NEWSLETTER

INSOLVENCY, RESTRUCTURING
AND CREDITORS’ RIGHTS the global voice of
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION the legal profession

Vol 15 No 2 SEPTEMBER 2005

IN THIS ISSUE FROM THE CO-CHAIRS

From the Co-Chairs 1

Officers of the Insolvency, Restructuring

and Creditors’ Rights Section 2 Exciting Times for
IBA 2005 Conference – Prague

Confirmation of Plan: More Power to

3
our Section
Judges within the Bankruptcy Process 4 Ben B Floyd Agustín Bou
Munsch Hardt Kopf & Harr Jausas
New Bankruptcy Reform Has Significant
Houston, Texas Barcelona
Impact on Corporate Bankruptcies 7
bfloyd@munsch.com abou@jnv.com
Recourse Available to Creditors in Co-Chairs, Section on Insolvency, Restructuring and Creditors’ Rights
Singapore Against a Singapore
Incorporated Debtor Company 12

President Bush Signs Section 256 –

Enacting Bankruptcy Reform
Legislation
Tentative Reform of Italian
Bankruptcy Law
Debt Restructuring Agreements in Italy
under the Recent Law No 80/2005 29
Priority for Tax Claims in Reorganisation
Proceedings: is the Tax Priority Justified
in Colombian Insolvency Law?
An Overview of China’s Insolvency Law
on Foreign-Invested Enterprises 36
Corporate Insolvency and Creditors’
Rights in India
Reform of French Bankruptcy Law:
the New Creditor Input
O ne hundred and twelve people attended the Section’s mid-year
meeting in beautiful, sunny Salzburg, Austria. Post-meeting reviews
were universally positive. Many thanks to our host Committee for the
18 superb social arrangements and venues and to our session chairs for the
excellent technical programme.
The Section has gained 28 new members so far this year, many of whom
27
have joined since the Salzburg meeting.
Our next meeting will be held in conjunction with the IBA Annual
Conference in Prague from 25-30 September. Full details of our technical
sessions may be found on page 3. Note that there is a short business
meeting scheduled after the close of our afternoon technical session on
Thursday, 29 September. If you have not already done so, please log on to
33
the IBA website, www.ibanet.org and register.
And while you are logged on, please take a look at your member details
and update them if necessary. Our Website Coordinators plan to have a
Section listserv up and running soon, and we need your current e-mail
addresses.
38
Planning is well under way for our 2006 mid-year meeting in Athens,
from 7-9 May. Thanks to good advance work by our Vice-Chair, Marika
43 Chalkiadis and hard negotiations by our host Committee, we have secured
Continued overleaf

Newsletter Editors
Gian Bruno Bruni
International Bar Association
Bruni Gramellini Leonelli 10th Floor, 1 Stephen Street, London W1T 1AT, United Kingdom
Corso di Porta Vittoria 28, 20122 Milan, Italy Tel: +44 (0)20 7691 6868. Fax: +44 (0)20 7691 6544
Tel: +39 (02) 5519 0378. Fax: +39 (02) 545 7495. info@ancillex.it www.ibanet.org
Marika Chalkiadis © International Bar Association 2005.
Nabarro Nathanson
All rights reserved. No part of this publication may be reproduced or transmitted
Lacon House, Theobalds Road, London WC1X 8RW, United Kingdom in any form or by any means, or stored in any retrieval system of any nature
Tel: +44 (0)20 7524 6000. Fax: +44 (0)20 7524 6524. without the prior permission of the copyright holder. Application for permission
m.chalkiadis@nabarro.com should be made to the Managing Editor at the IBA address.
 FROM THE CO-CHAIRS SECTION OFFICERS

a marvellous venue. We will be meeting at the Grande Co-Chairs

Bretagne (www.grandebretagne.gr). Our technical Ben B Floyd
Munsch Hardt Kopf & Harr PC, Bank of America Center
sessions will cover automotive insolvency, admiralty and
700 Louisiana Street, Suite 4600, Houston, TX 77002-2732, USA
insolvency, and enforcement of arbitral awards in Tel: +1 (713) 222 1466
insolvency. If you are interested in preparing a paper Fax: +1 (713) 222 1475
or presenting at one of the technical sessions in Athens, bfloyd@munsch.com
please contact any Section Officer. Agustin Bou
Your leadership will present a proposal for the Jausas, Paseo de Gracia 103, 7th Floor, 08008 Barcelona, Spain
Tel: +34 (93) 415 0088
creation of substantive Subcommittees to the Legal Fax: +34 (93) 415 2051
Practice Division in Prague. Once approved, we will abou@jnv.com
announce the Subcommittees and detail the sign-up
Senior Vice-Chair
procedures on the listserv.
Finally, at its 38th session in Vienna on 15 July, Christopher Besant
UNCITRAL considered a number of proposals for Cassels Brock & Blackwell, Scotia Plaza, Suite 2100
40 King Street West, Toronto, Ontario M5H 3C2, Canada
future work to be undertaken by the Commission on Tel: +1 (416) 869 5739
the topic of insolvency law, including the treatment of Fax: +1 (416) 350 6923
corporate groups in insolvency and the use of cross- cbesant@casselsbrock.com
border protocols in transnational insolvency cases. The Vice-Chairs
Commission agreed that in order to obtain the views of
David Roque Vítolo
international organisations and insolvency experts on
Vítolo Abogados, Paraguay 866, 3rd Floor
the proposed topics, an international colloquium Buenos Aires C1057AAL, Argentina
should be held in Vienna from 14-16 November 2005. Tel: +54 (11) 4175 5085 / (11) 4312 8099
It is anticipated that the colloquium will be followed Fax: +54 (11) 4312 8299 / (11) 4312 8399
vitolo@vitolo-abogados.com.ar
by a meeting of UNCITRAL’s Working Group on
Insolvency Law in Vienna next spring. These sessions Koji Takeuchi
Sakura Kyodo Law Offices, Yamato Seimei Building 16F
will be attended by the world’s foremost insolvency 1-1-7 Uchisaiwai-cho Chiyoda-KU, Tokyo 100-0011, Japan
experts. Volunteers are needed to staff the colloquium Tel: +81 (3) 5511 4400
and the anticipated semi-annual Working Group Fax: +81 (3) 5511 4411
meetings in Vienna and New York and to draft takeuchi@sakuralaw.gr.jp

submissions by the Section. If you are interested in Marika Chalkiadis

participating in this challenging work, please contact Nabarro Nathanson
Lacon House, Theobalds Road, London WC1X 8RW, United Kingdom
any Section Officer.
Tel: +44 (0)20 7524 6000
We look forward to seeing you in Prague! Fax: +44 (0)20 7524 6524
m.chalkiadis@nabarro.com

Publications Officer/Newsletter Editor

Gian Bruno Bruni
It’s Your IBA Bruni Gramellini Leonelli, Corso di Porta Vittoria 28
20122 Milan, Italy
Tel: +39 (02) 5519 0378
As a professional membership organisation, Fax: +39 (02) 545 7495
info@ancillex.it
the IBA is keen to ensure that we provide
UNCITRAL Liaison
services, benefits and opportunities that
Daniel Glosband
fulfil the expectations and wishes of our Goodwin Procter LLP, Exchange Place, Boston, MA 02109, USA
members. Tel: +1 (617) 570 1930
Fax: +1 (617) 523 1231
dglosband@goodwinprocter.com
If you have comments and thoughts about
what is currently offered, we would be Website Coordinator
Carsten Ceutz
delighted to hear from you. If you have Bech-Bruun Dragsted, Langelinie Alle 35, Copenhagen 2100, Denmark
suggestions on how we can expand and Tel: +45 7227 3366
Fax: +45 3525 9866
improve the programme of activities, or carsten.ceutz@bechbruundragsted.com
you would like to know how you could get
more closely involved in the Association,
please do contact us at
feedback@int-bar.org.
LPD Senior Administrator
Ronnie Hayward, lpd@int-bar.org

2 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005
 IBA 2005 CONFERENCE
The Insolvency and Creditors’ Rights Committee
is planning to hold the following sessions
at Prague, 25-30 September 2005
Aviation insolvency
Joint session with Aviation Law.
Session Co-Chairs
Christopher W Besant Cassels Brock & Blackwell LLP, Toronto,
Ontario, Canada; Senior Vice-Chair, Insolvency and Creditors’
Rights
Berend Crans De Brauw Blackstone Westbroek, Amsterdam,
the Netherlands
Few industries impact global commerce more than commercial
aviation. The causes of instability in this sector are myriad:
terrorism, SARS, rocketing fuel prices, regulation/deregulation,
cut-throat competition from discounters and burdensome legacy
and social costs. From Air Bourbon to Volare, at least 30 carriers
have restructured or filed proceedings to reorganise or liquidate
in the past months. Panellists, drawn from the ranks of insolvency
professionals, aviation consultancy and various segments of the
industry will address one of the most complex and persistent
economic issues confronting the global economy in the 21st
century.
Speakers
Steven van de Heijden TUI Nederland NV and ArkeFly, Rijswijk,
the Netherlands
William J Rochelle III Fulbright & Jaworski LLP, New York, USA
Frank Bennett Bennett & Company, Toronto, Ontario, Canada
Cameron A McCaw Zwaig Consulting Inc, Antigua, West Indies
Lenard Parkins Hayes & Boone LLP, Houston, Texas, USA
Brigitte Umbach-Spahn Wenger Plattner, Zurich, Switzerland
Rutger Schimmelpenninck Houthoff Buruma, Amsterdam, the
Netherlands
Steve Akers Grant Thornton UK LLP, London, England
Maria Regina Lynch Xavier Bernardes Bragança, São Paulo, Brazil;
Vice-Chair, Aviation Law
Neil Harnby Linklaters, Amsterdam, the Netherlands
Selinda A Melnik Edwards & Angell LLP, Wilmington, Delaware,
USA; Council, Legal Practice Division; Vice-Chair, UNWOC
Huib van Doorn debis AirFinance BV, Amsterdam, the Netherlands
0930 – 1700 WEDNESDAY
Conference Hall, PCC
The world’s insolvency court?
Session Chair
Leonard H Gilbert Holland & Knight LLP, Tampa, Florida, USA
This session will focus on the use of US bankruptcy law by or
against non-US entities to obtain relief that would not otherwise be
available in the debtor’s homeland. Recent cases to be covered will
include: the Chapter 11 filing of the Russian oil giant, Yukos Oil
Company; Parmalat SpA, with its multiple filings under Chapter 11
(as well as under section 304); Globo Comunicações e Participações
SA (Globopar), in which US bondholders filed an involuntary
Chapter 11 case against a Brazilian debtor; and the case of the
Colombian airline, Avianca, which recently reorganised under
Chapter 11. The session will also consider recent filings under
section 304 of the Bankruptcy Code, including cases brought by
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Varig Airlines and by Multicanal SA, in which US recognition has
been sought for an Argentine ‘prepackaged’ proceeding.
The effect of the EU regulations will also be examined – under
what circumstances should the centre of main interest be in the
United States? The panel will also briefly discuss the potential
impact of new Chapter 15 of the US Bankruptcy Code, which
adopts in part the UNCITRAL Model Law on Cross-Border
Insolvency and which is scheduled to replace current section 304
in cases filed on and after 17 October 2005.
Speakers
The Honourable Allan L Gropper United States Bankruptcy Court,
New York, USA
Hugh M Ray Andrews Kurth LLP, Houston, Texas, USA
William H Schrag Morgan Lewis & Bockius LLP, New York, USA
Daniel R Vitolo Vitolo Abogados, Buenos Aires, Argentina;
Vice-Chair, Insolvency and Creditors’ Rights
Christopher Mallon Weil Gotshal & Manges LLP, London, England
0930 – 1230 THURSDAY
Club E, PCC
Insolvency reform in Eastern Europe
Session Chair
Thomas J Salerno Squire Sanders & Dempsey LLP, Phoenix, Arizona,
USA
Insolvency law reform is becoming an international phenomenon,
with major efforts underway in Eastern Europe. The panel will focus
on insolvency law reform efforts in the Czech Republic, Slovakia,
Romania, and other Eastern European countries, including
discussions of political, cultural and economic challenges relating
to such efforts.
Speakers
The Honourable Redfield T Baum United States Bankruptcy Court,
Phoenix, Arizona
Katarina Čechová Čechová & Partners, Bratislava, Slovakia
Sylva Rychtalikova Rychtalikova Sylva JUDr. Advokat, Prague,
Czech Republic
Barbu Radu Milhaescu Bucharest, Romania
Thomas J Salerno
Bohumil Havel Pilsen, Czech Republic
1400 – 1600 THURSDAY
Club E, PCC
Open business meeting: project updates and
future programmes
All Section members are invited to join the Officers of the Section
on Insolvency, Restructuring and Creditors’ Rights (SIRC) for an
update on current and planned Section projects, the opportunity to
get more actively involved in the Section’s work and suggest panel
topics for future conferences, and an open, lively exchange on the
most pressing insolvency issues internationally.
1600 – 1700 THURSDAY
Club E, PCC
September 2005 3
 Confirmation of Plan:
More Power to Judges within
the Bankruptcy Process
Sebastián Rodrigo
Alfaro Abogados, Buenos Aires
srodrigo@alfarolaw.com
R ight after the economic crisis of 2002, the National
Congress enacted different laws the main purpose
of which was to minimise the negative effects of the
crisis over companies in default after the termination of
the convertibility regime. The most controversial matter
was the amendment to the Bankruptcy Act, especially in
relation to the regulation of the reorganisation process
(Concurso Preventivo). The debate concluded with the
enactment of the emergency legislation,1 which
introduced important amendments to the bankruptcy
process. Among other issues, this legislation granted
judges the power to accept or reject debtors’ plans
once they were admitted by their creditors.
For the purposes of a better comprehension of the
matter, it is important to make brief reference to the
former regulations of the bankruptcy process.
During the validity of Law No 19,5512 (1972 to1995)
judges were empowered to approve or reject the plan
proposed by the debtor. In fact, judges were allowed to
analyse, among other circumstances related to the
public interest, whether the debtor actually deserved
the approval of the plan in accordance with his prior
behaviour and the real causes that brought about his
insolvency. However, for some authors, giving the
judges the opportunity to review the merits of the
debtor was not considered appropriate, since the
negotiation (and the terms and conditions of the
settlement) were matters concerning exclusively the
debtor and his creditors.
In the1990s, and due to the privatisation process (a
key issue of the Argentine economy in that decade),
the Congress enacted a new Bankruptcy Act where the
powers of judges were notably diminished. The new
Law No 24,5223 established that judges should approve
those plans which met the majorities required by the
law, disregarding any other circumstance and thus
eliminating the faculties granted to the judges that
were provided by the former Law No 19,551.
Despite the new imposition, the Act maintained the
quantitative limit to debtors’ proposals established by
the former Law. Debtors were entitled to structure the
proposal, but they were obliged to offer at least 40 per
cent of the total amount of the outstanding credits.
Therefore, judges could at least reject proposals that
did not meet that minimum. The new Act did not
provide any rule for the control of abusive or
4 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
fraudulent plans, but judges began to apply general
principles established in the Civil Code in order to
reject those plans considered abusive or fraudulent. For
instance, the National Commercial Court of Appeals of
the city of Buenos Aires rejected a plan (even after it
obtained prior approval by a majority of the creditors),
because it was considered abusive. The debtor offered
payment of 40 per cent of the total amount, without
interest, in 20 annual instalments, after a forbearance
period of five years, counted as from the date of the
judicial approval of the agreement (Homologación). In
that case, the appeal rejected the plan based on the
rules provided by the Civil Code in relation to the
‘abuse of law’.
In 2002, during the worst of the economic crisis, the
National Congress amended the Bankruptcy Act No
24,522 in order to readapt the rules in accordance with
the new scenario in place at that time: the termination
of the convertibility regime and a generalised default.
In February it was enacted as Law No 25,563,4 which
declared the productive and credit emergency. Among
the provisions of the new Law, one contained specific
amendments to the Bankruptcy Act. In this sense, and
in relation to the debtor’s proposal, Section II
introduced an amendment that eliminated the
mandatory minimum limit of 40 per cent to be offered
by the debtor.
Later on during May 2002 Law No 25,5895 was
enacted, which introduced amendments to the above-
mentioned Law No 25,563 and also (and again) to the
Bankruptcy Act. This new Law re-established the power
of judges to accept or reject debtors’ plans.
In relation to the acceptance, judges are now entitled
to admit debtors’ plans even if the majorities have not
been obtained (as a rule, judges shall approve those
plans that have the majorities required by the Law). If a
debtor offers different proposals to different categories
of creditors (ie labour, banking and financial
institutions, privileged, etc), and if the majorities are
not met, judges are provided with the ‘cramdown
power’ to impose a debtor’s plan so long as the
following requirements are complied with:
(1) approval of the plan by at least one category of
creditors;
(2) approval by creditors that represent at least three-
quarters of the non-privileged creditors;
September 2005
 MORE POWER TO JUDGES WITHIN THE BANKRUPTCY PROCESS
(3) the plan shall not discriminate against those
creditors who have not consented to the proposal;
and
(4) the payment to be received by creditors shall not be
inferior to the amount they would have received if
the debtor had been declared bankrupt.
Related to the rejection, the amended Act provides that
judges shall not approve plans considered abusive or in
contravention of the law, as regulated by the Civil
Code.
As a result of the new legislation, the conflict of rules
becomes evident: the emergency legislation provides,
on the one hand, the elimination of the minimum 40
per cent to be offered by debtors and, on the other
hand, it mandates the rejection of those plans that are
abusive or contravene the law. In this respect, opinions
among authors are divided: part of the legal doctrine
understands that judges shall approve the plan so long
as evidence of having obtained the legal majorities is
submitted, disregarding the terms of the proposal. The
main argument is based on the elimination of the
minimum 40 per cent that entitles debtors to make any
proposal that shall be admitted by the bankruptcy
judges if the legal majorities are met.
The other position understands that judges may
approve plans that are in compliance with the
requirements established by law so long as the proposal
is not abusive or is not fraudulent. They consider as
abusive those proposals where the structure of the
payment and the combination of each of its
components (ie percentage of payment, interest rate,
forbearance or grace period, number of instalments,
etc), affect in a significant way the creditors’ rights vis-à-
vis the final amount to be obtained from the proposal.
Terms and Conditions for submission of articles
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2. The article must be the original work of the author, must not have been
previously published, and must not currently be under consideration by another
journal. If it contains material which is someone else’s copyright, the unrestricted
permission of the copyright owner must be obtained and evidence of this
submitted with the article and the material should be clearly identified and
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knowledge, contain anything which is libellous, illegal, or infringes anyone’s
copyright or other rights.
3. Copyright shall be assigned to the IBA and the IBA will have the exclusive
right to first publication, both to reproduce and/or distribute an article (including
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
As from the date of the amendment, some
jurisprudence has rejected some proposals considered
abusive. For example, the following has been
considered abusive: a plan that proposes the payment
of ten per cent of the total amount of the admitted
credits, without interest, in ten annual instalments, with
a forbearance period of five years, counted as from the
date of the judicial approval of the plan. Likewise,
within the business reorganisation process of one of the
most powerful oil traders in Argentina, a ruling by the
Court of Appeals of the city of Buenos Aires is still
pending concerning the appeal raised by certain
creditors to the judicial approval of a plan that
proposed the cancellation of 100 per cent of the
common credits in 24 annual instalments after a
forbearance period of 18 years, without recognising
interests in favour of these creditors.
Notwithstanding the uncertainties that the new
amendment has brought, and the arguments that
sustained the different interpretations of the new legal
text, the relevance of the amended Bankruptcy Act is
the re-establishment of the judges’ power to reject
those plans considered abusive. Then only an
exhaustive analysis of the real capacity of each debtor
to repay his debts should determine the legitimacy of
his proposal.
Notes
1 Law No 25,563 (‘Productive and Credit Emergency’) and Law No 25,589
(‘Amendments to the Bankruptcy Act and to Law No 25,563’).
2 Enacted on 4 April 1972.
3 Enacted on 7 August 1995.
4 Enacted on 14 February 2002.
5 Enacted on 15 May 2002.
the abstract) ourselves throughout the world in printed, electronic or any other
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to do the same. Following first publication, such publishing rights shall be
non-exclusive, except that publication in another journal will require permission
from and acknowledgment of the IBA. Such Permission may be obtained from
the Managing Editor at editor@int-bar.org.
4. The rights of the author will be respected, the name of the author will always
be clearly associated with the article and, except for necessary editorial changes,
no substantial alteration to the article will be made without consulting the
author.
September 2005 5
International Practice

Diploma Programme
The International Practice Diploma Programme is a continuing legal
education programme designed specifically to meet the needs of
international practitioners throughout the world.
Developed by the International Bar Association and The College of Law of England and Wales, the
Programme will be of particular interest to newly qualified lawyers wishing to enhance their knowledge
of particular areas of legal practice, and lawyers wishing to diversify their legal knowledge.

The Programme’s flexible distance learning format and support structure mean that jurisdictional
boundaries represent no barrier to successful completion.

Previous entrants to the Programme include lawyers from every corner of the globe, from Australia and
Argentina, to the USA and Uruguay. Contributors to the Diplomas include international law firms such as
Allen & Overy LLP, Baker & McKenzie, Freshfields Bruckhaus Deringer and Debevoise and Plimpton LLP.

The International Practice Diploma programme offers the following nine Diplomas:
• International Business Organisations
• International Mergers and Acquisitions
• International Competition Law
• International Joint Ventures
• International Intellectual Property Law
• International Arbitration
• International Capital Markets and Loans
• Human Rights Law and Practice
• Human Rights and Criminal Procedure

Applications for modules commencing on 23 January 2006 are being accepted until 2 January
2006.

A limited number of scholarships are available to young, deserving lawyers who require financial assistance
in order to participate in the Programme. For further details, please visit the IBA website.

