose of assets to an Insolvency Administrator (unless the debtor’s management retains control – as above); (ii) prevents the commencement or continuation of any enforcement action; (iii) joins to the insolvency procedure any judicial action that may affect the value of the debtor’s assets; and (iv) accelerates the debtor’s obligations to maturity except for obligations subject to conditions precedent.

Processo de Insolvência

Insolvency procedure

Creditors are required to assess the company’s financial viability and decide , at a creditors‘ general meeting, whether recovery or liquidation is appropriate, and under what terms and conditions.
An insolvency plan proposes either: (i) a restructuring and recovery of the debtor or (ii) its liquidation. The insolvency plan reflects the majority of creditors’ preferences, as discussed and approved at a creditors’ meeting and then ratified by the Court of Law.
Alternatively, when a company is declared insolvent, the creditors’ general meeting can vote for its liquidation instead of its recovery.

Processo Especial para Acordo de Pagamento (PEAP)

Special procedure for a payment agreement

A procedure analogous to special revitalisation proceedings for companies but created specifically for natural persons.
Most of the key features of Processo Especial de Revitalização (PER) apply, but with the following additional features:
- As in the case of PER, during PEAP negotiations, the provision of certain essential public services cannot be suspended (eg water, power and gas, electronic communications and postal services); and
- if the debtor brings an end to the proceedings, they cannot resort to PEAP for a period of two years.

Processo de Insolvência de pessoas singulares

Natural persons insolvency procedure

A natural person is deemed insolvent when they are unable to pay their debts when they fall due and when their liabilities materially exceed their assets.
The insolvency procedure of a natural person is similar to the Processo de Insolvência for companies, but with the following particular features:
- if the insolvency procedure is initiated by the debtor himself, the petition may also include a proposed payment plan which must be approved by thecreditors and the court, with the insolvency procedure suspended until approval is granted; or
- the administration of the insolvency estate is mandatorily transferred to an Insolvency Administrator and no insolvency plan can be presented.

Processo de Insolvência de pessoas singulares

Natural persons insolvency procedure

"Fresh Start": under certain circumstances, the law permits a debtor to apply for a special regime called Exoneração do Passivo Restante, with a view to obtaining a judicial pardon in respect of debts that were not paid as an integral part of the insolvency procedure or in the three years after its termination (except some specific types of debts, eg tax and social security debts). If this is approved by the debtor’s creditors and the court, it establishes a three-year period in which part of the debtor’s income must be paid to the Insolvency Administrator (or a fiduciary) so that they can pay whatever amount is possible within that time frame. During this period, enforcement proceedings and requests to initiate insolvency proceedings against the debtor are suspended.

Ação Executiva

Enforcement procedure

Before a creditor can judicially initiate an enforcement procedure, they must have an EOC (enforcement order certificate, which in Portuguese corresponds to Título Executivo). An EOC may be, inter alia, a court order directing the debtor to pay the creditor; or an agreement certified by a notary or lawyer, where the debtor recognises an obligation to pay the creditor.
With an EOC, a creditor may immediately apply to court to foreclose the collateral or to try to seize any other assets of the debtor.
After its seizure by an Enforcement Agent, the collateral may be sold by:
- Adjudication: the creditor may apply to the court to acquire the collateral but its offer may not be lower than 85% of the base value of the collateral.
- Sale in regulated markets (if the secured assets are listed in a regulated market).
- Electronic auction: if none of the above apply, this is the preferred method of sale.
- Public auction: when agreed upon by the creditor and the debtor or if the court determines it is appropriate in view of the nature of the secured assets.
- Sealed first-price auction: the starting point of the sale price corresponds to 85% of the base value of the collateral.
- Public deposit: this only arises if the court determines that the collateral (only movable assets) should be moved to a public deposit.
- Private sale: applicable when other methods fail, if the sale must be effected urgently or if agreed between the debtor and the creditor.

Ação Executiva

Enforcement procedure

Public creditors (tax authority and social security) and other creditors holding security over the same asset (eg a second ranking mortgage) will be notified by the appointed Enforcement Agent to bring their claims within the course of the main enforcement procedure. Payments will be made after the asset has been sold, in accordance with the legal hierarchy of creditors and after the court’s ruling on such claims (if any).

EU Directive

The EU Directive on Restructuring and Insolvency1^{^[1]} requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

The directive was implemented in Portugal by Law 9/2022, 11 January.

Law 9/2022

This law came into force on 11 April 2022, with immediate application to all proceedings (except PER) pending on that date.

In relation to PER proceedings, this law was only applicable to proceedings filed after its entry into force.

In relation to natural persons insolvency procedure pending on the date of entry into force of this law, in which (i) the request for Exoneração do Passivo Restante had already been approved prior to that date and (ii) three years had passed from the period of assignment of cession of disposable income in progress, such period is deemed terminated with the entry into force of this law.

The law did not, however prejudice the processing and judgment, in the first instance or on appeal, of any outstanding issues relating to the regime of Exoneração do Passivo Restante.

Regarding its terms, this law brought some significant amendments to the special revitalisation procedure, as well as in the insolvency procedure.

Those changes were foreseen as predicted in the EU Directive Implementation and are already reflected in the several points above mentioned.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings2^{^[2]} applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

The recognition of foreign insolvency processes in which the centre of the debtor’s main interests is located outside a Member State of the European Union in Portugal is subject to a judicial review process.

In this context, the Court will reject the recognition of foreign insolvency processes in Portugal if: (i) the jurisdiction of the foreign court has not been attributed under the criteria of debtor’s domicile, centre of debtor’s main interests, or equivalent connection, or (ii) the recognition of the insolvency process would lead to a result clearly contrary to the fundamental principles of the Portuguese legal system.

Processo Extraordinário de Viabilização de Empresas – PEVE

Extraordinary Company Viability Process

A judicial recovery process for companies in a difficult economic situation or in imminent or current insolvency by virtue of COVID-19 and aims to obtain a judicial approval of an agreement reached between the company and its creditors. In this regard, it should be noted that:

In order to apply for PEVE, the company must submit an application containing, among other things: (i) a written statement signed by the company’s directors certifying that the company’s situation is due to the COVID-19 pandemic and the company meets the necessary conditions for recovery/viability; (ii) a list of all creditors signed by the company’s directors and the respective accountant in the last 30 days; and (iii) an agreement signed by the company and the majority of the creditors.
Once the documents have been received, the Court appoints a Provisory Judicial Administrator (who is responsible for issuing an opinion on the feasibility of the reached agreement within 15 days) and orders the publication of the agreement and the list of creditors. Subsequently, the creditors have 15 days to challenge such list and/or request the rejection of the agreement by the Court.
After the above-mentioned deadlines have elapsed, and with consideration of any challenges presented by the creditors, the agreement and the opinion of the Provisory Judicial Administrator, the Court decides on the approval of the agreement in 10 days.
Until the Court’s final decision becomes final and non-appealable, all ongoing judicial proceedings initiated by/against the company with identical purposes will be suspended and, in case of judicial approval of the agreement, those proceedings will cease (except as otherwise agreed between the company and the creditors).
The creditors, partners and shareholders that finance the debtor’s activity, providing it with capital to make it viable, will enjoy of a general moveable credit privilege, ranked ahead of the general moveable credit privilege granted to employees.
This judicial recovery process is transitional, and will be in force until 30 June 2023.

Contact: Nuno Neves

Law stated as of 1 September 2023

A look at corporate, personal and, where relevant, partnership insolvency proceedings in Romania, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.

EU Directive Implementation
Restructuring and insolvency processes
1. Avertizarea timpurie - Early warning procedure
2. Proceduri de prevenire a insolvenţei - Insolvency prevention procedures
3. Acordul de restructurare (extrajudiciara a datoriilor)- (Out-of-court) Debt restructuring Agreement (Workout)
4. Concordat preventiv - Preventive composition
5. Insolventa - Insolvency proceedings
6. Reorganizare judiciara - Reorganisation proceedings (part of insolvency proceedings)
7. Faliment - Bankruptcy (liquidation) proceedings (part of insolvency proceedings)
8. Darea in plata a unor bunuri immobile - Mortgage discharge
9. Insolventa persoanei fizice - Consumer insolvency
10. Procedura de executare silita - Enforcement proceedings
Recognition of foreign insolvency processes

EU Directive Implementation

The EU Directive on Restructuring and Insolvency[1] (the “Directive”) required Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Romania

The national implementation date for the Directive at national level was set for July 17, 2021. Romania was granted a year extension of the initial transposition deadline.
On July 17, 2022, Law no. 216/2022 for the amendment and completion of Law no. 85/2014 on insolvency and insolvency prevention procedures and a normative act came into force in Romania ("Law no. 216/2022"). Among other amendments, the ad hoc mandate was replaced with the debt restructuring agreement, and the early warning procedure was implemented.
Law no. 216/2022 does not apply to procedures already started, which remains governed by Law no. 85/2014 on insolvency and insolvency prevention procedures and other normative acts ("Law no. 85/2014") in the form in force prior to this date.

Avertizare timpurie

Avertizare timpurie Early warning procedure

Under the early warning procedure, professionals are alerted by the tax authority to non-performance of certain obligations and are provided with information on the recovery solutions free of charge via a website.
Alert notifications are sent automatically via the electronic communication system developed by the Ministry of Finance/National Tax Administration Agency (ANAF) in relation to non-execution of obligations to the state budget, the state social security budget or the unemployment insurance budget.
The Ministry of Entrepreneurship and Tourism provides information and guidance on early warning on its website:
- detailed information on early warning and its role in signaling to the debtor the need to act without delay;
- indicators for a general assessment of the financial situation with a view to diagnosing distress or insolvency, using available diagnostic software;
- systematized information, presented in a user-friendly format, on solutions for recovery, including insolvency prevention and insolvency proceedings, with the effect of discharging liabilities;
- a list of insolvency practitioners and the authorities and bodies exercising their supervision; and
- information on programs and other support facilities.
In addition, the Ministry of Entrepreneurship and Tourism provides an early warning hotline for a general assessment of the business with a view to accessing recovery solutions.

Proceduri de prevenire a insolvenţei

Proceduri de prevenire a insolvenţeiInsolvency prevention procedures

These procedures represent judicial procedures aimed at preventing insolvency, in order for a debtor facing financial distress (but which is not yet insolvent) to restructure its activity, and through which it fully or partially pays its outstanding debt based on a restructuring plan approved by the court.
The debtor proves that it is facing financial distress through a report drafted by the restructuring administrator or the concordat administrator, which includes at least the following elements:
- the nature of the state of difficulty, and a description of the circumstances that has led to the need for a restructuring plan to be implemented and the likely effects of such a plan
- both the internal and external factors that has led to the financial distress of the debtor;
- the financial indicators applicable to the respective debtor, which may justify the existence of a threat to the debtor's future ability to pay its debts within a maximum period of 24 months from the occurrence of the respective circumstance; and
- the reason why the financial distress may not be considered naturally reversible by continuing the debtor's planned activity without taking appropriate recovery measures.
The report will be attached to the restructuring agreement, and in the case of the composition procedure, to the debtor's request regarding the opening of the procedure.
If an insolvency prevention procedure results in a definitive discharge of obligations, the debtor may not access another insolvency prevention procedure within a period of 12 months from the closure of the respective procedure.
A debtor may not access an insolvency prevention procedure if in the last three years prior to the request for confirmation of the restructuring agreement or the request for the opening of the composition procedure, he has been definitively convicted for committing:
- an intentional offence of patrimony, corruption, service , forgery;
- one of the offenses established by:
  - the Companies Law no. 31/1990;
  - Law no. 129/2019 for the prevention and combating of money laundering and terrorism financing;
  - Fiscal Code(Law no. 227/2015);
  - Law no. 241/2005 for preventing and combating tax evasion;
  - Competition Law no. 21/1996; or
  - art. 240 and 241 of the Romanian Criminal Code;
The company remains in control (debtor in possession) of its assets throughout the term of these procedures.

Acordul de restructurare (extrajudiciara a datoriilor)

Acordul de restructurare (extrajudiciara a datoriilor) (Out-of-court) Debt restructuring agreement (Workout)

A mainly confidential and out-of-court procedure through which a debtor facing financial difficulties submits for court confirmation a restructuring agreement, drafted by the restructuring administrator only or the debtor with the assistance of the restructuring administrator. Prior to submission to the court, the restructuring agreement is negotiated with the creditors with impaired claims, in order to restructure the debtor’s activity and fully or partially pay its debts.
The debt restructuring agreement procedure is largely an out-of-court process; however, the court is involved with the confirmation and the closing of the debt restructuring agreement. After confirmation is received from the court approving the plan, the debtor's activity will be restructured, and the rights of creditors holding impaired claims will be modified in accordance with the provisions of the restructuring agreement.
After the court’s confirmation, the agreement becomes valid against all creditors, including those creditors who vote against the agreement or do not express their vote.
A restructuring agreement may be rejected exclusively for non-compliance with the law provisions.
For a period of three years after court confirmation, the practitioner in the field of restructuring will quarterly monitor the implementation of the agreement. (even if the period provided for its execution is longer). If the period of the agreement is less than three years, then the monitoring period is reduced to this period.
The practitioner in the field of restructuring must be a licensed insolvency practitioner (i.e., an active member of the National Union of Insolvency Practitioners in Romania – UNPIR).
After the confirmation of the restructuring agreement and until the termination of the procedure, the debtor will not be able to access another insolvency prevention procedure and an insolvency procedure is not permitted at the request of a creditor with an impaired claim.
The confirmed restructuring agreement will have no effect with respect to creditors not affected by its provisions.
The restructuring agreement procedure ends with a decision by the court, in case of either fulfilling or failure to comply to the provisions of the restructuring agreement.

