Cross Border Insolvency Rescue
Cross border insolvency solutions
Financial distress can often be overcome, but the challenges it presents when a company operates in more than one country multiply rapidly. Although it is common for businesses to establish local companies to operate in other jurisdictions, there are many situations where companies operate abroad through branches.
The obvious restructuring issue is the interaction of different countries’ insolvency laws on the company. Although in principle most countries have an insolvency system designed to maximise returns to creditors from the value in the company, the detail of the way this is done varies hugely.
Within Europe there is a European Insolvency Regulation designed to facilitate co-operation between insolvency regimes in such circumstances. Using such European legislation in conjunction with local insolvency law and practice is one of Mercer & Hole’s particular skills.
Cross border insolvencies are not uncommon. Sometimes there is – as in any case of financial distress – an opportunity to rescue the company. Many jurisdictions have pre-insolvency procedures or practices to facilitate turnaround and rescue even when a company has run out of cash and has a balance sheet deficiency. As ever, the key is for such businesses to seek early professional advice.
However, not all restructuring and insolvency work involves rescue and sometimes we simply concentrate on achieving the best possible result for creditors in the circumstances. The case study on page 7 illustrates the interaction of European and local legislation and our role in protecting the interests of creditors, including local employees, using formal insolvency proceedings.
Acting in creditors’ interests – a case study
A German company, with branch operations in five other European countries including the UK, went into formal insolvency proceedings in Germany. There had been unsuccessful attempts to refinance and turn the company around and the situation faced by the German administrator was extremely difficult, with almost no cash available and few readily realisable assets to fund the proceedings.
We were contacted to deal with the English assets – a factory employing some 70 people, who had not been paid for 2 months and were not actually working as no raw materials were being supplied.
The German administrator saw a prospect of selling the international business as a whole and we were therefore appointed administrators both to facilitate a sale of the English operation as a “gone concern” if necessary and in par ticular to deal urgently with the employees. They were in limbo as the German management had not terminated their contracts although they were not working and were not being paid. Indeed, the employees’ situation was sufficiently dire to be the subject o f parliamentary discussion and of interest to various MEPs.
The urgent and unusual application to the English court by the German administrator was something we were able to facilitate and within 24 hours the employees were able at least to apply for state benefits.
In the longer term we were able, through cooperation with administrators in other jurisdictions, to facilitate the employees’ preferential claims against the company being met in the parallel Italian proceedings.
There was in fact no serious interest in the acquisition of the company’s operations as a whole and although we negotiated a settlement with the secured creditor, realisations from the English assets were insufficient to permit any distribution to creditors. However, we were subsequently appointed as liquidators in order to agree the claims of English creditors so that, in due course, they would be able to receive a distribution from the other estates. The current situation is that there may well be distributions made by insolvency officeholders in some other jurisdictions, but the likely quantum remains uncertain.
Without using the provisions of the European Insolvency Regulation it would not have been possible quickly to address the desperately difficult position of the unpaid employees. What we were also able to achieve was to put the creditors (particularly the English creditors) into the best position possible to allow them to share in any distribution from the company’s insolvency in due course.
Specialist advice is essential if you are faced with cross border insolvency. Chris Laughton, who heads our international insolvency services, is a leading practitioner in this field and is a past president of INSOL Europe.
If you would like us to provide you with any help, guidance or assistance in dealing with a cross border insolvency please contact us on 020 7236 2601.