Pre-insolvency or restructuring professionals – “Pifors”

At a conference held on 24 March by the QUT Commercial and Property Law Research Centre, a presenter, Dr Georg Kodek, explained ideas being proposed by the EU in implementing a Restructuring Directive (directive) for its members states. That directive follows on from a conference and report in mid-2016, in both of which QUT was involved.[1]

One such proposal, contained in what is presently a draft of the directive, is for the role of a pre-insolvency or restructuring professional, a ‘person in the field of restructuring’, or, Pifor, a term newly coined by Professor Bob Wessels.[2]

The Pifor is our restructuring professional, with a proposed role under the directive which bears consideration here in Australia. This is in the context of the long awaited response from the government and from the profession itself of the nature of the role of such a person and their authority and standards of conduct.

The Pifor

The proposed European directive has a focus on:

• preventive restructuring frameworks,
• a second chance for failed business, and
• measures to increase the efficiency of restructuring, insolvency and discharge procedures.

The proposal generally is seen as a welcome initiative in the EU, and internationally. 

Draft Article 2(15) of the directive provides for a ‘practitioner in the field of restructuring’, meaning

“any person or body appointed by a judicial or administrative authority to carry out one or more of the following tasks:

(a) to assist the debtor or the creditors in drafting or negotiating a restructuring plan;

(b) to supervise the activity of the debtor during the negotiations on a restructuring plan and report to a judicial or administrative authority;

(c) to take partial control over the assets or affairs of the debtor during negotiations.”

The equivalent ‘judicial or administrative authority’ in Australia would be the courts or the regulators, although in each case differently constituted.

Debtor in possession

In a preventive restructuring, the debtor would remain in full or partial control of its assets and of the day-to-day operations of its business, as a “debtor in possession”.

On-line restructuring plan models

Restructuring plans would be required to provide minimum mandatory information, with options to require additional information, “provided this does not put a disproportionate burden on debtors”.  On-line restructuring plan models and practical information on how a plan proposer would apply such models would be required.

A Pifor appointment

The appointment of a Pifor would be required or suitable where the debtor requests and is granted a general stay of enforcement actions or where the debtor’s restructuring plan needs to be confirmed by a judicial or administrative authority.  This could result from creditor disagreement which needs to be resolved by means of a creditor “cram-down”. 

The Pifor would therefore have an established role under the EU directive, with authority and responsibility for the implementation of reorganisation plans.

Creditor protections

Concerns that creditors might be negatively affected by the stay are addressed by provisions concerning the duration of the stay, the conditions for its renewal and its removal. Workers’ outstanding claims would be exempted from the stay to the extent that laws do not provide for an appropriate protection by other means.

Ipso facto clauses

The debtor would be able to count on the continued performance of contracts with suppliers and other creditors provided that it fulfils his obligations under such contracts, that is, ipso facto clauses are generally to be void. 

Safe harbour

There is also to be a ‘safe harbour’ protection for transactions carried out to further the negotiation of a restructuring plan, unless there is evidence of fraud or bad faith.

New money

Transactions that are proposed to be protected include “… transactions such as new credit, financial contributions or partial asset transfers outside the ordinary course of business made in contemplation of and closely connected with negotiations for a restructuring plan.”

But these must be approved by the Pifor, or by the judicial or administrative authority, in order to gain the protection. 

Standards and codes

The directive would require judges and relevant authorities to be trained and specialised in restructuring and insolvency, as well as Pifors, mediators and insolvency practitioners themselves. 

The proposed directive encourages the development of, and adherence to, voluntary codes of conduct by Pifors as well as other effective oversight mechanisms. 

Rules are also proposed for Pifors’ eligibility, selection, appointment, removal, oversight, fee-determination and sanctions.

Kid with a future?

As Professor Bob Wessels says:

“it is clear that a Pifor is a new kid on the block.  It remains to be seen whether the Pifor has a bright future ahead”.

Australia

The world trend towards a more forward looking approach to corporate revival has not yet been adopted in Australia, despite expressed intentions otherwise. As was evident from the INSOL conference, the UK, Singapore and other comparable jurisdictions are also proceeding down that restructuring path.

That seeks to have companies’ financial difficulties addressed earlier, and in a less legally restrictive environment.  Hence the need for development of duties and codes for Australian restructuring professionals, who presently provide their expertise with limited professional guidance or legal structure. 

The TMA has a useful Code of Ethics for those engaged in “turnaround and crisis management and corporate renewal”. Those professionals often have legal or accounting codes and ethical standards with which they must abide.

But as one commentator has said,

“there is a good deal of work to be done if turnaround professionals are to be able to claim that their accreditation system offers quality and performance controls to match those that are applicable to [insolvency practitioners]”.[3]

A starting point would be some statutory guidance in the law, perhaps not fully encapsulated in Australia by the long proposed ‘safe harbour’ regime.  It may be that if the directive proceeds, the EU member states will offer useful precedents and experience for the development of our law and for our professional codes regulatory guidance. 

Michael Murray, QUT Commercial and Property Law Research Centre

[1] EU, Brussels July 2016; Report of the University of Leeds, 2016 – see now European Insolvency Law, McCormack, Keay and Brown, 2017.

[2] http://bobwessels.nl/blog/ – If you’re the IP, I’m the Pifor, Professor Bob Wessels, Professor Emeritus of International Insolvency Law, University of Leiden, the Netherlands.  Or, it could be Peter, as in ‘P for Peter’.

[3] Vanessa Finch, Corporate Insolvency Law, Cambridge, 2009, pp 233-234.