#16693 - Corporate Groups - Debt Restructuring

Overview:

• Group structures

• Domestic solutions

• International approaches

Group structures:

• Vertical integration:
  

  • Greater centralisation of decision-making and running of the group’s business.

• Horizontal integration:
  

  • Number of sub-groups that can be run more independently.

  • Greater decentralisation and independence.

• Governance patterns:

  • Single economic unit.

  • Conglomerate with independent sub-groups.

  • Management along product lines, geographically, or regionally.

    • Such management often leads to obfuscation of the accounts of the different companies in the group.

  • Ownership and control through equity ownership, contract, and partnership- type arrangements.

  • Specific governance arrangements: appointment right, overlapping personnel.

Restructuring options:

• Where is the problem?

  • A single subsidiary or a sub-group?

  • A holding company?

  • Or the entire group?

• Strategies:

  • Removing the ailing subsidiary?

  • Restructuring the sub-group in question?

  • Comprehensive restructuring of various group entities?

  • The more integrated the group, the more likely comprehensive restructuring is likely to rescue the group.

Separate legal personality and limited liability:

• Separate legal personality:

  • The entity in question is the allocative end point of its assets and liabilities

  • Its assets and liabilities belong to it only

  • There is no link between the company’s assets and its members

  • The personal creditors of the company’s members do not have access to the company’s assets

• Limited liability:

  • Creditor has access to the company’s assets only

  • Members’ assets are shielded from the company’s creditors

  • Ex ante compensation for creditors in the form of higher interest rates on the loan

  • Ex ante and ex post opportunism

    • Ex ante = The company misrepresent that a particular assets belongs to the company when it, in fact, belongs to, say, its shareholders

    • Ex post opportunism = The shareholders manipulate the risk profile of the company after securing the loan

• These are the two principles that make it difficult to come up with solutions for group restructurings.

Domestic solutions:

• Procedural consolidation:

  • Joint administration of multiple proceedings

  • Concentrated in a single court

  • Single office-holder for all proceedings

  • Assets and liabilities of each member of the group remain separate

• Substantive consolidation:

  • Pooling of assets and liabilities of different entities

  • Disregarding of the companies’ separate legal personality

  • There is a much higher threshold for substantive consolidation

  • Who are the winners and losers?

• Winners and losers:
  

  • Sub1 is reasonably well capitalised, whilst Sub2 is not.

  • Nobody else other than C3 could reach Sub1’s assets until C3’s claims are satisfied in full.

  • Substantive consolidation = Everyone can now share ratably in Sub1’s assets.

  • C3 = Loser, and Everyone else = Winner.

Requirements for consolidation:

• Procedural consolidation:

  • US:

    • Bankruptcy Rule 1015(b)

    • Debtor and affiliate

    • Joint petition and joint administration

    • Protection against conflicts of interest

  • UK:

    • No formal rule

    • Appointment of the same administrator for all the entities within the same group

    • Proceedings concentrated in the High Court

• Substantive consolidation:

  • US:

    • Equitable remedy

    • Recognised since Sampsell v Impartial Paper & Colour Corp

    • Separate legal entities are treated as having merged into a single survivor

    • Last resort, meaning all other related remedies have to first be exhausted

    • Ex ante: Debtor treated the groups as one legal entity. The assets of the companies are so mixed up that it is impossible to see where one ends and where another begins.

    • Ex post: Amalgamation of assets and liabilities.

  • UK:

    • Salomon’s Case: The doctrine of separate legal personality is very strong in English law

    • Exceptions? Where the affairs of group entities are so “hopelessly intertwined” that they are impossible to disentangle and unravel, such that pooling is the only sensible way to proceed.

    • Scheme of arrangement as a substitute? Identical schemes for different group companies, as in Bluebrook? This effect is identical economically, although the companies remain legally separate.

International solutions:

• UNCITRAL Legislative Guide:

  • Cooperation between courts and office-holders

• 2015 EUIR:

  • Cooperation between courts and office-holders

  • Group coordination proceedings as one of its biggest innovations

• Cooperation:

  • Obligation on office-holders to cooperate:

    • Facilitate effective administration of proceedings;

    • Not contrary to local insolvency law;

    • Exchange of information; and

    • Towards coordinated restructuring plan.

  • Obligation on courts to cooperate:

    • Approval of protocols.

  • Rights for office-holders to participate in foreign proceedings.

• Group coordination proceedings:

  • To run alongside individual proceedings

  • At the request of an office-holder of the group entity:

    • Court with jurisdiction for any group member

    • Nomination of group coordinator

    • Outline of group coordination

  • Opening of group coordination proceedings:

    • Appropriate to facilitate effective administration

    • No creditor likely disadvantaged

    • Nominee meets requirements

    • Office holders must be heard and may object

    • Objection results in proceeding not being included. This means any entity can simply opt out of group proceedings.

    • Appointment of group coordinator

  • Group coordination plan:

    • Proposed by coordinator

    • Comprehensive set of measures

    • Not procedural or substantive consolidation

    • Cooperation duties

    • Office holders to follow coordinator’s recommendations on ‘comply or explain’ basis

  • Not groundbreaking, because it is voluntary, and because it adds an additional layer of group proceedings and costs when the group is already short of assets.