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The French insolvency regime is set out in the "Commercial Code." A substantial reform of the bankruptcy sections of the Code, enacted on July 26, 2005, came into force on Jan. 1, 2006.

The new law's main objective is to rescue distressed businesses as early as possible by promoting negotiated settlements with creditors and offering greater procedural flexibility to the debtor.

The law provides for several options depending on the likelihood of a viable reorganization.

In addition to purely out-of-court restructurings, debtors can apply for court-controlled "conciliation proceedings," which do not entail a moratorium or stay, and may remain confidential.

A debtor that is not insolvent but is experiencing difficulties likely to lead to insolvency can apply for "safeguard proceedings," which entail a stay on collection proceedings and payments. In safeguard proceedings, a "continuation" plan intended to ensure that the business remains viable is agreed with two creditors' committees (one representing lending banks and the other large trade creditors, bondholders being consulted separately), or imposed by the court if no agreement can be reached.

If the debtor is insolvent and has not applied for conciliation within 45 days, judicial rehabilitation (redressement judiciaire) or liquidation proceedings must be started at the initiative of the debtor, its creditors, or the court.

Redressement judiciaire triggers an automatic stay and the adoption of a rescheduling plan in the same way as the safeguard proceedings. A disposal plan may also be ordered. If the business is unlikely to be successfully continued, its assets are liquidated for the repayment of creditors.

The automatic stay in safeguard and redressement proceedings covers the initial "observation" phase (which can last for six months and up to 18 months in extreme cases) and remains in place throughout the duration of the plan. A continuation plan can last up to 10 years, although debts may be rescheduled beyond that. The law provides that, after the second year, the plan must provide for the repayment of at least 5% of liabilities each year.

Security can be granted over most assets, including real property, equipment, rentals, receivables, and bank accounts, but the grant often involves procedural complications and can be costly. There is no concept of a general floating charge.

Enforcement generally involves the sale of the asset by public auction. Furthermore, in insolvency, enforcement is prohibited during the stay period and throughout the duration of the plan. When permitted, enforcement takes place under the control of the courts, which makes security realization a lengthy and uncertain process.

Also, significant preferential creditor claims (salaries, court fees, claims arising from the continuation of the activity after the opening of proceedings, and tax, for example) may rank ahead of secured claims, depending on the precise security and the stage of the insolvency process. On the positive side, in liquidation, all creditors with pledges over movable assets can ask the courts to appropriate the collateral in satisfaction of the secured claim, thereby avoiding competition with other creditors.

Secured creditors with a retention right (such as a pledge over stocks or a securities account) may refuse to surrender the assets before liquidation until their claim is paid in full.

The French insolvency regime recognizes, only in limited circumstances, the doctrine of substantive consolidation, whereby the assets and liabilities of separate legal entities may be consolidated by a court. This may occur if it is demonstrated that there was a commingling of assets between parent and subsidiary (confusion des patrimoines) or that the subsidiary was a sham company.

Third-party guarantees, either in the form of a direct payment undertaking or the provision of collateral, are generally available in France. Validity is subject to strict conditions, however, as upstream and cross-stream guarantees may be viewed as a misuse of corporate assets. Guarantees are only permitted in the context of a genuine group and must be compatible with the financial capabilities of and corporate benefit to the companies involved.

Owing to the length of insolvency proceedings and the pre-eminent role of the courts and court-appointed officials, secured creditors have little control over the timing or method of asset disposals. The court can deprive secured creditors of their security, although their rights are transferred to the portion of the sale proceeds that corresponds to the secured debt.

The French courts' singular control over the insolvency process and the absence of meaningful creditor input favors debtors and is designed to preserve employment. As a result, Standard & Poor's generally considers that the French insolvency system, relative to other jurisdictions, makes it difficult for creditors to achieve predictable or timely recoveries of principal.

French insolvency law allows for a preference period, known as the "suspect period," which can last up to 18 months before an insolvency order and can give rise to legal challenges if creditors are seen to be enhancing their position at the expense of other parties. In particular, collateral granted to secure pre-existing debts is void.

To encourage negotiated settlements, however, the 2005 bankruptcy reform now provides that a court cannot look back beyond the date of a conciliation agreement for preference purposes. The new law also provides that loans extended as part of a negotiated conciliation procedure will enjoy priority of payment over other claims. In addition, lenders of "new money" in the conciliation are protected from tortious liability for excessive financial support (subject to certain exceptions in case of fraud or the taking of excessive security). It remains to be seen if these new measures will substantially increase the number of successful pre-insolvency workouts.