Concordat preventiv

Concordat Preventiv Preventive composition

Represents a judicial procedure aimed at preventing insolvency, in order for a debtor facing financial distress (but not yet insolvent) to restructure its activity, and through which it fully or partially pays its outstanding debt based on a restructuring plan approved by the court.
The process comprises of an agreement approved by creditors from each category of claims with an absolute majority of such claims.
Both debtors and creditors are able to request the opening of the concordat procedure (however creditors are only able to initiate the process with the prior consent of their debtor).
The entire procedure is supervised by a composition administrator (administrator concordatar), engaged by the debtor and subsequently appointed by the court according to the debtor's proposal. Within 60 days from the commencement of the procedure, the composition administrator drafts or, as the case may be, assists the debtor in drafting the restructuring agreement.
The proposed restructuring agreement must be negotiated and voted within 60 days from its submission. The restructuring plan is only submitted to the votes of those creditors who hold impaired claims (i.e. receivables whose terms are varied, amended, or terminated under the restructuring plan); creditors whose claims are unimpaired are not entitled to vote on it (they are regarded as lacking standing because they pursue no actual dispute with their debtor) and their claims continue to be taken care of as before the concordat procedure. From the opening of the procedure, all enforcement actions commenced by creditors (including secured creditors) are suspended for four months extendable up to 12 months. During this period, insolvency proceedings at the request of a creditor who holds an impaired claim are forbidden.
The restructuring plan may be devised for a period of up to 48 months from its confirmation, which may be extended for another 12 months.
The preventive composition proceedings end with a court decision, in case the restructuring agreement is either successfully implemented or fails. In case of failure, the debt, as restructured under the restructuring plan, reverts to its pre-restructuring values, reduced as a result of the payments made during the procedure.
From the approval of the plan and until the pronouncement of a court decision closing the procedure, insolvency proceedings at the request of a creditor who holds an impaired claim are forbidden.
A debtor with a failed concordat may seek for another restructuring process after three years.

Insolventa

Insolventa Insolvency proceedings

Commenced at the request of either the debtor or any of its creditors. The debtor is presumed to be insolvent if it has not paid its debts for a period of at least 60 days of a debt becoming due and the debt amounts to at least RON 50,000 (approx. EUR 10,000).
Within a maximum of 30 days from the occurrence of the presumed insolvency (as detailed above), the debtor must request a court decision for initiating the insolvency proceedings.
If the debtor is responsible for initiating the proceedings then the amount the state claims against it must be less than 50% of the value of all the declared claims against that debtor.
On opening the proceedings, evidence should also be provided proving that the tax authority was informed. Failure to do so will result in the request being rejected.
Following a court decision to commence the proceedings, the debtor enters an observation period until a reorganisation plan is approved or bankruptcy proceedings are commenced.
The court may permit the debtor to administer its assets under the control of a court-appointed judicial administrator and under the control of the court (syndic judge) itself. In certain cases, the court may refuse to permit the debtor to administer its own assets, in which case the judicial administrator appointed by the court will have all rights of administration. During this period, creditors are required to file their claims. The debtor is represented by a special administrator appointed by the general meeting of shareholders.
All enforcement procedures commenced before the opening of the insolvency proceedings are suspended, including those started by the secured creditors.
Creditors may not rely solely on the insolvency proceedings as grounds for terminating contracts entered into with the debtor.
Certain decisions within the insolvency proceedings are referred to a creditors’ committee of three or five creditors nominated by the creditors’ meeting from three classes of creditors (secured, unsecured and state claims).
Creditors cannot be appointed as the debtor’s special administrator.
The judicial administrator/liquidator/president of the creditors’ committee/any creditor holding more than 30% of the total claims may file a claim against those people responsible for the debtor’s state of insolvency.
Law provides specific conditions for insolvency/bankruptcy of groups of companies, credit institutions and insurance companies and for cross-border insolvency.

Reorganizare judiciara

Reorganizare judiciara Reorganisation proceedings (part of insolvency proceedings)

This procedure is not available to legal entities which have been subject to reorganisation proceedings within the last five years.
A reorganisation plan is proposed,within 30 days from the publishing of the definitive table of claims, by the debtor, the restructuring administrator and one or more creditors, together holding at least 20% of the total value of the claims.
The reorganisation plan may be devised for a period of up to three years from its confirmation.
If a reorganisation plan is approved as part of insolvency proceedings, the debtor will enter into a reorganisation procedure that may last up to three years. Regarding legal entities, the execution of the reorganization plan may take up to four years.
The reorganization plan will indicate the prospects for recovery in relation to the possibilities and specifics of the debtor's activity, the available financial means and the market demand compared to the debtor's offer and will include measures consistent with public order, including in terms of the method of selection, designation and replacement of administrators and directors.
The reorganisation plan must include the debt payment schedule. Claims registered as beneficiaries of a preferred cause in the definitive table of claims may bear interest and other accessories.
The reorganisation plan is voted by key creditors. The restructuring administrator confirms, in whole or in part, or denies the list of these creditors.
The plan is confirmed under the following conditions:
- if there are five categories of claims, at least three of those categories accept the plan provided that at least one of the disadvantaged categories accepts the plan and that at least 30% of the total value of the creditors accepts the plan;
- if there are three categories, the plan is accepted if at least two categories vote for the plan, provided that one of the disadvantaged categories accepts the plan and that at least 30% of the total value of the creditors accepts the plan;
- if there are two or four categories, the plan is accepted if it is voted by at least half of the number of categories, provided that one of the disadvantaged categories accepts the plan and that at least 30% of the total value of the creditors to accept the plan;
- each disadvantaged category of claims that rejected the plan will be subject to fair and equitable treatment by the plan; or
- receivables that will be paid in full within 30 days of confirmation of the plan or in accordance with the resulting credit or leasing contracts will be considered non-favored claims and will be considered to have accepted the plan;
A special administrator will conduct the debtor’s business in accordance with the reorganisation plan and subject to the control of a judicial administrator.
The reorganisation plan may provide, in certain conditions, for extinguishment of state tax claims and conversion into shares in the insolvent debtor. If the state claims are disputed and the court has not suspended their enforcement, those claims will be registered in the table of claims as contingency claims.
If no plan is confirmed and the deadline for proposing a plan has expired, the court will order the commencement of the bankruptcy proceedings.

Faliment

Bankruptcy (liquidation) proceedings (part of insolvency proceedings)

Bankruptcy proceedings can be commenced as part of insolvency proceedings in the following circumstances: (i) if the debtor applied for a simplified insolvency procedure; (ii) the debtor/its creditors/judicial administrator did not propose a reorganisation plan; (iii) the reorganisation plan was not approved; (iv) the reorganisation of the debtor failed; (v) the debtor's activity during his reorganization brings losses to his assets or (vi) the restructuring administrator’s proposal for initiating bankruptcy proceedings is approved;
Any creditor or the judicial administrator may file for the bankruptcy proceedings. The syndic judge shall decide whether the bankruptcy procedure is open.
In the case of insurance/reinsurance companies, insurance policies automatically expire and all reinsurance agreements are terminated 90 days after the decision to open the bankruptcy proceedings.
In the case of bankruptcy, claims are paid in the following order:
1. taxes, stamps or any other expenses related to the procedure;
2. claims from financing granted in the reorganization procedure;
3. claims from financing granted in insolvency prevention procedures, as well as the practitioner's fees from such procedures;
4. claims arising from employment relationships;
5. receivables resulting from the continuation of the debtor's activity after the opening of the procedure;
6. budget claims;
7. claims representing sums owed by the debtor to third parties;
8. claims representing the amounts established by the court for the maintenance of the debtor and his family, if he is a natural person;
9. claims representing bank loans;
10. other unsecured claims;
11. 11. subordinated claims;
The procedure involves liquidation of all of the debtor’s assets.

Darea in plata a unor bunuri imobile

Mortgage discharge

An out-of-court procedure where the debtor transfers ownership of all mortgaged (residential) properties to the lender and in return is discharged from the outstanding loan and all accrued costs.
If the procedure fails, the debtor may apply to court for an order regarding the mortgage discharge.

Insolventa persoanei fizice

Consumer insolvency

A procedure for individuals whose debts do not arise from professional activities, where there is no reasonable prospect that the debtor will be able to meet their obligations within a maximum 12-month period. It seeks to maintain a reasonable standard of living for the debtor and their dependents.
The procedure is conducted by an insolvency committee/administrator/liquidator and by the court, depending on which of the following procedures is followed.

procedura de insolvenţă pe bază de plan de rambursare a datoriilor

Insolvency procedure based on a plan for debt repayment

A natural person’s debt repayment plan is approved if creditors representing at least 55% of the total value of debts and 30% of preferential debts vote in favour of it.
If the proposed plan is not approved by creditors, the debtor can request the competent court either to confirm the plan or order the opening of an insolvency procedure based on the liquidation of the debtor’s assets.
Following the approval of the plan, all enforcement procedures initiated against the debtor are suspended, including those commenced by secured creditors.
Contracts that are ongoing when the insolvency procedure was opened must be maintained and cannot be terminated due to the opening of the insolvency proceedings.
If the insolvency committee determines that the plan for debt repayment cannot be fulfilled, it will submit the debtor’s/administrator’s request to the competent court.

procedura judiciară de insolvenţă prin lichidare de active

Insolvency court procedure based on the liquidation of the debtor’s assets

If the court approves an application to open proceedings based on liquidation of the debtor’s assets, it will appoint a liquidator.

procedura simplificată de insolvenţă

Simplified insolvency procedure

A simplified insolvency procedure can be applied to an insolvent debtor where: (i) the total amount of debts is equal to ten times the minimum wage; (ii) the debtor has no realizable assets or income; and (iii) the debtor is past the standard retirement age or retired early as a result of losing at least half of their capacity to work.

Procedura de executare silita

Enforcement proceedings

Enforcement proceedings can be taken in respect of both movable and immovable assets. They can take place out of court or via court proceedings.
The out-of-court procedure applies to secured claims over movable assets only and subject to certain conditions.
In all other cases, the procedure is conducted by an enforcement officer selected by the creditor(s) from a list of local enforcement officers. They must give the debtor notice of the proceedings, informing them that they have a certain period of time within which to pay all their debts, including enforcement costs.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings[2] applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

In 2002, Romania was one of the first countries to implement the Uncitral Model Law on Cross-Border Insolvency (1997) (Model Law) into its internal legal framework, by passing Act no. 637/2002 on conflict of laws rules in cross-border insolvency. The relevant rules were further incorporated as a special Title III – Cross-border Insolvency into the new Insolvency Act no. 85/2014 (Romanian Cross-Border Insolvency Law).

Romanian Cross-Border Insolvency Law expressly acknowledges its international origin and the need for promoting the uniformity in its application. Thus, while not formally transposed into the internal legal framework, the UNCITRAL Guide to Enactment and Interpretation (2013), and the Practice Guide on Cross-Border Insolvency Cooperation (2009), respectively represent useful tools for the interpretation and application of the Model Law.

The relevant provisions are aimed to apply in relation to recognition of foreign insolvency cases commenced in jurisdictions outside European Union for which either (a) Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (New EU Insolvency Regulation) is not applicable; or (b) Romania and the relevant foreign jurisdiction have not concluded a relevant international assistance treaty.

Recognition of foreign insolvency proceedings

Representatives of foreign insolvency proceedings are authorized to file a request for the recognition of such foreign insolvency proceedings directly with the Romanian court of competent jurisdiction (specific jurisdiction clauses are included for that purpose in the Romanian Cross-Border Insolvency Law).

Romanian Cross-Border Insolvency Law mandates certain conditions for the recognition of foreign insolvency proceedings.

The conditions include:

Determination that the foreign proceedings requested to be recognised, and the foreign representative requesting such recognition constitute “foreign proceedings” and a “foreign representative”, respectively, as defined by the Romanian law;
Absence of fraud in the rendering of the foreign jurisdiction court decision (fraud must be both pleaded and proved);
Absence of violation by the relevant foreign proceedings and the associated foreign court decisions of the Romanian public policy related to its private international law rules (although not yet settled as a rule, violation must be both pleaded and proved);
Reciprocity between Romania and the foreign jurisdiction insofar as the mutual recognition of the court decisions rendered in these two jurisdictions (although not stated in the law, reciprocity must be proved via an official letter issued by the Romanian Ministry of Justice).

A list of documents must also support a request for the recognition of foreign insolvency proceedings, as follows:

Certified copy of the foreign court decision(s) commencing the insolvency proceedings and appointing the foreign representative;
An affidavit letter issued by the relevant foreign court certifying the commencement of the foreign insolvency proceedings and the appointment of the foreign representative;
If the documents under a) and b) above are missing or cannot be produced, any other documentary evidence attesting the commencement of the foreign insolvency proceedings and the appointment of the foreign representative, certified under either (i) the Hague Apostille Convention or (ii) any applicable bi or multilateral international assistance treaty;
An affidavit of the foreign representative indicating all the foreign insolvency proceedings the representative is aware of.
Although left to the discretion of the Romanian court, in practice all documents listed under a) – d) above shall be accompanied by official Romanian translations. Also, even though the law permits the Romanian court to accept plain copies of the supporting documents and accept them as accurate, in practice the Romanian courts will most likely require certified and apostilled/legalized documents.

