Principles for a special cross-border restructuring law

This week UNCITRAL Working Group V has started considering the thorny issue of applicable law in insolvency proceedings in its latest project. The deliberations use the recommendations 30–34 and accompanying commentary of the UNCITRAL Legislative Guide on Insolvency Law (the “Guide”) as the starting point and intend to focus first on lex fori concursus and exceptions thereto in the context of a simple scenario– an insolvency proceeding with respect to a single debtor – taking up any other issues of applicable law in insolvency proceedings. The baseline scenario already encompasses the question whether applicable law rules may raise distinct issues in the context of reorganization as opposed to liquidation. In my view, the answer to this question is YES based on the assessment published in my new Working Paper (download here).

The paper explains the phenomenon of a restructuring (or reorganization in US bankruptcy law terminology) and the mechanisms for cross-border effects. It analyses the role of the lex causae and continues to portray why this role has been sidelined in insolvency proceedings by the lex fori concursus. The analysis demonstrates that the asset-oriented rules and principles of cross-border insolvency law are not well aligned with the needs in debt-oriented restructuring procedures. The paper concludes by identifying principles for the development of a special cross-border restructuring framework based on the principles of Private International Law.

The key insights of the paper are summarizes as follows:

(1) The debtor’s COMI is not a solid criteria both for allocating debt-oriented restructuring proceedings and their recognition abroad.

(2) Debt-restructuring proceedings in the country closest connected to the law governing the restructured debt under PIL rules shall pincipally both be available there (in terms of international jurisdiction even without COMI) and recognised abroad.

(3) Debt-restructuring proceedings in a country with (only) a sufficient connection to the law governing the restructured debt under PIL rules may pincipally be made available there (policy choice in terms of international jurisdiction with or without COMI and extending the lex fori to substantive modification) but only recognised in countries with closer connections under a substantive protection test.

(4) Debt-restructuring proceedings in the country not connected to the law governing the restructured debt under PIL rules shall pincipally not be made available (in terms of international jurisdiction without COMI) and cannot expect to be effective abroad.

These insights may provide orientation in a world where modern legislation shows the tendency to extend the tools available in restructuring and insolvency proceedings to affect substantive rights. Plans and discharges may discharge or amend creditor rights against third parties in or even without a group context. Executive contracts may be terminated not only in case of the administration of a bankruptcy estate but also if petitioned by the debtor in some (Dutch) restructuring proceedings.

The new UK Reconstruction Plan – No APR? No problem!

On 20 May 2020, the Government in London presented the Corporate Insolvency and Governance Bill to Parliament where it passed through the House of Commons in one day on 3 June 2020 (for updates see the tracker). [Update: The Bill received Royal Assent on 25 June 2020 and entered into force on 26 June 2020.]

This new bill will introduce a stand-alone moratorium for up to 20 business days for troubled companies (which can be extended for further 20 business days) and new rules on ipso-facto-clauses to the Insolvency Act 1986. More importantly, it will introduce an new type of a scheme of arrangement to the Companies Act 2006: „Arrangements and Reconstructions for Companies in Financial Difficulty“ – or in short: a reconstruction plan.

Reconstruction plan – it looks like a scheme process

The new plan procedure would follow the procedural steps of a common scheme of arrangment (first hearing, class meetings, confirmation hearing). It could be accompanied by the new moratorium if necessary. The key feature of the new plan process is that it will allow a company to bind all creditors, whether senior or junior, even if they vote against the plan, through the use of the  “cross-class cram down” provision. In contrast, the scheme of arrangement only allows to bind a dissenting class of shareholders if they have „no economic interest“ in the company; dissenting creditor classes can veto a scheme.

For companies in financial difficulties

While a scheme of arrangement is available to all companies regardless of their financial status (solvent and insolvent schemes), the new plan would need to explain that the company has encountered or is at least likely to have encountered financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern. This rather soft threshold of financial difficulties would probably be met by most companies that use solvent schemes today.

A cram-down rule with no (absolute) priority rule

With respect to the ongoing discussion in EU Member States about the best implementation of a cram-down rule, the statement of the UK government and restructuring practice is clear (and no surprise).  A dissenting class is bound if the best interest test is observed and one „in-the -money“ class supports the plan. The court does not test whether the distribution of the restructuring surplus follows the waterfall of a liquidation in or outside bankruptcy proceedings. English law does not implement any (relative or absolute) priority rule for the sanctioning of the new reconstruction plan. This comes as no surprise as no such rules have existed for schemes of arrangements when shareholder classes were crammed down. Both the Englisch restructuring practice and finance industry have flourished without them.

Takeaways for Europe (and Germany)

For the overall EU discussion about APR/RPR and the implementation of art. 11 of the Directive, the UK approach demonstrates two key insights.

First, there is obviously no need for an absolute priority rule in order to save the world of credit, company or even private law as we know it. Fearmongering of such kind against the implementation of any kind of a relative priority rule (see de Weijs at al. or Brinkmann) neatly overlooks the fact that the UK (as most other European jurisdiction) has been fine without any such rules. Even more, London has established itself as a restructuring hub with schemes of arrangements being routinely recognised elsewhere, even in the US.

Second, the combination of actual consent and a best interest test (or no creditor worse off test) provides a solid basis for a cramdown rule, provided that the latter does not simply compare the plan distribution with the low payoff in a bankruptcy liquidation. I made this point earlier already (see most prominently here). I doubt, however, that actual consent is sufficiently demonstrated if only one class of in-the-money creditors supports the plan. Such a low threshold leaves a lot of room for coercive plans that can only be trusted to parties in a jurisdiction where practitioners and judges are capable and willing to recognise possible misuse. Most jurisdictions would be well-advised to require a higher level of actual consent before allowing a plan to be confirmed against the veto of a class.


