#16699 - The Menu Approach The Choices - Debt Restructuring

Overview:

• The Menu Approach

• Articles 3 and 7 EUIR: The Centre of Main Interest (“COMI”)

  • Wind Hellas

• Cross-Border Schemes of Arrangement

  • Rodenstock

  • APCOA

• The US Bankruptcy Code

  • Using the US Bankruptcy Code to restructure a non-US business

  • Global Ocean Carrier

Worldwide Motor (“WM”) Group:

• WM Group’s business:

  • Providing retail auto financing and leasing facilities through WM dealers.

  • WM Group has asbestos personal injury creditors.

  • And a pension deficit.

  • And also security over its factory premises that secure acquisition loans and working capital.

• Questions to ask:

  • Which are the subsidiaries that are struggling financially?

• WM Corporation = Holding company based in Detroit

  • Company law the US is state-specific.

  • We can be fairly certain that WM Corporation is incorporated in Delaware.

• WM North American Inc = Privately- or closely-held corporation.

• WM Asia Pacific Pte Ltd = Singapore-based.

  • Pte Ltd = Private Limited.

• WM Latin American SA

• WM Europe SA

• WM Sarl and WMAC Inc = Joint ventures with FIAT and Capital Management LLC.

  • Similar to partnerships.

  • UK = Mere contract.

  • France = Separate legal entity.

• Capital Management LLC:

  • LLC = Limited liability company.

  • LLCs are taxed like partnerships. They are not taxed at corporate level, but at the level of their shareholders.

Menu Choice:

• Universalism:

  • One state has jurisdiction over all the debtor’s assets and affairs (this is the “principle of unity”). This state is base on the closest connection.

  • That jurisdiction covers the debtor’s assets on a worldwide bases (this is the “principle of universality”).

• Territorialism:

  • Concurrent and parallel proceedings in different countries (the “principle of plurality”).

  • Each proceeding is confined to local assets (the “principle of territoriality”).

• Menu choice:

  • Free selection of jurisdiction and applicable insolvency law.

• Recap:

  • Bankruptcy law as an implicit term in the lending agreement.

  • Determines the lender’s payout.

  • Factored into lending decisions.

  • Interest rate depends upon the applicable bankruptcy law.

  • Equity would bear the cost of an inefficient bankruptcy law.

  • Equity thus drafts the most beneficial bankruptcy regime.

  • Standardisation through menu of bankruptcy options either nationally or internationally.

  • Selection ex ante or ex post.

Article 3 EUIR, Centre of Main Interest (“COMI”):

• EUIR is a conflicts of law instrument.

  • It tells us what the applicable insolvency law is + which court has jurisdiction for the opening of insolvency proceedings.

  • It does not set out any substantive law.

• Jurisdiction to open proceedings where COMI is situated.

• The place where debtor conducts administration of his interests on a regular basis and is therefore ascertainable by third parties (Article 3(1) EUIR 2015).

• There is a presumption that COMI = where the corporation has his registered office in the absence of proof to the contrary.

  • Unless the corporation has moved its registered office within 3 months prior to the opening of insolvency proceedings (Article 3(1) EUIR 2015).

• Applicable Law:

  • Law of main proceedings for all matters concerning the insolvency procedure including its commencement, conduct, closure,and the priority of creditors’ claims (Article 7).

  • Exceptions (Articles 8-18):

    • Inter alia security interests;

    • Other rights in rem;

    • Set-off rights;

    • Rights under employment contracts; and

    • Rights under retention of title provisions.

• COMI: Eurofood

  • The term “COMI” must be interpreted in a uniform way across the EU.

  • There is no such thing as a “group COMI”; COMI is to be assessed separately for each distinct legal entity.

  • Control of the subsidiary by the parent is not sufficient to rebut presumption that the subsidiary’s COMI is in Ireland.

    • Here, the Italy-based parent attempted to argue the the subsidiary’s COMI is also Italy.

    • Although this presumption might work if the subsidiary is nothing but a letter-box company.

  • COMI must be identified by criteria that are both objective and ascertainable by third parties.

• COMI: Interedil

  • Where management and supervision of a company are in the same place as the State of registration and such management decisions are ascertainable by third parties as being in that place, the presumption of COMI as being in the place of registration is irrebuttable.

  • The presence of company assets and contracts in a Member State other than the state of registration cannot be regarded as sufficient factors for rebutting the presumption.

