Date of publication: 1 September 2020
Dmitry Konstantinov, Сounsel, Head of Insolvency and Financial Restructuring
The coronavirus nightmare, plummeting oil prices and troubled payments have coincided with the newly erupted concerns for the bankruptcy procedures. The EU countries have adopted the new Directive 2019/1023, whereas discussions have started around the draft reform of Russian bankruptcy laws since early 2020 already. In is supposed to end up in a far-reaching application of rehabilitation procedures.
Both the European directive and the Russian draft reform serve as sound of a well-known assumption: any restructuring is about finding the party that would “cover the bill” of retaining the debtor’s solvency.
Implementation recommendations of the 2019/1023 Directive by INSOL Europe concentrate a lot on the sequence of satisfying claims of the creditors and the balance of interests, attributable to various priorities. Over the course of rehabilitation, creditors of various categories are treated differently. To say the least, some of them (for instance, fiscal authorities and banks) do enjoy the preferential treatment.
The principles behind prioritizing creditors during a company being restructured or liquidated differ only slightly. The creditors who have abandoned their hopes of satisfying claims within the framework of receivership proceedings shall feature the largest vulnerability exposure towards rehabilitation (and vice versa). Russia currently follows the same path: proceeding from the draft law, endorsed by the Ministry of economic development, there appeared to be no reasons to think differently.
In terms of restructuring, the creditors may be divided into the affected and unaffected. Essentially, it shall be the same case in Russia. As a matter of tradition, the scope of voting creditors excludes the debtor’s equity holders and his affiliated parties. INSOL Europe suggests subordinating other creditors for restructuring purposes – all those, to whom the lower-than-average priority has been assigned. In Russia, the legal concept of subordinating claims is only at the development stage, therefore, it is too early to discuss its applicability to rehabilitation. Authors of the draft law decided to avoid raising this issue.
It looks like a sound idea to regulate creditors’ status in the disputed liabilities as a particular move. It is one of the rules that Russian legislation has failed to adopt on the full scale for the time being.
Any lawyer that has a practice in bankruptcy proceedings is certain to have faced the creditors, who engaged into the proceedings unexpectedly and with good profit for the debtor’s equity holders, if appropriate. In the opinion of INSOL Europe, whenever the share of such loans appears to be considerable once the restructuring has been enabled, it is necessary to quit the rehabilitation procedure entirely, because in this case it would be impossible to outline the scope of creditors who must provide consent to adopt the restructuring plan. In such case, legitimacy verification of each creditor’s claims would prove a lot more effective.
It is possible to turn down the votes of a creditor, whose claims may be disputed. In such case the implementation of restructuring plan may be disputed in court. One of the practicable solutions could be the appointment of a special arbitrator to select the voting creditors or engagement of public authorities into this process.
The Directive also dwells on the role of the debtor company equity holders. Two approaches may be taken with regard to these. In the first case, they may be entirely withdrawn from the restructuring process – then the national governments of the Member States shall also ensure that equity holders are not allowed to unreasonably prevent or create obstacles to the implementation of a restructuring plan. In the second case, quite on the contrary, shareholders shall be engaged into the restructuring process (as a rule, restricting their right to approve of the restructuring plan) and it becomes possible to modify the equity structure and prioritize the shareholders similarly to the creditors.
Restructuring affects any debtor’s corporate structure way stronger than liquidation. Amidst such a procedure, the used-to-be creditor may become a major shareholder, whereas an existing shareholder could face the need to increase the company’s capital.
Although restructuring plan essentially is a treaty between the creditors, it does not require consent from each and any of them to be adopted. The approval of holders of the majority of voting claims is needed instead. However, the concept of “majority” may be determined differently: starting from 50% and up to 75% of votes within each creditor class (priority).
In fact, not even the consent of all creditor classes is required in order to adopt the restructuring plan. When certain conditions are attained, the refusal of an entire creditor class may be overcome by the cross-class cram down. Without this kind of tool, the restructuring may only be the highly marginal procedure for those cases, when “all belong here”. This is the way it currently happens in the Russian bankruptcy proceedings and it is something that not even a fairly progressive draft law, endorsed by the Ministry of economic development is ready to face.
The other day Russian Central Bank suggested adding to this draft law the option of adopting the decision to restructure contrary to the will of the majority of creditors. Obviously, this topic is being discussed not only in the professional circles.
Restructuring per se does not enable the debtor to pay back to his creditors in a magical way. For many, this procedure rather means truncating of part of the claims or shifting the repayment terms. Such losses must not exceed those incurred by these same creditors if a debtor goes bankrupt, but the debtor rehabilitation would not bring everyone to happiness and prosperity either.
Those commercial creditors, who are already getting the least out of the receivership proceedings shall be particularly vulnerably exposed.