What We're Reading:

Wholesale inflation in June surged 11.3%­­ from a year ago. Inflation at the wholesale level climbed 11.3% in June compared with a year earlier, the latest painful reminder that inflation is running hot through the American economy. (AP)

What's happening in Sri Lanka and what comes next. Sri Lanka's president has fled the country after months of turmoil culminated in protesters converging on the presidential palace. (NPR)

Wildfires rage as Europe battles heatwave. A heatwave spreading across Europe is fueling wildfires in Portugal, France and Spain. Around 3,500 firefighters in Portugal are battling dozens of blazes, as temperatures break records in various parts of the country. (BBC)

Biden: US prepared to use force to stop Iran getting nuclear arms. President Joe Biden has pledged that the U.S. is “prepared to use all elements of its national power” to stop Iran from getting a nuclear weapon. (BBC)

EU expects Russia's invasion of Ukraine to push inflation to record high. The European Commission expects Russia's invasion of Ukraine to push eurozone inflation to “historical highs” of 7.6%. It also predicted economic growth to slow in 2022 and 2023. (DW)

Saudi ports cargo volumes jump 16.1 percent to 27m tons: Mawani. Saudi Arabia’s ports witnessed a 16.1% increase in cargo throughput volumes in June 2022 compared to the same period a year before, according to the latest release by the Saudi Ports Authority, also known as Mawani. (HSN)

The rumbles of a reverse currency war. With inflation at an all-time high, countries are scrambling to pull the brakes and cool down their overheating economies. But with everyone doing the same, tensions could flare. (NPR)

Euro slips below dollar as Europe’s economic fortunes slump. The euro’s slide below parity with the U.S. dollar reflects Europe’s sinking economic fortunes in the face of the war in Ukraine. But unlike the last time the euro was this weak 20 years ago, nobody is coming to the common currency’s rescue. (WSJ)

Italy: Mario Draghi wins confidence vote but uncertainty still looms. Prime Minister Mario Draghi survived a no-confidence vote in the Italian Senate Thursday, yet his government's future was thrown into question due to a boycott of the vote by the populist 5-Star Movement (5SM), a key coalition ally. (DW)

A truly massive interest rate hike is now on the table. Central banks have made clear that after a sluggish start, they're serious about putting a lid on inflation. Now, as prices soar even faster than expected, they're weighing increasingly drastic options. (CNN)

Ukraine war: 22 killed in Russian rocket attack on Vinnytsia. Russian missiles have struck a city far from the eastern frontline, killing at least 22 people including three children, Ukrainian officials say. Some 100 more were reported injured in the attack in Vinnytsia, to the south-west of Kyiv and a long way from the heart of the fighting in Donbas. (BBC)

US warns it will defend Philippines in South China Sea. US Secretary of State Antony Blinken called on China to stick to its international law obligations and promised any attack on the Philippines would trigger a US military response in the South China Sea. (DW)

Cuba faced the biggest protests since the revolution. One year on, the government's grip is tighter than ever. The largest anti-government protests to take place in Cuba since the 1959 revolution started with a blackout on a boiling hot summer day. After days of power cuts by the government, residents in the small city of San Antonio de los Baños ran out of patience. (CNN)

How will we know if we’re in a recession? Regardless of the dim forecasts and souring mood among Americans, it could take a while before we actually know if and when the country has tipped into a recession. (Vox)

When most creditors braced for a wave of business insolvencies at the start of the pandemic, bankruptcies actually dropped. But now, nearly every sign is indicating that a bankruptcy tsunami has begun.

“Businesses are fighting a losing battle against rising costs—with the added worry of falling consumer spending,” Rebecca Dacre, partner at Mazars told Yahoo!Finance. “Price pressures are becoming more embedded as interest rates rise and the economy contracts. Whilst easing slightly from the peak in March, the latest insolvency figures will still cast greater uncertainty over businesses that are already facing a grim outlook.”

Company insolvencies jumped 40% in England and Wales year-over-year in June, according to The Guardian. That is up 15% compared to insolvency statistics before the pandemic. “Many businesses are now spending the cash buffers built up over the last couple of years and so from a cashflow perspective, appear to be reasonably healthy,” Interpath Chief Executive Blair Nimmo told Express. “But their balance sheets and profit and loss statements are weak, and the reality is that it won't be too long before cash outflows catch up.”

The percentage of companies with a default risk between 1% and 10% increased in June, and those with a default probability of over 20% also increased slightly, according to the Kamakura Troubled Company Index. Among the 20-riskest-related firms in June, 10 were in the U.S.; two each in China, Luxemburg and Sweden; and one each in India, Ireland, Switzerland and the U.K.

