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Investing in distressed assets in Belgium                      64   Remedies for creditors under the Russian bankruptcy law             74
LORENZ                                                              BAKER & MCKENZIE

Trans-European insolvency proceedings                          66   Enforcing foreign insolvency proceedings in Switzerland             76
KUBAS KOS GAERTNER                                                  SCHELLENBERG WITTMER

German Intervention to support distressed companies in              Schemes of arrangement and the IMO Car Wash decision –
current crisis                                                 68   valuation is key                                                    78
THE RÖLFSPARTER GROUP                                               SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP’S

Japanese turnaround ADR                                        70   US restructuring market – recent developments and outlook           80
ATSUMI & PARTNERS                                                   TURNAROUND MANAGEMENT ASSOCIATION

Preferred mechanics in a consensual restructuring in Romania   72   International restructuring – the challenges for US professionals   82
PELIFILIP                                                           BTG MESIROW FINANCIAL CONSULTING

Investing in distressed assets in Belgium

O     n 1 April 2009, the new Belgian Business
      Continuity Act entered into force. This
Act replaced the previous legislation relat-
                                                     riencing financial difficulties: (i) a court-as-
                                                     sisted voluntary agreement with creditors; (ii)
                                                     a collective agreement with the creditors; and
                                                                                                             These new mechanisms, and specifically the
                                                                                                           court-assisted voluntary agreement, offer new
                                                                                                           opportunities for investors seeking to acquire
ing to the judicial composition of companies         (iii) a transfer of all or part of the business un-   distressed businesses or assets.
(gerechtelijk akkoord / concordat judiciaire),       der the supervision of the court.                       Until the entry into force of the Business
which was often criticised and proved to be            A court-assisted voluntary agreement with           Continuity Act, creditors of a company have
rather unsuccessful.                                 creditors is a settlement negotiated by the           generally been reluctant to enter into voluntary
  The former legislation imposed very strict         debtor with a number of its creditors (at least       agreements with a debtor in financial distress,
conditions on companies in order to be eligible      two) with a view to reorganising its business.        as such voluntary agreement could easily be set
for judicial composition, as a result of which, it   Such an agreement, reached without judicial           aside in the event the debtor ultimately went
never offered a real alternative to bankruptcy.      involvement, must simply be filed in a regis-         bankrupt soon after entering into the agree-
As soon as the conditions for bankruptcy were        ter with the competent court, but will remain         ment. Such was often the case, given the strict
met (i.e., when a company was in a situation         confidential (i.e., third parties cannot access       rules applying to bankruptcy proceedings. The
of persistent cessation of payment and was un-       it). The debtor can also first seek judicial pro-     rules relating to the so-called suspect period
able to obtain credit), the company had an ob-       tection before negotiating a reorganisation           allowed third parties to challenge certain trans-
ligation to petition for bankruptcy within one       plan, with some or all of its creditors. In that      actions entered into by the debtor prior to the
month. The new Business Continuity Act pro-          case, the court’s role is to confirm the plan in      date of bankruptcy, including any transactions
vides that being in a state of bankruptcy does       its judgement and close the reorganisation pro-       with creditors or third parties who had knowl-
not in itself rule out the option of opening or      ceedings.                                             edge of the debtor’s insolvency. A divestment
continuing reorganisation proceedings. There-          A collective agreement consists of a reorgan-       of assets could therefore be undone, if the pur-
fore, the continuity of the business has become      isation plan devised by the company, which is         chaser was, or should have been, aware of the
a real alternative to bankruptcy: the aim of the     submitted to the vote of the creditors. At least      financial distress of the seller.
reorganisation, rather than the fact the debtor      half of the creditors, both number and value of         The Business Continuity Act favours volun-
is facing bankruptcy, is now the deciding fac-       claims, must vote in favour of the reorganisa-        tary agreements, which are often the best and
tor when choosing between bankruptcy and             tion plan to have it approved. The plan may           sometimes the only efficient option for mul-
reorganisation proceedings.                          include measures to reduce or reschedule lia-         tinational companies to redress their financial
  The Business Continuity Act offers a com-          bilities and interest obligations, swap debt into     situation and avoid bankruptcy. Certain pay-
bination of three different options to facilitate    equity, or reduce the company’s headcount. An         ments and transactions made in the context of a
the judicial reorganisation of companies expe-       approved reorganisation plan binds all credi-         judicial reorganisation, whether it be pursuant
                                                     tors, including secured creditors, whether they       to a voluntary agreement, reorganisation plan
                                                     have voted in favour of the plan or not. The          or sale of assets under supervision of the court,
                                                     plan must provide for payment of interest on          are now protected against subsequent insol-
                                                     the creditors’ claims and the repayment of            vency challenge. The insolvency rules that dis-
                                                     such claims may not be suspended for more             allow payments of unmatured debts, payments
                                                     than 24 months or, if at the end of the initial       in kind and transactions with counterparties
The new Business                                     suspension, the debtor requests an extension          who have knowledge of the insolvency of the
                                                     and demonstrates that the suspended claims            debtor, are not applicable to debtors subject to
Continuity Act provides                              will be paid in full, 36 months. If successfully      judicial reorganisation.
that being in a state of                             implemented, the debtor is released from all            A second advantage of the court-assisted vol-
                                                     debts included in the reorganisation plan.            untary agreement is that it remains confiden-
bankruptcy does not in                                 A transfer of all or part of the business un-       tial, as third parties need not be informed of the
itself rule out the option                           der supervision of the court is an option that a      filing or the content of such agreement without
                                                     company may apply for when filing the peti-           the express consent of the debtor. However, it
of opening or continuing                             tion, or at a later stage in the court proceedings.   should be noted that the secrecy of the agree-
reorganisation                                       However, the Public Prosecutor, a creditor or a       ment does not relieve the debtor of its obliga-
                                                     party interested in acquiring all or part of the      tions to inform and consult his employees, in
proceedings.                                         debtor’s business, may also request the court         accordance with Belgian labour law.
                                                     to order such transfer in specific circumstances        For investors who wish to acquire or take
                                                     defined in the Business Continuity Act.               a participation in a distressed company, it is
                                                       In its petition for judicial reorganisation, a      essential to be aware of the risks involved.
                                                     company must indicate which of the afore-             Obtaining a competitive price may, of course,
                                                     mentioned options (or combinations thereof) it        increase the return on investment in case of a
                                                     wishes to pursue.                                     turnaround of the company, but it is equally 8

64 | FW January 2010 |

important to address a number of legal is-               ceived by the management of the distressed               independent appraisal of the business or the
sues. These include: (i) careful review of the           company.                                                 assets, following a proper legal and financial
financial statements of the distressed com-                If an investor does not wish to acquire the            due diligence, is carried out. If the divestment
pany; (ii) due diligence on the intangible as-           company, but simply part of its assets, the fo-          of the business or assets takes place after the
sets (e.g., determining if and to what extent            cus of the legal due diligence should lie on             debtor has entered into reorganisation pro-
goodwill may be affected) and the tangible as-           the title of such assets. It will be important to        ceedings, or if the debtor files for bankruptcy
sets (e.g., title and security); (iii) employment        check commercial contracts with suppliers in             soon after the divestment, third parties may
relationships (particularly, if the company has          order to identify any retention of title clauses         challenge such divestment to the extent that
a works council or union representation); (iv)           and to verify whether the assets are subject to          the debtor has not received a fair consider-
directors’ liability; (v) tax issues (both of the        a lien or other form of security.                        ation. The rationale of the transaction should
acquired company and the purchasing entity);               Although the purchase price may be com-                therefore be carefully considered, as the price
and (vi) assessment of the recovery plan con-            petitive, it is nevertheless important that an           must be defensible in court.

Steven De Schrijver                                      Thomas Daenens
Partner                                                  Senior Associate
Brussels, Belgium                                        Brussels, Belgium
T: +32 2 239 2000                                        T: +32 2 239 2000
E:                          E:

Steven De Schrijver heads the Corporate/M&A De-          Thomas Daenens is a member of the Corporate/M&A
partment of Lorenz. His practice concentrates on         Department of Lorenz. He has gained experience in
mergers and acquisitions, joint ventures, corporate      large international law firms and as in-house counsel.
restructuring and finance, venture capital, complex      Mr Daenens has extensive experience in advising in-
commercial agreements and new technologies. He           ternational and national companies on corporate and
has assisted several companies with corporate re-        commercial transactions and has assisted several
structurings because of financial difficulties or for    companies with the restructuring of their Belgian
tax reasons and assisted several foreign corporations    subsidiaries.
with the acquisition of Belgian distressed assets.

Lorenz is an international law firm with offices in      are privileged to be involved in high profile inter-     ordinating international teams and in providing an
Brussels, Bishkek and Geneva. Our growing team           national projects, the focus of the practice is to of-   integrated and seamless service in relation to inter-
of highly qualified lawyers has broad experience         fer day-to-day solutions and to address legal needs      national legal projects in an independent and, there-
in handling transactions, resolving disputes and in      in an efficient manner. Special about Lorenz is its      fore, cost-efficient manner is what makes Lorenz
providing all-round compliant business solutions.        independent status whilst being strategically con-       different and highly effective. Our local experience
We assist clients in a wide variety of practice areas,   nected to some of the finest law firms all over the      and knowledge of local business customs and con-
including corporate and M&A, restructuring and in-       world. This allows Lorenz to assist its clients in in-   ditions, political and economical stakeholders, mar-
solvency, commercial contracts, IT and new media,        ternational legal projects when needed and at the        ket trends and developments enable us to offer our
HR and employment, privacy and data protection           same time provide a personalised and tailor-made         clients a truly unique service. For more information,
and commercial litigation and arbitration. While we      service. The vast experience of Lorenz lawyers in co-    visit

