Vol 18 (2021) - Issue 6

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Towards a European Code of Conduct for Creditors´ Committees

Synopsis
If we are discussing the role of creditors in restructuring and insolvency proceedings, we primarily tend
to look at the right of a creditor to receive payments on its outstanding claim, be it through the channel
of a (sometimes long lasting and complex) process.
However, a creditor has a wider position with regard to its debtor. In matters of restructuring and insolvency in Europe many creditors have the right to be involved in a decision-making process in insolvency or restructuring proceedings. Historically, in nearly all European countries liquidation of assets is the classical goal for insolvency proceedings. At the end of the 20th century in the EU, proceedings with a different goal were in a minority. The core function of the larger number of insolvency proceedings at that time was pure satisfaction of the claims of creditors via liquidation proceedings using an efficient liquidation of the estate and the distribution of receivables amongst creditors according to their rank. In the original EU Insolvency Regulation of 2002 any opened secondary proceeding had to be a winding-up or liquidation proceeding and the name of the traditionally, by court appointment, involved insolvency practitioner had close to hundred different national names, however under the Insolvency Regulation he or she was termed ´liquidator´.
As by definition for a debtor being ´insolvent´, the proceeds from selling the estate or its individual assets will not suffice to pay all creditors the full amount of their claims. In such a case national insolvency law may enact a choice of one of the following three options: (1) all creditors are paid equally pro rata, or (2) some creditors are paid first before others, or (3) a mixture of both options. Many European jurisdictions have taken the third path. And although many times significant divergences among Member States as to ranking of creditors in detail exist, most national laws provide for a list of ranking of claims, which presents basic similarities. In 2013 Philip Wood has submitted that usually, the ´corporate ladder´ comprises of at least six main ranks or rungs, in the following way: (a) superpriority creditors (with some super-super priority creditors), (b) priority creditors, (c) pari passu creditors, (d) subordinated creditors, (e) equity shareholders, and expropriated creditors. Wood, to his own amazement, has observed that sometimes there are some 60 or 70 rungs on the ladder.
As an example for England and Wales, see what in the same year Lord Neuberger summarised regarding the order in which claims on the insolvent estate are discharged. In Re Nortel GmbH he observed: ´In a liquidation of a company and in an administration (where there is no question of trying to save the company or its business), the effect of insolvency legislation... as interpreted and extended by the courts, is that the order of priority for payment out of the company´s assets is, in summary terms, as follows: (1) Fixed charge creditors; (2) Expenses of the insolvency proceedings; (3) Preferential creditors; (4) Floating charge creditors; (5) Unsecured provable debts; (6) Statutory interest; (7) Non-provable liabilities; and (8) Shareholders.´ In principle, jurisdictions differentiating in these classes are also mentioned in the UNCITRAL Legislative Guide on Insolvency Law of 2013. With only a few limited exceptions, ranking results in absolute priority meaning that lower ranking creditors only receive value after all superior claims are paid.
In our European study of 2017, mentioned earlier, Madaus and I made five recommendations to mitigate the rather strict classification system. Each and every type of a restructuring or insolvency procedure involves the legal rights of all or at least some creditors. It is the very meaning of the term ‘concursus’ that creditors come together. As a consequence, it seems obvious to give the body of creditors a voice in such proceedings, maybe even a dominating voice. In the end of the day, it involves their money. As insolvency and restructuring proceedings frequently involve a multitude of creditors, their participation is commonly organised by convening general meetings of creditors and by establishing standing creditors’ committees. These both give creditors a voice.