A court decision rendered in a foreign insolvency proceedings recognition context is appealable and it is only carrying partial res judicata; a third party in interest may petition the court to vary or vacate the decision to the extent the relevant applicable grounds and conditions were not met at the time of its rendering, or they ceased to exist.

The recognition of foreign insolvency proceedings, either as main or secondary, will bring about certain consequences, depending upon the nature of such foreign insolvency proceedings, regarding the following:

Staying the actions or enforcements against the debtor’s rights, assets and obligations and its impact on the associated statute of limitations period;
The disposal of the debtor’s property;
The commencement of local insolvency proceedings and proof of claims within such proceedings;
Provisional measures;
Temporary custody and management of debtor’s property situated in Romania;
Avoidance actions;
Standing of the foreign representative to intervene in actions and proceedings in which the debtor is a party;
Commencement of a local insolvency case against the debtor

Insolvency changes in response to COVID-19

Temporary measures

On 14 May 2020, the Romanian Government issued the Government Emergency Ordinance (GEO) no. 70/2020 addressing several aspects related to the COVID-19 situation and amending several laws in conjunction with the transition from the state of emergency (instituted on 15 March 2020) to the state of alert, which was declared on 15 May 2020 for a 30-day period and subsequently extended for similar consecutive periods (still effective as at the time of this update). On the other hand, on 18 May 2020, a bill passed by Romanian Parliament entered into force as Act No.55/2020 on certain measures for preventing and combating the effects of the COVID-19 pandemic (the COVID-19 Response Act). Act No. 55 reiterates tale quale the measures instituted in GEO 70/2020, and adds several others. COVID-19 Response Act made more temporary adjustments to the ordinary legal insolvency treatment that are aimed at being applicable during the state of emergency and the state of alert.

For the first time since the institutionalized response to the COVID-19 outbreak, GEO 70/2020 and Act 55/2020 introduced several temporary relief measures for debtors facing insolvency, which are aimed at encouraging, during the state of alert, out-of-insolvency restructuring negotiations and workout agreements between distressed debtors and their creditors.

Those debtors that are or become insolvent during the state of alert are left the option of filing for insolvency, if they choose to do so, but they are expressly excused from the statutory duty of filing which Act no. 85/2014 (the general insolvency law) imposes on insolvent debtors. Thus, the 30-day period during which – under ordinary circumstances – Act no. 85/2014 imposes a duty to file on debtors becoming insolvent only starts to run after the end of the state of alert.

Similarly, if there are debtors negotiating a debt workout with their creditors, either as an informal out-of-court arrangement or preventive composition (concordat preventiv), and such negotiations collapse during the relevant state of alert, the five-day period within which the debtors are ordinarily obliged to file for insolvency following the failure of such negotiations only starts to run on the end of the state of alert.

The additional changes introduced by the Covid-19 Response Act were designed to encourage financial restructuring for those debtors who are insolvent or who are facing insolvency, and the business of which has been stayed, either entirely or partially, due to the measures imposed by the authorities in response to COVID-19. These changes include:

The minimum aggregate value claim threshold for an eligible insolvency case is increased from RON 40,000 to RON 50,000 (around EUR 10,000) in case of debtors forced to suspend, entirely or partially, their business during the state of emergency and state of alert due to the intervention of public authorities .
The additional prerequisite that tax charges should represent less than half of the total value of claims at the time of the insolvency petition is put on hold during the state of alert.
The creditors of debtors forced to suspend, entirely or partially, their business during the state of emergency and state of alert due to the intervention of public authorities are allowed to file during the state of alert involuntary insolvency petitions against such debtors only if the creditors have first tried reasonably to reach a debt repayment arrangement with the relevant debtors.
The period during which ongoing negotiations had been held at the time COVID-19 Response Act was enacted between debtors and their creditors for preparing or reaching an agreement on a preventive concordat was extended for another 60 days, and the implementation phase of such an arrangement was similarly extended for another two months.
Further time extensions were granted in case of insolvency cases that were active at the time of the COVID-19 Response Act, as follows:
the supervision period (perioada de observatie) within an insolvency case for three additional months;
the period available to propose a reorganisation plan, or an amended reorganisation plan, for three additional months;
the maximum original implementation periods and variation of restructuring plans for one additional year up to four years, with the possibility of a further maximum one-year extension for debtors that have entirely or partially suspended their business due to the intervention of public authorities;
the implementation of reorganisation plans for two additional months;
the interruption, on the relevant debtors’ request, of implementation of reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely suspended their business due to the intervention of public authorities for an additional two-month period; and
the extension up to five years of the implementation term of reorganisation plans, possibly in conjunction with other amendments of the reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely or partially suspended their business due to the intervention of public authorities.

Contact: Marian Dinu and Ioan Chiper

Law stated as at 11 October 2023

_{[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132

[2] Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).}

Konkurz, konkurzné konanie

Bankruptcy, bankruptcy proceeding

A company, partnership or natural person is insolvent (úpadok) if: (i) in the case of a company or a partnership it is unable to pay at least two monetary liabilities due to more than one creditor within 90 days of the (respective) due dates (platobne neschopný) or, in case of natural person, such person is unable to pay at least one monetary liability within 180 days of the (respective) due dates; or (ii) over-indebted (predĺžený), which means that the value of its liabilities exceeds the value of its assets.
It is assumed that a legal entity (company or partnership) is solvent if, taking into account all the circumstances, it can be reasonably assumed that it is possible to continue the management of assets or the operation of the business and the difference between the amount of its payable monetary liabilities and monetary assets ("coverage gap") is less than a tenth of the amount of its payable monetary liabilities, or within a period of no longer than 60 days, the coverage gap falls below such a limit.
Bankruptcy provides for a sale of the debtor’s assets and satisfaction of its creditors from the proceeds of sale. For corporate entities or partnerships, it leads to the winding up of the debtor.
Once the court declares the bankruptcy of the debtor, the debtor is obliged to limit the performance of its activities to usual legal acts.
During the bankruptcy, the trustee appointed by the court shall administer and realise the property subject to bankruptcy and use the proceeds from the realisation to satisfy creditors. However, creditors can give binding instructions and recommendations to the trustee in connection with the administration of the property subject to bankruptcy, the operation of the debtor’s enterprise and the realisation of the property that is subject to the bankruptcy.

Any debt still outstanding following the debt discharge will be rendered unenforceable, together with:

any interest or default charges exceeding 5% of the principal per calendar year accrued before a "decisive date" (being the calendar month in which the bankruptcy was declared or the protection from creditors was provided).
any interest or default charges accrued on and after the decisive date.
claim from the bill exchange, if it was signed by the debtor before the decisive date.
contractual penalties and other private law or public law monetary sanctions (if the obligation triggering the penalty or sanction was breached prior to the decisive date).
claims of the affiliated parties accrued before the decisive date.
costs of participants in the proceedings incurred in connection with their participation in the bankruptcy proceedings.

The following claims receive protection from the debt discharge:

unregistered claims (which the individual creditor did not acquire by assignment, transfer or transition, except for inheritance) of an individual creditor (natural person) on the grounds that such creditor has not been notified in writing of the bankruptcy proceedings by the trustee.
secured claims up to the value of the pledged assets.
claims from legal aids provided to the debtor by Centre for Legal Aid as a part of debt discharge proceeding.
a claim from liability for damage caused to health or caused by intentional action, including accessories of such claim.
non-monetary claims.
any monetary penalty pursuant to the Criminal Code.
employment claims of the employees against the debtor.
alimony claims including accessories of such claims.

There is also a "homestead exemption." If a homestead is included in the debtor’s property assets, the first EUR 10,000 of realisations in relation to the homestead will not be subject to the bankruptcy. The debtor’s homestead cannot be realised if the proceeds after deduction of EUR 10,000 would not satisfy the costs of realisation and at least part of the creditors’ claims. The value of the debtor’s homestead is estimated by the trustee.

An electronic application to declare bankruptcy may be filed at court by a debtor, a creditor (only where the debtor is a corporate entity or natural person entrepreneur) or a liquidator of the debtor. A debtor is obliged to submit an application to declare bankruptcy within 30 days of the date when it knew or, exercising professional care, should have known of its insolvency.

As part of the decision declaring bankruptcy, the court will appoint a trustee, at random, from the register of trustees.

The trustee manages the debtor’s property, sells the debtor’s assets and distributes the proceeds to creditors.

Malý konkurz

Small bankruptcy

A form of bankruptcy (intended to be faster than regular bankruptcy) that can apply to insolvent companies and all forms of partnership.
Small bankruptcy is filed by the debtor (or person authorised to act on behalf of the debtor). The debtor is obliged to attach the financial statements prepared during the past five calendar years to the application for the declaration of small bankruptcy, if the debtor was obliged to prepare them.
A court may declare small bankruptcy if::
the application for declaration of small bankruptcy was submitted by the debtor, who is a legal entity;
the debtor has an established statutory body;
the debtor's statutory body or members of the statutory body are persons who do not act as a statutory body or members of the statutory body in more than ten legal entities registered in the commercial register;
an advance payment was paid for the costs of a small bankruptcy;
the debtor is not in breach of Section 40 (2) or Section 40 (4) (filing of the financial statements to the Collection of Deeds or Register of Financial Statements) of the Commercial Code;
the debtor has no liabilities exceeding EUR 1,000,000 and no assets exceeding EUR 1,000,000 according to the last five financial statements;
in relation to the debtor, the effects of the initiation of bankruptcy proceedings or the declaration of bankruptcy do not apply; and
the application to declare a small bankruptcy is complete and is authorized by a person authorized to act on behalf of the debtor.
All licenses to conduct business of the debtor expire by declaring a small bankruptcy.
Like bankruptcy, small bankruptcy provides for a sale of the debtor’s assets and satisfaction of creditors from the proceeds of sale.

Konkurz prevádzkovateľa prvku kritickej infraštruktúry

Bankruptcy of the critical (essential) infrastructure element operator

Special rules apply to bankruptcy concerning the assets of a critical infrastructure element operator (ie entities designated by the Slovak authorities operating in sectors such as transport, telecommunications, energy, health, finance, agriculture) on the grounds that the operation of the critical infrastructure is at risk.
The operation of the critical infrastructure element shall be at risk if the operator has entered into (amongst others) liquidation, bankruptcy or similar proceedings or enforcement of security or exercise of a security right has been initiated, regardless of whether such proceedings are conducted on the territory of the Slovak Republic. The operator is obliged to notify this fact in advance to the competent Slovak authority.
Any transfer of a critical infrastructure element as a result of entering into liquidation, bankruptcy or similar proceedings may be subject to review under the new FDI regime.

Reštrukturalizácia

Restructuring

Proceedings that provide a flexible approach under a plan to restructure a debtor’s liabilities or to effect other restructuring measures (including a sale of assets).
An application to authorise a restructuring may be submitted to the court by a debtor, or a creditor with the debtor’s consent, but only if a trustee registered in the register of trustees provides an expert opinion and recommends restructuring.
During a restructuring, a debtor is obliged to restrict its actions to those in the ordinary course of business; any other actions must be approved by the trustee.
The trustee supervises the debtor and reviews registered claims. After a successful restructuring, the debtor may continue to operate its business.

Oddlženie

Debt discharge

Insolvent natural persons may apply for debt discharge via bankruptcy or a payment schedule regardless of whether their liabilities and obligations arise from business activity.
As regards the debt discharge by means of a payment schedule, the court will provide the debtor with protection from creditors and appoint a trustee within 15 days of the receipt of the draft payment schedule.
The payment schedule must enable unsecured creditors’ claims to be paid at an amount that is at least 10% higher than they would have obtained in bankruptcy.
If the debtor’s situation does not allow the payment schedule to be drawn up, the trustee shall advise the debtor to apply for declaration of bankruptcy.
In debt discharge proceedings, any debts due to creditors that were not satisfied in the previous bankruptcy proceedings will become unenforceable.

Záložné právo

Pledge right

A pledgee is entitled to enforce a pledge in any way permitted by the legal regulations applicable at the time of the enforcement and as set out in the pledge agreement

Záložné právo k nehnuteľnosti

Mortgage

A mortgagee is entitled to enforce a mortgage in any way permitted by the legal regulations applicable at the time of the enforcement and as set out in the mortgage agreement. In bankruptcy proceedings, a mortgagee shall claim all amounts due to it through an application. However, it is a trustee who is entitled to exercise the mortgage right, ie to sell the property and subsequently to satisfy the mortgagee.

EU Directive Implementation

The EU Directive on Restructuring and Insolvency requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Slovakia

The Directive was already implemented in the Slovak legislation in 2022, among others also into Act No. 111/2022 Coll. on Resolving Imminent Bankruptcy and on Amendments to Certain Acts, as amended ("Act"); Act No. 7/2005 Coll. On Bankruptcy and Restructuring, Act No. 513/1991 Coll. Commercial Code, as amended, etc.

The Act also introduced preventive proceedings, including public preventive restructuring and temporary protection, amongst others.

Implementation date

The Directive was implemented on 17 July 2022 into the Slovak legislation.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

Recognition of third country insolvency processes

The recognition of third country insolvency proceedings (non-EU) is governed by the principle of reciprocity, unless stipulated otherwise by an international treaty. The Slovak court ordinarily has jurisdiction if the debtor has property in the territory of the Slovak Republic regardless of its value.

Third country insolvency proceedings will be recognised by the Slovak court upon petition of the foreign trustee in bankruptcy, if (i) there is reciprocity with the third country, (ii) the foreign trustee in bankruptcy proves the initiation of bankruptcy, its appointment and legal interest in obtaining recognition; and unless an international treaty stipulates otherwise.

