I-Introduction
The new Financial Reorganization and Bankruptcy Code (Federal Decree No. 51 of 2023) turned heads when it was issued in 2023 (“FRBC”) as it caused a tectonic shift to the former bankruptcy regime that stakeholders and practitioners were just becoming accustomed to.
Now that the FRBC entered into effect in May 2024, we have received many inquiries on the benefits and the overall process involved in the newly introduced ‘preventive settlement’ scheme, which under the older (abrogated) legislations (and comparative laws) is referred to as a ‘preventive composition’.
We set out below our analysis on a set of frequently asked questions in relation to this new concept.
II-FAQs
- What is it for? Is it helpful?
Perhaps the essence of the preventive settlement scheme is that it allows a debtor, under the Bankruptcy Court’s auspices, to address all creditors with a consolidated proposal aimed at restructuring or rescheduling all its debts in a centralized manner.
From a practical perspective, we know it is difficult for any debtor to implement such a uniform approach as it would have to appease and seek the consent of all competing creditors who are probably concerned with their individual interests and whose claims naturally differ and sometimes even conflict with each other in terms of their size, form or due date. The preventive settlement scheme seeks to alleviate some of this difficulty.
- Who is eligible for a preventive settlement scheme?
The FRBC sets out whom it applies to (commercial companies, individual merchants, etc.). The debtor can file such an application to the Bankruptcy Court within sixty days from the date upon cessation of payment or from the date upon which information indicating such an imminent cessation arises.
- Restrictions on business operations? Does the Court appoint a Trustee?
No Trustee is usually appointed in the event the Court initiates a preventive settlement proceeding, thereby allowing the debtor to continue ‘business as usual’, except that no decisions can be made if they lead to prejudicing the creditors’ interests. Also, any acts falling outside the ordinary course of business would need to be sanctioned by the Court.
Having said that, the Bankruptcy Court may decide to specifically prohibit some decisions or acts from being taken, and in any event, one must be mindful of Article 223(1) which generally states that the debtor is not permitted to make payments of any debts once the preventive settlement proceeding begins. Article 223(2) states the debtor may obtain permission from the Bankruptcy Court to pay employee salaries, vendors and other operational expenditures that are imperative for the continuation of the business.
- Moratorium?
Perhaps among the notable aspects of the old law was the introduction of the moratorium concept which barred any creditors from filing unilateral judicial claims against the debtor.
Under the FRBC’s new preventive settlement scheme, once the application is accepted, a moratorium on judicial claims also takes effect for a period of three months starting from the date of the decision to initiate the preventive settlement proceeding.
This is extendable by way of a Court decision on a month-by-month basis but is limited to six months overall.
- Would secured creditors be able to enforce on their collateral?
Similar to the older law, the FRBC allows a secured creditor to obtain permission to enforce on their security despite moratorium. This may be contested by the debtor or any other creditor if the pool of creditors’ interests summon the need for all or some of the debtor’s assets (including that security) be sold together as a going concern.
- Who prepares the preventing settlement proposal and who votes?
The debtor is required to circulate a preventive settlement proposal for a vote by the group of creditors. The general rule is that only ordinary creditors can vote on the proposal but certain exceptions can be applied to allow a secured creditor to vote.
The minimum threshold of votes must be equivalent to more than two-thirds of the liabilities represented at the meeting.
- What should the proposal look like?
This is generally left to the free will of the parties to decide on. The proposal can therefore contemplate any financial solutions deemed acceptable to the majority vote.
The performance of the debtor’s obligations under the preventive settlement plan can also be secured with collateral (guarantees, mortgages, pledges, assignments, etc.).
- What happens after the majority vote is achieved? Is it binding on the opposing creditors?
If the proposal is approved by majority vote, the debtor will submit it to the Court within ten business days for ratification.
The Court must then verify that the creditors were given enough time and information to review the proposal, that the voting standards provided for in the FRBC were honoured, and that it is fair to creditors situated in comparable positions.
Upon ratification, the preventive settlement plan becomes binding on all the creditors, whether they had approved it or opposed it.
- What if the majority vote is not obtained?
In this case, the Court will declare the failure of the preventive settlement proceeding. Moreover, if it is seen that the debtor’s financial status warrants a restructuring or bankruptcy, it may declare such. The rules governing restructuring and bankruptcy schemes differ than those of a preventive settlement and should therefore be examined separately.