German corporate insolvencies are governed by the "Insolvency Code" (Insolvenzordnung). The Insolvenzordnung replaced the previous code (Konkursordnung) to provide more options for rehabilitating, rather than liquidating, the debtor. A creditors' meeting decides whether to liquidate or reorganize.

Reorganization is carried out by the Insolvenzverwalter or the debtor under either the general rules of the Insolvenzordnung or under an insolvency plan designed to reduce or otherwise reorganize the liabilities--thereby improving the business and financial prospects of the debtor. The Insolvenzplan must be approved by a simple majority of each class of secured and unsecured creditors. Therefore, a secured creditor (alone or with allied creditors) with at least one-half of the secured debt can effectively veto the adoption of the Insolvenzplan. A minority secured creditor may also block the plan if it can prove that it is prejudicial to its interests.

Insolvency proceedings must be instigated by the debtor or may be involuntarily initiated by any creditor if the company is overindebted (Überschuldung) or unable to pay its debts (Zahlungsunfähigkeit). Proceedings may also be instigated if the debtor is imminently unable to pay its debts (drohende Zahlungsunfähigkeit). While the court determines whether grounds for insolvency proceedings exist, it may also take certain interim steps to protect the debtor's estate, including appointing a preliminary Insolvenzverwalter or ordering a stay on payments and enforcement of security. Once the court determines that valid grounds exist, it will appoint a permanent Insolvenzverwalter, whom creditors may vote to replace at the first creditors' meeting. Following the appointment of the Insolvenzverwalter, a decision is taken to liquidate or reorganize the debtor.

Once proceedings have begun, the power to dispose of the debtor's assets vests in the Insolvenzverwalter. The Insolvenzverwalter also has the power to repudiate unfavorable contracts, which have not yet been fully performed at the time proceedings begin. The Insolvenzverwalter may also demand repayment of monies made by the debtor within the preference periods, which may range from one month to ten years in the case of fraud.

There is no limitation on the type or class of assets over which security may be granted. German law does not, however, recognize the concept of a floating charge or "blanket security" as in the U.K. (see "U.K." below). Lenders are also prohibited from taking "excessive" security and benefiting from excessive overcollateralization. If the initial pledge of security grants excessive overcollateralization to a secured lender, the pledge can be declared void. To the extent that excessive overcollateralization may develop over time (for example, due to capital repayments), the borrower can require creditors to release part of their security to a more reasonable threshold. Similarly, to the extent that the value of security declines over time, the borrower may be contractually required to provide additional security. Additional security granted within the prescribed preference periods may be subject to clawback risk, however.

The Insolvenzverwalter, rather than the secured creditor, will realize security over most types of assets, usually several months after proceedings have commenced. For example, goods that are subject to a security title transfer may only be realized by the Insolvenzverwalter. Secured creditors with first-priority security over real estate or bank accounts may enforce security themselves, although they may be delayed in doing so under certain circumstances, particularly in the case of security over real estate when enforcement can be delayed until the creditors' meeting.

To the extent that the Insolvenzverwalter is required to enforce security, the proceeds of that enforcement will be significantly eroded by the Insolvenzverwalter's entitlement to deduct fees of about 9% from the realization proceeds. The ultimate amount of these fees may be higher or lower than 9%, depending on the actual costs of enforcement.

Like other European countries, Germany imposes limitations on financial support by operating subsidiaries and sister companies entering into guarantees or pledging security. Stock companies (Aktiengesellschaft or AG) are prohibited from providing financial assistance to back the acquisition of shares in the company by a third party. No specific financial assistance rules apply for limited liability companies (Gesellschaft mit beschränkter Haftung or GmbH), but German law prohibits the making of payments and the provision of guarantees or collateral security if, as a result of the transaction, the company's net assets at book value no longer cover its stated capital. A director of a GmbH may be personally liable for violating this rule.

German insolvency law does not contemplate the substantive consolidation of assets and liabilities of an insolvent debtor with those of its parent or another affiliate. Under general principles of German corporate law, however, a parent can incur liability for the debts of its subsidiary under "piercing the corporate veil" principles (in unusual circumstances, a subsidiary can also incur liability for the debts of its parent). In this respect, German case law is substantially similar to other jurisdictions. A court might consolidate the assets of separate legal entities if there is a commingling of assets, for example.

