Objectives Effective Liquidation Procedure

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Liquidation
Liquidation

Liquidation procedures are usually applied when there is no economically viable possibility of rehabilitation. While such procedures can therefore be seen as the second of the two components of insolvency proceedings, they are considered first in this study because they are the most widely used and are generally considered the “basic” procedures on which rehabilitation procedures are constructed. . Although many companies successfully rehabilitate, they generally do so out of court and, in fact, rely on the “shadow” of liquidation to facilitate rehabilitation.

Building on the general objectives of insolvency law outlined in the previous chapter, the most important objectives of an orderly and efficient liquidation proceeding can be summarized as follows.

(1) The main objective is to maximize the value of real estate assets. Many elements of the insolvency system are designed to achieve this goal. These features include the introduction of a moratorium on the application of creditor remedies, which prevents premature break-up; appointment of an independent liquidator with broad powers; when the trustee deems it necessary to temporarily continue the company’s activities, creating incentives for creditors to provide financing through priority financing after application; and the inclusion of recovery clauses that recover assets expropriated by a debtor to the detriment of creditors.

(2) Another objective is to ensure fair treatment for creditors in a similar situation. Insolvency creates a collective procedure that will only be effective if the participants consider it fair. This is achieved by including a number of features, including foreclosure provisions and a general stay of foreclosure by creditors.

(3) The ultimate goal, although much broader, is to provide a mechanism to facilitate investment decisions. If creditors can count on a mechanism that allows them to exercise their rights against the debtor, this will help them make investment decisions. The start criteria are critical for this reason. Furthermore, if post-settlement distribution priorities recognize contractual priority, lenders will be confident that they can manage, at least to some extent, the risks they take in making investment decisions.

While the above goals generally complement each other, they can sometimes conflict. Indeed, one of the challenges in developing an orderly and efficient settlement procedure is striking the right balance between competing objectives. For example, the broad powers granted to the trustee, allowing him to cancel transactions already made and change the terms of existing contracts, can undermine the predictability of the contractual relationship, which is essential for making investments.

initial requirements

Debtor Rating

Determining which entities are eligible to be a debtor under a country’s general insolvency law is an important threshold issue and has important implications for a country’s economy. For example, if the law excludes certain legal entities, those legal entities will not be subject to disciplinary measures under the current bankruptcy regime and will not be able to benefit from the protection granted to them. At the same time, important political considerations may lead countries to establish special insolvency procedures for individuals or for certain regulated entities. However, the exclusion of a company from any form of insolvency law should be avoided.

Natural/legal persons

Insolvency law should generally determine which businesses are covered by its provisions. You can decide to treat legal persons separately from natural persons, either in different laws or in different chapters of the same law. Such a separate regime may arise for a number of reasons, including public policy considerations regarding consumer protection. As this report focuses on insolvency law’s treatment of those entities that have the greatest impact on a country’s economy, it does not express a preference as to whether individuals should be subject to a special regime or the structure of such a regime. .

Government-Related Organizations

It is generally accepted that sovereign states are not subject to any insolvency law, international or national. Local authorities, such as municipalities, may be completely excluded from the scope of insolvency law or may be given special treatment by law2. such company

Foreign Debtors

The foreign ownership of a debtor should not be a criterion for determining jurisdiction over insolvency proceedings. However, international insolvency cases raise a number of complex jurisdictional issues that require international cooperation. For this cooperation, see the Annex, which describes the UNCITRAL model law on cross-border insolvency.

Main conclusions

While exclusion of a company from any form of insolvency regime should be avoided, countries may wish to establish special regimes outside the general insolvency law for highly regulated individuals or entities, such as financial institutions. However, public ownership of a company should not in itself be a reason for excluding a company from the scope of general insolvency law.

Conditions to start

While insolvency laws generally provide for the initiation of liquidation proceedings by either the creditor or the debtor, they differ in the specific criteria that must be met before proceedings can be commenced. In addition, several laws establish alternative criteria. However, one widely relied upon approach, and one that is consistent with the overall objectives of insolvency, is to allow proceedings to be commenced when the debtor has generally failed to meet its obligations when due. How this criterion is used varies from country to country. In some countries, it serves as the basis for initiating a liquidation proceeding or a rehabilitation proceeding, and if liquidation is chosen, the proceeding can later become rehabilitation. In other countries, based on this criterion, only a rehabilitation procedure can be initiated, and the procedure can be converted to liquidation only after it is determined that the company cannot be restored. In the third criterion, this criterion is used to initiate a single procedure, and the choice between liquidation and rehabilitation is made later3.