For more information, see www.ibanet.org or www.lawcol.org.uk or contact:

Client Services Professional Development Department
The College of Law, Braboeuf Manor
Portsmouth Road, Guildford, Surrey GU3 IHA, United Kingdom
DX: 2400 Guildford
Tel: +44 (0)1483 460200
Fax: +44 (0)1483 460306
E-mail: ibapracticediploma@lawcol.co.uk
 New Bankruptcy Reform Has
Significant Impact on
Corporate Bankruptcies
Mark Broude
Latham & Watkins LLP, New York
mark.broude@lw.com
O n 20 April 2005, President Bush signed into law
the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (the ‘Act’). Although the focus
of the Act is on consumer bankruptcies, the Act
contains significant amendments to the Bankruptcy
Code (the ‘Code’) that will affect corporate
bankruptcies.1 This article describes the Act’s most
important business bankruptcy amendments to the
Code. In general, most of these provisions will apply
only to bankruptcy cases commenced on or after 17
October 2005, 180 days after enactment; I have noted
certain exceptions below.
Additional exceptions to the automatic stay
The Act has added exceptions to the current automatic
stay provisions under section 362 of the Code. Most
notably, the Act excepts from the stay certain actions by
a ‘securities self regulatory organization’, which is
defined as a securities association registered with the
SEC or a national securities exchange. Such
organisations may commence or continue an
investigation or action (a) for enforcement of its
regulatory powers, (b) for enforcement of orders or
decisions, other than monetary sanctions, obtained in
enforcing its regulatory powers and (c) to delist, delete
or refuse to permit the quotation of any stock that does
not meet applicable regulatory requirements.
In addition, the Act also limits the stay as to certain
tax matters. In particular, the Act makes clear that the
stay as to the commencement of proceedings in the
United States Tax Court applies only to proceedings
related to tax periods ending prior to the petition date.
In addition, the Act permits taxing authorities to set-off
pre-petition tax refunds against pre-petition tax
liabilities to the extent permitted by non-bankruptcy
law.
Changes to financial contracts
The Act expands the definitions of ‘forward contract’,
‘commodity contract’, ‘swap agreement’ and ‘securities
contract’ to include ‘any other similar agreement’ so as
to allow for similar undefined agreements and changes
in such agreements over time. In addition, the
definitions of the terms listed above, as well as the
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
definition of ‘repurchase agreement’, have also been
revised to include master agreements that provide for
multiple transactions, even if there are non-qualifying
transactions under the master agreement; for example,
if a debtor has under one master agreement entered
into multiple repurchase agreements as well as other
transactions that do not qualify as repurchase
agreements, the master agreement and the repurchase
agreements thereunder qualify as repurchase
agreements even though the other transactions do not.
The Act also amends the definition of ‘repurchase
agreement’ to include agreements where the underlying
assets are sold subject to repurchase of mortgage loans
or interests in mortgage related securities.
The Act also adds section 561 of the Code, which
provides that an exercise of a contractual right to cause
the termination, liquidation or acceleration of or to
offset or net termination values, payment amounts or
other transfer obligations arising under a securities
contract, commodity contract, forward contract,
repurchase agreement, swap agreement and/or master
netting agreement will not be stayed, avoided or
otherwise limited by operation of any provision of title
11 or any order of a court or administrative agency in
any proceeding under title 11 assuming the party
exercising the contractual right could do so under
sections 555, 556, 559 or 560.
Additionally, with the addition of section 562 the Act
clarifies the damage measure in connection with a
debtor’s rejection of securities contracts, commodity
contracts, forward contracts, repurchase agreements,
swap agreements or master netting agreements. Section
562 provides that rejection damages will be measured as
of the earlier of the date of rejection or the date(s) of
liquidation, termination or acceleration.
Committees
The Act adds two subsections to section 1102 of the
Code, which affects the membership and duties of a
committee of creditors or interest holders. First, upon
request of a party in interest, if a court determines that
a change in a committee is necessary to ensure
adequate representation of creditors or equity security
holders, the court may order the US Trustee to change
the membership of a committee appointed under
September 2005 7
 NEW BANKRUPTCY REFORM HAS SIGNIFICANT IMPACT ON CORPORATE BANKRUPTCIES
section 1102. To effect such a change, the court may
order an increase in the size of the committee to
include a creditor that is a ‘small business concern’ if
the creditor holds claims of the kind the committee
represents where the aggregate amount of the claims,
compared to the annual gross revenue of the creditor,
is disproportionately large. Secondly, under the Act a
committee is required to (a) provide access to
information to creditors who hold claims of the kind
represented by the committee and are not appointed to
the committee, (b) solicit and receive comments from
such creditors and (c) be subject to a court order
compelling any additional report or disclosure to be
made to such creditors. These additions to section 1102
will most likely increase the power struggle over
committee memberships and cause confidentiality
agreements to proliferate.
Debtor’s exclusivity period
The Act limits a debtor’s ability to extend the exclusive
period to file a plan under section 1121(d) of the
Code. Previously, the Code allowed a debtor to extend
the exclusive period indefinitely ‘for cause’. In practice,
bankruptcy courts have routinely granted multiple and
lengthy extensions. However, the Act prohibits the
extension of the exclusive period (a) for filing a plan
beyond 18 months after the entry of the order for relief
and (b) for solicitation of a plan beyond 20 months
after entry of the order for relief. This limitation on
extensions of the exclusivity period will increase the
leverage of creditors’ committees and other
constituencies as time passes and the case approaches
the 18-month mark.
Dismissal/conversion of a case
The Act enhances the ability of a party in interest to
have a case dismissed or converted to a case under
chapter 7 pursuant to section 1112 of the Code. The
Act provides that, absent unusual circumstances, a
court shall dismiss or convert a case if the party in
interest requesting such a result can establish cause for
the dismissal or conversion. The definition of ‘cause’
has been enlarged to include, among other things:
(a) gross mismanagement;
(b) failure to maintain appropriate insurance;
(c) unauthorised use of cash collateral;
(d) failure to comply with a court order;
(e) unexcused failure to timely satisfy any filing or
reporting requirements;
(f) failure to attend a section 341(a) meeting of
creditors without good cause shown;
(g) failure to timely pay post-petition taxes;
(h) failure to timely provide information and attend
meetings requested by the US Trustee; and
(i) failure to file a disclosure statement, or to file or
confirm a plan within the exclusivity period.
8 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
If the debtor or another party in interest objects,
however, the court will not dismiss/convert if such
party shows that such relief is not in the best interests
of the creditors and the estate by establishing that
(a) there is a reasonable likelihood that a plan will be
confirmed within the exclusivity period or a reasonable
time and (b) the grounds for granting a dismissal/
conversion include an act of omission of the debtor
for which there is a reasonable justification and which
will be cured within a reasonable period of time.
Furthermore, the court must hold a hearing on a
motion to dismiss or convert within 30 days after
the filing of the motion and must enter an opinion
on the motion within 15 days after the hearing.
Executory contracts and non-residential real property
leases
The Act modifies section 365(d)(4) of the Code by
restricting the amount of time a debtor has to assume
or reject a non-residential real property lease. Under
current law, the debtor has 60 days to assume or reject
all non-residential real property leases, at which time
any leases not assumed are deemed rejected; however,
the statute permits extensions of that 60-day period
without limits, and courts routinely grant numerous
extensions, frequently through the confirmation of a
plan of reorganisation. The Act modifies section
365(d)(4) to provide that the initial period within
which the debtor must assume or reject all non-
residential real property leases is 120 days after the
commencement of the case. The debtor may receive
one 90-day extension if it is able to show cause for such
an extension. However, any subsequent extensions after
the first 210 days of the case will only be authorised if
the lessor provides written consent for the extension.
Thus, effectively a debtor will have no more than
210 days to determine whether to assume or reject
its leases. This change will greatly impact on retail
reorganisations because a retail debtor will have
only a relatively short amount of time within which
to determine which properties it wishes to retain.
The Act seeks to ameliorate the impact of this
shortened assumption/rejection period by adding
section 503(b)(7) of the Code, which provides for a
cap on the amount of administrative expenses. Under
the new section, if a non-residential real property lease
is assumed under section 365 and then subsequently
rejected, the lessor’s administrative claim for damages
is limited to two years of rent from the later of the
date of rejection or turnover of the premises, without
reduction or set-off except for sums received or to be
received from another entity. Moreover, any remaining
amounts due under the terms of the lease will be
treated as a pre-petition claim under section 502(b)(6)
of the Code. While somewhat beneficial, this provision
will still offer little comfort to retail debtors who may be
facing premature assumption/rejection decisions on
hundreds of leased properties.
September 2005
 NEW BANKRUPTCY REFORM HAS SIGNIFICANT IMPACT ON CORPORATE BANKRUPTCIES
In addition, the Act amends section 365(b)(1)(A) of
the Code to make it easier to cure contract defaults in
connection with assumptions. That section provides
that a debtor must cure all defaults at the time of
assumption of a contract or lease; however, the Act
amends that section to provide that it is not necessary
for the debtor to cure defaults related to non-monetary
obligations if it is impossible to do so. However, upon
assumption of a lease of non-residential real property,
the debtor must perform all non-monetary obligations,
and the lessor’s losses from the debtor’s failure to
perform non-monetary obligations prior to assumption
will be cure costs.
Expanded opportunities for investment banks
For any professional to be retained by a debtor under
section 327 of the Code, that professional must be
‘disinterested’. The term ‘disinterested’ is defined in
section 101(14) of the Code. Under the current
definition, an entity is not ‘disinterested’ if either
(a) it was an investment banker for an outstanding
security of the debtor or (b) within three years prior to
the petition date, it acted as the debtor’s investment
banker in connection with an offer, sale or issuance of
the debtor’s securities. The Act, however, revises that
definition by omitting these per se disqualifications.
Thus, any investment banker may seek to represent
a debtor even if that investment bank previously
underwrote securities issued by the debtor. The
United States Trustee and other parties may still
object to such retention on the grounds that, based
on the prior relationship, the investment bank holds
or represents an interest adverse to the debtor’s
estate and is, therefore, disqualified from the
representation. The elimination of the per se
disqualification may open up new opportunities to
investment banks to act as advisers to debtors in
chapter 11 cases.
In addition, attorneys who represented investment
bankers during their pre-bankruptcy relationships with
the debtor are also no longer per se disqualified from
serving as counsel to the debtor under section 327 of
the Code.
Jurisdiction
The Act amends 28 USC § 1334, to provide that the
district court in which a chapter 11 case is commenced
or pending has exclusive jurisdiction over all claims
or causes of actions that involve the construction
of section 327 of the Code (governing employment
of professionals) or rules relating to disclosure
requirements under that section.2 This amendment
means that a lawsuit against a professional retained
by a debtor, committee or other person under
section 327 of the Code for claims arising from the
professional’s engagement can only be brought in
the bankruptcy court or the district court where the
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
bankruptcy court sits, thus avoiding future Merry-Go-
Round type lawsuits.
Key employment retention programmes
The Act alters section 503 of the Code by significantly
curtailing a debtor’s ability to provide retention
bonuses, severance payments and other payments
to key employees. First, the Act prohibits retention
bonuses to insiders unless a court finds that (a) the
payment is necessary because the insider has a bona
fide job offer from another business at the same or
a greater level of compensation, (b) the services
provided by the insider are ‘essential to the survival
of the business’ and (c) either (i) the payment is less
than ten times the average payment given to non-
management employees for any purpose during the
current calendar year or (ii) if no such payment was
made to non-management employees during the
current calendar year, the payment cannot exceed
25 per cent of any similar payment made to the
insider for any purpose during the current calendar
year. Secondly, the Act forbids severance payments
to insiders unless (a) the payment is part of a
programme that is generally applicable to all full-time
employees and (b) the amount of the payment is less
than ten times the average severance payment given
to non-management employees during the current
calendar year. Thirdly, under the Act a debtor is
not permitted to make payments to officers,
managers or consultants hired post-petition if
such payments are outside the ordinary course of
business and are not justified by the facts and
circumstances of the case.
Preferences and fraudulent conveyances
The Act changes the requirements to prove an
ordinary course of business defence to a preference
under section 547 of the Code. Currently, to prove
the ordinary course defence, the transferee must prove
that the payment was made in the ordinary course of
business subjectively and objectively. The subjective
component considers the ordinary course of business
between the debtor and the transferee. The objective
component takes into account the ordinary payment
terms found in the transferee’s industry. Under section
547 as amended by the Act, a transferee will no longer
have to prove both the subjective and objective aspects
of the ordinary course defence. Under the Act, the
transferee will have to prove that the transfer was
made in payment of a debt incurred by the debtor in
the ordinary course of business and either that (a) the
payment was made in the ordinary course of business
or financial affairs of the debtor and transferee or (b)
the payment was made according to ordinary business
terms. In corporate bankruptcies, the Act also sets the
threshold amount for a transfer to be avoidable as a
preference at US$5,000.
September 2005 9
 NEW BANKRUPTCY REFORM HAS SIGNIFICANT IMPACT ON CORPORATE BANKRUPTCIES
The Act also expands a debtor’s ability to recover
fraudulent conveyances under section 548 of the
Code. The debtor will now be able to avoid a transfer,
including a transfer for the benefit of an insider under
an employment contract that was made or incurred
within two years prior to the petition date.3 To avoid a
transfer under an employment contract, the debtor
must show that (a) the payment was made to an insider,
(b) the payment was outside of the ordinary course of
business and (c) it received less than a reasonably
equivalent value in exchange for the payment.4
Prepackaged plans
The Act has made two noteworthy changes affecting
‘prepackaged plans’. A prepackaged plan is one that is
negotiated between the debtor and its creditors and/or
equity security holders prior to filing for bankruptcy
protection. First, the Act amends section 341 of the
Code, which directs the US Trustee to convene a
meeting of creditors soon after the petition date. The
Act provides that upon motion by a party in interest,
the court for cause may order that the US Trustee not
convene such a meeting when the debtor has filed a
prepackaged plan. Secondly, the Act adds a subsection
to section 1125 of the Code, which allows a debtor to
solicit votes for a prepackaged plan without a court-
approved disclosure statement, as long as such
solicitation complies with applicable non-bankruptcy
law. This addition clarifies section 1126 of the Code,
which permits solicitation of a prepackaged plan if the
solicitation was in compliance with any applicable non-
bankruptcy law.
Revised reclamation rules and critical vendors
The Act revises sections 503(b) and 546(c) of the Code
in a manner which, while primarily aimed at rights of
reclamation, may make it easier for debtors to
implement broad critical vendor programmes.
First, the Act adds a new administrative claim, for
the value of any goods received by the debtor in the
ordinary course of business within the 20 days prior
to the commencement of the case. While the statute
speaks of the value of the goods and not the price,
this provision should nonetheless give all vendors an
administrative expense claim for all goods shipped
in the 20 days prior to the petition date. Since
administrative expenses must be paid in full as part
of any plan of reorganisation, debtors may be able to
support critical vendor programmes as being no more
than a question of when, not whether, such vendors
will be paid.
Secondly, the Act expands the period within which a
vendor can seek to reclaim goods sold pre-petition.
Currently, the Code only recognises the state law right
to reclaim goods if the vendor sends a reclamation
notice within ten days after the goods were received by
10 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
the debtor (or within 20 days after the petition if the
ten-day period expires after the petition date). The Act
expands the ten-day notice period to 45 days. Thus, all
goods received within 45 days of the petition date may
be subject to reclamation. The Act then eliminates the
right that the Code currently provides for the debtor to
give the vendor an administrative expense claim in lieu
of the goods themselves. Theoretically, then, the
debtor may be required to return to the vendor all
goods subject to reclamation.5 If the goods truly are
required for the debtor’s operations, the debtor would
then of course simply repurchase the goods. Based on
this, a debtor could try to argue that the critical vendor
programme is no more than a recognition of the
vendors’ reclamation rights and the elimination of the
mechanical step of returning and repurchasing the
goods themselves.
Utility service
The Act changes section 366 of the Code for the
benefit of utilities. Under the Code, a utility cannot
discontinue service or discriminate against a debtor
solely because it filed for bankruptcy protection, as
long as the debtor provides adequate assurance of
payment within 20 days after filing its petition.
Currently, if a debtor and a utility are unable to agree
on the amount of a deposit or other assurance of
payment, the debtor can bring the dispute before the
bankruptcy court, as bankruptcy courts have generally
ruled favourably for the debtor. Typically, the court
would conclude that the protection of an administrative
claim for post-petition utility services combined with
the availability of debtor-in-possession financing
constitutes adequate assurance for the utility without
the need for a deposit. The Act, however, limits the
phrase ‘adequate assurance of payment’ by defining
it as:
(a) a cash deposit;
(b) a letter of credit;
(c) a certificate of deposit;
(d) a surety bond;
(e) a prepayment of utility consumption; or
(f) another form of security that is mutually agreed
upon between the utility and the debtor.
In addition, the Act also removes an administrative
expense priority claim as an example of adequate
assurance. Moreover, the Act allows the utility to
determine in the first instance what adequate assurance
is required. If, during the first 30 days of the debtor’s
case, the utility does not receive adequate assurance
that is satisfactory to the utility, the utility may alter,
refuse or discontinue service. Only after the fact may a
party in interest ask that the court modify the adequate
assurance required by the utility. In determining
whether assurance is adequate, the court may not
consider (a) the absence of security before the petition
date, (b) the timely pre-petition utility payments made
September 2005
 NEW BANKRUPTCY REFORM HAS SIGNIFICANT IMPACT ON CORPORATE BANKRUPTCIES

by the debtor or (c) the availability of an administrative Notes

expense priority claim. Furthermore, a utility may use a
pre-petition deposit to set off amounts owed by the
debtor without notice or order of the court. These
changes to the Code will require debtors to negotiate
utility deposits prior to filing for bankruptcy, giving
utilities significant leverage over debtors.
1 The Act also adds a chapter 15 to the Code, implementing a slightly
modified version of the UNCITRAL Model Law on Cross Border
Insolvencies. This article does not describe that new chapter.
2 This amendment will apply to cases filed after 20 April 2005 (the date of
enactment).
3 This amendment will only apply to cases filed one year after 20 April
2005 (the date of enactment).
4 This amendment will apply to cases filed on or after 20 April 2005 (the
date of enactment).
5 Of course, there are a number of defences to reclamation rights, and
the Act could also have the effect of placing greater emphasis on those
defences and increasing the amount of litigation that reclamation rights
create.

Young Lawyer Training Courses –

Call for Speakers
The PPID Training Courses Committee organises highly interactive one-day training courses throughout the world,
aimed at assisting young and newly qualified lawyers in their understanding of the fundamentals of international
legal business practices. The courses are designed to maximise opportunities for discussion and audience participation
on topics of relevance to young lawyers, as chosen by local Bar Associations or Law Societies.
The range of topics is considerably varied, and the IBA aims to provide top-quality and expert speakers for each of
them. For this reason, we are constantly seeking to add to our database speakers who are both skilled and willing
to participate in such training courses.
If you are interested in representing your Committee and speaking at an IBA Training Course, please see the IBA
website (www.ibanet.org/legalpractice/training_courses.cfm) for more details, or contact Kerri Deegan
(kerri.deegan@int-bar.org) for further information.

IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005 11
 Recourse Available to Creditors in
Singapore Against a Singapore
Incorporated Debtor Company
Christopher Chong
Kenneth Tan Partnership, Singapore
chris@kennethtan.com
T he avenues of recourse available to a creditor
against an insolvent debtor company vary from
jurisdiction to jurisdiction. This article seeks to provide
a general overview of the main avenues of recourse
available in Singapore to a creditor against an insolvent
debtor company incorporated in Singapore.
The test of insolvency in Singapore
There are two tests of insolvency accepted by the
Singapore courts. The first is when a company is unable
to meet a current demand for a debt already due1 – this
is also often referred to as the commercial test for
insolvency. The second test is when a company’s total
liabilities are in excess of its total assets.2 An excess of
current liabilities over current assets does not
necessarily mean a company is insolvent.3
A debtor company is regarded as insolvent if either
test is satisfied. For example, a debtor company that
cannot pay its debts as they fall due is regarded as
insolvent even if its total assets are in excess of its total
liabilities.
The obvious concern to creditors in respect of an
insolvent debtor company is whether the insolvent
debtor company will be in a position to fully pay its
debts.
A creditor in this situation has two options. He or she
can choose to do nothing and hope for full payment of
debts owed to him. Doing nothing is usually not the
best option available, particularly when the debt owed
to the creditor is significant. The usual and, in most
cases, the more effective response is for the creditor to
actively seek recourse against the debtor company and
to look to its assets for satisfaction of the debts owed.
The avenues of recourse available to a creditor
against an insolvent debtor company will vary
depending on whether it is a secured or unsecured
creditor.
Recourse available to a secured creditor
A secured creditor is as its title suggests a creditor which
is holding some security for the debts owed by the
debtor company. The term ‘security’ has been defined
by the Singapore Court of Appeal to mean ‘some real
or proprietary interest, legal or equitable, in the
12 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
property as distinguished from a personal right or claim
thereon’.4
Under Singapore law, a creditor’s right of recourse
against the security provided by a debtor company is
generally not prejudiced by the mere fact that the
debtor company is insolvent. There are, however,
circumstances where a creditor will not be allowed to
enforce an otherwise valid security – for example, after
a petition to put the debtor company under judicial
management has been made and after a judicial
management order has been made. This will be
touched on below.
Security can come in many forms. For the purposes
of this article, the two most common forms of security
provided in Singapore by debtor companies to a
creditor – mortgages and charges – will be briefly
discussed.
Mortgages
A mortgage of property (usually real property such as
land) can be legal or equitable. A legal mortgage is
created by the mortgagor conveying his legal title to the
mortgagee in consideration of the loan made to the
mortgagor, subject to a proviso for redemption.5
In the event of default by a debtor company
mortgagor, remedies are available to the creditor
mortgagee under statute and in most cases under the
loan agreement as well.
Some examples of recourse available to the creditor
mortgagee under statute include the power to appoint
a receiver of the income of the mortgaged property
under section 24(1)(c) of the Conveyancing and Law of
Property Act6 where the mortgage is by deed. The
creditor mortgagee can also exercise the power of sale7
where the mortgage is by deed. Where the mortgage is
not by deed, the creditor mortgagee can apply to the
court for a sale of the property.8
Charges
A charge is a security interest in property that is created
by contract. A charge transfers neither title nor
possession.9
Charges may be fixed or floating. A fixed charge is
one that attaches to a specific asset. A floating charge
does not attach specifically to a particular asset; it is a
charge on a class of assets. It is ‘ambulatory and shifting
September 2005
 RECOURSE AVAILABLE TO CREDITORS IN SINGAPORE
in its nature, hovering over . . . the property which it is
intended to affect until some event occurs or some act
is done which causes it to settle and fasten on the
subject of the charge within its reach and grasp’;10 this
event or act crystallises the floating charge. The
company that granted the floating charge can continue
to deal with the assets as though they were
unencumbered, as long as the floating charge has not
crystallised.
Charges over certain types of assets must be
registered with the Registry of Companies and
Businesses under the Companies Act within 30 days of
their creation.11 Examples of charges that must be
registered include a charge to secure any issue of
debentures,12 a charge on shares of a subsidiary
company owned by the company,13 a charge on the
book debts of the company,14 and a floating charge on
the undertaking or property of the company.15 If a
charge is not registered within 30 days of its creation, it
becomes void against the liquidator and any creditor of
the company.16
Receivership
A secured creditor who is a debenture17 holder may be
able to enforce the security under the debenture by the
appointment of a receiver. This is commonly done by
either the debenture holder or the trustee for the
debenture holders pursuant to a power in the
debenture.
In the case where there is a charge over the business
or undertaking of the company as opposed to specific
assets and it is necessary to realise the business as a
going concern, a receiver and manager may be
appointed by the creditor. A receiver simpliciter has
power to get in the assets subject to the charge; he or
she has no power to run the company’s business.
A receiver and manager has the power to run the
business with a view to its eventual disposal as a going
concern.
It should be noted that the appointment of a receiver
will crystallise floating charges granted by the
company.18 The assets subjected to the floating charge
would then be subject to a fixed charge and the
company cannot deal with any part of these assets
except subject to the charge.
Receivership is not a proceeding for the collective
benefit of the creditors but for the benefit of the
individual secured creditor. Any surplus of assets after
the claims of the chargee have been satisfied must be
returned to the company.
In the case of a floating charge, there are certain
debts payable in priority to the claims of the debenture
holders19 where the uncharged assets of the company
are insufficient to meet these preferred debts. These
include debts which would be preferred in a winding-up
on account of wages, salary, retrenchment benefit or ex
gratia payment, vacation leave and superannuation or
provident fund payments.
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Recourse available generally
The avenues of recourse set out below are available to
both unsecured creditors and secured creditors (on top
of the avenues of recourse available to a secured
creditor set out above).
In the case of a creditor who has a Singapore court
judgment against the debtor company or a foreign
judgment or an arbitration award properly registered in
Singapore, the usual court-assisted modes of execution
are available.
These modes of execution are asset specific and
include the writ of seizure and sale and garnishee
orders against the debtor company.
Writ of seizure and sale
A judgment creditor can apply to the court for a writ of
seizure and sale, which is a form of enforcement against
the property of the judgment debtor company.
Property that can be seized includes:
(a) goods and/or chattels on premises occupied by the
judgment debtor company;
(b) property owned by the judgment debtor company;
or
(c) securities consisting of government stock or any
stock of any company or corporation registered or
incorporated under any written law.
The seizure is conducted by a Sheriff of the High Court
or a Bailiff in the subordinate courts and only property
belonging to the judgment debtor company can be
seized. The process of seizure and sale can be initiated
as soon as judgment is given in favour of the judgment
creditor.
The property seized will have to be auctioned off
before the judgment creditor can recover the sums due
under the judgment.
Garnishee orders
Moneys in the judgment debtor company’s current or
deposit account with a bank or other financial
institution (whether or not the deposit has matured
and notwithstanding any restriction as to the mode of
withdrawal) or other moneys due and owing to the
judgment debtor company by third parties can be
attached to satisfy the judgment debt by an application
to the court for a garnishee order against the relevant
bank, financial institution or third party.20
Non-asset-specific avenues of recourse
In reality, asset-specific modes of execution may often
be ineffective against insolvent debtor companies as
such companies may not have any assets available for
creditors to seize or funds for creditors to garnish.
In these circumstances, a creditor may consider a
petition to wind up the insolvent debtor company or to
place the insolvent debtor company under judicial
management. Unlike the appointment of a receiver,
seizure and sale and garnishee proceedings, these
September 2005 13
 RECOURSE AVAILABLE TO CREDITORS IN SINGAPORE
alternative avenues of recourse are not directed against
specific assets owed by the debtor company.
Liquidation or winding-up
Liquidation, also known as winding-up, is the process to
dissolve a company. The process is what the term
‘winding-up’ literally suggests. The business of a
company is put to an end, the company’s non-monetary
assets will be sold and creditors will be paid. Excess
funds after all creditors have been paid are distributed
between the members of the company. After the whole
process is concluded, the company will cease to exist.
From the perspective of an unsecured creditor, the
winding-up of an insolvent debtor company will result
in full satisfaction of the debt owed if the debtor
company is only commercially insolvent (ie it is unable
to pay its debts as they fall due) but has total assets that
equate to or are in excess of total liabilities. In cases
where the total liabilities of the debtor company are
higher than the total assets, the unsecured creditor is
unlikely to be in a position to recover his debt in full; it
may well be the case that little will be recovered if the
assets of the company have already been provided to
secured creditors as security.
However, in practice, the threat of a petition for
winding-up is often used as a means to pressure the
debtor company into settling the debts owed to the
petitioning creditors. This can be very effective, as the
presentation of a winding-up petition will often trigger
a string of unpleasant consequences for the debtor
company. For example, the debtor’s creditor banks may
call in all the loans made to the debtor company and
other creditors may press the debtor company to repay
debts owed. It is also not unusual for contracts to provide
for a right of termination in the event that winding-up
proceedings are commenced against a company.
A CREDITOR IS ENTITLED TO PETITION TO WIND UP THE DEBTOR
COMPANY
Any creditor, whether secured or unsecured, is entitled
to petition to wind up a debtor company.21
The term ‘creditor’ may include22:
(a) the assignee of a debt, if the assignment is not
made while the creditor’s petition is pending;
(b) the equitable assignee of part of a debt;
(c) the executor of a creditor, even before probate;
(d) a creditor in respect of a debt incurred by voluntary
liquidation;
(e) a secured creditor;
(f) a judgment creditor;
(g) the holder of a debenture bond of an insolvent
company which has not yet matured for payment;
or
(h) generally any creditor whose debt is not genuinely
disputed by the company on substantial grounds.
As long as a debt is substantively disputed by the
company, the ‘creditor’ is not regarded as a creditor
and has no locus standi to petition for a winding-up.23
14 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Contingent and prospective creditors may also
petition, subject to the provision of security for costs.24
However, a person who is claiming damages against a
company is not a creditor until judgment is given in his
favour and cannot make a winding-up petition before
that.25
THE DEBTOR COMPANY MUST BE UNABLE TO PAY ITS DEBTS
The Singapore Companies Act sets out various grounds
under which a company can be wound up. From the
perspective of a creditor, the usual ground relied on is
that the company is unable to pay its debts.26
The petitioner must prove to the satisfaction of the
court that the company is unable to pay its debts and
the court will take into account the contingent and
prospective liabilities of the company.27 It is, in practice,
difficult for a petitioner to establish this as the
petitioner is unlikely to have access to the accounts of
the debtor company. The odds of the petitioner
establishing that the debtor company is unable to pay
its debts are thus heavily stacked against the petitioner.
To even the odds, the Companies Act sets out various
circumstances where a debtor company would be
presumed to be unable to pay its debts. A debtor
company is presumed to be unable to pay its debts
when the debtor company is served with a statutory
demand for a sum in excess of S$10,000 and the debtor
company is unable to pay the sum or to secure or
compound the sum to the reasonable satisfaction of the
creditor.28 This is the most common presumption relied
upon by petitioning creditors.
A debtor company is also presumed to be unable to
pay its debts if execution or other process issued on a
judgment in favour of a creditor of the debtor company
is returned unsatisfied in whole or in part.29
THE WINDING-UP PETITION
The winding-up petition is commenced in the form of
an Originating Petition in the High Court of
Singapore.30
THE EFFECT OF THE PRESENTATION OF A WINDING-UP PETITION
Once the winding-up petition is made, any person who
accepts any part of the debtor company’s property
disposed of by the debtor company after the
presentation of a winding-up petition takes the risk that
the disposition will be void in the event that the
winding-up order is made by the court. This is because
section 259 of the Companies Act provides that any
disposition of the debtor company’s property after the
commencement of a winding-up is void unless the court
otherwise orders. Under section 255(2), a winding-up
order made by the court is deemed to have
commenced at the time the winding-up petition was
made.
Section 260 of the Companies Act provides that any
attachment, sequestration, distress or execution put in
force against the estate or effects of the company after
September 2005
 RECOURSE AVAILABLE TO CREDITORS IN SINGAPORE
the commencement of the winding-up31 by the court is
void.32 This would cover any writs of seizure and sale
and garnishee orders.
For execution or attachment proceedings
commenced but not completed before the date of
presentation of the winding-up petition, a judgment
creditor cannot retain the benefit of the execution
against the liquidator.33
The debtor company, creditor or contributory can
also apply to the court after the presentation of a
winding-up petition (and before the winding-up order
is made) to stay or restrain further proceedings in a
pending action or proceeding against the debtor
company.34 The court can make such an order on such
terms as it deems fit.
THE HEARING OF THE WINDING-UP PETITION
At the hearing of the winding-up petition, the court has
a wide discretion and may dismiss the petition or may
adjourn the hearing conditionally and unconditionally
and make such interim orders as it thinks fit.35 The
court will generally order a company to be wound up
where the petitioning creditor has established the debt
and there is no dispute or counterclaim.36
THE LIQUIDATOR
In a court-ordered winding-up, the liquidator is
appointed by the court. The liquidator can either be
the Official Receiver or a company auditor approved as
a liquidator under section 9(3) of the Companies Act.
If no liquidator is appointed by the court or if there is a
vacancy, the Official Receiver will by default be the
liquidator.37
POWERS AND DUTIES OF THE LIQUIDATOR
The powers and duties of the liquidator, in summary,
are as follows:
(a) he is to take into his custody or control the
property and assets of the company;38
(b) he may bring or defend any action or legal
proceeding in the name and on behalf of the
company;39 and
(c) he can sell the property of the company40 and
appoint agents to do any business which he is
himself unable to do personally.41
One of the most important powers of the liquidator is
the power to disclaim onerous covenants, shares in
corporations, unprofitable contracts and any other
property which is otherwise unsaleable or not readily
saleable.42 This power can only be exercised with the
leave of the court or the consent of the committee of
inspection43 (a committee appointed by the court
comprising creditors and contributors to supervise the
liquidator).
Judicial management
As an alternative to liquidation, a creditor may, if it
wishes, petition to the High Court to put an insolvent
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
debtor company under judicial management.44
Unlike liquidation, which seeks to put an end to the
existence of the company, judicial management seeks
to rehabilitate the debtor company by providing the
debtor company with a moratorium to allow the debtor
company to be rescued. A creditor may consider it in its
interest to go the judicial management route rather
than the liquidation route where the company has a
viable business and there are good prospects that the
company will be in a position to repay its debts in full
when rehabilitated. The liquidation option in contrast
only makes available to creditors whatever assets the
debtor company has; it may well be the case that the
creditor will not be able to recover the debts owed by
the debtor company in full.
JUDICIAL MANAGEMENT PETITION
Like a winding-up petition, a judicial management
petition must be commenced by way of an Originating
Petition in the High Court of Singapore.45
EFFECT OF THE PRESENTATION OF A JUDICIAL MANAGEMENT
PETITION
On the presentation of a judicial management petition,
the court can, if it wishes, appoint an interim judicial
manager.46
During the period commencing with the
presentation of a judicial management petition and
ending with the making of the judicial management
order or the dismissal of the petition, the debtor
company cannot be wound up.47
During the same period, a creditor cannot, unless
with the leave of the court and subject to whatever
terms the court may impose:
(a) enforce any charge on or security over the
company’s property;48 and
(b) repossess any goods in the debtor company’s
possession under any hire-purchase agreement,
chattels leasing agreement or retention of title
agreements.49
No other proceedings and no execution or other legal
process can be commenced or continued, and no
distress may be levied against the debtor company or its
property, except with the leave of the court and subject
to whatever terms the court may impose.50
HEARING OF THE JUDICIAL MANAGEMENT PETITION
On hearing the judicial management petition, the
court has a wide discretion, as in the case of the
winding-up petition. The court may dismiss the petition
or adjourn the hearing conditionally or unconditionally
or make any interim or any other order that it thinks
fit.51
In the event a judicial management order is made by
the court, it will remain in force for a period of 180
days from the date of the order, unless it is otherwise
discharged.52 The court may extend this period subject
to its terms.53
September 2005 15
 RECOURSE AVAILABLE TO CREDITORS IN SINGAPORE
PREREQUISITES BEFORE THE COURT WILL GRANT A JUDICIAL
MANAGEMENT ORDER
Under section 227B(1)(a) of the Companies Act, the
court must be satisfied that the debtor company is or
will be unable to pay its debts before it can grant the
petition to put the debtor company under judicial
management.
Besides this requirement, the court must also be
satisfied that the making of the judicial management
order would achieve one of the following objectives:
(a) the survival of the company, or the whole or part of
its undertaking as a going concern;54
(b) the approval under section 210 of a compromise or
arrangement between the company and any such
persons as are mentioned in that section;55 or
(c) a more advantageous realisation of the company’s
assets would be effected than on a winding up.56
It is clear from the above that the survival of the debtor
company is not the only legitimate objective for putting
a debtor company under judicial management. The Act
contemplates that the debtor company may not survive
even after going under judicial management, and the
court can nevertheless make a judicial management
order if a more advantageous realisation of the debtor
company’s assets can be achieved even if the survival of
the debtor company was not the objective of the
judicial management exercise.
The court cannot make a judicial management order:
(a) after the company has gone into liquidation;57
(b) where the debtor company is a bank licensed under
the Banking Act or is a finance company licensed
under the Finance Company Act;58 and
(c) where the company is an insurance company
registered under the Insurance Act.59
In addition, the Companies Act provides that the
petition for judicial management shall be dismissed
where:
(a) a receiver and manager has been or will be
appointed;60 or
(b) the making of the order is opposed by a person
who has appointed or is entitled to appoint such a
receiver and manager.61
There is an exception in section 227B(10)(a) that
would allow the court to grant the judicial management
order even if the above prerequisites are not satisfied or
where the above prohibitions apply. This is when the
court considers that public interest requires the making
of the judicial management order and the appointment
of the judicial manager. What constitutes ‘public
interest’ is not defined by the Companies Act and has
not been considered by the Singapore courts in the
context of a judicial management petition.
APPOINTMENT OF THE JUDICIAL MANAGER
The nomination of a judicial manager is made by the
petitioner.62 The nominee must be an approved
company auditor who is not the auditor of the
16 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
company.63 The court can reject the nomination and
appoint another person to be the judicial manager.64
The Minister can also nominate a person to be the
judicial manager if public interest so requires.65 The
nominee of the court or the Minister need not be an
approved company auditor.66
The majority in number and value of the creditors of
the company (including contingent or prospective
creditors) may object to a nomination made by the
company.67 The court can invite these creditors to
nominate a judicial manager and can adopt this
nomination.68
THE EFFECT OF THE JUDICIAL MANAGEMENT ORDER
During the period for which a judicial management
order is in force, all powers conferred and duties
imposed on the directors under the Companies Act or
by the memorandum and articles of association shall be
performed by the judicial manager.69 The 11th
schedule of the Companies Act sets out extensively the
powers of the judicial manager.
During this period, a creditor cannot, unless with the
consent of the judicial manager or with the leave of the
court (and subject to whatever terms the court may
impose):
(a) enforce any charge on or security over the
company’s property;70 and
(b) repossess any goods in the debtor company’s
possession under any hire-purchase agreement,
chattels leasing agreement or retention of title
agreements.71
The company cannot be wound up,72 and no other
proceedings and no execution or other legal process
can be commenced or continued, and no distress may
be levied against the debtor company or its property,
except with the leave of the court and subject to
whatever terms the court may impose.73
The rationale for the moratorium on enforcement of
security is to allow the judicial managers to carry on the
business as a going concern with a view to achieving
one or other of the objectives provided in section 227B
without any interference from creditors.74
As long as the judicial management is in force, a
receiver and manager cannot be appointed.75 It appears
from this that a receiver simpliciter can be appointed by
creditors.
PROPOSALS OF THE JUDICIAL MANAGER
Where a judicial management order has been made,
the judicial manager shall, within 60 days (or such
longer period as the court may allow) after the making
of the order send to the Registrar, the members and
the creditors of the company a statement of his
proposals for the achievement of the purposes for
which the order was made.76
A meeting of creditors will decide whether to
approve the proposal.77 At this meeting, the majority in
number and value of creditors present and voting
September 2005
 RECOURSE AVAILABLE TO CREDITORS IN SINGAPORE

either in person or by proxy whose claims have been 27 s 254(2)(c) Companies Act.
28 s 254(2)(a) Companies Act.
accepted by the judicial manager, may approve the
29 s 254(2)(b) Companies Act.
proposals with modifications but shall not do so unless 30 Rule 26 Companies (Winding up) Rules.
the judicial manager consents to each modification.78 31 Commencement of winding-up for a creditor’s petition is defined in
In the event that the meeting of creditors declines to s 255(2) of the Companies Act as ‘the time of presentation of the
petition for the winding-up’.
approve the proposal (with or without modifications), 32 s 260 Companies Act.
the court has a wide discretion to make any order it 33 s 334(1) Companies Act.
thinks fit, including an order to discharge the judicial 34 s 258 Companies Act.
management order.79 35 s 257(1) Companies Act.
36 Wei Giap Construction Co (Pte) Ltd v Intraco Ltd [1979] 2 MLJ 4, and Re
Dayang Construction and Engineering Pte Ltd [2002] 3 SLR 379.
37 s 263 Companies Act.
Conclusion
38 s 269(1) Companies Act.
It is clear that many avenues exist in Singapore for a 39 s 269(2) Companies Act.
40 s 272(2)(C) Companies Act.
creditor, whether secured or not, to recover debts owed 41 s 272(2)(i) Companies Act.
by an insolvent Singapore debtor company. These 42 s 332(1) Companies Act.
avenues can be asset-specific or otherwise. 43 ss 277-278 Companies Act.
The challenge is to select the avenue most suitable 44 s 227A Companies Act.
45 s 227B(1) Companies Act.
and advantageous to a particular creditor from a result 46 s 227B(10)(b) Companies Act.
and cost perspective. 47 s 227C(a) Companies Act.
48 s 227C(b) Companies Act.
Notes 49 Ibid.
1 Re Great Eastern Hotel (Pte) Ltd [1988] SLR 841, 860, Tang Yoke Kheng 50 s 227C(c) Companies Act.
(trading as Niklex Supply Co) v Lek Benedict and Others (No 2) [2004] 4 SLR 51 s 227B(6) Companies Act.
788, and Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and 52 s 227B(8) Companies Act.
Others [2004] 1 SLR 434. 53 Ibid.
2 Ibid. 54 s 227B(1)(b)(i) Companies Act.
3 Ibid. 55 s 227B(1)(b)(ii) Companies Act.
4 Electro Magnetic (S) Ltd v Development Bank of Singapore Ltd [1994] 1 SLR 56 s 227B(1)(b)(iii) Companies Act.
734, 738. 57 s 227B(7)(a) Companies Act.
5 Tan Sook Yee, Principles of Singapore Land Law (2nd ed, Butterworths, 58 s 227B(7)(b) Companies Act.
2001), pp 431. 59 s 227B(7)(c) Companies Act.
6 Cap 61, 1994 Rev Ed. 60 s 227B(5)(a) Companies Act.
7 s 24(1)(a) CLPA. 61 s 227B(5)(b) Companies Act.
8 s 30(2) CLPA. 62 s 227B(3)(a) Companies Act.
9 Gough, Company Charges (2nd ed, Butterworths, 1996), pp 18-19. 63 Ibid.
10 Illingworth v Houldsworth [1904] AC 355, 358. 64 s 227B(3)(b) Companies Act.
11 s 131(1) Companies Act, Cap 50, 1994 Rev Ed. 65 s 227B(3)(d) Companies Act.
12 s 131(3)(a) Companies Act. 66 s 227B(3)(e) Companies Act.
13 s 131(3)(c) Companies Act. 67 s 227B(3)(c) Companies Act.
14 s 131(3)(f) Companies Act. 68 Ibid.
15 s 131(3)(g) Companies Act. 69 s 227G(2) Companies Act.
16 s 131(1) Companies Act. 70 s 227D(4)(d) Companies Act.
17 Debenture is defined in s 4(1) of the Companies Act to include 71 Ibid.
‘debenture stock, bonds, notes and any other securities of a 72 s 227D(4)(a) Companies Act.
corporation whether constituting a charge on the assets of the 73 s 227D(4)(c) Companies Act.
corporation or not, but does not include (a) a cheque, letter of credit, 74 Electronic Magnetic (S) Ltd v Development Bank of Singapore [1994] 1 SLR
order for the payment of money or bill of exchange; (2) subject to the 734, 745, and Re Wan Soon Construction Pte Ltd [2005] 3 SLR 375.
regulations, a promissory note having a face value of not less than 75 s 227D(4)(b) Companies Act.
$100,000 and having a maturity period of not more than 12 months 76 s 227M(1)(a) and s 227M(2)(a) Companies Act.
…’. 77 s 227N(1) Companies Act.
18 Haw Par Bros International Ltd v Overseas Textiles Co Ltd [1978] 2 MLJ 19, 78 s 227N(2) Companies Act.
and Perbadanan Pembangunan Bandar v Syabas Holdings Sdn Bhd [1990] 79 s 227N(4) Companies Act.
2 MLJ 116.
19 These preferred debts are set out in s 226(1) of the Companies Act.
20 Order 49 rule 6 of the Rules of Court
21 s 253(1)(b) Companies Act.
22 Ganda Holdings Bhd v Pamaron Holdings Sdn Bhd [1989] 2 MLJ 346, and
Malayan Flour Mill Bhd v Raja Lope & Tan Co [2000] 6 MLJ 591.
23 Mark Jaya Engineering Sdn Bhd v LFY Construction Sdn Bhd [1990] 1 MLJ
372, Datuk Mohd Sari bin Datuk Hj Nuar v Idris Hydraulic (M) Bhd [1997]
5 MLJ 377, Emporium Jaya (Bentong) Sdn Bhd (in liquidation) v Emporium
Jaya (Jerantut) Sdn Bhd [2002] 1 MLJ 182, Pembinaan Purcon v
Entertainment Village (M) Sdn Bhd [2004] 1 MLJ 545, Abd Hamid bin
Jaafar (trading as sole proprietor as Bintang Enterprise) v Shamsiah dan
Keluarga Sdn Bhd [2004] 5 MLJ 349.
24 s 253(2)(c) Companies Act.
25 SSAB Oxelosund SB v Xendral Trading Pte Ltd [1992] 1 SLR 600, 607.
26 s 254(1)(e) Companies Act.

IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005 17
 President Bush Signs Section 256 –
Enacting Bankruptcy Reform
Legislation*
Daniel M Glosband
Goodwin Procter LLP, Boston, Massachusetts
dglosband@goodwinprocter.com
O n 20 April 2005, President Bush signed into law
section 256, the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, which had been
approved by the House of Representatives on 14 April
2005 and previously passed by the Senate on 10 March
2005. The most prominent changes set forth in the new
legislation are those that affect individual debtors
under the Bankruptcy Code, but this law also contains
significant provisions affecting the administration of
Chapter 11 reorganisation cases and international
insolvency cases as well. Greater clarity of the treatment
of certain financial contracts under the Bankruptcy
Code also constitutes an important part of the new
legislation. Most of the provisions of the law take effect
180 days from its enactment and collectively represent
the most sweeping changes to the Bankruptcy Code in
many years. This article highlights many of the key
provisions of this legislation.
Consumer and individual bankruptcy amendments
Eligibility and procedural changes
MEANS TESTING
The new legislation takes the ‘Bankruptcy Abuse
Prevention’ portion of its name from a collection of
provisions designed to require consumer debtors to
satisfy more stringent criteria as a condition to
obtaining a discharge of their indebtedness. These
provisions focus on testing whether a consumer debtor
has the means to repay a portion of his obligations out
of future income. Under the new legislation, the
current ‘substantial abuse’ dismissal standard will drop
simply to an ‘abuse’ threshold. Such abuse will be
presumed if the debtor’s current monthly income less
the debtor’s qualifying living expenses, multiplied by 60
months (notably, the maximum term of a Chapter 13
plan) is not less than the lesser of (i) 25 per cent of the
debtor’s non-priority unsecured claims in the case, or
US$6,000, whichever is greater; or (ii) US$10,000. The
IRS National Standards will serve as the benchmark for
measuring the debtor’s qualifying living expenses. The
debtor can challenge the presumption of abuse only
under ‘special circumstances’, such as in the case of a
major medical condition or a call or order to active
military service, and must always certify the nature of
18 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
the special circumstances and the accuracy of all of the
information provided.
Under the new law, any party in interest will be able
to move under section 707(b) of the Bankruptcy Code
to dismiss a debtor’s case for abuse or, with the debtor’s
consent, to convert the case to a Chapter 11 or Chapter
13 case, which will require the debtor to perform under
a payment plan. However, only the judge, the United
States Trustee or a bankruptcy administrator will be
able to seek dismissal of a Chapter 7 case if the debtor’s
income falls below the state median income for a family
of similar size.
MANDATORY CREDIT COUNSELLING EDUCATION AND DEBTOR
EDUCATION
To be eligible for any form of bankruptcy relief, an
individual must receive credit counselling from an
approved non-profit budget and credit counselling
agency. Such counselling can be provided in individual,
group, internet or telephone settings, and is to outline
the opportunities for credit counselling, as well as to
assist the prospective debtor in analysing his budget.
While the court will have the power to waive the pre-
filing counselling requirement if the debtor
demonstrates exigent circumstances, the debtor must
submit to credit counselling within 30 days after the
bankruptcy case is commenced. If a debt management
plan is developed for the debtor, that debtor must file
it with the bankruptcy court. Presumably, it will serve as
a benchmark against which to determine whether
proceeding under Chapter 7 constitutes abuse, and
whether a Chapter 13 payment plan is adequate. The
court may deny a discharge to Chapter 7 and Chapter
13 debtors who fail to complete a personal
management instructional course.
Notices and disclosures
The new legislation materially modifies notice
requirements on all parties to an individual’s
bankruptcy.
Notices to creditors. Under amended section 342, notices
to a creditor will not be effective unless such notices are
served at the address designated by such creditor and
contain the current account number used by the
creditor with respect to the debtor, provided that such
September 2005
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
creditor has supplied the debtor with the designated
address and current account number in two
communications within 90 days before the
commencement of a voluntary case. Alternatively, an
entity may also file with any bankruptcy court a notice
of address to be used by all the bankruptcy courts or by
particular bankruptcy courts (as specified by such
entity) to provide notice to such entity in all cases
under Chapters 7 and 13 pending in the courts in
which such entity is listed as a creditor.1
Mandatory disclosure to the individual debtor. Amended
section 342 of the Bankruptcy Code also provides that,
before the commencement of a bankruptcy case by an
individual debtor, the clerk of the bankruptcy court will
be required to provide individual debtors with a brief
description of Chapters 7, 11, 12 and 13 and the
general purpose, benefits and costs of relief under each
of those chapters. The clerk of the court will also
provide descriptions of the services available from
credit counselling agencies, which will be a necessary
prerequisite for relief. Lastly, the clerk’s notice will also
inform an individual debtor that all information
supplied by that debtor in connection with the debtor’s
case will be subject to examination by the Attorney
General of the United States.
Production of tax returns and related financial information.
At the request of a creditor, the US Trustee or any
party in interest, a debtor will be required, under
amended section 521, to file tax returns and in the case
of Chapter 13 debtors to identify third parties that are
sources of income or support. Certain other
information, including any interest a debtor has in an
educational or individual retirement account must also
be disclosed. Furthermore, amended section 521(a)(1)
will require a debtor to provide an itemised statement
of monthly income and a statement disclosing any
changes in income or expenses reasonably expected to
occur in the 12 months following the filing of the
petition.
DISCHARGEABILITY OF DEBTS
Chapter 13 debtors may no longer receive a discharge
for trust fund taxes, taxes for which no return was filed
(as well as for certain late returns), or taxes for which
the debtor filed a fraudulent return. Also excluded
from the scope of a Chapter 13 discharge are domestic
support payments, student loans, claims resulting from
operating a motor vehicle or vessel while intoxicated,
claims (including fines and restitutions) arising out of
malicious acts causing personal injury or death, debts
(i) incurred in connection with a debtor’s fraudulent
misrepresentation, (ii) arising out of a debtor’s
defalcation as a fiduciary, and (iii) which the debtor
failed to schedule. Also, unless his income is below the
applicable monetary threshold, he will not receive
‘discharges’ until he has completed a five-year payment
plan.
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
The student loan discharge exception has been
broadened to include not just governmental loans, but
those which are owed to for-profit lenders. Debts of
US$500 or more owed for luxury goods, and incurred
within 90 days before the petition is filed, are
presumptively non-dischargeable, as are cash advances
exceeding US$750 within 70 days before filing. And, a
debt incurred to pay a non-dischargeable tax claim will
not be dischargeable.
Under the new legislation, the debtor must wait eight
(rather than six) years following his discharge to file a
new petition under Chapter 7. A discharge will not be
provided to a Chapter 13 debtor if he had previously
received a discharge under any of Chapters 7, 11 or 12
within a four-year period prior to filing his subsequent
case (or a two-year period for a prior Chapter 13 case).
SERIAL AND OTHER ABUSIVE FILINGS
In addition to the foregoing constraints upon a
debtor’s access to relief, other measures in the new law
are intended to discourage serial, bad faith and other
‘abusive’ bankruptcy filings. For example, if an
individual debtor’s prior case had been dismissed
within one year prior to the commencement of a
subsequent case, the automatic stay of debt collection
will terminate 30 days after the new case is commenced.
While the debtor can seek to demonstrate ‘good faith’
to preserve the stay with respect to affected creditors,
there are multiple statutory presumptions against such
a finding. A debtor will also lose his right to the
automatic stay of real estate foreclosure proceedings if
the court finds that the filing of a petition was part of a
scheme to delay, hinder or defraud creditors involving
either (i) transfer of real estate without creditor
consent or court approval, or (ii) multiple bankruptcy
filings affecting the same parcel(s) of real property. An
order lifting the automatic stay for the benefit of such
creditor will be binding on the debtor for two years.
REAFFIRMATION AGREEMENTS
Section 524 of the Bankruptcy Code has been amended
in an effort to discourage abuse of reaffirmation
agreement practices that had become notorious several
years ago. Specifically, once effective, amended section
524 will require that certain specified disclosures be
provided to an individual debtor at or before the time
such debtor signs a reaffirmation agreement. These
specified disclosures, which must be in writing, will
include certain advisories and explanations that are
clear and conspicuous. In addition, at the election of
the creditor, the disclosure may include a repayment
schedule. If the debtor is represented by counsel,
counsel will be required to file a certification stating
that the debtor has been fully informed of the effect of
the agreement, that it represents the voluntary
agreement of the debtor, that it does not impose an
undue hardship on the debtor or any dependant of the
debtor and that debtor’s counsel fully advised the
September 2005 19
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
debtor of the legal effect and consequences of such
agreement as well as any default thereunder.
To the extent that the amount of the scheduled
payments due on the reaffirmed debt exceeds the
debtor’s available income, it will be presumed for 60
days from the date on which the reaffirmation
agreement is filed with the court that the agreement
presents an undue hardship. In that case, the attorney
must also certify that, in the attorney’s opinion, the
debtor is able to make the payments required under
the reaffirmation agreement. If a presumption of
undue hardship exists, the court must review the
reaffirmation agreement and disclosure. The
presumption can be rebutted by a debtor by a written
statement explaining the additional sources of funds
that would enable the debtor to make the required
payments on the reaffirmed debt. If the presumption is
not rebutted to the satisfaction of the court, the court
may disapprove the reaffirmation agreement. No
reaffirmation agreement may be disapproved without
notice and hearing to the debtor and the creditor.
Federal criminal enforcement provisions with respect to
such agreements have also been explicitly strengthened.
DOMESTIC SUPPORT OBLIGATIONS
Under the new law, domestic support obligations2 will
be accorded an administrative expense priority, subject
to the costs incurred by the bankruptcy trustee to
administer the assets available for payment of domestic
support. Moreover, the automatic stay against
enforcement of pre-petition claims will not apply to the
payment of domestic support obligations from assets
that are not property of the estate, or to enforcement
of wage withholding orders. If a debtor does not
remain current on his support obligations, his case may
be dismissed. Furthermore, the debtor will be required
to remain current on his support payments in order to
confirm a plan under, or receive a discharge under,
Chapters 11, 12 or 13. Such debts will continue to
remain non-dischargeable in a Chapter 7 case. The Act
also obligates the trustee to provide notice to child
support claimants and agencies, including notice to
domestic support claimants of their right to use the
services of the state child support enforcement
agencies.
REGULATION OF THE PLAYERS IN INDIVIDUAL DEBTOR CASES
The various amendments have a significant impact on
the roles of a number of the players in an individual
consumer bankruptcy case.
Attorneys. Pursuant to amended section 707, an
attorney’s signature on a petition, pleading or motion
will constitute certification that the attorney will have
(1) performed a reasonable investigation into the
circumstances giving rise to the petition, pleading or
motion, (2) determined that the petition, pleading or
motion is well grounded in fact, (3) determined that
20 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
the petition, pleading or motion is warranted by
existing law or a good faith extension, modification or
reversal of existing law, (4) concluded that the petition
does not constitute an abuse, and (5) affirmed that he
has no knowledge, after an inquiry, that any of the
information contained in the schedules filed with the
petition is incorrect. The court may grant a trustee
reasonable costs, including attorney fees, or may assess
civil penalties payable to the US Trustee if the court
finds that the debtor’s attorney violated rule 9011.
Critics of the new law have asserted that this new
standard in particular will cause bankruptcy fees to
‘skyrocket’, as bankruptcy attorneys will be forced to
invest far more time and effort to verify the
information provided to them by their clients.
Bankruptcy petition preparers. Pursuant to amended
section 110, a Bankruptcy Petition Preparer (a ‘BPP’)
will be prohibited from giving a debtor legal advice. A
BPP must advise the debtor of maximum fees
permitted3 before accepting any payment or preparing
any documents, file a declaration with the petition
under penalty of perjury stating the total fees received
in the 12 months preceding the filing and, if maximum
fees have been set, a certification that the fees do not
exceed the maximum. The court must disallow any fees
in excess of the value of the services or the maximum
amount established. Amended section 110 also includes
sanctions for violations by a BPP, including that a court
may enjoin a BPP that has violated a previous order sua
sponte or upon the motion of the trustee or US Trustee.
Moreover, a BPP may be fined US$500 for each
violation of the prohibitions imposed upon a BPP
pursuant to section 110. Fines may be tripled under
certain circumstances.
Debt relief agencies. The new amendments will also
provide direct regulation of debt relief agencies.4 Each
debt relief agency will be required to provide
individuals that have sought its assistance, not later than
five days after the first date on which it provides
bankruptcy assistance services to a particular client, to
execute a written contract with such individual. Each
contract must specify clearly and conspicuously the
services the agency will provide, the basis on which fees
will be charged for such services, and the terms of
payment. In addition, a debt relief agency will be
required to provide an individual that has sought its
advice with the notice required to be sent by the
bankruptcy court pursuant to section 342 plus a notice
providing that:
(1) all information the individual person provides in
connection with the case must be complete,
accurate and truthful, and all assets and liabilities
must be completely and accurately disclosed in the
documents filed to commence the case;
(2) the current monthly income, monthly expenses
and, in a Chapter 13 case, disposable income must
be stated after reasonable inquiry; and
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 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
(3) the information an individual provides may be
audited and that the failure to provide such
information may result in the dismissal of the case
or other sanction including, in some instances,
criminal sanctions. Waivers regarding these
prohibitions will be unenforceable.
Changes in the composition of assets of the individual debtor’s
estate
EXEMPTIONS OF PROPERTY FROM AN INDIVIDUAL’S ESTATE
The new law places greater limitations on an individual
debtor’s ability to exempt property from that debtor’s
estate and to keep it out of the hands of creditors. The
two key provisions in this regard are the new section
522(b)(3) governing the application of state and local
law exemptions and the new section 1115 which
governs post-petition earnings of an individual debtor
in a Chapter 11 case.
State and local law exemptions. Under the Bankruptcy
Code, an individual debtor has the option to elect
either state and local property exemptions, on the one
hand, or the federal exemptions set forth in section
522(b) of the Code on the other hand to protect
certain limited assets from distribution to creditors.
The broad coverage offered under certain state
exemption schemes, most notably the homestead
exemptions in Florida and Texas, has resulted in actual
and perceived pre-bankruptcy planning by debtors to
shield substantial assets from creditors. New section
522(b)(3) specifies that the state or governing law for
application of the exemption is the law of the place of
the debtor’s domicile for the 730 days before filing.
Moreover, to the extent that the debtor did not
maintain a domicile in a single state during that time,
then it is the law of the place of the debtor’s domicile
for the majority of the 180-day period prior to the 730
days before filing. This long look-back is clearly
intended to prevent debtors from manipulating the
state exemption differences to the debtor’s advantage
and consequently shielding assets from creditors.
Additional value and timing limitations are placed on
the debtor’s use of a state law homestead exemption as
well.
Post-petition earnings. A thorny issue in individual
Chapter 11 cases has been the status of a debtor’s post-
petition earnings. A new section 1115 will define
property of the estate of an individual debtor to include
property acquired post-petition. Related provisions in
new section 1123(a)(8) will provide for funding of a
plan from an individual’s future earnings and require a
best efforts test in connection with confirmation of a
debtor’s plan under new section 1129(a)(15). As a
result of these changes in the aggregate, an individual
debtor’s Chapter 11 case will more closely resemble an
individual’s case under Chapter 13.
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Retirement funds. While the United States Supreme
Court has recently ruled on the exclusion of certain
individual retirement accounts from property of an
individual debtor’s estate, the newly enacted legislation
should clarify any historical ambiguities. Subject to
certain limitations, retirement funds covered under
sections 401, 403, 408, 408A, 414, 457 or 501(a) of the
Internal Revenue Code are exempt from property of
the estate regardless of whether state or federal
exemption laws are applied. Likewise, direct transfers
from one such type of account to another will also be
protected.
RECOVERY OF CERTAIN TRANSFERS
Like the limitations to be placed on the use of state law
property exemption statutes, new section 348(e) allows
a trustee to avoid any transfer by the debtor to a self-
settled trust or similar device made as far back as ten
years before the date of the commencement of the
bankruptcy case, provided that the trustee can show
that the transfer was made (like a fraudulent
conveyance) with ‘actual intent to hinder delay or
defraud’ certain creditors. The trustee must show,
however, that the transfer was made to avoid a
particular claim not merely as a general asset protection
measure.
EXCLUSIONS OF PROPERTY FROM THE ESTATE
New section 541(b)(5) will exclude from a debtor’s
estate funds placed in an educational or individual
retirement account qualified under section 530(b)(1)
more than one year prior to the bankruptcy case and
similarly, new subsection (b)(6) protects funds
contributed to a state tuition programme qualified
under section 529(b) of the Internal Revenue Code
more than one year prior to the bankruptcy case. In
each case, there are certain limitations including a
maximum exclusion of up to US$5,000 per beneficiary
for the period between 365 and 720 days prior to the
commencement of the individual debtor’s bankruptcy
case.
CONTRACTS AND LEASES UNDER SECTION 365
The new legislation amends section 365 governing
executory contracts and unexpired leases to provide
that if a lease of personal property is not rejected or not
assumed by the debtor (or trustee) in a timely manner,
such property is no longer property of the estate and
the automatic stay under section 362 of the Bankruptcy
Code with respect to such property is terminated. In a
Chapter 11 or 13 case where the debtor is an individual
lessee of personal property and the lease is not assumed
in the confirmed plan, the lease is deemed rejected as
of the conclusion of the confirmation hearing. If the
lease is rejected, the automatic stay under section 362
(as well as the co-debtor stay pursuant to section 1301)
is automatically terminated with respect to such
property.
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 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
Significant Chapter 11 [business bankruptcy], claims
priority and general administrative amendments
While the primary focus of the new bill is consumer
bankruptcy, there are many changes that affect all cases
and those that relate directly or indirectly to business
bankruptcy cases under Chapter 11. The new time
limits imposed on debtors in the Chapter 11 process
and the favourable treatment afforded to many creditor
groups under the new law will make reorganisation
more difficult and could be expected to result in more
liquidations. The bill includes new procedures for small
business debtors, restrictions on management
compensation and other important amendments.
The appointment of Chapter 11 trustees
The new law apparently encourages the appointment of
Chapter 11 trustees in some cases which had typically
been reserved for cases in which gross mismanagement
or wilful misconduct was found. Cause under amended
section 1104(a)(3) has been expanded to include
failure to pay post-petition tax or to maintain insurance
or the unauthorised use of cash collateral.5 New section
1104(e) provides that the United States Trustee may
move for the appointment of a trustee if there is
misconduct by management. While trustees have
generally been compensated on an hourly basis, the
percentages contained in section 326 are now treated as
a commission for the Chapter 11 trustee under new
section 330(a)(7).
New time limits affecting Chapter 11 cases
The modifications in the amendments to existing time
limits set forth in the Code are expected to have a
significant impact on the Chapter 11 process.
EXCLUSIVITY
The debtor’s exclusive right to propose a plan of
reorganisation under amended section 1121 will no
longer be extended beyond 18 months. This limit will
change the dynamics and timing of complex cases and
increase the pressure on debtors in the largest and
most complex cases.
ASSUMPTION/REJECTION OF LEASES
In addition, under the amendments to section
365(d)(4), non-residential real property leases must be
assumed or rejected within a maximum of 210 days.
The standard period will be 120 days subject to a 90-day
extension ‘for cause’. Thereafter, the landlord must
consent to any extension.
Small business debtors under Chapter 11
New provisions may subject Chapter 11 debtors with
secured and unsecured debts not exceeding
US$2,000,000 to special procedures intended to
expedite the administration of these cases, provided
that the United States Trustee does not appoint a
22 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
creditors’ committee. Under modified section 1125(f),
qualifying debtors may (i) file a combined plan and
disclosure statement, (ii) use a standard form
disclosure statement or (iii) combine approval of the
disclosure statement with confirmation. While these
debtors will have an exclusive period of 180 days to file
a plan, they will be required to file within 300 days
under section 1121(c). The court must confirm the
plan within 45 days under section 1129(g).
Treatment of tax claims under a Chapter 11 plan
The new law amends section 1129(a)(9)(c) to require
that deferred payments to taxing authorities be paid in
regular cash payments over a period not exceeding five
years with an interest rate that preserves the value of
the claim on the effective date of the plan.
Administrative expense priority claims
The new legislation has a number of provisions which
raise the priority of certain claims or expand the
category of claims allowable as administrative expenses,
improving the prospects for recovery for certain
holders of these claims. For example, new section
507(b)(9) created an administrative expense priority
for claims arising from all goods received by a debtor in
the ordinary course of business for a period of 20 days
prior to commencement of the proceeding. Similarly,
under amended section 546(c) the period for
reclamation claims will be expanded from 10 to 45 days
after receipt of goods (or 20 days after commencement
of the proceeding).
Some claims will receive higher priority treatment
indirectly through the operation of other provisions.
The new deadlines imposed by amended section
365(d)(4) in respect of the assumption or rejection of
non-residential real property leases are likely to lead to
the increase of protective assumptions of such leases,
elevating landlord claims for cure and deficiencies to
administrative expense priority status. As an offset and
acknowledgment of the likely effect of the amendment
to section 365(d)(4), the administrative expense claim
for leases assumed during the proceeding and later
rejected will be limited under section 505(h)(7) to two
years’ rent.
Indeed, in at least one instance, existing
administrative expense priority status is apparently no
longer enough for certain creditors. Specifically,
granting administrative expense priority to the claims
of utilities will no longer be considered as adequate
assurance of payment. Amended section 366 will
require a debtor to post additional security in the form
of cash or other collateral to continue utility service
post-petition.
Management retention bonuses
An area of administrative expenses priority claims that
will affect the administration of large Chapter 11 cases
are the amendments relating to the practice of granting
September 2005
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
retention bonuses and severance pay to management.
Under amended section 503(c), authorisation of such
retention bonuses and management severance will be
subject to increased scrutiny and limitations. On a
related note, payments under employment contracts to
insiders may constitute fraudulent conveyances under
the new law unless made in the ordinary course of
business under section 548(a).
Retention of investment bankers
In a change that is expected to have a profound
impact on the professional restructuring community,
investment banking firms will no longer be required
to satisfy the ‘disinterested’ standard set forth in
section 101(14). Historically, an investment banking
firm could not satisfy the disinterestedness test if it had
served as the investment banker for an outstanding
security of the debtor or if within three years of the
commencement of a case, it had served as investment
banker with respect to an offering sale or issuance of a
security of the debtor. Presumably, the large investment
banking firms that had been locked out of these
restructuring opportunities will now have the chance
to compete in this market against the boutique firms
that have dominated the restructuring market for
years.
Healthcare proceedings
In light of the spate of bankruptcy cases of certain
healthcare providers over recent years, certain
protections will be added to protect patients’ rights. In
particular, new section 333 will require the court to
appoint a ‘patient care ombudsman’ to facilitate the
protection of patients’ rights including the monitoring
of the quality of patient care by the debtor facility. In
addition, new procedures are established under section
351 for disposition of patient records in these cases.
The expenses associated with the patient care
ombudsman and the disposition of patient records will
be entitled to additional administrative expense
priority, along with the cost of moving a patient to
another facility under section 503(b)(8).
Exceptions to the application of the automatic stay
With each piece of bankruptcy reform legislation, it
seems that the number of exceptions to the application
of the automatic stay continues to grow. The current
legislation appears to be no different. New exceptions
have been added for landlords seeking to evict tenants
and enforce judgments of possession, for recovery of
personal property collateral upon an individual
debtor’s failure to comply with his statement of intent
with respect to such property, for prosecution of
proceedings before the Tax Court, for expanded rights
to close out and offset certain financial contracts, for
the repayment of loans from pensions plans and for the
enforcement actions by securities self regulatory
organisations.
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
International insolvency amendments
The new Chapter 15 to the Bankruptcy Code
incorporates the Model Law on Cross-Border
Insolvency completed by the United Nations
Commission on International Trade Law in 1997. The
new legislation encourages cooperation between the
United States and foreign countries with respect to
transnational insolvency cases. Insofar as possible,
Chapter 15 follows the language, section numbering
and general structure of the Model Law to promote
uniformity in its adoption and application.
Eligibility
Debtors who would be eligible for relief under section
109 of the Code will also be eligible under Chapter 15.
Foreign banks will not be eligible if they have a branch
or agency in the United States; however, foreign
insurance companies doing business in the United
States will be eligible for relief. They were added at the
request of the insurance industry to reflect the
common practice of invoking ancillary proceedings in
the United States as part of the wind-up of
multinational insurers. Insurance regulators can ask the
relevant United States bankruptcy court to abstain from
exercising jurisdiction over a foreign insurance
company under Code section 305 in an appropriate
case.
Nature of foreign proceeding
New Chapter 15 divides ‘incoming’ foreign proceedings
into foreign main proceedings, which are pending in
the country where the debtor has its centre of main
interests, and foreign non-main proceedings, which are
themselves ancillary proceedings. A case under Chapter
15 will be commenced by a petition filed by a ‘foreign
representative’ as defined in amended section 101(23)
of a ‘foreign proceeding’ as defined in amended
section 101(24), accompanied by documents
evidencing the foreign proceeding and the
appointment and authority of the foreign
representative. The order granting ‘recognition’ of the
foreign proceeding will specify whether the foreign
proceeding is main or non-main. Pending recognition,
a foreign representative will be entitled to seek
‘provisional’ or temporary relief if urgently needed.
Relief under Chapter 15
Unlike section 304, where all relief has been dependent
on court approval based on satisfaction of a statutory
list of criteria, Chapter 15 provides that upon
recognition of a foreign main proceeding, the
automatic stay and selected other provisions of the
Bankruptcy Code will take effect subject to the existing
exceptions and protections in the Code. In addition, a
foreign representative of a foreign main proceeding
will be authorised to continue operation of a debtor’s
business in the ordinary course.
September 2005 23
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
The recognition procedure will be the sole entry
point for access by a foreign representative to the state
and federal court systems in the United States (except
for the limited purpose of collecting the debtor’s
accounts receivable). Venue will also be narrowed to a
single entry point where the debtor has its principal
place of business; if none, where litigation is pending
against the debtor; if none, where venue will be
consistent with the interests of justice and the
convenience of the parties, having regard to the relief
sought (28 USC section 1410). If recognition is denied,
the foreign representative will not be able to proceed in
another court. If recognition is granted, the foreign
representative can seek additional relief from the
bankruptcy court or any other state or federal court,
including commencing a full (as opposed to ancillary)
case under the Code; if the foreign representative is
acting on behalf of a foreign main proceeding, it may
commence a voluntary proceeding under section 301
or 302; otherwise it can only commence an involuntary
case under section 303 of the Code.
Communications and coordination among courts and
representatives
Chapter 15 also codifies the Model Law’s provisions for
cooperation and communication among courts and
representatives, for coordination of multiple
proceedings and for untangling Chapter 15 cases from
cases which involve the same debtor and which have
been commenced under other chapters. Under both
the Model Law and section 1525, courts and estate
representatives in the enacting country must ‘cooperate
to the maximum extent possible’ with foreign courts
and foreign representatives. The law entitles courts to
‘communicate directly with, or to request information
or assistance directly from, foreign courts or foreign
representatives’.
The court will be able to implement such
cooperation by ‘any appropriate means’ including the
appointment of persons to act at the direction of the
court, coordination of administration and supervision
of the debtor’s assets and affairs and use of
coordination agreements or protocols. Following the
Model Law, Chapter 15 also promotes the coordination
of concurrent proceedings involving the same debtor,
including both coordination between a local
proceeding and a foreign proceeding and coordination
when foreign representatives in more than one foreign
proceeding seek recognition and relief.
Financial contract amendments
Prior law
Several provisions of the Bankruptcy Code, mostly
added in 1997, walled off financial market transactions
from the effects of the automatic stay. The collapse of
several large securities dealers shortly after the
adoption of the Bankruptcy Code in 1979 raised
24 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
concerns that the failure of one participant in the
financial markets might have a ripple or domino effect
causing widespread damage in the financial markets,
and led to changes in insolvency laws giving certain
financial market participants broader rights to exercise
contract remedies upon the bankruptcy or insolvency
of a counterparty to a financial contract. Designed to
protect the market from disruption in the event that a
participant became bankrupt, the provisions permitted
liquidation of certain types of financial contracts based
upon insolvency of a party, even if that party was
bankrupt.
Purpose and scope of amendments
The amendments update and expand the financial
contract provisions to allow termination, close-out, set-
off and netting across a broader range of financial
market participants and products.
Specific changes
The financial contract provisions in the new legislation
amend various provisions of the Bankruptcy Code, the
Federal Deposit Insurance Act (‘FDIA’), the Federal
Credit Union Act (‘FCUA’), the Federal Deposit
Insurance Corporation Improvement Act (‘FDICIA’)
and the Securities Protection Act (‘SIPA’) governing
the rights and remedies of financial market participants
under commodity contracts, forward contracts,
securities contracts, repurchase agreements, swaps and
netting agreements (collectively, ‘Financial Contracts’).
Previous measures were enacted somewhat randomly in
statutes, regulation and policy statements as Congress,
the FDIC, and the Securities Investor Protection
Corporation (‘SIPC’) reacted to concerns and
problems. The amendments will clarify uncertainties in
existing law, harmonise the laws affecting different
types of debtors and provide a more coherent scheme
for treatment of financial contracts in insolvency
proceedings.
The amendments expand the definitions in the
Bankruptcy Code, the FDIA and FCUA of ‘securities
contract’, ‘commodity contract’, ‘forward contract’,
‘repurchase agreement’, and ‘swap agreement’. The
revised definition of ‘securities contract’ now expressly
covers margin loans and also makes clear that
agreements for the sale and repurchase of securities are
included in the definition of ‘securities contract’. The
definition of ‘swap agreement’ is expanded to pick up
additional swap transactions such as total return swaps,
credit swaps and weather swaps and will permit
expanded coverage as the swap market develops by
including transactions which presently, or in the future,
become ‘the subject of recurrent dealings in the swap
markets’. The definition of ‘repurchase agreement’ in
the Bankruptcy Code will now harmonise with the
definition under the FDIA and FCUA to include
mortgage-related securities, mortgage loans and
interests in mortgage loans. The definitions will
September 2005
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
expressly include any related security agreement or
credit enhancement.
The parties eligible to take advantage of these special
provisions presently are limited to commodity brokers,
forward contract merchants, stockbrokers, financial
institutions or securities clearing agencies. The
amendments add significant market players, defined as
‘financial participants’, who satisfy specific tests for
dollar volume of activity in the financial markets.
Netting contracts between financial institutions that are
enforceable under FDICIA will no longer need to be
governed by the laws of the United States or a
particular state. Cross product netting agreements
between certain parties will be enforceable in
bankruptcy proceedings to the extent that the
underlying financial contracts could be closed out by
the particular counterparty.
Overview of the rules governing administration of
financial contracts in insolvency proceedings
Application of these rules will vary with the type of
debtor, the type of insolvency proceeding, the type of
Financial Contract and the identity of the counterparty.
The following is a brief overview of these rules to
facilitate analysis of the foregoing amendments.
Business debtor bankruptcy proceedings
Commodity brokers, forward contract merchants,
stockbrokers, financial institutions, financial
participants and securities clearing agencies may close
out and enforce security for commodity contracts,
forward contracts, securities contracts (including
margin loans and agreement for the sale and
repurchase of securities) and related master netting
agreements, notwithstanding the automatic stay and
may not be enjoined from enforcing default provisions
based on the occurrence of a bankruptcy or the
financial condition of a party (commonly called ‘ipso
facto’ provisions) or from enforcing other remedies
under such contracts.
Counterparties to repurchase agreements and swap
agreements may close out and enforce security for
repurchase agreements, swap agreements and related
master netting agreements notwithstanding the
automatic stay and may not be enjoined from enforcing
ipso facto provisions or other remedies.
Pre-petition margin payments or settlement
payments made by the debtor with respect to any such
Financial Contracts may not be recovered as
preferences or fraudulent transfers, except in the case
of transfer made with actual intent to hinder, delay or
defraud creditors.
Stockbroker liquidation proceedings under SIPA
Creditors may liquidate, terminate or accelerate
securities contracts, commodity contracts, forward
contracts, repurchase agreements, swap agreements or
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
master netting agreements and foreclose on any cash
collateral pledged by the debtor, notwithstanding the
automatic stay or any order or decree obtained by SIPC
in a stockbroker liquidation proceeding. However, SIPC
may obtain an injunction prohibiting creditors from
foreclosing on, or disposing of, securities pledged by
the debtor, sold by the debtor under a repurchase
agreement or lent by a debtor under a securities
lending agreement. In the past, SIPC has routinely
sought and obtained injunctions against the close-out
of securities contracts and repurchase agreements, but
in a series of policy letters has made clear that following
receipt from a counterparty of an affidavit as to the
absence of SIPC fraud and the existence of a perfected
security interest in any collateral or underlying
securities, SIPC would consent (and would urge the
trustee to consent) to the counterparty’s obtaining
relief from the injunction provided that the collateral
or underlying securities were not needed to satisfy
customer claims in the liquidation proceeding. In the
event SIPC and the trustee determined that the
collateral or underlying securities were needed to satisfy
customer claims, the trustee would perform the
debtor’s obligation or pay the counterparty for the
collateral or underlying securities.
Pre-petition margin payments and settlement
payments would be afforded the same protection as in a
regular bankruptcy proceeding, as discussed above.
FDIC-insured depository institution conservatorship or
receivership proceedings
Counterparties to securities contracts, commodity
contracts, forward contracts, repurchase agreements
and swap agreements (referred to collectively in the
FDIA as ‘qualified financial contracts’) with the insured
depository institution may close out such qualified
financial contracts, subject to certain limitations and
the right of the FDIC to transfer such qualified
financial contracts. The FDIC as conservator or receiver
of an insured depository institution has the right to