  • Unless it is possible to establish in a manner ascertainable to third parties that the company’s actual centre of management and supervision is located in that other Member State based on a comprehensive assessment of all relevant facts.

  • Factors relevant in determining COMI:

    • Internal accounting functions and treasury management

    • Law governing main contracts;

    • Business relations with clients;

    • Main lenders;

    • HR functions and employees;

    • Purchasing control;

    • Location of IT systems;

    • Domicile of directors;

    • Board meetings; and

    • Restructuring negotiations with creditors.

    • Most importantly, the perception of creditors (recital of Article 28).

• COMI: Staubitz-Schreiber

  • The debtor relocated from Germany to Spain after filing a bankruptcy request in Germany but before proceedings had been opened in Germany.

  • COMI cannot be shifted between the date on which a bankruptcy request is filed and the date on which bankruptcy proceedings are opened.

  • Presumption in favour of registered office does not apply if moved within 3-month period prior to the request for opening of proceedings (recital of Article 3(1)).

• Hellas I:
  

  • Proposed pre-pack .

  • Hellas II = The financing SPV (where the debt sat).

    • Luxembourg-based

    • Similar in form to a limited partnership.

  • The group incorporated Hellas UK Ltd.

    • Hellas UK joined the Hellas II partnership as managing partner.

    • All other partners then withdrew.

    • The partnership’s assets and debts then vested in Hellas UK via a form of “inheritance”.

    • Secured creditors moved with the pre-pack, but unsecured creditors stayed with the remaining company.

    • This is the “accretion” method.

  • Scandalous: Headlines reported that London had become the “restructuring brothel” of Europe.

• Hellas II:
  

  • Numerous SPVs had to have their COMI moved to UK.

  • Achieved through:

    • Independent management and advisors resident in England.

    • Head office in London.

    • All business activities undertaken from there.

    • Transfer of books to new head office.

    • London bank account.

    • Termination of existing contracts in Luxembourg.

    • Notice to creditors.

    • Meetings and negotiations in London.

    • Registration as foreign company and UK establishment.

    • Registration for tax purposes.

  • Held, that this was sufficient.

  • The second restructuring was carried as 5 different but identical schemes of arrangement.

Cross-Border Schemes

• Cross-Border Schemes: Rodenstock
  

  • Manufacturer of spectacle frames and accessories.

  • Rodenstock had to restructure is senior debt.

  • Senior debt contracted under English law + jurisdiction clause pointing to the UK.

• Cross-Border Schemes: APCOA
  

  • 60% majority required to change the applicable law.

  • The governing law was thus changed from german law to English law.

• The scheme jurisdiction of English courts:

  • Encompasses companies “liable to be wound up under the Insolvency Act 1986”.

    • S221 IA 1986: Unregistered companies, including foreign companies.

    • EUIR: Neither COMI nor establishment in the UK. Does COMI override S221 IA 1986 (because EU law trumps national law)? No, because the scheme of arrangement is not an insolvency process; it is not covered by the EUIR.

    • Brussels I Regulation: Assigning jurisdiction to where the seat of the company is.

  • Second requirement imposed by case law: Sufficient connection with the UK.

    • Carries on business or has assets in the UK.

    • English law as the governing law of facility agreements.

    • Subsequent amendment of choice law to English law on the basis of majority creditor consent (as in APCOA).

• Recognition and enforcement:

  • Relevant for sanctioning the scheme by English courts.

    • Because English courts will not sanction a scheme only for it go be rejected under the applicable law.

  • Articles 3 and 12 Rome I Regulation: Likelihood of recognition of amendment (or reduction) of contractual claim under the applicable law.

  • Article 36 Brussels Regulation: Sanctioning the scheme as a “judgment”?

The effects of Brexit:

• The two features that make the UK so attractive a destination for restructuring: administration + schemes of arrangement.

• Administration pursuant to UK law:

  • No automatic recognition.

  • Dependent on private international law of Member States.

  • E.g. German private international law.

    • Based on headquarters rather than COMI.

    • Some differences that may result in friction.

• Scheme of arrangement:

  • Recognition as a prerequisite for sanctioning.

  • Based on private international law of Member States (Rome I).

    • This is less problematic, because, under Rome I, any scheme will be automatically recognised in other signatory states.

The US Bankruptcy Code:

• “Debtor” under Chapter 11 United States Code (the “USC”, which refers to the US Bankruptcy Code).

  • This means a person that:

    • Resides or has a domicile in the US (domicile, for companies, means the place of incorporation);

    • Has a...