CERIL Statement 2019-2 on Reversal of Value Extraction Schemes
Initiated and chaired by Prof Reinhard Bork, University of Hamburg, a CERIL working group dealt with value extraction schemes and their combating in national transactions avoidance laws of the EU Member States. The resulting Report Reversal on Value Extraction Schemes covers fourteen European jurisdictions.
Insolvencies are sometimes caused by shareholders sucking the last valuable assets from their company, only based of the sheer ownership of the shares in the company. It can frequently be observed that investors buy a company in financial distress via share deal and, while feigning a rescue attempt, strip it of its assets and eventually send it into insolvency proceedings. The company is then no longer salvageable, is subject to liquidation proceedings, and creditors will then receive only a small (if any) return of the proceeds.
Such value extraction schemes appear in various shapes: (i) shareholders (or other closely related persons) are granted a contract as directors and receive an unusually high salary, (ii) the company pays a “management fee” to the shareholders without them being official directors, (iii) shareholders grant a short term loan with unusually high interest rates which is paid back in the vicinity of the application for, or opening of, insolvency proceedings, (iv) shareholders receive charges over company property for securing such loans, (v) shareholders buy assets for an unusually low price or lease them back for excessive remuneration; etc.
After the opening of insolvency proceedings, Insolvency Practitioners (if necessary by approaching a court) will try to reverse such a value extraction scheme by recollecting unfair advantages from the shareholders, be it by means of transactions avoidance, be it by means of company or general civil law.
The analysis in the Report on Value Extraction Schemes supports the thesis that, in all jurisdictions covered by the survey, value extraction schemes can be challenged through transactions avoidance law, particularly through rules on transactions at an undervalue and on intentionally fraudulent transactions, providing for aggravation to the disadvantage of closely connected parties by extension of suspect periods or by rebuttable presumptions for certain prerequisites such as mental elements or detriment to the general body of creditors. Additional remedies can be found in company law and/or certain rules of general civil law (including tort law), particularly in the rules on directors’ liability. Interestingly, nearly all national reporters feel that their national laws provide for sufficient protection against value extraction schemes already, while the decisive problem can be seen in acquiring the necessary information about the relevant facts rather than in pursuing the claims resulting from these facts.
The CERIL Statement 2019-2 can be downloaded here.
The CERIL Report 2019-2 can be read downloaded here.