The relevant cram-down provision in Part 26A of the Companies Act 2006 would read as follows:

901G Sanction for compromise or arrangement where one or more classes
(1) This section applies if the compromise or arrangement is not agreed by a number representing at least 75% in value of a class of creditors or (as the case may be) of members of the company (“the dissenting class”), present and voting either in person or by proxy at the meeting summoned under section 901C.
(2) If conditions A and B are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning it under section 901F.
(3) Condition A is that the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (see subsection (4)).
(4) For the purposes of this section “the relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F.
(5) Condition B is that the compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or (as the case may be) of members, present and voting either in person or by proxy at the meeting summoned under section 901C, who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
(6) The Secretary of State may by regulations amend this section for the purpose of—
(a) adding to the conditions that must be met for the purposes of this section;
(b) removing or varying any of those conditions.
(7) Regulations under subsection (6) are subject to affirmative resolution procedure.


A Simple Guide to the Relative Priority Rule

The final version of the Directive (EU) 2019/1023 on Restructuring and Insolvency provides for a new rule to assess the fairness of the distribution of value under a plan if an affected class of creditors voted against the plan: the Relative Priority Rule (RPR). It is provided in art. 11 (1) (c) stating that one of the conditions to confirm a plan over the veto of a class is that the plan

ensures that dissenting voting classes of affected creditors are treated at least as favourably as any other class of the same rank and more favourably than any junior class’.

As an alternative to the RPR, art. 11 (2) allows Member States to implement an Absolute Priority Rule (APR) stating that the plan must ensure

the claims of affected creditors in a dissenting voting class are satisfied in full by the same or equivalent means where a more junior class is to receive any payment or keep any interest under the restructuring plan.’

As a result, all Member States are faced with the choice of either implementing the RPR or the APR when implementing the Directive into their local restructuring laws.

While the APR represents a concept that has been a part of US law for 80 years and German law for 20 years, the idea of an RPR is not just new. It has also not yet been explained extensively by scholars. If Member States consider implementing such a concept, they would probably like to know how it works and what it needs to work best.

The following quick guide aims at providing this assistance:

A simple guide to RPR (download here).

(An updated version correcting three typos was posted on Jan. 20 at 14:55 CET.)

ELI Report on business rescue finalized and approved

ELI Report on business rescue finalized and approved

Nach dem Eingang aller Berichte der National Correspondents im Jahr 2016 (siehe Beitrag) haben Prof. Bob Wessels und ich im Sommer 2017 unseren rechtsvergleichenden Bericht fertiggestellt. Er wurde auf der Jahrestagung des European Law Institute im September 2017 in Wien ohne Gegenstimme angenommen und ist nun als Instrument des ELI hier abrufbar. Eine Veröffentlichung des Berichts in Buchform ist für das erste Quartal 2018 bei Oxford University Press geplant. Dort sollen zeitgleich auch die Länderberichte (insgesamt ca. 1.100 Seiten) erscheinen.

Bob and I (left and center on the photo, with project assistant Gert-Jan Boon) are pleased to report that last week, during the General Assembly and Annual Conference of the European Law Institute (ELI) in Vienna, our report ‘Rescue of Business in Insolvency Law’ was approved as an official ELI Instrument.

The Report consists of 115 recommendations explained on more than 375 pages. Its ten chapters contain recommendations on a variety of themes affected by the rescue of financially distressed businesses: (1) Actors and procedural design, (2) Financing a rescue, (3) Executory contracts, (4) Ranking of creditor claims; governance role of creditors, (5) Labour, benefit and pension issues, (6) Avoidance transactions in out-of-court workouts and pre-insolvency procedures and possible safe harbours, (7) Sales on a going-concern basis, (8) Rescue plan issues: procedure and structure; distributional issues, (9) Corporate group issues, and (10) Special arrangements for small and medium-sized enterprises (SMEs) including natural persons (but not consumers). The Report also includes a glossary of terms and expressions commonly used in restructuring and insolvency matters.

We as Reporters feel that the Report is timely and may have a significant and positive impact on the harmonisation efforts of the European Commission as laid down in the November 2016 Proposal for a Directive on preventive restructuring frameworks. The topics addressed in the Report are intended to present a tool for better regulation in the EU, developed in the spirit of providing a coherent, dynamic, flexible and responsive European legislative framework for business rescue. Mindful of the European Commission’s commitment to better legal drafting, the Report’s proposals are formulated as comprehensibly, clearly, and as consistently as possible. Still, the recommendations are not designed to be overly prescriptive of specific outcomes, given the need for commercial flexibility and in recognition of the fact that parties will bargain in the ‘shadow of insolvency law’. The Report is addressed to the European Union, Member States of the EU, insolvency practitioners and judges, as well as scholars. The targeted group many times flows explicitly from the text of a recommendation or the context in which such a recommendation is developed and presented.

We cherish the belief that the report will assist in taking a next, decisive step in the evolutionary process of the European side of business rescue and insolvency law.

The suggested citation is either:

Wessels, Bob and Madaus, Stephan, Business Rescue in Insolvency Law – an Instrument of the European Law Institute (September 6, 2017). Available at SSRN:,

or alternatively

Wessels, Bob and Madaus, Stephan, Business Rescue in Insolvency Law – an Instrument of the European Law Institute (September 2017). Available at