Litigation is an increasingly common feature of European restructuring processes, including In the U.K. where in 2024 all six of the restructuring plans on which A&O Shearman advised were challenged in court. We expect this dynamic to continue into 2025 and beyond.
The trend is in response to the increasingly coercive nature of restructurings, where we are seeing more alternative proposals or challenges to a debtor’s evidence (e.g., on valuation) put forward by creditors, or debtor-proposed plans that are not supported by the in-the-money class(es).
From a procedural perspective this affects deal certainty and timing, with parties advised to proceed on the basis that any plan could face litigation, and to ensure their technical analysis and evidence-gathering is conducted with this in mind.
EU directive aims to harmonize certain aspects of restructuring processes in member states
Europe’s restructuring landscape continues to evolve in response to the EU Preventive Restructuring Directive, which was passed in 2019 and was due to be implemented across member states by July 2021 (although many national governments made use of the option to delay this deadline by 12 months).
The directive was designed to harmonize certain aspects of restructuring processes across the EU, and, among other things:
- requires member states to implement early warning tools that help businesses identify when they are facing financial difficulty;
- provides businesses with access to a framework that allows them to remain in control of their assets and operations during a restructuring process, and that offers a mechanism to secure a temporary stay from creditor claims while they negotiate a restructuring plan;
- aligns the content of restructuring plans, establishes how they must be approved (typically through a vote of affected parties), and sets out how to proceed if all classes are not in agreement (i.e., via a court-confirmed cross-class cramdown provided certain conditions are met);
- protects new financing provided during a restructuring process in the event of an insolvency;
- discharges entrepreneurs from debt after three years; and
- appoints judicial and administrative authorities to oversee the restructuring process and ensure compliance with the directive.
Netherlands restructuring scheme tested in cross-border proceedings
The Netherlands’ WHOA (Wet Homologatie Onderhands Akkoord) was one of the first European pre-insolvency schemes introduced under the directive and it has since been deployed successfully in a number of large, complex restructurings.
Over the past 18 months we have seen cross-border proceedings in which a WHOA has been used in combination with a U.S. Chapter 15 process or an English scheme of arrangement.
In 2024 the restructuring of the Dutch shipping company Royal IHC, which was led by A&O Shearman, also saw the WHOA used for the first time to cram down a syndicate of lenders.
Royal IHC relied on bank guarantees for its working capital, and we were able to successfully argue before the Dutch courts that the WHOA should allow for the terms of such undrawn commitments to be restructured and amended alongside the restructuring of outstanding drawn facilities.
However, the case was subsequently brought before the Dutch High Court, which ruled that the WHOA cannot be used to force a lender to continue financing an undrawn facility against its will.
While the decision has no impact on the restructuring of Royal IHC, it limits the ability of parties to use the WHOA to protect working capital going forward. This is not unusual in a global context, bringing as it does the Netherlands’ restructuring process in line with the U.S. Chapter 11 and Singaporean restructuring regimes, among others.
That said, the Dutch High Court’s ruling also overturned a decision of the lower courts which had previously determined that it was not possible to amend the ranking of security pursuant to a WHOA.
This is a helpful development in that it allows for the WHOA to enable new working capital to take precedence over existing facilities in a debtor’s capital structure (as is the case in Chapter 11, for example), potentially offsetting the fact that parties are now not able to adjust the terms of their undrawn commitments.
Germany’s StaRUG proves effective at handling variety of restructuring situations
Germany’s restructuring landscape similarly continues to develop, four years on from the enactment of the StaRUG regime (Unternehmensstabilisierungs- und -restrukturierungsgesetz).
In that time the StaRUG has proved effective at handling fully-fledged restructurings of a variety of German-domiciled businesses (including the transfer of shares to new investors) and has also been customized to good effect to deal with lighter-touch processes.
If the restructuring involves English law-governed debt owed or guaranteed by UK domiciled obligors, the recognition of the German StaRUG is challenged by the “rule in Gibbs” (a law which means the English courts will not recognize the compromise of an English law debt under a foreign insolvency or restructuring process where the creditor has not participated). As a result, the StaRUG might be used in parallel with a U.K. restructuring plan to handle such a complex cross-border restructuring.
The StaRUG has also been criticized over its lack of a facility to handle the termination of mutual agreements such as lease contracts.
