The INSOL Helsinki Joint One Day Seminar 2018 which was jointly organised by INSOL International, INSOL Europe and the Finnish Insolvency Law Association (FILA) was the occasion for the audience to be informed on the main features of the EU Directive proposal on restructuring, insolvency and second chance (‘the Directive proposal’) and to discuss with the panellists the rationale of the tools contained into the Directive proposal and the risk that it could be (too) easily used at the expense of creditors.
 
The One Day Seminar was also the occasion to share two success stories from Finland (national operational business restructuring) and from France (international financial restructuring) as well as the latest developments on group insolvencies under the application of the EIR Recast (in particular the German/Austrian ‘NIKI cases’) and the current work undertaken by the UNCITRAL Working Group V and the establishment of a so-called ‘planning proceeding’.
 
The seminar ended with a focus on two important issues in the Nordic region, namely environmental liabilities in bankruptcy proceedings and debt-equity swaps.

A full report by Myriam Mailly can be read here.

By a judgement of 4 April 2018, the Dutch speaking commercial court of Brussels opened insolvency proceedings for three main companies of the Belgian well known Flamant Group : Flamant SA, Flamant Group SA and Flamant Retail Belgium SPRL.

Flamant is a lifestyle and interior design brand, founded more than 35 years ago, and offers a wide range of styles and products. In Europe, Flamant has become a reference brand for exclusive, charming and timeless interiors. The company experienced a rapid growth which led to a turnover of 44 million euro in 2008. His Majesty Filip, King of the Belgians, awarded the company with a royal warrant. The company has the following sales channels: 7 own stores in Belgium and France, more than 200 client-resellers in more than 40 countries and an online store.

In 2009 the Flamant Group and its branches encountered financial difficulties due to the global economic and financial crisis, which resulted in a drop in turnover. On 4 April 2018 the court ordered a judicial reorganisation by transfer under judicial authority and appointed Bart De Moor as insolvency practitioner, in view of a transfer of the undertakings and continuation of the activities.

The proceedings include a stay until 13 June 2018. Bids are awaited for the entire undertakings or parts of it and large publicity is made towards potential interested purchasers. Bid may be made for the whole undertakings of the companies involved, including its subsidiaries, or for certain activities or a combination thereof. Upon proposition of the insolvency practitioner the Brussels court of commerce will decide on the authorization of the transfer to one or more purchasers in view of the continuation of the activities without interruption. The decision is made with the continuation of the employment and the creditors’ rights and interests as main criteria. Upon closing of the insolvency proceedings and a successful transfer of a major part of the viable activities the initial legal entities in reorganization will presumably be liquidated.

For more information contact Mr. Bart De Moor, lawyer at STRELIA,
Email: bart.demoor@strelia.com

When Tarmac’s construction arm was spun out in 1999 and rebranded as Carillion, the new name was said to be a corruption of ‘carillon’, a peal of bells sounding a clear, new identity to the industry. By January this year, the peal had slowed to a death knell, as Britain’s second largest contractor collapsed spectacularly and controversially.

As the recriminations gather momentum, a light is shone on the industry’s precarious business model of gigantic projects yielding meagre profits. Juggling complex contracts spanning a range of sectors and markets is testing even for the world’s most talented management. Add in projects going wrong, then subtract a degree of talent and the outlook quickly becomes bleak.
 
Carillion’s debt profile and pension deficit were for a long time wholly inconsistent with its business model. Delivering a net margin of 3% on 2016 sales of more than £4bn left hardly any wriggle room once interest payments and an unrealistic dividend policy were serviced.
 
That is why predictable cash flow from operations is always so critical. It’s also why former Carillion CEO Richard Howson’s apparent strategy of chasing risky low-margin contracts, while keeping subcontractors unpaid for up to 120 days, was unsustainable.
 
The whiff of desperation about the company’s cash management clearly did not elude the hedge funds which have made fortunes shorting Carillion stock from as far back as 2013. The inexplicably low tenders for large contracts, now obviously to keep the cash circulating, seems to have prompted fewer questions.
 
The revenue profile is, ultimately, why the company has - at first, bafflingly – gone into liquidation, rather than administration.  It is now obvious that there are no viable parts of the business to sell. The contracts are certainly not meaningful assets to borrow against, even if a diligent administrator might have found a creative way to sell them on.
 
What remains baffling for the corporate recovery community is why the six to seven months between Carillion’s major profit warning in mid-2017 and the company’s eventual collapse did not feature a significant day-to-day involvement of professional, external turnaround specialists. It beggars belief that the full picture of woe was not known to the executive board some time before this.
 
