Reconsidering Procedural Consolidation for Multinational Corporate Groups in the Context of the Recast European Insolvency Regulation

• Author: Daoning Zhang
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: http://doi.org/10.1002/iir.1286

Reconsidering Procedural Consolidation for

Multinational Corporate Groups in the

Context of the Recast European Insolvency

Regulation

Daoning Zhang, PhD*

School of Law, University of Manchester, Manchester, UK

Abstract

Procedural consolidation, as a solution to the rescue of insolvent multinational

corporate groups (‘MCGs’), is said to be able to preserve group value for

creditors. This article explores the desirability of procedural consolidation in

the EU in the light of theories of corporate rescue law, cross-border insol-

vency law, multinational enterprises and relevant EU cases with reference to

the European Insolvency Regulation. It argues that, based on current cross-

border insolvency rules in the EU, there is an inherent difficulty for proce-

dural consolidation in balancing the goal of preservation of group value and

the goal of certainty. The article also considers the new ‘group procedural co-

ordination proceedings’offered by the Recast European Insolvency Regulation

and argues that it may help to supplement the gap left by the procedural

consolidation in the EU. Copyright © 2017 INSOL International and John

Wiley & Sons, Ltd.

I. Introduction

The cross-border insolvency of multinational corporate groups (MCGs)

1

is a rela-

tively underdeveloped topic, and the issue touches on the nexus where private in-

ternational law, insolvency law and multinational enterprise theories meet. A

frequently mentioned example of a cross-border insolvency case involving MCGs

*E-mail: daoningzhang@gmail.com

1. MCGs refer to a group of companies that conduct

business in more than one member state. Each

member company may have its own creditors, assets;

each subsidiary may be subject to a different insolvency

jurisdiction.

Copyright © 2017 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 26: 332–347 (2017)

Published online 25 August 2017 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1286

is the insolvency of KPNQwest NV.

2

In that case, the main business of the group

lies in Telecom Industry, and it consists of many European subsidiaries. The value

of the MCG relies on the integration of its underground cables in different mem-

ber states. As at that time no cross-border insolvency solutions were available for

MCGs, the KPNQwest NV group fell into fragmented insolvency proceedings in

different member states, and the value of the whole business could not be pre-

served for creditors. This is a typical case that appeals for cross-border rescue so-

lutions for MCGs in the EU.

Before moving to the discussion of cross-border insolvency solutions for MCGs

in the EU, it is convenient to start with a basic question: What purposes does cor-

porate rescue law serve for an individual company? Theoretically, the main job of

corporate rescue law is to preserve the going concern value

3

for individual compa-

nies.

4

It is believed that the going concern value of a business is much larger than

the piecemeal value of that business in liquidation proceedings; therefore, releasing

going concern value is in the interests of all the creditors.

What is equally important is that corporate rescue law, by and large, strives to

release such going concern value by following noninsolvency law as a baseline. It

has long been recognized that alteration of noninsolvency law entitlements without

justification inside insolvency proceedings will provide stakeholders with incentives

to conduct strategic behaviours,

5

which lead to high cost of corporate rescue activ-

ities

6

; it will also give rise to a high cost of borrowing interest rate due to the uncer-

tainty.

7

Because low interest rates can help borrowers keep more profits and

engage in more investment, offering creditors predictable rules is an important

goal of corporate rescue law.

8

Never mind the fact that in the business world, most

companies are solvent, so benefits of rescuing insolvent companies by using uncer-

tain rules may outweigh the costs those rules are caused to solvent companies.

9

Therefore, besides preservation of going concern value, corporate rescue law gen-

erally needs to provide certainty to creditors.

2. Different functions of operations and assets of

KPNQwest group are located in different European

member states. Natasha Labovitz and Jessica Basil,

‘How Will New Chapter 15 Affect Multinational

Restructurings?’(11 July 2005) New York Law Journal,

2, available at: <http://www.gibsondunn.com/

fstore/documents/pubs/7-11-05_NYLJ_Labovitz-

Mulitnational_Restructurings.pdf>; Robert van Ga-

len, ‘The European Insolvency Regulation and Groups

of Companies’, paper delivered at the INSOL Europe

Annual Congress, Cork, Ireland, 2003, 16–18.

3. Going-concern value is the value of a company as an

ongoing entity. This value differs from the whole value

of a liquidated company’s assets because an ongoing

operation has the ability to continue to earn profit,

while a liquidated company does not: <http://www.

investopedia.com/terms/g/going_concern_value.

asp>.

4. The rationale behind corporate rescue procedures,

such as the CVA or administration procedures in UK

insolvency law, is to release the going concern value

of the potential business: Department of Trade and In-

dustry, A Review of Company Rescue and Business

Reconstruction Mechanisms (2000), 5.

5. Strategic behaviours exist as certain stakeholders

may be treated better or worse inside and outside

insolvency law proceedings.

6. Thomas Jackson, The Logic and Limits of Bankruptcy

Law (Harvard University Press, 1986), 21; Douglas

Baird, ‘Loss Distribution, Forum Shopping, and Bank-

ruptcy: A Reply to Warren’(1987) 54 University of Chi-

cago Law Review 815, 825.

7. See, general, Alan Schwartz, ‘A Normative Theory

of Business Bankruptcy’(2005) 91 Virginia Law Review

1199; Yaad Rotem, ‘Pursuing Preservation of Pre-

Bankruptcy Entitlements: Corporate Bankruptcy

Law’s Self-Executing Mechanisms’(2008) 5 Berkeley

Business Law Journal 79.

8. Schwartz (n 8) 1220.

9. Richard Butler and Scott Gilpatric, ‘A Re-examina-

tion of the Purposes and Goals of Bankruptcy’(1994) 2

American Bankruptcy Institute Law Review 269, 277.

Recast European Insolvency Regulation 333

Copyright © 2017 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 26: 332–347 (2017)

DOI: 10.1002/iir