Forum Shopping in Insolvency
When considering insolvency in the context of an international conference, it is impossible not to compare and contrast the insolvency regimes adopted by respective jurisdictions. It is perhaps not surprising then, that creditors and companies initiating proceedings may also consider in which jurisdiction it may be most advantageous to commence (or consolidate) insolvency proceedings. Whilst forum shopping is generally seen as a bad thing in litigation, it must be acknowledged that there may be benefits arising. By way of example, Luxembourg’s archaic rules relating to restructuring mean that, practically speaking, any company entering into insolvency proceedings will be wound up. A company that wishes to restructure, may therefore seek to enter insolvency proceedings elsewhere.
Whereas there is no doubt that forum shopping in insolvency proceedings could be open to abuse, and may give rise to disadvantages, there are a number of factors which might suggest that forum shopping in an insolvency context is more advantageous than not. Competition between jurisdictions could result in innovation and the development of centres of excellence. This in itself may result in higher standards throughout, greater efficiency and lower costs. It emerged, for instance that Germany, in particular, had seen the effects of what is known as COMI migration (whereby a company may seek to migrate its centre of main interest to a particular jurisdiction in order to take advantage of its insolvency regime) to the UK, and has amended its laws in order to seek to prevent the shift.
When the question was posed whether ideologically forum shopping ought to be available in the insolvency context, 70% of attendee voters voted yes. Paradoxically, and recognising that where one jurisdiction may gain, another may lose, 60% of voters acknowledged that forum shopping had the potential to damage the economy of a jurisdiction. Taking everything into account, over 62% still considered that companies and creditors should be able choose its insolvency regime.
The availability of Restructuring Tools
The advantages and disadvantages of the availability of restructuring tools were considered. Risks include that restructuring tools can be very expensive. If unsuccessful the costs will (in most cases) be borne by the creditors, who have already suffered losses in the insolvency. Secured creditors often stand to lose the most and it is for this reason that it is not uncommon for secured creditors to vote against restructuring options. The risks to creditors rights must, however, be balanced against the chance of preserving enterprise and employment.
In order to address the risks, almost 65% of attendee voters believed there should be a viability test before entering into restructuring proceedings. Currently, Isle of Man restructuring takes place via Schemes of Arrangement, which do not require a test of viability.
A viability test at the outset is therefore vital. The EU Directive provides that a viability test only needs to take place at the time of presentation of the restructuring plan – is this too late? In schemes of arrangement there is no viability test. Even consideration of viability takes time and money.
When considering what was important in restructuring, considerations only approximately 20% of attendee voters believed preservation of shareholder value and employment was important in restructuring whereas almost 92% believed preservation of enterprise was important. Interestingly, less than 70% believed that restructuring should seek to protect creditors.
Isle of Man
It is generally considered that the Isle of Man’s insolvency law would benefit from some modernisation. In considering the regime to be adopted, it is hoped that the need to compete in the international market and the need for efficient and cost-effective restructuring tools will not be overlooked.