No cheers for the non-executive directors here, either.  Howson was replaced as CEO on an interim basis by an NED of two years’ service, Keith Cochrane. He would have stepped aside this month anyway when a permanent boss joined, although his basic salary of £750,000 was to remain until July. NEDs had already approved, in 2016, a relaxation of rules to claw back bonuses.
 
A business in such dire straits probably needed a full suite of interim executive directors with turnaround experience – at the latest, early in 2017. Some existing directors might have moved to NED roles, for continuity and assistance. The move would no doubt have hastened the slide in Carillion shares, but something might have been salvaged for investors at the end.
 
Instead, directors persisted with a dereliction of duty on a scale rarely seen before in a major UK public company.  The egregious abandonment of decency in matters of boardroom pay, given the circumstances, is symptomatic of the lack of grip on reality at the top. It’s a kick in the teeth for all stakeholders, but certainly not the first or last time spectacular failure has been rewarded.
 
Much worse and longer lasting is the effect on Carillion’s ten of thousands of employees, its suppliers, many of them SMEs, subcontractors, contract partners and clients.  Those who survive this sorry episode, including banks, will incur significant costs and write downs. Others will lose livelihoods, businesses and homes. The total fallout, including debt and shareholder value, could run into billions.
 
Over more than a decade, Carillion had been a consolidator in the construction industry. It acquired Alfred McAlpine, Mowlem and part of John Laing. In 2014 it failed to win Balfour Beatty for £2bn. Now Balfour faces estimated costs of £45m from its suitor’s collapse.
 
None of these deals insulated Carillion from the flawed workings of its sector. They added diversity which only made the enlarged group even harder to manage, while possibly encouraging an unrealistic view of growing the top line. None of it helped margin growth, cash flow or risk management longer term.
 
The hedge funds were right, four years earlier. Last year, Carillion shares were consistently among the most shorted. The bells had begun to toll.
 
David Buchler is chairman of restructuring and turnaround advisers Buchler Phillips

INSOL Europe attended the 52nd session of Working Group V (Insolvency law) held in Vienna from 18 to 22 December 2018 in its capacity as an invited international non-governmental organisation ("NGO") with observer status. Other observers included, inter alia, World Bank, European Investment Bank, European Banking Federation, the American Bar Association, the International Bar Association, INSOL International, International Insolvency Institute, European Law Institute.

Our INSOL Europe delegation was headed by its President Radu Lotrean and included past-president Steffen Koch, Frank Tschentscher and Florian Bruder. The delegation engaged in numerous discussions with delegations of the Working Group at this 52nd session so as to provide INSOL Europe's views on the matters discussed as we believe that our organisation has specific national and international insolvency expertise.

During the 52nd session, the UNCITRAL Working Group mainly focussed on two topics based on the respective working papers, namely:

1. Recognition and enforcement of insolvency-related judgments: draft model law and draft guide to enactment of the model law - A/AC.9/WG.V/WP.150 and WP.151
2. Facilitating the cross-border insolvency of multinational enterprise groups: draft legislative provisions and obligations of directors of enterprise group companies in the period approaching insolvency - A/CN.9/WG.V/WP.152 and WP.153
3. Proposal by the United States of America for the development of model legislative provisions on civil asset tracing and recovery - A/CN.9/WG.V/WP.154

The above documents together with additional working papers (namely commentary and notes prepared by the Secretariat) are available on the UNCITRAL webpage.

It is intended to present the work on the draft model law on recognition and enforcement of insolvency-related judgements in more detail in a further contribution.

1. Based on the mandate by the Commission to develop a model law or model legislative provisions providing for the recognition and enforcement of insolvency-related judgements, in previous sessions, the Working Group had identified key issues to be addressed in a draft instrument, agreed that a stand-alone model law should be developed, as opposed to forming part of the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), and discussed earlier drafts. 

In preparation of the 52nd session the Secretariat prepared a revised draft text, including notes by the Secretariat, based on the comments of the 51st session (see Eurofenix #68, Summer 2017). The Working Group discussed the revised text, including the Secretariat's drafting proposals and agreed several revisions for the next revised version.

