#16698 - The Menu Approach Recognition And Enforcement - Debt Restructuring

Overview:

• S426 Insolvency Act 1986

• EU Insolvency Regulation

• Common Law

• UNCITRAL Model Law on Cross-Border Insolvency

  • Cross-Border Insolvency Regulations 2006

  • USC, Title 11, Chapter 15

• All of these four options deal with incoming cases (into the UK). The EUIR also deals with outgoing cases.

S426 Insolvency Act 1986:

• Automatic recognition of decisions made in other parts of the UK

• Assistance can also be granted on such a basis to a number of other countries

  • Hong Kong

  • Malaysia

  • Bermudas

  • Isle of Man

  • Etc.

Common Law:

• Acts as a fallback option.

• Foreign proceedings will be recognised in the UK if the state of proceedings is also the state of incorporation of the debtor company, even if its place of business or its head office is located elsewhere.

• If the state of proceedings is not the state of incorporation, it may still be recognised if the company is an English company with its place of business in the UK.

• If not, there must be a close connection.

EU Insolvency Regulation:

• Coordination of insolvency procedures relating to insolvent debtors with their COMIs or an “establishment” in an EU Member State.

• Main proceedings:

  • Opened in the state where the debtor has its COMI.

• Secondary (or territorial) proceedings:

  • Opened in the State where there is an “establishment”.

  • With effect only in that Member State. This means that its effect is restricted to the assets that are located in that Member State.

  • No longer restricted to winding up proceedings.

  • Note that territorial proceedings are secondary proceedings, but without a main proceeding.

• Recognition under Article 19 EUIR:

  • Judgment to open insolvency proceedings (whether it be main, secondary, or territorial proceedings).

    • To be recognised in all Member States.

    • From the time it becomes effective in the State where proceedings were opened.

    • Subject to a public policy exception under Article 33 (due process, right to be heard, notified, and to have access to documents.

  • Ancillary judgment of the court whose judgment it was to open insolvency proceedings is recognised under Article 19 EUIR.

    • Concerning the course and the closure of insolvency proceedings.

    • Compositions approved by the court.

    • To be recognised without further formalities.

    • Subject to public policy concerns under Article 33 EUIR.

  • English procedures covered under Annex A:

    • Winding up by the court.

    • Creditors’ voluntary winding up (with court confirmation).

    • Administration.

    • Voluntary arrangements under insolvency legislation.

    • Bankruptcy or sequestration.

  • English procedures excluded:

    • Schemes of arrangement.

    • Should they be included? Why does this matter? Because schemes of arrangement do not fall under the EUIR can hence be used without COMI transfers.

    • Brexit? https://www.gov.uk/government/publications/handling-civil-legal-cases-that-involve-eu-countries-if-theres-no-brexit-deal/handling-civil-legal-cases-that-involve-eu-countries-if-theres-no-brexit-deal

UNCITRAL Model Law:

• Transposed in the US through Chapter 15 USC, and the UK through the Cross-Border Insolvency Regulations 2006.

UNCITRAL Model Law, as transposed into US law:

• Countrywide:
  

  • Recall that Countrywide, an English company, was acquired through a string of Cayman Island-based companies.

  • The senior revolving facility and the notes were all governed by New York law.

  • A Cayman Island scheme and an identical UK scheme were sanctioned:
    

    • The senior notes and the floating rate notes were swapped for equity in HoldCo4.

    • The senior revolving facility was repaid in full

  • Floating rate notes and senior notes governed by New York Law.

    • Cayman Island scheme = Recognition in the Cayman Islands.

    • English scheme = Recognition in the US?

    • Recognition and relief sought under Chapter 15 USC for the English scheme of arrangement.

    • Question: From where did the scheme jurisdiction of the English court come from? HoldCo4’s COMI was in the UK, because its main asset — Countrywide — was in the UK.

• Scope of application:

  • Assistance is sought by a foreign court or representative in connection with foreign proceedings (an inbound request from the perspective of US courts).

  • Assistance is sought in a foreign country in connection with a domestic case (an outbound request).

  • Foreign proceedings and domestic case are pending concurrently

  • Foreign creditors request commencement of, or participation in, a domestic case.

  • There is no reciprocity requirement.

  • Chapter 15 USC is the “exclusive door” to assistance in the US.

• The first question: Do we have a “foreign proceeding”?

