European Perspective in Brief

Europe has struggled mightily during the last several years to triage a long series of critical blows to the economies of the 27 countries that comprise the European Union, as well as the collective viability of eurozone economies. Here we provide a snapshot of some recent developments relating to insolvency and restructuring in the EU.

The United Kingdom—On October 24, 2012, the English Supreme Court handed down judgments in Rubin v. Eurofinance SA [2012] UKSC 46 and New Cap Re v. AE Grant [2012] UKSC 46, two unrelated cases, in both of which insolvency practitioners were seeking to enforce foreign (non-EU) court judgments arising from insolvency proceedings in their jurisdictions (the U.S. and Australia) against English defendants in English courts. The majority held that Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508, the previously leading case, which promoted the idea of universality of recognition in insolvency proceedings, was wrongly decided. Instead, the Supreme Court held that insolvency judgments are subject to standard common-law principles relating to recognition and enforcement. Specifically, the Supreme Court held that a foreign judgment cannot be enforced under either the Cross-Border Insolvency Regulations 2006 (enacting the UNCITRAL Model Law on Cross-Border Insolvency in the U.K.) or s426 of the Insolvency Act because, in the court’s view, neither expressly provides for the enforcement of judgments.

In light of this decision, English courts will not afford “special treatment” to judgments arising from insolvency proceedings. Instead, parties wishing to enforce insolvency judgments in England through English courts must rely on the traditional common-law body of cases and, where appropriate, the EC Regulation on Insolvency Proceedings, which is not affected by this judgment and which makes foreign judgments falling within the ambit of the EC Regulation enforceable automatically in the U.K. The decision is likely to have significant consequences for cross-border insolvencies. At a minimum, it will make it more difficult to enforce foreign insolvency judgments in England and may lead to an increase in the volume of parallel insolvency proceedings filed in English courts in cross-border bankruptcy cases (e.g., “nonmain” proceedings under the Model Law) for the purpose of obtaining recognition of (and enforcing) such judgments.

Spain—On August 31, 2012, the Spanish government approved Royal Decree-Law 24/2012 (“RDL 24/2012”), providing for the restructuring and resolution of “credit entities.” Although the law became effective immediately, RDL 24/2012 has not yet been ratified by the Spanish parliament, where the ruling party (Partido Popular) holds the majority. RDL 24/2012 implements a new framework for the restructuring and resolution of financial institutions, which will become an essential tool to manage the banking crisis in Spain. To that end, RDL 24/2012 reinforces the role of supervisors, available instruments, and administrative procedures. The ultimate objective of the legislation is to safeguard the stability of the Spanish financial system as a whole, rather than any given entity, and to minimize the expense borne by taxpayers.

With the publication of RDL 24/2012, the Spanish government fulfilled commitments made on July 20, 2012, to the Eurogroup under the program of financial assistance to Spain for the recapitalization of the banking sector, which were included in the memorandum of understanding between Spain and the European Commission.

Among other things, RDL 24/2012 provides for: (i) a new framework for early intervention, restructuring, and orderly resolution of credit entities; (ii) the establishment of an asset management company (sociedad de gestión de activos) as a repository for distressed real estate assets, or a “bad bank”; (iii) management of hybrid instruments until June 2013; (iv) reinforcement of the administrative powers of the Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria); (v) augmented capital requirements for financial institutions; and (vi) delegation of powers by the Ministry of Economy to the Bank of Spain.

France—On September 20, 2012, the French government issued a decree (the “Decree”) amending the requirements for the commencement of an accelerated financial safeguard proceeding (procédure de sauvegarde financière accélérée (“SFA”)). An SFA combines the elements of a “conciliation” (an out-of-court pre-insolvency proceeding involving a court-appointed mediator that is widely used to restructure distressed businesses in France) and a “safeguard” proceeding, which is a court-supervised proceeding culminating in the implementation of a plan restructuring a company’s debt over a period of up to 10 years. An SFA is a pre-packaged financial restructuring that can be approved by the court with the consent of a 66⅔ percent majority of the creditors. The court can impose the restructuring plan on dissenting creditors within a maximum of two months following the commencement of an SFA.

Prior to the Decree, an SFA was available only to solvent companies having more than 150 employees or turnover in excess of €20 million. Accordingly, an SFA could not be filed by a holding company, which typically has neither the required number of employees nor adequate turnover. Since the issuance of the Decree, an SFA may also be commenced by a solvent company with either: (i) a balance-sheet surplus exceeding €25 million; or (ii) a balance-sheet surplus exceeding €10 million, provided it controls a company satisfying the 150-employee or €20 million-turnover thresholds. Thus, an SFA will now be available to most holding companies. Because LBO transactions are typically structured with acquisition debt at the holding-company level, the Decree will clearly facilitate financial restructurings in distressed-LBO scenarios.

Other recent European developments can be tracked in Jones Day’s EuroResource.