                                                                                                            | January 2010 FW | 65

Trans-European insolvency proceedings

A     mid the economic crisis, entrepreneurs
      should carefully consider European
provisions regulating bankruptcy issues, i.e.
                                                    registered seat mentioned in the company’s
                                                    statute. The recognition of the jurisdiction by
                                                    the court of a state different than the statutory
                                                                                                        to exercise all the entitlements granted to him/
                                                                                                        her, depending on the country instigating the
Council Regulation (EC) No. 1346/2000 of            registered seat shall be dependent on rebutting       The judgment in the subject of declaring in-
29 May 2000. Under these provisions, the            this presumption.                                   solvency, pursuant to Article 3 of the Regu-
declaration of insolvency of a company in one         Establishing the location of the debtor’s         lation, is subject to automatic recognition in
member state may be carried out by the court        main centre of interests has been at the source     all remaining EU states, from the moment it
of another member state.                            of much controversy. In the judgment in case        becomes effective in the state instigating the
  To declare insolvency in a different member       no. C 341/04 (Eurofood IFSC Ltd), the Eu-           proceedings. This means that it is not neces-
state than the one in which the statutory regis-    ropean Court of Justice confirmed that “the         sary to conduct any additional proceedings in
tered seat of the debtor is dependent on, the lo-   presumption laid down in the second sentence        the debtor’s state. However, the regulation in-
cation of the centre of main interests (COMI)       of Article 3(1) of Council Regulation (EC)          troduces a security system, allowing the mem-
must be established. Indeed, the location of        No 1346/2000 of 29 May 2000 on insolven-            ber state to refuse to recognise insolvency pro-
the company’s registered seat, as mentioned in      cy proceedings, whereby the centre of main          ceedings instigated in another member state,
its statute, is not always the company’s head-      interests of that subsidiary is situated in the     in case recognition would contradict its public
quarters or the place where it conducts busi-       Member State where its registered office is         policy, fundamental principles or rights, as
ness activities. This is what we call ‘forum        situated, can be rebutted only if factors which     well as freedom of individuals, granted by the
shopping’, which involves the transfer of the       are both objective and ascertainable by third       constitution. In the above cited judgment, the
estate or court proceedings from one member         parties enable it to be established that an ac-     ECJ expressed the opinion that the refusal to
state to another, in order to obtain the most fa-   tual situation exists which is different from       recognise the judgment on the declaration of
vourable legal situation. In order to guarantee     that which location at that registered office is    insolvency may constitute a violation, by the
the creditors’ protection against the possibility   deemed to reflect.” The ECJ has indicated that      court, of the basic right of being heard, en-
for debtors to use forum shopping, the pos-         such a situation may take place, specifically in    titled to the participants of the proceedings.
sibility for a court to declare the insolvency      the case of the so-called ‘company-post box’,         The obligation of immediately informing all
of a company has been introduced, depending         which does not conduct any activities on the        creditors, whose place of residency or regis-
on the COMI. The regulation also establishes        territory of the member state, in which it has      tered seat is located in other member states,
the presumption that the COMI location is the       its registered seat. Attention has also been        rests with the court that issued the judgment
                                                    drawn to the fact that if the company in fact       on the debtor’s insolvency. Notification on
                                                    conducts its activities in a state in which its     this takes place through an individual notifi-
                                                    statutory seat is located, then the possibility     cation, which must also contain information
                                                    that the economic decisions are or may be           on the deadlines, the consequences of failing
                                                    controlled by a superior company having its         to do so, as well as the bodies or institutions
                                                    registered seat in a different member state,        relevant to accept submissions of statements
In order to guarantee                               is not sufficient to rebut the presumption es-      of claims. Creditors are of course entitled to
the creditors’ protection                           tablished in the regulation. It should be noted     submit their claims in relation to the debtor.
                                                    that a court’s decision on the declaration of         The regulation foresees the institution of
against the possibility                             insolvency may only take place by means of          so-called secondary insolvency proceedings
for debtors to use                                  appealing against such a judgment, pursuant         (Article 27 of the regulation) – this means
                                                    to the relevant provisions of the state’s pro-      proceedings instigated in the state of the
forum shopping, the                                 cedures. In the event of doubts in this scope,      debtor’s statutory seat or branch. Such pro-
possibility for a court to                          motioning the ECJ with a prejudicial enquiry        ceedings must be conducted according to the
                                                    may prove necessary.                                legal provisions of this state and must only
declare the insolvency                                The regulation is of the stance that the intro-   cover the estate of the debtor located on the
of a company has been                               duction of uniform and universal insolvency         territory of the said state. Importantly, when
                                                    proceedings for all EU member states is not         examining a motion for the instigation of sec-
introduced, depending                               necessary – for this reason it does not provide     ondary proceedings, the court is exempt from
on the COMI.                                        detailed procedural regulations, only indicat-      the duty of examining whether the debtor is
                                                    ing the minimum requirements for insolvency         insolvent. The right to instigate such proceed-
                                                    proceedings, which will vary on a local basis.      ings is held by the court administrator in the
                                                    The administrator mentioned in the judgment         main proceedings as well as by any other
                                                    on the declaration of insolvency is authorised      person entitled to lodge a motion for the dec- 8

66 | FW January 2010 |

laration of insolvency in the state where the      a tendency to use differences between indi-
secondary proceedings are to be instigated. It     vidual legal systems to maximise their legal
is also not possible to examine the jurisdiction   situation in relation to creditors. As such, the
of the state whose court declared the debtor’s     possibility of declaring insolvency by a court
insolvency in such proceedings. Furthermore,       of a different state than that in which the debt-
the regulation states that secondary proceed-      or’s statutory seat is located, introduced by
ings must encompass the liquidation of the         the regulation, should be deemed as a solution
debtor’s estate.                                   strengthening trade security. However, in or-
  Undoubtedly, in a situation in which busi-       der for this mechanism to function effectively,
nesses’ operations increasingly extend beyond      courts must avoid overtly rash declarations of
the borders of one state, entrepreneurs have       insolvency.                                         Dominik Gałkowski
                                                                                                       Warsaw, Poland
                                                                                                       T: +48 22 321 83 00

                                                                                                       Dominik Gałkowski is an attorney-at-law and partner
                                                                                                       at Kubas Kos Gaertner. He specialises in banking law,
                                                                                                       civil law and company law, and leads a team provid-
                                                                                                       ing complex legal services to one of the most rapidly
                                                                                                       developing banks on the Polish banking market. Re-
                                                                                                       cently has taken part in large restructuring projects
                                                                                                       covering, among others, the bankruptcy proceedings
                                                                                                       of one of the Polish oil refineries.

Kubas Kos Gaertner (KKG), the leading full         cialises in providing full and comprehensive        may encounter in their business activities.
service Polish law firm with a firmly e            legal services for commercial entities. As          The law firm’s associates possess extensive
]stablished reputation in legal practice which     a result, we are able to assist in providing        experience in litigation, M&A and restructur-
extends to all fields of commercial law, spe-      solutions to any legal problem that clients         ing projects.

                                                                                                 | January 2010 FW | 67

German intervention to support distressed companies in current crisis

T    he extent of the crisis required quick and
     decisive action. The German legislator
therefore passed a number of laws to reduce
                                                     assumption required evidence that liquidity
                                                     could be secured until the end of the coming
                                                     financial year, for instance, based on the com-
                                                                                                          for the purchase of shareholdings.
                                                                                                            A corporation loses the right to utilise loss
                                                                                                          carry forwards if the purchaser obtains more
the impact on companies for a limited period.        pany’s business plan.                                than 50 percent of the shares within five years
While longstanding and proven regulations              The definition of over-indebtedness was sig-        of the transaction. If less than 50 percent but
have been revised and dampened down, tem-            nificantly modified on 18 October 2008. Since          more than 25 percent of shares are purchased,
porary measures have also been prolonged             then, over-indebtedness does not apply when          tax losses are not useable equal to the pur-
once or several times, or had their contents         a continuation of business is predominantly          chased quota. The initial exception to the rule
adjusted, in the course of this hectic release of    probable. The result of this change is the ex-       for purchases as a restructuring measure has
legislation. The main aspects of the new legis-      clusion of over-indebtedness if good future          been removed without review.
lation are prevention of insolvency, tax relief      prospects of a company result in a positive            As a consequence, restructuring efforts and
and employment security, which are set out           assumption of business continuation. A com-          subsequently realised profits were dispropor-
below with relevant examples. The measures           parison of assets and liabilities is not required    tionately hit with income tax as losses carried
show positive results, even though the process       unless the continuation of business assumption       forward could not be used. Following the fi-
appears rather unusual.                              is negative.                                         nancial crisis, no other option was left for the
                                                       The main reason for the change was to              German tax legislator, as the restriction on loss
Preventing insolvency                                protect companies from the duty to file for in-       carry forwards is a hindrance for company re-
In Germany the inability to pay debts as they        solvency, when they had a positive continua-         structuring procedures. The respective regula-
fall due is a reason to petition for insolvency as   tion of business assumption but had suffered         tion had to be changed again. The loss carried
well as over-indebtedness for corporations.          significant losses on their shares and proper-        forward remains in the event of a share pur-
  Prior to 17 October 2008, the test for over-       ties due to the financial crisis. As a result, they   chase for restructuring purposes. This privi-
indebtedness analysed whether a company’s            were in danger of being over-indebted even if        lege is dependent on different and complex
assets covered all its debts. The valuation of       assets were valued on a going concern basis.         conditions. It requires a restructuring and the
assets was primarily based on the probability        This regulation was initially applicable until       continuation of the main company structures.
that the business could continue. Assets could       31 December 2010, but has been prolonged by            Additionally, it is not allowed to discontin-
be valued on a going concern basis if the as-        three years, as the change in the definition of       ue the business of the company after the share
sessment of future prospects resulted in a pre-      over-indebtedness has significantly improved          purchase or change sectors within five years of
dominant probability of business continuation.       the prevention of insolvency.                        the share purchase. The restructuring exemp-
The usually lower liquidation values had to be         However, the change in definition has been          tion can be used for share transfers between
used otherwise. The continuation of business         criticised because it also protects companies        1 January 2008 and 31 December 2009 (also
                                                     whose insolvency is not necessarily related to       retrospectively).
                                                     the financial crisis. Additionally, the matter of       The reintroduction of the restructuring ex-
                                                     the continuation of business assumption, com-        emption was urgently necessary. However,
                                                     bined with application problems and insolvent        there is a risk that its tight conditions may
                                                     trading, can lead to difficulties in the settle-      endanger a restructuring as intended by this
                                                     ment of creditor claims.                             regulation or even make it impossible. This
                                                                                                          is especially applicable in regard to the use
The change in definition                             Tax relief                                           of vague legal terms. A further modification
                                                     The German tax legislator introduced or in-          – ideally a simplification – of the exception
has been criticised                                  creased regulations during the last few years        is desirable. The current intentions regarding
because it also protects                             which reduced the tax planning opportunities         the increased use of loss carried forward on
                                                     for companies and hindered the restructur-           intra group share transfers, or the utilisation of
companies whose                                      ing of companies in crisis. They consequently        losses up to the amount of hidden reserves, are
insolvency is not                                    acted as a recession accelerator. These tax re-      going in the right direction.
                                                     strictions have been melted down, at least for
necessarily related to                               a limited time.                                      Securing employment
the financial crisis.                                  The most important corrective measure is           In Germany, short-time work is a well estab-
                                                     the introduction of a new restructuring privi-       lished instrument to avoid the redundancy of
                                                     lege for loss carry forwards for corporations.       qualified and established employees during a
                                                     Germany tightened regulations to reduce the          crisis situation. Work can hereby complete-
                                                     premises for tax avoidance and to limit the          ly be stopped or proportionately reduced.
                                                     purchase of shell companies for tax losses, as       Employees lose their right to get paid by the
                                                     well as to reduce the undue use of tax losses        employer, based on the reduced working time, 8

68 | FW January 2010 |

but receive short-time work money from the                payment period. Generally, the time limit is six           Disadvantages are the high red tape efforts of
federal employment agency. This money is 60               months. As a reaction to the financial crisis,              all parties, the de-motivation and income re-
or 67 percent of the net wages difference.                this period was initially extended to 18 months            duction for employees as well as the interrup-
  The main condition for the payment of short-            and later to 24 months for all employees.                  tion of internal and external processes.
time work money is a substantial reduction of             Further improvements have also been made.
working hours due to economic reasons or an               This includes the reduction of red tape but also           Other measures
unavoidable and passing event. A significant               the proportionate and, from the seventh month              The described instruments are supported by
hurdle to obtain this money is to prove the un-           onwards, full refund of social insurance pay-              additional measures which should ease the
avoidability of the required reduction in work.           ments of the employer by the federal employ-               burden on companies in the current financial
All reasonable measures have to be carried out            ment agency.                                               crisis. Most of them are only valid for a limited
to avoid the reduction in work. The federal                 The introduction and subsequent extension of             period. These include tax measures, such as
employment agency also checks whether the                 short-time work has many positive effects apart            improved depreciation opportunities or easier
reduction in work can be compensated through              from the temporary security of employment.                 access to actual taxation for VAT. Additionally,
use of annual leave and reduction of overtime.            The liquidity and profit situation of companies             credit opportunities will be improved through
  The crisis brought a significantly less strin-           is improved, as well as the rapid adjustment of            the creation and extension of existing credit
gent test of these conditions and prolonged the           the organisation to changing market conditions.            and guarantee programs.

