Not only is the integrity and viability of Eurozone
threatened by the lack of a fiscal union and other pressures, but the European
automotive industry is also facing years of stagnation and weakness caused by
the economic downturn there. In October,
the European Automobile Manufacturers Association reported that, in September
2012, European motor vehicle sales fell for the twelfth month in a row,
affected by recession, spending cuts and high unemployment in the Eurozone. General Motors Corporation is negotiating
with Germany's labor unions for the closure of its Bochum plant in North
Rhine-Westphalia only a few years after cancelling its planned sale of this
subsidiary to a consortium led by Magna Corporation. In July, PSA Peugeot Citroen announced the
closure of its plant in Aulnay-sous-Bois near Paris and the elimination of
8,000 jobs. Phillipe Varin, Peugeot's CEO, was recently
quoted that European car manufacturers expect a sixth year of falling sales in
2013 and that this situation is not expected to improve for "years to come."
The immediate problem facing European automakers is that
of plant overcapacity, increasing overhead costs and creating labor
redundancies. According to a recent New
York Times article,"[h]uge overcapacity, . . . has spawned a crisis similar
to the one the U.S. industry barely survived just a few years ago. In fact, the downturn in Europe threatens the
remarkably rapid recoveries that Ford and General Motors were able to make
after Detroit's moment of truth in 2009.
Underused plants are ruinous for car companies which must continue to pay
upkeep costs and make payroll even as revenue plunges. By some estimates, the European industry as a
whole is operating at only about 60 percent to 65 percent of capacity. As a general rule, plants must operate at about
75 percent or 80 percent to be profitable, analysts say."
European carmakers are reacting to this structural
problem by beginning to shutter factories in Europe, especially in higher-cost
Western Europe. David Cole, the former
head of the Center for Automotive Research in Ann Arbor, Michigan, recently
observed that he anticipated major restructuring in European automotive
industry. "Everybody has decided that
this is the right time to make structural changes. When they see that a company could disappear
with all of its jobs, they may realize its better to lose 20 percent."
These current and future plan closures and elimination of
jobs, when coupled with falling motor vehicle sales in Europe, augur great
economic pain not only for laid-off autoworkers but also for Tier 1 and Tier 2
automotive suppliers and tooling fabricators doing business with European auto
manufacturers. Closing of factories may
have the ultimate effect of pushing these suppliers and fabricators into
insolvency proceedings in Europe, which will likely cause an adverse credit
reaction up the supply chain that can reach to North American shores.
If European firms slide into insolvency as an end result
of this inevitable right-sizing of plant capacities, it is important for
American creditors to realize that the insolvency laws of many European states,
especially laws of the major auto-producing countries, have radically changed
in the last ten years. This sea change
in the insolvency laws of European nations to foster business reorganizations
comes as welcome relief to creditors, especially those creditors who do not
wish to see a valued customer disappear.
Rather than having a bankruptcy administrator liquidate the assets of
troubled suppliers, these enterprises may now be saved, thereby reserving
valuable jobs in a battered continent and keeping alive critical members of the
supply chain. For example, the business
bankruptcy laws of Germany, France and Italy have recently been amended to
provide for Chapter 11 type reorganizations, which change represents a dramatic
break with the past. These recent statutory
changes are summarized below.
On March 1, 2012, a thorough revision of Germany's
insolvency laws was enacted by the Bundestag, known as Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen ("ESUG"). The ESUG incorporates into German insolvency
laws concepts similar to those employed in Chapter 11 of the United States
Bankruptcy Code and the French procedure
de sauvegarde. For example, the
German insolvency court handling proceedings involving a business debtor must
appoint a creditors committee when the bankruptcy petition if certain specific
financial and employment criteria are present.
This committee may propose a candidate for the position of preliminary
insolvency administrator. The insolvency
judge must appoint this candidate unless the court determines that he or she is
not qualified to act in that capacity.
The ESUG also encourages the administration of the debtor's business by
its existing management in ways similar to debtors in possession in Chapter 11
reorganization cases. If a debtor
requests self-administration, the court will grant that request provided that
no circumstances exist that could prejudice the rights of creditors. If the creditors committee unanimously
supports the request, then the court must provide for self-administration.
Other similarities of Chapter 11 are also present in this
new legislation. Like those two foreign
reorganization proceedings, the ESUG permits the imposition of an automatic
stay of creditor enforcement actions to enable debtors facing imminent
illiquidity or over-indebtedness to propose and negotiate restructuring
plans. Finally, debt-for-equity swaps
pursuant to a reorganization plan are now specifically permitted without the
risk of collateral attack after the plan is approved by the court.
In July, 2005, the French National Assembly amended the
insolvency laws to add a new reorganization procedure for financially troubled
business enterprises. This new
proceeding, entitled procedure de
sauvegarde, was inspired by Chapter 11 of the United States Bankruptcy Code
with the specific purpose of preventing the debtor "from becoming insolvent by
providing it with strong protection and giving it the necessary time to draw up
a recovery plan." The ultimate goal of sauvegarde proceedings is the negotiation of a reorganization plan
for the debtor's business to permit it to remain in business, which plan may
provide for a disposition of a portion of the debtor's business assets. A stay of creditor enforcement actions is
imposed at the inception of the proceedings to prohibit the company's
dismemberment during plan negotiations.
Two separate creditors committees will be formed in these
proceedings-one for banks and another for trade creditors-to negotiate the
terms of a reorganization plan which, if agreed upon by the committees, may
then be approved by the court. If a
restructuring plan cannot be so negotiated, the court may impose its own plan
on the debtor and its creditors under certain circumstances. In October, 2010, the French National
Assembly enacted legislation, effective as of March 1, 2011, establishing a
"fast-track" sauvegarde procedure in
financial restructurings involving pre-packaged reorganization plans-the sauvegarde financiere acceleree.
