Third Session Insolvency Case-Studies Chair Stefania Bariatti University

Third Session: Insolvency Case-Studies Chair: Stefania Bariatti (University of Milan)

Lessons from Africa The Story of Africa-Israel Investments David Hahn

Trade d Stock Lebaye v AFI Investments AFI Trade and Agencies 100% Danya Cebus 73% AFI Properties AFI Residences AFI Industries AFI Int’l Holdings 67. 85% 74. 95% 70. 91% 100% AFI Int’l Properties (2002) 100% AFI Europe 100% AFI Int’l Investments (1997) AFI Developments 71. 7% 100% AI Holdings (U. S. A. ) 100%

AFI Bonds • All 13 series were unsecured bonds • Indentures included: – Material adverse changes acceleration clauses – cross-default clauses – cross-acceleration clauses

AFI – 2009 Q 2 Financial Statement • Auditors refer to a note to the financial statement, that stated that – – Given the global financial crisis, its effect on the activity of the AFI group, and its total outstanding debt of approximately 21. 2 billion NIS, the management has devised a business plan that includes delay of payment of bank debt, rearranging its bonds debt, selling real estate and extracting dividends from its subsidiaries. – The company’s solvency and its continued operations are dependent on the implementation of this plan.

in millions Financial statement Liquidation 30/09/2009 Pessimist Liquidation Optimist Assets Israel AFID Public holdings total Private Total holdings Trustee's fees and expenses Tax (provision) Other debtors Cash Total Value for Distribution Liabilities Bond holders (adjusted) Banks and other financial debt Accounts Payable Guarantees Total Liabilities for Distribution Net worth Bondholders Recovery Percentage 3. 014 5. 246 8. 26 128 8. 388 0 0 189 356 8. 933 1. 267 1. 277 2. 544 538 3. 082 (t 509 t) 334 189 207 3. 303 2. 011 3. 031 5. 042 1. 007 6. 049 (t 955 t) (t 551 t) 189 207 4. 939 7. 459 428 339 0 8. 226 707 7. 495 670 239 1. 195 9. 563 (t 6. 260 t) 7. 495 570 239 800 9. 067 (t 4. 128 t) 34. 50% 54. 50%

AFI Investments Ltd. Projected Cash Flow Statement (before Arrangement) (in thousands NIS) end of 2009 551, 702 356, 246 157, 681 98, 588 1, 164, 218 733, 103 1, 043, 049 121, 169 2010 121, 169 515, 929 698, 827 1, 335, 924 929, 457 72, 000 372, 530 (o 280, 108) 1, 093, 879 242, 045 June 2011 242, 045 540, 949 185, 201 968, 196 923, 922 44, 273 Sources Cash and Short Term Investments Dividends from subsidiaries Sale of assets and operations Repayment of loans by subsidiaries Total Sources Uses Payment of Bonds (principal + interest) Current Expenses (including current interest payments) Additional investments in unified corporations (esp. USA) Recycling loans in USA Total Uses Projected Cash at the end of period Assumptions: This statement was made public by the company on 27/8/09. In light of the crisis, the "Dividends" and "Sales of assets for reasonable prices" must be discounted. Conclusion: Without an arrangement the company is expected to become insolvent during 2010.

Sep-Oct 2009 • A committee was elected to represent all bondholders, of all series; • Series A voted, in a separate meeting, to hold out and to not be represented with the other series. – Series I’s due date was Nov. 9 th, 2009. • Negotiations take place between AFI and the (12 series) bondholders committee.

Foundations of the Plan • The going-concern value of the AFI group is related to the controlling position of Mr. Lebayev. – Enjoys personal connections in Russia and other Eastern Europe countries, that enhance the business development there. • Realization of property as of the end of 2009 would generate low recovery for the creditors, given the economic downturn in those real estate markets. – Prior to 2009 Q 2, AFI realized assets and paid off approx. 3. 3 billion NIS.

Lebayev’s Position under the Plan • The Plan contemplated the ongoing managing of AFI by the management team of controlling shareholder, Mr. Lebayev. • Lebayev would invest 750 M NIS as new value in AFI. • Lebayev would be diluted by virtue of the AFI stock issued to the bondholders, but not beneath a 50% holding. – This was of concern to the banks who financed Lebayev and held his AFI stock as collateral. – The banks eventually consented.

Valuation for the Plan • AFI going-concern value for the purpose of the arrangement: 2 billion NIS (or 36. 1268 NIS per share). – AFI and the bondholders’ committee consented to this valuation; – The bondholders consented to Lebayev retaining the controlling position at AFI. • His personal contacts in Russia and Eastern Europe were considered a major component to the conglomerate’s value.

Series A Objection • Argued that their imminent due date sets them apart from the other series • To the extent AFI is currently solvent (cash-flow), it should pay Series A in full – If it later wishes to reach an arrangement with other series – OK. • Lebayev cannot retain control without paying the bonds in full.

November 2009 • AFI filed with the court for voting on a proposed arrangement 1 day before Series A due date. – Filed under s. 350 of the Companies Act. – Arrangement can be approved by a voting class if approved by a majority of 75% of votes (in value). • Requested a general bondholders meeting, comprised of holders of all 13 series, for the vote. • Note: the filing accelerated all the series and thus effectively rendered AFI insolvent.