Prof Heinz-Christian Knoll                                Dr Falk von Craushaar
Partner                                                   Partner
Leipzig, Germany                                          Frankfurt, Germany
T: +49 341 3980 182                                       T: +49 69 36 6002 175
E:                 E:

Prof Heinz-Christian Knoll is a partner at RölfsPart-     Falk von Craushaar is a partner at RölfsPartner. His
ner. His key activities include: transaction related      key activities include: multidisciplinary reorganisa-
consulting, especially reorganisation and restructur-     tion and restructuring of companies, transaction re-
ing; purchase and sale of companies, especially with      lated consulting and support, statutory and special
regard to reorganisation and restructuring; special       audits as well as due diligence audits.
audits, especially insolvency audits, reorganisation
audits as well as special audits under company law;
and due diligence as well as designing of funds, es-
pecially real estate funds.

The RölfsParter Group, one of Germany’s largest           of disciplines in one group, they are able to offer true   team of more than 600 employees includes more
independent auditing, consultancy and restructur-         multidisciplinarity: wherever required, experts from       than 70 partners who are qualified as German CPA,
ing firms, offers clients a unique interdisciplinary      these disciplines work closely together to bundle          tax adviser, attorney or consultant and is located in
approach – auditors, tax advisers, attorneys, man-        their know-how and develop tailor-made solutions           different German cities. The restructuring unit is an
agement consultants and restructuring management          for clients’ specific needs. Interdisciplinarity is the    independent, competent partner for reorganisation
specialists work hand in hand to provide a wide range     philosophy to obtain first-rate results for the clients    and restructuring as RölfsPartner has an excellent
of service. RölfsPartner is, by being a member of Bak-    at all times, even where just one of the disciplines is    network of banks, investment companies and inves-
er Tilly International, represented in all major indus-   concerned. It is a natural and efficient way of achiev-    tors and consulting experience acquired through the
trial countries. As RölfsPartner combines this variety    ing optimum results in each individual discipline. The     effective realisation of over 100 projects.

                                                                                                               | January 2010 FW | 69

Japanese turnaround ADR

T    urnaround ADR procedures were intro-
     duced in Japan in November 2008 and
supplement the two existing types of workout
                                                    ings) involve all creditors, including all of the
                                                    debtor company’s customers which have out-
                                                    standing claims against the company. These
                                                                                                        a practical and feasible business restructur-
                                                                                                        ing plan, and facilitate a mediation to lead all
                                                                                                        participating parties to a fair and reasonable
processes – court-sanctioned insolvency pro-        proceedings risk the company losing its busi-       agreement. This enables minor lender banks to
ceedings and debt restructuring by negotia-         ness relationship with existing customers and       have confidence in the process and to accept
tion without mediators, taking useful elements      will likely accelerate bond and other debt obli-    losses on a pro-rata basis.
from each. The process has become increas-          gations, so creating additional immediate debt
ingly popular for large companies in financial      obligations and, as the filing is public, causing   Who is responsible for preparing restruc-
difficulties.                                       a negative impact on the debtor company’s           turing plans
                                                    market appeal.                                      The debtor company prepares the restructur-
What is turnaround ADR?                               On the other hand, turnaround ADR is a pri-       ing plan, as well as conducting due diligence,
Turnaround ADR is a voluntary but legally           vate process and only needs to involve a lim-       evaluating assets and preparing balance sheets
structured work-out process for companies           ited number of creditors (usually only major        which reflect the real value of the company’s
struggling under a high debt burden. The pro-       lender banks) whose claims need to be reduced       business. A debtor company needs to consult
cess is managed by a government approved            or rescheduled to enable the debtor company to      the JATP prior to its formal application for the
organisation; currently only the Japanese As-       continue its business. In addition, as the JATP     ADR service to obtain a preliminary view on
sociation of Turnaround Professionals (JATP),       has a policy of absolute confidentiality, debtor    whether the restructuring plan and other items
an association of experienced turnaround ad-        companies’ applications for the ADR service         are sufficient to assure the probability of suc-
visers (lawyers, accountants, financial advis-      will not be publicised by the JATP (though          cessfully revitalising its business under the re-
ers and others) is approved.                        the debtor company may have a disclosure            structuring plan.
  Turnaround ADR is a mediation process             obligation under listing rules, etc.) and bond
which involves a debtor company and some of         and other debt obligations are less likely to be    The ADR procedure
its creditors (usually limited to lender banks),    accelerated by the application than on com-         After the JATP has accepted the formal appli-
mediated by a person who is appointed by the        mencement of formal insolvency proceedings.         cation, a notice under the names of the debtor
JATP as a mediator, and is aimed at achieving       An application for turnaround ADR therefore         company and the JATP will be sent to the se-
debt-restructuring by mutual agreement be-          has less impact on a debtor company’s ability       lected lender banks requesting them to refrain
tween the company and those creditors.              to revitalise its businesses than the filing for    from enforcing their claims and to invite them
                                                    court-sanctioned procedures.                        to the first meeting of the notified creditors.
Differences from other types of workout               While turnaround ADR is simpler, quicker,           At the first participating creditors meeting,
proceedings                                         more flexible and cheaper than court-sanc-          the debtor company explains its financial posi-
Court-sanctioned proceedings                        tioned proceedings, it does have disadvantages      tion and the proposed restructuring plan. All
Court-sanctioned insolvency workout pro-            in that a restructuring plan in a turnaround        the following will then need to be agreed by
ceedings (i.e., Civil Rehabilitation Proceed-       ADR needs to be agreed by all creditors in-         all parties: (i) continuing the ADR process;
ings and Corporate Reorganisation Proceed-          volved in the process, and creditors who are        (ii) appointment of a mediator; (iii) acknowl-
                                                    not involved in the process (either not invited     edging the previously sent enforcement-stop
                                                    or have refused to participate) are not prevent-    request and its period; and (iv) providing DIP
                                                    ed from enforcing their rights, for example on      finance (if required) and its terms.
                                                    default of bond terms.                                If a participating creditor does not agree, the
In Japan, in a workout                                                                                  ADR process may continue without that credi-
through negotiation                                 Workouts by bilateral negotiation                   tor, though of course if it is a major creditor
                                                    In Japan, in a workout through negotiation          this may not be practicable.
without mediators,                                  without mediators, banks with greater expo-           At the second participating creditors’ meet-
banks with greater                                  sure are expected to bear more than their pro-      ing, the mediator will report on the fairness,
                                                    rata portion of any debt-forgiveness due to         reasonableness and economic feasibility of the
exposure are expected                               the major lenders’ closer relationship with the     restructuring plan.
to bear more than their                             debtor company and better knowledge of the            At the third creditors’ meeting, it will be re-
                                                    true position of the debtor.                        solved whether the plan is agreed by all par-
pro-rata portion of any                               In a turnaround ADR, the mediator nomi-           ticipating creditors. The plan is then binding
                                                    nated by the JATP will be highly experienced,       on those creditors (but not other creditors).
debt-forgiveness.                                   neutral and fair and so all participating lender
                                                    banks may rely on the mediator to review the        Protection of DIP finance during turn-
                                                    debtor company’s business and financial sta-        around ADR
                                                    tus, advise the debtor company on preparing         If DIP finance is to be provided in the course 8

70 | FW January 2010 |

of turnaround ADR approved restructuring, the            tirements of directors of the company (unless
JATP will confirm if the relevant criteria, for          materially prejudicial to the company’s busi-
the necessity of DIP finance for the company’s           ness); and (ii) provide for the extinguishment
continuing operation of its business, have been          of all or a part of the company’s shareholders’
met, and that all creditors involved in the ADR          rights.
process have agreed that such DIP finance is               The plan must require the debtor company to
to be given priority over existing claims held           periodically report to the JATP and the partici-
by those creditors. Such DIP finance might be            pating creditors on the progress of the restruc-
given priority over general claims in subse-             turing plan.
quent Civil Rehabilitation Proceedings or Cor-
porate Reorganisation Proceedings.                       Failure to agree a restructuring plan                    Ryuichi Nozaki
  In addition, the debtor company may seek               If all participating creditors fail to agree to a        Partner
guarantees from quasi-government credit in-              restructuring plan at the third creditors’ meet-         Japan, Tokyo
stitutions.                                              ing, the mediator will end the turnaround ADR            T: +81 (0)3 5501 2138
                                                         process unless he believes he may be able to             E:
Contents of a restructuring plan                         persuade objecting creditors to approve the
                                                                                                                  Ryuichi Nozaki has extensive experience, since join-
The restructuring plan needs to be such that             plan, for example by explaining to them that             ing Atsumi and Partners in 2003, in continuously
the debtor company anticipates getting out of            the proposed plan will likely nevertheless be            advising Japanese major banks and securities firms
capital deficit and achieving a current-account          passed by majority vote in subsequent court-             in the area of structured finance, including securitisa-
surplus within three years.                              sanctioned workout proceedings.                          tion, M&A and debt restructuring.
  The plan must include: (i) the reason why it             Following failure to reach agreement and the
has become difficult for the company to con-             resulting end of the turnaround ADR process,
tinue operations; (ii) how to restructure the            a court-sanctioned workout procedure (i.e.,
company’s business; (iii) how to achieve capi-           Civil Rehabilitation Proceedings or Corporate
tal adequacy; (iv) foreseeable expectations of           Reorganisation Proceedings) will likely be
changes in the company’s financial status; (v)           the next step. In such proceedings, the same
how to obtain cash funding; (vi) debt repay-             restructuring plan might be passed by a major-
ment schedule; (vii) discharge (waiver) (in-             ity of votes, so overriding the objections to the
cluding debt-equity swaps) or moratorium of              plan in the ADR process.
existing debts; and (viii) amount expected to
be realised by each participating creditor under         Summary
the plan.                                                Turnaround ADR is a useful, swift, flexible
  In addition, if the plan envisages creditors           and impartial route to restructure the major
discharging debts (not limited to providing a            debts of a viable company and is likely to con-
moratorium), the plan needs to: (i) provide re-          tinue to increase in popularity.

