Legislative/Regulatory Developments of 2016
Puerto Rico Oversight, Management, and Economic Stability Act
On June 30, 2016, President Obama gave his imprimatur to the Puerto Rico Oversight, Management, and Economic Stability Act, Pub. L. No. 114-187 (2016) ("PROMESA"). The bipartisan legislation was approved by both houses of Congress in a flurry of legislative dealmaking that preceded a July 1, 2016, deadline for Puerto Rico to make $2 billion in bond payments. The enactment of PROMESA followed a June 13, 2016, ruling by the U.S. Supreme Court that upheld lower-court rulings declaring unconstitutional a 2014 law (portions of which mirrored chapter 9 of the Bankruptcy Code) that would have allowed the commonwealth’s public instrumentalities to restructure a significant portion of Puerto Rico’s bond debt (widely reported to be as much as $72 billion). See Commonwealth v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938 (2016). PROMESA provides for, among other things, the establishment of an oversight board entrusted with determining the adequacy of budgets and fiscal plans for the instrumentalities of Puerto Rico and other covered territories. It also provides a mechanism for the implementation of voluntary out-of-court restructuring agreements between an instrumentality and its bondholders as well as bond debt adjustment plans (consensual and nonconsensual) in a case commenced in federal district court. A summary of PROMESA’s provisions is available here.
Changes to the U.S. Bankruptcy Rule and Official Bankruptcy Forms
Changes and one addition to the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Official Bankruptcy Forms became effective on December 1, 2016. The changes affecting business and international bankruptcy cases include the following:
- Cross-Border Bankruptcy Cases. Rule 1010(a) and Rule 1011(a) and (f) were amended to remove chapter 15 petition and responsive pleading procedures, which are now contained in new Rule 1012. Rule 2002(q) was amended to clarify notice procedures in cross-border cases.
- Jurisdiction. Rules 7008, 7012(b), 7016(a) and (b), 9027 and 9033 were amended to remove the distinction between "core" and "non-core" matters. Parties are now required to state whether they consent to the entry of final orders or judgment by the bankruptcy court in all adversary proceedings, not merely in "non-core" matters. The amendments provide that the court shall decide, on the request of a party-in-interest or sua sponte, whether to: (i) hear and determine a proceeding; (ii) hear a proceeding and issue proposed findings of fact and conclusions of law; or (iii) take some other action.
- Service/Computation of Time. Rule 9006(f) was amended to eliminate the three days formerly added to the time to respond if service was made by electronic means.
The Judicial Conference Advisory Committee on Bankruptcy Rules has proposed additional amendments to the Bankruptcy Rules and the Official Bankruptcy Forms and has requested that the proposals be circulated to the bench, bar, and public for comment. The proposed amendments, Advisory Committee reports, and other information are posted at http://www.uscourts.gov/rules-policies/proposed-amendments-published-public-comment. Comments on the proposed amendments must be submitted no later than February 15, 2017. A brief summary of the proposed changes is available here.
European Commission Proposal for Directive on Preventive Restructuring Frameworks
On November 22, 2016, the European Commission published a Proposal for a Directive on preventive restructuring frameworks; second-chance measures; and measures to increase the efficiency of restructuring, insolvency, and discharge procedures. The proposed Directive sets out a number of legal principles and a series of more detailed minimum rules that would have to be adopted by Member States as part of their restructuring and insolvency laws. Among these rules are the following: (i) debtors should remain fully or partly in possession during bankruptcy or insolvency cases; (ii) the appointment of an insolvency practitioner should not be mandatory; (iii) the court or administrative authority shall have the power to stay creditor enforcement actions, other than actions by employees to collect nonstate guaranteed obligations, for up to one year, including actions to terminate essential "executory" contracts; (iv) restructuring plans can be consensual or confirmed by a judicial or administrative authority over the objections of dissenting creditors or equity holders under certain circumstances; and (v) new rescue financing or interim financing extended during a restructuring should be excluded from anti-avoidance laws (other than in cases of fraud or bad faith) and rank senior in priority to the claims of unsecured creditors.
The proposed Directive, once made, will need to be enacted by Member States within two years of its entry into force (subject to certain longer-dated exceptions).
Swiss International Insolvency Law Reforms
In October 2015, the Swiss Federal Department of Justice and Police (Eidgenössisches Justiz- und Polizeidepartement) published a preliminary draft of reforms to title 11 of the Swiss Private International Law Act ("SPILA"), which governs insolvency proceedings and compensation proceedings (Articles 166–175 rev-SPILA), together with an explanatory report. The consultation procedure for the proposed reforms culminated on February 5, 2016. The preliminary draft was intended to improve existing rules, including procedures governing recognition by Swiss courts of foreign bankruptcy and insolvency cases along the lines of the procedures set forth in the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"). Although the Model Law has now been enacted by 41 nations or territories, Switzerland has not adopted the legislation.
Indian Bankruptcy Reforms
On May 11, 2016, India’s parliament (Lok Sabha) passed a bill—the Insolvency and Bankruptcy Code (2016)—to overhaul the country’s archaic bankruptcy laws. The bill was signed into law on May 28, 2016, by Indian Prime Minister Narendra Modi. The law unifies more than four overlapping sets of rules. It is intended to expedite decisions on whether to rehabilitate or liquidate ailing companies, in a move to curb asset stripping and ensure higher recovery rates for creditors, both of which are key to fostering a modern credit market and increased investment in India. The new law includes provisions: (i) entrusting the resolution process to insolvency professionals; (ii) establishing creditors’ committees that will participate in bankruptcy cases; and (iii) ending government involvement that has created decades of judicial gridlock. A more detailed discussion of the new law is available here.
Decree to Promote Efficiency of Italian Insolvency Proceedings
The Italian government has recently focused on reforming the Italian lending market, with the aim of boosting access to financing for Italian businesses and improving bankruptcy and enforcement proceedings. As part of this reform process, the Italian Council of Ministers enacted Decree No. 59 of 3 May 2016 (the "Decree"). The Decree introduced measures designed to, among other things: (i) create a new form of security—a "nonpossessory pledge," or floating charge; (ii) establish the "patto marciano" agreement, which permits extrajudicial foreclosure on real property collateral; and (iii) expedite and improve the efficiency of enforcement and insolvency proceedings. The Decree was later amended and converted into law by Law No. 119/2016, which came into force in November 2016. A more detailed discussion of the Decree is available here.
United Kingdom Legislation to Expedite Recovery From Insolvent Debtor’s Liability Insurers
On August 1, 2016, six years after it received Royal Assent, the U.K. Third Parties (Rights against Insurers) Act 2010 (the "2010 Act") finally came into force. The 2010 Act provides a more effective mechanism for third-party claimants to seek recovery directly from an insolvent debtor’s liability insurers. It supersedes the U.K. Third Parties (Rights against Insurers) Act 1930, which provided for a statutory assignment to a third-party claimant of an insolvent debtor’s rights to claim against its liability insurer, but it proved cumbersome because it required two separate sets of proceedings. Under the 2010 Act, the claimant can simply sue the defendant’s insurers directly, while at the same time seeking a declaration of the insured defendant’s liability in that single set of proceedings. A more detailed discussion of the 2010 Act can be found here.
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