The Original Proposed Plan • Equal payment to all bondholders, of all series, calculated on the basis of adjusted value (par value + interest) of each series, as of 30. 9. 09. • Payment package comprised of: – – – Cash Newly issued short-term bonds Newly issued long term bonds Newly issued stock of AFI Stock of subsidiaries • All series were offered identical packages, with identical breakdown of components.

Litigation – Round I • Series A cried foul – Argued that the filing, just 1 day prior to its due date, was in bad faith, in order to deny its payment. – Argued that the proposed arrangement, which offered all the series a total of 550 million NIS in cash, used unjustly the cash available for Series I in favor of other series • Series A demanded separate classification for voting. – Note: No cram-down provision in Israel’s law. • AFI and other series called for equal treatment and single classification.

December 2009 – Reaching a Deal • The court withheld its opinion and sent all parties to further negotiations. • Eventually, the adversary parties agreed to modify the proposed plan and appease Series A, as follows: – Overall package shall remain equal; but – Series I’s cash component will be inflated, in exchange for shrinking its bonds component.

in millions Financial statement Valuation for CPA's valuation 30/09/2009 arrangement (including fair valuation for assets and TSB transaction) Assets Israel AFID Public holdings total Private Total holdings Other debtors Cash Total Assets Liabilities Bond holders (adjusted) Banks and other financial debt Accounts Payable Tax reserves Total liabilities Net worth 3. 014 5. 246 8. 26 128 8. 388 189 356 8. 933 2. 707 4. 055 6. 762 128 6. 89 189 202 7. 281 2. 766 3. 908 6. 674 1. 634 8. 308 189 202 8. 511 7. 459 3. 681 428 339 0 8. 226 707 428 339 35 4. 483 2. 798 428 339 35 4. 483 4. 028

Litigation - Round II • There still remained a minority within Series A opposing the modified plan. • The court revealed its cards – – Ordered a single classification for all series; – Noting that absent the modification, the “substantive equality” between the series would have been violated and that it would reject the proposal; – The increase in Series I’s cash component secured “substantive equality” and justified the single classification. – Rejects the demand of Series I’s minority for separate classification, because it may impede the entire arrangement …

Total Before Total After

Thank you!

Reorganizing Czech Businesses: A Bankruptcy Law Reform under a Recession Stress -Test Tomáš Richter Clifford Chance LLP Prague / Charles University Prague

Overview • Reorganization under the Czech Insolvency Act • A glimpse of statistics on proceedings in general • Introduction of the dataset on reorganizations • Tentative findings from the dataset • Conclusions

Czech Reorganization • Act 182/2006, in force since 1 Jan 2008 • Available to businesses subject to a size test – “ 100 mil sales / 100 staff” • Ways of correcting outcomes of the size test – creditors’ decision-making • Conduct of the proceedings • Locus of power - DIP/trustee/ creditors/court • Timeline – from filing to confirmation of a plan, statutory deadlines and extensions

General overview of statistics Year Annual change in GDP New petitions for insolvency of businesses General (for liquidation / insolvency) For reorganization / composition Court decisions on the petitions 1 Liquidation orders Reorganization / composition orders 2009 - 4. 3 5743 39 2004 14 2008 + 3. 2 3603 14 868 6 2007 + 6. 0 4992 23 1104 11 2006 + 6. 8 4203 24 1238 7 All data comes from the Czech Ministry of Justice save for the GDP figures, which come from the Czech Statistical Office Estimate; all insolvency petitions MINUS petitions for consumer discharge Businesses PLUS consumers 1 Richter, T. , Insolvenční zákon v roce dva: první statistické údaje a pokus o jejich prozatímní interpretaci, Jurisprudence 6/2009

First 2 years of reorganization - dataset • Cut-off date: 30 June 2010 • 20 debtors (vs. 48 from 1991 to 2007) • 19 above the size test (S. 316(4)Ins. A) • 18 debtor petitions • 17 Czech, 3 Slovak • 9 x private co. , 8 x joint-stock co. , 1 ltd. partnership, 1 SE, 1 sole proprietor

First 2 years of reorganization - dataset • 14 x creditor decision on type of proceedings • 2 x moratorium (0 before proceedings) • 3 x restriction on DIP powers • 4 x conversions into liquidation (1 x following plan confirmation, 3 x before) • 1 x plan performed

Tentative findings INSOLVENCY PETITION INSOLVENCY ORDER REORGANIZATIO N ORDER PLAN SUBMISSION COURT PLAN CONFIRMATION PETITION FOR REORG. 5. 5 weeks 10. 6 weeks 22. 7 weeks 10. 7 weeks ( Me 3 weeks) (Me 11 weeks) (Me 24 weeks) (Me 8 weeks) 11 months (Me 11, 1 m)

Conclusions • Number of reorganizations relative to • Total number of proceedings • Total number of compositions under previous law • Market practice seems comptatible with statutory time-lines • Outlook • Market conditions • Legal conditions