  • UNCITRAL Definition = “Collective judicial or administrative proceeding in a foreign country including an interim proceeding.”

    • Has this been adopted? See below.

  • S101(23) USC:
    “Under a debt adjustment law, in which proceeding assets and affairs of the debtor are subject to control or supervision by a foreign court, for purposes of reorganisation or liquidation.”

  • CBIR, Schedule 1, Article 2(i):
    “Pursuant to a law relating to insolvency, in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.”

  • “Debt adjustment law” VS “Law relating to insolvency”: Why the difference?

    • Because the former is wider, and insolvency is thus not a prerequisite to using Chapter 11.

    • Scheme of arrangement = Having the senior secured creditors agree to a reduction or a debt-for-equity swap. This may be problematic since the debtor’s assets are not really being subject to the “supervision or control” of a foreign court.

• The second question: Do we have a foreign “main” proceeding?

  • This is significant because there is a difference in remedies.

  • Foreign main proceeding = Foreign proceeding in the country where debtor has its COMI.

  • Absent “evidence” to the contrary, a corporate debtor’s COMI is presumed to be situated at the place of its registered office.

    • Note that the word use in the UNCITRAL model law is “proof”.

  • Burden of proof is on the foreign representative who seeks recognition in the US.

  • Weight of the presumption?

  • What is the problem here? The registered office of the scheme company — HoldCo4 — is the Cayman Islands.

• Re SphinX Ltd:

  • Cayman Island hedge fund with presence in the Caymans only to maintain registration there.

  • Location of headquarters, management,primary assets, majority of creditors, law applicable to most disputes = US.

  • The company sought recognition in the US.

    • Is it therefore a foreign main proceeding?

    • This turns on whether the hedge fund has its COMI in the Caymans. This is problematic since the company has everything in the US.

  • Consenting adult approach: Absent abuse, the above presumption (that COMI is situated where the debtor’s registered office is) will prevail if none of the parties object.

    • Held, that there was abuse here, so Sphinx could not rely on the consenting adult approach.

• Re Bear Stearns:

  • Bear Stearns, the investment bank, sponsored certain hedge funds.

  • Cayman Island hedge fund as above.

  • The court appeared to limit the consenting adult approach: The presumption is only of limited weight, and has no special evidentiary value.

  • Absence of objections is immaterial.

  • Fund was run from the US, creditors in the US, and assets in the US.

  • Held, that COMI was in the US.

• Re Basis Yield Alpha:

  • Cayman Island hedge fund required under Cayman Island law to conduct its business mainly outside the Cayman Islands.

  • This was deemed to be sufficient to rebut the presumption.

• Re Ernst & Young Inc:

  • Fraudster resident in Canada set up a Colorado company.

  • Company run by Colorado resident under the supervision of the Canadian fraudster. Canadian court appoints receiver who was granted recognition in the US.

  • The “head office functions test” = “The location of those who manage the debtor.”

• Summarising the position on “foreign main proceeding”:

  • COMI essentially = Principal place of business

  • “Nerve center”:

    • From which a corporation radiates out to its constituent parts and from which its officer direct, control, and coordinate all activities.

    • Where the corporations overall policy originates.

    • This is for geographically widespread corporations.

  • “Place of operations”:

    • Place where corporation conducts its principal operations.

    • This is for centralised, locally restricted corporations.

  • Hertz Corp v Friend:

    • “Nerve center test”: From where the corporation’s officers direct, control, and coordinate activities.

UNCITRAL Model Law, as transposed into UK law:

• The UK position: Re Stanford International Bank Ltd (in receivership):

  • COMI under CBIR to be interpreted in the same way as under EUIR in line with Eurofood.

  • What are the arguments in favour of this approach?

    • Consistency?

    • Office holders coming in from different places are treated in the same way.

  • And the arguments against?

    • Different regimes altogether?

    • Recognition under the EUIR is automatic, and the EUIR only deals with 27 other countries. It is much easier to justify mutual recognition and enforcement.

    • The CBIR, on the other hand, deals with all other countries, including those with rogue government and questionable judiciaries.

  • Is there a difference with US law? Is the UNCITRAL Model Law COMI in the UK different from the UNCITRAL Model Law in the US?

    • Eurofood = Objectively ascertainable by third parties.

    • Re Ernst & Young Inc: Fraud is really only fraud when others can’t tell it is a fraud.

Foreign non-main...