A creditors' meeting will decide whether to liquidate or reorganize the debtor. Secured creditors vote as a separate class on the adoption of an Insolvenzplan.

In many cases, the secured creditor relies on the Insolvenzverwalter to enforce security. Creditors may have to wait several months (or sometimes longer) prior to security being enforced, until the creditors' meeting decides to liquidate or reorganize.

The Italian insolvency system consists of the following main proceedings:

Liquidation can be complex and may last for several years. The court appoints a trustee and a controlling judge to supervize the procedure. Enforcement proceedings by secured creditors cannot be commenced or continued from the date that bankruptcy is declared. However, the secured lender of certain bank mortgage loans may take action and enforce its security during the insolvency process if: (i) the financing is for a period of more than 18 months; (ii) the maximum loan-to-value ratio does not exceed 80%; and (iii) the security takes the form of first-ranking mortgages over real estate.

The prebankruptcy composition plan is a court-supervized process, which may be initiated only by the distressed company. The plan must either be approved by the majority creditors of each class, or, alternatively, by the court exercising a "cram down"--under which it can compel acceptance of the plan, notwithstanding the disagreement of minority classes.

The plan may include:

• (i) Debt rescheduling;
• (ii) Payment of claims in any form, including the transfer of the debtor's assets to a third party or to the creditors, and the converting of creditors to stakeholders;
• (iii) The assignment of the debtor's assets to a third party ("assuntore") that takes responsibility for the performance of the obligations of the debtor under the prebankruptcy composition plan; and
• (iv) The creation of different classes of creditors.

From the date when the petition is filed until approval of the plan, secured creditors cannot commence or continue enforcement proceedings. Any new security granted with respect to new financing must be approved by the supervising judge in order to be effective against existing creditors. Payment priorities are set out in the approved composition plan.

In the bankruptcy composition, as in the prebankruptcy composition, secured creditors are generally entitled to receive full principal. The relevant composition plans might provide for different treatment, however. In composition plans where the secured creditors do not receive full principal, they are requested to vote on the composition proposal as members of a specific class. For the plans to be binding and effective, they must be approved by the majority creditors of each class or, alternatively, by the court exercising a cram down.

Under both the prebankruptcy and bankruptcy composition procedures, secured creditors that are paid in full have approval voting rights only to the extent that they agree to waive their security in whole or in part. This waiver is effective only for the purposes of the relevant composition procedure.

The Marzano procedure (i) is available for large insolvent businesses with, on a group basis, 500 employees for at least one year and obligations of not less than €300 million; (ii) may be extended to other insolvent companies of the same group; and (iii) may allow composition. Only the debtor may file for protection under this procedure.

Generally, security can be taken over most business assets by means of specific asset or asset class security. It is difficult to take security over future claims and bank accounts where the debtor maintains control over the account. Italy does not recognize the concept of the floating charge or "blanket security," nor does it allow for the appointment of an administrative receiver. In addition, Italian insolvency law does not recognize the doctrine of substantive consolidation, whereby the assets and liabilities of separate legal entities may be consolidated by a court.

Upstream and cross-stream guarantees are subject to the usual corporate benefit tests. Guarantees must satisfy the economic interests of the guarantor. Market practice generally limits the amount of the guarantee to (i) the part of the guaranteed loan that the guarantor has received; or (ii) the net assets of the guarantor (if the guarantor has received some other corporate benefit such as fees for granting the guarantee). In addition, financial assistance rules prohibit Italian companies from granting security or giving guarantees to third parties for the purpose of buying shares. This necessitates careful structuring of Italian LBO transactions to ensure financial assistance laws are not violated.

Although security can be clawed back if granted to a lender with knowledge of the debtor's insolvency, recent reforms have reduced the preference period to a maximum of one year prior to the date of the bankruptcy declaration. Claw-back may also apply to payments and other transactions during the preference period.

A court-appointed trustee generally controls the realization of security. The sale of assets is ordinarily carried out through a court-supervized auction. Statutory priorities require proceeds to cover proportionally all insolvency procedure costs (including, if applicable, costs relating to the continuation of trading) while (i) the proceeds of unsecured movable assets are available to meet general liens (including employees salaries and tax debts); and (ii) the proceeds on the realization of assets secured by pledge or mortgage are applied to satisfy the relevant secured creditors, subject only to special prior liens on these assets (such as overdue taxes). The time and expense of enforcing security in Italy will vary with the type of asset (movable or immovable) and the initiatives of the insolvency trustee.