Building from its award-winning finance and securi-      bonds and similar structured finance transactions, as    expertise and capabilities to the firm. In addition to
tisation practices, Atsumi & Partners has developed      well as the creation and management of investment        giving us the ability to advise on the laws of e.g.,
a depth of expertise that extends across all fields of   funds, both inbound and outbound. In April 2005, At-     New York and England, this enables us to provide
business and finance law. The firm has a recognised      sumi & Partners became the first Japanese law firm       comprehensive, highly sophisticated drafting, re-
excellence for its innovative capabilities in finance,   to create a foreign law joint venture, which permits     search and other legal services seamlessly across
particularly for our work in project finance, PFI, M&A   us to admit as partners attorneys admitted in juris-     multiple jurisdictions. For more information, visit
finance, syndicated loans, securitisation, covered       dictions other than Japan, bringing real international

                                                                                                            | January 2010 FW | 71

Preferred mechanics in a consensual restructuring in Romania

R    omania is one of the most severely af-
     fected markets in the CEE, with the IMF
forecasting an economic contraction of 8 per-
                                                    businesses when confronted with a consensual
                                                    restructuring, namely the spin-off, the sale of
                                                    assets and transfer of contracts to a newly cre-
                                                                                                          transfer leases – the consent of the landlords
                                                                                                          will likely not be required. The same applies to
                                                                                                          supply contracts and other agreements which
cent in 2009. This downturn follows a series        ated company, or the contribution in kind to          do not expressly require that the co-contracting
of good years and steady increase in foreign        a newly incorporated company. The last two            party issue its consent to such an operation.
direct investment with a peak of 7.9 percent in     available options present a number of similari-         Furthermore, security over transferred assets
2008. Consequently, most Romanian compa-            ties and mainly raise the same category of con-       will not lapse at any time and will be automati-
nies were caught by the financial turmoil in the    cerns, the main difference consisting of the fact     cally transmitted. This should reduce complex-
process of implementing courageous expansion        that the assignment of various contracts / rights     ity in the relationship with the banks, even if in
plans with heavily indebted balance sheets and      (to be performed in case of assets sale) is re-       practice the banks are very likely to ask for the
most of their assets encumbered in favour of        placed with a contribution of assets to the new       re-registration or the restructuring of the secu-
creditors and over valuated. Confronted with        company – an operation simpler and easier, to         rity package in any event.
this reality, despite the increasing number of      be kept under the banks’ control. Therefore the         However, one of the most significant disad-
statutory insolvencies, Romanian companies          main corporate operations presented herein are        vantages of the spin-off is that it is a lengthy
facing the prospect of insolvency, along with       the spin-off and the direct sale of assets in the     and formalistic process. Also, another disad-
their lenders, are generally in a constant search   context of a consensual restructuring.                vantage is that there is a legally built-in possi-
for ways to reorganise their business out-of-         Each of these options is complicated by the         bility for the creditors to challenge the process
insolvency, agree a consensual restructuring        fact that creditors other than those that are in-     (within 30 days from the date when the plan
between the main creditors, and generate cash       volved in the process (for example, the banks)        has been published). Any such opposition will
by all means available.                             can try to initiate insolvency proceedings for        suspend the spin-off procedure. There is no
                                                    their unpaid receivables.                             limit as to the value of the receivable of the
Overview                                              Also, none of these options should be viewed        creditor contesting the spin-off. This means
As part of an out-of-insolvency consensual re-      as a means to bypass the applicable labour law        even small creditors can frustrate the spin-off
structuring, most companies need to regroup         provisions. Romanian labour legislation clear-        (or effectively make it subject to their receiv-
their operations based on profitability criteria,   ly envisages that the employees will enjoy the        able being repaid).
in order to separate viable assets from dis-        same rights as previously. Any redundancy               A factor that usually lengthens the process
tressed ones, attract new money or allow a bet-     program will need to be dealt with separately.        is the necessity to require the approval of the
ter sale. We typically encounter three ways in                                                            creditor banks under the lending documenta-
which companies endeavour to separate their         Spin-off                                              tion.
                                                    The spin-off is a corporate operation through           Last but not least, the spin-off is not an en-
                                                    which an existing company transfers all or part       tirely clean break. Thus, if creditors of the
                                                    of its assets and liabilities to either existing or   old company remain unpaid, they will have a
                                                    newly-created companies. The shareholders of          right to direct their unsatisfied claim against
                                                    the company subject to spin-off or the transfer-      the new company, to the limit of the net assets
As part of an out-of-                               ring company receive shares in the transferee         transferred to the new company.
insolvency consensual                               companies. The company subject to the spin-
                                                    off will cease to exist in case of a total spin-      Sale of assets
restructuring, most                                 off or will continue to exist in case of a partial    The sale of assets is governed by the rules of
companies need to                                   spin-off.                                             Civil and Commercial Code and is document-
                                                      The main advantage in choosing this option          ed via asset sale and purchase agreements and
regroup their operations                            is that the spin-off is a relatively straightfor-     assignments of contracts and other rights (such
based on profitability                              ward and clean way to separate a company’s            as the trademark).
                                                    patrimony. The transaction is always transpar-          The operation is less regulated and, in theory,
criteria, in order to                               ent and, after the 30 days opposition-term for        quick to execute. Nevertheless, the documen-
separate viable assets                              the creditors has expired, there is no additional     tation is complex and the banks are likely to
                                                    procedure for them to challenge the transfer of       require close oversight of the transaction so,
from distressed ones,                               the patrimony.                                        in practice, it is still a fairly complex process.
attract new money or                                  Moreover, unlike the case of the assets’ sale,      Also, a new company, namely the purchaser
                                                    the spin-off does not require a price to be paid      of the assets will need to be established and
allow a better sale.                                in exchange of the patrimony transfer.                funded.
                                                      Also, the spin-off will not typically require         One of the main advantages of this option is
                                                    co-contractor consent. This means, for in-            that, even allowing for delays caused by the
                                                    stance, that it will be considerably easier to        complexity of the restructuring, this is likely 8

72 | FW January 2010 |

to be a significantly faster process than the               The alternative of direct sale of assets also          tionships with the new company.
spin-off. It is also less formalistic and much            presents disadvantages. A major one is the                 Unlike the case of the spin-off, if the old
more in the control of the parties to it, namely          fact that the assets cannot be transferred to the        company carries on as a going concern for
the company and its creditors. The process                new company in the absence of consideration.             more than three years from the date of this op-
is also considerably more flexible since the              Therefore available funds should exist in the            eration, a clean break between the companies
banks and other creditors would effectively               company for the transfer (since additional               is achieved.
be co-opted in the process and will have more             funding is de facto excluded). In order for the            None of these options is perfect, each having
transparency.                                             assets’ transfer operation to comply with the            its advantages and disadvantages. While, at a
  Also, another major advantage is the fact that          fiscal and civil regulation, the price should be         first glance, the asset-sale option appears to be
the sale purchase of assets is harder for credi-          within the limits set forth by the market value          the more advantageous legal option, this great-
tors to challenge and, even if they do contest it,        of the transferred assets.                               ly depends on the commercial realities, banks
they will not be able to suspend it by the simple           The transfer of agreements will also be prob-          position and fiscal implications. Therefore, de-
challenge, as is the case with the spin-off. For          lematic from the perspective of the agreement            pending on the effective status of the company
a successful challenge, creditors would have              of the counterparty. For instance, leases or             involved as well as on the relation with the
to prove that the respective asset transfer was           supply agreements would remain with the old              creditors and the banks, each corporate alter-
made in order to defraud them by diminishing              company if the other party to the agreement              native may be reasonably recommendable for
the patrimony of the old company.                         does not wish to enter into contractual rela-            implementation.

Ioan Dumitrascu                                           Raluca Misu
Partner                                                   Senior Associate
Bucharest, Romania                                        Bucharest, Romania
T: +40 21 527 2006                                        T: +40 21 527 2000
E:                          E:

Ioan Dumitrascu is primarily involved in M&A, re-         Raluca Misu’s primary practice areas are corporate,
structuring and mainstream corporate work. Other ar-      employment matters and real estate. She is currently
eas of specialisation are private equity, concessions     involved in the restructuring of real estate projects,
and extensive experience in labour law. Before join-      renegotiation of commercial agreements and assist-
ing Peli Filip, Mr Dumitrascu worked in the Bucharest     ing clients in reorganisation of the work force.
and Frankfurt offices of a Magic Circle firm and in the
leading Romanian law firm.

PeliFilip is formed by top legal practitioners in         sions and banking. The PeliFilip team maintains          the finest way and to invest heavily in their profes-
Romania as per the independent assessment of              a good balance between experienced lawyers               sional development. We believe this is the proper
all major international league tables. Their ex-          and younger practitioners who are constantly su-         environment to ensure satisfaction of our clients’
perience covers a variety of fields such as M&A,          pervised, trained and guided by our partners and         demands, with efficiency and uncompromising
corporate, energy & projects, real estate, compe-         other experienced associates. Our team members           attention to quality. For more information, visit
tition, capital markets, infrastructure & conces-         share a strong willingness to perform their work in