transfer to another financial institution all qualified
financial contracts between the insured depository
institution and any one counterparty or its affiliates.
The conservator or receiver is required to notify the
counterparty of the transfer by 1700 on the business
day following the date of appointment of the receiver
or the business day following the transfer in the case of
a conservatorship.
After 5.00 p.m. on the business day following the
appointment of the FDIC as receiver, provided that the
counterparty has received no notice that the receiver
has made a transfer of the qualified financial contracts
to another financial institution, the counterparty may
enforce, and may not be enjoined from enforcing, any
default based on the appointment of the FDIC as
receiver and may terminate, liquidate or accelerate any
qualified financial contract with the insured depository
institution, foreclose on any security agreement
September 2005 25
 PRESIDENT BUSH SIGNS SECTION 256 – ENACTING BANKRUPTCY REFORM LEGISLATION
securing such qualified financial contract and enforce
any master agreement for the netting of obligations
with respect to such qualified financial contracts.
In the case of a FDIC conservatorship, a counterparty
to a qualified financial contract with the insured
depository institution may enforce, and may not be
enjoined from enforcing, any default under a qualified
financial contract which is enforceable under
applicable non-insolvency law and may terminate,
liquidate or accelerate any qualified financial contract
with the insured depository institution, foreclose on any
security agreement securing such qualified financial
contract and enforce any master agreement for the
netting of obligations with respect to such qualified
financial contracts. However, the counterparty may not
enforce an ipso facto provision or default based on the
appointment of the FDIC as conservator for the insured
depository institution.
Any transfers of money or property by an insured
depository institution may not be recovered as a
preference or fraudulent transfer, except in the case of
transfers made with actual intent on the part of the
transferee to hinder, delay or defraud creditors.
Conclusion
Although versions of this bill have circulated for many
years in Congress, the newly enacted section 256
represents perhaps the most sweeping changes to the
Bankruptcy Code since its enactment. Indeed, many of
the amendments represent changes in not only the
mechanical workings of the Bankruptcy Code, but also,
with respect to at least individual debtors, its underlying
This Newsletter is intended to provide general information regarding recent developments in the law relating to insolvency, restructuring and
creditors’ rights. Views expressed are not necessarily those of the International Bar Association.
26 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
philosophy. The amendments affecting Chapter 11
cases should also have a material impact on the
administration of Chapter 11 and, as a result, the
debtor–creditor negotiating dynamics could be altered
dramatically. Lastly, the new Chapter 15 represents the
culmination of many years of work by international
insolvency practitioners and experts in their efforts to
harmonise cross-border proceedings.
Notes
* This article first appeared in the April 2004 edition of the Goodwin
Procter LLP Bulletin and is reproduced with kind permission of
Goodwin Proctor LLP.
1 It should also be noted that, unless the creditor has received effective
notice under these new provisions, the court may not impose any
monetary penalty for the violation of the automatic stay or the
provisions relating to the turnover of property (sections 542 and 543 of
the Bankruptcy Code) by such creditor.
2 A ‘domestic support obligation’ is a debt that accrues pre- or post-
petition that is recoverable by a spouse, child, other family member, or
by the government on behalf of such people. It must be in the nature of
alimony, maintenance or support pursuant to a separation agreement,
divorce decree or property settlement, a court order or a determination
by a governmental unit.
3 The maximum amount of fees that may be charged by a BPP will most
likely be set in the Federal Rules of Bankruptcy Procedure or by
guidelines promulgated by the Judicial Conference of the US (JCUS).
4 Pursuant to new section 101(12A), a Debt Relief Agency is defined as
any ‘person who provides any bankruptcy assistance to an assisted
person’ for compensation except (1) an officer, director, employee or
agent of the person who provides assistance, (2) a non-profit
organisation exempt under IRC section 501(c)(3), (3) a creditor of the
assisted person to the extent that that creditor is assisting the person in
restructuring a debt owed to the creditor, (4) a depositary institution or
credit union, (5) author, publisher, or distributor of works subject to
copyright protection.
5 These new grounds also constitute cause for the conversion or dismissal
of a Chapter 11 proceeding under section 1112.
September 2005
 Tentative Reform of
Italian Bankruptcy Law
Gian Bruno Bruni
Bruni Gramellini Leonelli, Milan
info@ancillex.it
T he Italian legislator has repeatedly intervened to
regulate the insolvency of groups or of large
corporations in distress by way of the so called
‘Extraordinary Administration’ procedure (Legislative
Decree 3 April 1979 No 95, Legislative Decree 8 July
1999 No 270, modified by Decree Law 23 December
2003 No 347, which was passed to supplement the
previous Law in order to extend the rules on
Extraordinary Administration to Parmalat and its
group). This procedure is, however, limited to a
restricted number of important companies.
Despite the many partial alterations, effected over
the years as a consequence of several rulings by the
Constitutional Court, Italian bankruptcy law is an
obsolete tool and a constant cause of concern to
foreign creditors, to the point that over the last two
years it has been subject to scrutiny by the European
Commission.
In fact ordinary insolvency has been regulated for
more than 60 years by the Royal Decree 16 March 1942,
No 267. A complete re-statement of ordinary
bankruptcy proceedings has been underway ever since
the first half of 2003, but conflict between members of
the Committee appointed to redraft the law is such that
it has not been possible, to date, to submit a complete
project for approval to Parliament.
Recently the Government has decided to extract
from the bill a few rules regulating matters in respect of
which a sine die postponement would have hampered
the implementation of the new Company Law
(effective as of 1 January 2004) and jeopardised new
policies on enhancing investments.
This mini-reform has in fact been hastily included in
a very heterogeneous set of rules that goes under the
name of ‘measures to revamp the ability of Italian
enterprises to compete on the market’.
The most important features of novelties introduced
by Law 14 May 2005 No 80 are described below.
Rules on the possibility for the courts to set aside
‘suspect’ transactions
Section 67 of the Bankruptcy Act has always been a
nightmare for creditors, particularly banks and
suppliers. According to the old text of this provision,
transactions entered into by or with the insolvent
debtor involving:
• payments or transfers at an undervalue;
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
• the discharge of debts made without recourse to cash;
and
• voluntary pledges or mortgages on the debtor’s
assets,
if made in the two-year period prior to the declaration
of bankruptcy could be set aside by courts, at the
instigation of the liquidators, particularly those in
favour of the banks.
In the same way, the regular payment of debts and
the creation of preferential rights to cover debts made
in the year prior to the declaration of bankruptcy could
be rendered null and void. This ‘suspect period’ (ie the
run-up period prior to bankruptcy), once the lengthiest
in Europe, has now been halved, respectively to one
year and six months.
In addition, a series of transactions has been
excluded from avoidance by the courts, in particular
‘payments of goods and services made in the ordinary
course of business within regular expiry terms’. This
definition implies that regular transactions are only
those for which cash is paid as consideration at the
contractual (or customary) expiry dates.
Another important feature is that ‘payments
made to a bank account, provided that they have not
consistently and lastingly reduced the indebtedness of
the bankrupt towards the banks, are also excluded’.
This rule is likely to have the greatest impact on
bankruptcy proceedings to which banks are parties.
Prior to the reform, cash paid by the debtor on an
overdraft was systematically set aside up to the limits of
credit facilities granted by the bank.
Exclusion from avoidance also concerns:
(1) sales (for consideration) of buildings destined to
become the main residence of buyers;
(2) acts, payments and the issue of security on the
debtors’ assets provided that they are contemplated
in a rescue plan which appears to be adequate for
permitting the company to recover from debts and
re-establish its financial situation;
(3) acts, payments and guarantees under an
arrangement with creditors;
(4) remuneration for works carried out by employees
or third parties not employed by the bankrupt; and
(5) payments of liquid and enforceable debts made on
their due expiry date in order to obtain services
instrumental to accessing arrangements with
creditors.
September 2005 27
 TENTATIVE REFORM OF ITALIAN BANKRUPTCY LAW
Arrangements with creditors
Recourse to arrangements with creditors has been
significantly enhanced by the legislator as an alternative
method of resolving a financial crisis. It is noteworthy
that ‘contractual’ work-outs represent a totally
unprecedented approach to insolvency in comparison
with the traditional tendency to administer insolvency
through official proceedings and authorities.
Legal requirements to be satisfied by the debtor in
order to be eligible for this procedure have been widely
simplified.
It is now sufficient for the debtor to be in a position
to propose a plan to creditors, which may alternatively
provide for:
(a) debt restructuring and the payment of claims in any
form whatsoever, also through the assignment of
assets, assumption of the bankruptcy liabilities by
third parties or extraordinary transactions, such as
the assignment of shares, bonds, convertible bonds
or other financial instruments or securities to
creditors or companies owned by them;
(b) the assignment of assets of companies in distress to
a third party, which will acquire them by way of the
assumption of liabilities. Assumption may take place
through vehicle companies or newcos to be set up
for this purpose;
(c) the subdivision of creditors into classes in
accordance with their legal status and their having
the same economic interests; and
(d) different treatment for creditors belonging to
different classes.
In practice, a petition for approval of an arrangement
with creditors must be supported by:
• a revised report on the financial and economic
situation of the company;
• a detailed list of assets and a list of creditors
showing their claims and their preferential rights,
if any;
• the list of creditors having real or personal security
rights on assets belonging to the debtor; or
• the value of assets and a list of creditors of
unlimitedly liable shareholders, if any.
The role of the court is therefore confined to verifying
preliminary conditions and approving and enforcing
the arrangement.
Pursuant to the new section 163 BA the court begins
its verification by way of a non-challengeable order. It is
noteworthy that the majorities required for approval of
the schemes of arrangement have been modified by the
new section 167.
The arrangement is still approved by the favourable
vote of as many creditors as represent the majority of
claims.
However, if the proposed arrangement provides for a
variety of classes of creditors, the arrangement must be
approved by the majority of creditors entitled to vote in
each class.
28 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
The court may, however, approve an arrangement
irrespective of dissent by one or several classes of
creditors, provided that the majority of classes has
approved it or that creditors belonging to dissenting
classes can be satisfied by the arrangement to no lesser
extent than they would be under any other alternative
solution actually available (‘cram-down’).
As customary, secured creditors cannot express their
vote unless they waive their preferential rights.
The effects of waiver are, however, confined to
fulfilment of the conditions for the arrangement with
creditors.
Dissenting creditors may file their conclusions ten
days before the hearing for the final approval of the
arrangement with creditors. A trial phase may then take
place. If the majority of creditors vote in favour of the
scheme, the court approves the arrangement by decree.
A totally new feature of the reform is represented by
‘debt restructuring agreements’.
Pursuant to section 182-bis the debtor may file the
documents required for a petition to confirm a scheme
of arrangement, together with a debt restructuring
agreement entered into with creditors representing at
least 60 per cent of claims, together with a report on
the feasibility of the agreement drawn up by an expert,
whereby regular payment of the dissenting creditors is
guaranteed.
The agreement is published in the Companies
Register. Dissenting creditors and third parties may file
an opposition within 30 days of publication.
After a decision has been issued on any oppositions,
the court proceeds to approve the agreement by
decree.
Such decree may be challenged before the Court of
Appeal within 15 days of its publication in the
Companies Register.
In comparison with the original aims of the
Government three years ago, this reform represents a
fairly poor achievement. Section1.5 of Law No 80/2005
does, however, contain a delegation to the Government
to adopt one or several Legislative Decrees within six
months, for the purpose of implementing a wider
reform of bankruptcy law, which should encompass at
least the following issues:
(1) The Creditors’ Committee, which should be shaped
as a management board whose tasks would be to
handle the crisis of the insolvent company, to
monitor the liquidator’s activity and to adopt or
approve decisions concerning the interim
continuation of the business.
(2) The new professional eligibility requirements of the
liquidator should make him or her a manager
rather than a public officer. In this respect, not only
lawyers and chartered accountants will be eligible
for this job but also professional firms and
companies as they are expected to be able to
provide all of the necessary services to carry out the
liquidator’s functions.
September 2005
 TENTATIVE REFORM OF ITALIAN BANKRUPTCY LAW
(3) Small companies and partnerships will be excluded
from insolvency proceedings in order to avoid the
courts being congested with files concerning
insignificant proceedings in terms of assets,
liabilities and social danger.
(4) The new delegated (bankruptcy) judge will assist
the ‘liquidator-manager’ and confine monitoring
activities to deciding disputes arising in connection
with the bankruptcy, without being involved in
time-consuming and bureaucratic administrative
tasks.
(5) Consequences of declaration of insolvency for the
debtor. A large number of personal restrictions,
such as the obligation to reside in a certain place,
to deliver correspondence to the liquidator, etc will
be eliminated. However, the most important
feature in this regard is the application to the
debtor of an unconditional ‘discharge’. Once
insolvency proceedings are over, there will no
longer be a residual ‘civil personal liability’ on the
part of the debtor towards creditors (as now exists),
for debts that have not been paid by the
bankruptcy.
Debt Restructuring Agreements
in Italy under the Recent Law
No 80/2005
Antonio Auricchio
Partner, Gianni Origoni Grippo & Partners, Milan
aauricchio@gop.it
R ecently, Italian insolvency law has appeared to
herald a new approach that focuses on corporate
reorganisation/restructuring rather than liquidation of
the debtor’s assets. In this legal framework, the
possibility to provide for arrangements with creditors is
to be welcomed.
Debt restructuring agreements are not new in our
legal system. In fact, out-of-court restructurings are
usually attempted at the onset of financial difficulties,
in order to avoid the disadvantages arising from formal
insolvency proceedings.
Such agreements spread as a reaction to the many
problems arising from the existing Italian insolvency
regime, which appears to be rigid and inflexible. In
fact, several provisions of the Royal Decree of 16 March
1942 (the ‘Italian Bankruptcy Act’) are outdated and
major problems coming from the current Italian
insolvency legislation include the following:
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It is, however, noteworthy that the delegation to the
government does not contain even the vaguest mention
of the Community Regulation on Insolvency No 1346/
2000.
In this regard, it seems that the Italian legislator has
paid no attention at all to recent modifications to
insolvency law in Germany, the Netherlands and Spain,
which were imposed by the need for integration with
new Community rules.
The above summary of future rules on insolvency
clearly shows that the Italian legislator has finally
abandoned its project for the radical reform of
bankruptcy law in favour of a much easier
‘composition’ of old rules. It is hard to believe that
such limited restyling will satisfy the market.
• new funding enjoys no priority;
• unsecured creditors do not usually recover their
claims;
• high costs and expenses of insolvency procedures use
up a substantial proportion of the assets; and
• the proceedings can be excessively lengthy (up to
seven or eight years).
Therefore, the experience of out-of-court, informal
agreements between the debtor and its creditors is
already known in our legal system, especially in the
relationships with banks.
In fact, banks (which are the major creditors of the
company) usually enter into private discussions with the
debtor outside the insolvency framework and, in some
cases, may obtain full repayment or improved security
in exchange for helping a distressed company.
In 2000 the Italian Banking Association issued a
voluntary code of conduct based on the London
September 2005 29
 DEBT RESTRUCTURING AGREEMENTS IN ITALY UNDER THE RECENT LAW NO 80/2005
Approach. Even though this code is not binding, it
is an important instrument in informal restructuring
processes, aimed at: (i) the cooperation of the banks
involved; (ii) recovery of value; and (iii) rescue of
financially troubled companies.
According to Law No 80 of 14 May 2005, (‘Law
80/2005’)1 two different kinds of debt restructuring
agreements are now provided in the Italian insolvency
legal system:
• debt restructuring agreements in the framework
of composition with creditors proceeding; and
• informal, out-of-court debt restructuring agreements.
Debt restructuring agreements in the framework of
composition with creditors proceeding
For the first time in Italian law, within the framework of
a composition with creditors proceeding, Law 80/2005
allows the debtor to file before the court also a debt
restructuring agreement, already agreed with the
creditors.
Even though some scholars and law practitioners
have suggested that debt restructuring agreements
represent an autonomous and separate legal
instrument with respect to composition with creditors
proceedings, we underline two factors which might
support the opposite opinion. In particular:
• debt restructuring agreements are set forth in the
section of the Italian Bankruptcy Act (as amended
and supplemented by Law 80/2005) concerning
composition with creditors proceedings; and
• the provision concerning debt restructuring
agreements (ie Article 182-bis of Law 80/2005)
expressly refers to the filing of said agreements
‘together with the documents set forth in the
preceding art. 161’, concerning the request of
admission to composition with creditors proceeding.
New provisions concerning composition with creditors
proceedings
For the sake of completeness, it is worth noting that the
composition with creditors proceeding was amended
and supplemented by Law 80/2005 and now appears
swifter and more flexible.
Pursuant to the former provisions, the insolvent
debtor could file a petition for a composition with
creditors as long as it could guarantee payment of
(i) 100 per cent of the claims of secured creditors; and
(ii) at least 40 per cent of the claims of unsecured
creditors, within a six-month period starting from the
approval of the composition by the relevant court. The
debtor was also entitled to transfer all of its assets to the
creditors, provided that the above percentages of claims
were expected to be paid within the same period.
Under Law 80/2005 the above requirements are no
longer requested, except for the payment of 100 per
cent of the secured claims. Indeed, even if it is not
30 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
expressly stated by the new provisions, it seems that the
debtor is still requested to pay in full its secured
creditors, because the latter do not vote upon the
composition proposal (the irrebuttable presumption of
law is that the secured creditors do not have an interest
in the composition proposal, since they are in any case
paid in full).
In addition, pursuant to Law 80/2005 the debtor is
entitled to request the composition with creditors
proceeding if it is in a ‘state of crisis’ and not with
‘insolvency status’.
One of the most important changes in the
composition with creditors proceeding is that the
debtor may propose a plan to its creditors, providing for:
• the restructuring of debts and satisfaction of
creditors’ claims through any technical or legal
means, including the assumption of debts, mergers or
other corporate transactions (in particular, the
composition can allow for the allocation to creditors
or classes of creditors, or companies in which they
have holdings, of stock/shareholdings, quotas or
bonds, including bonds convertible into shares, or
other financial instruments and debt instruments);
• the transfer of the assets of all companies involved in
the proposed composition to a contracting party
(‘assuntore’);
• the division of creditors into classes, according to
their legal position and uniform economic interests;
and
• the different treatment of creditors belonging to
different classes.
In this respect, it is worth stressing that the above
provisions clearly recall the rules concerning the
composition with creditors included in the
restructuring plan set forth in the recent Law No 39 of
18 February 2004 concerning the new extraordinary
administration proceeding for large size companies
(the ‘Marzano Law’).2 In fact, despite its ad hoc
development in response to the Parmalat collapse, the
Marzano Law represented the first real step towards
rehabilitative insolvency solutions for distressed
companies. Although some scholars and law
practitioners have criticised some of its provisions, the
composition with creditors is undoubtedly one of the
most important and welcome improvements
introduced by the Marzano Law in the Italian
insolvency system.
The aim of the composition with creditors, in
particular, is to quickly reach a settlement with the
creditors – who might also become the new holders of
the company through a debt-for-equity swap (as in the
very well-known Parmalat case) – in order to speed up
the end of the insolvency procedure and not jeopardise
the prosecution of business of the company.
Debt restructuring agreements
With specific reference to debt restructuring
agreements in the framework of composition with
September 2005
 DEBT RESTRUCTURING AGREEMENTS IN ITALY UNDER THE RECENT LAW NO 80/2005
creditors proceeding, Law 80/2005 provides for the
following requirements:
• the agreement shall be entered into by the debtor
and creditors representing at least 60 per cent of all
claims; and
• a report drafted and executed by an expert
concerning the feasibility of the agreement (the
‘Report’) shall be submitted to the bankruptcy
court.
It is worth stressing that the Report is of great
importance, because the approval of the debt
restructuring agreement by the bankruptcy court is
mainly based on the content of the Report. In
particular, the Report shall contain specific reference
to the suitability of the agreement so as to ensure full
payment to the so-called ‘external creditors’ (ie the
creditors not entering into the agreement).
The debt restructuring agreements shall be
published in the Companies Register and are effective
as from the date of publication. Creditors and any
other interested parties are entitled to challenge the
debt restructuring agreement within 30 days from its
advertising.
The bankruptcy court then shall decide on the
challenging petitions and possibly approve the debt
restructuring agreement.
With reference to the content of the debt
restructuring agreement, it is worth noting that it may
contain both different terms and conditions of
payment of the relevant claims and provisions
concerning the re-funding of the concern, in order to
allow prosecution of the business activities and
restructuring.
Should the debtor nonetheless be declared insolvent,
Law 80/2005 provides that any act, payment or
guarantee performed in order to execute a debt
restructuring agreement approved by the bankruptcy
court cannot be set aside (ie cannot be declared null
and void vis-à-vis the bankruptcy estate).
The above provision may be qualified as a ‘clawback
exemption rule’ or an exception to the applicability of
the rules concerning clawback actions and clearly
represents a great incentive granted by Law 80/2005.
In fact, clawback risks have always been perceived as
one of the major obstacles in the relationships between
financially troubled companies and creditors.
It should be noted, however, that the benefit of the
above clawback exemption rule is provided not only in
case of debt restructuring agreements performed
within the framework of composition with creditors
proceedings, but also, inter alia, in case of informal,
out-of-court restructuring agreements, provided that
certain requirements are met (see below).
Informal, out-of-court debt restructuring agreements
Law 80/2005 now also allows informal and ‘private’
agreements, entered into by the debtor and its
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
creditors outside the framework of judicial insolvency
proceedings.
In this respect, it is worth stressing that informal debt
restructuring agreements are only indirectly recognised
by Law 80/2005. In other words, the new provisions do
not contain detailed rules and regulations concerning
informal debt restructuring agreements.
However, the lack of specific provisions on the above
agreements should not be perceived as a negative
aspect. Rather, informal debt restructuring agreements
are intended to be a flexible legal instrument and the
interested parties may choose among a variety of tools
and techniques aimed at the restructuring, according to
different circumstances.
Moreover, as mentioned above, the new provision on
informal debt restructuring agreements contained in
Law 80/2005 refers to the clawback exemption rule.
In case the debtor is declared insolvent, any acts,
payments and guarantees performed in order to
implement a plan aimed at: (i) debt reorganisation of
the insolvent company; and (ii) economic and financial
recovery of business activities, cannot be set aside, as
long as an expert (ie audit firm) confirmed the
feasibility of the plan by means of a fairness opinion,
pursuant to Article 2501-bis, paragraph 4 of the Italian
Civil Code (referring to the well-known merger
leveraged buy-out).
This provision is clearly an advantage reserved to
projects aimed at the restructuring and recovery of
financially troubled companies, even though it lies
outside the formal insolvency proceedings.
In particular, the clawback exemption rule gives
some (subsequent) protection to the above
restructuring plan, since in the case of informal debt
restructuring agreements the so-called ‘stay of
enforcement proceedings’ against the company
(arising from the opening of a judicial insolvency
proceeding) is lacking. In this respect, it is advisable
that the highest number of creditors agree on the
restructuring plan, in order to ensure the stability of
the plan and avoid the risk of individual enforcement
proceedings.
The main difference between informal debt
restructuring agreements and agreements performed in
the framework of the composition with creditors
proceedings is that the former are out-of-court
agreements and there is no need for approval by the
court.
However, some scholars have said that a court
decision, even though only possible and subsequent, is
required also with respect to informal debt
restructuring agreements. In fact, should the debtor be
declared insolvent, the court shall ascertain ex post the
validity of the plan aimed at the debt reorganisation of
the insolvent company and the economic and financial
recovery of business activities, in order to grant the
benefit of the clawback exemption rule.
As mentioned above, informal restructuring
September 2005 31
 DEBT RESTRUCTURING AGREEMENTS IN ITALY UNDER THE RECENT LAW NO 80/2005
agreements are a flexible legal instrument. In this
‘open’ framework, the debtor and its creditors may
agree on set-off, assignment of claims, pactum de non
petendo, reduction of claims and deferred claims. In
specific cases, the restructuring plan may be based on a
debt-for-equity swap.
In most cases, a single agreement will be entered into
by the debtor and its creditors. However, it may be
allowed the performance of more than one agreement
with creditors. The plan may also provide that creditors
are entitled to enter into the agreement later.
The plan may further provide for a particular role for
some creditors. In particular, major creditors (ie banks)
could exercise a surveillance power over the debtor’s
business, as well as management or control rights.
Besides the debtor and its creditors (including
banks), the subjects involved in the restructuring plan
are the adviser and the lawyers. Restructuring
professionals participate in the negotiations in order to
evaluate the proposed rescue plan and mediate
between the parties. Cooperation among the key
players is essential. The adviser, in particular, shall be
reliable and qualified in order to ensure the success of
the restructuring plan.
Conclusions
Traditionally, the Italian insolvency legal framework has
been hostile to investors, such as international private
equity funds focusing on special situations and trying to
extract value from turnaround investments in distressed
companies. Clawback risks were perceived as one of the
major obstacles. This picture is very likely to change in
the near future.
Law 80/05 provisions will facilitate the
implementation of turnaround plans and hopefully
permit the injection of cash into distressed companies
aimed at preservation of a going concern and its
goodwill, which is a prerequisite for the entry of private
32 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
equity or industrial investors.
In advance of the forthcoming general reform of
Italian insolvency regime (expected by the end of this
year), Law 80/2005 focuses on debt restructuring
agreements, both within the framework of the
composition with creditors and outside from any
judicial insolvency proceedings.
As outlined above, two kinds of debt restructuring
agreements are now provided in the Italian insolvency
legal system and ruled by different provisions. However,
in spite of the relevant differences, such agreements are
aimed at: (i) the restructuring of financially troubled
companies; and (ii) avoidance of the declaration of
insolvency of such companies.
Therefore, Law 80/2005 appears to be in line with
the most advanced insolvency regimes and enables legal
instruments based on negotiations between the debtor
and its creditors, in order to solve in advance, if
possible, financial crises and problems of distressed
companies, as well as to avoid insolvency.
It is likely that debt restructuring agreements will
allow for the swift satisfaction of creditors’ claims
without any need for a lengthy insolvency procedure,
which is always detrimental to the debtor’s business, its
value on the market and the creditors’ interests.
In conclusion, the provisions concerning debt
restructuring agreements and the new rules, which will
be soon implemented, will restore efficiency in the
Italian system, opening up the potential for significant
investment opportunities, and allow investors skilled in
special situations to provide their contribution to the
Italian market.
Notes
1 The Decree-Law No 35 of 14 March 2005, ratified by Law No 80 of 14
May 2005, sets out new rules concerning clawback actions, composition
with creditors and debt restructuring agreements.
2 We refer to the Law Decree No 347 of 23 December 2003, ratified with
amendments by Law No 39 of 18 February 2004, and further
amendments.
September 2005
 Priority for Tax Claims in
Reorganisation Proceedings: is the
Tax Priority Justified in Colombian
Insolvency Law?
Juan Diego Rodríguez and Eduardo Zuleta
Zuleta Suarez Araque & Jaramillo Abogados, Bogotá
jrodriguez@zulga.com and ezuleta@zulga.com
T his article will describe the priority for tax claims
under Colombian reorganisation proceedings.
After a brief and general description of the Colombian
reorganisation proceedings, it will focus on the tax
priority system as currently contemplated by Colombian
insolvency law, emphasising the justification for it.
Finally, it includes a brief description of the most
important differences provided for in Law 550 between
tax claims and other types of claims.
General overview of the Colombian reorganisation
proceedings
Petition
As a general rule, a reorganisation proceeding in
Colombia commences when a petition is filed with the
government agency having jurisdiction over the debtor
(hereinafter the ‘Superintendence’). A petition may be
voluntary, which is filed by the debtor, or involuntary,
which is filed either by one or more creditors or ex
officio by the Superintendence. Law 550 of 1999
(hereinafter ‘Law 550’), which regulates reorganisation
proceedings in Colombia,1 provides that the applicant
must prove either that the debtor has defaulted in the
payment for more than 90 days of two or more
commercial obligations, or that there are at least two
executive judicial proceedings against the debtor for
the collection of unpaid commercial obligations. In
either case, the accrued value of the unpaid obligations
shall be at least equal to 5 per cent of the current
liabilities of the debtor.
Debtor in possession and appointment of a promoter
As a general rule the debtor keeps possession and
control of its assets while undergoing reorganisation
under Law 550. Additionally, the Superintendence
must appoint an individual known as the ‘Promoter’,
who participates in both the preparation and
negotiation of the restructuring agreement. The duties
of the Promoter must include the determination of the
admissible credits and the voting rights of creditors.
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Automatic stay
While the negotiations for a restructuring agreement
are taking place, no creditor is permitted to commence
any executive judicial proceeding (proceso ejecutivo)
against the debtor, and any pending proceedings of
such nature shall be suspended. In addition, during
such period, any rights to repossess the assets of the
company by a secured creditor are suspended.
Approval of the restructuring agreement
Law 550 provides for the following five categories of
creditors:
(a) internal creditors (debtor’s shareholders);
(b) employees and pensioned employees;
(c) public entities and social security entities;
(d) financial entities; and
(e) other external creditors (either secured or
unsecured creditors).
Restructuring agreements require the approval of the
absolute majority (50 per cent plus one) of the
admissible votes from creditors coming from at least
three of the above-mentioned categories. If there are
only three categories of creditors, the majority shall
require votes from at least two categories.
The number of votes that each creditor has varies
depending on whether the creditor is an internal or an
external creditor and is calculated based on the
amount of the equity or the credit, as the case may be.
Mandatory liquidation
If within the four months counted as from the date in
which the voting rights are definitely determined there
is no agreement for the restructuring, or if the
negotiations fall apart, the Promoter is to advise the
proper authority so that it can immediately commence
the mandatory liquidation of the debtor.
September 2005 33
 PRIORITY FOR TAX CLAIMS IN REORGANISATION PROCEEDINGS
Priority of tax claims within the Colombian
reorganisation proceeding
The UNCITRAL Legislative Guide on Insolvency Law 2004
(the ‘Guide’) is intended to be used, among others, as
a reference by national authorities and legislative
bodies when preparing new laws and regulations or
reviewing the adequacy of existing laws and regulations.
The Guide concludes that clear rules for the ranking of
priorities of both existing and post-commencement
creditor claims are important for providing
predictability to lenders, and for ensuring consistent
application of the rules, confidence in the proceedings
and that all participants are able to adopt appropriate
measures to manage risk. According to the Guide,
where certain public interests are given priority and as a
result thereof equality of treatment based upon the
ranking of claims is not observed, it is desirable that the
policy reasons for establishing that priority be clearly
stated in the insolvency law.
Although many different approaches have been
considered to the types of credits that will be given
priority, employee and tax claims are particularly
prevalent. As a general rule, restructuring agreements
in Colombia can amend the priority of payments as
provided for in the Colombian Civil Code2 provided,
however, that at least 60 per cent of the creditors’ votes
in such sense are obtained. Note that such votes must
come from the different categories of creditors, as
explained above. Hence, assuming that the necessary
majorities are obtained, creditors may, for example,
agree to withdraw the priorities granted by law to
secured creditors and to treat them as unsecured
creditors.3
In spite of the above, Article 34(12) of Law 550
expressly provides that the priority granted to employee
and tax claims cannot be disregarded in a restructuring
agreement. As a result, it is not possible to agree on the
elimination of the tax and labour credit priorities
under Colombian reorganisation proceedings.
Therefore, the following question arises: What are the
policy reasons, if any, for establishing a tax priority in
the Colombian insolvency law? Law 550 does not
contain any express policy reasons for adopting such
priority. As mentioned before, it only, by way of
reference, applies the general priority provisions
contained in the Civil Code. However, Article 2 of Law
550, which regulates Articles 334 and 335 of the
Colombian Constitution,4 provides that the state shall
intervene in the economy in order to reach the
following goals (the ‘goals’):5
(1) Promote the reactivation of the economy and
employment by means of the restructuring of
companies.
(2) Make efficient use of all resources related to
entrepreneurial activity.
(3) Improve the competitiveness and promote the
social function of all the restructured companies
and sectors.
34 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
(4) Re-establish the payment capacity of restructured
companies so that they can comply with their
obligations.
(5) Facilitate access to credit.
(6) Make more powerful the direction and internal
control system of restructured companies.
(7) Guarantee the quality and opportunity of the
information to be provided to shareholders or
third parties.
(8) Seek ways for companies and their employees to
agree upon special and temporary labour
conditions that facilitate the restructuring of
companies.
(9) Facilitate the guarantee and payment of pension
liabilities.
(10) Establish an adequate regulatory framework for
restructuring companies in a quick and equitable
way.
As may be observed, the tax priority applicable within
Colombian reorganisation proceedings is not
supported by any of the above-mentioned goals. On the
contrary, based on them, it could be claimed that: (a) it
is the obligation of the state to seek and facilitate the
adequate reorganisation of debtors and, in that sense,
no justification for a favourable treatment of a state
credit would exist; and (b) not only should the state be
treated the same way as any other creditor, but it also
has an obligation to negotiate its tax credits with the
debtor so that the latter can achieve an adequate
reorganisation.
Given that no express policy reason is established in
Law 550 for adopting tax priority, the main ground to
justify its application would be that it is needed to
protect public revenue. In turn, this brings us to the
well-known debate on the convenience of having tax
priorities within reorganisation proceedings, debate
that, as mentioned before, is not resolved or even
treated in Colombian insolvency law.
In this respect, different countries have enacted
recent insolvency regulations amending, among others,
their treatment of tax claims. For instance, Germany
and Australia have eliminated all tax priorities. Other
countries, such as the United States, Canada and
England, have restricted tax priorities based on the
type, duration and percentage of the tax. The new
Brazilian insolvency law provides for secured claims to
have priority over tax claims. In fact, the current
tendency, at least in industrialised countries, is to
restrict or even to remove in some cases the application
of tax priorities.
Nevertheless, as different authors in this matter have
explained, it is not likely that governments in emerging
countries, such as Colombia, where tax authorities have
significant problems in collecting taxes, accept the
need to abolish or even to restrict the tax priorities
within reorganisation proceedings. And the probable
justification for this is clear: (a) eliminating the tax
priority will result in an eventual decrease in the
September 2005
 PRIORITY FOR TAX CLAIMS IN REORGANISATION PROCEEDINGS