The construction, industrial manufacturing and retail industries experienced the sharpest rise in bankruptcies due to a higher exposure to inflation, supply disruptions and rising interest rates, per Evening Standard. “Businesses up and down the country continues to be buffeted by an array of headwinds, from inflation and interest rate rises, to supply chain disruption and staff shortages, not forgetting the war in Ukraine and now political uncertainty on the home front with the impending change in Prime Minister,” Nimmo said.

German companies are currently at a greater risk of default compared to businesses in other European countries because of Germany’s high reliance on Russian gas. Levels of corporate distress in Germany are at the highest point since August 2020, according to the Weil European Distress Index.

“The findings come as countries across Europe face a cost-of-living crisis driven by supply chain issues arising from the aftershocks of the pandemic and the war in Ukraine,” the report reads. “Central banks are starting to tighten monetary policy in response to 40-year highs in inflation, putting further pressure on spending, investment and highly leveraged companies. This is filtering through into an economic slowdown, with data pointing to a likely increase in corporate defaults.”

On 26 June 2019, the Directive on restructuring and insolvency^[1] of the European Parliament and of the Council was published in the Official Journal of the European Union.

The main objective of the Directive is to harmonize national laws and proceedings concerning preventive restructuring and insolvency measures, to contribute to the proper functioning of the internal market, and remove obstacles to the free movement of capital and freedom of establishment^[2].

As is the case for Spain, Italy and Netherlands^[3] (which shall adopt the laws and regulations by 17 July 2022 to comply with the Directive), several Member States are still in the process of transposition.

Germany has also amended its insolvency regulations via a law dated 29 December 2020 which has been enforceable since January 2021. France also completed the transposition process by an ordinance dated 15 September 2021 enforceable as of 1st October 2021.

The two countries have adopted legislations that cover both in-court and out-of-court restructuring proceedings. French out-of-court restructuring frameworks have been slightly fine-tuned as they were already largely aligned with the requirements of the Directive.

Is the transposition of the Directive fulfilling its objective? Are Germany and France speaking with one voice on restructuring?

Preventive proceedings

Both German and French legal frameworks provide for proceedings intended to solvent debtors, opened only on their initiative, to implement confidential restructuring schemes^[4]. 

German law allows the debtor to disclose^[5] the proceedings, which will in practice prevent creditors from taking steps to recover their debts. A limited exception under French law concerns the publicity of the judgment approving the conciliation agreement, which will disclose the existence of the proceedings and the agreement but not its content.

In Germany and in France, these proceedings do not trigger an automatic stay. German debtors can petition the court for a stay against one or several creditors for a maximum period of eight months. French debtors may petition the court for a stay against reluctant creditors for the duration of the proceedings (up to five months) or for grace periods of up to two years against pursuing creditors.

Preparation of restructuring plans 

The debtor can always prepare and submit a restructuring plan, in compliance with the Directive^[6].

German creditors affected by a restructuring plan may propose amendments to the plan prepared by the debtor, while French creditors may propose a restructuring plan competing with the debtors under reorganization proceedings.

Formation of classes of creditors 

As minimum standards, the Directive requires that secured and unsecured creditors are treated in separate classes^[7].

These minimal standards were transposed into French law, it being specified that equity holders affected by a restructuring plan shall be treated in a separate class and class formation shall comply with subordination agreements. Under German law, at least four classes shall be formed including secured creditors, unsecured creditors, subordinated creditors and equity holders. 

At first glance, these two sets of provisions may seem very similar in their approach. Actually, while German law institutes an automaticity of equity holders’ efforts, French law underlies that a restructuring plan does not necessarily need to include efforts from equity holders.

German and French law also differ in two respects:

• The formation of the classes belongs to the debtor under German law. Under French law, this is the judicial administrator’s role. 
• German law provides that parties connected to the debtor may, depending on the nature of their claims, automatically fall within the class of subordinated creditors, whereas French law has not transposed any specific provision on this matter, despite the recommendation of the Directive^[8].

Adoption of restructuring plans 

German and French creditors are involved in the adoption of a restructuring plan.

In principle, to be approved by the court, a German restructuring plan shall be adopted by each class by a three quarters majority. In France, each class shall adopt the restructuring plan by a two thirds majority^[9], subject to the possibility under reorganization proceedings to consult creditors individually allowing the court to impose payment delays^[10]. 

By way of exception, a German or French court may approve a restructuring plan adopted by a majority of classes—a key measure of the Directive^[11]. 

Overall, the objective of harmonizing legal frameworks on restructuring and insolvency sought by the European Parliament and the Council seems to have been achieved for Germany and France. The transposition amongst all Members States^[12] should facilitate the work of the insolvency practitioners when handling cross-border cases.