Dutch insolvency law provides for two outcomes (2): reorganization and liquidation. Reorganization ("suspension of payments") allows for the continuation of viable businesses in distress. Liquidation ("bankruptcy") allows for the equitable liquidation and distribution of the debtor's assets among its creditors. Despite efforts purporting to increase the effectiveness of reorganization, this proceeding has not been a satisfactory means of rehabilitating distressed businesses. In most cases, it is merely the first step toward liquidation.

At the outset of both reorganization and liquidation proceedings, the court imposes a stay on the rights of creditors to proceed against the debtor's assets for up to four months. The stay gives the insolvency administrator time to assess the financial position of the debtor.

In reorganization, the debtor operates under the supervision and control of an insolvency administrator. The debtor does not have to pay unsecured creditors for up to 18 months (this 18-month period can be extended indefinitely), and attempts to reorganize its affairs by negotiating with its creditors. Unsecured and nonpreferential creditors may not take action against the debtor's assets. Following the expiry of the four-month stay, however, secured creditors may realize security.

In liquidation, a debtor that has ceased to pay its debts (regardless of whether it is actually unable to pay its debts) can be declared bankrupt voluntarily, involuntarily (at the request of one or more of its creditors), or, if public interest requires, at the request of the public prosecutor. Bankruptcy has the effect of imposing a general attachment on nearly all the debtor's assets for the benefit of all creditors. The debtor immediately loses the right to manage and dispose of its assets. A court-supervized liquidator is appointed on behalf of unsecured creditors. Although U.K.-style receivership is not recognized in The Netherlands, secured creditors may directly realize their security after the expiry of the four-month stay.

In principle, security can be taken over all types of corporate assets. Provided that the security has been validly created (which may require registration), it will be enforceable before and after the debtor's insolvency. Pledges and mortgages are the only security instruments that have traditionally been recognized by Dutch law. It should be noted, however, that claims coming into existence after the debtor has been declared bankrupt or been granted a suspension of payments would not be subject to the pledge of receivables, pledges over accounts, and pledges over rental installments. In the case of rental payments, the mortgage security over the real property (if any) will provide an additional asset against which to enforce the security. With the recent enactment of the European Collateral Directive into Dutch law, it is now possible to transfer securities or cash by way of security. Dutch law does not recognize the concept of a floating charge or "blanket security."

Challenges to the grant of security may be based on grounds of avoidable preference. Preferences may arise in transactions prejudicial to the creditors when the effect of the transaction was known to the relevant parties at the time. A secured party may exceptionally be liable toward other creditors by keeping up the appearance of creditworthiness to the detriment of other creditors and by intending to acquire security interests over virtually all of the debtor's assets.

Generally, secured creditors may enforce their security rights and realize the underlying assets by private sale, public auction, or by requesting court permission to appropriate an asset. The steps a creditor must take to control foreclosure depend on whether the security is first-ranking with physical possession or whether the security interest is nonpossessory and undisclosed. Enforcement may also depend on the terms of the security document.

If the first-ranking secured party fails to take foreclosure action or effect a private sale within a reasonable period, the liquidator may sell the collateral. Although the claims of the secured party would then be subordinated to certain administrative costs, no other fees, taxes, or other duties are payable on foreclosure.

In principle, Dutch law gives creditors equal pro rata rights to the proceeds of the debtor's assets. The law prescribes, however, that certain creditors must be paid before others. Secured creditors are, in principle, paid in priority to all other creditors (except for any administrative costs borne by a liquidator who sells an asset on behalf of a secured creditor). Certain tax and social security liabilities may take precedence over certain secured party claims. To the extent that the sale proceeds of pledged security are insufficient to pay the secured claim in full, any shortfall will be treated as an unsecured claim and paid out of other available assets from the debtor's estate. Intercreditor and subordination arrangements are generally enforceable under Dutch law.

The Dutch insolvency regime does not recognize the doctrine of substantive consolidation. In certain cases, however, lower courts have consolidated separate legal entities within a group of companies. Consolidation arose when the group companies were jointly and severally liable for each other's debts and it was practically impossible to establish which assets belonged to which individual group company.

