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Technical Session Kindly Sponsored by

Technical Session Kindly Sponsored by. EU Insolvency Regulation: Where to Go From Here? Tallinn, 27 May 2011 Bob Wessels University of Leiden Law School St. John’s University School of Law, New York. 7 th EECC Conference – A Return to Prosperity?. Changing Environment.

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Technical Session Kindly Sponsored by

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  1. Technical Session Kindly Sponsored by

  2. EU Insolvency Regulation: Where to Go From Here? Tallinn, 27 May 2011 Bob Wessels University of Leiden Law School St. John’s University School of Law, New York 7th EECC Conference – A Return to Prosperity?

  3. Changing Environment • EU – since 2002 12 new countries • Growing number of cross-border operating companies • [Increasing] availability of capital • E-connection (commerce; justice) • Growing desire to have a solid statutory framework for cross-border insolvencies

  4. May 2011: Launch of large external study June 2012: Commission report (Art. 46) 2013: Legislative proposal Additional policy options: Start harmonising? (Art. 81 TFEU: “approximation”) Best practices / recommendations (Art. 288 TFEU) Revision Process: the rules

  5. Preliminary assessment: 1. Regulation as a measure 2. Matters of international jurisdiction 3. Conflict of law rules 4. Recognition of judgments 5. Communication and cooperation 6. What is not offered under the EIR 7. Future Revision Process: the topics

  6. 1. Regulation as EU measure • Unflexible tool • “Collective insolvency proceeding” • Annexes • Amendments • Infringement proceedings • Adaptation process

  7. 1. Regulation as EU measure (cont’d) • Rescue culture • Liquidation focused • Approach to “consumers”? • Procedural framework • Method of interpretation “historic” / “purposive”

  8. 2. Matters of international jurisdiction • COMI • Compressed decision • Information • COMI shopping/migration • Establishment

  9. 3. Conflict of law rules • Vague terms • COMI, Establishment, participate, cooperate, communicate etc. • Policy choices • E.g. consumercontracts • Forum shopping?

  10. 4. Recognition of judgments • Domestic (no cross-border) publications • Case register • Insolvency related judgments

  11. 5. Communication and cooperation • Vague Art. 31 • CoCo Guidelines (soft law) • Cross-border between courts? • “European insolvency industry” – capacity building

  12. www.bobwessels.nl www.insol-europe.org

  13. 6. What’s not in the EIR? • Group provisions • Relation with non-EU Member States • Harmonisation – • “Subsidiarity” (Art. 5 TEU)

  14. Future • Amendment proposal • Publication of seminar outcomes • Approximation? • Guided by “European Expert Committee on Insolvency”?

  15. www.bobwessels.nl Thank you for your attention! Bob Wessels info@bobwessels.nl ++31629577403 These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

  16. The Baltic Region – Insolvency Successes to Date and Future Restructuring and Investment Potential Speakers:Annemari Õunpuu (Swedbank, Estonia) Anna Maria Pukszto (Salans, Poland) Risto Agur (Sorainen, Estonia) Erik Selander (Swedbank, Sweden) Martins Zutis (DnB Nord, Latvia)

  17. Back on trackMarket situation in the Baltic states

  18. Legal framework, insolvency caseload and problems to tackle TheBaltic states: Estonia, Latvia, Lithuania Annemari Õunpuu Erik Selander

  19. Bankruptcy legislation Latvia.The Law on Insolvency and Bankruptcy of Undertakings and Companies: 1992. Amended 1996. Insolvency Law Act: 2007. New Insolvency Law Act: 2010. Lithuania.Enterprise Bankruptcy Law: 1992. Amended in 1996, 2001, 2008 Estonia. Bankruptcy Act: 1992. Amended in 1996, 2003, 2009. Restructuring legislation Latvia. Part of Insolvency Law Act: 2007 Lithuania. Law on Restructuring of Enterprises: 2001. Amended significantly in 2010. Estonia. Reorganization Act: December 2008