About Bird & Bird: Our global Restructuring team provides in-depth knowledge, resources and experience to handle the most complex multijurisdictional insolvency cases. Our clients can rely on 84 restructuring lawyers in 30 offices worldwide, including 21 in Europe.

[1] Directive (UE) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)—link to the Directive here.

[2] Directive, recital no. 1.

[3] Netherlands has already partly transposed the Directive by a law enforceable since 1st January 2021.

[4] We refer to out-of-court restructuring proceedings as amended by “StaRUG” law for German law, and to the conciliation proceedings for French law.

[5] Effective 1st July 2022.

[6] Directive, article 9.1. We refer to out-of-court restructuring proceedings as amended by “StaRUG” law for German law, and to safeguard and reorganization proceedings for French law.

[7] Directive, article. 9.4.

[8] Directive, recital no. 46: “Member States should in any case ensure that adequate treatment is given in their national law to matters of particular importance for class formation purposes, such as claims from connected parties, (…)”.

[9] Under French law, the formation of classes of creditors is compulsory for companies with more than 250 employees and a turnover of more than EUR 20 million or for those with a net turnover of more than EUR 40 million. 

[10] This is also possible in safeguard proceedings without the formation of classes of creditors.

[11] Scheme referred to as “cross-class cram-down”, which is subject to several conditions, specific to each national law.

[12] Directive, article 34: “Member States shall adopt and publish, by 17 July 2021, the laws, regulations and administrative provisions necessary to comply with this Directive (…) Member States that encounter particular difficulties in implementing this Directive shall be able to benefit from an extension of a maximum of one year of the implementation period”.

People generally trust the reliability of government, but levels of trust vary significantly across institutions and few people feel they have a say in what government does according to a new OECD report.

As countries work to address the ongoing impacts of the largest health, economic and social crisis in decades there is a need for governments to boost trust. Levels of trust in government remain slightly higher than in the aftermath of the global financial crisis, but do remain under strain.

According to the report based on a survey of 50,000 people across 22 OECD countries, trust and distrust are evenly split. Participating countries were Australia, Austria, Belgium, Canada, Colombia, Denmark, Estonia, Finland, France, Iceland, Ireland, Japan, Korea, Latvia, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Portugal, Sweden and the United Kingdom. Most countries were surveyed in the period November 2021 to February 2022, with Finland and Norway surveyed in 2020 and Portugal and the U.K. surveyed in March 2022. The survey found that on average across countries 41.4% of respondents say they trust their national government, and 41.1% say they do not.

Building Trust to Reinforce Democracy: Main Findings of the 2021 OECD Survey on Drivers of Trust in Public Institutions is the first cross-national gauge of what drives public trust in open democratic governments. The survey is aimed at helping governments better understand where citizen confidence is wavering, where it remains solid and what needs to be done to close the gap. The survey took place during the COVID-19 pandemic and for most countries before Russia embarked on its war of aggression against Ukraine.

Key takeaways from the report include:

Most people feel that government is reliable: On average across countries, most people feel that, even during times of crisis, their government is reliably delivering crucial public services such as education (57.6%) and health (61.7%), that it enables easy access to information on administrative procedures (65.1%) and protects personal data (51.1%). Only a third (32.6%) are concerned that governments would not be prepared for a future pandemic.

Public trust varies across institutions: The police (67.1%), courts (56.9%), the civil service (50.2%) and local government (46.9%) garner higher levels of public trust than national governments (41.4%) and parliaments (39.4%).

Governments could do better in responding to citizens’ concerns and tackling issues that are important to them, like climate change: While 50.4% think governments should be doing more to reduce climate change, only 35.5% are confident that countries will actually succeed in reducing their country’s contribution to climate change. Less than a third of citizens feel they have a say in what government does (30.2%).

Generational, educational, income, gender and regional gaps in trust indicate that progress can be made in enhancing participation and representation for all: Disadvantaged groups with less real or perceived access to opportunity and voice have lower levels of trust in government. Women and people with less education and lower incomes tend to trust the government less. Younger people also have lower trust in government than older ones, with an almost ten percentage point trust gap in surveyed OECD countries. These gaps may reflect the negative impact that wider societal inequalities are having on public trust and their role in fueling partisanship and polarization. The report shows, for example, that people who did not vote for their country’s incumbent government are far less likely to trust it.

Public perception of government integrity is an issue: Slightly less than half of citizens (47.8%), on average across countries, think a high-level political official would grant a political favor in exchange for the offer of a well-paid private sector job. Around a third (35.7%) think that a public employee would accept money in exchange for speeding up access to a public service.

The OECD Trust Survey will be repeated every two years to follow progress in countries and gather evidence of what works and what does not as countries work to further strengthen public trust.

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate