Conflicts of interest, intra‐group financing and procedural coordination of group insolvencies

• DOI: http://doi.org/10.1002/iir.1370
• Author: Ilya Kokorin
• Published date: 01 May 2020
• Date: 01 May 2020

RESEARCH ARTICLE

Conflicts of interest, intra-group financing and

procedural coordination of group insolvencies

Ilya Kokorin

Department of Financial Law, Leiden University, Leiden

Correspondence

Ilya Kokorin, Department of Financial

Law, Leiden University, Leiden, The

Netherlands.

Email: i.kokorin@law.leidenuniv.nl

Abstract

Modern insolvency law instruments recognise the spec-

ificity of enterprise group insolvencies, premised on the

existence of close operational and financial links

between group members. It is widely accepted that

maximisation of insolvency estate value and procedural

efficiency depend on coordination of insolvency pro-

ceedings opened with respect to group entities. Such

coordination is prescribed in the European Insolvency

Regulation (recast), the United Nations Commission on

International Trade Law (UNCITRAL) Model Law on

Enterprise Group Insolvency and the recently reformed

German insolvency law. Yet in insolvency, group mem-

bers retain their own insolvency estates and pools of

creditors. This is based on the traditional company law

principle of entity shielding. Active communication

and cooperation between insolvency practitioners and

courts do not sit well with the separate (atomistic)

nature of insolvency proceedings, as well as different

and oftentimes conflicting interests of creditors in such

proceedings. As a result, communication and coopera-

tion may be restricted in a situation of conflicts of inter-

est. This article explores how in the context of group

distress the risks arising from conflicts of interest can

be controlled and mitigated, while ensuring efficient

Received: 30 October 2019 Revised: 31 March 2020

DOI: 10.1002/iir.1370

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2020 INSOL International and John Wiley & Sons Ltd

32 Int Insolv Rev. 2020;29:32–60.wileyonlinelibrary.com/journal/iir

cross-border cooperation and communication to the

maximum extent possible. It analyses three cutting-

edge coordination mechanisms, namely (a) cross-

border insolvency agreements or protocols, (b) special

(group coordination and planning) proceedings and

(c) the appointment of a single insolvency practitioner.

It concludes that both the likelihood and significance of

conflicts of interest correlate with the degree of proce-

dural coordination. Therefore, conflict mitigation tools

and strategies need to be tailor-made and targeted at a

specific level and coordination mechanism.

1|INTRODUCTION

No man can serve two masters: for either he.

will hate the one, and love the other; or else.

he will hold to the one, and despise the other.

[Matthew 6:24].

This biblical warning remains topical today. It relates to a situation where a person acts for

the benefit of two (or more) parties in a situation where these parties have different, even con-

trasting interests. This article addresses this situation and discusses the issue of conflicts of

interest, but does so in the context that has not yet received much attention, namely procedural

coordination of insolvency and restructuring proceedings opened with respect to members of a

multinational enterprise group (MEG).

Whenever several members of a group of companies become financially distressed and enter

insolvency or restructuring proceedings, conflicting situations between them (i.e., between

insolvency estates and pools of creditors) become particularly pronounced.

1

Different groups of

creditors, debtors and even national (financial, regulatory and tax) authorities may “compete”

with each other in achieving the most beneficial position. The high intensity of conflicts is

manifested in intra-group financial relations. Execution of intra-group transactions (e.g., loan

repayment, enforcement of a guarantee or collateral), avoidance of related-party transactions

(e.g., challenge of a guarantee or collateral), as well as rescue financing extended by one group

member to another are inherently conflict-driven.

In order to avoid such conflicts or even their appearance, whether actual or potential, purely

atomistic (entity-by-entity) treatment of group entities can be embraced. As a result, contractual

bonds and channels for communication and cooperation between enterprise group members

may be interrupted. This solution, although based on the longstanding doctrine of corporate

separateness, fails to take into account the intertwined economic and information links within

the group.

2

Most importantly, it does not contribute to the accomplishment of insolvency law

goals. In particular, maximisation of the insolvency estate value and procedural efficiency

depend on coordination of insolvency proceedings opened with respect to group entities.

KOKORIN 33