Prior to 2005, Italian commercial insolvency law provided
for the liquidation of business and the distribution of those liquidation
proceeds to creditors. In 2005, however,
the Italian legislature began enacting a series of measures:
". . . to achieve a more modern and flexible insolvency
law system based on private rather than judicial initiative (sometimes referred
to as 'deregulation' or 'privitization' of bankruptcy law), with creditors as
the real engine of the insolvency proceedings.
The reform, in particular, brought new life to 'agreed' insolvency
procedures as an alternative to bankruptcy.
Previously, bankruptcy proceedings had been heavily regulated, burdened
with strict legal requirements, and subject to the pervasive direction of the
courts-and thus were rarely attractive and seldom used in comparison with other
Between 2005 and 2010, the Italian legislature enacted
amendments to the Italian Bankruptcy Law to liberalize the process and to
encourage negotiated reorganization plans.
For example, Article 67 of the Italian Bankruptcy Law created the
"recovery plan" concept, which is an instrument imposing certain obligations on
a business debtor to restructure its debt.
The recovery plan's feasibility, however, must be certified by an independent,
third-party expert before it may be adopted.
Another amendment approved the use of prepackaged reorganization plans,
called "restructuring agreements" under Article 182-bis of the Italian
Bankruptcy Law. Another innovation was
the expanded scope and use of the concordato
preventivo, in which a debtor may
propose to its creditors a plan for the restructuring the troubled
business. Creditors are entitled to vote
to accept or reject the proposed concordato
and dissenting creditors may be "crammed down" under certain circumstances.
Most recently, on June 22, 2012, the Italian Council of
Ministers, adopted a Law Decree
containing proposed amendments to the Italian Bankruptcy Law that "are aimed at
facilitating the restructuring distressed entities similar to the key
principles underlying the U.S. Chapter 11." The changes advocated in this Law Decree,
which was enacted by the Italian Parliament on September 11, 2012, include (i)
providing for a stay of creditor enforcement actions in concordati preventivi and Article 182-bis restructuring agreements;
(ii) avoiding creditor judicial attachments of the debtor's realty obtained
within 90 days before a concordato is
published in the companies registry; (iii) increasing the scope and
availability of interim post-petition financing of debtors in concordati preventivi and Article
182-bis restructuring agreements; and (iv) providing for payment of
prebankruptcy debts owed to critical vendors under certain circumstances.
As reported in this article, years of economic pain
resulting from the restructuring of the European automotive industry have been
predicted by many experts. Job losses in
the automotive sector are expected to increase and the reduction in the number
of automobiles manufactured in Europe will negatively impact the bottom line of
auto suppliers selling to the European OEMs.
The recent reforms to European insolvency laws reported herein should
nevertheless soften the blow for these suppliers, thereby increasing the
chances of their economic survival during these dire times.
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European Car Sales "Fall for 12 Months in
(last viewed on October 16, 2012). See also Neil Winton, Currency Crisis, Economic Weakness Bear Down
on Europe's Car Industry, The Detroit News Online Version, http://www.detroitnews.com/print/article/201208/opinion03/208250318
(last viewed on August 28, 2012).
Jeff Bennet, GM Pushes to Close German
Factory, Wall Street Journal Online Edition, http://online.wsj.com/article/SB/0000872396390444017504577647640519391480.html
(last viewed on October 19, 2012).
Dietmar Hawranek and Isabell Hulsen, Peugeot
on the Brink: How Paris is Killing French Industry, Spiegel Online, http://www.spiegel.de/international/europe/french-industrial-policies-are-aiding-rapid-decline-of-peugeot-a-850348.html
(last viewed on October 19, 2012); Rachel Holman, Closing of Peugeot Factory an Art of 'War', Unions Say, France 24
International News Online Version, http://www.france24.com/en/print/5338255?print=now
(last viewed on October 19, 2012).
Greg Keller, Peugeot Citroen CEO: No
Recovery for Years, http://www.sfgate.com/news/article/peugeot-citroen-ceo-no-recovery-for-years-3898600.php
(last views on October 19, 2012).
Jack Ewing and Bill Vlasic, Europe's Auto
Industry Has Reached Day of Reckoning, New York Times Online Version, http://www.nytimes.com/2012/07/26/business/global/europes-auto-industry-has-reached-day-of-reckoning
(last viewed on October 19, 2012).
Laurence Frost, Europe's Carmakers Ready
Cuts to Emulate Detroit, Reuters Business & Financial News Online
(last viewed on October 19, 2012).
Frederic Cohen, Restructuring a French Company's Liabilities: How Can the Law Help?, http://www.alfainternational.com/files/tld_s12Publications/FileUpload92/187/Restructuring.
Global Insolvency, Legal News from France: Learning by doing, or Sauvegarde, the third
Weil Bankruptcy Blog, France Gives the
Thumbs-Up to a Pre-Pack Restructuring Procedure-Introducing the Sauvegarde
Francesco Squerzoni and
Tommaso Cefis, European Perspective: Italian Supreme Court Recognizes That
Judiciary Has Limited Power to Review Arrangements With Creditors, p. 1
(July/August 2011) (paper in possession of the author).
See generally, Paolo
Manganelli, The Evolution of the Italian
and U.S. Bankruptcy Systems: A
Comparative Analysis, 5 J.Bus. & Tech.L. 237 (2010).
Tobia Croff, et al., Further Aligning Italian Bankruptcy
Law to US Ch. 11, p. 1, http://www.law360.com/articles/362107/print?section=bankruptcy.
Id. at pp. 1-4.