Dutch law does not limit the size of guarantees or the amount of security that may be granted by reference to any particular monetary amount or percentage of assets over which security may be granted. Guarantees may be made downstream (parent to subsidiary), upstream (subsidiary to parent), or cross-stream (between sister companies). Corporate benefit may need to be established if a company is granting a guarantee expressly (and this is not covered by the company's objects clause in its articles of association). This may be difficult to demonstrate in the case of an upstream or a cross-stream guarantee. In addition, financial assistance and voidable preference rules have to be taken into account as the bases for potential legal challenges to the guarantee.

Generally, a privately-held Dutch Besloten Vennootschap (B.V.) may not provide security or grant guarantees to enable third parties to:

• Acquire or subscribe to shares in its own capital;
• Acquire or subscribe to shares in a direct or indirect parent company; or (according to some)
• Refinance any indebtedness incurred as a result of acquiring or subscribing to shares as described above.

A slightly different prohibition applies to publicly-traded Dutch Naamloze Vennootschap (N.V.) companies.

Although all creditors have equal pro rata rights to the proceeds of the assets of the debtor, in principle secured creditors have a right to be paid in priority to unsecured creditors out of the proceeds of enforcement. Unsecured creditors do not have direct recourse to the assets of a debtor during bankruptcy, while secured creditors may enforce their security subject to the four-month cooling-off period.

Insolvency proceedings may result in the reorganization of debts by means of a composition. A debtor may propose a composition and, after approval by the majority of creditors, request court approval. The composition only affects unsecured nonpreferential creditors. In practice, "informal compositions" also take place, which could involve all creditors. As secured creditors, banks often play an important role in informal compositions. In exceptional circumstances, Dutch courts may compel objecting creditors to accept an informal composition, particularly if it can be established that they would not obtain a more favorable outcome through formal proceedings and there are no grounds for voting against the informal composition. This compulsion is analogous to the "cram-down" procedure available in other jurisdictions.

In the event of a postpetition financing, lenders providing new money receive a priority claim payable prior to all insolvency claims. Postpetition interest can be claimed as a secured claim to the extent that proceeds from the sale of secured assets are available.

Widespread reforms to the Spanish insolvency regime became effective in September 2004. The changes created a single insolvency procedure to replace the various procedures previously available. The regime now places greater weight on reorganization or administration rather than liquidation. Liquidation is still, of course, available.

Insolvency proceedings are now held in specialist commercial courts where the judge is given wide powers and where secured creditors have limited powers.

Insolvency proceedings can be initiated either voluntarily by the debtor or involuntarily by a creditor on the grounds of actual or imminent insolvency. The debtor must file if it cannot meet its debts. As a general rule, the debtor continues running the estate during a voluntary insolvency under the supervision of the insolvency administrators. Proceedings can also be involuntarily initiated after certain events affecting the net worth of the debtor or following a general suspension of payments. In the event of an involuntary filing, management of the estate passes to the insolvency administrators.

The recent regulation has facilitated the process of taking security in Spain. Once notarization and registration, if applicable, have been effected, secured creditors may enforce their security prebankruptcy without court involvement.

Once a debtor has been filed into bankruptcy, however, a stay on enforcement proceedings over assets devoted to the company's activity applies to all creditors. The stay will last a maximum of one year, but may be lifted on the earlier of a liquidation or creditor composition (convenio). In some circumstances, the insolvency administrators may decide to pay claims of secured creditors out of the insolvency estate during the stay and without enforcing the relevant security, where--for example--the insolvency administrators determine that it is in the best interests of all concerned for the debtor to retain assets necessary for its continued operations.

Following the lifting of the stay, enforcement of security by court-appointed insolvency administrators can begin. Collateral security is generally sold at public auction. The court may also order a private sale, provided that the purchaser pays a cash price higher than the appraised value of the asset and the administrators publicize the intended sale and purchase price to allow for higher bids.

Security granted during the preference period (two years before the filing) could be rescinded if part of a "prejudicial transaction"--one that has a negative economic impact on the insolvent's estate. Negative economic impact is presumed (without the possibility of presenting contrary evidence) in the case of donations and the extinguishment or advance payments of obligations becoming due after the filing. Negative impact is also presumed (although may be rebutted by contrary evidence) in the case of onerous transactions entered into with persons having a special relationship with the debtor and if the security is granted in order to secure pre-existing obligations. In all other circumstances, the party seeking to rescind the transaction must prove the negative impact.