Once recognised by the Slovak court, the third country decision on insolvency has the legal effects associated with it by the law of the state in which it was issued. The Slovak court may also exclude some of its legal effects in the territory of the Slovak Republic, or grant some additional legal effects under the Slovak insolvency legislation.

Contact: Michaela Stessl

Law stated as of 1 September 2023

POSTOPEK PRISILNE PORAVNAVE

Compulsory settlement proceedings (insolvency proceedings)

An insolvent debtor discloses their financial position to creditors and provides them with sufficient information to enable them to assess whether a proposed financial restructuring plan would result in the solvency of the debtor.
The plan cannot compromise the claims of priority and secured creditors, and exclusion right.
There is a stay on enforcement proceedings for any pending claims (for both secured and unsecured creditors). In some cases, the initiation of compulsory settlement proceedings can also delay (or eventually terminate) bankruptcy proceedings.
During the procedure the debtor’s legal capacity is limited. An administrator (upravitelj) and the court will supervise the debtor’s activities.

POSTOPEK PRISILNE PORAVNAVE ZA MALO GOSPODARSTVO

Compulsory settlement proceedings for small businesses (insolvency proceedings)

Only available for micro-companies whose value of assets in the last two years has not exceeded EUR 700,000.00 and the total amount of their liabilities has not exceeded EUR 700,000.00, and for entrepreneurs who meets the criteria for micro-company in terms of the number of employees and turnovers, and whose total liabilities has not exceeded EUR 700,000.00.

The provisions governing the compulsory settlement proceedings shall be used with some exceptions.
An important distinction from compulsory settlement proceedings relates to the costs involved, as the proposal for these proceedings does not require the submission of an auditor’s report and a report of a chartered appraiser, and the estimated value of the assets does not require to be prepared by a certified business evaluator.The debtor will only need to attach a declaration to the proposal, affirming that the report on the financial statement accurately reflects its true and fair financial position and affairs.

POSTOPEK PREVENTIVNEGA PRESTRUKTURIRANJA

Preventive restructuring proceedings (restructuring proceedings)

The process can be commenced even if the company is not yet insolvent. This is one of the main distinctions of this procedure from proceedings. A presumption that a company would become insolvent in a period of one year is sufficient for the proceedings to begin. Only large, medium-sized and small companies can undertake preventative restructuring proceedings. Micro-companies are excluded.
The company remains in control of its assets and can continue trading.
A standstill arises for a maximum period of ten months. The presence of a notary and auditor in the proceedings provides safeguards to avoid abuses by the debtor.
A preventive restructuring arrangement can only come into effect if: (i) creditors whose total amount of ordinary financial claims amount to at least 75% of the sum of all ordinary financial claims, are in favour; (ii) creditors whose total amount of secured financial claims amount to at least 75% of the total of all secured financial claims, are in favour (this is relevant if the arrangement is intended also to apply to secured financial claims); and (iii) the creditors and the debtor reach an agreement. A dissenting minority is bound by the agreement, provided that the treatment of their claims is no worse than the treatment of the claims of the majority.
The agreement can provide for a maximum five-year moratorium. The agreement can provide for ordinary creditors’ debts to be reduced, and for secured creditors’ interest rates to be lowered.

POSTOPEK SODNEGA PRESTRUKTURIRANJA ZARADI ODPRAVE GROZEČE INSOLVENTNOSTI

Judicial restructuring proceedings for preventing imminent insolvency (restructuring proceedings)

All types of entity except micro-companies can be subject to these proceedings, the purpose of which is to enable financial restructuring based on a concluded compulsory settlement, which shall eliminate the causes that could lead the debtor into insolvency.
Imminent insolvency is a position that arises when the debtor is likely to become insolvent within the next year.
The provisions governing the compulsory settlement proceedings shallapplyunless otherwise provided by law.
The proceedings can be initiated only by the debtor’s proposal.

IZVENSODNO PRESTRUKTURIRANJE

Out-of-court restructuringproceedings (restructuring proceedings)

The proposal can be made by any of the involved parties, and neither the commencement nor the conclusion requires the permission or consent of the court.
The master restructuring agreement is the result of negotiations between the parties.

STEČAJNI POSTOPEK NAD PRAVNO OSEBO

Bankruptcy proceedings against a legal entity (insolvency proceedings)

All types of entity can be subject to these proceedings, the purpose of which is to sell all of the debtor’s assets and repay its creditors.
Secured creditors look to their collateral to settle their claims. Although the costs of the bankruptcy proceeding are to be repaid first, secured creditors must only bear the costs of selling the assets charged in their favour, not the costs of selling all of the debtor’s assets.
An administrator is appointed to represent the debtor in bankruptcy and to manage their operations.
Any pending enforcement proceeding is suspended or terminated.

POSTOPEK OSEBNEGA STEČAJA

Personal bankruptcy proceedings (insolvency proceedings)

Available for all natural persons – consumers, entrepreneurs, and private persons. Similar in nature to bankruptcy proceedings against a legal entity.
The debtor’s legal capacity is limited so that they cannot conclude certain financial contracts without the consent of the court.
After sale of the debtor’s assets and repayment of their creditors, the court can relieve the debtor of their liabilities (including the claims of secured creditors).

POSTOPEK STEČAJA ZAPUŠČINE

Legacy bankruptcy proceedings (insolvency proceedings)

Proceedings against the estate of a deceased natural person to which the deceased bankrupt’s heir and creditors are parties.
The rules for bankruptcy proceedings against a legal entity and for personal bankruptcy proceedings apply.

EU Directive Implementation

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Slovenia

The EU Directive on Restructuring and Insolvency has been transposed into Slovenian law with ZFPPIPP-H amendment to

the Slovenian Financial Operations, Insolvency Proceedings, and Compulsory Dissolution Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju, "ZFPPIPP") which will come into force on 1 November 2023.

EU Regulation on Insolvency Proceedings

Recognition of Third Country Insolvency Proceedings

Third country insolvency proceedings can be recognised either under the ZFPPIPP or under the general Slovenian rules on the recognition and enforcement of foreign judgments.

The ZFPPIPP provides that a request to recognise foreign judicial insolvency proceedings may be filed by a person who is appointed the administrator of the proceedings. Following this request, the court will issue a decision recognising the foreign insolvency proceedings, only if:

the request was properly made;
the proceedings, which are the subject of the recognition request, have the characteristics of foreign judicial insolvency proceedings;
the foreign administrator holds the position of a foreign administrator;
the centre of the debtor’s main interests or place of business is in a foreign country in which the proceedings which are the subject of the recognition request are conducted; and
such a decision would not be likely to adversely affect sovereignty, security or the public interest of the Republic of Slovenia.

The court is obliged to publish any decision in relation to recognition, on the website for insolvency publications.

By recognising foreign insolvency proceedings, a foreign administrator shall acquire the standing in Slovenia to contest the insolvent debtor’s legal actions as well as to intervene in any procedures in Slovenia in which the insolvent debtor is the client.

Key contact: Jasna Zwitter-Tehovnik

Law stated as of 11 October 2023

Comunicación de apertura de negociaciones con los acreedores con el fin de alcanzar un plan de reestructuración (Procedimiento previsto en los artículos 585 a 613 de la Ley Concursal)

Communication of the opening of negotiations with creditors for achieving a restructuring plan (Proceeding regulated under articles 585 to 613 of the Spanish Insolvency Act)

The Spanish Insolvency Act includes the possibility for distressed companies to communicate to the relevant court the opening of negotiations with its creditors (or the intention of opening those negotiations immediately) for achieving a restructuring plan to overcome the distress situation. The distressed company should be under a situation:
- of actual insolvency (insolvencia actual), but only to the extent that no petition for insolvency by a creditor (concurso necesario) has been filed yet;
- of imminent insolvency (if it foresees that it will not be able to regularly comply with its obligations in 3 months); or
- in which it is probable to become insolvent (when it is objectively predictable that, if no restructuring plan is achieved, it will not be able to comply with its obligations within the next 2 years).
Once the court publishes the relevant declaration on the communication of the opening of negotiations, the effects of such declaration would be summarized as follows:
- Will not affect the administration and disposal authorities of the debtor; it may continue operating its business.
- Shall not have any effects, per se, in the any agreements currently in place, Spanish Insolvency Law expressly states that any contractual provision that might allow one of the parties to terminate an agreement on the grounds of the opening of negotiations with the creditors, will be null and void.
- No security enforcement will be allowed to start (or if already started will be suspended) until a 3 month-period as from the date on which the communication is made has elapsed (stay). Such stay will directly extend to those assets that are necessary for the continuity of the debtor’s business, but it can also be extended by the court (at the debtor’s request) to any other assets or rights necessary for ensuring a satisfactory outcome of the negotiations.
- During such stay: (i) the obligation of the debtor of filing the voluntary insolvency (concurso voluntario) declaration is also suspended; and (ii) no insolvency petition by a third party (concurso necesario) can be filed.
The stay period previously mentioned can be extended for an additional 3-month period if the debtor or creditors representing more than 50% of the indebtedness that may be affected by the restructuring plan which is being negotiated request such extension to the court. The court shall decide on the extension based on the petition by the debtor and/or the creditors and also on the report prepared for such purposes by the restructuring expert previously appointed by the court (if such appointment has taken place).

Planes de Reestructuración (Procedimiento previsto en los artículos 614 a 634 y concordantes de la Ley Concursal)

Restructuring Plans (Proceeding regulated under articles 614 to 634 and concordant of the Spanish Insolvency Act)

A procedure designed to avoid insolvency proceedings by introducing changes to (i) to the liabilities and assets of the creditor (terms, structure, etc…), or (ii) its equity structure, but also by facilitating the transmission of assets, business units or even the whole business, and operational changes. This is possible as long as such distressed company is under current insolvency, imminent insolvency or is probable to become insolvent.
The distressed company and/or its creditors (as per below) will approve a restructuring plan that will allow the distressed company to continue to trade.
Under the Spanish Insolvency Act, not only financial creditors, but also commercial creditors can be affected by the restructuring plan if so agreed by the parties involved thereunder.

In this regard, the “affected liabilities” shall be defined as any credit right which may suffer amendments of its terms and conditions by means of the restructuring plan (including but not limited to amendments to its maturity date, principal amount, interest, security or even its conversion to profit participation loans or any other subordinated financing).

Planes de Reestructuración (Procedimiento previsto en los artículos 614 a 634 y concordantes de la Ley Concursal)

Restructuring Plans (Proceeding regulated under articles 614 to 634 and concordant of the Spanish Insolvency Act)

For the purposes of the approval of the plan, creditors shall be divided into classes based on a common interest in accordance with objective criteria. In this regard:
- all creditors raking pari passu in an insolvency scenario in accordance with the classification set out in the Spanish Insolvency Act will form one class of creditors (although they can be separated into different subclasses provided there are sufficient criteria to support such segregation, such as the nature of the credit rights or any conflict of interest between those creditors); and
- all secured creditors by means of an in rem security will be considered a separate class, unless the heterogeneity of the underlying assets requires otherwise.
The restructuring plan shall be deemed as approved by each class of creditors if:
- It is supported by at least 2/3 of the creditors of such class; or
- If it is supported by at least 3/4 of the creditors of such class, if the class is formed by creditors enjoying a general or special insolvency privilege.

Procedimiento de homologación de planes de reestructuración (Procedimiento previsto en los artículos 635 a 664 y concordantes de la Ley Concursal)

Homologation of restructuring plans (Proceeding regulated under articles 635 to 664 and concordant of the Spanish Insolvency Act)

The homologation of a restructuring plan is a procedure consisting on the approval by the court of said plan, which can be initiated either by the distressed company or any creditor which is a party to the plan.
This procedure is needed when it is intended that:
- Dissenting creditors or classes of creditors are also bound by the plan;
- In the interest of the restructuring, certain agreement(s) are early terminated; or
- The protection from claw back extends to any interim financing, any new financing granted within the restructuring plan or any other action foreseen in the plan that could be eventually be subject to claw back.
Within 15 days, the court shall rule on the homologation of the restructuring plan, based on the requirements set out in the Spanish Insolvency Act being complied with.
Upon homologation, the restructuring plan will be immediately effective and it will bind any dissenting creditors whether secured or unsecured (intraclass cram down).

Homologation of restructuring plans not supported by a class of creditors

As mentioned above, as a general rule, the restructuring plan will be homologated if it has been approved by all the classes of creditors. However, if that is not the case, it can still be subject to homologation by the court if:
- It is approved by a simple majority of the classes of creditors, as long as one of the classes that approves the plan must be a class with generally or specially preferred claims (i.e. secured creditors, public creditors, etc…); or
- It is approved by at least one class of creditors that could be considered as being “in the money”, meaning a class that would reasonably receive some form of payment following assessment of the debtor as a going concern.
In this scenario, if the relevant court approves the restructuring plan, it will bind not only the dissenting creditors (whether secured or unsecured) within a class (intraclass cram down), but also those classes of creditors that have not approved the restructuring plan (cross-class cram down).

Dissenting secured creditors

Article 651 of the Spanish Insolvency Act states that dissenting secured creditors bound by the restructuring plan can initiate the enforcement of the relevant security provided that, within the class they belong to, the votes in favor of the plan were lower than the dissenting votes.