collection of taxes, and (b) the ineffectiveness of tax Notes

1 Law 550 was issued as a temporary law for a term of five years counted as
authorities in collecting taxes must be assumed not by
from December 1999. However, by means of Law 922 of 2004, the term
the state itself but by the other external creditors of the was extended for an additional period of two years.
debtor. 2 Pursuant to Articles 2495, 2497, 2499, 2502 and 2509 of the Colombian
Civil Code: (a) labour and tax claims are considered of first priority; (b)
claims secured by pledges are considered of second priority; (c) claims
Other differences between tax credits and other types secured by mortgages are considered of third priority; (d) charity and
of external credits educational establishments funded with public funds are, inter alia,
considered of fourth priority; and (e) any other unsecured creditor is
Finally, in addition to the tax priority explained above, considered of fifth priority.
3 Pursuant to Article 34(9) of Law 550, all credits caused after the order
below is a general description of the most important accepting the reorganisation petition will have priority of payment and
differences provided for in Law 550 between tax claims thus will not be subject to the priority of payments set forth in the
and other types of claims. Most of these provisions restructuring agreement.
grant the tax administration (hereinafter ‘DIAN’) an 4 Articles 333 and 334 of the Constitution provide for the general
principles of economic freedom and intervention of the state in the
additional privilege or benefit over the rest of the economy.
external creditors of the debtor: 5 For purposes of achieving the goals, Article 3(8) of Law 550 establishes
(1) DIAN has voting rights within the reorganisation that the state must enact the appropriate regulation in order to
proceedings. However, interest and fines in favour negotiate the debts acquired by it with any kind of private, mixed or
public person, including tax debts.
of DIAN shall be computed to calculate its voting 6 Article 22 (paragraph fourth), Law 550.
rights.6 As explained before, voting rights of other 7 Article 30(7), Law 550.
creditors cannot be calculated using interest and 8 Article 33(3), Law 550.
9 Article 33(4), Law 550.
fines.
10 Article 34(2), Law 550. Please also refer to Article 55 of the same law.
(2) DIAN has a right of veto if any provision of the 11 Article 34(14), Law 550.
restructuring agreement attempts to sell assets of 12 Article 52, Law 550.
the debtor and if such sale decreases the value of
the assets in such a way that they are not enough to
cover the first priority claims (employee and tax).7
(3) Any credit, except for employee and tax claims, can
be capitalised and thus converted into stock of the
debtor.8
(4) Principal of tax credits cannot be converted into
risk bonds. In addition, only an amount up to 50
per cent of the interest of tax claims can be
converted into such bonds.9
(5) One of the effects of the approval of the
restructuring agreement is that all the prevailing
interim measures will be terminated, except for the
ones ordered by DIAN.10
(6) DIAN has a right of veto within the surveillance
committee upon the transfer, at any title, of assets
of the debtor that has not been provided for in the
restructuring agreement, to the extent that such an
asset is not a current asset of the debtor and its
value is not below the 40 per cent of the amount of
the prevailing obligations with DIAN.11
(7) No negotiation of obligations pertaining to tax
withholdings can be made.12
DIAN is thus, with no clear policy justifications (at least
in light of the goals provided for in the law), a
superprivileged creditor not only because its priority
rights may not be amended, but also because it has
rights that no other creditor is granted.

IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005 35
 An Overview of China’s Insolvency
Law on Foreign-Invested Enterprises
George Ribeiro
Vivien Chan & Co, Beijing / Hong Kong / Shanghai
ribeiro@vcclawservices.com
Enterprise Insolvency Law
The PRC Enterprise Insolvency Law (Trial
Implementation) (‘Enterprise Insolvency Law’), the
first law governing insolvency in China, was
promulgated in 1986. It came into effect in 1988, but it
was not until 1992 that the related implementation
rules were enacted.
At the time when the Enterprise Insolvency Law was
drafted, state-owned enterprises (‘SOE’) played a key
role in China’s economy. Thus the Enterprise
Insolvency Law applied to SOEs only. In the 1990s, with
the growth of foreign investment in China, foreign
invested enterprises (‘FIE’) started to play an important
role in China’s economy. In about 1994, discussions on
a new insolvency law applicable to all enterprises started
to take place and drafts of the new insolvency law have
been produced over the years. While a number of
liquidation procedures and regulations were
introduced, no new insolvency law has been enacted
yet.
Voluntary liquidation of FIE
The Foreign Invested Enterprises Liquidation
Procedures (‘FIE Liquidation Procedures’) governing
the voluntary liquidation of FIE came into effect in
1996. Under FIE Liquidation Procedures, the board of
directors of an FIE may resolve to terminate the
operations and corporate existence of the FIE. Once
such a decision is made, the liquidation procedure of
the FIE commences.
Within seven days of commencement of the
liquidation, the FIE is required to deliver written notice
to:
(1) the enterprise’s approval authorities;
(2) the government department responsible for the
specific trade of the FIE;
(3) the customs authority and the foreign-exchange
control authority;
(4) the enterprise’s registration authorities;
(5) the state and provincial tax authorities;
(6) all the banks at which the FIE maintains an
account; and
(7) the relevant state-owned assets administrative
authority, if the FIE has state-owned assets.
36 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
A liquidation committee will be formed to oversee
the liquidation process. The liquidation committee
consists of at least three members chosen by the board
of directors of the FIE. The board may choose such
members from government authorities or professional
firms.
The liquidation committee must notify the creditors
by letter and public notice that the liquidation of the
FIE has commenced. The creditors should then file
their claims against the FIE. Once the creditors have
declared their claims, and the liquidation committee
has registered and verified them, the assets of the FIE
should be distributed in the following order:
• to pay the liquidation expenses;
• to pay the debts owed to the secured creditors;
• to pay wages due to the employees and labour
insurance expenses;
• to pay outstanding taxes; and
• to pay the debts of the unsecured creditors.
If the assets are insufficient to pay the debts of the FIE,
the liquidation committee should then apply to the
PRC Court to have the FIE declared insolvent. An FIE
which is declared insolvent will be administered
according to the Enterprise Insolvency Rules (see
below).
Insolvency of SOE and FIE
In July 2002, Several Issues on the Trial of Enterprise
Insolvency Cases Provisions (‘Enterprise Insolvency
Rules’) were passed and came into effect on 1
September 2002. They apply to both SOE and FIE.
Under the Enterprise Insolvency Rules, either a
creditor or the enterprise itself can apply to the court
which has the jurisdiction for insolvency declaration.
After the court accepts the application, it will form a
tribunal immediately. The tribunal should, within ten
days of acceptance of the application, notify the
enterprise that it will cease to pay any debt or fees
without the court’s permission.
Generally, the test for determining insolvency is the
inability to pay debts as and when they fall due. The
grounds upon which the court may declare an
enterprise insolvent are specified in Article 32 of the
Enterprise Insolvency Rules as follows:
September 2005
 AN OVERVIEW OF CHINA’S INSOLVENCY LAW ON FOREIGN-INVESTED ENTERPRISES
(1) The enterprise is unable to repay its debts, and is
unable to reach reconciliation agreement with its
creditors.
(2) The enterprise fails to perform the reconciliation
agreement.
(3) During the reorganisation period, the enterprise
continues to suffer more loss, ie the financial
position of the enterprise becomes worse.
(4) During the reorganisation period, the enterprise
has acted in serious prejudice of the interests of the
creditors.
(5) After the expiry of the reorganisation period, the
enterprise has still failed to pay its debts according
to the reconciliation agreement.
At the time when an enterprise is declared insolvent, all
its business operations have to cease unless otherwise
permitted by the court. However, any legal or arbitral
proceedings in which the enterprise is a party will not
be stayed.
Administration of the insolvent enterprise – the
liquidation committee
Within 15 days of the insolvency declaration, the court
has to form a liquidation committee. The members of
the liquidation committee can be chosen from
government authorities, banks, legal firms or
accounting firms. The liquidation committee takes over
the insolvent enterprise, administers the assets of the
enterprise, and attends to the litigation or arbitration
on behalf of the insolvent enterprise.
The liquidation committee is accountable to the
court. Therefore, the acts of the liquidation committee
are under the supervision and instructions of the court.
In addition, the liquidation committee should attend
the creditors’ meeting and answer the inquiries of the
creditors. If the liquidation committee makes a decision
that is in violation of the interests of the creditors, the
creditors can apply to the court for cancellation of the
decision.
Distribution of assets
The assets of an insolvent enterprise are distributed in
the following order:
• to pay the insolvency expenses;
• to pay the debts of the secured creditors;
• to pay the wages due to the employees and labour
insurance expenses;
• to pay outstanding taxes; and
• to pay the debts of the unsecured creditors.
Pro-rata distribution will be made if the assets are
insufficient to fully satisfy all creditors’ claims within the
same priority.
If the enterprise has insufficient assets to pay even
just the insolvency expenses, the insolvent liquidation
committee can apply to the court to terminate the
insolvency procedure (ie deregister the insolvent
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
enterprise) and the creditors’ meeting will be
cancelled.
The creditors may be paid from the assets of the
insolvent enterprise or from the proceeds of sale of
such assets. Under the Enterprise Insolvency Rules, the
creditors are also permitted to set off debts owed to the
enterprise provided that their debts have been verified
and the mutual debts to be set off arose before the
insolvency declaration.
Upon completion of the distribution, the liquidation
committee has to apply to the court to terminate the
insolvency procedure. The committee then applies to
the relevant registration authority for deregistration of
the enterprise.
New draft of the Insolvency Law
In June 2004, a new draft of China’s insolvency law was
presented to the National People’s Congress for
consideration. The new law is intended to apply not
only to SOE, but also to private or foreign invested
enterprises and individuals. The standards for
declaration of insolvency will also be expanded.
Further, the new draft also provides that an
enterprise or its creditors may apply to court for
reorganisation once the court has accepted the petition
for insolvency filed by the enterprise. As regards
reorganisation, creditors may have meetings and
propose reorganisation plans. In addition, the
enterprise or an administrator may also propose
reorganisation plans.
The new draft has adopted the concept of
‘administrator’ who is entitled to, among other matters,
manage the assets of the insolvent enterprises or
persons, investigate their affairs and participate in the
litigation or arbitration on behalf of the insolvent
enterprises or persons. Members of the legal
profession, accounting firms or experts in insolvency
may be appointed as administrators.
It is expected that the new law will be published early
next year.
September 2005 37
 Corporate Insolvency and
Creditors’ Rights in India
Anand S Saxena and Ravi Singhania
Singhania & Partners, New Delhi
office@singhania.net

I n a wider perspective corporate insolvency refers to a

position when the company’s assets are insufficient
to pay its debts, though the Indian laws do not provide
Developments in creditors’ rights
In the course of liberalisation and opening up of the
economy, one of the greatest challenges for the country
any express definition of them. Therefore, if the assets
was to bring its economic policies and laws in line with
of the company are inadequate to meet its debt burden
global standards. Although India has a set of well-
or liabilities, this leads the company into a state of
defined commercial laws, the judicial system has long
insolvency. The law relating to corporate insolvency in
been afflicted with the problem of delay in the actual
India is mainly contained in the Companies Act 1956.
enforcement of legal rights and claims. Such delays
In recent times corporate insolvency laws in India have
often resulted in the deterioration of the securities and
undergone an overhaul. This overhaul included repeal
other assets of the defaulting borrower. The actual sale
of the Sick Industrial Companies (Special Provisions)
of securities or other assets of the borrower took a very
Act 1985 and consolidation of the corporate insolvency
long time and lenders rarely recovered the full loan
laws in the Companies Act vide, the Companies
amount with interest. The system in India has
(Second Amendment) Act 2000.
traditionally functioned in a debtor-friendly
Commercial laws in India have recognised the rights
environment.
of the secured creditor to enforce his security interest
The scene has undergone a change on adoption of
without resorting to winding-up/insolvency
prudential norms based on income recognition
proceedings. Thus, secured lending to a certain extent
principles for the loans and advances of the banks and
mitigates the risk of default in payment of a loan by the
financial institutions. With the need for provisioning
debtor as a result of his insolvency. In spite of the
for Non-Performing Assets (NPAs) and non-recognition
favourable substantive provisions, the right of creditors
of income unless actually realised, debtors are now
to enforce the security was laden with the problem of
under pressure for prompt payment of loans on the
long delays. Therefore it was crucial that any new
due dates. Creditor rights have been strengthened by
insolvency laws contemplated by the Legislature must
enactment of the following laws:
necessarily have addressed the procedural delays in
(1) the Recovery of Debts due to Banks and Financial
enforcement of security interests apart from allowing a
Institutions Act 1993 (DRT Act);
secured creditor to take over the assets of the
(2) the Securitisation and Reconstruction of Financial
defaulting borrower without the intervention of the
Assets and Enforcement of Security Interest Act
court.
2002.2
The Securitisation and Reconstruction of Financial
Under the DRT Act the Government set up specialised
Assets and Enforcement of Security Interest Act, 2002
Debt Recovery Tribunals for recovery of loans
(SARFAESI Act) conferred upon banks and financial
disbursed by banks and financial institutions. Such debt
institutions the right to enforce their secured claims
recovery proceedings are not required to follow the
without the intervention of the court. As regards the
Civil Procedure Code, which is applicable to suits filed
unsecured creditors, by virtue of strong recognition of
in the civil courts and tribunals are free to determine
rights of secured creditors and statutory provisions for
their own procedure for dealing with the claims of the
certain preferential payments due to the Government
banks. The tribunals have adopted a summary
and labour, in many cases there are no assets available
procedure for the purpose of enabling speedy recovery
for satisfying the claims of unsecured creditors. It is
of the defaulted loans. However, Debt Recovery
extremely important to expedite decisions in insolvency
Tribunals were plagued by their own problems to the
proceedings in order to prevent deterioration and
extent that they could hardly cut down on legal delays.
ensure better realisation of the assets and also explore
There was, therefore, an imperative need for a faster
the possibility of selling the business enterprise as a
procedure empowering the banks to recover their dues
going concern, which can take care of the claims of
without the involvement of the courts.
unsecured creditors to a certain extent.1

38 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005
 CORPORATE INSOLVENCY AND CREDITORS’ RIGHTS IN INDIA
It was with this in view that the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI Act) was enacted.
However, the unsecured lenders continue to face the
same problem of delays in the recovery of defaulted
loans or claims made in insolvency proceedings. In fact
in regard to the winding-up proceedings against any
company registered under the Companies Act 1956, on
account of the rigid system of sale of assets of the
company by the official liquidator appointed by the
court, the delays are more pronounced. As a result of
inordinate delays, lenders do not consider proceedings
for insolvency as a viable mode for recovery of
defaulted loans. While the banking industry was
progressively complying with international prudential
norms and accounting practices, it was lagging in
certain crucial areas. There was, in particular, no
effective way to deal with bad debts or non-performing
assets that were at much higher than globally accepted
levels. The existing legal framework relating to
commercial transactions had not kept pace with
changing commercial practices and financial sector
reforms.
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002
To enable the banks and financial institutions to take
possession of the securities in the event of default and
sell such securities for the purpose of recovery of the
loan without the intervention of the courts, the
SARFAESI Act was enacted. The objective of the Act is
primarily to regulate the business of securitisation, asset
reconstruction and enforcement of security interests.
However, the scope of this discussion is restricted to the
clauses on enforcement of security interests on loan
defaults to banks. The basic intention behind this Act is
to strengthen the rights of secured creditors through
foreclosure and enforcement of securities by banks and
financial institutions. By conferring on lenders the right
to seize and sell assets held as collateral in respect of
overdue loans, it allows banks and financial institutions
to recover their dues promptly without going through a
costly and time-consuming legal process.
The Act enables banks/financial institutions to
foreclose on the collateral of defaulting borrowers
without going through elaborate court proceedings.
According to the Act, a borrower, who is under a
liability to a secured creditor under a security
arrangement, is deemed to be a defaulter within the
meaning of the Act if he does not pay any principal
amount or interest due thereon or any other amount
which is payable to the secured creditor by the
borrower, as a result of which his account in respect of
such debt is classified by the secured creditor as a non-
performing asset.3 If the borrower fails to discharge his
full liabilities within a notice period of 60 days,4 the
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
secured creditor is entitled to exercise various rights to
recover his secured debt such as:
• taking possession of the secured assets of the
borrower including the right to transfer by way of
lease, assignment or sale for realising the secured
asset;5
• taking over the management of the business of the
borrower including the right to transfer by way of
lease, assignment or sale for realising the secured
asset;6
• appointing any person to manage the secured asset,
the possession of which has been taken over by the
secured asset;7 and
• requiring at any time any person who has acquired
any of the secured asset from the borrower and from
whom any money is due or may become due to the
borrower, to pay the secured creditor so much of the
money as is sufficient to pay the secured debt.8
The notice referred to above shall give the details of
amount payable by the borrower and the secured assets
intended to be enforced by the secured creditor in the
event of non-payment of secured debts by the
borrower. The issue of the notice is treated as recall of
the loan and the secured creditor is empowered to take
the next step as envisaged above. Any person
(including the borrower) aggrieved by any of the above-
mentioned measures taken by the secured creditor or
his authorised officer under this chapter, may prefer an
application to the Debts Recovery Tribunal having
jurisdiction in the matter within 45 days from the date
on which such measures had been taken. Any person
aggrieved by any order by the Debts Recovery Tribunal
may prefer an appeal to an Appellate Tribunal.
Considering the fact that this Act overrides most of the
earlier enactments related to the issue besides a few
cases such as companies under liquidation, the above
provisions become much more effective. The Act has
taken away the comfort enjoyed by Sick Industrial
Companies, against which no proceedings could be
initiated or continued after reference to the Board of
Industrial and Financial Reconstruction (BIFR).9 This
means that banks and financial institutions may
proceed to enforce their secured interest even when
the debtor company is a Sick Industrial Company.
In the case of Mardia Chemicals, where ICICI Bank
had taken over one of the company’s units under the
Act, not only did the company challenge the bank’s
action in the Supreme Court, it also filed a case,
claiming damages against senior officials of the bank.
The main contention of the defaulters was that the Act
had vested the banks and the financial institutions with
arbitrary powers in dealing with defaulters and the Act
did not take into account lender’s liability. It was
further contended that the Act did not provide
safeguards against irresponsible action by the lenders
and that the terms and scope for appeal were
unjustified. While upholding the Act, the honourable
Supreme Court held that the process of implementing
September 2005 39
 CORPORATE INSOLVENCY AND CREDITORS’ RIGHTS IN INDIA
the law must be fair and reasonable. The apex court
underlined the need for action under the Act to be in
keeping with the concept of the right to know and
lender’s liability, which are part of international best
practice in banking. A Fair Practices Code with regard
to lender’s liability has since been introduced. The
court felt that the Act should not be a one-sided affair
shutting out all possible and reasonable remedies to the
borrowers. It therefore struck down the contentious
condition of the Act, which required the defaulters to
deposit 75 per cent of the disputed amount before
going to appeal. The Supreme Court has also
empowered the DRT to grant stays on sale of assets in
deserving cases. Accordingly the Act was amended in
2004. The Act as amended, inter alia, requires the
secured creditor to consider any representation or
objection raised by the borrower and if the secured
creditor comes to the conclusion that such
representation is not acceptable or tenable, he shall
communicate within one week of receipt of it the
reasons for non-acceptance of such representation to
the borrower. Further, the provision requiring the
defaulters to deposit 75 per cent of the disputed
amount before going to appeal has also been done
away with. Also, now the secured creditor is entitled to
transfer the secured assets of the borrower after taking
over the management of the business of the borrower
only if a substantial part of the business of the borrower
is held as security for the debt.
Recognition of rights of creditors under the Companies
Act
The expression ‘secured creditor’ includes a person
who holds a mortgage, charge or lien on any of the
company’s assets. The lien may be of any kind –
vendor’s lien, banker’s lien, etc – but if it is founded on
a contract, it must have been registered as per the
provisions of the Companies Act. A secured creditor
has the option to stand wholly outside the winding-up
proceedings and it is not necessary for him to prove his
debt before the liquidator. He may rely on his security
and proceed to realise his debt in the ordinary course
of law, but the same can be done only with the
permission of the winding-up court. If the security is
insufficient to pay his debt fully, he may exhaust the
security and prove for the deficiency in the winding-up.
It is open to him to prove for the balance due as an
ordinary creditor in the winding-up proceedings.
In India, the legitimate dues of workers rank pari
passu with secured creditors and above even the dues to
the Government in the event of the winding-up of the
company. The workers become secured creditors by
operation of law from the date of the winding-up order.
The dues of the workmen are to be paid in full but if
the assets are insufficient to meet them, in such a case
the dues of the workmen shall abate in equal
proportions along with those of secured creditors.
40 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Further, a secured creditor who realises his security is
liable to reimburse the liquidator for all expenses
incurred by the latter for the preservation of the
security before the realisation. The secured creditor is
liable to pay the whole of the expenses but if workmen
are participating in the security, then such expenses
should be apportioned between the secured creditors
and workers in the proportion of the amount to be
distributed to them.
The order of priority in paying off the debts in a
winding-up is as follows:
(1) secured creditors subject to a pari passu charge in
favour of the workmen to the extent of workmen’s
portion therein;
(2) workmen’s dues and debts;10
(3) costs and expenses of winding-up;
(4) preferential debts;11
(5) floating charges section;12 and
(6) unsecured creditors.
If there is any surplus (as may happen in the case of a
solvent company), capital is returned first to preference
shareholders, and then equity shareholders are
returned their capital, if assets are still available. As
regards priority between unsecured creditors, it has
been held by the Bombay High Court that priority of
state claims is qua unsecured creditors and not qua
secured creditors. Between the unsecured creditors, the
claim of income tax dues will have priority over all
other claims in the category of unsecured creditors.
Repeal of SICA: strengthening of creditors’ rights
The Sick Industrial Companies (Special Provisions) Act
1985 was enacted to effectively deal with the problem of
sickness of industrial units. The Act envisaged remedial,
preventive and ameliorative measures in respect of such
companies. However, the practical/actual operation of
SICA proved to considerably favour the debtor
company as many provisions of the Act were misused.
Section 22 of the Act provided for suspension of legal
proceedings with respect to the sick company, in the
circumstances mentioned therein. This provision of
SICA was resorted to by the debtor company to avoid
the payments due to its creditors. Now, an effort has
been made to overcome the deficiencies of SICA.
Accordingly, chapter VI A has been added to the
Companies Act. There is no provision corresponding to
section 22 of SICA in the amendment (chapter VI A).
This has to a large extent balanced the interests of the
debtor company and those of its creditors.
Conclusion
Indian laws have since long recognised the rights of
secured creditors to remain outside the insolvency
proceedings and proceed to realise their claim in the
ordinary course of law. However, problems of delays
have plagued the entire judicial system including the
September 2005
 CORPORATE INSOLVENCY AND CREDITORS’ RIGHTS IN INDIA
enforcement of claims by secured creditors. The
SARFAESI Act reformed the environment as regards
the enforcement of secured claims by banks and
financial institutions. Under the provisions of the Act,
the existing system was replaced by a procedure of the
bank serving a notice on the defaulting borrower for
payment of the defaulted loan and, in the event of non-
compliance, proceeding with the action for taking
possession and sale of securities. The Act has paved the
way for several out-of-court settlements and has helped
inculcate a repayment discipline among borrowers.
The judgment of the Supreme Court in the Mardia
Chemicals case, in which the constitutional validity of the
Act was challenged, is a significant landmark in banking
law in India because it recognises the contractual right
of the secured creditor to take possession of securities
in the event of default and sell them for realisation of
the loan. The Supreme Court read into the existing
provisions the requirement of secured creditors to act
in a fair and reasonable manner. The honourable court
has held that the Act should not be one-sided, shutting
out all possible and reasonable remedies to borrowers.
The verdict of the Supreme Court, therefore, strives to
create an environment that affords equal opportunity
to the borrower in light of the principles of natural
justice, along with the protection of the interests of
creditors.
Further, repeal of SICA, which was heavily favourable
towards defaulting debtor companies, has considerably
strengthened the interests of creditors. The judicial
verdict on the constitutionality of the SARFAESI Act
2002 and the repeal of SICA have strengthened the
rights of secured creditors and ensured efficient
recovery of debts. This positive trend is reflected by the
considerable decline in the Non Performing Assets
(NPAs) of banks and financial institutions.13
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Notes
1 Umarji R, ‘Trends and Developments in Insolvency Systems and Risk
Management: The Experience of India’, Paper presented at the Forum
on Asian Insolvency Reform 2004, New Delhi, India, 3-5 November 2004;
www.oecd.org/dataoecd/2/8/33930083.pdf viewed on 20 June 2005.
2 Ibid.
3 Section 2(1)(j) of the SARFAESI Act defines ‘default’.
4 As per section 13(2) of the SARFAESI Act.
5 Section 13(4)(a) of the SARFAESI Act.
6 Section 13(4)(b) of the SARFAESI Act.
7 Section 13(4)(c) of the SARFAESI Act.
8 Section 13(4)(d) of the SARFAESI Act.
9 A sick industrial company means an industrial company that has
accumulated losses equal to 50 per cent of its average net worth (sum
total of paid-up capital and free reserves after deducting provisions or
expenses) during the immediately preceding four financial years.
Alternatively, if an industrial company fails to repay its debt within three
consecutive quarters on demand in writing by a creditor (whether
secured or unsecured), it would be said to be a sick industrial company.
Such companies were to be referred to BIFR for their revival and
rehabilitation. As per the Amendment to the Companies Act 1956, such
companies are now referred to the Company Tribunal.
10 To the extent they could not be realised by virtue of the proviso to sub-
section (1) of section 529.
11 As under section 530 of the Companies Act 1956.
12 Ibid.
13 Reserve Bank of India (RBI) Report on Trends and Progress of Banking
in India 2003-04, at www.capitalmarket.com/
if.asp?L=MacroEconomy&m=macro/
report_on_trend_and_progress_of_.htm viewed on 25 June 2005.
September 2005 41
INTERNATIONAL BAR ASSOCIATION

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 Reform of French Bankruptcy Law:
the New Creditor Input
Jacques Henrot and Paul Talbourdet
De Pardieu Brocas Maffei, Paris
henrot@de-pardieu.com and talbourdet@de-pardieu.com
E xisting French bankruptcy law results from the
adoption of the following:
(1) On 1 March 1984 of a statute organising and
making statutory a pre-existing pre-bankruptcy
proceeding which was only a creation of case law
(ie the mandat ad hoc) and creating an elaborate
form of mandat ad hoc (with the possibility of a
court-ordered stay) called first, until 1994,
conciliation and then, after the 1994 partial reform
(see below), règlement amiable; those proceedings,
available to solvent debtors only, aim at reaching,
under the supervision of a court-appointed agent,
an agreement between the debtor and its main
creditors;
(2) On 25 January 1985, of a statute, deemed
‘innovative’ at the time, because of its alleged aim
of protecting jobs, reorganising the essentially
consensual bankruptcy proceedings so far governed
by a 1967 statute by clearly separating the
rehabilitation proceedings (redressement judiciaire)
from the judicial liquidation, which liquidation
could be ordered initially, or after an attempted
rehabilitation should the debtor appear during the
so-called ‘observation period’ (a maximum of 20
months) not to be viable. In addition, the 1985
reform created two possible exits from a
rehabilitation (apart from liquidation), namely:
• the continuation plan (plan de continuation)
which, as its name indicates, is the mere
continuation of the existing enterprise with
rescheduled debts and possibly a change of
shareholders (voluntary or ordered by the court);
and
• the transfer to third-party bidders (plan de cession)
of branches of activity or of the entire business.
The 1985 French bankruptcy laws were adopted by a
then-socialist Parliament in the context of doctrinal
Government involvement in the economy. Unlike
the previous regime adopted in 1967, the 1985
statute is generally considered to be more favourable
to debtors than to creditors, although it was partially
amended in 1994 (by the newly elected right-wing
Parliament) to strengthen creditors’ rights. In spite
of the 1994 partial reform, the objectives of French
bankruptcy proceedings, in order of priority, are
still:
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
(1) to preserve a failing company’s activities and
enhance, at the creditors’ cost, the company’s
prospects for recovery;
(2) to save jobs; and
(3) only as a third-ranking priority, to pay creditors
(French Commercial Code, Art L 620-1).
A draft bill aimed at modernising French bankruptcy
laws was approved by the Government in May 2004 and
voted upon, after several amendments, by the
Parliament in March 2005. The bill was voted upon by
the Senate on 30 June, and will be referred to –
pursuant to the so-called procedure d’urgence – to a joint
committee of the Parliament and of the Senate, to be
eventually adopted this autumn.
One of the main targets of the reform is to
encourage reorganisation at a preventive stage, as early
as possible in the restructuring process, essentially by
giving incentives to creditors, prompting them to take a
more active role in pre-bankruptcy and bankruptcy
proceedings, and more importantly to extend credit
(essentially new money) in a safer environment.
The following comments are based on the draft bill,
as adopted by Parliament. The amendments suggested
by the Senate and adopted a few days before this paper
was written, while improving the drafting of some
provisions of the bill, did not substantially modify its
philosophy.
Legal incentives aimed at promoting pre-bankruptcy
proceedings
Mandat ad hoc
The draft bill does not provide for any major change to
the mandat ad hoc. This pre-bankruptcy proceeding,
which is a ‘product’ issued from the practice of the
Paris Commercial Court for several decades, and which
was made a formal statutory proceeding by the 1994
reform, should remain a confidential and very flexible
procedure: the appointment of a mandataire ad hoc by
the President of the court has no binding / coercive
effects on the participants to what is essentially a court
supervised through the court’s agent (which is the
mandataire ad hoc) negotiation, or on third parties; the
settlement which, as the case may be, could be reached
between the creditors and the debtor remains of a
purely contractual nature.
September 2005 43
 REFORM OF FRENCH BANKRUPTCY LAW
Conciliation
Unlike the mandat ad hoc, the regime of règlement
amiable – which, if the pending reform is adopted ‘as it
is’, should be renamed conciliation (which is somewhat
confusing since the existing règlement amiable was often
referred to, since the 1984 statute was adopted, by non-
lawyers as a conciliation) – should be substantially
modified by the reform.
The existing règlement amiable is a voluntary and non-
coercive procedure, conducted under the supervision
of a conciliateur (who is for that purpose, exactly in the
same situation as the mandataire ad hoc, ie a court-
appointed agent with no representation powers) and
aimed at reaching a debt rescheduling and / or partial
debt forgiveness, with or without new credit facilities
being granted. A règlement amiable now renamed
conciliation is initiated at the debtor’s request and
presupposes by law that the debtor is solvent, ie able to
meet its current liabilities out of its current assets
(assets which can be quickly turned into cash).
If the efforts of the major creditors are sufficient to
restore the viability of the debtor, a workout agreement
(protocole de conciliation) will be signed by the debtor and
its major creditors, countersigned by the conciliateur and
filed with the President of the court. Reluctant
creditors (usually small ones) cannot be compelled to
accept the rescheduling plan. However, they can be
forced by the President of the court to accept a two-year
moratorium applying to their outstandings.1
The règlement amiable, even though used quite often
by commercial courts especially since the late 1980s, has
been criticised by some as not sufficiently incentivising
lenders from which debt rescheduling and / or new
credit facilities are expected. As a matter of fact,
creditors participating in the règlement amiable under the
existing legislation are not granted absolute protection
against the risk of future voidance2 : Indeed the French
Supreme Court ruled in 2002 that the date of
insolvency of a failing company could, for clawback /
voidance purposes, be backdated 18 months by the
court prior to the bankruptcy judgment, even if a
workout agreement had been approved by the
President of the court during that period.
This decision, like similar precedents, rested on the
assumption that the règlement amiable process is based
on a rebuttable presumption of solvency only, as such
procedure is opened on the basis of information
provided, by the management only, to a judge who, for
practical reasons, is not, at least at the beginning of the
process, in a process to verify such information.
Furthermore, providers of new money, if new money
is made available within the framework of a règlement
amiable do not – in the present state of French law –
benefit from any priority of payment should the debtor
later voluntarily file for, or be placed involuntarily in,
bankruptcy.
The pending reform intends to partially remedy
some of the identified defects of existing French
44 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
legislation. The new règlement amiable, renamed
conciliation, could be initiated by any debtor who: (i)
faces legal, economic or financial difficulties, whether
actual or simply foreseeable; or (ii) has been insolvent
for fewer than 45 days (in the present state of
legislation, the règlement amiable could not benefit
insolvent debtors).
To promote the adhesion of creditors to the exercise,
the new statute would give providers of ‘new money’
repayment priorities, and protection against a risk of
future voidance. However, those privileges /
protections would only be granted if a number of
conditions are met:
• Those who would benefit from the above priorities /
protection must be providers of new money3 stricto
sensu, ie new money provided to ensure that the
business will continue to be a going concern and to
ensure its viability in the longer term. The extension
of maturity dates of existing facilities is however, and
unfortunately, not covered by the newly created
exemption. In practice, this unfinished reform could
jeopardise the efficiency of new-type conciliation
proceedings, as creditors might be more reluctant to
grant debtors any debt rescheduling and / or any
debt forgiveness which will not benefit from the new
protection, and could appear tomorrow, a contrario, as
potentially more risky to grant than they were before
the reform, in terms of potential lender liability risk.
• Only court-approved workout agreements would
grant providers of new money with priority of
payment and protection against lender liability risks.
The ‘price’ to pay for this priority and protection will
be that the creditors and the debtor would have to
waive their right to keep the workout procedure and
agreement confidential. Should they do so, they
would open the door to possible recourses by third
parties against the judgment approving the workout
agreement.
As a matter of fact, the draft bill as amended by the
Parliament now provides for two types of court
approvals of future workout agreements:
(1) Either a simple stamping by the President of the
court upon the request of the parties to the
workout. No recourse by third parties will – as is
already the case today – be possible against such a
court decision which will not be res judicata;
however, creditors participating in the conciliation
would be deprived of the protection created by the
new statute against the risk of future liability action
and actions to obtain the voidance of collateral
granted during the conciliation. Providers of new
money would also not benefit from repayment
priority rights.
(2) Or a fully fledged court judgment, rendered upon a
formal request of the debtor, which requests the
court should usually grant, provided the three
following conditions are met:
• the debtor is not insolvent, or the workout
September 2005
 REFORM OF FRENCH BANKRUPTCY LAW
agreement effectively put an end to any
potential or even actual insolvency situation;
• the terms of the workout agreement should
ensure that the business continues as a going
concern and is presumably viable again; and
• the workout agreement is not detrimental to the
interests of third-party creditors.
Some practitioners underlined the difficulties that
could result, in practice, from the implementation of
the above criteria: how to ensure that the debtor is not
insolvent if the court is not provided – and it is not
today and will not in the present state of the draft bill –
with adequate tools to verify information provided to it
by the debtor? Which minimum steps should be taken
to determine whether the workout agreement ensures
future viability? How could a workout agreement
provide – as it should – for a fair and balanced
treatment of all creditors, whereas providers of new
money will precisely benefit from new security over the
debtor’s assets and from a priority of payment should
the debtor later file for bankruptcy? Moreover, when
trade creditors and clients of a company learn that such
company has faced financial difficulties, they generally
lose confidence and the company’s credit is weakened –
even when such difficulties have been solved, eg after a
successful règlement amiable. If the conciliation workout
agreement is approved by a court judgment, and thus
becomes accessible to any interested party,4 how can it
be avoided that trade creditors and clients of the
company, when they learn ‘after the fact’ that the
company has faced difficulties, lose confidence in the
creditworthiness of the company?
The view that is already developing among
practitioners is that the ‘improvements’ to the existing
règlement amiable procedure (already commonly called
conciliation by the market) were, to some observers,
mostly unnecessary and will probably not contribute
materially to an improvement of the existing process.
What is however generally viewed as a positive
change, is the fact that the legislators took into account
the need expressed by French banks to cease being
exposed, in practice essentially as a result of the ‘deep
pocket’ approach prevailing so far, to potential tort
actions against lenders based on improper support
(soutien abusif), even when new money was made
available during the règlement amiable. Indeed, the draft
bill provides that lenders should no longer be held
liable for soutien abusif, except in the case of fraud,
improper interference with the company’s
management decisions, or if the lender obtained
collateral out of proportion with the size of the facility
(see below).
The increasing role of creditors in bankruptcy
proceedings
Under the present status of French law, creditors do
not play an active role in bankruptcy proceedings.
IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Their interests are represented by the creditors’
representative (représentant des créanciers), or by the
liquidator as the case may be, who must keep them
informed and consult with them on certain matters.
However, since the adoption of the 1994 partial
reform of the 1985 statute, creditors may request the
bankruptcy judge to appoint between one and five
supervisors (créanciers contrôleurs), who have access to all
relevant documents but are subject to strict
confidentiality rules. The supervisors are invited to
participate in the final hearing of the bankruptcy court,
which will decide in camera upon a continuation plan, a
transfer plan or a judicial liquidation. The supervisors
are however not invited to vote and the final decision is
taken by the court at its sole discretion.
New ‘sauvegarde’ procedure
The new procédure de sauvegarde is perhaps the major
innovation of the pending reform. Any debtor still
solvent, but facing difficulties that may lead to an
insolvency situation, would be allowed to initiate
sauvegarde proceedings (‘rescue proceedings’) to
restructure under court protection. The company
having petitioned the court for the opening of rescue
proceedings would benefit from an automatic stay of all
claims against the company.
Creditors should not be entitled to provoke an
involuntary filing for rescue proceedings, contrary to
what is the case for rehabilitation (redressement judiciaire,
see below) and for judicial liquidations.
Under the supervision of a bankruptcy trustee, the
debtor would remain in possession, and continue
operating its business, during the period necessary to
prepare a plan de sauvegarde.
For companies of a certain size (and for small
companies subject to court approval), the new statute
will create two classes of creditors: one class gathering
all credit institutions and one for major suppliers.
Those two classes of creditors, organised through
comités, would be entitled to discuss and vote on the
rescue plan proposed by the debtor assisted by its court-
appointed trustee. The rescue plan would then be
confirmed by the court if a requisite number of
creditors (majority of creditors plus a two-thirds
majority of outstanding in each comité) vote to approve
the plan.
Once a plan is approved by the court, such plan will
be enforceable against all comités’ members, including
the dissenting minority.
Social and tax authorities would be authorised – and
this is also an innovation of the reform – to grant a
reduction / waiver of debt for unpaid taxes, or social
security contributions, or interest due for late payment,
or fines. Until now, it was illegal for a state organisation
to renounce to try to obtain payment of due and
payable claims against private debtors.
The new statute will provide that bondholders will
have to be consulted, as is already the case within the
September 2005 45
 THE REFORM OF FRENCH BANKRUPTCY LAW
framework of rehabilitation and judicial liquidation
proceedings. The bondholders however will not be part
of the credit institutions comité.
As regards creditors that are not members of the two
comités, the procedure would be that followed under
current provisions of the existing 1985 law governing
continuation plans: the court may impose new maturity
dates to creditors but cannot impose any debt-
forgiveness. The maximum effort that can be required
from reluctant creditors, in terms of postponement of
maturity dates, is ten years, except where the parties
initially stipulated longer maturity dates.
Those provisions would also be applicable where the
comités fail to reach an agreement on a plan within the
statutory time limit, or reject the debtor’s proposal, or
where the court does not approve the negotiated
rescue plan.
The rescue procedure, often said to be based on the
American law Chapter 11, is however only an inferior
copy of the US system. Unlike classes under Chapter 11,
the perimeter / nature / composition of the French
comités that will vote on the plan are pre-determined by
law without any possible flexibility. In addition, it is not
envisaged that a US-style ‘cramdown’ mechanism be
introduced. As a consequence, the reform – which
some qualify as a half-measure – may have the practical
result of giving each group of creditors the right to
cause the survival, or the death, of the company, thus
allowing each group to take the other as hostage –
which certainly was not the expected result of the
reform.
More generally, it remains to be seen whether rescue
proceedings are going to be as used and if so, whether
they will be successful – as its initiators predicted. The
Parliament’s Judiciary Committee was indeed
compelled, essentially for political reasons, to withdraw
the amendment of its vice-president, congressman de
Roux, suggesting a simplified dismissal procedure
applicable to rescue proceedings. This is already the
case for rehabilitation proceedings since the 1985
statute (enacted then, without any real discussion, by
the socialist Parliament). The common law dismissal
procedure, which can last up to 12 months, seems to
many practitioners inappropriate to the redundancies
that will most probably be necessary to make the rescue
successful since, almost by definition, rescue
proceedings will have to be resolved in a relatively short
period of time in order to be successful.
Rehabilitation proceedings and judicial liquidation
The delay in filing voluntarily for bankruptcy – which is
today 15 days – would be extended to: (i) 45 days from
the date when the debtor becomes insolvent (provided
no conciliation proceedings preceded the filing); or, if
so, (ii) eight days from the failure of a precedent
conciliation assuming the debtor became insolvent in
the meantime.
46 IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER
Most of the existing provisions governing
rehabilitation proceedings would remain unchanged,
with some improvements in favour of lenders.
The real novelty is – as for rescue proceedings – the
creation of two comités of creditors that will have the
power to vote on the rehabilitation plan, at the majority
plus two-thirds in amounts of outstandings in each
comité.
In order to comply with EU law, the draft bill
provides that claims for which proof of claim is not filed
within the statutory time limit (four months for non-
resident creditors; two months for domestic creditors as
from the publication in legal gazettes of the bankruptcy
judgment) and for which the court denied any relief,
should not be considered ‘extinguished’, as they were
under existing law. Creditors that filed proof of claim
after the deadline would be deprived, as they are today,
of their rights in any distribution of the estate’s
proceeds, but they would however remain entitled to
claim payment from guarantors and / or joint obligors,
which is a new development.
Moreover, the powers of the créanciers contrôleurs – ie
those creditors (usually the largest one(s)) appointed
by the court to ‘watch’ the procedure on behalf of all
creditors – should be increased. Indeed, the new-style
contrôleurs would be entitled to cause (in case court-
appointed agents remain passive), liability actions
against the company’s management and / or lenders to
be initiated.
As far as judicial liquidation is concerned, the draft
bill provides for a simplified procedure applicable to
small businesses. Such procedure would be reserved to
debtors that meet certain criteria (no property asset
owned by the debtor, amount of turnover and number
of employees below maximums to be determined by
decree). Simplified liquidations could not last longer
than one year, and should allow for a more rapid and
efficient payment of claims.
The reform of lender liability actions
Basing their decisions on Article 1382 of the Civil Code
(ie the general provision of French law which governs
liability in tort), French courts have ruled for several
decades that a financial institution can be held liable
for improper financial support of a failing company
(soutien abusif) and might have to indemnify, in whole
or in part, other creditors, if it is demonstrated that
such other creditors relied, to extend credit to the
company, on the undeserved appearance of solvency
that the bank’s wrongful support contributed to create.
In recent decisions, such as that handled down by the
Supreme Court on 22 March 2005, the court reaffirmed
that a lender should be held liable if such lender:
• granted new funding facilities, or failed to accelerate
or failed to demand payment of existing facilities,
thus knowingly conspiring to create a misleading
appearance of solvency for a debtor that in fact was
September 2005
 THE REFORM OF FRENCH BANKRUPTCY LAW

beyond any prospect of recovery (a concept that is Notes

1 And possibly to instalments falling due during the next two years
usually referred to in France as situation
following the first unpaid instalment, even though the point is unsettled
irrémédiablement compromise); or in case law.
• granted ruinous credit facilities knowing that the 2 Article L 621-107 of the Commercial Code provides that certain
resulting unbearable financial charge could not be transactions are automatically null and void if performed by the debtor
prior to the date of insolvency as backdated by the court (ie 18 months
borne by the business and could thus only lead to a maximum prior to the bankruptcy judgment), eg agreements in which
situation of insolvency. the debtor’s obligations substantially exceed those of the other party,
The draft bill as amended by Parliament now provides any payment of debts which have not fallen due, or any mortgage or
for an exemption of lender liability risks for all types of pledge on the debtor’s assets for pre-existing debts. Pursuant to Article L
621-108, any payment for matured debts or any transaction for
creditors (not only credit institutions), except in the consideration (acte à titre onéreux) concluded prior to the date of
case of: insolvency is voidable if, at the time of payment or transaction, the
(i) fraud; counterparty knew or was in a position to know of the debtor’s
(ii) improper interference with the company’s insolvency.
3 Suppliers of goods or services that are aimed at ensuring the business
management; or viability and continuity would also benefit, under the same conditions,
(iii) in case the lender obtained collateral out of from the priority of payment right and from protection against a risk of
proportion with the size of the facility. future voidance.
While the bill was under discussion in the House, those 4 Since any interested party would have access to the judgment approving
the workout agreement that will be filed with the Clerk of the court; the
criteria were criticised by some practitioners as a source whole process being jeopardised after a successful conclusion of the
of serious disputes in the future regarding negotiation with the creditors, since any third party would be entitled to
interpretation. In spite of those criticisms, the House, file a recourse action against the judgment approving the workout
agreement, with devastating consequences.
followed by the Senate, adopted the three limits to the
exemption. The Senate Finance Committee suggested
the introduction of a fourth exception to the
exemption, ie to cover situations where the creditor
knew, or was in a position to know, that the debtor was,
at the time the credit was granted or rescheduled,
beyond any prospect of recovery. This amendment was
eventually withdrawn during the vote that took place in
the Senate on 30 June. In fact, as the amendment uses
exactly the same words that are generally used in the
case law to define soutien abusif, the amendment calling
for such a court exception to the exemption granted to
lenders would, in fact, if adopted, have deprived the
reform of lender liability actions of most of its
significance.
There is no rational reason why the above
amendment should be reintroduced during the final
joint session of Parliament and Senate members, who
are gathering in July to finalise the wording of the
bill, which should be adopted before the end of
the autumn.

IBA Legal Practice Division INSOLVENCY, RESTRUCTURING AND CREDITORS’ RIGHTS SECTION NEWSLETTER September 2005 47
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the Prospectus Directive and its future implementation in EU Member
Court of First Instance, US Department of Justice,
States. The book will provide a source of essential practical reference
the World Bank and several competition
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Richmond Law and Tax Ltd/IBA publication,
IBA/Richmond Law and Tax publication, June 2005
September 2003
565pp Hard Cover ISBN: 1-904501-49-4
280pp Paperback ISBN 1-904501-07-9
IBA members: £59/€115/$133 Non-members: £95/€185/$215
IBA members £50.00 Non-members £75.00
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EC Merger Control: Ten Years on (2000) for FREE
FIDIC: An Analysis of International
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In this unique guide to the suite of contracts published by FIDIC (The Also for a further £10 you can get this book when you purchase
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Kluwer Law International/IBA publication, April 2005 Legal Challenges and Responses
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IBA members £67.00 Non-members £108.00 Force on International Terrorism
In this report, the IBA’s Task Force on International
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Editor Ramón Mullerat OBE developed and promotes the fundamental values
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all professionals and academics in relevant fields of law, policy and 186pp Paperback ISBN 1-57105-301-8
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Kluwer Law International/IBA publication, April 2005
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Legal Opinions in International Transactions
IBA members £118.00 Non-members £190.00
4th Edition
Energy Security, Managing Risk in a Dynamic Editors Michael Gruson, Stephan Hutter and Michael Kutschera
Legal and Regulatory Environment The fourth edition retains the basic structure of the prior editions: the
Report explains what opinions a US lawyer typically wants to obtain
Editors Barry Barton, Catherine Redgwell, Anita Rønne and Donald N Zillman from non-US counsel and how a US lawyer understands the various
This volume examines energy security in a privatised, liberalised and opinion clauses. It also suggests how non-US counsel can best respond
increasingly global energy market, in which the concept of sustainability to such requests and what analysis is required under non-US law to
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issues, but where the potential for supply disruptions, price fluctation the laws of 25 countries.
and threats to infrastructure safety must also be considered. Kluwer Law International/IBA publication, October 2003
Oxford University Press/IBA publication, April 2004 320pp Hard Cover ISBN 90-411-9902-0
650pp Hard Cover ISBN 0-19-927161-5 IBA members £50.00 Non-members £81.00
IBA members £52.50 Non-members £79.50

Global Business Workforce Restructuring

Editors Raymond Jeffers and Robert Mignin
Legal issues arise in the course of mergers, acquisition, sales, reductions
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Kluwer Law International/IBA publication, January 2005 Antitrust Reform in Europe: A Year in Practice
175pp Hard Cover ISBN 90-411-2241-9 Editors Philip Lowe and Michael Reynolds IBA publication
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