It is premature to assess accurately the length of the insolvency process or the timing of enforcement under the new regime. Enforcement will depend on the court, the location of the assets, and the type of assets to be sold. Although there could be a delay in the enforcement of security once the moratorium is lifted, most insolvency experts anticipate that realization would most likely be achieved within a reasonable timeframe, which--for Standard & Poor's--would be within three years of default.

In common with insolvency regimes in most European countries, secured creditors must overcome Spain's "financial assistance" rules. These rules prohibit a company from providing security or guarantees in support of the acquisition of its shares or those of its holding companies. Limited liability companies (sociedades de responsabilidad limitada) are also prohibited from granting financial assistance to acquire shares of any company within their group. Although there are no procedures that allow companies to overcome these prohibitions such as the "whitewash" procedure in the U.K., there are commonly accepted ways to mitigate violating these rules when structuring leveraged finance transactions in Spain.

Although the doctrine of substantive consolidation, whereby the assets of a debtor could be brought into its parent's bankruptcy proceedings, is not recognized under Spanish law, Spanish jurisprudence has recognized the concept of "piercing the corporate veil" (teoria del levantamiento del velo), by which the shareholders of the debtor may become liable for the debtor's action under certain circumstances such as a commingling of assets.

As an alternative to liquidation, the insolvent debtor, as well as a creditor or group of creditors, can propose the reorganization of the business through a composition with creditors (convenio). The composition, which may provide for nonpayment (quita) of 50% at most and defer payment (espera) for no longer than five years, must be approved by a majority of ordinary creditors. Subordinated and postpetition creditors have no vote. If secured creditors vote, they will be bound by the outcome. Their right to enforce security will be pre-empted by the terms of the convenio. If approved by the required majority of creditors and by the court, the convenio binds all secured voting creditors as well as unsecured and postpetition creditors. The insolvency court will order the liquidation of the debtor if i) no convenio has been proposed within a prescribed period; ii) the creditors do not accept any proposals of the convenio; iii) a court resolution declares the convenio null and void; or (iv) the convenio is not complied with.

Insolvency rules are contained in the Insolvency Act 1986 and subordinate legislation, as amended by the Enterprise Act 2002 and the Insolvency Act 2000.

Six principal insolvency procedures exist in the U.K. These are (i) administration; (ii) receivership; (iii) administrative receivership; (iv) liquidation or winding-up (which can be further subdivided into creditors' voluntary winding-up, members' voluntary winding-up, and compulsory liquidation by the court); (v) company voluntary arrangements (CVAs); and (vi) small companies' moratoria.

Administration replaces the existing management and has the effect of imposing a stay on the enforcement of security or any other legal proceeding against the debtor without the consent of the court or the administrator. The administrator may be appointed by order of the court or by means of the "out-of-court" route introduced by the Enterprise Act. The administrator acts on behalf of all creditors and its primary role is to rescue the debtor as a going concern. Failing this, the administrator must seek the best result for all creditors, without winding up the debtor, or, finally, it must liquidate the assets. The administrator has an extendable time limit of 12 months in which to do this, but must make proposals to creditors within eight weeks of appointment.

In receivership, a receiver can be appointed by a creditor with a charge over an asset to take control of the asset and realize its value without involving the courts. In administrative receivership, the administrative receiver, who may be appointed only in certain limited circumstances (and who may be able to block the appointment of an administrator), takes control of substantially all of the debtor's assets and may continue to operate the debtor as a going concern or seek to liquidate the assets. In both cases, the receiver's duty of care is primarily to the creditor that appointed it.

A liquidator owes a duty of care to all creditors, but is concerned with realizing and distributing unsecured assets to unsecured creditors.

A CVA is a procedure for a compromise of creditors' claims used where there is a strong likelihood of the business continuing as a going concern. It allows directors to remain in control, but requires the support of secured creditors.

Lastly, directors of small companies (for the purposes of the Insolvency Act 2000) may seek a 28-day to three-month moratorium on enforcement of security and legal proceedings against the debtor if they intend to propose a voluntary arrangement for approval by shareholders and creditors. This is subject to certain exceptions, including cases where the debtor has incurred a debt of at least £10 million and is a party to a capital market arrangement.

Security may be granted over all types of corporate assets and may be enforced both outside and within insolvency proceedings. Provided that security has been registered (where required) with the Registrar of Companies and at any other appropriate registry within the requisite time period, it will be enforceable in the insolvency of the debtor. Security may be unenforceable, however, if it has been granted within specified preference periods on or before the beginning of insolvency proceedings and if certain defenses cannot be established. There may also be challenges based on the intention of the debtor to defraud its creditors, regardless of the time at which the security was granted. In addition, floating charges may be challenged, except where the debtor received valuable consideration for the charge.

After the secured assets have been realized, the order in which the proceeds may be applied is governed by complex rules, which depend on the nature of the security and the time it was granted and registered. In general, the following order of priority applies: expenses of the receiver or administrator (including certain postappointment tax liabilities of the debtor), fixed secured creditors, statute-preferred creditors (including unsecured creditors up to a maximum of £600,000), floating-charge creditors, and unsecured creditors. Any beneficiaries of a fixed charge recharacterized as a floating charge may be treated as unsecured creditors, assuming that a separate floating charge in favor of the beneficiaries has not also been granted and registered.

The rules of priority are also affected by mandatory rules of set-off that apply in insolvency between the debtor and any creditor with mutuality of claims. In addition, the enforceability of intercreditor agreements and other subordination mechanisms between secured creditors are now clearly established under English law and are widely used and accepted in secured financing.

The validity of cross-stream (granted by a debtor to a sister company) and upstream guarantees (granted by a debtor to its direct or indirect parent) may be open to challenge. For example, a guarantee will be void if:

• (i) the corporate benefit to the guarantor cannot be substantiated;
• (ii) the guarantee was granted within certain preference periods; or
• (iii) the guarantee violates financial assistance rules prohibiting the debtor from financing the acquisition of its shares.

These same restrictions apply to the granting of security. Private (but not public) limited companies can, however, give financial assistance provided that this assistance complies with certain rules known as the "whitewash" procedure, which involves board resolutions and auditor and director declarations of the company's solvency and net asset position.

Although the doctrine of substantive consolidation, whereby the assets of a debtor could be brought into its parent's bankruptcy proceedings, does not exist as such under English law, the concept of "piercing the corporate veil" may have limited application to the same effect. The principle that an English company has a separate legal identity to that of its shareholders is a fundamental one. Piercing the corporate veil is the remedy exercised by a court when a parent, for example, disregards the separate corporate identity of a subsidiary to the extent that their enterprises are seen as effectively commingled. The circumstances in which courts have been prepared to do this are rare, however.

Depending on the specific insolvency procedure employed, creditors in the U.K. have a range of benefits. Although unsecured creditors have limited rights in all insolvency proceedings, their interests must be considered equally with secured creditors in most circumstances. Postappointment financing can be categorized as an expense of the administrator and therefore repaid in priority to unsecured creditors in an administration.

Secured creditors continue to enjoy significant protections and, in administrative receivership, they may effectively direct the actions of the administrative receiver to take control of the debtor to satisfy their claims. In administration, however, even secured creditors with fixed charges may lose control of enforcement, provided the court consents, and could see their recoveries reduced by expenses incurred by the administrator in realizing the assets. In the case of floating charge creditors, this includes any tax due on realization. Unless otherwise provided for, even secured creditors will normally only have a secured claim to interest payments up to the date of insolvency. In addition, under limited circumstances, a majority of secured creditors can be forced to accept an arrangement to reorganize a company's debts.

The "Bankruptcy Code" governs bankruptcy proceedings. Chapter 7 governs corporate liquidation and Chapter 11 governs reorganization. Reorganization is carried out by the debtor formulating a plan designed to reduce its debt, thereby improving its business and financial prospects. A new Chapter 15 came into effect in October 2005, which governs cross-border insolvencies and allows the U.S. bankruptcy court to "recognize" foreign insolvency procedures. A "recognition order" granted on behalf of the debtor's "foreign representative" may entitle the debtor to certain substantive rights available to domestic debtors under Chapter 11 such as the automatic stay under Section 362. Depending on where the debtor's principle activities are carried out, the court may allow additional relief, such as the use, sale, or lease of the debtor's property, or "adequate protection" for creditors.

Among the debtor's reorganization options are converting creditors to stockholders (wiping out existing stockholders), rescheduling the terms of its indebtedness (longer maturities and lower coupons), rejecting burdensome contracts, and arranging for new cash infusions. Although the Code provides for certain creditor protections, these protections can be eroded by agreements between creditors. For example, secured creditors have been known to forsake a portion of the security to which they are entitled in order to minimize the time and costs of the proceedings.

