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Fourth Session: Younger Academics Network

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  1. Fourth Session: Younger Academics Network Chairs: Myriam Mailly (University of Kent and University Lille 2) Emmanuelle Inacio (Université du Littoral Côte d’Opale)

  2. YAN The Younger Academics Network on Comparative and International Insolvency Law and Finance

  3. Who are we ? - Linked with the Academic Forum of INSOL Europe - Representation of younger academics or PhD fellows - 29 participants from 8 jurisdictions

  4. What are we doing ? - A (virtual) network - Exchange and cooperation - Support between researchers

  5. Where to find us ? - INSOL Europe website

  6. How to join us ? - How to join ?

  7. Discharge of Debts under Czech Law: The Role of Respective Actors and the Reflected Data Petr Sprinz (University of Palacky in Olomouc)

  8. Issues To Be Discussed • Discharge of debts is one of the methods of the resolutions of the debtors’ insolvency or threatened insolvency under the Czech Law leading to the debtor’s release from unpaid unsecured debts. • What is the role of the debtors, creditors, insolvency administrators and courts? • How they avail of their roles and affect the course and outcome of the proceeding?

  9. Types of Insolvency Proceedings - Eligibility *rather a theoretical possibility

  10. Discharge of Debts: Conditions • Honesty of a debtor • Ability to pay at least one third of unsecured debts via • repayment plan: non-exempt income is distributed to creditors over the period of five years; • sale of assets:liquidation of all non-exempt assets. Combination of both: Insolvency Act is silent, yet such combination seems acceptable if it helps the debtor.

  11. Debtors’ Petitions and Courts’ Approvals of Discharge of Debts

  12. Sale of Assets & Repayment Plan

  13. Debtors: Reflected Data • Debtors have presumably not much assets left. • Minimum repayment to unsecured creditors of 30 % has not inhibitory effect on the availability of the procedure. • In order to achieve the minimum repayment level, debtors sometimes use a form of external financing. A third party agrees to pay a monthly payment to a debtor (in exchange for nothing).

  14. Debtors: Carrot and Stick Approach • Discharge of Debts reflects the policy of carrot and stick. • Debtors have general duty to act honestly throughout the course of the procedure. • If a repayment plan is adopted, the debtor has a number of other duties such as to: • seek to maintain appropriate income, or • report any change of a residence or an employment. • Release from unpaid debts if all the duties are complied with or conversion to liquidation without any release.

  15. Debtors: Observers • Only debtors may file a motion for discharge of debts. • It seems that debtors are generally not familiar with all the peculiarities of the procedure. • Hence, the debtors are in many respects rather passiveobservers. • Cases indicate that the courts have embraced lenient attitude and provide debtors an opportunity to rectify mistakes - thereby giving them “second chance”.

  16. Creditors (1) • Current Insolvency Act embraced creditor-driven and creditor-oriented approach. • Creditors may generally: • vote over the method of discharge of debts; • contest claims of other creditors; or • file objections to the discharge of debts (e.g. regarding dishonesty of a debtor).

  17. Creditors (2) • However, in practice creditors generally doneither attend creditors meetings nor do they take active role. • Given the little amount at stake, rational apathy prevails. • Passivity may be ultimately to the detriment of creditors. Courts refer to the passivity of creditors in dismissing objections regarding: • discharge of debts of business nature, or • honesty of debtors.

  18. Insolvency Administrator: Supervisor • Duty to inter alia: • act diligently with professional care, • use all efforts to achieve the highest-possible satisfaction of the creditors. • Insolvency administrator holds personal liability for damages caused by the breach of his duties. • Insolvency administrator supervises the debtor. • Insolvency administrator also provides guidance to debtors.

  19. Insolvency Administrator (2) • Remuneration: • repayment plan: fee set at CZK 750 (approx. 30 euro) per month, • sale of assets: fee depends on the amount of distributed proceeds subject to the minimum fee of CZK 45,000 (approx. 1810 euro). • Due to the prevailing rational apathy of creditors creditors do not effectively supervise the fulfilment of the insolvency administrator's role.

  20. Courts: Gatekeepers • Courts have decision-making and supervisory powers. • Judges decide whether to approve discharge of debts. Creditors can only decide the method of discharge of debts. • Hence, courts are gatekeepers of legality. Hence, they are vigilant about the fulfilment of the preconditions for the discharge of debts.

  21. Workload of Courts: Rise in the Number of Insolvency Cases

  22. Courts: Gatekeepers (2) • Courts are overloaded, yet they are eventually the ones who have to handle the case. • Via interpretation courts also affect the outcome of the procedure. • The courts have recognized the complexity of the debtor’s situation and manifested tendency to take rather pro-debtor approach. • Their rulings reflect the alternatives to the discharge of debts which often do not bring about any benefits.

  23. Conclusions • The minimum 30 % repayment of unsecured debts does not have inhibitory effect. External financing may serve as a tool to reach the threshold. • The debtors file a motion for discharge of debts. Due to the lack of the understanding of all the peculiarities the debtors are rather passive observers. • Creditors do not take an active position as they have little at stake. • The insolvency administrators supervise debtors and provide them with a necessary guidance. • The courts are gatekeepers of legality and are eventually the ones who have to handle the case.Case-law indicates that the courts have adopted a pro-debtor approach.

  24. The Development of the Legal Framework for State InsolvencySDRM, SDA, SDRAM Yanying Li(University of Leiden)

  25. Overview • History of the legal framework for State insolvency • An insolvency proceeding for States? • SDRM and SDA • SDRAM Yanying Li, Leiden University

  26. 1. History of the legal framework for State insolvency Commercial banks Bilateral official creditors Multilateral creditors Bondholders Commercial banks Bondholders 1817 1930s 1990s 2012 Yanying Li, Leiden University

  27. Bilateral official creditors Bondholders (Paris Club) (Committees) Sovereign debtor Multilateral creditors Commercial banks (London Club) Yanying Li, Leiden University

  28. Government Bondholders diplomatic protection court litigation use of force sanctions arbitration/adjudication investment arbitration Sovereign debtor Yanying Li, Leiden University

  29. 2. An insolvency proceeding for States?