Since the objectives of liquidation and remediation procedures are different, the use of the same criteria for both procedures in various countries requires some clarification. For example, while it would be possible to contemplate a criterion that effectively indicates that the lack of liquidity is appropriate to initiate a liquidation procedure, it might seem more logical to condition the opening of a liquidation procedure to the demonstration of an even greater financial difficulty, such as insolvency. If the insolvency criterion were to be relied upon exclusively and applied in a strict sense, liquidation proceedings would, at least in most cases, normally only be opened at a later stage, i.e. when the company’s balance sheet showed that the value of the firm’s liabilities exceeded its assets.4

One of the main reasons why countries often allow liquidation proceedings to be opened on the basis of a “general default” definition is best explained in terms of the purpose of the proceedings. To the extent that liquidation procedures are designed to avoid a “grabber race” by individual creditors that leads to the dismemberment of the debtor to the detriment of the creditors’ collective interests, waiting until the debtor becomes insolvent to Often it just interrupts the “race”. for the capture”, which is in full swing. In addition, it is often difficult for creditors to prove that a balance is insolvent because they do not have inside information.

On the other hand, reliance on a “blanket stop payment test” is intended to initiate proceedings early enough in the debtor’s financial difficulties to preempt this race. An obvious problem with such a “proactive” approach (initiating liquidation proceedings against a financially distressed but still viable company) can be resolved by giving the debtor the opportunity to transform the liquidation proceedings into a rehabilitation proceeding. As noted above, an alternative way of dealing with this problem is to allow the creditor to initiate rehabilitation or “unitary” proceedings only on the basis of a general default test, with the possibility of post-liquidation conversion.

Although the “general default” standard is theoretically frequently applied to proceedings initiated by both the creditor and the debtor, the issues that arise in its application in these two different cases will be different. Each is now being discussed in turn, as is the start of liquidation procedures by the government.

Creditor Claims

A more complex question that arises in relation to debtor-initiated applications is whether the insolvency law should impose an obligation on the debtor to initiate proceedings at a certain stage of its financial difficulties. One approach to addressing this problem is to include specific provisions in the law that hold officers and directors liable for “trading in default.” The advantage of this approach is that it forces debtors to start liquidation or rehabilitation procedures at an early stage. This early registration increases the chances of rehabilitation, or at least protects the interests of creditors, avoiding further dispersion of the company’s assets. However, the downside to including such rules is that they may discourage management from attempting to negotiate a restructuring agreement out of court due to concerns that any delay in initiating formal proceedings could result in personal liability. If a country chooses not to rely on sanctions as a means of forcing debtors to start production early, it may be necessary to encourage debtors to do so by offering them incentives to start production. As will be shown in the next chapter, such incentives can be effectively built into the rehabilitation process.

the court’s decision

Normally, a court of competent jurisdiction will determine whether the relevant conditions for commencement of proceedings have been met. The decision must be published or made available to the public in the court record. Since speed is critical in the context of insolvency proceedings, one may consider requiring the court to make a decision within a certain period after the filing of the application. Such limitation may be particularly important when the power of the judiciary is limited.

Main conclusions

When the law establishes separate procedures for liquidation and rehabilitation, it must allow the initiation of liquidation procedures on the basis of an application filed by the creditor or the debtor. When an application is made by a creditor, it is appropriate that the main criterion for the initiation of the procedure is proof that the debtor has stopped making payments. Various tests can be used to determine whether the termination of payments is truly general. With respect to applications filed by debtors, an important political decision must be made as to whether the law should impose specific sanctions on the administration for not initiating proceedings after a general default. If it is decided that such sanctions should not be imposed, it is recommended that, alternatively, the law provide adequate incentives in the rehabilitation procedure to encourage debtors to use these procedures at a sufficiently early stage. Where the power of the judiciary is limited, it may be appropriate to require the court to decide whether to initiate proceedings within a specified period of time after the application has been filed.