                                                                                                             | January 2010 FW | 73

Remedies for creditors under the Russian bankruptcy law

B     ankruptcies in Russia are subject to the
      Federal Law ‘On Insolvency / Bankrupt-
cy’, dated 26 October 2002, as subsequently
                                                     meetings. The financial rehabilitation may not
                                                     last for more than two years.
                                                       Bankruptcy administration. The objective is
                                                                                                          and, at later stages, to independently direct the
                                                                                                          debtor. The bankruptcy commission is called
                                                                                                          upon to analyse the latter’s financial condition
amended. The statute does not apply, however,        to make the debtor solvent again under guid-         and counter its bad-faith acting by challeng-
to banks and other financial institutions, the       ance from the bankruptcy administrator in lieu       ing transactions executed by the debtor and by
bankruptcy of which is governed by separate          of its former management team. The bankrupt-         holding its management and the so-called con-
legislation.                                         cy administration plan is to be approved by a        trolling persons liable.
  The latest version of the law gives the bank-      creditors’ meeting, as is any major transaction        Creditors’ meeting. A creditors’ meeting has
ruptcy administrator / liquidator a key role and     and any transaction involving the extension of       responsibility for choosing the bankruptcy pro-
provides various options to review transac-          any loan, guarantee, or surety and contemplat-       cedure to follow and picking and supervising
tions at an undervalue.                              ed at this stage. The bankruptcy administration      the administrator. At some phases in bankrupt-
  Even though the law offers a choice of dif-        routine has a time limit of 18 months, but may       cy procedures, the debtor’s management or the
ferent options, statistics demonstrate that the      be extended for another six months.                  administrator is required to obtain a go-ahead
vast majority of bankruptcies still boil down          Bankruptcy proceedings. This phase sees the        from a creditors’ meeting for the execution of
to sell-offs of the debtors’ assets and liquida-     debtor wound up and the creditor claims met          any transaction with the debtor’s assets.
tions with a number of debtors’ malpractices.        through the sale of its assets, as arranged by the     A creditors’ meeting may form a creditors’
It also shall be noted that bankruptcy litigation    bankruptcy liquidator elected by a creditors’        committee to lend greater dispatch to decision-
is among the most conflict-laden categories of       meeting and approved by the court.                   making.
cases, in which the parties in dispute file nu-        An amicable settlement between the debtor
merous complaints against each other. In such        and the creditors may close the bankruptcy           Practicalities
circumstances, vigorous, competent and time-         case at any phase.                                   The most pressing practical need for creditors
ly counteraction is the only option for creditors                                                         locked in a bankruptcy case is to countervail
to uphold their economic interests.                  Order of priority in meeting creditor claims         any unfair acting on the part of the debtor. It
                                                     All creditors fall into three categories. Top        is not infrequent, for example, that the latter
Bankruptcy phases                                    priority goes to individuals claiming damages        attempts to shed its assets and squirrel them
Any creditor under a monetary obligation             for physical harm and ‘moral detriment’. The         away for its own use before the commence-
(around US$3400) overdue for at least three          second-priority category includes employees’         ment of bankruptcy procedures so as to be able
months and confirmed by the court, may initi-        and royalties’ claims. The others, among them        to pay off only such creditors as are important
ate bankruptcy procedures.                           government agencies, belong to the third-prior-      to itself and then to launch another business
  The debtor may likewise file a petition in         ity category. The claims of the same priority are    undertaking, while leaving the majority of the
bankruptcy against itself under certain circum-      met on a pro rata basis in case of insufficient      creditors high and dry.
stances within one month after these circum-         funds. Claims secured by pledges enjoy the             Another common way of shaking off credi-
stances come into evidence.                          preemptive right to grant out of 80 percent for      tors is the so-called controlled bankruptcy
  Supervision. Supervision procedures are the        banks (70 percent for others) of the value of the    whereby the debtor deliberately provokes a
initial and sine qua non phase of bankruptcy         pledged assets once these are sold off.              backlog of liabilities and then gets a friendly
routines. The idea behind such outside super-                                                             bankruptcy administrator appointed so as to
vision is to identify all of the debtor’s credi-     Key figures in bankruptcy procedures                 retain a grip on the goings on. This kind of
tors, analyse its financial standing, and make       Arbitrazh court. All bankruptcy procedures go        scheming likewise results in creditor claims
arrangements for a first meeting of creditors.       under the control of the state arbitrazh court in    receiving unequal treatment and amounts to an
Although the debtor’s management retain all          the debtor’s area. The court’s principal powers      abuse of rights or even a criminally punishable
of their powers, the administrator exercises         include those to open a bankruptcy case, verify      offense.
control over their actions. The statutory period     creditor claims before their inclusion on the
prescribed for supervision procedures is seven       creditor register, approve a candidate bankrupt-     Leverage for protecting creditor interests
months.                                              cy administrator, and review complaints from         Bringing controlling persons to liability
  The creditors at their first meeting opt to pur-   parties to the bankruptcy case.                      In April 2009, the law introduced a new term –
sue one of the following scenarios:                    Bankruptcy administrator. The bankruptcy           ‘controlling person’, broadly defined as an indi-
  Financial rehabilitation. The objective is to      administrator is an independent player bearing       vidual or legal entity having (for two years prior
restore solvency and discharge liabilities in ac-    different names at different phases of the bank-     to the bankruptcy procedures) been in a position
cordance with the debt repayment schedule, as        ruptcy procedures. This officer is appointed by      to be able to control the debtor’s operations and
secured by a bank guarantee, pledge, surety, or      the arbitrazh court first upon a proposal from       to issue binding instructions to the latter.
other collateral. The debtor’s management re-        the petitioner in bankruptcy and then upon             Should a controlling person’s acts or any
main subject to certain constraints on the part      a motion from a creditors’ meeting to over-          action taken upon its instructions with respect
of the bankruptcy administrator and creditors’       see the activities of the debtor’s management        to the debtor cause injury to the rights of the 8

74 | FW January 2010 |

latter’s creditors, such person may be held vi-          tions which may be contested if necessary to              to the prescribed order of priority in granting
cariously liable under the debtor’s monetary             enlarge the debtor’s bankruptcy estate.                   claims or resulting in the preferential satisfac-
obligations if the assets of the debtor prove in-        ‘Suspicious’ transactions include the sale or             tion of a creditor’s claims compared with the
sufficient to meet its creditors’ claims.                 transfer of its assets at undervalue for one year         regular statutory repayment.
The law also makes the debtor’s CEO liable for           prior to the commencement of the bankrupt-
the loss or falsifying of any of its accounting          cy procedures, and asset sell-offs aiming to              Resume
and reporting documents before the bankrupt-             infringe upon creditor rights for the last three          Bad-faith business entities in Russia still rely
cy procedures or for non-action on compulsory            years before the initiation of such procedures            on bankruptcy procedures too often in order
bankruptcy.                                              against the debtor.                                       to evade the performance of their obligations.
                                                           Transactions with preference to one creditor            But bankruptcy legislation, as presently restat-
Challenges to the debtor’s transactions                  over others may also be attacked. These com-              ed, provides creditors with a wide choice of
The Law identifies several types of transac-              prise, for example, deals entailing a change              remedies to neutralize such malpractices.

Ivan Smirnov                                             Igor Kokin
Partner, Baker & McKenzie                                Associate
Moscow, Russia                                           Moscow, Russia
T: +7 812 303 90 00                                      T: +7 812 303 90 00
E:                             E:

Ivan Smirnov is a partner of the St. Petersburg office   Igor Kokin is an associate of the St. Petersburg office
of Baker & McKenzie where he heads the Insolvency        of Baker & McKenzie. He specialises in dispute reso-
& Restructuring and Dispute Resolution practice          lution and has extensive experience in representing
groups. His extensive experience includes represent-     creditors in bankruptcy cases.
ing creditors, including banks, in bankruptcy cases
and developing strategies for asset recovery, fraud
control and avoiding questionable transactions.
Chambers Europe recommends Mr Smirnov for his
‘exceptional expertise’.

Baker & McKenzie has been global from its incep-         leading companies on the legal issues of doing busi-      employment, mergers & acquisitions, tax, real estate,
tion. It is part of our DNA. We offer clients both the   ness around the world. We have cultivated the global      banking & finance and intellectual property, we ser-
uncompromising commitment to excellence expect-          mindset, commercial pragmatism and collaborative          vice an impressive roster of large multinational and
ed of a top firm and a distinctive way of thinking,      relationships that it takes to deliver consistently       Russian clients. Our in-depth industry knowledge and
working and behaving — as a passionately global and      world-class service tailored to the preferences of our    ability to devise commercially viable solutions help
genuinely collaborative firm. We seamlessly combine      clients worldwide. Our Russia practice is composed        our clients to respond quickly to the changing Rus-
this instinctively global perspective with the nuanced   of offices in Moscow (opened in 1989) and St. Pe-         sian market and regulatory environment and achieve
local insights of 3900 locally qualified lawyers in 67   tersburg (opened in 1992) staffed by more than 120        business successes. As a result our Russia practice
offices around the world. We call this fluency, and      qualified lawyers specialising in more than 15 dif-       received the Award For Excellence – Law Firm of the
our clients tell us that it is what distinguishes us     ferent practice areas. Recognised as one of the ‘pre-     Year in Russia 2009 from Chambers Europe. For more
from other law firms. Since 1949 we have advised         mium-class’ firms in the areas of dispute resolution,     information, visit

                                                                                                             | January 2010 FW | 75

Enforcing foreign insolvency proceedings in Switzerland

S    witzerland is not a member of the Euro-
     pean Union (EU). The relevant EC Regu-
lation (1346/2000) is therefore not applicable.
                                                    when assets are located in various ‘cantons’
                                                    – Switzerland is composed of 26 small states
                                                    called cantons, will have jurisdiction for the
                                                                                                         ule of claims is recognised in Switzerland. In
                                                                                                         other words, the unsecured creditors domiciled
                                                                                                         in Switzerland should not be discriminated
Furthermore, although Switzerland has rati-         exequatur of said bankruptcy decision. The           against vis-à-vis any other foreign creditors.
fied Bilateral Agreements I and II with the         trustee of a foreign composition agreement, or       Should the Swiss court find that there is dis-
EU, EC Regulation 1346/2000 has not been            the debtor, but not a creditor, may also apply to    crimination, the positive balance will be split
implemented in Switzerland. The country also        a Swiss Court to obtain the recognition of said      among the Swiss ordinary creditors (art. 174
has not adopted the UNCITRAL model law on           composition agreement.                               PILA).
insolvency.                                           Since 1997, a foreign decision with similar          The effect of a foreign decision related to
  Recognition of a foreign insolvency decision      effects as the Swiss composition moratorium          judicial composition proceedings may be dif-
in Switzerland will thus be governed by the         can also be recognised in Switzerland.               ferent. Such a decision may grant a stay or
Swiss Private International Law Act (PILA),           According to article 175 PILA, the condi-          ratify a composition agreement in which the
in particular provisions 166 et seq., which pro-    tions for recognition of a foreign bankruptcy        contractual terms of the credits are modified,
vide that foreign insolvency decisions may be       decision, a decision related to a composition        or in which the debtor obtains a partial release
recognised in Switzerland under certain condi-      agreement, or to any other similar proceed-          from his/her debts. In any case, the recognition
tions. Specifically, recognition in Switzerland     ings, are identical.                                 of similar decisions will result in local compo-
may be available where the foreign decision           In practical terms, a foreign decision will be     sition proceedings and any debt enforcement
results in liquidation proceedings or reorgani-     recognised if the following four conditions are      proceedings will be stayed. This, in turn, will
sation measures in Switzerland. Recognition         cumulatively met: (i) the decision must have         prevent any creditors from commencing spe-
(exequatur), however, is limited to assets held     been rendered at the debtor’s domicile; (ii) the     cial debt enforcement proceedings against the
by the debtor in Switzerland. The territoriality    decision must be enforceable in the state in         debtor.
principle in Switzerland – as opposed to the        which it was rendered; (iii) there is no ground        The Swiss Court in charge of the exequatur
principle of bankruptcy unity – is therefore of     to deny recognition under article 27 PILA;           of the foreign decision may assist with the im-
limited scope.                                      and (iv) reciprocity must be granted to Swit-        plementation of the composition agreement in
  The trustee of a foreign bankruptcy estate or     zerland by the state in which the decision was       Switzerland, appointing a commissioner or a
a creditor may apply to a Swiss court to obtain     rendered.                                            co-trustee in Switzerland if necessary.
recognition in Switzerland of a foreign bank-         In addition, in order to be recognised, the de-      The recognition of a foreign insolvency de-
ruptcy decision. The Swiss bankruptcy court         cision must have comparable effects as bank-         cision is also deemed necessary to allow the
having jurisdiction in the ‘cantons’ in which       ruptcy or composition proceedings in Switzer-        trustee, the liquidator and/or the commissioner
the assets are located, or the first court seized   land.                                                to act in Switzerland. However, this is a dis-
                                                      Whereas the second and third conditions are        puted issue, since art. 29(3) PILA provides
                                                    easy to understand and ensure due respect for        that a foreign decision may be recognised pre-
                                                    public policy and the principle of legal certain-    liminarily. Furthermore, special conservatory
                                                    ty, the first condition as to domicile is problem-   measures may be granted pursuant to art. 168
                                                    atic insofar as under EC regulation 1346/2000,       PILA.
                                                    the relevant location of the debtor is the cen-        Finally, it is worth mentioning that the Swiss
                                                    tre of main interest (COMI), i.e., the effective     Federal Law on Banks and Savings Banks
These provisions                                    location from which the company organises            (LB) contains two relatively new provisions
were adopted in order                               its activities, and not the registered office or     applicable to foreign decisions and measures
                                                    debtor’s domicile. Consequently, Switzerland         regarding banks and savings banks.
to ensure first the                                 and an EU member state could simultaneously            These provisions were adopted during the
realisation of the assets                           start insolvency proceedings in two different        revision of the LB of 3 October 2003 in order
                                                    locations.                                           to ensure first the realisation of the assets and
and second equal                                      The exequatur of a foreign bankruptcy judg-        second equal treatment for foreign and Swiss
treatment for foreign                               ment in Switzerland will result in local bank-       creditors. These provisions are important be-
                                                    ruptcy proceedings in Switzerland, in which          cause the notion of domicile or registered office
and Swiss creditors.                                case a ‘summary’ procedure will apply. First,        pursuant to art. 166 PILA does not correspond
                                                    the assets located in Switzerland will be liq-       to existing requirements in practice, as foreign
                                                    uidated and privileged creditors and secured         authorities and the Swiss Federal Bank Com-
                                                    creditors domiciled in Switzerland will be paid      mission often initiate bankruptcy proceedings
                                                    out. Any positive balance will then be allo-         at the effective location at which the bank or
                                                    cated to the foreign creditors (i.e., the foreign    the savings bank organises its activities.
                                                    bankruptcy estate) only if the foreign sched-          Therefore, when a bank or a savings bank 8

76 | FW January 2010 |

has its registered office in Switzerland and a         decision rendered in the State of the effective
foreign branch office, the Swiss liquidator will       location from which the bank organises its ac-
have to coordinate the Swiss proceedings with          tivities is also recognised in Switzerland and
one or more foreign proceedings pursuant to            the privileged creditors domiciled abroad are
article 37f LB. Said provision also provides           also allowed to participate in the Swiss pro-
for equal treatment of creditors that were par-        ceedings.
tially paid out abroad and creditors participat-         In conclusion, cross-border liquidation or
ing in the Swiss proceedings. Thus the amount          reorganisation has not yet been simplified in
allocated to a creditor in the foreign proceed-        Switzerland, because the country does not ap-
ings will be deducted from the amount to be            ply the UNCITRAL model law on insolvency
distributed in the Swiss proceedings.                  and because, not being an EU member state, it            Vincent Jeanneret
  Furthermore, pursuant to article 37g LB, a           does not apply EC Regulation 1346/2000.                  Managing Partner
                                                                                                                Geneva, Switzerland
                                                                                                                T: +41 22 707 8000

                                                                                                                Vincent Jeanneret is a partner in the Dispute Resolu-
                                                                                                                tion Group of Schellenberg Wittmer in Geneva, and
                                                                                                                heads the firm’s Restructuring and Insolvency team.
                                                                                                                He specialises in commercial and banking litigation
                                                                                                                with a focus on international and complex cases. He
                                                                                                                has been described as one of the few specialists who
                                                                                                                deals with major insolvency cases on the Swiss and
                                                                                                                international levels. Since May 2009 he is Managing
                                                                                                                Partner of the firm.

Schellenberg Wittmer is one of the leading Swiss       individuals. The firm offers a full range of services,   M&A, Private Equity and Venture Capital; Private
business law firms with offices in Zurich and Geneva   from focused advice to project management. The           Clients, Trusts & Estates, Foundations; Real Estate;
and more than 110 lawyers. Its clients are domestic    areas of advice include: Banking and Finance; Dis-       Restructuring and Insolvency; Taxation; White-Col-
and foreign companies as well as high net worth        pute Resolution and International Arbitration; IP/IT;    lar Crime and Compliance.

                                                                                                          | January 2010 FW | 77

Schemes of arrangement and the IMO Car Wash decision –
valuation is key

F   inancing documents often contain high
    consent thresholds which, combined with
the diverse interests of lenders and complicated
                                                    dure under Part 26 of the Companies Act 2006
                                                    for effecting a compromise or arrangement be-
                                                    tween a company and its creditors. A scheme
                                                                                                         for the IMO Group could be secured. Final-
                                                                                                         ly, King Sturge LLP valued a number of the
                                                                                                         IMO Group’s sites and PwC extrapolated an
capital structures, can make it very difficult in   will be binding on the company and its credi-        overall value from those valuations. All these
practice to achieve a successful consensual re-     tors if it is supported by a majority in number      valuation exercises were conducted on a go-
structuring. In circumstances such as these, a      representing 75 percent of each class that is        ing concern basis and produced an estimate of
scheme of arrangement in the UK is a very ef-       voting upon the proposed compromise or ar-           how much the business could be sold for in the
fective tool to implement a restructuring as it     rangement, and it is subsequently sanctioned         current market. However, none of these valu-
permits the binding of a dissenting minority of     by the court.                                        ation exercises demonstrated a value in excess
creditors provided that the requisite majorities                                                         of £275m which was significantly less than the
vote in favour of the compromise arrangement.       The restructuring proposal                           value of the outstanding senior debt.
  Set against this background, the judgment of      The restructuring proposal that the IMO Group          The mezzanine lenders countered the above
Justice Mann in the IMO Car Wash decision           put forward consisted of three interlinked           valuations with a ‘Monte Carlo simulation’
(Bluebrook Ltd and others [2009] EWHC 2114          schemes of arrangement pursuant to which the         of discounted cash flow valuations. This was
(Ch)) potentially holds significant lessons for     relevant IMO Group companies agreed com-             designed to demonstrate the most likely valu-
all stakeholders involved in the restructuring      promises with the senior lenders conditional         ation outcomes given a variety of inputs and
process going forward, but particularly for ju-     upon the assets of the IMO Group being trans-        assumptions, in so doing it alluded to the ‘in-
nior creditors.                                     ferred by administrators to a ‘newco’ owned          trinsic’ value of the IMO Group. The valua-
                                                    in large part by the senior lenders. In con-         tion report concluded that it was highly likely
Factual background                                  sideration for this transfer, the senior lenders     that the value of the IMO Group ‘broke’ in the
Bluebrook was the holding company of a              ‘credit bid’ their debt by releasing a substan-      mezzanine debt as a significant majority of
group of companies (together, the IMO Group)        tial portion of their existing claims against the    outcomes exceeded £320m.
which operated the biggest carwash business         ‘oldco’ structure. The mezzanine lenders were          Justice Mann analysed the various valuation
in the world. The IMO Group was acquired            excluded from the schemes and were left with         exercises and confirmed that, in considering
in 2006 by the Carlyle Group in a leveraged         worthless claims against the ‘oldco’ structure.      whether to sanction a scheme of arrangement
buyout which had left it owing approximately          The schemes were approved by the requi-            for a financially distressed company where the
£313m under a senior credit agreement and           site majority of the senior lenders. However,        alternative is the likely enforcement of secu-
£119m under a mezzanine facility agreement.         the mezzanine lenders sought to challenge the        rity, it was necessary to determine the present
An intercreditor agreement firmly subordinat-       schemes on grounds of fairness, namely that          market value of the company’s business estab-
ed the mezzanine debt to the senior debt.           they unfairly deprived the mezzanine lenders         lished on a going concern basis. In this regard,
  Following the buyout, the IMO Group did           of valuable rights that they had against the         however, the ‘Monte Carlo simulation’ lacked
not perform according to expectations, with         IMO Group. Their two key arguments were,             credibility before Justice Mann, and “as an ex-
the result that interest payments were in arrears   firstly, that the senior lenders had valued the      ercise of assessing what a third party purchaser
and certain financial covenants were breached.      IMO Group on an incorrect basis resulting in         would pay, it [was] very unconvincing”. Jus-
Further, credit insurers had withdrawn cover        the mezzanine lenders being wrongly declared         tice Mann considered it a “robotic exercise”
and the IMO Group was beginning to encoun-          ‘out of the money’ and, secondly, that the di-       which produced a “mechanical, and not a judg-
ter difficulties with certain suppliers. In light   rectors of the scheme companies had deprived         mental assessment”, concluding that “a proper
of these issues, the board entered into nego-       the mezzanine lenders of value by failing to         approach to valuation in a case such as this
tiations with both the senior and mezzanine         extract a proper benefit for all creditors, there-   requires some real world judgments as to what
lenders with a view to restructuring the IMO        by breaching their fiduciary duties.                 is likely to happen”. As such, the mezzanine
Group’s balance sheet.                                                                                   lenders failed to persuade the Court that they
  A long-established principle relating to          Valuation issues                                     had an economic interest in the IMO Group.
schemes of arrangement is that, if a creditor       The IMO Group engaged in three different
has no economic interest in the company that        valuation exercises. PwC used an ‘Income             Directors’ duties issues
is proposing the scheme, then there is no need      Approach’ which valued the IMO Group on              Justice Mann’s judgment also provides useful
for the company to seek a compromise with           a discounted cash flow basis, a ‘Market Ap-          guidance on the nature of directors’ duties in
that particular creditor and they can be left out   proach’ which involved a comparison of the           the context of a distressed situation. The mez-
of the scheme process. It was on this basis that    IMO Group to comparable publicly-traded              zanine lenders attempted to argue that the di-
the IMO Group proposed a restructuring which        companies and a leveraged buyout analysis            rectors of the IMO Group had breached their
did not involve its mezzanine lenders.              aimed at determining how a private equity            duties by not attempting to negotiate a better
                                                    investor would fund the purchase of the IMO          deal on behalf of all creditors. Further, the
Schemes of arrangement                              Group. Rothschild conducted a third-party            mezzanine lenders attempted to allege that,
A scheme of arrangement is a statutory proce-       sales process with a view to seeing if a buyer       since the IMO Group was cash-generative, it 8