Most bankruptcy filings are voluntary. During proceedings, existing management (rather than a trustee or other type of administrator that displaces existing management, as in most European jurisdictions) generally runs the company. One of the strategies of bankruptcy is to maximize the size of the bankruptcy "estate" created by the filing to maximize the assets available for reorganization and the satisfaction of creditor claims. Accordingly, an all-encompassing automatic stay immediately attaches at the time of the bankruptcy filing. The stay (with certain exceptions) prevents wastage of the estate by prohibiting creditors or others from taking possession of any property (including collateral security) until authorized by the court. It remains in place until the plan is confirmed at the end of the bankruptcy proceedings and is lifted by court order after a hearing.

The average length of a U.S. bankruptcy is 30 months. "Prepackaged" bankruptcies can be concluded in as little as eight months. These involve a pre-agreed bankruptcy plan between the debtor and its creditors before formal proceedings are initiated, and occur when the debtor's obligations are to relatively few creditors whose interests are generally aligned with those of the debtor. Some bankruptcies can continue for years, however, depending on the complexity and contentiousness of the proceedings.

Security can be granted over almost any property. To obtain secured claim status in bankruptcy, however, the grant of security must be perfected, or registered with the appropriate recording agency. During bankruptcy, creditors are prohibited from foreclosing on their security without a court order.

Unlike in the U.K., where collateral security over an asset effectively removes that asset from the bankruptcy estate, collateral security in the U.S. does not give the creditor rights to the asset; it merely entitles the creditor to a claim payable from the asset's liquidation proceeds. To the extent that proceeds are insufficient to pay the secured claim, any unpaid balance is treated as unsecured. The existence and ranking of the collateral lien is therefore significant, as unsecured creditors have an incentive to increase their recovery potential by challenging the collateral lien.

Among unsecured claims, the code provides for several priorities of payment, the most important of which are the administrative expenses of bankruptcy proceedings, certain unsecured postpetition claims, employee wages (up to a cap), and contributions to benefit plans. Certain liens, such as tax, judgment, and environmental liens, may have statutory priority even over secured claims. Secured claims usually rank above all others--with the exception of these statutory liens--followed by unsecured claims with certain priorities, which rank ahead of ordinary unsecured creditors.

While in bankruptcy, the debtor may obtain unsecured credit for normal business expenses without court approval. The debtor may obtain secured credit on unpledged property (at the expense of the unsecured creditors) or on the basis of a subordinate lien with court approval. If the debtor is unable to access credit, it may obtain secured credit on the basis of a "super-priority" lien if it demonstrates that existing secured creditors will be adequately protected. Priorities with respect to existing creditors will therefore change in the event that a super-priority lien is granted.

Under the equitable provisions of the Bankruptcy Code, a court has the power to substantively consolidate ostensibly separate but related entities and treat the assets and liabilities of the entities as if they belonged to one, thus enabling the creditors of each to reach the assets of the consolidated estate.

Multiple obligor transactions frequently feature guarantees or pledges of security from affiliated members of a corporate group. If the guarantor does not receive proceeds from the borrowing for its own direct use, or grants liens on its property on behalf of the borrower, such guarantees or liens may be voided on the ground that they constitute fraudulent transfers should the guarantor or grantor become insolvent.

In corporate bankruptcies, creditors have few controlling rights relative to the debtor. In many cases, creditors are more effective against their fellow creditors than against the debtor, and the debtor may benefit from these intercreditor conflicts. After a certain period, creditors may propose an alternative reorganization plan. Creditors are also entitled to "adequate protection" should their lien be lifted by the court. The reorganization plan must be approved by creditors, although they may be subject to "cram down"--the process where, in exceptional circumstances, a plan can be confirmed over creditors' objections if the court believes the plan is fair and equitable.

In the majority of cases, the status of a secured creditor will result, after the conclusion of the bankruptcy process, in full recovery, assuming correct collateral valuations. In some situations, however, even secured creditors might not fare as well--the U.S. bankruptcy system sometimes benefits management and the debtor's ongoing survival at the expense of creditors. Even on approval of the reorganization plan, there is no assurance that creditors will be repaid in cash: they may instead receive a mix of cash and securities, or simply new securities, thereby continuing their involvement with the debtor after its death and rebirth.