Among the matters discussed, the Working Group proposed a definition of "insolvency-related judgments", i.e. a judgment that "arises as a consequence of or is materially associated with an insolvency proceeding […]".  The draft guide to enactment contains (at paragraph 54) examples of the type of judgment that might be considered to fall within the definition.  The Working Group noted the distinction between the recognition by a receiving court of a judgment made by a foreign originating court and the enforcement by the receiving court of that judgment.  However a proposal to bring Article 9 of this draft model law in line with the most recent draft issued by the Hague Conference Special Commission on the Recognition and Enforcement of Foreign Judgements (17 February 2017) by making only the enforcement of a judgment  (as opposed to both its recognition and enforcement) conditional on the provision of security to ensure that the relevant party is not prejudiced pending an appeal or review of the originating court's judgment or order, did not receive sufficient support by the Working Group. The availability of provisional relief, including staying the disposition of any assets, was approved by the Working Group. The Working Group also agreed a revised version of the draft guide to enactment of this model law.

It is intended to circulate a revised version based on the discussions with a view to reviewing the text at the 53rd session in May 2018 and for the final draft text to be submitted to the Commission for possible adoption at its 51st session in 2018.

2. In previous sessions, the Working Group has developed draft legislative provisions facilitating the cross-border insolvency of multinational enterprise groups. Those provisions incorporated key principles including (a) coordination and cooperation of insolvency proceedings relating to an enterprise group; (b) elements needed for the development and approval of a group insolvency solution involving multiple entities; (c) the use of so-called “synthetic proceedings” in lieu of commencing non-main proceedings; and two supplemental areas (d) the use of “synthetic proceedings” in lieu of commencing main proceedings; and (e) approval of a group insolvency solution on a more streamlined basis by reference to the adequate protection of the interests of creditors of affected group members.

During the 52nd session the Working Group based its discussions on, a consolidated draft incorporating comments from the 51st session (see Eurofenix #68, Summer 2017).  The Working Group, inter alia, discussed the proposed scope of the law, concluding that it should apply "to enterprise groups where insolvency proceedings have commenced for one or more members". Regard was also had to the concept, requirements and recognition of a "planning proceeding", i.e. the insolvency proceeding of an enterprise group member in which a group insolvency solution is being developed and implemented. The EU and some EU member states suggested that the definition should accommodate the group coordination proceedings provided for by the European Insolvency Regulation. It was proposed for further consideration during the next session that a planning proceeding should require, inter alia, (i) that the respective enterprise group member subject to the proceeding is a necessary and integral part of the group insolvency solution; (ii) that one or more other enterprise group members are participating in that proceeding for the purpose of developing and implementing a group insolvency solution, and (iii) that a group representative has been appointed. Substantial progress was made on the wording of provisions to accommodate the treatment, in main proceedings, of foreign claims  with a view to facilitating the insolvency of an enterprise group and minimizing the commencement of both non-main proceedings as well as, by way of a supplemental provision, main proceedings.

Part IV of UNCITRAL's Legislative Guide to Insolvency Law addresses the obligations of directors in the period approaching insolvency.  During previous sessions, the Working Group had agreed and discussed a revision of Part IV to address those obligations in an enterprise group context. The revised draft text was noted but will await further development of the work on enterprise group insolvency.

As that work has already reached an advanced stage, INSOL Europe's delegation anticipate that efforts are likely to be made during the next session(s) also to finalise this work.

3. The United States presented a proposal for future work by the Working Group regarding the development of model legislative provisions on civil asset tracing and recovery. The Unites States argued that the ability to trace and recover assets that have been moved across borders can be vital for enabling insolvency representatives to obtain the maximum possible recovery for creditors and therefore suggested that the Working Group request the Commission to grant a mandate to begin preliminary exploration.  The Working Group conducted a preliminary discussion with a view to further consider the proposal in the next session.

We are looking forward to continuing the work at the 53rd session which is tentatively scheduled to take place in New York from 7 to 11 May 2018 and in particular to assisting in finalizing the revised text of the draft model law on the recognition and enforcement of insolvency-related judgements and to progressing as expeditiously as possible, the work on multinational enterprise group insolvencies.

23 January 2018
Florian Bruder

Links:
Download the full report by Florian Bruder here.
Access the documents and working papers on the UNCITRAL webpage here. [Read more]

We are pleased to announce that the Eastern European Countries' Committee Conference will be held in Riga (Latvia) on 31 May and 1 June 2018. Riga is the largest city in Latvia and also its capital city, and the largest city in the Baltic States with over one third of Latvia's population. Riga is home to the European Union's office of European Regulators for Electronic Communications (BEREC) and is served by Riga International Airport, the largest airport in the Baltic states. [Read more]