78 | FW January 2010 |

could have continued to trade, thereby giving             lenders, as there was a potential downside to            no genuine economic interest are very limited.
the mezzanine lenders further opportunity to              an equity investment of this nature. Crucially,          Third, it also provides support for credit bid-
secure a deal with the senior lenders.                    Justice Mann felt that the mezzanine lenders’            ding in such situations. Finally, Justice Mann’s
  The first argument suffered from the fact               right under the inter-creditor agreement to              decision underlines the importance of the buy-
that the mezzanine lenders had only presented             purchase the senior debt at par upon an en-              out rights of junior creditors under intercredi-
their valuation evidence very late, once the              forcement provided the mezzanine lenders                 tor arrangements, which provide such creditors
restructuring proposal had already been for-              with an important level of protection, as it left        with protection against senior creditors getting
mulated. Thus, the directors’ only proper con-            it open to them to buy out the senior lenders if         ‘too good a deal’ or ‘unfair value’.
clusion when formulating the restructuring                they really did believe that the senior lenders            It is, however, important to note that this
proposal was that the mezzanine lenders had               had a good prospect of a benefit in the future           judgment is fact-specific. Justice Mann did not
no economic interest in the IMO Group. Fur-               which was unfair to the mezzanine lenders.               dismiss the mezzanine lender valuation on the
ther, Justice Mann considered that this argu-                                                                      basis that conceptually it was wrong in these
ment was not appropriate on the basis that the            Comment                                                  circumstances to determine economic inter-
mezzanine lenders’ interests had at all times             This is an important judgment for the restruc-           est according to the ‘intrinsic’ value of a dis-
been represented by the mezzanine steering                turing, finance and private equity communi-              tressed company – in fact, this concept gave
committee and at no point had they indicated              ties. In the context of restructuring distressed         him ‘pause for thought’. Instead, he dismissed
that they expected the directors to negotiate             companies, four key points are worth mention-            the mezzanine lender valuation on the basis
on their behalf. In relation to the second ar-            ing. First, the judgment supports the proposi-           that it was not good enough to establish what
gument, Justice Mann considered that the di-              tion that it is not necessary to take account of         it sought to establish. As such, although this
rectors were not in a position to start bargain-          the interests of creditors with no genuine eco-          judgment provides welcome clarity on certain
ing with the senior lenders, “and for them to             nomic interest in the company. In this regard,           key issues, in particular on valuation issues,
threaten to carry on trading in those circum-             it provides much needed guidance on valua-               going forward it nevertheless remains to be
stances, when they had quite properly recog-              tion issues, namely that, where the alternative          seen whether junior creditors can successfully
nised a problem about that, would arguably                is enforcement action by the secured lenders,            establish an economic interest based on an
have been to threaten to engage in wrongful               valuation should be by reference to present              ‘intrinsic’ valuation methodology, particularly
trading”.                                                 market value established on a going concern              in circumstances where “[it is demonstrated]
  Further, it is important to note that Justice           basis. Second, the judgment provides comfort             with sufficient clarity that market conditions
Mann considered that the restructuring pro-               to directors of distressed companies in that it          are currently giving the senior lenders an un-
posal constituted a genuine risk for the senior           establishes that their duties to creditors with          fairly good deal”.

Christian Pilkington                                      Alex Rogan
Counsel                                                   Associate
London, United Kingdom                                    London, United Kingdom
T: +44 (0)20 7519 7139                                    T: +44 (0)200 7519 7255
E:                                   E:

Christian Pilkington has experience dealing with the      Alex Rogan is an associate in Skadden, Arps, Slate,
full spectrum of insolvency practitioners and credi-      Meagher & Flom LLP’s London office, specialising in
tors, advising on all aspects of national and cross-      corporate restructuring. His practice focuses on na-
border restructuring and insolvency work. He also has     tional and cross-border representation of distressed
regularly advised directors of companies in financial     companies and creditors. His representations include
difficulty, often with an international element. He has   major financial institutions, chemical and telecom-
extensive experience working with overseas counsel        munications companies.
and coordinating advice on cross-border restructur-
ing and insolvency issues.

Skadden, Arps, Slate, Meagher & Flom LLP’s                matters. We have played a key role in the most           recognised by peers and restructuring professionals
global corporate restructuring practice advises           widely publicised matters in recent years involv-        as one of the top practices in the world, including
companies experiencing financial difficulties, pur-       ing troubled companies in diverse global industries      such honours as ‘International Legal Firm of the
chasers of and investors in distressed companies,         from transportation, energy and steel to retail, tele-   Year’ and ‘International Insolvency & Rescue Firm
and lenders to and creditors of such companies            communications and financial services, both within       of the Year’ (Credit Today), ‘Bankruptcy Team of the
on complex business reorganisations, troubled             the Americas and in Asia, Australia, Europe and the      Year’ (Chambers USA), and ‘Restructuring Law Firm
company M&A, debt restructurings and financing            Middle East. Our practice has been consistently          of the Year’ (M&A Advisor).

                                                                                                             | January 2010 FW | 79

US restructuring market – recent developments and outlook

T    he economic downturn in the United
     States and overseas has contributed to the
current ‘full employment environment’ for
                                                    experience (43 percent).”
                                                      It appears that this downturn has differed
                                                    from prior downturns, at least early on, in
                                                                                                        firms, law firms and other players that serve
                                                                                                        the corporate renewal industry seem both pre-
                                                                                                        scient and timely.
turnaround professionals. The bursting of the       the larger number of Chapter 11 liquidations          As the recession has matured, an increasing
housing bubble and increasing unemployment          prompted by the severity of the recession and       number of lenders appear to be more willing to
rate have negatively impacted consumer and          lack of credit. According to the TMA poll, “the     work with troubled borrowers, even convert-
business spending. This has contributed to a        lack of financing available to distressed com-      ing a sizeable amount of debt to equity rather
rapid decline in revenues for many businesses.      panies is also triggering a wave of distressed      than risk liquidation at fire sale prices. In the
The combination of nearly non-existent credit       business sales, especially those dictated by        past, lenders have generally restructured loans
that followed the quick downturn in the fi-         certain classes of creditors who stand to lose      along the ‘A’ loan – ‘B’ loan model, with ‘A’
nancial industry in Fall 2008, together with        the most if the company liquidates. As a result,    loans being performing loans, and ‘B’ loans
rapidly declining revenues and asset values,        buyers are selecting turnaround professionals       having a pay-in-kind interest provision, al-
contributed greatly to an increase in business      to perform due diligence and assist in negotia-     lowing banks to potentially recover some of
failures. Business bankruptcy filings in the        tions, according to respondents.” While there       their write-offs should the borrowers do well
US for the four quarters ended 30 June 2009         have been a number of filings to facilitate §363    following the restructurings. Of course, prior
(54,738) were the highest for any 12-month          sales, many late decline sales appear to be con-    to 2007, many banks could sell their distressed
period since 1993, according to bankruptcy          cluded for breakup value or are acquisitions by     loans for par or close to it.
statistics published by the US Courts.              strategic buyers.                                     As we may be beginning to come out of the
  All of this activity has been a boon to turn-       “Hampered by the unfavorable credit climate,      recession, there appear to be continued oppor-
around firms as reflected in Turnaround Man-        most turnaround professionals are generally         tunities for turnaround professionals on the
agement Association’s October 2009 Trend            finding solutions for distressed clients outside    horizon. The impact of the recession on vari-
Watch poll (‘As Recession Slows, Turn-              of bankruptcy court,” the poll also indicates.      ous businesses may be catching up with the
arounds Multiply’) of its members in which          “Only 41 percent of this year’s respondents         commercial real estate market. Despite signs
“[m]ore than four in 10 respondents said            described their most frequent engagements as        of recovery, the housing market may not be as
staffing levels increased at their firms this       in-court reorganizations or liquidations, com-      stable as it has recently appeared, and many
year, with employers paying most attention to       pared to 78 percent last year.”                     economists expect unemployment to continue
prospective hires with prior turnaround expe-         This year’s poll also indicates that the impact   to rise. And, importantly, there may be a sub-
rience (57 percent), followed by operational        of the recession was as widespread as last year.    stantial amount of high-yield debt coming due
                                                    Engagements typically involved “manufactur-         over the next five years, according to an Au-
                                                    ing (65 percent), construction (43 percent)         gust 2009 report by Aviva Investors, with the
                                                    and distribution (42 percent) companies. Most       sources of potential refinancing in doubt.
                                                    companies show up in late decline, according          In 2010, we may see a number of new play-
                                                    to 61 percent of respondents, but they also         ers in the process, e.g., private equity, hedge
                                                    noted more engagements coming from compa-           funds, sovereign wealth funds, foreign buy-
                                                    nies in relatively better shape. For example, 16    ers and healthy US companies. Lenders may
                                                    percent of respondents, up from 12 percent in       continue to restructure troubled loans and may
                                                    2008, said companies in early decline are seek-     sell more of them if the market for such debt
As the recession has                                ing help, and 45 percent, up from 31 percent,       picks up. It is possible that we could see more
matured, an increasing                              said the same of companies in mid-decline.”         sales or reorganisations where investors have
                                                      While the economy has been affected broad-        acquired distressed debt prior to filing to facil-
number of lenders                                   ly by the downturn, certain sectors stand out       itate taking ownership of the company. And,
appear to be more                                   including: developers, home builders and con-       of course, in certain sectors, we may continue
                                                    struction contractors and the building supply       to see more liquidations, due in part to the
willing to work with                                industry; retailers, which have experienced         changing economic landscape expected as we
troubled borrowers.                                 liquidations at a higher rate than in past down-    come out of this recession.
                                                    turns; consumer products manufacturers and            We have seen a number of predictions that
                                                    their suppliers, including the auto industry;       the global economic growth engines going
                                                    print and broadcast media; and banks, mort-         forward will be driven by emerging markets,
                                                    gage brokers and certain other financial ser-       including the BRIC countries (i.e., Brazil,
                                                    vices firms.                                        Russia, India and China). Accordingly, we
                                                      The recession has had a global impact and         may see more capital flows into such markets
                                                    has affected a number of multinational busi-        as the global economy recovers. Several glob-
                                                    nesses, making the expansion of turnaround          al players have indicated that they intend to 8

80 | FW January 2010 |

increase their investment in emerging markets              years, 2010 through 2014 could, like 2009,            some anticipate, and, as a possible mountain
to take advantage of such growth opportuni-                be strong years for the turnaround profession.        of high-yield debt matures over the next five
ties presented by the new economic landscape               There will likely continue to be a need for op-       years, to facilitate debt restructures, rollovers
they believe will evolve post-recession.                   erational turnarounds and, potentially, we may        and refinancing. All in all, the near-term fu-
  In conclusion, due to the oncoming and                   see an increase in merger integration services        ture of our industry appears to look strong.
continued distress in various sectors of the               as industries continue to consolidate. Trans-         The long-term holds promise, as well, as it has
economy as well as the mountain of high                    actional specialists are likely to be needed to       been demonstrated time and again that the les-
yield debt coming due over the next five                   help facilitate the many sales transactions that      sons of history are not easily learned.