Reorganizing Czech Businesses: A Bankruptcy Law Reform under a Recession Stress -Test www. cliffordchance. com © Clifford Chance LLP Sdružení Advokátů 2010 Clifford Chance, Jungmannova Plaza, Jungmannova 24, 110 00 Prague 1, Czech Republic PRG 724399

Fourth Session: Younger Scholars Forum Chair: Myriam Mailly (University of Kent) Emmanuelle Inacio (Université du Littoral Côte d’Opale)

Exercising Creditors' Rights in Light of the Changeable Applicable Law in Cross Border Insolvency Proceedings Signe Viimsalu

Structure of the Presentation: 1. Consequences of the Opening of Insolvency Proceedings 2. Creditors’ Choices to Make 3. Exercise of Creditors’ Rights 4. Conclusion

Changing Position of the Creditors: Day 1: Opening of main proceedings 3 months later: Opening of secondary proceedings Lex fori concursus universalis Lex fori concursus secundarii Consequences and choices A Consequences and choices B

Exceptions with regard to certain rights in respect of certain assets – Art 5, 6, 7 General Conflict of Law Rule (lex fori concursus) – Art 4 and Art 28 Exceptions with regard to certain legal relationships – Art 8, 9, 10, 11, 14, 15 Exception with regard to detrimental acts - Article 13 Exception with regard to certain rights concerning patents and trade marks Article 12 Uniform Substantive Rules in EIR – Publication and Registration (Art 21 -22), Honouring an Obligation to the Debtor (Art 24), Exercising of Creditors’ Rights (Art 32), Provision of Information for Creditors and Lodgement of their Claims (Art 39 -42)

Opening of II proceedings 3 months later: Main proceeding: 1. Claims have been defended Opening of secondary proceeding: 1. Submission of claims 2. Assets on sale upon approval of creditors’ commitee 2. Structure of assets, incl claims to be determined 3. Litigation (claims; debtor’s liability) pending 3. Powers of liquidator in litigation

Aspects to consider whether to participate in insolvency proceedings or not: 1. Information available and predictability of proceedings 2. Claims versus assets/estate 3. Powers of liquidators versus creditors 4. Different substantial and procedural rules for resolving disputes 5. Expenses 6. Debtor’s liability 7. Preferencial claims and distribution rules Possibilities to influence proceedings through: 1. creditors’ general meetings 2. creditors’ commitee meetings 3. petititions to liquidators, supervisory judge or other authorized bodies

Conclusion • If the legal consequences stipulated in the lex fori concursus universalis differ from legal consequences provided by the lex fori concursus secundarii, problems in administrating insolvency proceedings usually occur. • Creditors may not be in an equal position with regard to access and participation in the proceedings.

Conclusion continues. . . • To be a successful creditor in participation of cross border insolvency proceedings, one should be able to predict and influence the progress of the proceedings within the changeable applicable law. • The Regulation should prevent legal uncertainty, which can be translated into additional costs for creditors. It should support equal treatment of creditors’ rights and efficient, effective administration of insolvency proceedings.

Insolvency of Russian corporate groups Olga Lvova The Lomonosov Moscow State University

Legal framework • Corporate groups (so called “holdings”) are quite widespread forms of large scale business in Russia • The term “holding” is not used in the corporate and insolvency law

Legal framework • Only few attention is paid to the problems of holdings – some parts of joint -stock law, tax and accounting law, antimonopoly law to a certain extent cover the holding-type relationships • There is no difference between “holding (corporate group) insolvency” and “insolvency of the simple legal entity”

• The following scheme of companies’ bankruptcy has become widespread: major obligations of a single holding are “thrown down” to the one enterprise of the group which enters the bankruptcy procedure to be liquidated as a result • Such liquidations usually attract few attention or corresponds to a part of M&A processes

The main problems: • If all assets have been already stripped out from such firm the creditors will never get their money back • It is very difficult to prove the fact that the debtor the balance sheet of which contains only debts depends on the parent company with healthy balance • If it is even possible to find a real owner the creditors will hardly get something back because of the lack of appropriate legal provisions

• In Russian practice the bankruptcy procedure can be used for M&A of middle-sized companies which is not possible by usual purchase because of the antimonopoly legal provisions • “Affiliated financing” is one of its advantages of the corporate group but it decreases transparency substantially. Even companies’ directors can evaluate its real volume only approximately

New Law draft • The draft of the Federal Law “On financial rehabilitation and insolvency (bankruptcy)” is prepared by the Ministry of Economy in 2009 and introduces legal provisions for holdings • It was not accepted by the Government initially, has been amended some times to the date and still is not passed

1. The definition of “enterprise group”: some debtors (legal entities), one or several of which are under control of the member of this enterprise group and connected by the single management, production or technological processes 2. Consolidation of claims and actions in the court 3. All procedures can be enforced to the whole group 4. Creditors can request bankruptcy of all members of the group if its activity was conducted in an unfair way 5. Creditors may ask satisfaction of their claims by the parent company

Conclusions • In general, in spite of the recent suggestions oriented at modernization of Russian legislation several problems still require solution • Our practice of law enforcement needs significant amendments for providing an increase of transparency and making possible the detection of real holdings owners