Challenge of the homologation of a restructuring plan

The homologation of a restructuring plan can be appealed by dissenting creditors. The grounds to challenge the homologation of the plan will depend on whether the plan has been approved by all creditor classes.
If the plan has been approved by all the classes of creditors, the main ground to challenge such plan is the best interest of creditors rule, which can be alleged by creditors that would have received more in an hypothetical insolvency liquidation proceedings carried out two years after the plan is approved than as a result of the plan.
If the plan has not been approved by all the classes of creditors, there are various grounds to support the challenge of the homologationm being those that seek to ensure that creditors are treated fairly the most substantive ones: equal treatment among classes belonging to the same rank, prohibition on granting one or several classes rights that exceed the value of their credits, and, above them all, the absolute priority rule (i.e. that no lower-ranking class of creditors, or the shareholders, should receive any amount or rights when the credits of the higher ranking class have not been paid in full).

Concurso

Insolvency proceeding

Proceeding for distressed companies that may result in either the rescue of the debtor through an arrangement with its creditors (convenio) or the liquidation of the debtor (liquidación).

Concurso (presupuestos objetivos)

Insolvency proceeding (objective requirements)

The insolvency declaration may apply upon the distressed debtor being in a state:
- of actual insolvency (insolvencia actual), if it can no longer pay its due obligations on a regular basis; or
- of imminent insolvency (insolvencia inminente), if it expects that it will not be able to comply with its due obligations in a 3-moths period.
The debtor is obliged to apply for the voluntary insolvency proceedings (concurso voluntario) within 2 months of the date when the debtor becomes aware, or should have become aware, of its insolvency (unless the communication of the opening of negotiations pursuant to Article 585 et seq. of the Spanish Insolvency Act is filed and declared, when an additional one month period to file for insolvency will apply as from the end of the stay period —as already mentioned it can extend up to 6 months—).
Alternatively, any creditor of the relevant debtor is also entitled to file an application for commencement of insolvency^{^[1]}, which result to a mandatory insolvency proceeding (concurso necesario). In this case, relevant creditor would be required to provide (i) evidence of its debt; and (ii) enough evidence that one of the aforementioned revealing facts occurs.

Concurso (etapas)

Insolvency proceeding (stages)

The insolvency proceeding is initiated filing an application for commencement either by the debtor entity itself or by creditors (voluntary vs. mandatory insolvency proceeding).
Should the insolvency court declare the insolvency of the debtor entity, the initial phase of the insolvency proceeding is the common phase (fase común), which concludes with the the filing of the so-called “final reports (textos definitivos)”.
Concluded the common phase (fase común), there can be two different outcomes to the insolvency proceeding:
- Composition phase (fase de convenio), aimed at reaching an agreement between the insolvent entity and its creditors.
- Liquidation phase (fase de liquidación), aimed at monetising the assets of the debtor entity in order to pay its debts as much as possible.

Concurso (fase común)

Insolvency proceeding (common phase)

If the insolvency court declares the insolvency following an application for commencement, next step will be the publication of such a declaration, the appointment of the insolvency administrator (which shall be appointed by the insolvency court in the aforementioned resolution that publicly declares the opening of the insolvency proceeding (auto de declaración de concurso)) and the communication of such declaration to all the creditors so that they can inform the insolvency court about their claims.
The creditors shall communicate their credits to the insolvency administrator within one month from the publication of the insolvency proceeding.
The initial phase of the proceeding (common phase (fase común)) continues by the drafting by the insolvency administrator of a report which shall analyse the insolvent entity, the state of its accounts, etc. and to which shall be appended both the inventory of the insolvent entity and the list of its creditors in the appropriate order of ranking (as discussed further below), which can be challenged in court by any creditor. As a general rule, said report shall be filed by the insolvency administrator within two months of being appointed as such by the insolvency court.
The decision declaring the end of the common phase will order the opening of the creditors’ arrangement phase, unless the liquidation has already started.

Efectos de la declaración de concurso sobre la gestión de la entidad insolvente

Effects of the declaration of insolvency over the management of the insolvent entity

As a general rule, the insolvency declaration shall not discontinue the ordinary business activity of the insolvent entity.
In mandatory insolvency proceedings (concurso necesario), the court appoints an insolvency administrator to manage the insolvent entity’s assets and the directors will play no further management role. In voluntary insolvency proceedings (concurso voluntario), the directors remain in control of the insolvent entity, subject to the supervision of the insolvency administrator appointed by the court.
The insolvency declaration shall not be a cause for the acceleration of any agreements. Any clause included in any agreement stating that will be terminated upon the insolvency declaration of the counterpart are considered null and void.
The insolvency administrator may decide to reinstate those financing agreements early terminated (as a consequence of a breach of principal or interest payment) in the three months prior to the insolvency declaration. Such reinstatement shall be communicated to the relevant creditor before the end of the period for communicating any claims against the insolvent entity and shall be made together with the payment of any amounts owed at the time of reinstatement.
Once insolvency proceedings have been commenced, there is a stay on all execution proceedings or writs against the insolvent entity or its assets, and such entity may not enter into any further transactions without the authorisation of the appointed insolvency administrator.
Once the relevant entity is declared insolvent, the enforcement of security interests over assets owned by the debtor and used for its professional or business activities will be stayed until the occurrence of either: (i) approval of a creditors’ arrangement (unless the content has been approved by the secured creditor, in which case it will be bound by whatever has been agreed); or (ii) one year has elapsed since the declaration of insolvency without the liquidation phase being initiated (whichever is earlier).
Those actions performed by the insolvency entity (including the execution of financial or commercial agreements) during the two years prior to the application for insolvency, as well as from such application to the actual insolvency declaration, may be rescinded if they are determined as prejudicial to the insolvent entity’s estate (claw-back period). In certain scenarios, those actions made in the two years prior to the communication of opening of negotiations may also be rescinded.

Concurso (fase de convenio)

Insolvency proceeding (composition phase)

The composition phase is aimed at reaching an agreement between the insolvent entity and its creditors.
A creditors’ agreement will include a detailed repayment schedule. In general terms, the proposal of arrangement with creditors must contain proposals for debt write-offs or debt moratorium or debt write-off and debt moratorium. The waiting period in case of debt moratorium must not exceed ten years. It can also contain other measures such as debt-for-equity swaps, conversion of ordinary debt into profit participation debt, transfer of business with debt assumption, etc.
Different voting rights are vested in each group of creditors. Privileged creditors have the right to abstain from voting. If a creditor abstains, it will not be bound by the creditors’ agreement. If the creditor votes, it will be bound by the agreement. Ordinary creditors are entitled to vote and will be bound by the decision of the majority, whether or not they vote or abstain. Subordinated creditors cannot vote. In general, the approval of creditors representing at least 50% of the total amount of ordinary claims is required to approve a composition arrangement (65% is required for a moratorium between five years and ten years, and write-offs of more than the 50% of the claims).

Concurso (fase de liquidación)

Insolvency proceeding (liquidation phase)

The purpose of the liquidation is to monetise the assets in order to pay debts.
The liquidation phase will be declared by the insolvency court and initiated:
- if asked (at any time) by the insolvent entity;
- if so requested by the insolvency administrator as a result of the total or partial cessation of the entity's activity;
- if no arrangement with creditors is reached (either if neither the insolvent entity nor a creditor proposes a creditors’ arrangement, or if the proposal is not approved by the requisite majority at the creditors’ meeting or by the court); or
- in case of non-compliance by the insolvent entity of the approved arrangement with creditors.
The general effects of the opening of the liquidation include, among others:
- The debtor’s management being definitively replaced by an insolvency administrator.
- The court declaring the dissolution of the debtor (which would have otherwise required the approval of the shareholders).
- Deferred claims being automativally accelerated.
The court shall decide whether the insolvency proceeding shall be classified as: (a) tortious (concurso culpable) when it is determined by the relevant court that the insolvency was caused (or aggravated) with gross negligence or wilful misconduct; or (b) fortuitous (concurso fortuito) when such gross negligence or wilful misconduct canno be appreciated. The Spanish Insolvency Act includes certain scenarios that work as presumptions of the insolvency being tortious, being one of them the failure by the directors to file for insolvency on a timely manner.

If the insolvency has been considered by the relevant court as tortious (concurso culpable), those responsible for the insolvency of the insolvent entity (directors, managers and other relevant persons/entities) could face potential adverse consequences in the form of being declared codebtors of the Spanish Company liabilities. It is also envisaged that the tortious classification may affect accomplices (i.e., persons that, while conducting with gross negligence or willful misconduct, have cooperated in the actions that might have led to the classification of the insolvency proceedings as tortious —even a shareholder of the insolvent entity may be considered as accomplice if it is understood that such shareholder acted in such a way—).

The insolvency court will determine the liquidation rules and, in collaboration with the insolvency administrator, shall determine the final liabilities and assets lists and any information needed for facilitating the disposal of the insolvent entity’s assets. The amounts retrieved from such disposal shall be distributed between the creditors in accordance with the ranking priority assigned to each of them and with the liquidation rules determined by the insolvency court.

Secured creditor enforcement procedures

Secured creditors are generally prohibited from appropriating collateral without the supervision of either the court or a notary public.
The enforcement action that a creditor can take will depend on the type of asset and security held.
A secured creditor may adopt either in or out of court proceedings to effect a sale of a property to repay a secured debt. In the former, the court supervises the sale of the asset, and in the latter the sale is supervised by a notary public. In both cases, the property is auctioned, and if no sale is achieved, the creditor may take control of the asset in exchange for 50-70% of the appraisal value of the asset. However, the holder of a real estate mortgage may not initiate extrajudicial proceedings without an express right in the mortgage deed. As a general rule, the average time from the occurrence of an event of default to obtaining the property through in court proceedings is between 6 and 18 months but could be less in the case of the out-of-court proceedings.

Contact: Juan Gelabert

Law stated as of 11 October 2023

_{[1] For that purpose, the creditor must provide enough evidence that one of the aforementioned revealing facts occurs.}

Företagsrekonstruktion

Company reorganisation

On 1 August 2022, the new Swedish Company Reorganisation Act (Sw. lag (2022:964) om företagsrekonstruktion) (the "Company Reorganisation Act") entered into force.
Company reorganisation shall only be opened by the court if

it can be shown that the debtor is unable to pay its debts that are due or
that this is likely to occur shortly, or that the debtor is in some other respect suffering financial distress that includes a risk of insolvency, and
there is good reason to assume that the viability of the business can be
secured through the reorganisation.

The reorganisation initially lasts for three months and may be extended by three-month intervals up to fifteen months.
If the court approves the application, the court will appoint an administrator (Sw. rekonstruktör). The management and the directors remain in charge of the ordinary day-to-day business. The concept of debtor in possession ("DIP") is also recognised, meaning that the debtor remains in possession of its property. However, the debtor must comply with the administrator's instructions regarding the conduct of the business, and certain decisions are vested with the administrator. In particular, the administrator must approve the completion or securing of obligations that were incurred prior to the start of the restructuring, transactions outside of the ordinary day-to-day business and disposals of or encumbrances over assets that are of significant importance to the debtor’s business.
There is a moratorium on actions taken by unsecured creditors during the reorganisation, but secured creditors may, under certain circumstances, with the consent of the administrator, take actions to protect their claims during the reorganisation.
The debtor has the right to terminate long-term contracts and to decide whether an agreement entered into before the reorganisation must be performed.
Prohibition of ipso facto clauses (i.e. contractual conditions that grant a party the right to cancel a contract because the other party applies for or commences a company restructuring procedure).

Planförhandling

Restructuring plan procedure

Initiated by either the debtor or the administrator, by applying to the district court. The application must contain a proposed restructuring plan.
A restructuring plan meeting must be held within 3–5 weeks of the court's decision on a restructuring plan procedure, where the affected parties must vote on the restructuring plan in groups.
The restructuring plan is approved if in each group a minimum of two-thirds of the voters have voted in favour of the restructuring plan.
If the restructuring plan has been approved, the court must examine whether the plan is to be adopted.
Notwithstanding that a restructuring plan has not been approved the court may adopt the restructuring plan by way of a cross-class cramdown.

Rekonstruktionsplan

Restructuring plan

Contains measures that are necessary to deal with the debtor's financial distress and to ensure that the business conducted by the debtor can be continued.
May include other measures other than a financial settlement. For example, the restructuring plan may require a change of the ownership, the governing board or the chief executive officer of the company.
May be pre-packaged and approved by the creditors in advance.
An adopted restructuring plan is binding on the debtor and all affected parties as well as on the lenders in a new financing agreement, including DIP financing.

Privat ackord

Private composition

A private arrangement proposed by a company or a partnership to reduce its debts.
An entirely voluntary procedure, which is not regulated by law. For example, there is no stay prohibiting secured creditor enforcement action; no time limits to comply with; no asset supervision or control (by the court or an insolvency practitioner).
All creditors must approve the composition.

Konkurs

Bankruptcy – legal entities

Initiated by either a creditor or the debtor (company or partnership) by filing a petition for bankruptcy with the competent local district court.
The applicant must prove that the company or partnership is insolvent (i.e. not only temporarily unable to pay its debts).
In practice, a bankruptcy petition submitted by the debtor is normally accepted by the court (i.e. the debtor is in such case presumed to be insolvent).
Large-scale bankruptcies are time-consuming and usually last for many years while bankruptcy proceedings for smaller companies often are completed within one year.
The district court appoints a bankruptcy administrator (Sw. konkursförvaltare), who will take charge of the company or partnership and its assets.
A creditor’s financial claim should be filed with the district court and determined in the bankruptcy proceedings.
A statutory moratorium is imposed on all creditors and, generally, only a creditor holding a perfected security over a debtor’s assets can continue to enforce its rights.
When the bankruptcy is finalised, the company or partnership ceases to exist.

Frivillig likvidation i kombination med ackord

Voluntary liquidation in combination with private composition

Initiated by the debtor (company or partnership).
Voluntary liquidations typically take between seven and twelve months.
The Swedish Companies Registration Office (Sw. Bolagsverket) ("SCRO") appoints a liquidator (Sw. likvidator) who will take charge of the company or partnership.
The liquidator is able to call for unidentified creditors for a minimum period of six months by publishing an announcement in the Swedish Official Gazette (Sw. Post – och Inrikes Tidningar) and ask unidentified creditors to submit their claims. During this period, creditors must submit proof of their claims (an unproven unidentified creditor’s claim is generally invalid).
There are no substantive tests for a voluntary liquidation and neither consent to nor approval of the procedure is required.
There is no stay prohibiting secured creditor action.
When the voluntary liquidation is finalised, the company or partnership ceases to exist.

Tvångslikvidation

Compulsory liquidation

Initiated by the SCRO, which appoints a liquidator.
The liquidator can also be appointed by a court order if the company (i) has not registered its board, managing director or auditor; or (ii) has not provided the SCRO with its annual audited report.
The liquidator will take charge of the company.
The liquidation typically takes between seven and twelve months.
There is no stay prohibiting secured creditor action.
When the compulsory liquidation is finalised, the company ceases to exist.
Compulsory liquidations also apply to partnerships.

Skuldsanering

Debt rescheduling – natural persons

The Swedish Enforcement Authority (Sw. Kronofogdemyndigheten) ("SEA") decides if debt rescheduling should be initiated and, if so, the SEA will take charge of the procedure.
Creditor’s consent or approval of debt rescheduling is not required.
The debtor remains in control of their assets.
Claims by unidentified creditors are invited by public announcements and all debts are reduced.
Every unsecured creditor has an equal right to be paid. The SEA decides how much the debtor will pay each creditor. Secured creditors are not included in debt rescheduling and as such their security remains unaffected.
Debt rescheduling only applies to natural persons.

Personlig konkurs

Bankruptcy – natural persons

Initiated by either a creditor or the debtor by applying to the district court, which appoints a receiver.
Only a creditor holding a perfected security over a debtor’s assets can continue with bankruptcy enforcement proceedings.
The general rules of corporate insolvency apply to bankruptcy of natural persons.
The debtor may still be required to pay after the bankruptcy procedure has been finalised.

Secured creditor enforcement procedures

In the case of disputed claims, to enforce the payment of a loan or realise a security, an enforcement order must generally be obtained through the public courts or arbitration, as the claim itself is not enough.
Once the creditor has obtained an enforcement order and applied to the SEA or the bailiff, the borrower’s assets can be seized.
In the case of undisputed claims, there is a simplified bailiff procedure.

Recognition of foreign insolvency processes

EU Regulation on Insolvency Proceedings

The EU Regulation on Insolvency Proceedings ("Regulation") applies to all EU Member States, except Denmark, and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

Third country insolvency processes (i.e. commenced outside the EU) are not automatically recognised under Swedish law. As a consequence, third country insolvency processes do not preclude the opening of insolvency proceedings in Sweden and assets located in Sweden are not automatically ring-fenced by such proceedings. Parallel insolvency proceedings and special enforcement measures may thus be commenced in Sweden. At the same time, a foreign bankruptcy estate, which has legal capacity under a foreign jurisdiction, is considered to have legal capacity in Sweden. A foreign bankruptcy estate may thus enter into agreements in Sweden and act as a party in legal proceedings, including insolvency and enforcement processes.

Contact: Erik Selander and Jonas Premfors

Law stated as of 11 October 2023

Scheme of arrangement

Derives from company as opposed to insolvency legislation, and can be used for the solvent reorganisation of a group structure as well as insolvent restructuring.
Can be proposed by both a company and a limited liability partnership (either by the directors or members or by an administrator or liquidator if the entity is in an insolvency process). The procedure is broadly the same for each.
The court convenes meetings of members and creditors to consider a proposed compromise that must be approved by a majority in number and at least 75% in value of each class of creditors and members voting on the scheme.
A scheme may propose only to affect the rights of some or all of the debtor’s creditors. As long as the statutory voting thresholds are met, schemes can compromise or write off the claims of secured creditors without their consent.
Increasingly being used by both UK-based and overseas incorporated companies (that need to establish a sufficient connection with the English jurisdiction in order to implement a scheme of arrangement) in the leveraged buy-out market to write off or exchange debt for equity.
Schemes do not automatically provide a stay against actions and proceedings. However, in rare cases, the court has granted a stay to enable a scheme to be pursued. In other cases, the scheme may be preceded by a standstill agreement and/or a lock-up agreement where (usually in exchange for a fee) creditors will commit, in advance, to vote to approve the proposed scheme. Where the protection of a stay is imperative, the company may first enter administration (which brings an automatic stay) and the scheme would then be proposed by the administrators.

Restructuring plan

A new process introduced in 2020, also deriving from company legislation, this court supervised restructuring process is largely modelled on schemes of arrangement but with the addition of a cross-class cram-down. The restructuring plan can be used with or without the protection of the new moratorium process introduced at the same time.
The restructuring plan process can be used only by companies and limited liability partnerships which have encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern. The process is commenced by an application to Court which can be made by the company, its debtors, creditors, shareholders, administrators or liquidators.
Like the scheme of arrangement, a restructuring plan may affect the rights of some or all of the company’s creditors. It can also compromise or write off secured debt.
In order to implement a restructuring plan, a proposal must be made to the relevant creditors and/or members. Meetings of the creditors or members are then convened by the Court in classes, at which the proposal must be approved by 75% in value of creditors or members in each class who vote, subject to the cross-class cram-down mechanic. Following the voting, a further Court hearing is held at which the Court considers whether to sanction the plan and whether to apply the cross-class cram-down if applicable. The cross-class cram-down allows a class or classes of creditors or members which do not vote in favour of the plan to be bound if the Court is satisfied that:
- at least one class of creditors, or members, who would receive a payment, or have a genuine economic interest in the company, have voted in favour; and
- the dissenting creditors, or members, would not be any worse off under the plan than they would have been in the event of whatever the court considers would be most likely to occur in relation to the company should the plan be rejected;
- and the Court is prepared to sanction the plan.

Administration

One of the main rescue procedures available for insolvent companies and all types of insolvent partnership in England and Wales, designed to provide breathing space so that the debtor can be rescued or reorganised or, failing that, its assets realised for the benefit of its creditors.
An administrator can be appointed either by court order on application of the debtor’s directors/members or any creditor or administration may be commenced more swiftly without a court hearing in some circumstances by the filing of documents at court by the insolvent debtor itself, its directors/members or a creditor who is a qualifying floating charge holder.
The debtor’s management is replaced by an administrator who must be an independent, licensed insolvency practitioner. An administrator has full powers to run and manage the company or partnership, including a power to borrow money and grant security over the debtor’s assets. Regardless of who appointed him, the administrator owes their duties to the debtor’s creditors as a whole.
On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset. However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder.
Administration provides for a stay on all action against the debtor including litigation against the debtor and the enforcement of security and can be used to facilitate (controversially in some cases) pre-packaged sales of the company’s or partnership’s business. Despite the stay, an administrator has no power to sell assets which are subject to fixed charge security without first obtaining the permission of the charge holder or the court.
Administration lasts for one year but can be extended initially with creditors’ consent for a further year and afterwards for a period fixed by order of the court. The moratorium on creditor action remains in place for the duration of the process.

Compulsory liquidation/Compulsory winding up/Winding up by the court

A terminal insolvency process commenced by court order against a company or all types of partnerships in England and Wales, usually at the instigation of an unpaid creditor.
It is commenced by petition filed by the entity itself, its directors / members, one or more creditors or insolvency office holders. The presentation of a petition does not operate as an automatic stay of proceedings against the debtor. However, dispositions made by a debtor after the presentation of a petition will be void if a winding-up order is subsequently made.
If a winding-up order is made, a licensed insolvency practitioner is appointed to act as liquidator and the powers of the company’s directors/members of a limited liability partnership/partners cease. It is unusual for a company or partnership to trade in liquidation. Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors.
Proceeds are distributed, broadly, first to the secured creditors and then the unsecured creditors receive the remainder according to the principle of pari passu (in proportion to the amount of debt owed to them when compared with the total amount of unsecured debt of the company). Once all distributions have been made, the debtor will be dissolved.
Compulsory liquidation brings a stay on court proceedings against the debtor, but it does not prevent secured creditors from enforcing their security.
On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset. However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder. A liquidator owes their duties to the creditors of the company as a whole and must act in the interests of all creditors.

Creditors voluntary liquidation/ Creditors voluntary winding up

A terminal process commenced by resolution of the company’s shareholders or for limited liability partnerships by a decision of its members.
A licensed insolvency practitioner is appointed to act as liquidator and powers of the directors/members cease. It is unusual for a company or limited liability partnership to trade in liquidation. Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors. The liquidator owes their duty to the creditors as a whole.
Once all distributions have been made, the company or limited liability partnership will be dissolved.
There is no automatic stay on actions against the company or limited liability partnership but on application the court may grant such a stay either generally or in relation to specific claims. Such court orders are rare and there is usually nothing to prevent secured creditors enforcing their security.

Moratorium

A director led process also introduced in 2020 which leaves the directors in situ to trade the company (or the members to trade a limited liability partnership) with an insolvency practitioner acting in the role of "monitor" overseeing the company’s affairs. The monitor supervises the moratorium and must be, and remain of, the view that a rescue of the company will be possible. The directors therefore remain in control of the company and the aim is to allow companies time to formulate a turnaround plan with a breathing space from creditor action.
Companies are eligible to use the moratorium if the directors state that the company is, or is likely to become, unable to pay its debts and the monitor is of the view that it is likely a moratorium would result in the rescue of the company as a going concern. Companies already subject to an insolvency procedure, and those that have been in a moratorium, CVA or administration in the previous 12 months are excluded from using the process. Certain companies, including insurance companies and banks, are automatically excluded.
There are two ways a company may enter moratorium:
- by the directors filing relevant documents at court (the out-of-court process); or
- by the directors making an application to court (the in-court process).

The in-court process is only required where there is an outstanding winding up petition or the company is incorporated overseas.

The initial period for the moratorium will be 20 business days but this is capable of being extended or terminated early. An initial 20 business day extension is available without creditor/Court consent, so many moratoria may last 40 business days. Further extensions are available with the consent of creditors or the permission of the court.
During the moratorium period:
- the day to day running of the business of the debtor company remains with the directors but under the supervision of a monitor (an insolvency practitioner) and with the monitor’s consent required before the directors can undertake certain transactions;
- creditors and lenders will not be able to take enforcement action against the debtor company (including enforcement of security) for pre moratorium debts; and
- landlords cannot exercise rights of forfeiture.
The company must continue to pay certain of its debts during the moratorium. These include amounts due for new supplies made during the moratorium, rent in respect of a period during the moratorium, wages and salary, and amounts due under financial contracts, including loan agreements. These amounts must continue to be paid or the moratorium will have to end. As amounts due to lenders during the moratorium are among those which must be paid lenders have a large measure of control over the moratorium and it is expected that moratoria will generally be instigated with lender support/consent.
Certain debts, largely those incurred during the moratorium, have priority status in an insolvency process which follows within 12 weeks of the end of the moratorium.

Company voluntary arrangement (CVA)

Allows a solvent or insolvent company in England or Wales to propose a compromise with its creditors which, if accepted by 75% of creditors who participate in the decision whether or not to approve the proposal, is binding on all of the debtor’s unsecured creditors (unless more than 50% of unconnected creditors vote against the proposal). It is therefore commonly used to cramdown dissenting creditors.
A CVA cannot affect the rights of secured or preferential creditors without their consent.
Unless it is proposed by a debtor that is already in administration, there is no automatic stay of actions against the debtor. The directors may apply for a 28-day moratorium in the case of a "small" company (one of the criteria being that it has fewer than 50 employees). This will stay creditors’ actions for the period during which the CVA proposals are circulated among creditors and until creditors decide whether to accept or reject a proposal. During this period, no steps may be taken by secured creditors to trigger a default nor to enforce security.
A CVA can be challenged within a 28-day period by dissenting creditors on the basis that it is unfairly prejudicial or that there has been a material irregularity.

Partnership voluntary arrangement (PVA)

Allows all forms of partnership in England and Wales to propose a compromise with their creditors that, if accepted by 75% of creditors who participate in the decision whether or not to approve the proposal, is binding on all of the partnership’s unsecured creditors.
A PVA cannot affect the rights of secured creditors without their consent.

Individual voluntary arrangement (IVA)

An IVA is a composition in satisfaction of a natural person’s debts or a scheme of arrangement of their affairs in England or Wales.
Usually proposed by debtors to avoid bankruptcy. If the debtor requires protection from their unsecured creditors, they can first apply for an interim order that stays actions of unsecured creditors during the period when proposals for the IVA are circulated and until creditors have decided whether to accept or reject the debtor’s proposals.
An IVA cannot affect the rights of secured creditors without their consent.
The proposal takes effect if approved by 75% in value of creditors who elect to participate in the decision (unless more than 50% (in total value) of creditors who are not associated with the debtor vote against the proposal).
The agreement sets out how creditors will be paid and normally provides for the debtor to make monthly contributions from their income for three to five years. At the end of an IVA, a debtor will be released from their remaining unsecured debts in accordance with the terms of the IVA. If a debtor fails to adhere to the payment plan, a creditor may petition for the debtor’s bankruptcy.

County Court Administration Order/Composition Order

If a debtor owes less than GBP5,000 to at least two creditors pursuant to a county court or High Court judgment, they can apply to court for an administration order. The court then decides how much of the debt the debtor must repay and sets the level and duration of monthly repayments. The court will collect one monthly payment from the debtor and divide this payment between their creditors.
Creditors listed on the administration order cannot take any further action against the debtor without the court’s permission.

Debt Management Plan

A non-formal and unregulated way for a debtor to deal with their debts.
There is no court involvement and no supervision by a licensed insolvency practitioner. They tend to be a written agreement between a debtor and their creditors (or some of them) in relation to the debts.
When the plan is in place, there is no moratorium and there is nothing (beyond the contractual provisions) to stop a creditor from issuing proceedings against the debtor.

Debt relief order (DRO)

A procedure available to financially distressed natural persons in England and Wales with very few assets and low income.
The maximum amount of debt that can be covered by such an order is GBP20,000. The maximum value of a person’s assets in order to be eligible for a debt relief order is GBP1,000 and they must have a disposable monthly income of less than GBP50.
A debt relief order provides a debtor with a year’s protection from creditors taking steps to enforce their debts without court permission. At the end of a year, the debtor is discharged in respect of those debts.
A DRO does not lead to realisation or distribution of assets.

Breathing space

Introduced in May 2021 to incentivise natural persons to access debt advice, the breathing space moratorium pauses enforcement action and freezes charges, fees and certain interest in relation to certain unsecured debts. The policy aim of the breathing space moratorium is to reduce stress caused by problem debt and to allow individuals to reach sustainable debt solutions.
Breathing space moratoria can only be commenced by seeking advice from a debt adviser. The adviser must conclude that the debtor satisfies the eligibility criteria, is unable to pay some of their debt as it falls due and that a moratorium would be appropriate. If the adviser reaches such a conclusion, they notify the Insolvency Service to enter the breathing space moratorium on the relevant register and to notify creditors.
To be eligible, the debtor must:
- be an individual;
- owe a qualifying debt to a creditor;
- live or usually reside in England or Wales;
- not have a debt relief order, an individual voluntary arrangement, an interim order, or be an undischarged bankrupt at the time they apply; and
- not already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply.
The breathing space moratorium is not a complete payment holiday and the debtor is under an obligation to maintain certain ongoing liabilities such as mortgage, taxes and utility bills as they fall due.
The breathing space moratorium lasts for a maximum of 60 days, but can be cancelled earlier by the debt advice provider if (i) the debtor fails to comply with their obligations; (ii) a debt solution has been implemented in respect of the relevant debts; or (iii) the provider has not been able to contact the debtor.
In addition to the standard breathing space moratorium, a mental health crisis breathing space is also available in certain circumstances.

Bankruptcy

In England and Wales, when a natural person is unable to pay their debts, one or more of their creditors (owed GBP5,000 or more) may petition the court for a bankruptcy order to be made against him. Alternatively, the debtor may himself apply for such an order, usually online. The same procedure applies regardless of whether the debtor was in business or not.
Statute provides that, on a bankruptcy order being made, almost all of the debtor’s assets vest automatically in either the Official Receiver or a Trustee in Bankruptcy. Their role is to realise the debtor’s assets for distribution, pari passu, among their creditors. The tools of the debtor’s trade and items needed to fulfil their basic domestic needs are excluded from enforcement action.
Creditors are obliged to accept their distribution and, once discharged from bankruptcy, a debtor has no further liability for their bankruptcy debts.
The Official Receiver/Trustee in Bankruptcy will continue to manage the debtor’s bankrupt estate even after they have been discharged from bankruptcy (usually a year after the bankruptcy order is made).
A bankruptcy order does not prevent secured creditors from enforcing security. A secured creditor may also prove in the bankruptcy for any shortfall.

Administrative receivership

An administrative receiver may be appointed out of court to a company or an LLP in England and Wales by a creditor who holds floating charge security over the whole or substantially the whole of the company’s assets created by a charge that pre-dates 15 September 2003 (and in other very limited circumstances).
The directors’ powers cease on the appointment of an administrative receiver.
An administrative receiver must be a licensed insolvency practitioner. The administrative receiver’s role is to realise the secured assets in order to repay the debt due to the secured creditor. An administrative receiver has the power to run and dispose of the business of any company over which they may be appointed. An administrative receiver can sell assets by private sale. The administrative receiver owes their duties primarily to the secured creditor who appointed them.
Following changes in the law, administrative receivership is now very rare.

Receiver/LPA Receiver/Fixed Charge Receiver

A secured creditor who holds fixed charge security over assets owned by a company, all forms of partnership or a natural person in England or Wales can appoint a receiver out of court provided that the charge has become enforceable.
The receiver’s powers are limited to the assets over which they have been appointed. They will usually either sell them to repay the debt due to the secured creditor (private sale is permissible) or receive income from income-generating assets, similarly to discharge the debt due to the secured creditor. Any surplus after the receiver’s fees have been paid and the secured debt discharged will be returned to the debtor.
The receiver’s primary duty is to the appointing charge holder, but they owe a residual duty to the other creditors and the debtor. There is no requirement for a receiver to be a licensed insolvency practitioner.

Mortgagee possession/ Chargeholder’s possession

A creditor who holds security over the assets of a company, all forms of partnership or a natural person in England or Wales may take possession of the secured asset in order to sell or lease it to repay sums due.
A court order is required before taking possession of a natural person’s home, but otherwise court proceedings are not essential. Instead, the secured creditor may simply take physical possession of the charged property.

EU Directive Implementation

The EU Directive on Restructuring and Insolvency¹ requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

The UK left the EU on 31 January 2020 and therefore it is not required to implement the Directive. However, the UK made several changes to its insolvency law in the course of 2020 many of which mirror key provisions in the Directive. For example, directors faced with financial distress can now weigh up the new restructuring plan, or the existing ‘tried and tested’ scheme of arrangement. The restructuring plan also introduced a cross-class cram-down tool to the UK: the ability for a restructuring plan to bind one or more dissenting classes of creditors or shareholders.

Recognition of foreign insolvency processes

Many restructuring matters will involve more than one jurisdiction. For example, a company registered in England and being wound up under the Insolvency Act 1986 may have branches, subsidiaries or real estate assets located in overseas jurisdictions. When dealing with such cross-border matters, two key issues which often arise for insolvency practitioners are recognition and assistance.

There are various legislative tools within the UK which facilitate cross-border recognition, for example:

The UNCITRAL Model Law on cross-border insolvency was enacted in the UK by the Cross Border Insolvency Regulations 2006. This is a set of model terms for UN Member States that provide a process for foreign office holders to apply to court for recognition and assistance;
Section 426 of the Insolvency Act 1986 provides that a court in a country designated by the Secretary of State (including the Channel Islands, the Isle of Man and most commonwealth countries) can apply to the UK courts for assistance in insolvency proceedings. In providing such assistance, the UK court has a wide discretion and can apply local insolvency law or the relevant foreign insolvency law. The types of assistance the UK court might give under section 426 include an injunctive or administration order; and
The EU Regulation on Insolvency Proceedings (Recast Insolvency Regulation) applies to proceedings opened in the UK on or after 26 June 2017 and before 11pm on 31 December 2020 (the end of the Brexit transition period). Whilst the Recast Insolvency Regulation will not be relevant to new UK insolvency proceedings, it is relevant to older UK proceedings and to proceedings in EU Member States. Where the Recast Insolvency Regulation does apply, it requires that certain collective insolvency proceedings occurring in one EU Member State are recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Where there is no legislative tool available to allow recognition of insolvency proceedings or assistance of insolvency office holders, common law countries may still provide assistance based on common law rules.

*Broadly similar insolvency provisions to those in England and Wales apply in Northern Ireland.

Contact: Robert Russell and Chris Parker

Law stated as of 1 October 2022

_{[1] - Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.}

Scheme of arrangement

Derives from company as opposed to insolvency legislation and can be used for the solvent reorganisation of a group structure as well as insolvent restructuring.
Can be proposed by both a company and a limited liability partnership (either by the directors or members or by an administrator or liquidator if the entity is in an insolvency process). The procedure is broadly the same for each.
The court convenes meetings of members and creditors to consider a proposed compromise that must be approved by a majority in number and at least 75% in value of each class of creditors and members voting on the scheme.If the relevant members and creditors approve the scheme, the court will decide at a further hearing whether the scheme is fair and should be sanctioned.
A scheme may propose to affect the rights of some or all of the debtor’s creditors. As long as the statutory voting thresholds are met, schemes can compromise or write off the claims of dissenting creditors in a class, including secured creditors without their consent.
Increasingly being used by both UK-based and overseas incorporated companies (which need to establish a sufficient connection with the jurisdiction in order to implement a scheme of arrangement) in the leveraged buy-out market to write off or exchange debt for equity.
Schemes do not automatically provide a stay against actions and proceedings. However, in rare cases, the court has granted a stay to enable a scheme to be pursued. In other cases, the scheme may be preceded by a standstill agreement and/or a lock-up agreement where (usually in exchange for a fee) creditors will commit in advance to vote to approve the proposed scheme.
Where the protection of a stay is imperative, the company may first enter administration (which brings an automatic stay) and the scheme would then be proposed by the administrators.

Restructuring plan

A new process introduced in 2020, also deriving from company legislation, this court supervised restructuring process is largely modelled on schemes of arrangement but with the addition of a financial difficulties requirement and the addition of a cross-class cram-down. The restructuring plan can be used with or without the protection of the new moratorium process introduced at the same time.
The restructuring plan process can be used only by companies and limited liability partnerships which have encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern. The process is commenced by an application to Court which can be made by the company, its debtors, creditors, shareholders, administrators or liquidators.
Like the scheme of arrangement, a restructuring plan may affect the rights of some or all of the company’s creditors. It can also compromise or write off secured debt.
In order to implement a restructuring plan, a proposal must be made by the company (or its creditors or shareholders) to the relevant creditors and/or members. Meetings of the creditors or members are then convened by the Court in classes, at which the proposal must be approved by 75% in value of creditors or members in each class who vote(unlike in a scheme there is no numerosity test), subject to the cross-class cram-down mechanic. A class of creditors or members can be excluded from voting if none of the creditors or members of that class have a genuine economic interest in the company.
Following the voting, a further Court hearing is held at which the Court considers whether to sanction the plan and whether to apply the cross-class cram-down if applicable. The cross-class cram-down allows a class or classes of creditors or members which do not vote in favour of the plan to be bound if the Court is satisfied that:
- at least one class of creditors, or members, who would receive a payment, or have a genuine economic interest in the company, have voted in favour; and
- the dissenting creditors, or members, would not be any worse off under the plan than they would have been in the event of whatever the court considers would be most likely to occur in relation to the company should the plan be rejected;
and the Court is prepared to sanction the plan.
The assessment of genuine economic interest, along with the cross-class cram-down, means valuation is often key.
The restructuring plan will also be available to non-Scottish companies as it retains the “sufficient connection” test in terms of jurisdiction which provides a relatively low bar of connectivity.

Administration

One of the main rescue procedures available for insolvent companies and limited liability partnerships, designed to provide breathing space so that the debtor can be rescued or reorganised or, failing that, its assets realised for the benefit of its creditors.
An administrator can be appointed either by court order on application of the debtor’s directors/members or any creditor or administration may be commenced more swiftly without a court hearing in some circumstances by the filing of documents at court by the insolvent debtor itself, its directors/members or a creditor who is a qualifying floating charge holder (being a charge over all or substantially the whole of the property and undertaking of the chargor).
The debtor’s management is replaced by an administrator who must be an independent, licensed insolvency practitioner.
An administrator has full powers to run and manage the company or partnership, including a power to borrow money and grant security over the debtor’s assets. Regardless of who appointed the administrator, the administrator owes their duties to the debtor’s creditors as a whole.
On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset.
However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors (which from 1 December 2020 includes HMRC in respect of VAT and PAYE) and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder.
Administration provides for a stay on all action against the debtor (including litigation against the debtor and the enforcement of security) and can be used to facilitate (controversially in some cases) pre-packaged sales of the company’s or partnership’s business. Despite the stay, an administrator has no power to sell assets which are subject to fixed charge security without first obtaining the permission of the charge holder or the court.
Administration lasts for one year but can be extended initially with creditors’ consent for a further year and afterwards for a period fixed by order of the court. The moratorium on creditor action remains in place for the duration of the process.

Compulsory liquidation/Compulsory winding up/Winding up by the court

A terminal insolvency process commenced by court order against a company or limited liability partnership, usually at the instigation of an unpaid creditor.
It is commenced by petition filed by the entity itself, its directors/members, one or more creditors or insolvency office holders.If a qualifying floating charge holder appoints an administrator prior to the winding-up hearing it automatically results in the dismissal of the winding-up petition.
The presentation of a petition does not operate as an automatic stay of proceedings against the debtor. However, dispositions made by a debtor after the presentation of a petition will be void if a winding-up order is subsequently made.
If a winding-up order is made, a licensed insolvency practitioner is appointed to act as liquidator and the powers of the company’s directors/members or the partners of a limited liability partnership cease. It is unusual for a company or LLP to trade in liquidation.
Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors.
Proceeds are distributed, broadly, first to the secured creditors and then the unsecured creditors receive the remainder according to the principle of pari passu (in proportion to the amount of debt owed to them when compared with the total amount of unsecured debt of the company). Once all distributions have been made, the debtor will be dissolved.
Compulsory liquidation brings a stay on court proceedings against the debtor, but it does not prevent secured creditors from enforcing their security.
On enforcement, the only deduction to be made from fixed charge realisations is the cost of realising the asset. However, legislation provides that the costs and expenses of the insolvency officeholder, sums due to preferential creditors and also a percentage of realisations that are compulsorily ring-fenced for unsecured creditors must be paid in priority to any sums due to a floating charge holder. A liquidator owes their duties to the creditors of the company as a whole and must act in the interests of all creditors.