Arthur T Perkins
TMA Chairman
San Francisco, CA, United States
T: +1 (415) 783 4164

Arthur T. Perkins, Jr. is the 2009 chairman of the Turn-
around Management Association and co-head of De-
loitte Financial Advisory Services LLP’s Western Re-
gion Reorganization Services practice, San Francisco,
California. He assists underperforming companies to
achieve their value potential through shareholder
value optimisation, strategy, turnaround and financial
restructuring consulting.

The Turnaround Management Association is the               in 46 chapters, including 32 in North America, and    China. TMA members are a professional community
only international non-profit association dedicated        one each in Australia, Brazil, the Czech Republic,    of turnaround and corporate renewal professionals
to corporate renewal and turnaround management.            Finland, France, Germany, Italy, Japan, the Nether-   who share a common interest in strengthening the
Its international headquarters is in Chicago. Estab-       lands, Southern Africa, Spain, Sweden, Taiwan and     economy through the restoration of corporate value.
lished in 1988, TMA has more than 9000 members             the UK, with a chapter in formation in Hong Kong/     For further information, visit

                                                                                                           | January 2010 FW | 81

International restructuring – the challenges for US professionals

A     s the recession continues to take its toll
      on America’s industry and commerce,
US restructuring professionals are finding
                                                    with underlying operational faults. This cre-
                                                    ates another problem for US firms dealing
                                                    with the overseas operations of US corporates
                                                                                                         which were not designed for complex multi-
                                                                                                         jurisdictional cases and which have inevitably
                                                                                                         failed to keep pace with change in the business
that they need to mobilise workout resources        filing Chapter 11. Suddenly, operational turn-       world. UNCITRAL, the United Nations body
in many overseas jurisdictions and on a scale       around professionals are in huge demand and          charged with creating worldwide protocols
never previously experienced. Not only this,        short supply.                                        for effective international interaction on busi-
but their search for foreign support is taking        How, for example, can you find at short no-        ness rescue has at last got round to the issue of
them to places where local talent is scarcer        tice enough auto industry experts to deal with       international groups, but far too late for this
than they had ever imagined, at least as regards    cases like the Visteon Chapter 11 filing, where      recession.
those with any meaningful cross-border expe-        suitably savvy ‘boots on the ground’ were              It is worth considering the narrow escape US
rience or awareness.                                needed in 23 countries at once, especially           professionals have had following the decision
  Just consider the position in America’s           when the entire sector is undergoing a com-          of General Motors to keep its European op-
leading trading partners around the world.          plete makeover? The good ones are already            erations, rather than sell them. But it is worth
Discounting the professionally-developed ju-        overcommitted, although there is no shortage         analysing what might have happened if Gen-
risdictions such as Canada, the UK and the          of retrenched former executives willing to try       eral Motors itself had walked away from Opel
Netherlands, the other 12 countries in the top      their hand. Sadly, experienced business rescu-       after the proposed Magna rescue collapsed.
15 have only 398 members of INSOL Interna-          ers know from bitter past experience that ex-        Some experts have concluded that General
tional. Three countries have no INSOL mem-          ecutives who honed their skills in the headlong      Motors itself could not have been rescued un-
bers and South Korea has just one. Eight of the     growth of the past two decades are rarely good       der any other insolvency regime than Chapter
jurisdictions lack a chapter of the Turnaround      at downsizing businesses.                            11. There is nothing remotely comparable with
Managers Association. The implications of             The restructuring community has also failed        that process anywhere in Europe, with its un-
this can be seen from the total annual US trade     to engage with governments and lawmakers             workable patchwork quilt of debtor-friendly,
with the under-resourced 12 countries, which        worldwide to create business rescue regimes,         creditor-friendly, employee-biased and grossly
is more than $1.5 trillion.                         which can be used to address issues in the           inefficient court-driven systems.
  With the severe squeeze on liquidity in the       foreign operations of troubled US corporates.          The European division of General Motors
world’s financial system, the days are over         Despite some progress, there are still many          operates in 34 European countries, of which
when business problems could be solved just         significant jurisdictions where there is no ef-      only 24 are within the framework of the Eu-
by financial engineering, rather than dealing       fective mechanism for ring-fencing troubled          ropean Union and therefore the EU Insolvency
                                                    businesses while they are reorganised and            Regulations. It employs around 60,000 people
                                                    revitalised. India, China & Russia are among         across 29 nations, with more than a thousand
                                                    them. There has been comment recently in the         in 10 different countries. There are well over
                                                    professional media that Hong Kong is at last         3000 directly-owned car dealerships in eight
                                                    considering the enactment of a modern restruc-       countries and manufacturing plants in seven
                                                    turing law. If one of the most sophisticated fi-     jurisdictions. Dealing with just the European
Despite some progress,                              nancial and commercial locations on earth is         insolvency issues alone would have been se-
                                                    still reinventing the restructuring wheel, what      verely testing, even without considering the
there are still many                                chance has a struggling but potentially viable       problems which would be created by the inter-
significant jurisdictions                           outpost of a US business in the Czech Repub-         connection on contractual, funding, intellectu-
                                                    lic or Poland?                                       al property and regulatory aspects to the rest of
where there is no                                     One happier outcome was the rejection, re-         the world, especially the US mother ship.
effective mechanism for                             cently, of an attempt by organised labour to           Just how would the European insolvency re-
                                                    overturn Brazil’s new business rescue law,           gime have coped with this if GM worldwide
ring-fencing troubled                               where a pragmatic decision in the Supreme            had gone the same way as Lehman Brothers?
businesses while they                               Court rescued the legislation from being neu-        The major manufacturing centres, with the
                                                    tered at birth. It remains to be seen if the law     greatest concentration of assets and employees
are reorganised and                                 will work in practice, but at least it survived to   are located in Germany, the UK, Poland and
                                                    be moulded into a workable regime through its        Russia. But there are also large concentrations
revitalised.                                        application to real life restructurings.             of dealerships in France, Spain, Greece, Por-
                                                      Judicial capacity and cross-border coop-           tugal and Austria. Settling the location of GM
                                                    eration is another concern. Institutions like        Europe’s COMI would have exercised even
                                                    INSOL International have been working for            the finest legal minds for myriad reasons.
                                                    many years to bring together judges to en-           The result might have been the ultimate Eu-
                                                    courage a more practical application of laws,        ropean insolvency nightmare, with overarch- 8

82 | FW January 2010 |

ing and potential oppressive control vested             poration proposed to rescue itself through a               ting approval from the US bankruptcy court.
under Chapter 11, a US trustee answerable to            sale to a Korean investment fund and chose to                US restructuring firms have a massive job
a bankruptcy court in Manhattan and an unse-            file for bankruptcy protection in Delaware.                ahead of them to educate the world about the
cured creditors committee with no knowledge               Fortunately, the mandate to represent the un-            American rescue regime, while themselves
of the commercial world beyond America’s                secured creditors committee went to a US firm              being on a steep learning curve about foreign
borders and probably little interest in learning        with true international capability. Even so, the           bankruptcy regimes. Ultimately, the degree to
about it.                                               first obstacle was explaining to its Korean as-            which they will succeed is likely to be dictated
  This highlights the final issue for US profes-        sociates that a success fee basis was inappro-             by the quality of the overseas professionals
sionals dealing with overseas operations. Not           priate because the role was purely to review,              with whom they engage. This is no time to
only are there complex legal issues and severe          inform and monitor – not actually to realise as-           be instructing auditors or generalist corporate
resource restrictions, but the effectiveness of         sets or undertake the sale, as most insolvency             lawyers; local help must be sought from com-
local professionals is also hampered by their           professionals around the world would have ex-              mercially aware, problem solvers who make
lack of understanding of the Chapter 11 pro-            pected their task was. A further challenge was             their living from insolvency and restructuring
cess. This was well illustrated by a recent case        managing their expectations on the payment of              and who understand the need for pragmatic,
when a substantial Korean manufacturing cor-            fees in the face of the inevitable delays in get-          value adding solutions.

Larry H. Lattig                                         Nick Hood                                                  Nigel Atkinson
Senior Managing Director                                Executive Chairman                                         Partner & Head of Restructuring
Mesirow Financial Consulting                            Begbies Global Network                                     Begbies Traynor Group
E:                                   London, United Kingdom                                     London, United Kingdom
T: +1 (0)877 505 8059                                   E:                                        E:
                                                        T: +44 (0)7967 658 296                                     T: +44 (0)20 7398 3801

Larry Lattig has over 25 years experience advis-        Nick Hood has 20 years’ corporate recovery experi-         Nigel Atkinson has nearly 30 years’ experience in
ing creditors’ committee in bankruptcies, lenders       ence and specialises in reviews for secured lenders        corporate recovery and restructuring assignments,
in workout situations, companies and creditors in       and turnaround work. He is responsible for inter-          specialising in the aviation, construction, financial
liquidations, buyers and sellers in mergers and ac-     national operations at Begbies Traynor and is the          services, leisure, manufacturing and property sectors.
quisitions and parties in financing and financial       Group’s media spokesperson. He is active in promot-        He has taken CRO positions at various companies un-
transactions. He is primarily responsible for Mesirow   ing improvements in professional resources and in-         dergoing restructuring. Major assignments include:
Financial Consulting’s creditor advisory capabilities   solvency regimes around the world, working closely         Silverjet, Rush & Tompkins, Abingworth, Danair &
nationwide in the United States.                        with INSOL International.                                  Alitalia.

BTG Mesirow Financial Consulting is a compre-           firm has been created as a joint venture between the       Financial Consulting can quickly mobilise the right
hensive international corporate recovery and restruc-   Begbies Traynor Group, the UK’s leading indepen-           resources on a local, regional and international ba-
turing firm, which addresses the increasing number      dent corporate recovery and restructuring practice         sis. This structure enables an understanding of the
of complex cross-border cases requiring local mar-      and Mesirow Financial Consulting, one of the most          nuances, regulatory climate and specific market
ket-based expertise, solutions and service. Whether     prestigious US restructuring firms. Its global footprint   issues for cases with reach and implication across
acting as advisors or crisis managers, we work with     supports multi-national assignments and provides a         multiple geographies. Our services include insol-
our clients every day on major international en-        competitive advantage worldwide. With a network            vency and restructuring, forensic accounting, litiga-
gagements to develop value adding restructuring         of over 6000 talented advisors located throughout          tion support, valuations, investigations, asset tracing
strategies that can serve as a solid foundation for a   the United States, the United Kingdom and in over          and risk consulting. For more information, visit www.
positive financial outcome and future success. Our      100 other countries around the world, BTG Mesirow

                                                                                                              | January 2010 FW | 83

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