We expect this to be tested in restructuring processes through 2025 and beyond, particularly in the bricks-and-mortar retail sector.
Lease agreements are one of the biggest costs for physical retailers, and at present, given the limitations of the StaRUG, a German retailer would need to go into a self-administered insolvency proceeding to deal with such contracts.
Combining available schemes will be key to finding suitable solutions to complex cases
In cases where the COMI of the company is located (or moved to) the Netherlands, the public Dutch WHOA (constituting technically an “insolvency proceeding” pursuant to Annex A of the European Insolvency Regulation) does offer the opportunity to use the special rights of termination provided for under German insolvency law with regard to leases in Germany. Going forward, we expect that combining the available scheme instruments will be key to find suitable solutions for the relevant case.
It will also be interesting to see how different capital providers respond to businesses in need of new money but that are already highly leveraged.
In recent years, Germany’s commercial banks have tended to take an amend and extend approach to distressed financings, particularly among debtors in Germany’s Mittelstand.
However, we expect more situations to arise where amend and extends will not protect the business in the longer term, and where the restructuring process will therefore need to create opportunities for new investors such as special situation funds, off-balance sheet financings or other alternative capital providers to step in, potentially alongside existing equity investors and/or (senior) lenders.
However, to arrange for the necessary financing, there are still questions to be resolved in relation to how shareholders can inject new capital without being subordinated, how investment funds offering new money can integrate with legacy financing providers, and under what conditions a new money package could take out an existing capital stack in its entirety. Could such a refinancing be used in combination with a StaRUG, or would it always have to be a consensual deal?
Litigation of novel issues continues in Spain
Several restructuring plans have been filed in Spain since the implementation of the EU directive. Here we continue to see litigation around novel issues, including in relation to how rival sponsor- and creditor-led plans are dealt with in the absence of regulations to address competing plans.
Following the decision of the Madrid courts in the Single Home case, the restructuring plan that is filed first is the one that is approved, provided that the required voting majorities are present.
However, we expect future litigation to clarify what happens when a later plan is filed that offers more value to stakeholders. This is a complex issue in Spain given the degree of flexibility offered by local law to define the perimeter of the debt affected by a restructuring plan.
Under Spanish law, if a debtor’s center of main interest (COMI) is in Spain then it can file a restructuring plan locally regardless of the governing law of the debt. Spanish law also provides that foreign entities within Spanish groups can be included in a restructuring plan filed in Spain where this is necessary for the success of the group restructuring.
This section of the law has been tested twice in the Spanish courts, including in the successful restructuring of gaming group Codere in 2024 (where the group was advised by A&O Shearman) which was executed via a Spanish restructuring plan and involved the first use of the “syndicate majority” exemption with a 50.1% majority. The plan covered a Luxembourg holding company and a Luxembourg share pledge enforcement, and use of the distress disposal mechanics in an English law intercreditor agreement to effect a debt-for-equity swap.
Looking ahead, we anticipate future litigation around whether a restructuring plan can be filed in Spain in situations where the restructuring of a foreign entity is needed to ensure the viability of a Spanish group, but where the COMI is outside Spain.
New Italian insolvency code offers prospect of more efficient resolutions
Italy’s, Business Crisis and Insolvency Code entered into force in July 2022 and was amended in September 2024 (you can read about the recent changes here).
Restructuring processes under the previous regime were typically slow to resolve and often ended in prolonged litigation and insolvency, with the revised rules designed to speed up the process and preserve business continuity.
The Code introduced (among other things) an out-of-court procedure (composizione negoziata) overseen by an independent expert that enables debtors to negotiate confidentially an agreement with their creditors and other stakeholders. This has become the key mechanism for resolving corporate crises at an early stage.
Boards also now have a duty to implement mechanisms to detect financial stress based on 12-month cashflows, and to report to auditors any challenges that emerge.
In the past, Italy’s commercial banks have been reticent to provide new money to businesses facing financial difficulties while founders have often been reluctant to consider fresh investment until it is too late. But there is hope that the protections offered under the nascent regime for investors exploring distressed M&A situations can attract new capital from international funds.
Indeed, we are already seeing U.S. and U.K. private capital providers – as well as newly formed domestic funds - exploring investment opportunities among distressed credits in the SME sector.