  30. From 1950 to 2010, over 600 sovereign debt negotiations were conducted. • 447 negotiations in 88 countries with the Paris Club. • 86 restructurings in 68 countries with private creditors. • Since 1998, 17 sovereign bond exchanges with foreign bondholders in 13 countries; in addition, 6 bond exchanges mainly aimed at domestic creditors.

  31. All bank debt restructuring of recent years were post-default cases. • Among 17 recent sovereign bond restructurings, about half of the cases were preemptive, namely Jamaica (2010), Belize (2007), Dominican Republic (2005), Grenada (2005), Moldova (2002), Pakistan (1999), Uruguay (2003) and Ukraine (1998, 2000).

  32. Recent sovereign debt restructuring Sources: Andritzky (2006, 2010), Cruces and Trebesch (2011), Enderlein, Schumacher and Trebesch (2011), IMF Staff and Country Reports, Sturzenegger and Zettelmeyer (2006).

  33. Observations: • No run to the courthouse (data) • No run on assets, because judgments against a sovereign debtor may encounter serious enforcement problems in both the debtor’s territory and abroad. Is there still a need for an insolvency proceedings for States? (intercreditor relationships)

  34. 3. SDRM and SDA Sovereign Debt Arbitration (SDA) Permanent Court of Arbitration Sovereign Debt Restructuring Mechanism (SDRM) International Monetary Fund Yanying Li, Leiden University

  35. SDRM: non-collective proceeding, it defines eligible claims and leaves to the debtor to decide on which claim to restructure. SDA: collective proceeding, it advocates for the inclusion of all claims in the arbitration mechanism. Yanying Li, Leiden University

  36. A Need for a collective proceeding with all claims included? Advantages of a collective proceeding: • Reduced strategic costs • Increased aggregate pool of assets • Enhanced administrative efficiencies Such advantages are not applicable in the sovereign debt context.

  37. 4. SDRAM Sovereign Debt Restructuring Arbitration Mechanism (SDRAM) Main feature: quasi- collective proceeding SDRAM includes claims of all similarly-situated creditors who may be prejudiced by the temporary insolvency of the debtor. Yanying Li, Leiden University

  38. The phrase “similarly-situated creditors” should exclude multilateral creditors, Paris club creditors etc. It is unnecessary and impossible to include them as different classes. “Creditors who may be prejudiced by the temporary insolvency of the debtor” should include creditors holding claims with maturity in X years. X should be proposed by the debtor in its restructuring plan.

  39. Example of a quasi- collective insolvency law proceeding: “accelerated financial safeguard procedure“ in France, (sauvegarde financière accélérée), 1st March, 2011 Only financial creditors will be involved with such a procedure, no trade creditors.

  40. Potential problem with SDRAM: As it includes all similarly-situated creditors holding claims with maturity in X years, it may drive up the cost of short-term borrowing for the debtor. Suggested solution: To exclude all bonds with maturity less than one year (the ESM treaty approach)

  41. Differently-situated creditors: multilateral creditors, bilateral official creditors, trade creditors etc. SDRAM Different maturities: creditors holding claims with maturity after X years Policy concerns: bonds with maturity less than one year

  42. Free Movement of Insolvency Judgments versus Public Policy Dr Ekaterini Sabatakakis (University of Strasbourg)

  43. Introduction • Brussels Convention (1968), EIR (2000) and Brussels I Regulation (2000) : • For the purposes of the free movement of judgments and by virtue of the principle of mutual trust, judgments delivered in a Member State should be recognised automatically in another Member State.

  44. The exception to this principle: • A judgment shall not be recognised if it is manifestly contrary to public policy in the Member State in which recognition is sought. • ECJ: a decision opening insolvency proceedings must not be made in disregard of some principles recognised by EU and International law, nor by the constitutional traditions common to the Member States.

  45. Which are these fundamental principles or constitutional rights and liberties of the individual mentioned by the EIR and the ECJ? • What are their effects on the free movement of judgments and the application of the EIR by the EU Member States?

  46. I. Recognition of insolvency proceedings Article 67 of the Treaty on European Union • Area of freedom, security and justice. • Respect for fundamental rights and the different legal systems and traditions of the Member States. • Mutual recognition of judgments in criminal matters. • Mutual recognition of judicial and extrajudicial decisions in civil matters.

  47. Article 16 of the EIR • Recognition of a judgment opening insolvency proceedings in a Member State means that the judgment produces the same effects in the other States as under the law of the State of the opening of these proceedings.

  48. Article 25 of the EIR • Not only the recognition of the opening of insolvency proceedings is automatic, but also the course and closure of those proceedings, the compositions approved by the court whose judgment opened those proceedings, judgments deriving directly from the insolvency proceedings and which are closely linked to them, as also judgments relating to preservation measures taken after the request for the opening of insolvency proceedings.

  49. Articles 3 and 17 of the EIR • Distinction between main proceedings and secondary proceedings. • MG Probud Gdynia sp. z o.o. (Case C-444/07) [2010]: only the opening of secondary insolvency proceedings is capable of restricting the universal effect of the main insolvency proceedings.

  50. II. The public policy exception and the fundamental rights • Recognition of judgments delivered by the courts of the Member States is based on the principle of mutual trust . • Grounds for non-recognition should be reduced to the minimum necessary. • The only ground for opposing recognition is the public policy exception.