  20. “ The costs and delay of commercial litigation and corporate insolvency should be regarded as a drag on the economy. The amounts in dispute are, in effect, DEAD CAPITAL. The longer a commercial dispute continues, or the longer a corporate liquidation continues, the greater the LOSS TO THE COMMUNITY in terms of dead capital. It is impossible to compute, but IF these PROCESSES could be REDUCED across the board by, say one year, it would probably LIBERATE SIGNIFICANT AMOUNTS OF CAPITAL into economy. This capital could be effectively deployed, rather than remain frozen. In order to maximize the positive social contribution of the legal profession, it is NECESSARY to seek to resolve commercial disputes and liquidations expeditiously.” (emphasis added by Annemari Õunpuu) J.J. Spiegelman, Chief Justice of New South Wales. Access to Justice and Access to Lawyers. The 35th Australian Legal Convention, Sydney, March 24, 2007

  21. Assessment Of Insolvency Laws & Views On The Insolvency Regimes In The Region By International Organizations EBRD insolvency law assessment project: 2009 World Bank statistics (based on model case) Time required to recover debts in insolvency proceedings Estonia: 3 years, Latvia: 3 years, Lithuania: 1.5 years Regional average in the EU – approx. 1.9 years Cost required to recover debts in insolvency proceedings Latvia: 13% of estate, Estonia 9%, Lithuania 7% Regional average in the EU – approx. 10.6% Recovery rate for creditors in insolvency proceedings Lithuania 49.6%; Estonia 35.5%; Latvia 31.9% Regional average in the EU – approx. 59.3%

  22. Mere existence of good quality legal framework is not sufficient, it must be utilized and tested to prove that the system functions in a consistent and predictable manner. “The capacity of the court system to handle large scale insolvencies remains untested. However, market participants frequently complain about the delays and unpredictability, as well as the inconsistency of rulings. Further efforts are therefore needed to educate judges about the changing debt restructuring and insolvency framework, to streamline court procedures, and to standardize the training of administrators.” Source: Michaela Erbenova, Yan Liu, and Magnus Saxegaard IMF Working Paper Corporate and Household Debt Distress in Latvia: Strengthening the Incentives for Market-Based Approach to Debt Resolution, April 2011.

  23. Parex Bank casestudy Risto Agur

  24. PAREX BANKCASE

  25. FACTS Bank of systemic importance: Market leader (non-resident deposits), 2nd by assets, 3rd by resident deposits 2 majority shareholders (c. 85%) plus various minority shareholders Reasons for failure: Global financial market turmoil Deposit withdrawal and rumors Large syndicated debt exposure No parent bank with deep pockets

  26. BAILOUT Purchase deal is amended: state owned bank takes over all 85% shares of two main shareholders for 2LVL Purchase of 51% shares from main shareholders for 2 LVL by stateowned bank 25 % and 1 share of Parex were transferred from state owned joint stock company to EBRD 2008 2009 10 November 2008 3 September 2009 3 December 2008

  27. RESTRUCTURING (1) Agreement on Transfer of Undertaking is entered into between Parex and Citadele Law on Credit Institutions is amended Parex restructuring is approved by EC Constitutional Court’s decision Citadele bank receives banking licence EBRD entry into Citadele Transfer of undertaking 2009 2010 2011 30 June 30 July 1 August 15 September February 2009 30 March 28 July

  28. RESTRUCTURING (2) The largest and most complex restructuring in the Baltics Transfer of undertaking As a result two separate companies were formed: Citadele banka – good assets  currently provides standard banking services; Parex banka (resolution bank) – bad assets  has discontinued to provide banking services; Over 10 jurisdictions were involved (branches, subsidiaries, securities located in other jurisdictions), including bank branch in Estonia and bank corporation in Lithuania

  29. Constitutional Court case (1) Transfer of a bank under the Credit Institutions Law: NO information to creditors NO consent of creditors NO recognition null and void

  30. Constitutional Court case (2) The Court established: NO violation of the principle of legitimate expectations NO violation of the right to receive information on his or her rights and duties NO violation of the principle of fair trial NO violation of the right to receive compensation and recover losses in unlawful cases NO violation of property rights No recognition of the transfer of banks null and void protects rights of other persons and welfare of the society The norms are not designed that any party of transaction could not fulfil its liabilities

  31. LESSONSLEARNED State needs a strategy in advance Understanding consequences of failure of an individual bank Strategy for bank rescue and further actions Regulatory framework must be in place Options for state must be as varied as possible Rescue must be swift Other issues –PR, business implications (counterparties, depositors)

  32. LATVIA Restart through bankruptcy SAWMILL casestudy Martins Zutis

  33. Sawmill with 40m EUR annual sales, part of one legal entity, which was also involved in a variety of businesses, including retail DIY Business was hit initially by collapse in depression in the UK timber market and then by collapse in Latvian economy As a result – one of the largest Latvian insolvencies

  34. A number of banks, large vendors moving in conflicting directions with no coordination – hence insolvency was inevitable But insolvency appeared as a scary option – trustee compensation motivates sale of assets by separate items, while suspension of production would result in the loss of the UK market and gradual impairment of equipment

  35. Cooperation between Sawmill’s management team and its senior lender Production was restarted within one month after insolvency declaration and market environment enabled swift return to healthy cash flow levels Management team acquired Sawmill facility from the insolvency estate and continues successful trade

  36. POLAND Success stories against the background of the Polish insolvency system Anna Maria Pukszto

  37. Bankruptcy and reorganization proceedings – a mixed bag for creditors and investors Proclaimed restructuring–friendliness An open list of compositions–available options include: composition with debt-for-equity swap winding-up composition Fast-track compositions during the preliminary creditors meeting

  38. Bankruptcy and reorganization proceedings – a mixed bag for creditors and investors (cont.) No tools to effectively expedite the proceedings Still insufficient tools forcreditors to exercise meaningful control over proceedings: no right to appoint or dismiss a bankruptcy administrator no general right to give the administrator binding instructions, e.g. regarding the sale of assets in the liquidation bankruptcy (but the creditors committee may suggest certain actions, and approve and regulate actions proposed by the administrator)

  39. Institutional framework and ‘law in practice’ observations Specialized bankruptcy courts only in bigger cities Judge-commissioners– passive supervisors rather than active players Administrators – sometimes insufficient skills, hard to remove Frequently formalism prevails over creditors’ interests

  40. Success stories of: ODLEWNIE POLSKIE MONNARI TRADE ELEKTRIM

  41. ODLEWNIE POLSKIE Industry: metal casting Background: a successful company that collapsed under the weight of terminated derivative transactions against the backdrop of the depreciation of the Polish zloty in 2008 Composition bankruptcy opened inFebruary2009 Restructuring: banks as drivers of the debt-to-equity composition adopted in May 2010

  42. MONNARI TRADE Industry: fashion retail chain Background: fast growing company with expansion plans to Russia and Germany; factors which inter alia caused bankruptcy: a fall in demand caused by the financial crisis and a rise in costs of lease (rent denominated in EUR, rapid and deep depreciation of the Polish zloty started in August 2008)

  43. MONNARI TRADE (cont.) Liquidation bankruptcy opened in August 2009 Restructuring: liquidation bankruptcy transformed into composition bankruptcy in January 2010; composition adopted in September 2010; reduction accepted by secured lenders, whereas debt-for-equity swap accepted by an unsecured lender

  44. ELEKTRIM Industry:holding company involved in telcom and energy sectors Background: involved in numerous disputes with various stakeholders / creditors (bondholders, the State Treasury, Vivendi and T-Mobile for the control over the then-most successful mobile telecom operator ERA)

  45. ELEKTRIM(cont.) Composition bankruptcy opened in August 2009 Restructuring: out-of-court settlement with major creditors in December 2010, a buy-out ofc.350 small creditors, exit from bankruptcy, closing of the transaction and repayment of major creditors in January2011

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