DescriptionIn most EU Member States, a company in financial distress may be subjected to several formal rescue procedures in order to restructure its business successfully. In the UK for example, companies can make use of the following three formal procedures: the pre-pack procedure, the scheme of arrangement, and the company voluntary arrangement procedure. According to the European Commission, it is of great importance that companies in financial distress have access to a framework allowing them to restructure with the objective of preventing insolvency. However, not all EU Member States provide for formal rescue procedures. Current Dutch law, for example, still lacks appropriate and efficient methods to restructure companies in financial distress successfully. At present, the Dutch legislator is working to develop a framework for companies in financial distress. Inspired by the UK system, the Dutch Minister of Security and Justice proposed an Act on pre-pack proceedings and an Act on the scheme of arrangement outside bankruptcy proceedings. Despite the fact that the development of possibilities to restructure companies in financial distress in Europe is welcome in respect of economic and labour market policies, the question arises whether creditor protection is sufficiently ensured in pre-pack and scheme of arrangement proceedings. In my opinion, creditor protection is not (yet) sufficiently ensured in the UK pre-pack nor in the proposed Dutch pre-pack. In the UK, the courts try to ensure creditor protection by underlining the importance of consulting with major creditors ahead of completing a pre-pack sale. Furthermore, the UK Insolvency Service drafted the SIP 16 Report, in order to ensure that creditors are informed on the reasons why a practitioner decided on a pre-packaged sale. Nevertheless, some legal experts still think that the UK pre-pack procedure lacks transparency and is open to abuse. In the Dutch proposal, the creditors are not at all involved in a pre-pack procedure. As a result, creditor protection is lacking. Taking into consideration the points of criticism of the pre-pack procedures, I consider it important that the European Commission makes a proposal to harmonise the rules for restructuring companies by a pre-pack procedure. In accordance with the Commission Recommendation on a new approach to business failure and insolvency, creditor protection is ensured in the UK scheme of arrangement procedure as well as in the proposed Dutch procedure. However, according to the European Commission, the Member States have not (fully) adopted the recommendations on a new approach to business failure and insolvency. This leads to legal uncertainty, a high amount of accumulated private debt and barriers for cross-border investment. Harmonisation in this field is thus needed. In case of unviable companies in financial distress, the national systems provide for several dissolution methods. In most Member States unviable companies in financial distress can be dissolved very quickly. In the Netherlands, a company can be dissolved without pursuing liquidation proceedings if there are no longer any assets at the time of dissolution. This quick and cheap dissolving procedure - laid down in Article 2:19 (4) DCC - is also referred to as turbo liquidation. Because turbo liquidation is seen as a quick and cheap method of dissolving a company, it is regularly applied. Turbo liquidation also appears to be easy. Article 2:19 (4) DCC seems to suggest that only one condition has to be met in order to dissolve a company by turbo liquidation: the absence of assets at the time of the dissolution. In contradiction to the Dutch system, the UK system does not offer the option to dissolve a company in one day. According to Section 1003 CA 2006, it is possible to strike off a company from the Companies Register and thereby terminate its existence, also known as the voluntary striking off procedure. This procedure is considered inexpensive and easy. An application for striking off a company must be made on behalf of the company by the majority of the directors through a prescribed form, which has to contain certain information. The applicant must secure that, within seven days from the day on which the application for voluntary striking off is made, a copy of the application is provided to every creditor of the company. Creditors are able to lodge objections as to why the company should not be struck off. In case no (reasonable) objections are lodged, the company will be dissolved. The question arises whether these quick dissolving methods are in fact an open invitation to commit fraud and to circumvent a bankruptcy procedure. Another question that arises is whether creditor protection is ensured in these dissolving methods. In my opinion, the Dutch turbo liquidation is indeed an open invitation to commit fraud and to circumvent a bankruptcy procedure. Because of the presumed ease of turbo liquidation, the directors might try to ensure that no assets exist at the moment of dissolving the company. Taking steps in order to lose assets in the prelude to a turbo liquidation may lead to fraudulent acts. Currently, the prevailing doctrine is that companies without assets, but with outstanding debts, may be dissolved through turbo liquidation. If a company is allowed to be dissolved while there are outstanding debts, it is easy for fraudsters to take advantage of this method of dissolution, because it enables them to avoid bankruptcy by making the company disappear. This is quite different in the UK system. In the UK system, creditor protection is ensured because of the requirement that creditors and shareholders must be informed about the intention to strike off the company. They may lodge objections against striking off the company. Furthermore, the potential liability of the board of directors remains after dissolving. A drawback is that the procedure is not as 'turbo' as the Dutch procedures: in the UK, companies cannot be dissolved in one day. Surprisingly, there is currently no EU harmonisation in the field of dissolution of companies. Taking into consideration the consequences of dissolution for creditors of a company, especially in case of turbo liquidation, I consider harmonisation of the rules for dissolution and liquidation of companies important.
|Event title||Academic Forum INSOL Europe|