Creditors voluntary liquidation/Creditors voluntary winding up

A terminal process commenced by resolution of the company’s shareholders or, for limited liability partnerships, by a decision of its members.
A licensed insolvency practitioner is appointed to act as liquidator and the powers of directors/ members cease. It is unusual for a company or limited liability partnership to trade in liquidation. Instead, the liquidator’s role is to realise the debtor’s assets and distribute the proceeds to creditors. The liquidator owes their duty to the creditors as a whole.
Once all distributions have been made, the company or limited liability partnership will be dissolved.
There is no automatic stay on actions against the company or limited liability partnership but on application the court may grant such a stay either generally or in relation to specific claims. Such court orders are rare and there is usually nothing to prevent secured creditors enforcing their security.

Moratorium

A director led process also introduced in 2020 which leaves the directors in situ to trade the company (or the members to trade a limited liability partnership) with an insolvency practitioner acting in the role of "monitor" overseeing the company’s affairs. The monitor supervises the moratorium and must be, and remain of, the view that a rescue of the company will be possible.
The directors therefore remain in control of the company and the aim is to allow companies time to formulate a turnaround plan with a breathing space from creditor action.
Companies are eligible to use the moratorium if the directors state that the company is, or is likely to become, unable to pay its debts and the monitor is of the view that it is likely a moratorium would result in the rescue of the company as a going concern.
Companies already subject to an insolvency procedure, and those that have been in a moratorium, CVA or administration in the previous 12 months are excluded from using the process. Certain companies, including insurance companies and banks, are automatically excluded.
There are two ways a company may enter moratorium:
- by the directors filing relevant documents at court (the out-of-court process); or
- by the directors making an application to court (the in-court process).
The in-court process is only required where there is an outstanding winding up petition or the company is incorporated overseas.
The initial period for the moratorium will be 20 business days but this is capable of being extended or terminated early. An initial 20 business day extension is available without creditor/Court consent, so many moratoria may last 40 business days.
Further extensions are available with the consent of creditors or the permission of the court.
During the moratorium period:
- the day to day running of the business of the debtor company remains with the directors but under the supervision of a monitor (an insolvency practitioner) and with the monitor’s consent required before the directors can undertake certain transactions;
- creditors and lenders will not be able to take enforcement action against the debtor company (including enforcement of security) for pre moratorium debts; and
- landlords cannot exercise rights of forfeiture.
The company must continue to pay certain of its debts during the moratorium. These include amounts due for new supplies made during the moratorium, rent in respect of a period during the moratorium, wages and salary, and amounts due under financial contracts, including loan agreements. These amounts must continue to be paid or the moratorium will have to end.
As amounts due to lenders during the moratorium are among those which must be paid lenders have a large measure of control over the moratorium and it is expected that moratoria will generally be instigated with lender support/consent.
Certain debts, largely those incurred during the moratorium, have priority status in an insolvency process which follows within 12 weeks of the end of the moratorium.

Company voluntary arrangement (CVA)

Allows a solvent or insolvent company or limited liability partnership in Scotland to propose a compromise with its creditors which, if accepted by 75% of creditors who participate in the decision whether or not to approve the proposal, is binding on all of the debtor’s unsecured creditors (unless more than 50% of unconnected creditors vote against the proposal). It is therefore commonly used to cram-down dissenting creditors.
A CVA cannot affect the rights of secured or preferential creditors without their consent. Secured creditors can vote in respect of the unsecured balance of their claim.
Unless it is proposed by a debtor that is already in administration there is not automatic stay of actions against the debtor.
The directors may apply for a 28 day moratorium in the case of a „small“ company (one of the criteria being that it has fewer than 50 employees).This will stay creditors’ actions for the period during which the CVA proposals are circulated among creditors and until creditors decide whether to accept or reject a proposal. During this period, no steps may be taken by secured creditors to trigger a default nor to enforce security.
A CVA can be challenged within a 28-day period by dissenting creditors on the basis that it is unfairly prejudicial or that there has been a material irregularity.

Protected Trust Deeds

This is a voluntary arrangement that a debtor (being a natural person, general or limited partnership) reaches with their creditors to compromise their debts.
The arrangement takes the form of a trust deed granted in favour of a Trustee who will be a registered insolvency practitioner.
The trust deed effectively creates a voluntary form of sequestration with the same assets being transferred to the Trustee as would vest on sequestration, the Trustee being given the same powers and the Trustee being directed to distribute funds in the same way. The debtor will usually agree to pay a fixed contribution from income in addition.
There is a statutory process that must be followed (circulars to creditors with an opportunity to object) for the trust deed to acquire "protected status" and thus make the arrangement binding on creditors and protect the debtor from enforcement action.
Objections are required from one-third of creditors in value to prevent the trust deed becoming protected.
On 1 October 2021, the Accountant in Bankruptcy launched the "PTD Protocol" which sets out non-statutory changes to the Protected Trust Deed operational processes.

Debt Payment Programme under the Debt Arrangement Scheme

A statutory scheme that allows natural persons, general or limited partnerships to manage and repay their debts. It is a debt management tool rather than an insolvency procedure and does not involve any compromise of debt. It is, however, possible to freeze interest, fees and charges on debts and to extend the period over which debts are repaid.
An application for a Debt Payment Programme is made through an Approved Money Adviser. Creditors have the opportunity to object but objections may be overridden by the Accountant in Bankruptcy as the DAS Administrator if it is determined that it would be fair and reasonable to allow the Debt Payment Programme to proceed.

Sequestration

When a natural person is unable to pay their debts, one or more of their creditors may petition the court for an award of sequestration to be made against him. Alternatively, the debtor may himself apply to the Accountant in Bankruptcy for their own sequestration. The same procedure applies regardless of whether the debtor was in business or not.
Statute provides that almost all of the debtor’s assets vest automatically in their Trustee in Sequestration. The Trustee continues to manage the debtor’s bankrupt estate even after the debtor has been discharged from sequestration (usually a year after the award of sequestration is made).
An award of sequestration does not prevent secured creditors from enforcing security.
The same terms apply to general and limited partnerships.

Moratorium on Diligence

Individuals, partnerships (and some other types of businesses) can invoke a "moratorium on diligence".
The moratorium lasts for a period of 6 months during which the debtor is protected from creditor enforcement.
An application for a moratorium is made to the Accountant in Bankruptcy either directly by the individual (or the eligible entities) or via a Money Advisor.
If a moratorium is granted then it will appear on the Register of Insolvencies and on the Debt Arrangement Scheme (DAS) register – a register which is publicly accessible.

Receivership

A receiver may be appointed out of court to a company by a creditor who holds floating charge security over the whole or substantially the whole of the company’s assets.
The directors’ powers cease on their appointment.
The receiver’s role is to realise the secured assets in order to repay the debt due to the secured creditor. A receiver can sell assets by private sale. The receiver owes their duties primarily to the secured creditor who appointed him.
Following changes in the law, receivership is now very rare.

Enforcement of a standard security

The process for enforcing a standard security is set out in statute. It must be strictly adhered to so as to prevent or limit the possibility of a challenge being raised. The holder of a standard security may exercise the rights contained within the security document or statute as appropriate where the debtor is in default. Such rights may be: to sell the secured property; to carry out necessary repairs; to enter into possession and recover rents; if in possession, to let; or to apply for a decree of foreclosure.
The secured creditor may only enter into possession and sell the secured property in the case of a financial breach where a calling up notice is issued.

EU Directive Implementation

Notable features required to be included in Member States’ national laws include:

An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
An ability to cram down dissenting classes of creditors.
Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

The restructuring plan also introduced a cross-class cram-down tool to the UK: the ability for a restructuring plan to bind one or more dissenting classes of creditors or shareholders.

Recognition of foreign insolvency processes

Many restructuring matters will involve more than one jurisdiction. For example, a company registered in Scotland and being wound up under the Insolvency Act 1986 may have branches, subsidiaries or real estate assets located in overseas jurisdictions. When dealing with such cross-border matters, two key issues which often arise for insolvency practitioners are recognition and assistance.

There are various legislative tools within the UK which facilitate cross-border recognition, for example:

The UNCITRAL Model Law on cross-border insolvency was enacted in the UK by the Cross Border Insolvency Regulations 2006. This is a set of model terms for UN Member States that provide a process for foreign office holders to apply to court for recognition and assistance;
Section 426 of the Insolvency Act 1986 provides that a court in a country designated by the Secretary of State (including the Channel Islands, the Isle of Man and most commonwealth countries) can apply to the UK courts for assistance in insolvency proceedings. In providing such assistance, the UK court has a wide discretion and can apply local insolvency law or the relevant foreign insolvency law. The types of assistance the UK court might give under section 426 include an injunctive or administration order; and
The EU Regulation on Insolvency Proceedings ("Recast Insolvency Regulation") applies to proceedings opened in the UK on or after 26 June 2017 and before 11pm on 31 December 2020 (the end of the Brexit transition period). Whilst the Recast Insolvency Regulation will not be relevant to new UK insolvency proceedings, it is relevant to older UK proceedings and to proceedings in EU Member States. Where the Recast Insolvency Regulation does apply, it requires that certain collective insolvency proceedings occurring in one EU Member State are recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Contact: Sarah Letson

Law stated as of 1 September 2023

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Chris Parker

Dietmar Schulz

Dictionary of Insolvency Terms in EU Member States

Latvia

TIESISKĀS AIZSARDZĪBAS PROCESS

ĀRPUSTIESAS TIESISKĀS AIZSARDZĪBAS PROCESS

JURIDISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESS

PĀREJA NO JURIDISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESA UZ TIESISKĀS AIZSARDZĪBAS PROCESU

FIZISKĀS PERSONAS MAKSĀTNESPĒJAS PROCESS

FIZISKĀS PERSONAS ATBRĪVOŠANA NO PARĀDSAISTĪBĀM

HIPOTĒKA

KOMERCĶĪLA

EU Directive Implementation

Lithuania

Įmonės bankroto procesas ne teismo tvarka

Fizinio asmens bankroto procesas

Sutartinė hipoteka

Sutartinis įkeitimas

Priverstinis įkeitimas/hipoteka

Įkeitimas / hipoteka perduodant įkeistą turtą kreditoriui

EU Directive Implementation

Luxembourg

GESTION CONTRÔLÉE

CONCORDAT PRÉVENTIF DE FAILLITE

Conciliation

SURSIS DE PAIEMENT

ACCORD AMIABLE

Réorganisation judiciaire

SURSIS DES PAIEMENTS (RÉORGANISATION)

ACCORD COLLECTIF

Transfert par DÉCISION de justice

FAILLITE

LIQUIDATION JUDICIAIRE

Dissolution administrative sans liquidation

RÉGIME SPÉCIAL DE LIQUIDATION DU NOTARIAT

SURENDETTEMENT DES PARTICULIERS

LA RÉALISATION DES SÛRETÉS RÉGIES PAR LA LOI SUR LES CONTRATS DE GARANTIE FINANCIÈRE DU 5 AOÛT 2005

LA RÉALISATION DES HYPOTHÈQUES

EU Directive Implementation

Malta

Arrangament jew kompromess ma’ kredituri

Procedura biex kumpannija tirkupra

Xoljiment U STRALĊ KONSEGWENZJALI

Hatra ta’ amministratur provvizorju

Stralċ volontarju mill-membri jew mill-kredituri

Stralċ mill-qorti

Falliment f’każ ta’ kummerċjant

Xoljiment ta’ socjetajiet f’isem kollettiv u socjeta in akkomandita

Ipoteki talba ta’ bejgh ta’ immobli jew il-hwejjeg mobbli mghobbija b’ipoteka

Rahan ta’ mobbli Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Rahan ta’ mobbli Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Garanzija

Jedd Biex Izomm F’idejh Il-Hwejjeg

TRUSTS TA’ Garanzija

Fuq garanzija bi trasferiment ta’ titolu

Infurzar tad-drittijiet

EU Directive

Netherlands

Surseance van betaling

Faillissement

Wet Schuldsanering Natuurlijke Personen

Executeren van een hypotheekrecht

Executeren van een pandrecht op vorderingen

Executeren van een pandrecht op goederen

EU Directive Implementation

Poland

Postępowanie o zatwierdzenie układu

Przyspieszone postępowanie układowe

Postępowanie układowe

Postępowanie sanacyjne

Układ częściowy

Postępowanie upadłościowe

Przygotowana likwidacja / pre-pack

Upadłość osób fizycznych nieprowadzących działalności gospodarczej, upadłość konsumencka

Zasady ogólne

Egzekucja hipoteki

Egzekucja zastawu zwykłego

Egzekucja zastawu finansowego

Egzekucja zastawu rejestrowego

Implementacja Dyrektywy EU 2019/1023

EU Directive Implementation

Portugal

Ipoteki
talba ta’ bejgh ta’ immobli jew il-hwejjeg mobbli mghobbija b’ipoteka

Rahan ta’ mobbli
Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Rahan ta’ mobbli
Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti