International Insolvency & Restructuring Report 2019/20

International Insolvency& Restructuring Report

2019/20

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International Insolvency& Restructuring Report

2017/18


International Insolvency & Restructuring Report 2019/20

Contributors

Drinker Biddle & Reath LLP

Ernst & Young LLP

Fellner Wratzfeld & Partner Rechtsanwälte GmbH

Felsberg Advogados

Gilbert + Tobin

GLAS

Homburger AG

International Insolvency Institute

Loyens & Loeff

Milbank LLP

Peña Briseño, Peña Barba, Palomino Abogados

PUNUKA Attorneys and Solicitors

Skadden, Arps, Slate, Meagher & Flom (UK) LLP

UNCITRAL Secretariat, Office of Legal Affairs, United Nations

Walkers

White & Case

www.homburger.ch

Focused.Effective. Precise.

We provide Swiss made advice and representation to enterprises

and entrepreneurs in a global environment in transactions,

disputes and complex legal, tax and regulatory matters.

ArbitrationBanking and Finance

Capital MarketsCompetition | Regulatory

ComplianceCorporate | M&A

Crisis ManagementEmployment Law and

Executive CompensationIP | IT

InsuranceInvestigations and

EnforcementLitigation

Private ClientsReal Estate

Restructuring | InsolvencyTax

Technology and Digital Economy

White Collar Crime

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Contents

Foreword 01 by Alan Bloom, President, International Insolvency Institute, and Partner – Restructuring, Ernst & Young LLP

The current work by UNCITRAL in the area of insolvency law 04 UNCITRAL Secretariat, Office of Legal Affairs, United Nations

Johnston Press PLC – Restructure by pre-pack 08 administration GLAS

Cross-border restructuring in the US: Chapter 15 approval 12 of third-party releases granted in foreign proceedingsMilbank LLP

Developments in Australian insolvency law: 17 Combatting illegal phoenixingGilbert + Tobin

Restructuring trusts: A viable structure for securing 22 and restructuring financing in AustriaFellner Wratzfeld & Partner Rechtsanwälte GmbH

The insolvency scenario in Brazil: Certain relevant issues 26 Felsberg Advogados

Off with his head! An offshore perspective – Is the 29 “headcount test” heading for the guillotine?Walkers

Selected restructuring issues in continental Europe – 35 An illustration with LuxembourgLoyens & Loeff

Insolvency and restructuring in Mexico 39Peña Briseño, Peña Barba, Palomino Abogados


Contents

Overview of insolvency and restructuring in Nigeria 43 PUNUKA Attorneys and Solicitors

Swedish insolvency law 47 White & Case

Crypto assets and data in insolvency: Switzerland’s 50 proposed new rules Homburger AG

Proposed reforms create cross-border opportunities 53 in the UK Skadden, Arps, Slate, Meagher & Flom (UK) LLP

Proposed amendments to Chapter 15 in the US 57 Drinker Biddle & Reath LLP

Contributors 62


I last offered a Foreword to this publication to coincide with the International Insolvency Institute’s Conference in New York City in September 2018. This latest contribution coincides with the equivalent 2019 Conference being held in Barcelona in June, just nine months later.

What a difference nine months makes. From a position where most world stock markets were at record levels with an upward trajectory, we have since seen significant corrections in the past nine months, with the Dow Jones, the FTSE, the Nikkei and pretty much all other stock markets suffering major falls, many of them over 20%.

As regards the prospects for economic growth, the OECD has forecast static global growth for 2019 and 2020 at 3.5%. Most of the G20 countries show slowing growth and China’s significantly slowing economy is forecast to have a very marked impact on world growth more generally. Growth in the Eurozone is forecast to reduce from 2.5% to 1.6% with Germany, the largest Eurozone economy by far, showing signs of a slowdown. The US, from a position of strong and steady growth in 2016 and 2017, is now forecasting a slowdown in that rate of growth.

The oil price which, nine months ago, looked as if it was on the rise and providing a steady base for investment, has again fallen and is still operating a few dollars either side of US$60 per barrel.

And for those with an appetite for cryptocurrencies, Bitcoin, which was trading at US$18,000 at its highpoint in 2018, is now trading at US$8,000.

Curiously, bond defaults remain relatively static and Moody’s recently anticipated that corporate profits and liquidity will remain healthy despite the projections of slow economic growth and although there is expected escalation in the volatility in the high yield market, most rated companies have a low refinancing risk in 2019.

So as with my previous Foreword, the messages are mixed. On the one hand we have slow growth and a significant slowdown in some of the largest economies, adverse stock market reaction and lower oil prices but, on the other hand, defaults on high yield remain at a relatively comfortable level.

When discussing these trends with colleagues, some who operate within the stressed and distressed markets and others who do not, the broad consensus is however that we are more likely than not to see a downturn and some form of market correction if not towards the end of 2019, then certainly by early 2020.

The most likely cause of the downturn? As in 2006 and 2007, there is no real consistency as to what might precipitate matters. The most frequently made suggestions revolve around increased protectionism, most obviously evidenced by the current tariff war between the world’s two largest economies, the US and China; the complexities of the UK’s planned departure from the EU; the rise in nationalism and the effect this may have on global trade; political tensions between the United States and North Korea, Russia and others.

Add to this, the enormous impact of the changes that technology is making to almost every walk of life, the financial impact of which is already being felt by a number of sectors and will continue to affect any market that finds itself disrupted by technological advancement.

We are already seeing the effects of this on the automotive sector, where investment in electrification and autonomous vehicles is creating pressures in the sector with some manufacturers very hard hit by the move away from traditional fuels, particularly the demonisation of diesel. The impact is, of course, felt right through the supply chain, as the OEMs seek to offset some of the cost.

In retail we are seeing enormous changes to the way in which people shop with the consequential impact on bricks and mortar retailers, many of which have filed for bankruptcy protection of some sort in order to re-organise their real estate portfolio.

by Alan Bloom, President, International Insolvency Institute, and Partner – Restructuring, Ernst & Young LLP

Foreword

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In the oil and gas sector, the flattening out of the oil price has again left a number of participants vulnerable and although as we speak there has not been a further large-scale increase in the number of bankruptcy filings in this sector, it remains a weak and vulnerable sector.

Many other sectors are finding themselves vulnerable to the disruption of their business model and it is highly likely that we will see a number of the participants in the sectors using in or out of court restructuring techniques to re-organise themselves to compete.

The costs associated with an in-court restructuring are often considerable and sometimes prohibitive. Quite apart from the professional fees involved, both financial and operational restructuring comes at a price – rescheduling debt, cancelling contracts, exiting leases, reducing staff numbers – all place a considerable burden when companies are at their weakest.

However, such is the complexity of modern businesses that if these enterprises are to use in-court solutions, it is ever more important that these procedures are able to stand up to such complexity, including the vital element of needing to deal with multijurisdictional enterprises. These organisations do not necessarily organise themselves by reference to corporate entities but often by reference to their products, their offerings or geographical regions that go beyond the boundaries of individual nations (EMEA, Americas, Asia Pacific).

At a time when, as referenced above, we are seeing increased nationalism and protectionism, it is ever more important that the insolvency professions work tirelessly to ensure that our processes and the way in which we interact with one another are as effective as possible. If the work of such organisations as the International Insolvency Institute and INSOL was important in the first two decades of the century, it is ever more so as we enter these challenging times.

We have good evidence of the benefits of collaboration between practitioners and the judiciary across borders and continued efforts are being made to ensure that the value of bankruptcy estates is maximised by making the borders as frictionless as possible. If the commentators are right and the next downturn/correction will be within the next 12 to 18 months, we are going to see great challenges to the professions in giving effect to this.

As a small microcosm of the issue, I was asked a while ago how the Nortel realisations might have been impacted had the disposals taken place in a post Brexit world as opposed to a world in which the whole of the EMEA estate of Nortel was filed in a single country, the UK. Whilst not being able to put a precise number on the value reduction, it was quite clear to me, having actively participated in the series of disposals, that purchasers of the various businesses who paid billions of dollars, would have had major concerns if they had not been able to acquire Nortels operations in all of the geographies in which it traded. If separate insolvency practitioners had been appointed to every separate corporate entity, the likelihood of being able to deliver a joined-up business to each of the purchasers, was much lower.

I recall a much smaller version of Nortel that my firm handled before the EU regulations came into place in 2003, similarly with a Canadian parent, where the recoveries were very disappointing given that each individual entity within EMEA had to file separately and their officeholders looked after the interests only of that country’s creditors with, justifiably, little or no regard to the general position.

Initiatives to improve cross-border cooperation and court-to-court communication continue in many jurisdictions:• In the US, Congress is looking at proposals for revisions to the chapter 15 regime.• In south-east Asia, the Asian Business Law Institute continues its work to look at the insolvency

regimes of a dozen or so countries, to improve consistency and increase the level of cooperation between the Judiciary and the professions.

• In China, in the Shenzhen province, a bankruptcy court has been opened which is in part designed to deal with the issues arising from foreign investment in China and the cross-border issues arising.

• Conversely, within the EU, the UK and the other remaining 27 countries are grappling with Brexit and may well have to deal with a situation in which UK-based companies cannot be easily managed within a European group after March 2019.

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Court-to-court communication is something that is increasingly relevant, and on this subject, the International Insolvency Institute is reviewing the findings of a survey conducted with judges from a number of jurisdictions, which will be presented as part of the annual conference in Barcelona in June 2019.

The Judicial Insolvency Network, formed a couple of years ago to provide a platform for dialogue between judges from a number of jurisdictions, has recently added Seoul and the Cayman Islands to its impressive list of participating courts. This communication has already proved very successful in many situations and ensured the smoothest possible facilitation for assisting in complex cross-border matters.

Concluding commentsMost of the indicators and the received wisdom within the marketplace is that there will be some form of downturn/correction in many jurisdictions over the course of the next 18 months. The more progress that we are able to make in creating the frameworks for dealing with multijurisdictional groups, the better prepared we will be. The consequences of not being fully prepared are very significant indeed. It is down to organisations like the International Insolvency Institute and others to further the cause of cooperation and communication in order to avoid significant loss of value to creditors.

Post scriptIt is hard to sign off on this Foreword without some recognition of the turmoil within my own country at the time of writing. The Brexit debate has divided the nation and whatever one’s view on whether or not we should leave the European Union and on whatever the terms of the disengagement, the uncertainty has created major problems for the country politically, socially and economically.

The UK’s growth over the past six or seven years has been sluggish and forecasts of growth for 2019 and 2020, even based on a smooth Brexit process, continue to be at the lower end of the G20 spectrum. In the event of a hard-edged Brexit, economists find it difficult to judge the level of further negative impact on economic growth, both in terms of quantum and duration. The level of investment from both outside the UK and within the UK is reducing and until matters are resolved satisfactorily, both consumer and corporate confidence remain low.

I hope that by the time this article goes to press we have a clear way forward. Continued uncertainty does no good at all.


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Overview of UNCITRAL texts in the area of insolvency lawSince the early 1990s UNCITRAL has adopted a number of different legislative texts in the field of insolvency law, addressing both domestic and cross-border aspects of insolvency. Those texts have been used worldwide as a benchmark for insolvency law reform.

The first of the UNCITRAL insolvency text was the UNCITRAL Model Law on Cross-Border Insolvency with its Guide to Enactment (1997) (the MLCBI), which focuses on providing a legal framework to assist the conduct of cross-border insolvency cases involving a single debtor. It establishes straightforward requirements for the recognition of foreign insolvency proceedings, which aim at minimising formality, time, costs and disputes and promoting predictability of outcomes in cross-border insolvencies. The MLCBI has been used as the basis for enacting domestic cross-border insolvency legislation in 48 jurisdictions2 and to the knowledge of the UNCITRAL secretariat, several States are currently considering enacting the MLCBI, including India, Ireland and Thailand.

Some case law on MLCBI has raised questions relating to the interpretation of certain provisions of the MLCBI, in particular, the meaning of “centre of main interests” (COMI), the scope of the public policy exception in article 6 and application of the relief provisions in articles 19, 20 and 21. To provide additional information and clarify those issues of interpretation and application, the 1997 Guide to Enactment accompanying the MLCBI was revised, and on the basis of a revised text, without changing the substance of the MLCBI

itself, the Commission adopted the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency in 2013.

Throughout the 2000s, UNCITRAL worked on its Legislative Guide on Insolvency Law addressing key aspects of insolvency law, such as commencement standards, avoidance and liquidation and reorganisation proceedings. Parts one and two of the UNCITRAL Legislative Guide on Insolvency Law dealing with those key issues were adopted in 2004. They were supplemented by part three addressing treatment of enterprise groups in insolvency in 2010 and by part four on directors’ obligations in the period approaching insolvency in 2013.

In addition to the legislative texts, UNCITRAL has authored a number of practical tools of a particular relevance to judges in response to the experience with the use of the MLCBI. In 2009, UNCITRAL adopted the Practice Guide on Cross-Border Insolvency Cooperation, which expands on article 27 of the MLCBI, discussing the various ways in which cooperation in cross-border insolvency cases can be achieved and compiling experience with the use of cross-border insolvency agreements. In 2011, “The UNCITRAL Model Law on Cross-Border Insolvency: The Judicial Perspective” was adopted, which was subsequently updated in 2013. It identifies issues that may arise on an application for recognition or cooperation under the MLCBI and discusses approaches that courts have taken in countries that enacted the MLCBI.

The 2018 UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) with its Guide to Enactment is a recent addition to the UNCITRAL

The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966 as the core legal body within the United Nations system in the field of international trade law. Considering that divergencies arising from laws of different States in matters relating to international trade constitute one of the obstacles to the development of world trade, the Commission was entrusted with the mandate to further the progressive harmonisation, modernisation and unification of the law of international trade.

by Samira Musayeva, UNCITRAL Secretariat, Office of Legal Affairs, United Nations1

The current work by UNCITRAL in the area of insolvency law

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insolvency texts, and in July 2019, UNCITRAL is expected to add thereto texts on enterprise group insolvency (a model law with its guide to enactment and a text addressing obligations of directors of enterprise group companies) (see below).

The UNCITRAL secretariat assists States with the use of UNCITRAL texts, in particular by providing technical assistance with drafting legislation based on those texts. Harmonised interpretation of UNCITRAL legal texts is facilitated by the Case Law on UNCITRAL Texts (CLOUT) system, under which the UNCITRAL secretariat publishes abstracts of judicial decisions (and, where applicable, arbitral awards) that interpret conventions and model laws emanating from UNCITRAL in the six official languages of the United Nations and the full, original decisions are available, upon request. There are currently 118 cases on the MLCBI in the system. With the enactment of the MLIJ by States and ensuing case law, the CLOUT system is expected to be enriched by MLIJ-related case law as well. 3

Most recent developments The 2018 UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) with Guide to EnactmentUNCITRAL took up the work on the topic of recognition and enforcement of insolvency-related judgments in order to address both the lack of an international instrument covering the recognition and enforcement of these judgments, as well as some uncertainty as to whether articles 7 and 21 of the MLCBI explicitly provides the necessary authority for such recognition and enforcement.

The resulting MLIJ, with its Guide to Enactment, complements the MLCBI by allowing any foreign insolvency-related judgment to be enforced, including a judgment relating to the recovery of assets of the debtor located in a jurisdiction whose insolvency proceedings would be neither a main nor a non-main proceeding under the MLCBI. Article X of the MLIJ is specifically addressed to States that have enacted legislation based on the MLCBI explicitly clarifying that, notwithstanding any prior interpretation to the contrary, the relief available under article 21 of the MLCBI includes recognition and enforcement of a judgment.

The MLIJ defines an insolvency-related judgment as one that arises as a consequence of or is materially associated with an insolvency proceeding (whether or not that proceeding has closed) and was issued on or after the commencement of the insolvency proceeding. It does not include a judgment commencing an insolvency proceeding, since it would be covered by the MLCBI, but the Guide to Enactment makes it clear that some of the orders made at the time of commencement, those that are referred to in some jurisdictions as first day orders, would fall within the definition.

The MLIJ specifies certain conditions and the procedure for recognition and enforcement of an insolvency-related judgment and effect of a recognised judgment in the recognising State. It allows recognition and enforcement of a severable part of a judgment and granting a provisional relief.

MLIJ also identifies grounds for refusal of recognition and enforcement, including: (a) if recognition and enforcement would be manifestly contrary to the public policy, including the fundamental process of procedural fairness; (b) if basic due process requirements (e.g. proper notification) were violated in the proceeding giving rise to the judgment; (c) where the judgment was obtained by fraud; (d) where the judgment is inconsistent with a judgment issued in the recognising State in a dispute involving the same parties or with an earlier judgment issued in another State in a dispute involving the same parties on the same subject matter, provided that that judgment is capable of being recognised and enforced in the recognising State; and (e) where concerns arise over the administration of the debtor’s insolvency proceedings, over protection of interests of creditors and other interested persons or over the jurisdiction of the originating court.

An upcoming adoption of texts on enterprise group insolvencyRecognising that the MLCBI focuses on cross-border insolvency proceedings relating to a single debtor and that insolvency of multiple debtors members of the same enterprise group may require a different treatment, UNCITRAL commenced work on the insolvency treatment of enterprise groups in 2006. That work resulted


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in part three of the UNCITRAL Legislative Guide on Insolvency Law, adopted in 2010, which includes both domestic provisions to facilitate the conduct of enterprise group insolvencies, as well as provisions on cooperation and coordination in the cross-border context. The latter extend the cooperation and coordination principles of chapter IV of the MLCBI to multiple debtors connected by membership of an enterprise group.

The work on the topic subsequently proceeded with the intention to prepare a model law on enterprise group insolvency. At its 54th session, in December 2018, the Working Group completed its work on a draft model law on enterprise group insolvency (the draft MLEGI), and transmitted the text for finalisation and adoption by UNCITRAL at its forthcoming annual session in Vienna, in July 2019. The draft MLEGI was also circulated in January 2019 for comment by States and relevant international organisations. Any comments received by the UNCITRAL secretariat will be put before UNCITRAL for consideration together with the draft MLEGI. It is anticipated that at that session the Commission will be in the position to finalise and adopt the UNCITRAL model law on enterprise group insolvency on the basis of the draft MLEGI.

This will be a step further in providing to States a legislative template for addressing enterprise group insolvencies. The draft MLEGI extends the recommendations contained in part three of the Legislative Guide, particularly as they relate to the cross-border context, by allowing a certain degree of centralisation of insolvency proceedings relating to multiple debtors of the same enterprise group with the goal of protecting, preserving, realising or enhancing the overall combined value of group members. Such centralisation is achieved through mechanisms that allow (a) the negotiation of a proposal or a set of proposals in the planning proceeding for the reorganisation, sale or liquidation of some or all of the operations and assets of one or more enterprise group members (a “group insolvency solution”); (b) approval domestically, and cross-border recognition, of the planning proceeding and the group insolvency solution; (c) provision of appropriate relief to assist

development and implementation of the group insolvency solution; and (d) the treatment of foreign creditor claims in the jurisdiction that commences insolvency proceedings in accordance with the law applicable to those claims (often referred to as “synthetic” measures).

New terms introduced include, in addition to “group insolvency solution” discussed above: “group representative”, being a person or body including one appointed on an interim basis authorised to act as a representative of a planning proceeding; and “planning proceeding”, being a proceeding commenced in respect of an enterprise group member in the State where that member has the COMI, provided: (i) one or more other group members are participating in that proceeding for the purposes of developing and implementing a group insolvency solution; (ii) the enterprise group member subject to the proceeding is a necessary and integral part of the group insolvency solution; and (iii) a group representative has been appointed.

The text is based upon several widely-agreed foundational principles: preservation of the jurisdiction of the State in which each group member has its COMI; preservation of the ability to commence insolvency proceedings in respect of a group member as and when such proceedings might be required; and protection of the interests and expectations of creditors and other interested persons.

In parallel with its work on the draft MLEGI, the Working Group has been working on two other closely related texts: a draft guide to enactment to accompany the model law and a supplement to part four of the UNCITRAL Legislative Guide on Insolvency Law addressing obligations of directors of companies that are members of an enterprise group.

The work on the guide to enactment is expected to be finalised at the Working Group’s session in May 2019 and afterwards transmitted to the Commission so that it could consider it together with the draft MLEGI. The text addressing specific obligations of directors of enterprise group members participating in the development of a group insolvency solution was finalised by the Working Group at its December 2018 session. It will be before the Commission for finalisation


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and adoption at the same time as the draft MLEGI and its guide to enactment.

Insolvency of micro, small and medium-sized enterprises (MSMEs)The Working Group is currently working on developing appropriate mechanisms and solutions to address the insolvency of MSMEs, focusing on both legal and natural persons engaged in commercial activity. At the Working Group session in December 2018, the prevailing view was that work should focus on the needs in the first instance of individual entrepreneurs and micro and small businesses of an essentially individual or family nature with intermingled business and personal debts.

The UNCITRAL Legislative Guide on Insolvency Law was used as the starting point for discussion and the Working Group identified issues that were not addressed in the Legislative Guide. Personal guarantees and parallel proceedings for managers and MSMEs debtors were given as examples of issues not addressed in the Legislative Guide but that, in the view of some delegations, would require detailed treatment in the context of MSMEs insolvency.

The Working Group also looked into issues that would justify different treatment in the context of MSMEs insolvency in the light of factors that usually discourage micro and small business debtors from seeking timely solutions to their financial difficulties. Those factors include, in addition to costs, complexity and the lack of knowledge, a risk of loss of control over the business and the social stigma of insolvency. The Working Group considered various options to address them, including confidential out-of-court procedures with a possible active role of an administrative authority as a persuasive mediator, the debtor-in-possession approach as the default, a quick discharge, imposition of fewer restrictions on professional and financial activities of a discharged debtor and other mechanisms to facilitate a fresh start. It was acknowledged that appropriate safeguards would need to be in place to prevent and punish abuses of a simplified insolvency regime.

Practicability, flexibility, time- and cost-efficiency and maintaining a balance between the interests of debtors and creditors and other interested persons were cited as essential considerations to keep in mind in devising any simplified insolvency mechanism. It was also recognised that many mechanisms that would facilitate the resolution of financial difficulties of micro and small business debtors would be found outside the insolvency law framework. They would comprise educational, taxation, banking and institutional measures, including enabling the completion of many procedural steps online using readily available templates and providing access to low-cost professional advice on debt restructuring.

The form that the work of UNCITRAL on MSMEs’ insolvency might take is still to be decided. Various proposals are considered, including preparation of a supplement to the UNCITRAL Legislative Guide on Insolvency Law or a stand-alone text.

Notes:1 The views expressed in this article are those

of the author and do not necessarily reflect those of the United Nations.

2 As of March 2019, Bahrain was the latest enacting State. A list of enacting jurisdictions is available at uncitral.un.org.

3 Available at http://www.uncitral.org/clout/search.jspx?f=en%23cloutDocument.textTypes.textType_s1%3aModel%5c+Law%5c+on%5c+Cross%5c-Border%5c+Insolvency%5c+%5c(1997%5c).

Author:Samira Musayeva, Legal Officer,

Secretary, Working Group V (Insolvency Law)International Trade Law Division

(UNCITRAL secretariat)Office of Legal Affairs

United NationsWebsite: uncitral.un.org


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Pre Pre-PackIn March 2017 the Group initiated a thorough strategic review to undertake a detailed examination of all possible options to address the £220m debt burden of the Group. The Group comprised the largest publisher of UK regional newspapers and was owner of the “i”, the digital version of the former Independent newspaper. In particular the review considered the financing options in relation to a refinancing or restructuring of its senior secured bonds (the “Original Bonds”). Given the debt burden, a pension deficit and the fact that the group operated in an industry in strategic decline, the board of directors (the “Board”) explored multiple options for the Group including a debt for equity swap, third-party equity and/or debt refinancing and a regulated apportionment arrangement of the group’s defined benefit pension scheme as well as a formal sales process for the entire Group.

The Company announced in October 2018 that the Board had decided to seek offers for the purchase of the Company. However, after careful consideration, the Board concluded that none of those offers would result in net proceeds sufficient to enable the Group to repay the amounts owed by it in respect of its Original Bonds. Based on the valuation of the Group implied by those offers and given the level of liabilities in the Group, the Board concluded that there was no longer any value in the ordinary shares of the Company. The Board therefore concluded that it was necessary for

the Group to be placed into administration via a Pre-Pack. This preserved jobs and ensured the continuation of the business as a going concern.

Pre-PackUnder the Pre-Pack, all of the Group’s businesses and substantially all of the Group’s assets were sold to a newly-incorporated group of companies controlled by holders of the Original Bonds through JPI Media. Holders representing the required majority of the Original Bonds contractually agreed to support the transaction. The Company’s ordinary shares were cancelled from listing on the London Stock Exchange. Bondholders wrote off approximately 70% of the Original Bonds, reducing this to £85m from £220m. New notes (the “New Notes”) were issued as well as new equity (the “New Equity”) plus new money injected into JPI Media. Through a well organised and executed process the Pre-Pack was implemented in accordance with the pre-arranged steps and timetable.

As the Company was listed it was necessary to consider the requirements of the London Stock Exchange and ensure confidentiality of the transaction. Therefore, administration orders were obtained outside ordinary Court hours in England, Scotland and Northern Ireland following the company’s announcement on the afternoon of November 17, 2018.

In addition to the practical expertise enabling GLAS to provide services across the

Following a strategic review, the restructuring and asset sale of British newspaper group Johnston Press PLC and its subsidiaries (the “Group”) to JPI Media (“JPI”) (a newly incorporated company) was implemented by way of a pre-pack administration (a “Pre-Pack”) in November 2018. Key to the transaction was the restructuring of the debt of the Group as approved by a majority of bondholders as the secured creditors of the Group. The outstanding bonds were partially written down and replaced with new notes in the form of senior notes, senior secured notes and equity. GLAS companies acted as note trustee and security agent on the original bonds and agent and security agent on the new notes as well as tabulation agent, information agent, lock-up agent, holding period trustee, calculation agent and escrow agent.

by Simon Schiff and Paul Cattermole, Global Loan Agency Services Limited (“GLAS”)

Johnston Press PLC – Restructure by pre-pack administration

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restructuring, its internal legal team worked closely with advisers to provide a proactive and commercial approach facilitating a smooth restructuring.

Pros and cons of Pre-PacksAlthough not a new restructuring strategy, pre-pack administrations have become very popular in the last few years. They are a process through which a company is put into administration and its business or assets (or both) are immediately sold by the administrator under a sale that was arranged before the administrator was appointed. It may involve a sale of a company’s business on a going concern basis or just some of the assets with the remainder of the business or assets being sold separately or liquidated.

Advantages• Cost. It is less expensive than a traditional

administration as the business is transferred to the buyer immediately or shortly after administration, so the administrators are not required to run the business.

• Return for creditors. It is likely to provide a better return for creditors than a liquidation.

• Avoids receivership and bankruptcy. Pre-Packs prevent secured creditors from enforcing a charge against the company’s property or assets which allows the company to avoid receivership and bankruptcy.

• Retention of jobs. It is less likely that there will be job losses and there are important legal protections for employees. This should limit redundancies, reducing the number of and value of preferential and unsecured claims.

• Maintains value of the company. It protects the value of the company by completing the Pre-Pack before news of insolvency reaches the market avoiding customers and suppliers losing confidence in the company.

• Business not interrupted. It facilitates continuation of the business as the administration process is pre-negotiated, so business operations are not interrupted or detrimentally affected.

• Removes burden of historical debt. In theory the newco should have a better chance of survival without the burden of historical debt and any new investment will be applied to develop and expand the business.

• Value of company may be higher. Assets of a company in financial difficulty may be sold at a higher price since the insolvency practitioner can negotiate with potential buyers before he/she has been formally appointed as administrator compared with a lengthy negotiation for a sale after the company goes into administration.

Criticisms• Lack of transparency. Though secured

creditors will usually be consulted in advance (because their consent is needed to the release of their security), unsecured creditors will not usually be informed of a Pre-Pack until after it has completed so have no opportunity to protect their interests by considering and voting on the Pre-Pack proposal.

• A lack of accountability. The decision to execute a Pre-Pack is a matter for the commercial judgment of the administrator. Accordingly, the administrator can sell assets of the company before his proposals have been agreed by creditors and without court sanction (however additional regulation in this area may make this less of a concern).

• Pre-Packs do not necessarily maximise returns for unsecured creditors. The value of a business could be destroyed if its financial difficulties are leaked. As a result, an administrator selling the business and/or assets of a company in a Pre-Pack will not necessarily test the market value of the business by wide advertising for interested buyers.

• The proposed administrator has an inherent conflict of interest. The proposed administrator may be introduced to the company by its directors in the context of a Pre-Pack proposal that the directors have begun to formulate. If the relevant insolvency practitioner wants to be appointed as the company’s administrator, he has an incentive to agree to implement the Pre-Pack.

• Writing off liabilities using a Pre-Pack is a short-term fix. A Pre-Pack sale of a business and assets does not itself subject the business being sold to a restructuring, which is often necessary if the business is to survive in the long term.


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Role of an independent agent in a Pre-PackUnder a Pre-Pack there are many roles that an independent Corporate Trust and Agency provider can fulfil which adds value in the whole process, especially with the operational mechanics, so it is advisable to discuss with and involve such a provider from the early stages of structuring a Pre-Pack. Every Pre-Pack has its own nuances and depends on what original debt the existing creditors are holding but some typical Corporate Trust and Agency roles in a Pre-Pack are:

Lock-Up Agent Required when a group of creditors are signing up to a further agreement with the issuer/borrower usually in the form of an implementation agreement. The creditors are ‘locking up’ their debt which is usually processed outside of any Clearing System for bond debt. When this occurs, proof of holding of bond debt will be required which can be a long and laborious task for the Lock-Up Agent to process.

Information and Tabulation Agent An ‘event’ is usually launched to all creditors providing them with the information to decide whether to participate in the event and also to claim any future entitlements. The Information Agent will be able to provide information and assistance to the creditors by, for example, supplying the appropriate legal documents. During the end stages of a Pre-Pack, the Tabulation Agent is required to tabulate or count votes from the creditors and to collate this information to provide to the issuer/borrower. These votes are typically made via the Clearing Systems for bonds. It is important to provide documentation in time to the Clearing Systems before the start of the process which the Tabulation Agent can assist with to ensure smooth operational processing.

Calculation Agent With most Pre-Packs, a defined amount of new debt will be issued to creditors and this can take many forms, for example new bonds, equity, loans and cash. Creditors may be able to pick and choose what they would like to receive or alternatively it may be a fixed amount. This can cause issues if existing

creditors are not able to hold the new debt. The Calculation Agent will be able to assist in determining each creditors entitlement in each type of new debt being issued.

Holding Period Trustee One of the last stages of a Pre-Pack. Creditors may hold off claiming their new debt (or ‘entitlements’) and those entitlements can be held by the Holding Period Trustee in Trust for those creditors. Upon receipt of a creditor requesting their entitlements, the Holding Period Trustee can then deliver these to the creditor. It is important that the Holding Period Trustee is aware what the entitlements are and in what markets they may be asked to hold the new debt. For example, can they hold local equity and what are the local requirements of being the registered owner of that equity, especially if it is a majority stake? Therefore, the Holding Period Trustee would seek to carve out any voting requirements on its holding.

Trustee A vital role in any Pre-Pack with existing debt and/or security and any new debt and/or security being issued or granted. The Trustee will need to consider what is beneficial for all its trust beneficiaries and will play an active role through the whole process with all interested parties including any administrators and valuers. The Trustee will need to show proactiveness and commerciality, so it is important the Trustee is onboard at an early stage in a Pre-Pack process.

Roles on the Johnston Press Pre-PackAshurst LLP advised the Group, Latham & Watkins advised the committee of bondholders and White & Case LLP advised GLAS in conjunction with its internal legal team.

GLAS companies had numerous roles demonstrating the breadth of our offering and offers a single point of contact for multiple roles in complex restructurings:• Note Trustee and Security Agent on the

Original Bonds acting under the rights and obligations and instructions made pursuant to the Original Bond documents.

• Information and Tabulation Agent in relation to the voting and instructions by Original Bondholders processed by way of an event held through Euroclear and Clearstream.


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• Lock-up Agent in relation to the lock-up arrangement applying prior to grant of the administration processed by way of confirmations received from bondholders outside of Euroclear and Clearstream.

• Holding Period Trustee and Calculation Agent in relation to distributing non-cash consideration payable to Original Bondholders including cash realised from the sale of such non-cash consideration via a broker. Also holding the non-claimed non-cash consideration for a period of one year, waiting for Bondholders to claim these entitlements.

• Agent and Security Agent in relation to the New Notes.

• Escrow Agent in relation to the new money provided by certain Original Bondholders.

GLAS continues to advise on the Original Bonds and New Bonds and to distribute consideration to the Original Bondholders.

Authors:Simon Schiff, Legal Counsel

Paul Cattermole, Head of Trustee and Escrow Services

GLAS45 Ludgate Hill

London EC4M 7JUUK

Tel: +44 20 3597 2940Email: [email protected]

[email protected] Website: www.glas.agency


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The benefits of obtaining such a broad release for non-debtor parties is clear, but its availability is limited. In fact, many foreign jurisdiction companies will choose to commence restructuring proceedings in the US or under an English law-based regime in order to secure the benefits of such a third-party release.

However, such third-party releases are often a source of controversy regardless of the jurisdiction where they are sought. This is the case in the US, where, notwithstanding its prevalence in chapter 11 plans, such provisions often draw objections and can be heavily litigated, specifically in the context of whether such releases can be granted absent the grantee’s actual consent. Some courts in the US have flatly rejected the availability of non-consensual third-party releases. In contrast, it appears to have become less and less difficult to obtain recognition and enforcement of third-party releases granted in foreign jurisdictions in cases commenced under chapter 15 of the US Bankruptcy Code.3

In several recent cases, commencing with Metcalfe in 2010 and continuing through Avanti in 2018, recognition and enforcement in the US have been granted to third-party releases contained in foreign schemes and plans even where such releases might not have been granted in a plenary US case.

Third-party releases outside of chapter 15 casesFavourable chapter 15 treatment of third-party releases must be viewed against the backdrop of the treatment of such releases in other contexts,

such as chapter 11 plans and schemes and plans sanctioned in foreign jurisdictions.

There is no consensus as to the availability of third-party releases. The US circuit courts of appeals are split as to whether a bankruptcy court has the authority to approve, over an objection, chapter 11 plan provisions that release non-debtors from liability or enjoin dissenters from asserting claims against non-debtors.4 Even those courts that believe that such authority exists would only approve such releases under limited circumstances, where (i) these releases are “essential” to the reorganisation; (ii) the parties being released are making a substantial financial contribution to the reorganisation; and (iii) the affected creditors overwhelmingly support the chapter 11 plan.5

Similar controversy has arisen in other jurisdictions. While third-party releases are generally allowed in UK schemes of arrangement and comparable regimes in other commonwealth countries, such as Canada and Australia,6 each of France, Germany and Italy prohibit granting third-party releases in connection with schemes or similar arrangements under their respective insolvency laws.7

Favourable treatment in chapter 15 casesIn chapter 15 cases, however, with growing frequency third-party releases approved by foreign courts have been recognised and deemed enforceable by US courts, with little to no consideration of the concerns that have made them controversial in chapter 11 cases. These

Non-consensual third-party releases (i.e., where companies through a plan of reorganisation, plan of arrangement, scheme, or similar in-court restructuring transaction, seek to bind third-party creditors to a full release of the restructuring company, its reorganised company, its officers, directors, affiliates, employees, professionals, lenders and other parties that played a key role in the restructuring from claims relating in any way to the company)2 are an often- sought form of relief pursued in connection with restructurings under the laws of the United States of America.

by Abhilash M. Raval, Lauren C. Doyle and Dennis C. O’Donnell,1 Milbank LLP

Cross-border restructuring in the US: Chapter 15 approval of third-party releases granted in foreign proceedings

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decisions appear to follow a line of decisions by Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York.

Avanti The most recent example of this trend is the April 9, 2018 decision in In re Avanti Communications Group PLC,8 where Judge Glenn held, among other things, that non-consensual third-party releases included in a UK scheme of arrangement were enforceable in the US under chapter 15 of the Bankruptcy Code.

In that case, Avanti Communications Group plc (“Avanti”), a satellite operator, undertook to restructure its senior secured debt consisting of more than US$890m in senior secured notes maturing in 2021 and 2023 (the “Notes”) guaranteed by certain of Avanti’s direct and indirect subsidiaries. Avanti and an ad hoc group of the holders of the Notes entered into a restructuring support agreement, which formed the basis for a scheme of arrangement under UK law (the “Scheme”) that included releases of, among others, the Guarantors, which were to be granted without the consent on the dissenting noteholders (the “Third-Party Release”).

Avanti initiated a proceeding before the High Court of Justice of England and Wales for approval of the Scheme, which, after convening a creditors’ meeting at which 98.3% of the noteholders voted in favour of the Scheme, sanctioned the Scheme, finding jurisdictional, statutory and fairness requirements to be satisfied. Thereafter, Avanti’s foreign representative commenced a chapter 15 case in the US court seeking, among other relief, the enforcement of the Scheme in the US, including the Third-Party Releases.

Judge Glenn granted the relief sought, concluding that the Scheme, including the Third-Party Releases, was entitled to recognition in the US because (i) it satisfied the requirement of chapter 15 of the Bankruptcy Code; (ii) it did not prejudice the rights of US citizens or violate US domestic public policy; and (iii) the Third-Party Releases were necessary to give practical effect to the Scheme.

While acknowledging the controversy with respect to approval of third-party releases by US bankruptcy and appellate courts, Judge Glenn decided he could grant recognition

and enforcement of the Third-Party Releases authorised by the UK court. Judge Glenn held that it was unnecessary to analyse the US court’s authority to approve third-party releases under chapter 11 as no chapter 11 case had been filed and, in a chapter 15 case, principles of comity and enforcement of foreign judgments were paramount, more pressing concerns (he also pointed out that only a small number of creditors impaired by the Scheme would be bound by the Third-Party Releases).

Judge Glenn pointed out that the issues presented by third-party releases in chapter 15 cases are different than those courts have to grapple with in chapter 11 cases, the focus being on whether the foreign court had the proper authority to grant the releases and, accordingly, whether to enforce the release approved by the foreign court was “appropriate relief” and “additional assistance” authorised by sections 1507 and 1521(a) of the Bankruptcy Code.

Judge Glenn distinguished In re Vitro S.A.B. de C.V., 70 F.3d 1031 (5th Cir. 2012), the one reported case where a US court declined to recognise a third-party release approved by a foreign court. In Vitro, the Fifth Circuit declined to grant comity and enforce the Mexican court’s order approving a concurso plan that released non-debtor affiliates’ guarantees. In distinguishing Vitro, Judge Glenn noted both that third-party releases are generally not available in the Fifth Circuit, and, more importantly, that Vitro “had a number of very troubling facts,” such as the fact that the creditor approval of the concurso plan was achieved only by counting insiders’ votes, which would not have been counted to approve a chapter 11 plan pursuant to section 1129(a)(10) of the Bankruptcy Code. It was this misalignment of the Vitro’s concurso proceeding with fundamental US policy – which was not an issue in Avanti or any of the other cases discussed here – that was chiefly responsible for the Vitro court refusing to recognise the non-debtor releases approved by the Mexican court.

MetcalfeJudge Glenn has reached a similar conclusion in In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010). In that chapter 15 case, the court agreed to provide “additional assistance” to


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a Canadian debtor by enforcing a Canadian court’s order confirming a restructuring plan that contained third-party releases, even though it was far from clear whether such releases would have been approved in a chapter 11 case.

The Metcalfe court took comfort in the following: (i) the third-party release provisions had been contested and fully litigated in the Canadian court; (ii) the Canadian court expressly found that it had jurisdiction to grant the releases; and (iii) the Canadian plan received a very high level of non-affiliate creditor support. Id. at 699-700.

In the end, Judge Glenn concluded, as he did in Avanti, that any uncertainty about the validity of third-party releases was of little significance in a chapter 15 case, and that “principles of enforcement of foreign judgments and comity in chapter 15 cases strongly counsel approval of enforcement in the United States of the third-party non-debtor release and injunction provisions included in the Canadian Orders, even if those provisions could not be entered in a plenary chapter 11 case.” Metcalfe, 421 B.R. at 696.

Sino-ForestIn In re Sino-Forest Corp., 501 B.R. 655 (Bankr. S.D.N.Y. 2013) – a third decision by Judge Glenn on this issue – the court employed the same rationale articulated in Metcalfe, recognising and enforcing, as a form of “additional assistance” under section 1507, a Canadian court-approved settlement containing a third-party release. Because the issue of the propriety of the third-party releases had been “fully and fairly” litigated in the Canadian courts, the court found that it could recognise and enforce the releases in the United States under the comity principles set forth in section 1507. Id. at 664.

The court also noted that approving the release did not violate section 1506 of the Bankruptcy Code (which prohibits enforcement of a foreign judgement if doing so would be “manifestly contrary to the public policy of the United States”) because comparable relief was available in the Second Circuit (albeit “rarely”) and seven other judicial circuits. Id.

Unreported decisionsTaking their lead from Judge Glenn, a number of other courts have undertaken similar analyses in chapter 15 cases and approved third-party releases granted by foreign courts. See, e.g. In re Emeco Holdings Ltd., No. 16-13080 (MKV), Transcript of March 8, 2017 Hearing, at 8:1-19 (Bankr. S.D.N.Y. Nov. 30, 2016) (Australian scheme releases recognised as “type of injunctive relief [that] has regularly been granted in Chapter 15 cases” and found enforceable); In re Boart Longyear Ltd., No. 17-11156 (MEW), Verified Petition [Docket No. 2] (Bankr. S.D.N.Y. Aug. 30, 2017) (enforcing releases granted in Australian scheme because “‘[t]he equitable and orderly distribution of a debtor’s property requires assembling all claims against the limited assets in a single proceeding; if all creditors could not be bound, a plan of reorganisation would fail’”) (quoting Victrix S.S. Co., S.A. v. Salen Dry Cargo A.B., 825 F.2d 709, 713-14 (2d Cir. 1987)); In re Magyar Telecom B.V, No. 13-13508 (SHL), Verified Petition ¶ 154 [ECF No. 26] (Bankr. S.D.N.Y. Dec. 11, 2013) (recognition of the third-party releases granted because “the Scheme cannot function without such releases”).

SummaryBased on these cases, it appears that, in the absence of egregious facts like those in the Vitro case, foreign debtors should assume that they will be highly likely to obtain recognition and enforcement of the protections against dissenting stakeholders granted by their home jurisdictions from US courts in chapter 15 cases.

As a result, despite the prevalence of third-party releases in US chapter 11 cases, to the extent a third-party release is an integral component of a foreign company’s restructuring, it may prove advantageous for foreign companies to avail themselves of another court’s jurisdiction in obtaining approval of a third-party release and, thereafter, seek recognition of the plan or scheme approved by the foreign court under chapter 15.

Notes:1 Abhilash M. Raval and Lauren C. Doyle are

partners, and Dennis C. O’Donnell is of counsel, at Milbank LLP.

2 Third-party releases generally release a


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specified set of claims against the “Released Parties,” which typically include a broad array of debtor-related parties, including the debtor’s directors, officers, professionals, lenders, and contract parties, etc. The parties providing such releases – the “Releasing Parties”– include a comparably broad group of debtor-related parties, including all of the foregoing, but, most relevantly, also include “(i) the holders of Impaired Claims who abstain from voting on the Plan or vote to reject the Plan but do not opt-out of these releases on the Ballots” (Second Amended Joint Chapter 11 Plan of Reorganisation of Tops Holding II Corp and Its Affiliated Debtors (with Technical Modifications), In re Tops Holding II Corp., et al., Case No. 18-22279 (RDD) (Bankr. S.D.N.Y. Nov. 8, 2019), at 73.) The claims released run an equally broad gamut, absolving the Released Parties of liability for “any and all claims, obligations, rights, suits, damages, Causes of Action, remedies, and liabilities whatsoever (including contract claims, claims under ERISA and all other statutory claims, claims for contributions, withdrawal liability, reallocation liability, redetermination liability, interest on any amounts, liquidated damages, claims for attorneys’ fees or any costs or expenses whatsoever), including any derivative claims, asserted or assertable on behalf of a Debtor, whether known or unknown, foreseen or unforeseen, liquidated or unliquidated, matured or unmatured, contingent or fixed, existing or hereinafter arising, in law, equity or otherwise, that such Entity would have been legally entitled to assert in its own right (whether individually or collectively) based on or relating to, or in any manner arising from, in whole or in part, the Debtors, the Estates, the Restructuring, the Chapter 11 Cases, the purchase, sale or rescission of the purchase or sale of any Security of the Debtors or the Reorganised Debtors, the subject matter of, or the transactions or events giving rise to, any Claim or Interest that is treated in the Plan, the business or contractual arrangements between any Debtor and any Released Party (other than assumed contracts or leases), the restructuring of Claims and Interests before or during the Chapter 11 Cases, the

negotiation, formulation, preparation or consummation of the Plan (including the Plan Supplement), the Definitive Documents, or any related agreements, instruments or other documents, or the solicitation of votes with respect to the Plan, in all cases based upon any other act or omission, transaction, agreement, event or other occurrence taking place on or before the Effective Date. (Id.)

3 Chapter 15 of the US Bankruptcy Code, which is derived from the Model Law on Cross-Border Insolvency, (i) furnishes “effective mechanisms for dealing with cases of cross-border insolvency with the objectives of . . . cooperation between courts of the United States . . . and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases”; and (ii) is focused on rendering “assistance” to “foreign debtors” seeking to protect assets in the US. 11 U.S.C. § 1501(a)(1),(b)(1). Chapter 11, by contrast, addresses all aspects of a statutory regime for US and foreign debtors seeking to reorganise or liquidate in a plenary case in US bankruptcy court.

4 The minority view, held by the Fifth, Ninth, and Tenth Circuits, bans such nonconsensual releases on the basis that section 524(e) of the Bankruptcy Code, which provides generally that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt,” prohibits them. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990). However, the majority of circuits to consider the issue – the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits – have found such releases and injunctions permissible under certain circumstances. See In re Drexel Burnham Lambert Grp., 960 F.2d 285 (2d Cir. 1992); In re Cont’l Airlines, 203 F.3d 203, 214 (3d Cir. 2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re Airadigm Commc’ns, Inc., 519 F.3d 640 (7th Cir. 2008); SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying, Inc. (In re Seaside Eng’g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015); see generally


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4 Collier on Bankruptcy ¶ 524.03(a) (outlining scope and basis for circuit split as to third-party releases).

5 See 4 Collier on Bankruptcy ¶ 524.03(a) (outlining applicable standard). Also often litigated in this context is whether a third- party release can be approved that deems third-party creditors to have “opted into” a release by voting in favour of a plan, as opposed to having the affirmative right to “opt into”/“opt out of” the release regardless of whether they vote in favour of or against the plan. See Christy L. Rivera, Consensual Third-Party Releases: What Constitutes “Consent”? ZONE OF INSOLVENCY (Aug. 17, 2015) (enumerating consent requirements in plan voting context); see, e.g. In re Aegean Marine Petroleum Network Inc., Case No. 18-13374 (MEW) (Bank. S.D.N.Y), Transcript of Feb. 14, 2019 Hearing, at 29 (rejecting “opt out” approach to third party releases because “[i]f we’re going to seek consent, it ought to be real consent, and it should be on an opt-in basis, not an opt-out basis.”)

6 See C. Balmond & K. Crinson, Getting the Deal Through: England and Wales (Restructuring & Insolvency) ¶ 9.

7 See F. Grillo, L. Mabilat, S. Corbiere, Getting the Deal Through: France (Restructuring & Insolvency) ¶ 9; Aleth & N. Derksen, Getting

the Deal Through: Germany (Restructuring & Insolvency) ¶ 8; R. Lener, G. Rosato, Getting the Deal Through: Italy (Restructuring & Insolvency) ¶ 8.

8 In re Avanti Commc’ns Grp. PLC, 582 B.R. 603 (Bankr. S.D.N.Y. Apr. 9, 2018).

Authors:Abhilash M. Raval

Financial Restructuring PartnerTel: +1 212 530 5123


Lauren C. Doyle Financial Restructuring Partner


Dennis C. O’Donnell Financial Restructuring Of Counsel


Milbank LLP55 Hudson Yards

New York, NY 10001US

Website: www.milbank.com


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by Peter Bowden and Anna Ryan, Gilbert + Tobin

Developments in Australian insolvency law: Combatting illegal phoenixing

Background to illegal phoenixing Phoenix activity is not defined under Australian law and can encompass both legitimate business recovery measures, as well as illegitimate manipulation of insolvency processes to seek an outcome that avoids paying creditors. Generally speaking, there is a negative connotation with respect to phoenix activity as it is ordinarily associated with illegal phoenixing.

A common example of illegal phoenix activity is the transfer of company property to another corporate entity for undervalue (i.e. less than market value) by directors and shareholders, often with the assistance of an advisor to the stakeholders such as a “pre-insolvency advisor”.1 The transaction occurs with the intention of defeating creditors and often takes place when the company is nearing insolvency. Where this occurs, the directors usually proceed to appoint a voluntary administrator very shortly after the phoenix transaction has taken place. Such activity has immediate consequences for many stakeholders, including employees and suppliers, who are often left with little recourse to recover their debts. Illegal phoenix activity also affects statutory bodies (e.g. the Australian Taxation Office) and has had significant impacts at a systemic level; it has been estimated that the direct cost to business, employees and government in Australia in 2015-16 was between A$2.85bn and A$5.13bn.2

Illegal phoenixing activity is often hard to monitor and prevent as it takes place at a time when the company is insolvent, or approaching

insolvency, and regularly results in the relevant company being ultimately deregistered. This makes recourse against the company and/or its directors problematic.

Over the last three years a series of reforms have been introduced to the Australian insolvency landscape. The Insolvency Law Reform Act 2016 (Cth) was the first step in the process of this reform, modernising the previous framework to improve confidence in the system and reduce the costs associated with insolvency. The second major step was marked by the enactment of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Enterprise Incentives Act), which aimed to promote entrepreneurial turnaround and create breathing room for distressed companies.3

More recently, in what could be described as the third step on the path to reform, the Australian Government has sought to address illegal phoenix activity as part of its ongoing modification of the Australian corporate insolvency regime. In this respect, in February 2019, the Australian Government introduced the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) (the Bill). Following a period of public consultation, the Bill is currently being considered by the Australian Government.

Once it is passed,4 the Bill will aim to combat illegal phoenix activity at the systemic level. Upon enactment, it will introduce four significant reforms affecting the Australian insolvency and tax regimes:5 • Phoenix offences: Schedule 1 of the Bill

As part of the 2018-19 Federal Budget, the Australian Government announced a series of reforms to Australia’s corporations and taxation laws to combat illegal phoenix activity. Further to this announcement, in February 2019, the Government introduced the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. The bill, which followed other recent amendments to

Australia’s insolvency regime, if passed, will provide liquidators with a means to pursue creditor-defeating dispositions of property as voidable transactions and will introduce criminal liability

for such conduct. The bill also seeks to restrict the effect of director resignations where notice to the regulator has not been given within the required time limit and prohibits the abandonment of

companies where doing so would leave the company without a director.

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introduces offences to prohibit dispositions of property that are creditor-defeating; penalise persons who engage or facilitate such dispositions; and enable liquidators and the Australian Securities and Investments Commission (ASIC) to recover property that is the subject of creditor-defeating dispositions.

• Director accountability: Schedule 2 of the Bill prevents directors from improperly backdating resignations or ceasing to be a director when to do so would leave the company with no directors.

• GST liability: Schedule 3 of the Bill enables the Commissioner of Taxation to collect estimates of, and in certain circumstances make directors liable for, outstanding Goods and Services Tax (GST) liabilities.

• Taxation powers: Schedule 4 of the Bill authorises the Commissioner of Taxation to retain tax refunds where a taxpayer has failed to lodge a tax return to ensure taxpayers satisfy their obligations and pay outstanding amounts before being entitled to a refund. In this article, we will discuss those reforms

affecting the Australian insolvency regime and the Corporations Act 2001 (Cth) (Corporations Act), namely Schedules 1 and 2 of the Bill.

Phoenix offencesBackground and rationale The Australian insolvency regime attempts to balance the ability of directors to take reasonable and commercial risks with the interests, and the protection, of creditors. Part 5.7B of the Corporations Act, amongst other things, enables liquidators to seek compensation from directors for insolvent trading6 and to recover voidable transaction claims on behalf of insolvent companies and their creditors.7 In 2017, the Enterprise Incentives Act introduced a “safe harbour” defence to insolvent trading for directors of distressed companies, aimed at encouraging early engagement with financial distress and reasonable risk-taking to facilitate financial recovery.8 This defence is subject to some strict limitations that make it unattractive for those engaging in illegal phoenix activity.

In line with the legislative “balancing act” (referred to above), the Bill proposes new criminal offences and civil penalty provisions to improve the mechanisms available to both

liquidators and ASIC to combat creditor-defeating dispositions of company assets.

The new laws If passed, the Bill will see the introduction of a new section 588FE(6B) into the Corporations Act. The new section will provide that a transaction is voidable if it is a creditor-defeating disposition of the company’s property, and the transaction was made when the company was insolvent or the transaction causes the company to become insolvent or enter external administration within the following 12 months.9 Liquidators will bear the onus of demonstrating that the disposition contributed (directly or indirectly) to the company entering external administration.10 The proposed new section 588FE(6B)(c) provides that a transaction will not be voidable where it was entered into under a compromise or arrangement approved by a Court under section 411 of the Corporations Act; occurred pursuant to a deed of company arrangement; or where it was entered into by an administrator, liquidator or provisional liquidator.11 These exemptions are in place to ensure that legitimate restructuring efforts can still take place.

The term “creditor-defeating disposition” is defined in the proposed new section 588FDB to the Corporations Act as “a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up”; intent is irrelevant.12

The Bill also proposes to give ASIC specific powers to apply for an order to recover property disposed of under a voidable creditor-defeating disposition for the benefit of a company’s creditors. The purpose behind expanding this power is to allow ASIC to intervene where it forms the view that the liquidator is not fulfilling his or her duty to the company’s creditors to recover property on the basis that the liquidator may have been complicit in the illegal phoenix activity.

Liquidators may also apply to ASIC seeking such an order.13 Notably, Courts retain the power to set aside an ASIC order within 60 days under the proposed new section 588FGAE of the Corporations Act.

Importantly, the Bill seeks to also impose a duty on an officer of a company to prevent


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creditor-defeating dispositions. The Bill provides that an officer of the company must not engage in conduct that results in a creditor-defeating disposition. A contravention of these sections would constitute a criminal offence with recklessness being the fault element. To be held criminally responsible, the officer must be reckless as to the result of his or her conduct.14 The Bill would also introduce a civil penalty provision on similar terms (other than the reckless fault element). To establish a contravention of the civil penalty provision, it is sufficient to establish that a reasonable person would know the result of their conduct would be the company making a creditor-defeating disposition that prevents, hinders or significantly delays the disposed property becoming available to creditors (a negligence standard).15

The Bill further provides for the same criminal offence and civil penalty regime in relation to facilitators; any natural or legal person involved in a contravention. The basis for culpability in this case is specific conduct to procure, incite, induce or encourage the company to make the relevant disposition.16 Compensation may also be sought for a contravention of these provisions. The rationale for extending the offence to capture facilitators of illegal phoenix activity is to ensure that dispositions undertaken during external administration by an administrator or liquidator (other than those undertaken as part of an arrangement with creditors) are scrutinised and improper dispositions intended to defeat creditors are penalised.

The Bill also seeks to expand the “safe harbour” defence17 to apply to creditor-defeating dispositions where it is shown that such a disposition is made in connection with a course of action that is “reasonably likely to lead to a better outcome for the company” than proceeding immediately to voluntary administration or winding up.18 Similarly, the other statutory defences have been amended to encompass creditor-defeating dispositions.19 Creditor-defeating dispositions will not incur civil liability if it can be shown that a disposition was made where a defendant had reasonable grounds to expect, and did expect, the company was solvent and would remain solvent despite the disposition;20 and where a person took all reasonable steps to prevent the company making the creditor-defeating disposition.21

Application of the new phoenixing offences As the Bill is still being considered by the Government, it is premature to speculate as to how the Courts may apply the new laws regarding phoenixing offences. As noted above, the Bill seeks to provide a new mechanism for targeting illegal phoenix activity by including creditor-defeating dispositions as voidable transaction claims. As such, it is expected that there will be a significant increase in enforcement work referred by liquidators, especially in the Australian construction industry.22

If passed, the new phoenix offences described above will come into operation the day after Royal Assent.

Improving the accountability of resigning directorsBackground and rationale The Corporations Act regulates the appointment and removal of directors. Under the Corporations Act, a director may be removed by a unilateral resignation or by resolution of the members. A company must notify ASIC within 28 days if a person is appointed as, or ceases to be, a director.23

Directors engaging in illegal phoenix activity often exploit the rules around appointment and resignation of directors to escape liability for the company’s activities. For example, a former director may backdate the effective date of their resignation to escape liability or implicate a recently appointed director in respect of a contravention of the legislation. Often, directors will resign without an incoming director, abandoning the company and rendering it unable to notify ASIC of the resignation. This leaves the company registered with ASIC, possibly accumulating debt until creditors or ASIC commence winding up proceedings.

The Bill introduces new provisions dealing with the illegitimate backdating of director resignations and the abandonment of companies by directors where doing so leaves the company without oversight by a natural person.

The new lawsThe Bill introduces a new section 203AA to the Corporations Act providing that where a director’s resignation is reported to ASIC more than 28 days after the purported resignation,


20

the resignation will take effect on the day it is reported.24

The Bill further provides that where a resignation would result in the company having no other directors, it will have no effect unless the company is being wound up.25 A similar provision is included for where a resolution of the members would result in the company having no other directors (including a similar carve out for where the company has commenced a winding up).26

Application of the new resignation lawsBy way of illustration it is understood that the new back dating provisions would operate as summarised below:(i) John is the sole director of XYZ Pty Limited

(XYZ). In May, XYZ enters into a loan agreement at a time when XYZ is insolvent. In June of the same year, the funds advanced to XYZ are transferred, together with other assets of XYZ, to another company controlled by John, known as XYZ Pty Ltd (No 2) (XYZ No 2).

(ii) Two months after XYZ transfers the loan funds and its assets to XYZ No 2, a third-party creditor of XYZ commences proceedings seeking to wind up XYZ and a liquidator is appointed to XYZ in October.

(iii) Shortly after the appointment of the liquidator, in November, John lodges a form with ASIC resigning as director of XYZ and asserting that he was replaced by Jim. Under the new back dating provisions, John’s

resignation is taken to be effective from the date the form is lodged with ASIC and, on that basis, he may be liable for a breach of duty to prevent the company from trading while insolvent and for causing the company to make a creditor-defeating disposition.

A director may apply to ASIC within 56 days of the purported date of resignation or to the Court within 12 months (or longer where the Court permits) for the proper resignation date to be fixed; on application, a legitimate backdating can be effected.27

A former director bears the onus of adducing clear evidence to substantiate their position that they had ceased to be a director on the purported date in order to avoid a possible claim for breach of duty where a creditor defeating disposition occurs while the director is listed as

a director on the ASIC public register. The Explanatory Memorandum of the Bill

sets out that the abandonment provisions will be subject to an “end of day test” (that is, the resignation does not take effect at the “end of the day” if the company does not have at least one director).28 A potential issue with the application of the proposed sections 203AB and 203CA is the circumstance in which a company’s constitution contains a legal impediment to appointing a replacement director before the outgoing director may leave their office. The amendments therefore apply at the end of the day on which the director purports to resign. If another director is appointed the same day as the resignation, the resignation is effective. The same applies where there are multiple resignations.

These amendments, as well as the backdating amendments, will commence on the day following Royal Assent, except for those relating to director resignations and resolutions to remove directors (which will take effect on or after the day 12 months following Royal Assent).

Concluding remarksBroadly, these reforms are a welcome and much-needed addition to the Australian insolvency landscape. The proposed phoenixing offences should better equip liquidators to pursue creditor-defeating dispositions of company property, ensuring that dispositions falling outside of the previous types of voidable transactions are recoverable for the benefit of creditors.

The insertion of a criminal and civil penalty regime specifically targeting creditor-defeating behaviour should have a strong deterrent effect on persons engaging, or seeking to engage in illegal phoenix activity. This is enhanced as the offences and civil penalty provisions apply not only to officers of the company, but also the facilitators of illegal phoenix activity; the persons who, in most cases, encourage, propose and facilitate creditor defeating dispositions.

Notes:1 There is no definition of “pre-insolvency

advisor” under Australian law. Many pre-insolvency advisors are not associated with illegal phoenixing activities and have legitimate intentions in respect of the entities they act for. However, certain pre-insolvency


21


advisors have gained a reputation in the industry for using phoenixing as a means by which companies can avoid paying their debts.

2 PricewaterhouseCoopers, The Economic Impacts of potential Illegal Phoenix Activity, prepared July 2018.

3 For discussion on the ‘safe harbour’ and ‘ipso facto’ reforms, see: Bowden, P. & Ryan, A., Revitalising Australian restructurings: Developments in Australian insolvency law, CMI International insolvency & Restructuring Report 2018/19, 2018.

4 At the time of writing this article, the Bill has been considered by the House of Representatives and then referred to, and considered by, the Senate Economics Legislation Committee and the Senate Standing Committee for the Scrutiny of Bills. Unfortunately, the Bill did not pass prior to the dissolution of the Australian Parliament ahead of the Federal election in May 2019. As is the usual process where a Bill has lapsed, the Bill will be re-introduced to Parliament following the election. It is the authors’ expectation that the Bill will be reintroduced in mid-late 2019.

5 Explanatory Memorandum to the Bill, 3-4. 6 Section 588M of the Corporations Act. 7 Section 588FF of the Corporations Act. 8 Section 588GA of the Corporations Act. 9 Schedule 1, Item 20 of the Bill. 10 Explanatory Memorandum to the Bill,

2.33, 19. 11 Above n 9. 12 Explanatory Memorandum to the Bill, 2.12,

15; also see Schedule 1, Item 18 of the Bill.13 Schedule 1, Item 25 of the Bill.14 Explanatory Memorandum to the Bill, 2.69,

26; Schedule 1, Item 33 of the Bill. 15 Explanatory Memorandum to the Bill, 2.76,

28; Schedule 1, Item 33 of the Bill. 16 Ibid. 17 Until the enactment of the Bill, the safe

harbour defence only relates to insolvent trading claims.

18 See section 588GA of the Corporations Act; Schedule 1, Items 25 and 34-41 of the Bill.

19 Schedule 1, Items 45 – 54 of the Bill.20 An expectation of solvency must be supported

by facts that point to a high degree of certainty. A mere hope, possibility or suspicion that the company is solvent is insufficient. Explanatory Memorandum to the Bill, 2.97, 31.

21 Explanatory Memorandum to the Bill, 2.100-101, 32.

22 Senate Economics References Committee, Insolvency in the Australian construction industry (2015).

23 Explanatory Memorandum to the Bill, 3.2-3.11, 41-2.

24 Explanatory Memorandum to the Bill, 3.16, 43; Schedule 2, Item 2 of the Bill.



27 Schedule 2, Item 2 of the Bill; Explanatory Memorandum to the Bill, 3.21, 44.

28 Explanatory Memorandum to the Bill, 3.25, 45.

Authors:Peter Bowden, Partner

Anna Ryan, Senior LawyerGilbert + Tobin

L35, Tower TwoInternational Towers Sydney

200 Barangaroo AvenueBarangaroo

NSW 2000 Australia


Email: [email protected]: www.gtlaw.com.au


22

The starting point for restructuring and considering restructuring trusts as a potential instrument to align lenders’, shareholders’ and the debtor company’s interests or at least to find the lowest common denominator among them, is usually when the debtor faces a severe financial crisis and credit institutions or other lenders lose further trust in the skills of the shareholders and the debtor company’s management. Even in a situation where lenders’ collateral package already includes the shares in the debtor company, enforcement in a debtor’s financial crisis will usually generate substantially lower recovery compared to a sale in a structured sales process.

For setting up a restructuring trust, the lenders and the shareholders jointly appoint a restructuring trustee (Treuhänder) with the mandate to accept, hold and, if certain criteria are satisfied, to sell or re-transfer the shares in the debtor company. The restructuring trustee becomes the owner of the full rights of the shares (Vollrechtstreuhand) and therefore has the power to exercise all rights arising from the shares, including the right to sell the shares.

In the underlying restructuring trust agreement, the lenders and the shareholders agree with the restructuring trustee on general guidelines for the trusteeship, such as certain triggers for initiating the sales process in relation to the shares, milestones and timing, as well as other terms, such as corridors for a minimum purchase price and representations and warranties.

The “double-sided restructuring trust” combines an administrative component, which

is the administration of the participation conferred by the shares, and the security component, which covers the potential to realise the value embedded in the shares in case of an event of default or other events defined in the restructuring trust and finance agreements.

Following the execution of the restructuring trust agreement and the transfer of shares, the restructuring trustee is independent from the shareholders and the lenders in administering and executing the predetermined restructuring and sales process. This typically also avoids deadlock situations in restructuring and enforcement scenarios while the usual basic strategic goal of the structure remains to avoid an insolvency scenario (by maintaining or increasing the lenders’ financing position) and to allow a structured sales process for the debtor company.

The key element for a restructuring trust agreement is the agreement that the restructuring trustee is not bound by instructions from the lenders and the shareholders (Weisungsfreiheit). On the one hand, this is crucial for making the restructuring trust an instrument that continues to be effective even after the opening of insolvency proceedings and, on the other hand, is also vital for risk avoidance.

With respect to the first aspect of the waiver of the right to give instructions, in case of the opening of insolvency proceedings over the assets of a trustor, trusteeships with such trustors generally cease and the object of the trust is returned to the general estate of the

For a number of years, the “double-sided restructuring trust” (doppelseitige Sanierungstreuhand) has evolved in respect to large as well as mid-size companies as a viable instrument for securing financing and restructuring corporates in their times of crisis. The following article provides an outline of the general legal background and structure, the individual interests of the parties, as well as the potential risks and risk avoidance strategies.

by Dr. Markus Fellner and Dr. Florian Kranebitter, Fellner Wratzfeld & Partner Rechtsanwälte GmbH

Restructuring trusts: A viable structure for securing and restructuring financing in Austria

CAP8908 II&RR_p22_Fellner Wratzfeld Partner.indd 22 30/05/2019 16:40

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trustor. However, in respect of double-sided or multi-party trusteeships, the Austrian Supreme Court has confirmed that such trusteeships do not automatically cease as a consequence of the opening of insolvency proceedings over the assets of a trustor.

The administrator’s right to terminate not completely fulfilled contracts only applies to bi-lateral contracts, which do not include double-sided or multi-party trusteeships. To qualify as a double-sided or multi-party trusteeship in the view of insolvency law, it would be insufficient if the lenders and the shareholders agree to mandate a restructuring trustee. It is particularly essential that the parties agree that the restructuring trustee has an obligation to safeguard the interests of multiple parties (e.g. the lenders, the shareholders of the debtor company and the debtor company itself) and that rights and obligations are irrevocably assigned to the restructuring trustee.

The entering of a restructuring trusteeship and the measures undertaking a restructuring trustee might be voidable pursuant to Austrian insolvency law. Voidance on grounds of intentional discrimination of the creditors (Section 28 Austrian Insolvency Act; Insolvenzordnung - IO) would only be possible if the satisfaction of the creditors is delayed or hampered and, in particular, does not apply if the restructuring trusteeship constitutes from the perspective of the debtor company – from an ex ante point of view even objectively not correct – a promising restructuring concept.

In most instances a voidance because of a gratuitous transaction (Section 29 para 1 Austrian Insolvency Act) will not be applicable since restructuring trusteeships are entered into predominantly in consideration of granting additional funds or the prolongation of existing lines. A voidance pursuant to Section 30 et seq of the Austrian Insolvency Act is only possible if the debtor company was already materially insolvent under Austrian insolvency law at the time of the transaction. For this purpose, it should be considered to obtain a positive going concern prognosis before entering into a restructuring trusteeship, because the execution of the restructuring trusteeship as well as individual measures of the

restructuring trustee under the restructuring trusteeship may constitute detrimental transactions pursuant to Section 31 para 1 of the Austrian Insolvency Act, provided, however, that this basis for voidance also requires that the risk of the detriment occurring to the creditors was objectively foreseeable.

Therefore, one of the concepts underlying restructuring trusteeships is that fire sales are avoided and structured sales processes in relation to shares or other assets become possible and should per se not be considered detrimental.

Apart from insolvency aspects, one additional crucial aspect for granting and restructuring financing are the effects of the Austrian Equity Replacement Act (Eigenkapitalersatz-Gesetz – EKEG). This law concerns equity-replacing shareholder transactions and stipulates that loans that are granted by a “shareholder” to its subsidiary in times of a “crisis” of such subsidiary may be qualified to be equity replacing and are blocked from being repaid until the recovery from such a “crisis”. The subsidiary is in a “crisis” if it is unable to pay its debts as they fall due (zahlungsunfähig), or is over-indebted (überschuldet), or where its equity ratio is less than 8% and the fictitious debt repayment term exceeds 15 years and where these financial parameters are evident from the last prepared financial statements or would have been evident if timely prepared or the shareholders knew or should have known thereof.

In respect to the question whether the lenders in their capacity as trustors as well as the restructuring trustee may be considered a “shareholder” within the meaning of the law, Section 7 of the Austrian Equity Replacement Act provides that if a shareholder holds shares as a trustee for a third party, such a third party shall be considered for purposes of the effects of the Austrian Equity Replacement Act a shareholder, unless the trusteeship was disclosed in the credit agreement.

However, whether restructuring trusteeships are qualified as trusteeships within the meaning of Section 7 of the Equity Replacement Act has not been decided yet. Pursuant to Section 5 para 1 cif 3 of the Equity Replacement Act, lenders, even if they are not direct or indirect shareholders of the debtor company,


24

might be qualified as “shareholders” within the meaning of the Equity Replacement Act if they have a dominant influence on the management. Such influence might arise from the fact of the financing itself; only lender’s typical rights, such as information and book-insight rights, are excepted. Pursuant to Section 8 para 1 cif 1 of the Equity Replacement Act those lenders who have the possibility (even if not exercised) to exercise a controlling interest by having the right to give directives to the restructuring trustee to nominate and replace the majority of the members of the management are also included in the “shareholder” definition of the Equity Replacement Act.

Collateral, which has been provided during the crisis by a “shareholder” in addition has the effect that if such collateral secures existing claims of the debtor company, the lenders cannot claim repayment of such claims but rather must first request from the shareholder the repayment (Section 15 et seq of the Equity Replacement Act).

Whether the restructuring privilege (Sanierungsprivileg) pursuant to Section 13 of the Equity Replacement Act, which provides that the acquisition of shares against the grant of new credit lines is not considered equity replacing, is applicable to restructuring trusteeships has not been decided yet. Therefore, a diligent drafting of the restructuring trust agreement must seek to avoid application of the Equity Replacement Act and detrimental effects on the lenders, by including inter alia the aforementioned waiver of the right to provide instructions to the trustee in relation to the shares and the shareholder rights.

From the lenders’ point of view, particular caution is required when structuring double-benefit trusts in view of the potential liability risks associated with them, in particular those arising from the case law on de facto management (faktische Geschäftsführung) and liability for delay in applying for insolvency proceedings (Insolvenzverschleppung).

The de facto managing director (faktischer Geschäftsführer) is a person managing the company without, however, having been formally appointed to the management body of the company. The interests of parties to a restructuring agreement, in particular the

interest of lenders, often includes a limitation of certain rights conferred to the debtor company’s management. This may give rise to liability for lenders, if the lenders exercise their rights to issue instructions indirectly via the restructuring trustee or matters within the scope of authority of the management of the company. While outside the crisis of a company, individual directives by lenders generally do not create liabilities, the standards for potential liabilities in a crisis are much stricter.

In a crisis, individual actions, in particular the implementation of restructuring actions by the restructuring trustee upon instructions of the lenders, may give rise to liability. It has to be clarified that even persons who are not shareholders may act as de facto managing directors and therefore instructions to the trustee through financing banks may potentially give rise to liability.

In respect to the question if only persons or even corporate bodies can act as de facto managing directors, the Federal Court of Justice of Germany stated that this is only possible in respect to natural persons. In Austria, such opinion would probably not be assumed by the Supreme Court, when taking similar decisions by the court into account. For instance, the Supreme Court has established legal precedant that in respect to partnerships, corporate bodies can act as managing directors; a distinction would hardly be understandable for lenders.

Liability for delay in applying for insolvency proceedings arises if the managing director fails to comply with his obligation to apply for insolvency proceedings once the criteria for insolvency are met. The Supreme Court has already decided that a de facto managing director has such an obligation in accordance with Austrian corporate law and he has to at least instruct the management to apply for the opening of an insolvency proceeding. In case of a restructuring trusteeship structure, the lenders (assuming that they are de facto managing directors) would have to apply for insolvency proceedings themselves or they would have to influence the trustee (as shareholder) and/or the managing directors to do so. The damage, which is to be compensated if the delay in applying for


25


insolvency proceedings occurs, consists of the operational loss that has arisen due to the absence of or late applying for insolvency proceedings.

Furthermore, the Austrian Criminal Code (Strafgesetzbuch) also contains provisions on insolvency proceedings. The most important provisions are (i) grossly negligent interference with creditors’ interests; (ii) fraudulent intervention with a creditor’s claim; (iii) preferential treatment of creditors; and (iv) withholding of social security payments.

About fwpFellner Wratzfeld & Partner Rechtsanwälte GmbH (fwp) is one of Austria’s top business law firms, both at a national and international level. fwp employs approximately 70 lawyers and over 120 employees in total. fwp successfully applies a dual consultancy approach, relying on both legal expertise and well-founded business know-how. Our major fields of specialisation include, among others, reorganisation and restructuring, banking & finance, corporate law, M&A, capital market law, real estate and construction law, infrastructure and public procurement law, litigation and arbitration as well as competition and antitrust law. As a member of the international law firm network TerraLex and the Association of European

Lawyers, fwp can rely on an international referral network in more than 110 countries.

The insolvency law & restructuring team led by Markus Fellner and Florian Kranebitter advises clients in all areas of reorganisation and restructuring as well as with respect to national and cross-border insolvency law issues and includes the most prominent cases ever related to the Austrian market, such as the insolvency of the world-wide active ALPINE group or Steinhoff-Group. fwp’s work in this area is also boosted by the team members’ high degree of economic understanding and therefore also includes numerous successful transactions in relation to distressed assets including their reorganisation and their return to profitability.

Authors:Dr. Markus Fellner, Partner

Dr. Florian Kranebitter, LL.M., PartnerFellner Wratzfeld & Partner

Rechtsanwälte GmbHSchottenring 12

A-1010 ViennaAustria

Tel: +43 1 537 70 311Email: [email protected]

[email protected] Website: www.fwp.at


26

The Probability of the UNCITRAL Model Law being approved in Brazil in 2019Proposals are under way in the National Congress for a reform of the Insolvency Law (LFRE). Bill of Law nr. 10.220/2018, tabled in May 2018 by the Administration, adopts, among other provisions, the model law on cross-border insolvencies of the United Nations Commission on International Trade Law (UNCITRAL).

After almost 15 years in effect, expectations in relation to reforms in the LFRE are high, considering that several provisions no longer meet the current needs of the business world.

The absence of specific legislation in the international area has led Brazilian courts to apply current Brazilian law to cross-border conflicts, considering the rise in the number of cases of insolvency that cross national borders. Legal certainty and recognition of foreign insolvency decisions, however, have been subject to vagaries inconsistent with the requirements of modern inter-dependent economies.

With the intention of overcoming this legislative gap, the Bill contains a chapter dedicated to international insolvency and proposes the adoption of the UNCITRAL rules, created in 1997, with the purpose of providing greater strength to nations in their ability to resolve cases involving insolvency of transnational nature.

In addition to the general provisions relating to international insolvency, the Bill also presents specific rules concerning access to Brazilian jurisdictions by foreign representatives; the equal standing of the rights held by foreign and Brazilian creditors in insolvency processes; provisions addressing requests to Brazilian

judges for recognition of foreign processes; the cooperation between foreign authorities and representatives; and specific regulations for processes running concurrently in Brazil and overseas.

Despite the positive changes proposed, several legal experts have expressed their concern in relation to certain alterations addressed in other chapters of the Bill, especially the increase of the prerogatives conferred on the tax authorities in insolvency proceedings. In addition, the Bill addresses matters which are efficiently addressed by current legislation and case law and do not require change.

These difficulties may jeopardise the approval of the Bill in the 2019 legislature and delay the adoption of the Model Law.

The representation of bondholders in the General Meetings of Creditors and the individualisation of their creditsThe raising of financial resources through the issuance of trade currency on the international markets has become common practice in Brazil since the 1990s. According to available data, hundreds of billions of US dollars has been raised by companies or government entities in the past few years through the issuance of fixed income securities, including bonds, medium-term notes and securitisation transactions.1

Brazilian case law permits bondholders to be represented by their indenture trustees or to individualise their right to vote on the credits involved in an insolvency proceeding.

As an example, in the restructuring of the OGX Group,2 the 4th Commercial Court of Rio de Janeiro approved the adoption of a procedure

Being one of the larger economies of the world, Brazil has suffered the impact of international as well as national crises. For the insolvency sector, many issues of importance have been discussed at different levels of government and litigated in court. This article will discuss some of these issues.

by Thomas Felsberg, FELSBERG Advogados

The insolvency scenario in Brazil: Certain relevant issues

CAP8908 II&RR_p26_Felsberg Advogados.indd 26 30/05/2019 16:41

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proposed by the trustee, by means of which the bondholders could opt to individualise their proofs of claim to vote on the judicial reorganisation plan during the general meeting of creditors. The same happened in the Oi,3 Rede4 and Aralco5 cases, amongst others.

In 2015, the ‘II Jornada de Direito Comercial’ approved Statement nr. 76, which established that “in the cases of issuance of debt securities by a company under reorganisation, in which there exists a fiduciary agent or similar figure representing a collective group of creditors, it is the responsibility of the fiduciary agent to exercise the vote at the general meeting of creditors, under the terms and by means of the authorisations provided in the issuance deed, subject to the power of any final investor to file with the judicial reorganisation court a request for the break-up of the right to a voice and a vote at a general meeting to exercise such individually, solely by means of judicial authorisation.”

The foreclosure of credits which are not subject to a court reorganisationCreditors that hold title to assets or rights which were granted by an insolvent company as security are, in principle, not affected by an insolvency filing and are therefore authorised to enforce their rights².

Courts have, however, been resistant to applying this rule, in its strictest sense, whenever the enforcement of such rights during the stay period could jeopardise the reorganisation of the insolvent company. Several theories have emerged to justify this position, amongst which are the “essentiality” of the asset, the lack of “individualisation” of the credit, the recognition that the acceleration clause of such a debt is subject to the filing, or even the partial enforcement of the rule.

Although the STJ has positioned itself, in an isolated decision, as being contrary to such flexibility, the Court of Appeal of São Paulo (AgInt nr. 22369790) recently recognised that a creditor may not remove its security if it is essential to the debtor’s activities.

These matters are being discussed at all levels in the state courts and a final definition has yet to be handed down by the Superior Court of Justice in Brasilia.

Government credits against companies under judicial reorganisationLaw 11.101/05 establishes that the processing of judicial reorganisation shall not suspend the course of tax enforcements6 filed against the debtor (art. 6, §7) and, in parallel, the National Tax Code (art. 187, lead paragraph) excludes tax credits from any insolvency proceeding.

Thus, in relation to tax credits there can be no doubt: these are not subject to the judicial reorganisation proceedings and the foreclosure may proceed in the specialised courts in which they have been filed. Only the enforceable acts designed to constrict or expropriate the assets of a company under judicial reorganisation must be previously submitted to the proper restructuring court.7

However, government non-tax credits, have received different treatment by the courts, because statutory law is not clear in this respect.

In the Celpa and Oi8 (0057446-63.2017.8.1 9.0000) cases, penalties imposed by their respective regulators have been classified as unsecured credits in insolvency proceedings. Yet in the Viracopos case, according to the Court of Appeal of São Paulo, these same credits were treated as tax credits, overturning a contrary decision made by the lower court.

It is important to stress, however, that the Higher Courts have still not made their position clear with respect to this issue, and there is a recent precedent from São Paulo recognising that a public credit arising from contractual non-compliance should be subject to the judicial reorganisation of the Libra Group.

Credits in foreign currency within the judicial reorganisation The Brazilian Insolvency Law establishes that, in the general meetings of creditors, for decisions on any matters that are incidental to the judicial reorganisation proceeding, the creditor’s vote shall be proportional to the sum of their credit (art. 38, lead paragraph). In relation to the decisions for approval or rejection of the judicial reorganisation plan, this regulation also applies for the purposes of calculating the quorum for all the classes of credits, except for the credits from classes I (labour) and IV (micro-companies


28

and small companies), the quorums of which are calculated by a simple majority of the creditors present, regardless of the value of their credits (art. 45, §2º).

But if the creditors belonging to other classes that are not I or IV (that is, the holders of in-rem guarantees [class II] and unsecured creditors [class III]) vote, in all cases, the issue rests upon how foreign-denominated credits should be treated, given the natural fluctuation in exchange rates.

The sole paragraph of article 38 regulates the matter, establishing that, in judicial reorganisation procedures, for the exclusive purposes of voting at the general assembly, the credit in foreign currency should be converted into local currency using the exchange rate on the eve of the date upon which the meeting takes place. However, the law does not define the rate that should be applied to this conversion.

There exist different interpretations on this matter in legal doctrine. For some, considering that the currency has a sale price and a purchase price, the conversion should be performed in accordance with the currency sale price. The best understanding, however, seems to be that defended by other scholars, who suggest the equity criteria applicable in Brazilian law to overcome the legal gaps, defending that an average market rate should be applied, such which corresponds to the average sum falling between the purchase rate and the sale rate.

In relation to the payment conditions, the current Insolvency Law is favourable to a debt expressed in foreign currency: the legislation establishes that the exchange rate variation shall be the parameter of indexation of the liability, unless the amounts owed should come to be otherwise determined by the creditor (art. 50, §2). In other words, unless the foreign currency creditor expressly agrees to the provision of the judicial reorganisation plan that alters the parameters of the calculation of their credit when payment is effectively made, the rate of conversion should necessarily be observed as a parameter for the establishment of their credit.

The abovementioned issues are but a few of those which are being discussed by the legal and business community, as well as in our courts and universities. They reflect the vibrant atmosphere in which insolvency

matters are being dealt with in this country. For all those involved in insolvency matters in Brazil – creditors, debtors, consultant, lawyers, professors and legal scholars – there is a common link, which could be summarised by the expression “never a dull moment”.

The author wishes to acknowledge the support of his team at Felsberg Advogados, especially Beatriz Leite Kyrillos and Ronaldo Mendes de Souza.

Notes:1 <http://portal.anbima.com.br/informacoes-

tecnicas/boletins/mercado-de-capitais/Documents/BoletimMK_201508.pdf>

2 In re OGX, Case nr. 037762056.2013.8.19.0001, 4th Lower Commercial Court of Rio de Janeiro.

3 In re Oi S.A., Case nr. 0203711-65.2016.8.19.0001, 7th Lower Commercial Court of Rio de Janeiro.

4 In re Rede Energia, Case nr. 0067341-20.2012.8.26.0100, 2nd Lower Commercial Court of São Paulo.

5 In re Aralco, Case nr. 1001985-03.2014.8.26.0032, 2th Lower Civil Court of Araçatuba.

6 Judicial process of foreclosure for satisfaction of a tax or non-tax debt.

7 On the other hand, the debtor should present a certificate of good tax standing when requesting ratification of its judicial reorganisation plan, precisely so that its restructuring, although having an impact on the charging of the tax credits, does not end up providing defence for those under restructuring against their tax creditors.

8 Court of Appeals of Rio de Janeiro, Interlocutory Appeal n. 0057446-63.2017.8.19.0000 (2017).

Author:Thomas Felsberg, Founding Partner

FELSBERG AdvogadosAv. Cidade Jardim, 803 - 5º andar

São Paulo - SP01453-000 – Brazil


Website: www.felsberg.com.br


29


by Neil Lupton, Fiona MacAdam and Siobhan Sheridan, Walkers

Off with his head! An offshore perspective – Is the “headcount test” heading for the

guillotine?

Whilst originally implemented as a minority protection mechanism aimed at protecting smaller shareholders from decisions pushed through by larger shareholders with more significant stakes (and more significant financial resources), there is an argument that in today’s world, the headcount test is no longer fit for purpose.

This article examines the concerns with respect to the continued application of the headcount test and considers whether, in comparing the approaches taken in certain other jurisdictions, it is now time for reform in the Cayman Islands.

Cayman Islands scheme of arrangementThe Cayman Islands legislation for schemes of arrangement is derived from 19th century English legislation. The concept of the scheme of arrangement (together with the requisite approval thresholds to be attained) was first introduced into the Cayman Islands by the Companies Law in 1961 (replicating Section 206 of the English Companies Act 1948).1

A Cayman Islands scheme of arrangement is a court-sanctioned compromise or arrangement between a company and its creditors and/or shareholders (or any class of them) which binds all affected stakeholders (including any dissenting creditors and/or shareholders) provided that: (i) a majority in number; and (ii) 75% in value of each class of stakeholder present and voting at the court ordered meeting,

vote to approve the Cayman scheme.2 Cayman Islands schemes of arrangement are frequently used to implement cross-border and multi-level debt restructurings by varying or cramming down the rights of the relevant creditors and/or shareholders of a company and have become the restructuring tool of choice in the Cayman Islands given its flexibility and predictability.

A Cayman scheme enables a company to enter into a binding compromise or arrangement with its creditors and/or shareholders without the need to enter into an individual and separate contract with each and every affected stakeholder and provides companies with a tried and tested mechanism to implement an arrangement where it is not possible or practical to obtain a fully consensual deal. A Cayman scheme will only become effective in accordance with its terms and binding on the company and all members of the relevant classes (including any dissenting stakeholder and regardless of whether or not they voted) once the Cayman Court has sanctioned the scheme and the court sanction order has been filed with the Cayman Islands Registrar of Companies.

When schemes of arrangement were first introduced in England over 100 years ago, members and creditors typically held their interests both beneficially and legally so there was little difference between the persons whose name was entered onto the register of members of a company (or equivalent) and the person beneficially entitled to those interests. In its historical context, the statutory majority test

A Cayman Islands scheme of arrangement is a powerful and flexible tool frequently used to implement debt restructurings, corporate reorganisations and takeovers in circumstances

where it is not possible or practical to obtain consent from all affected stakeholders. The relevance of the headcount test – the statutory requirement that a Cayman Islands scheme

of arrangement has to be approved by a majority in number in addition to being approved by at least 75% in value of those voting at the scheme meetings before the Grand Court of

the Cayman Islands (the “Cayman Court”) has jurisdiction to sanction such scheme – in the context of modern restructurings has become subject to increased debate as to whether it

should be abolished.

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operated as an appropriate check and balance – the headcount test prevented a minority with a large stake prevailing over a majority with a smaller stake; and the value test prevented a numerical majority with a small stake prevailing over the minority with a large stake. As summarised by Brooking J, the dual majority test ensures that “mere numbers on a count of heads will not carry the day at the expense of the amount invested and on the other hand that the weight of invested money may not prevail against the desires of a sizeable number of investors.”3

However, this is no longer the case – stakeholders’ interests are now often held beneficially though nominees, custodians (such as The Depositary Trust Company in the United States or HKSCC Nominees Limited in Hong Kong), clearing houses or other third parties. If only registered holders and/or shareholders are considered for the purposes of the headcount test, then any headcount is unlikely to accurately reflect the wishes of the underlying stakeholders who ultimately hold the real economic interest in the debt instrument or equity.

Importantly, Cayman Islands law provides a unique feature in this regard in that the Cayman Court, in determining whether the relevant statutory majorities have been met, must “look through the register”4 and more specifically, “the majority in number will be calculated on the basis of the number of clients or members giving instructions to the custodian or clearing house.”5 However, given the complex arrangements in which shares and debt instruments are held today, looking through a single layer of ownership – usually to a custodian or nominee – may not necessarily be enough and the same criticisms apply. It is also worth noting that there have been calls for the practice of “looking through the register” to be reformed.6

The headcount test – no longer fit for purpose?The debate regarding the appropriateness of the headcount test centres on the following points:

The headcount test gives minority creditors and/or members too much power to reject a Cayman scheme, whatever its meritsIt is currently the position, as a matter of Cayman Islands law, that within one class

of creditors (who must have “rights not so dissimilar as to make it impossible for them to consult together with a view to their common interest”7 to form a class) a few small creditors holding a minimal percentage of the relevant debt could vote against a Cayman Islands scheme of arrangement, causing the scheme to fail (as the relevant headcount test threshold may not be met) and thereby preventing the implementation of an otherwise commercially reasonable scheme of arrangement approved by larger creditors holding a more significant portion of the relevant debt.

It is not clear why minority members and/or creditors with the same rights (forming part of the same class) should be granted additional control over the outcome of any vote which is tantamount to a right of veto. The circumstances are in direct contrast to the protections afforded to members and/or creditors with different rights who form a separate class – in that scenario, rightly, if the relevant class of members and/or creditors reject the Cayman scheme then the Cayman Court does not have the appropriate jurisdiction to sanction the Cayman scheme and the Cayman scheme will therefore fail.

Minority creditors and/or shareholders are already effectively protected by the statutory process for Cayman Islands schemes of arrangementThe Cayman statutory procedure for schemes of arrangement provides minority shareholders and creditors with sufficient protections.

For example, the Cayman Court has broad discretion to sanction (or not to sanction) a Cayman Islands scheme of arrangement notwithstanding that it has been approved by each class of members and/or creditors. The Cayman Court retains discretion to refuse to sanction any Cayman scheme where there is (or may be) abuse of the minority and furthermore, may even impose conditions on its sanction of the Cayman Islands scheme of arrangement (for example, where it is concerned that the terms of the Cayman scheme are not in the best interests of the members and/or creditors). As noted by Chadwick L.J. in Re Hawk Insurance, “the safeguard against minority oppression… is that the court is not bound by the decision of the [scheme] meeting…” and the


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Cayman Court retains the ultimate discretion as to whether or not to sanction the Cayman scheme at the sanction or fairness hearing.

The Cayman Court’s approach to sanction was most recently summarised by Parker J in Re Ocean Rig UDW Inc. as follows: the Cayman Court “should be slow to differ from the vote [of the scheme creditors] recognising that it is the creditors who are clearly the best judges of what is in their commercial interests” but that “the [Cayman] court is not a rubber stamp… [and] even where the scheme has the support of an overwhelming majority of the creditors… the court can differ from the vote, but only if it is satisfied that an honest, intelligent and reasonable member of the class could not have voted for the scheme…”8

If the headcount test were to be abolished, the Cayman Court may need to take on a more active role in considering the commercial benefits of any Cayman Islands scheme of arrangement as it would not, necessarily, be appropriate to take a view that the majority decision is appropriate in all circumstances.

Furthermore, under Cayman Islands law any person who voted at the scheme meeting(s) or gave voting instructions to a custodian or clearing house to vote at the scheme meeting(s) is entitled to appear and be heard at the sanction hearing.9 This goes further towards protecting a minority group from an oppressive majority in ensuring that any person with an economic interest in the relevant Cayman scheme has an opportunity to bring to the Cayman Court’s attention any issue relating to the Cayman scheme.

The headcount test is not line with modern Cayman Islands company law policy/approach to votingIn the context of shareholdings, Cayman Islands law historically required shareholder decisions to be made by way of numerosity and headcount approvals.10 However, modern law has moved away from this approach and provides that, subject to a Cayman company’s articles of association, the position in determining any shareholder decision is calculated on a “one share one vote” basis. From a policy perspective, it is not clear why Cayman Islands schemes of arrangement adopt a different approach. No similar comparison can be drawn for creditor decision-making.

The headcount test does not reflect how shares/debt instruments are held in the modern contextAs noted above, whilst historically legal and beneficial interests were not divided, today nominees, custodians and trustees (or other financial institutions or vehicles) may hold debt instruments and intermediaries operating through clearing houses may hold uncertificated shares for a large number of beneficiaries. In many jurisdictions, each nominee, custodian, trustee or intermediary (as applicable) is either treated as a single head for the purposes of the headcount test, or is given a “yes” and a “no” vote which cancel each other out. Such an approach materially fails to reflect the number of persons and value of claims represented.

The Cayman Court’s more nuanced approach was considered in In re Little Sheep Group Limited.11 It was held that a custodian or clearing house would be treated as a “multi-headed member” for the purposes of determining the count for the number of votes. The Cayman Court held that the number of participants (i.e. entities or brokers giving instructions to the custodian in relation to voting for the scheme of arrangement) from whom the custodian received instructions (both for and against) would determine the number of votes attributable to the custodian for the purpose of determining whether the majority in number had been achieved.

This approach only goes so far – looking through a single layer of legal ownership to the custodian/nominee does not operate to ensure that votes accurately reflect the views of underlying beneficiaries – in reality the ownership structure may be far more complex and involve numerous layers of ownership.

Furthermore, some critics consider the Cayman approach to be of limited use and practical effect: first, neither the chairman of the Cayman scheme meetings nor the Cayman Court is likely to be able to verify the validity of instructions. It is often the case that custodians will not disclose copies of voting instructions to the chairman of the scheme meeting or to the Cayman Court; second, it may be difficult to apply in practice. Looking further through the register to apply the headcount test may require scheme companies to have an impossible level of understanding and knowledge of the


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structures (and arrangements) in which debt or share instruments are held. It may also cause issues with overseas nominees / custodians who may not be willing to disclose the level of information required; and third, it is patently inconsistent (in the context of shares) with the Cayman Islands law approach in determining ownership of shares that is, persons entered onto the register of members being prima facie evidence of ownership.12

The headcount test is at risk of manipulationMembers and/or creditors may split their relevant holding across multiple entities or persons in order to acquire a disproportionate level of influence on the Cayman scheme. This can be very difficult to detect – for example, an objecting party may not have access to the register of members. It is also not clear how far the chairman of a Cayman scheme meeting must go to ensure that vote-splitting has not occurred (in such a way as to inappropriately affect the outcome of a scheme meeting).

In the case of notes, “splitting” may be more difficult to achieve. However, the trading of notes until the voting record date is not unusual, it is perfectly acceptable for a particular creditor to seek to acquire a controlling stake in a particular class.

Approaches in other jurisdictionsIn some jurisdictions (including New Zealand, Canada, India and South Africa) that have imported the scheme of arrangement from English law, a headcount test is not a requirement for the purposes of member schemes. However, the headcount test (in some form) is incorporated for the purposes of creditor schemes in Singapore, Hong Kong, Australia, BVI, Bermuda and South Africa. We outline below the approach taken in certain jurisdictions which have adopted a modified approach to the headcount test.

Hong KongIn Hong Kong, for takeover offers and general offers, the headcount test was replaced in 2014 by a 10% objection test, which requires the votes cast against a scheme of arrangement to not exceed 10% of the total voting rights attached to all disinterested shares.13 For all other arrangements or compromises, the headcount test is still required but the Hong Kong court has the discretion to dispense with the test.14

SingaporeIn Singapore, which is a jurisdiction that has in recent years made a number of legal reforms in its bid to become a leading international debt restructuring centre, has also made certain changes to the headcount test for schemes of arrangement. In 2014, the Companies (Amendment) Act was passed in Singapore, modifying the language of the headcount test requirement, which now provides that while a “majority in number” of creditors is required, this is now qualified by the caveat “unless the court orders otherwise.”15

AustraliaSimilarly, in Australia, the headcount test has been retained, but the court has discretion to dispense with it. In other words, a scheme must still be approved by 75% of the votes cast on the resolution, but the courts in Australia can order for the majority in numbers of shareholders test to be dispensed with.16

New ZealandAs for New Zealand, the judiciary has perhaps been the most radical in terms of the headcount test, which was abolished altogether in 1993. The legislation of New Zealand now does not set out a specific test for approving a scheme of arrangement, and instead the shareholders are only required to approve the proposed arrangement, amalgamation or compromise in such manner and on such terms as the court may specify.17 Although the headcount test was re-introduced in the context of certain listed entities by the 2014 amendment to the Companies Act,18 this statutory requirement only applied to “code companies.”19

Time for reform?England and WalesIn England and Wales, the question of whether the headcount test should be abolished was twice considered by UK Parliament when preparing the Companies Act 2006. The Company Law Review Steering Group recommended that the headcount test be abolished noting that, “the requirement for majorities in number as well as three-fourths in value has become irrelevant and burdensome, particularly in relation to shareholders and against the background of increasing use of nominees and possible artificial sub-division of


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nominal shareholdings to reach the requisite majority in number.” Parliament however, elected to continue to include the headcount test in the English Companies Act 2006.

On the first attempt, Lord Goldsmith (in his capacity as Attorney General) stated that whilst the proposed changes (to remove the headcount test) “would facilitate schemes for companies and large creditors and members, [but] would do [so] at the expense of the interests of small minority members and creditors [and that] therefore, the Government are not persuaded that the amendment strikes the right balance.”20

The second attempt was put forward on the basis that “the majority in number [test], focusing on a majority of registered holders is an anachronism, now that most retail holders hold through CREST nominees, where one registered holder may represent many thousands of beneficial owners. It is also open to abuse by shareholders who could subdivide their holding thought a number of nominee companies.”21 However, the proposal was again rejected this time, largely on the basis that the “theoretical possibility”22 of potential abuse through share splitting was an inadequate basis for removing the protection.

Given recent attempts at share splitting in Dee Valley 23 and the reported intention (pre-dating Brexit) for radical insolvency reform in England and Wales, the issue may once more be considered.

ConclusionThere is strong argument that the headcount test currently required in Cayman Islands schemes of arrangement is ripe for reform. The Cayman Court does appear to be willing to take steps to address the problematic issues of determining the intentions of underlying beneficiaries,24 however, more legislative change is required to allow the Cayman Court to progress further.

An appropriate compromise would be to remove the headcount test for Cayman member schemes given that the Cayman Court’s ability to “look through” the register can sometimes be impractical/unworkable; and the current approach being inconsistent with modern Cayman company law. Members would continue to have sufficient protection through, amongst other things, the Cayman Court’s ultimate

discretion to sanction Cayman schemes and the ability for affected shareholders to be heard at the sanction or fairness hearing. By comparison, the headcount test in Cayman creditor schemes is more easily conducted (particularly in conjunction with the Cayman Court’s approach in Little Sheep) to accurately reflect underlying beneficiaries’ views on a scheme.

In any case, the issues surrounding the headcount test in both member and creditor schemes in the Cayman Islands are not insurmountable. The Cayman Islands continue to be a leading jurisdiction of choice to implement complex cross-border restructurings by way of scheme of arrangement thereby ensuring that a proper balance is struck between the effective compromise of claims and protection for both majority and minority stakeholders.

Notes:1 Section 83 of the Companies Law 1961.2 Section 86 of the Companies Law (2018

Revision).3 ANZ Executors and Trustees Ltd. V Humes

Ltd [1990] VR 615 at paragraph 622.4 Cayman Islands Grand Court Rules 1995

(Revised Edition) (the “Grand Court Rules”, Order 102, r.20(6) and see also Practice Direction No. 2 of 2010, paragraph 4.

5 Practice Direction No. 2 of 2010, paragraph 4.4.

6 See per Cresswell J in re Alibaba.com Ltd, Unreported, 20 April 2012.

7 per Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573; and, in the Cayman Islands, In Re Euro Bank Corporation (In Liquidation) [2003] CILR 205 adopting the test set out by the Hong Kong Court of Final Appeal in UDL Argos Engr. & Heavy Indus. Co. Ltd v Li Oi Lin. See also the recent Cayman Court case of Ocean Rig UDW Inc. & Others Cause No. FSD 100, 101, 102 and 103 of 2017 per Parker J at paragraph 44: “In every case the court will consider whether it is appropriate to convene class meetings and, if so, the composition of the classes so as to ensure that each meeting consists of the shareholders or creditors whose rights against the company which are to be released or varied under the scheme, or the new rights which the scheme gives in their place, are


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not so dissimilar as to make it impossible for them to consult together with a view to their common interest [emphasis added].”

8 See per Parker J in Re Ocean Rig UDW Inc. at paragraph 89.

9 Grand Court Rules, Order 102, r. 20(10).10 See Section 57 of the Companies Law 1961.11 In re Little Sheep (Unreported, Jones J, 20

January 2012).12 See Section 48 of the Companies Law

(2018 Revision) and see also definition of “registered shareholder”.

13 Section 673 of the Companies Ordinance No. 28 of 2012.

14 Section 674 of the Companies Ordinance No. 28 of 2012.

15 Section 210 (3AB) of the Companies (Amendment) Act.

16 Section 411 Part 5.1 of the Corporations Act 2001.

17 Section 236 of the Companies Act 1993.18 Section 236A of the Companies Act 1993.19 Code companies being a listed issuer that has

financial products that confer voting rights quoted on a licensed market, or has 50 or more shareholders and 50 or more share parcels (as defined by the Takeovers Act 1993).

20 per Lord Goldsmith HL Deb 28 March 2006, GC326.

21 HL Deb 16 May 2006, col 217.22 per Lord Goldsmith HL Deb 16 May 2006,

vol 682, cols 216-217.23 Re Dee Valley Group Plc [2017] EWHC 184

(Ch) – In Dee Valley a minority stakeholder sought to manipulate the headcount test by using a share splitting strategy to defeat a scheme of arrangement. In that case, a disgruntled employee sought to derail a takeover scheme by transferring single shares to hundreds of people for the purpose of manipulating the “no” votes against the scheme. The company, aware of the changes made, by reference to its company books, sought (and obtained) a court order enabling the chairman of the scheme meetings to

reject the votes of any person who acquired shares from the disgruntled employee. See also Re PCCW Ltd. [2009] 3HKC 292, a similar case involving share-splitting in Hong Kong. In Re PCCW a controlling shareholder sought to manipulate the outcome of a takeover (by way of scheme of arrangement) by distributing shares to individuals who would vote in favour of the takeover scheme. The Hong Kong court was not satisfied that the vote was a true reflection of the shareholders’ will. The court disregarded (at the sanction stage) the votes of the shares subject to the share split and, as a result, the scheme failed. Note this decision pre-dates the changes to legislation detailed above.

24 See for example, Cresswell J in re Alibaba.com Ltd, Unreported, 20 April 2012 stated (in the context of the practice of “looking through the register”: “in light of my ruling of 20 April 2012 the opportunity might be taken (if thought appropriate) to confirm or re-consider Practice Direction 2 of 2010.”

Authors:Neil Lupton, PartnerTel: +1 345 914 4286

Mob: +1 345 525 8027Email: [email protected]

Fiona MacAdam, Senior Counsel Tel: +1 345 914 4273


Siobhan Sheridan, AssociateTel: +1 345 814 4558


Walkers 190 Elgin Avenue

George Town, Grand CaymanKY1-9001

Cayman IslandsWebsite: www.walkersglobal.com


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by Anne-Marie Nicolas and Alvaro Garrido Mesa, Loyens & Loeff Luxembourg

Selected restructuring issues in continental Europe – An illustration with Luxembourg

Group concept or lack thereof Luxembourg, like many other European jurisdictions, does not recognise the concept of group in a restructuring or insolvency context. Each member of the group is considered individually and so are their estates, except in certain situations where the corporate veil may be pierced, and the insolvency extended as means of a sanction to the shareholder or director at fault.

The Regulation (EU) 2015/848 of May 20, 2015 on insolvency proceedings (recast) does cater for rules regarding insolvency proceedings but their effects are mainly limited to allowing a coordination of the insolvency proceedings opened in several juridictions regarding entities of the same group and does not provide for the possibility to open a group-wide cross-border procedure before one and the same court. As a result, when creditors enter into restructuring dicussions with a corporate group which has a European presence, they may need to consider each entitiy individually instead of seeing the group as one entity and one estate with a single point of (bankruptcy) risk. They will also need to assess to which entity they can be linked and whether the group debt needs to be fitted to the expectation by the creditors to have a larger exposure than just to one or a few of the group entities.

Lack of efficient in-court restructuring options for global corporatesBankruptcy as the only in-court option in LuxembourgThere are a number of restructuring proceedings which are statutorily provided for under Luxembourg law such as controlled management, composition with creditors and suspension of payments.1 These procedures are, however, very rarely used as they (in addition to not catering for the possibility to consider the group debt as opposed to the individual Luxembourg entity’s debt) lack the necessary flexibility, are lengthy and thus costly, and involve some kind of publicity. As a result, bankruptcy proceedings in Luxembourg are by far the most frequent procedures applied to distressed companies and the chances of a recovery or restructuring being done in-court are extremely limited for a Luxembourg company.

A Luxembourg entity may be declared bankrupt by the court when the following two criteria are met:• when the company has ceased payments and

is unable to meet its commitments (cessation de paiements), that is, the company cannot, or does not, fully pay its due, certain and liquid debts as they fall due; and

• when the company has lost its creditworthiness (ébranlement de crédit),

Many continental European jurisdictions do not have the statutory framework to deal with global group restructurings, either because their in-court insolvency proceedings lack

flexibility or practicability, they do not have the relevant framework to incentivise out-of-court restructurings (including, for instance, provisions regarding standstill, restructuring plan

recognisition and creditor classes, creditor appointed administrators, etc.), or because they do not recognise the concept of a corporate group or conglomerate but instead focus on group

entities being treated individually and separately, also in a distressed context. As a result, many European restructurings have to address, at some point in time (i) the group concept or lack thereof and how it influences restructuring negotiations; (ii) the lack of efficient in-court

restructuring options for corporate groups; and (iii) the local recognition of foreign in-court restructuring proceedings.

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that is, the company is unable to obtain credit from any source. The first criteria above is very often the

bankruptcy trigger event in European civil law jurisdictions. The Luxembourg legislator added the second criteria, which in practice has emerged as paramount in the context of restructuring negotiations to avoid abrupt bankruptcy filing requirements and value destruction.

It is unclear how the lack of creditworthiness is measured under Luxembourg law and remains untested before Luxembourg courts in an ongoing restructuring scenario. It is however generally recognised that clear prospects of additional credit or a refinancing of existing debt or ongoing restructuring negotiations with creditors may help establish a company’s creditworthiness and Luxembourg courts would assess each situation on a case-by-case basis. These grounds are often also used by boards of directors to assess whether their statutory bankruptcy filing obligation has started to run.

The obligation for directors/managers to file for bankruptcy within one month of the insolvency is subject to criminal sanctions, which, in practice, can put a strain on the restructuring discussions and influence the structuring of the new money injections in the distressed corporate group. In jurisdictions like Germany, where the filing time period is very short (21 days) and the liability applied more strictly than in other jurisdictions, the insolvency tests and governance of the relevant entities must be very closely watched early on in the discussions and monitored throughout the restructuring process.

There are several consequences for directors if they are found to have acted unreasonably in light of the circumstances having resulted in bankruptcy (i.e. extension of a company’s bankruptcy to a director; liability for the company’s debts; ban on carrying out commercial activities). In addition to these specific liabilities in the event of bankruptcy, ordinary civil liability will also apply to the director’s actions in the context of a company’s financial difficulties (see above), and directors may also incur criminal liability.

Creditor’s struggles to control or influence the proceedingsIn many continental European jurisdictions, insolvency proceedings are purely court-led, with creditors not being able to influence or determine the appointment of the relevant trustee or administrator, participate to credit bids or even sit at the discussion table via the putting in place of creditor groups or committees, which would have direct access to the court or trustee. This is the case in Luxembourg where creditors, directors and shareholders have, in principle, no control over the bankruptcy receiver’s appointment and its management of the liquidation of the bankruptcy estate.

Bankruptcy receivers in Luxembourg have to represent the interests of both the creditors and the bankrupt company and their mission is to liquidate the estate of the bankrupt company. A Luxembourg company put into bankruptcy would therefore not recover from the proceeding, as opposed to, for instance, a company filing for a “recovery” proceeding, such as a Chapter 11 (US), safeguard (France) or RJ (Brazil).

There is little guidance as to how and how far the receiver may go in accomplishing its mission. Also, a receiver would normally apply the equal treatment of creditors’ principle when managing the bankruptcy so that it could not follow the instructions of a creditor without being in violation of its duties to the company and the other creditors. This and the fact that the most common insolvency proceeding in Luxembourg is the bankruptcy proceeding leads to creditors being very attentive to the Luxembourg insolvency test not being met as regards the Luxembourg companies of the group being restructured so as to avoid having to file for (or running the risk to be put into) bankruptcy.

Whether or not a creditor or shareholder can bid for the assets of a bankruptcy estate is not provided for under Luxembourg law and will greatly depend on the receiver. Some receivers will want to secure a third-party valuation for each sale of assets and might prefer to go through a public auction to avoid any liability issues. Others are happy to involve other creditors or shareholders to ensure a swift liquidation of the assets at a reasonable price.

As to the taking into account of insolvency proceedings affecting foreign subsidiaries of


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the bankrupt Luxembourg entity, a Luxembourg trustee would normally look into existing proceedings affecting the “assets” of the company and decide whether it makes more sense (again from the perspective of the company and the creditors as a whole and looking at value) to sell the structure or to wait until the proceedings lower down the structure have settled to either sell the structure or liquidate the assets one by one. Receivers have significant powers in Luxembourg, and it is generally difficult to predict which route they will favour as this will be predominantly dependant on the identity of the receiver and the factual situation existing at the time it is appointed.

By way of illustration, in the Oi restructuring proceeding, which is still ongoing, a Dutch insolvency court ultimately appointed a liquidator and refused to recognise that the restructuring proceedings had commenced in Brazil in respect of a Dutch company. Major differences between the Dutch and the Luxembourg bankruptcy regimes that could be relevant in a similar case to the Oi case is that (i) the Dutch insolvency test does not include the lack of creditworthiness (a Dutch company is insolvent when it has ceased its payments); and (ii) Dutch law does not recognise any foreign bankruptcy or insolvency proceedings in respect of Dutch entities as they have not implemented the principle of unicity and universality of bankruptcies, which are applied by Luxembourg courts.

The local recognition of foreign in-court restructuring proceedings EU proceedingsPursuant to article 3.1 of the Regulation (EU) 2015/848 of May 20, 2015 on insolvency proceedings (recast), the state of the company’s centre of main interests (i.e. the place where the company conducts the administration of its interests on a regular basis and which is ascertainable by third parties) has jurisdiction for opening insolvency proceedings. This provision further states that “in the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary. That presumption shall

only apply if the registered office has not been moved to another Member State within the three-month period prior to the request for the opening of insolvency proceedings.”

Secondary insolvency proceedings may also be initiated before the courts of another Member State of the European Union against the same debtor if the latter possesses an establishment within the territory of that other Member State. However, the effects of these proceedings are limited to the assets situated in the latter Member State.

It results from the above that insolvency proceedings may be initiated in Luxembourg against a company, if, in view of the factual circumstances, the company’s centre of main interests is situated in Luxembourg.

Furthermore, even after the company has migrated from Luxembourg to another Member State of the European Union, creditors would, in principle, not be prevented from starting insolvency proceedings against the company if it can be demonstrated that its centre of main interests remains in Luxembourg.

However, if the company moves from Luxembourg to a state which does not fall within the scope of the Regulation, Luxembourg courts would, in principle, no longer have jurisdiction from a Luxembourg law perspective to open bankruptcy proceedings against such company.

Foreign (non-EU) insolvency proceedingsIf a Luxembourg court were to consider that the company was required to file for bankruptcy in Luxembourg and the directors had not done so, then in principle the commencement of foreign insolvency proceedings would not be sufficient to prevent bankruptcy proceedings in Luxembourg and civil/criminal penalties being eventually ordered by a Luxembourg court.

Luxembourg courts have generally held that courts in the jurisdiction (outside the scope of the Regulation) of the principal establishment of the insolvent company should be competent to open insolvency proceedings. This entails that foreign insolvency or restructuring proceedings pertaining to a Luxembourg company could be recognised by the Luxembourg courts if the principal establishment of that company was located in the jurisdiction of the foreign court. There are very large differences in local laws in continential Europe in this area: some countries


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do not reognise any insolvency proceeding pertaining to their national companies, others for instance recognise the jurisdiction based on location of assets.

Notwithstanding these limitations, it remains relatively common for corporate groups with continental European subsidiaries and assets to restructure their group debt in-court in the US (Chapter 11) or in the UK (Scheme of arrangement), based of course on the governing law of the debt but also, most importanty, using the restructuring tools and court procedures available in these jurisdictions. It remains, however, largely untested whether those procedures in respect of continental European companies would be recognised locally if such recognition were sought or contested.

Note:1 Note, however, the bill of law N°6539 which

is meant to reform insolvency proceedings in Luxembourg and add bankruptcy prevention tools to the existing framework.

Authors:Anne-Marie Nicolas, Partner

Alvaro Garrido Mesa, Senior AssociateLoyens & Loeff

18-20, rue Edward SteichenL-2540 Luxembourg


Website: www.loyensloeff.lu


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by Luis Palomino, Peña Briseño, Peña Barba, Palomino Abogados

Insolvency and restructuring in Mexico

The LCM is the only legislation effectively addressing the insolvency phenomenon in Mexico, given that our Federal Civil Code regulates “Concurso Civil”,2 which is obsolete and as it is no longer applied for it does not contain effective tools to solve the issue regarding non-trading individuals.

The main spirit of the law is that the company should continue to encourage restructuring over bankruptcy, but must consider the legitimate rights of the creditors.

Hence, in this paper we will briefly expose the essential content of the LCM for any attorney to understand how insolvency is regulated in Mexico. We shall also reflect upon some modifications that, in my opinion, need to be implemented to improve the regulation on this matter in Mexico.

Basic terms of LCMMerchantAccording to the LCM, in order to be legally declared in bankruptcy you need to be a merchant.3

Therefore, this is one of the first limitations in our country: a non-trading individual cannot file for legal and effective insolvency proceedings.

In addition to the traditional definition of a merchant, the LCM indicates that the following may also be subjects entitled to be declared bankrupt:i. Estate contributed to a trust with business

activity purposes.ii. Companies who are part of a business group,

even though each process is carried out separately without asset mix-up.

Competence. Forum ShoppingThe process is carried out before the Federal Judge of the actual domicile of the merchant,

where its principal place of business is located; therefore, if the company is based in Cancún, Quintana Roo, and it has its assets and its principal place of business in that city, even if it has a branch in Mexico City, it cannot file for insolvency proceedings in Mexico City in the first instance.

Even if the merchant is incorporated in Mexico City, but its operations are carried out in another jurisdiction, at first, the Mexico City Judge is not competent.

The foregoing implies that Forum Shopping is not possible in Mexico.

The exception to the above comes in bankruptcy filings by a business group, where the competence is set by the first company of the group to become insolvent.

Legitimation to begin the processBankruptcy proceedings may be started voluntarily by the merchant through a request presented to the Judge,4 but the petition is not automatic given that certain requirements are demanded (sometimes too strict for small and medium-sized enterprises), which is one of the practical problems to quickly access the proceeding.

It is worth noting that, unlike other legislation, in Mexico there is no minimum period to force the merchant to file for bankruptcy from the moment it falls into insolvency, and there is no sanction for not doing so.

It may also be started involuntarily by any creditor of the merchant or by prosecution authorities through a lawsuit.5

Finally, it may be started as previously agreed between the merchant and the creditors representing a simple majority of its debt (pre pack).6

In Mexico, commercial insolvency is regulated by a Federal Act applicable nationwide: Ley de Concursos Mercantiles (Insolvency Proceedings Act) (hereinafter, referred to as “LCM”). Such regulation was published in the Diario Oficial de la Federación (Official Journal of the

Federation) on May 12, 2000, coming into force the day following its publication.1 Insolvency proceedings are therefore known as Concursos Mercantiles.

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Insolvency eventsAccording to the Ley de Quiebras y de Suspensión de Pagos (Bankruptcy and Suspension of Payments Act), in order to declare a merchant insolvent, generalised default on obligations was required. This ambiguous concept had many different interpretations and, therefore, there was no legal certainty in such regard.

Because of this, the LCM does not leave it to the free interpretation of the Judges when the merchant falls in generalised default on obligations before two or more creditors. The LCM defined the situation precisely in two scenarios:7

i. That more than 35% of the total obligations of the merchant are already due when the trial begins; and

ii. Not having 80% of liquid assets to cover already due obligations when the process begins.When this lawsuit is filed by a creditor or the

prosecution authorities, both premises must be confirmed.

In case of a voluntary request by the merchant, at least one of the two premises must be confirmed, and it is also possible to file the request if it is imminent that they will occur within 90 days from the request.8

Stages of the insolvency processIn Mexico, the insolvency process is made up of three stages: verification, reorganisation and liquidation.

Verification. It is the first stage of the insolvency process, except in the insolvency request with a prior restructuring plan.9 In this state, before passing the sentence, the Judge orders an inspection by an Insolvency Practitioner (IP) called Visitador (Visitor), who determines if the merchant falls into insolvency circumstances.

Reorganisation. If the previous cases are confirmed, the Judge moves on to passing the Insolvency Sentence (concurso mercantil sentence), which shall always begin in the reorganisation stage. The purpose of the reorganisation stage is to reach a restructuring agreement between the merchant and its creditors. This stage can only be avoided if the merchant directly requests its bankruptcy declaration or if it is requested by a creditor and accepted by the merchant.

It is important to point out that the merchant

continues managing its company (Debtor in Possession), and that an IP called Conciliador (Conciliator) is appointed as supervisor and the person in charge of achieving a negotiation and reaching a restructuring agreement.

Contracting credits with preferential conditions to operate the company (Fresh Money) is allowed; however, strict banking regulation limits its execution.

At first, a simple majority vote by the creditors is required for the execution of the agreement, and there are rules for subordinated creditors or related parties.

The execution of the agreement only benefits the company declared in “concurso”, not its joint obligors or guarantors. This should not be a problem for large enterprises, but most of the companies in Mexico are small and medium-sized companies and their shareholders are also their joint obligors or guarantors; therefore, if there is not a process in which they are all being restructured at the same time, it will be useless because the creditors will execute personal actions disregarding the business.

There are no limits on the amounts regarding releases or payment period.

Liquidation. When the merchant and its creditors cannot reach an agreement, the Judge shall proceed to pass the Bankruptcy Sentence, in which an IP called Síndico (trustee) is appointed to take possession of the company and to liquidate the assets of the company to pay the creditors in terms of preference set by the LCM. The regular sale of the assets is carried out in this stage. The Síndico can sell the assets but it has limitations. It basically has three sales methods:i. Public auction that has to be authorised by

the Judge;ii. Out of public auction – this is when the

Síndico believes it can obtain a better price for the sale of the assets, but it has to be previously authorised by the Judge; and

iii. Emergency sale – this is made directly by the Síndico, and then delivered by the Judge.In the above three stages, the IPs are named

by the Instituto Federal de Especialistas en Concursos Mercantiles (IFECOM) (Federal Institute of Insolvency Practitioners), not the Judge.

ResponsibilitiesIn Mexico, there is no civil or criminal responsibility for the merchant, its managers


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or directors for being declared in “concurso” per se, and it is not qualified as culpable or malicious.

There is a Title10 regarding responsibilities of the managers which in a casuistic manner specifies when there is a personal responsibility and how it should be demanded and charged.

There is another Title11 regarding criminal aspects of insolvency, which classifies certain insolvency crimes; however, in the 19 years in which the Act has been in force, it has not been applied efficiently.

Special bankruptcyThe LCM, whose main purpose is regulating the insolvency of a merchant, and whose legally protected right is the preservation of the company, also regulates the insolvency of financial institutions and credit organisations in a few articles, whose legally protected right must be the investors, bank savings by the public, not the banking company.

While it is true it refers to the applicable financial legislation, it is also true that it provides merchant insolvency structure to the insolvency of banking institutions and credit organisations, and this is not ideal.

It does not matter that, regarding credit institutions, the process always starts in liquidation; the regulation is not as agile and efficient as it should be in a type of insolvency which is as specialised as banking insolvency.

Cross-border insolvencyMexico was one of the first countries to adopt the UNCITRAL Model Law regarding Cross-Border Insolvency.

Therefore, if there is an insolvency process filed abroad, the foreign court or IP may request commencement of an insolvency process in Mexico in two possible scenarios:i. if the insolvent person has an establishment

in Mexico; andii. if the insolvent person has assets only in

Mexico.In the first scenario, an insolvency

process must start from the beginning of the process and go through all stages, including verification, even if the foreign proceedings are reorganisation or liquidation because the LCM protects local creditors. The competent Judge is that of the domicile of its principal place of business.

In the latter scenario, where there are only assets, the foreign Judge or IP requests the acknowledgement of foreign proceedings in Mexico, as an auxiliary process for the Mexican Judge to help them take control of the assets and liquidate them. The Mexican Judge can even appoint the foreign IP as Síndico.

Concluding thoughtsAs briefly described, the foregoing points comprise the backbone of our insolvency system in Mexico.

As a result, the following conclusions arise: (a) In Mexico it is necessary and urgent to efficiently regulate insolvency of non-trading debtors, of the individual, of the consumer. (b) In Mexico it is necessary to regulate the insolvency of credit institutions and credit organisations with one specific act. It cannot be included in a law that protects the company, given that the investors (the bank savings) are those which must be protected in this kind of insolvency. (c) In Mexico it is necessary to make the LCM more flexible in favour of MSMEs (Micro, Small and Medium Enterprises). There are many requirements to access the insolvency process, including the verification, for example, documents, events, and when they finally access it may be too late. Also, the insolvency process of the company must be allowed along with the insolvency process of its joint obligors or guarantors even when they are not merchants, given that they are normally 100% committed in the whole business.

Since 2002 there has been a law12 in Mexico which defines whether an enterprise is considered to be micro, small or medium.

Art. 3 of the above Mexican law uses the number of employees criterion method for distinguishing MSMEs from large enterprises.13

But this concept is not included in the insolvency law.

The main problems for the MSMEs for filing include:i. If you are filling as a debtor you need to

verification substantial information that most MSMEs will not have readily available.14

ii. In most cases15 the judge will order the verification (Visita) where a professional audits the company to analyse if it qualifies for the procedure. This Visita comes at a cost for the debtor, and a lot of MSMEs cannot


42

afford it.16 This is also a long process before entering the restructuring process.

iii. When you are in the restructuring process, an insolvency profesional17 is appointed and the debtor has to pay for those fees, which once again are expensive.

iv. We do not have special courts functioning, so if the debtor does not have legal advice it will be complicated to follow the process.I think that it would be very complex to have a

new legislation specifically designed for MSMEs. However, if we modified the existing legislation to apply to MSMEs it could work:i. Automatic stay when filing and no need for

the Visita.ii. Reduce at minimum the documents that you

need to present.iii. Reduce the cost of the insolvency

professional.iv. Reduce court participation.v. Eliminate the restrictions for the banks to

lend to companies in formal restructuring.vi. We already have the implementation of

special courts, but they have not been implemented yet.

vii. If the debtor requires, natural persons that are collaterals should be allowed to join the process as in a group of companies even if they are not merchants.

viii. Allow a discharge for the natural person and a fresh start.

ix. Give options to the debtor facing tax problems and labour problems.

x. In liquidation, let the trustee sell with minimum formalities.

(d) In Mexico there is no sovereign insolvency process, neither for municipalities nor state agencies, so the law does not state a way in which they must be treated when they are declared bankrupt. And even though it seems a little-used tool, the situation must be addressed.

Notes:1 This act replaced the Ley de Quiebras y

de Suspensión de Pagos (Bankruptcy and Suspension of Payments Act), which was valid in Mexico for almost 60 years, since 1943.

2 Third Part, First Title.3 In Mexico, we find the definition of merchant

in the Code of Commerce, article three: Article 3.– The following persons are

considered merchants: I.– Individuals with legal capacity to trade

and who make out of commerce their ordinary occupation;

II.– Companies incorporated in accordance with commercial law;

III.– Foreign companies and its branches, that perform commercial acts within national territory.

4 Article 20 LCM.5 Article 21 LCM.6 Article 339 LCM.7 Article 10 LCM.8 Article 20 Bis LCM.9 Article 341 LCM.10 Title Ten Bis.11 Title Eleven.12 Ley para el Desarrollo de la Competitividad

de la Micro, Pequeña y Mediana Empresa.13 Micro 0-10. Small 11-50 in Industry and

Services and 11-30 in Commerce. Medium 51-250 in Industry, 31-100 in Commerce and 51-100 in Services.

14 Art. 20 LCM.15 Except if you file a prepack.16 Around US$6,000.17 Conciliador.

Author: Luis Palomino, Partner

Peña Briseño, Peña Barba Palomino Abogados

Florencia 14Colonia Juárez, Zona ReformaCiudad de México. C.P. 06600

MexicoTel: +52 55 5426 0909

Email: [email protected]: www.penabriseno.com


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by Anthony Idigbe, PUNUKA Attorneys & Solicitors

Overview of insolvency and restructuring in Nigeria

Insolvency and restructuring in NigeriaThe UK 1948 Companies Act strongly influences the legal framework for corporate insolvency found in a few parts of the Companies and Allied Matters Act (CAMA), a statute drafted by the Law Reform Commission and enacted as a Decree in 1990. The Decree became an Act under the civilian regime and was consolidated in the 2004 Laws of the Federation of Nigeria. The Act makes provisions for the general legal framework for asset recovery or realisation. It recognises three broad types of insolvency procedures, to wit; Receivership, Liquidation/Winding-up and Arrangement and Compromises (“A & C”).

The insolvency procedures recognised by the Act are, in that sense, either collective or non-collective and undertaken by Insolvency Practitioners (“IP”). In terms of personal insolvency law, there is the Bankruptcy Act of 1979 consolidated in the 2004 Laws of the Federation of Nigeria, but this law has not had much impact because of its requirement for judgment and execution levied as a condition for proof of bankruptcy. Also, the ineffective discharge provisions render bankruptcy an unattractive option for debtors.

There is no specific legislation in Nigeria for the recognition of foreign insolvency proceedings, orders, or judgments as well as for co-operation between domestic and foreign

courts, coordination of concurrent proceedings or communication of information. Nigeria only has a limited framework for recognition and enforcement of an international monetary judgment which must be final and conclusive, unchallenged on appeal and conditioned on reciprocity. The legislative framework creates a dual regime for Commonwealth countries and other countries. Foreign insolvency orders would scarcely fulfil such requirements while foreign judgments are recognised and enforced through a process of obtaining leave of court and registration of the decision.

Evaluating the processThe Nigerian insolvency system is unduly creditor friendly and liquidation focused. There is no general business rescue law save for the scheme of arrangement provisions under CAMA, which provides a window for encouraging business recovery. However, the jurisprudence has not taken up the challenge primarily due to the conflicting requirements on approval majority of 75% under CAMA and 90% under the Investment and Securities Act (ISA) for a buyout of dissenting minority and the approach of the Securities and Exchange Commission (SEC) to the interpretation of those provisions.

CAMA precludes the appointment of a provisional liquidator before the advertisement of a winding-up petition. Also, the catastrophic decision of the Supreme Court of Nigeria in

“In Nigeria, there is no specific Insolvency Act. There is no definition of who an Insolvency Practitioner is, and there is no statutory framework for the proper regulation of the profession.

The Companies and Allied Matters Act (CAMA) enacted as a Decree in 1990 provides the general legal framework for corporate asset recovery or realisation. Whilst the provisions

of CAMA have been inadequate in addressing issues bothering on cross-border insolvency, netting, co-operation between domestic and foreign courts, coordination of concurrent

proceedings or communication of information in insolvency, etc., there is currently a new bill for the amendment of CAMA which has been passed by the National Assembly and awaiting

presidential assent to become law. The passage and implementation of the new Bill are progressive steps that would set a more definitive legal framework for insolvency proceedings

in Nigeria.” – Anthony Idigbe

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FMBN V NDIC [1999] 2 NWLR pt 591, 333, that only actions or proceedings pending or instituted in the Federal High Court (the court that has jurisdiction in bankruptcy cases) is prohibited by the stay provisions of s.417 of CAMA brought uncertainty to the law around the availability of moratorium. The decision has effectively circumscribed the automatic stay regime by the limitation on the bankruptcy court’s inherent power to bind everyone by a stay order on the threat of contempt. The absence of automatic stay encourages a race to the bottom as both creditors and debtors resort to various antics to either gain priority or moratorium. There is no effective moratorium even when the company is in liquidation. Creditors have also found a haven in filing for winding-up and obtaining a Mareva injunction (freezing order) when the company has not been found insolvent, and the petitioner is not a security holder but ends up exercising security rights over assets of the company even before judgment or winding-up order.

Notwithstanding the above, there is the existence of a limited rescue framework in the context of regulated industries such as banking and telecommunications through the Government’s enactment of AMCON Act, NDIC Act and NCC Act, establishing the Asset Management Corporation of Nigeria (AMCON), Nigerian Deposit Insurance Commission (NDIC) and the Nigerian Communications Commission (NCC) respectively. Whilst AMCON was meant to be a temporary solution designed to last for only seven years for the purchase of eligible bank asset – toxic assets which the regulator – Central Bank of Nigeria (CBN) or the bank itself wants out of their books, it has now become a draconian albatross that has refused to phase out. The NDIC Act, on the other hand, was amended to enable the appointment of a liquidator for a failed or failing bank or financial institution without the need to go through the filing and advertisement of a winding-up petition.

In this regard, the mere withdrawal of the banking institution’s operational licence by the CBN Governor suffices to enable NDIC to be appointed liquidator. However, banking regulators have since abandoned the use of the appointment of the liquidator as a tool for liquidation or restructuring of banks. They now prefer the creation of bridge banks as it enables

the bank to continue business the next business day after a weekend as a new bank.

The popular view, however, is that the AMCON Act is not an insolvency regime but legislation aimed at protecting banks from sudden collapse. It cannot, therefore, be a permanent solution in that it only purports to give respite to the banks but leaves the debtors entirely at the mercy of AMCON with its draconian powers. The need for a general insolvency and business rescue law that would render AMCON’s intervention unnecessary is thus imperative.

Legislative reform effortsThe past decade has seen the Business Recovery and Insolvency Practitioners Association of Nigeria (BRIPAN) champion the growth of insolvency and business rescue practice in Nigeria through training, advocacy and law reform. This commitment resulted in the drafting of a new, business rescue and cross-border insolvency friendly Insolvency Bill for resolution of both personal and corporate insolvency following stakeholders’ consultation sponsored by the UK Department for International Development (DFID). Under the current political dispensation, the ninth session of the National Assembly saw a private member’s Bill to reform only the Bankruptcy Act, 1979, but the Bankruptcy and Insolvency Bill (“BIB”) is yet to pass into law. The BIB was proposed to repeal the Bankruptcy Act of 1979 (“BA”). It seeks to make provision for individual insolvency, some aspects of corporate insolvency, rehabilitation of the insolvent debtor, creation of the office of supervisor of insolvency, cross-border insolvency recognition and enforcement as well as other connected matters.

It is thus arguable that the Nigerian terminology relating to bankruptcy refers to personal or individual insolvency status while insolvency refers to corporate insolvency. The name of the Bill is somewhat misleading as the scope is restricted since virtually all its provisions deal with individual and not corporate insolvency. It is, therefore, neither general corporate insolvency nor business recovery law. It merely introduces a few personal bankruptcy law provisions. There is no indication that it has received presidential assent to date.


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The CAC initiative About 30 years down the line, CAMA has recently been the subject of an arguably detailed review at the instance of the Corporate Affairs Commission (CAC) set up to administer the Act. The CAC proposed a Bill for amendment of CAMA, with new provisions incorporating some aspects of insolvency such as administration and registration of insolvency practitioners including the recognition of the Business Recovery & Insolvency Practitioners Association of Nigeria (BRIPAN) as a certifying professional body, amongst others. However, although the new CAMA Bill has gone through Senate approval, it has also not received presidential assent.

The Bill earned the support of the Presidential Ease of Business Committee (PEBEC) which is pursuing an agenda of reform of commercial omnibus laws because of the difficulty of passing laws through the National Assembly. Consequently, the new Bill was updated by CAC with some assistance from the World Bank and a section added with the subtitle “Business Rescue Procedure”, introducing UK-style administration, Company Voluntary Arrangement (CVA) and the UNCITRAL Model Law on Cross-Border Insolvency.

Though there is no standalone insolvency or business rescue law under consideration at this time at the National Assembly, the CAC sponsored Bill addresses some of the current shortcomings of the insolvency framework. By the provisions of the Bill, a liquidator or administrator once appointed has 28 days to submit a report to the court on whether a creditors meeting should be summoned to approve a voluntary arrangement. If the court agrees, then the liquidator or administrator shall convene the meeting to sanction the arrangement. Any member of the company has 28 days to challenge the meeting, and the court can decide whether a members’ meeting ought to hold and which of the members’ and creditors’ meeting to prefer.

Also, under the new CAMA Bill, the effect of administration is the dismissal of any winding-up petition and vacation of any receiver-manager appointed by secured creditors or holders of floating charge. There is also an automatic moratorium on enforcement of any security or repossession of goods and premises. This law, when it becomes effective,

will bring some sanity to the current practice of appointment of multiple receiver-managers and provisional liquidators. It will be apparent that the administrator would have priority, and failing administration the procedure will be converted to liquidation with the administrator as the liquidator or a separate liquidator is appointed to take over from the administrator. The CAMA Bill therefore definitely provides a slightly more comprehensive framework for business recovery and a framework for the regulation of the insolvency profession by requiring licensing of practitioners by CAC and recognising BRIPAN as a professional body whose certification is a condition for licensing.

Leading the process On the whole, managing insolvency and business restructuring in Nigeria in the face of the inadequate legal framework requires creativity and innovation. A combination of understanding of the legal process and the application of the principles of informal workout can be of great assistance in achieving restructuring in a creditor-friendly and liquidation-focused system. The creditors usually respond positively, if the debtor voluntarily appoints a reputable firm to do an independent business review (IBR). Creditor perception of commitment to reform and openness by the debtor through IBR can kickstart and sustain the informal workout process.

Current reform agendaAgitation by BRIPAN and other stakeholders have had an impact on the reform of some aspects of Nigeria’s personal and corporate insolvency laws. The National Assembly and existing institutions like the CAC have been sensitised and seem to be working on some relevance in the reform process. Also, following the amendment of the AMCON Act, the use of the receiver managers by AMCON has improved the environment for insolvency practice and development of a business rescue culture. PEBEC is considering the possibility of an omnibus Insolvency Bill to facilitate the ease of doing business and tackle challenges associated with existing legal impediments to various business indicators, including sound business recovery and insolvency framework. It means that the CAMA Bill is a stop-gap measure.


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Further, following constant engagement through training and attendance at INSOL/World Bank African Roundtable, practitioners and judges are now more commercially minded. The judges are more willing to use their authority under their enabling Act and rules to direct litigants to settle disputes amicably, encourage business rescue through negotiations and settlement, thereby creating the environment for multi-creditors workouts. The expectation is that with the support of the practitioners, judges and the National Assembly, a holistic solution that addresses the management and resolution

insolvency and restructuring issues in Nigeria is

achievable in the not-too-distant future.

Author:

Anthony Idigbe (SAN), Senior Partner

PUNUKA Attorneys & Solicitors

Plot 45, Oyibo Adjarho Street, Lekki Phase 1

Lagos

Nigeria

Tel: +234 803 540 3030; +234 1 270 4791

Email: [email protected]; [email protected]

Website: www.punuka.com


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by Carl Hugo Parment, White & Case

Swedish insolvency law

BankruptcyThere are two different formal insolvency regimes under Swedish law. The most common one is bankruptcy proceedings in accordance with the Swedish Bankruptcy Act. The purpose of a bankruptcy proceeding is the winding down of an insolvent company by way of selling its assets and distributing the divestment proceeds to the bankruptcy creditors and, if all creditors have been fully paid, distribute any remaining surplus to the owners of the insolvent company.

Company reorganisationThe second insolvency regime is company reorganisations pursuant to the Swedish Company Reorganisation Act. In contrast to a bankruptcy proceeding, the aim of a company reorganisation is that the insolvent company shall survive and continue its business operations. The purpose of company reorganisations is therefore to achieve financial workouts of companies that are deemed to have sustainable long-term business prospects. A company reorganisation provides – as a general rule – standstill of enforcement against the insolvent debtor.

Furthermore, the company reorganisation also provides a regime for debt composition where claims held by unsecured creditors are partially written-off subject to certain consent thresholds being met among the unsecured creditors. Any dissenting unsecured creditor can be “crammed down” and be forced to accept the level of write-off approved by the majority of the unsecured creditors.

Private restructuringIn addition to formal insolvency proceedings it is also quite common with private out-of-court restructurings. Swedish law provides very few tools for accommodating such informal restructurings. Nevertheless, they are quite common especially in cases where the scope of the financial difficulties is somewhat limited.

Among the benefits of a private out-of-court restructuring is that there is contractual freedom for the involved parties as regards the terms and conditions for the restructuring. Another benefit of a private restructuring is that the publicity associated with a formal insolvency proceeding can be avoided. The main disadvantages with a private restructuring are the lack of standstill against enforcement and the absence of any tools for dealing with creditors that are unwilling to accept a partial write-down of their claims against the insolvent debtor.

Weaknesses in the Swedish insolvency regimeThere has been significant criticism of certain parts of the Swedish insolvency regime during the last couple of years. The main criticism has been directed towards the rules regarding company restructuring and both legal scholars and practitioners have generally agreed that there needs to be certain legislative changes in order for the restructuring regime to be more successful.

The legislator has also looked into the issue and found that the Swedish insolvency regime could be improved by combining company restructurings and bankruptcy proceedings into

Sweden is commonly perceived to be a creditor friendly jurisdiction as regards insolvency law and creditor protection. This is, among other things, evidenced by generous possibilities to

off-set claims in bankruptcy proceedings, extensive claw-back provisions aimed at protecting the value and assets of a distressed creditor as well as rather strict rules limiting payments of

dividends and other distributions to equity holders.

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a combined legal framework instead of having two separate legal frameworks which is the current situation. However, it remains to be seen if the legislator will adopt any such new combined insolvency regime.

Another weakness of the Swedish system is the absence of legislation accommodating general debt compositions outside the framework of a formal insolvency proceeding. The absence of any possibilities to force non-consenting creditors to accept debt compositions outside formal insolvency proceedings gives to much negotiating leverage to the creditors.

It is likely that the number of successful out-of-court restructurings would increase significantly if such a framework were to be introduced.

Finally, another thing that is commonly perceived to be a weakness in the Swedish

insolvency regime is that there is no specific legislation dealing with shareholders/owners in financial restructurings. The Swedish insolvency regime primarily addresses various creditor issues, whilst failing to provide effective tools for restructuring the equity of a financially distressed company. It would therefore be well received if rules were introduced that provide tools for restructuring both debt and equity interests.

Concluding remarksIn conclusion, the Swedish insolvency regime is effective, robust and rather creditor friendly. From a creditor perspective there are no major concerns regarding the Swedish insolvency regime.

However, from an investor perspective, and perhaps also from a public policy perspective, it is fair to say that the Swedish insolvency

Complexity isn’t the challenge.Simplicity is.

whitecase.com


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regime is somewhat weak when it comes

to restructurings of financially distressed

companies that are intended to continue

to trade following the completion of the

restructuring.

It remains to be seen whether or not

the legislator will address this issue by

way of improving the regime for corporate

restructurings.

Author:

Carl Hugo Parment, Partner

White & Case

Biblioteksgatan 12, Box 5573

SE-114 85 Stockholm

Sweden

Tel: +46 8 50632 341


Website: www.whitecase.com


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Crypto assets and data are often stored by third-party custodians. For crypto assets custodians are, for example, wallet providers or trading platforms. For data cloud providers increasingly act as custodians. Under current Swiss law, it is unclear whether a segregation of crypto assets or data from the bankruptcy estate is possible, if such a third-party custodian enters insolvency. In its draft law concerning blockchain and distributed ledger technology (“DLT Draft Law”) of March 22, 2019, Switzerland’s federal government therefore proposes amendments to the Swiss Debt Enforcement and Bankruptcy Act (“DEBA”) and the Swiss Banking Act (“BA”). The proposed new insolvency rules foresee the following:• Segregation of crypto assets for the

benefit of creditors shall become possible, provided the relevant crypto assets are unambiguously allocated to the entitled party. The new segregation regime shall apply to all custodians, namely also to banks and securities dealers. Therefore, the insolvency regime for financial institutions shall be amended accordingly.

• Segregation of digital data in insolvency shall be facilitated. This article summarises key elements of

these proposed new insolvency rules.

Segregation of crypto assetsSwiss law does not define the term “crypto asset”. However, since crypto assets are ultimately tokens, i.e. pieces of information stored in a DLT register, the classification introduced by the Swiss Financial Market Supervisory Authority FINMA in February 2018 may be followed. Crypto assets, respectively

tokens, therefore fall in one or more of the three following basic categories: • Payment tokens are tokens, that are

intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. Such tokens do not give raise to any claims towards an issuer or a third party. According to prevailing Swiss legal doctrine payment tokens are therefore “purely factual, intangible assets”. For example, cryptocurrencies such as Bitcoin and Ether fall into this category.

• Utility tokens are tokens, that are intended to provide access digitally to an application or services by means of a DLT-based infrastructure.

• Asset tokens represent assets such as a debt or an equity claim on the issuer.Both payment tokens (which are also referred

to as “native tokens”) as well as utility and asset tokens (which are also referred to as “non native tokens”) may have considerable economic value. Consequently, they may constitute assets from an insolvency law perspective. Creditors may try to seize tokens and bankruptcy administrators can realise the value of tokens, provided there is a liquid market (such as, for example, in the case of Bitcoin, Ether and other cryptocurrencies).

When it comes to storing tokens there are two basic options: Either the owner of the tokens stores the tokens himself or the tokens are stored by a third-party custodian such as a wallet provider or a trading platform. There are various reasons why the owner may choose to store his tokens with a third party, such as, for example, the facilitated handling of private

On March 22, 2019 the Swiss federal government published a draft law concerning blockchain and distributed ledger technology (“DLT”). The draft law aims at further improving the Swiss regulatory framework for DLT-based business models and it shall amongst others increase legal certainty with regard to how crypto assets and data are treated in bankruptcy. This article outlines key elements of the proposed new insolvency rules.

by Stefan Kramer and Urs Meier, Homburger AG

Crypto assets and data in insolvency:Switzerland’s proposed new rules

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keys or improved security. However, if a third-party custodian becomes insolvent, it needs to be determined which assets belong to the bankruptcy estate. This can, in particular, be difficult whenever the bankrupt custodian had control over assets in relation to which a third party asserts (beneficial) ownership.

Under Swiss law, it is currently not clear whether crypto assets held by a custodian on behalf of a client may be segregated in bankruptcy, i.e. transferred back to the client. Switzerland’s federal government therefore aims to introduce a new provision in the DEBA. Under this new rule the owner may request segregation of its crypto assets if the bankrupt debtor had the sole power to dispose over the crypto assets, provided that the crypto assets are individually attributed in the DLT register to the relevant owner.

With regard to the first element, i.e. the bankrupt debtor (custodian) having the sole power to dispose over the crypto assets, the key question is whether the debtor had “exclusive actual power of disposal” regarding the tokens in question or not. Usually, whoever has access to the private keys may initiate DLT-based transactions and therefore has such actual power to dispose over the tokens. Consequently, the decisive element is how the private keys are being managed. Four basic set-ups may be distinguished:• Only client holds keys: If only the client holds

the keys, i.e. only the owner may directly dispose of the crypto asset and initiate a transaction in the DLT register, then there is no power of disposal on the side of the custodian. Consequently, the crypto asset does not fall into the bankruptcy estate of the custodian in the first place.

• Client and custodian hold keys separately: If the client and the custodian hold keys, which allows them both to initiate a transaction in the DLT register, it is assumed that the client (owner) retains actual power of disposal. Hence, even though there is “actual power of disposal” on the side of the custodian, it is not exclusive and therefore the crypto assets do not fall into the bankruptcy estate of the custodian.

• Client and custodian hold keys jointly: The client and the custodian may agree on a set-up, in which access to the crypto assets

requires several keys, which need to be used jointly in order to initiate a transaction in the DLT register. Such “multi-signature” set-ups may, for example, require two private keys, one of which is held by the client and the other one is held by the custodian (“two out of two multi-signature”). In such a set-up there is no “exclusive actual power of disposal” on the side of the custodian and therefore the crypto assets do not fall into the bankruptcy estate of the custodian.

• Only custodian holds keys: If only the custodian holds keys, i.e. only the custodian may directly dispose of the crypto asset and initiate a transaction in the DLT register, then there is “exclusive actual power of disposal” on the side of the custodian and the crypto asset falls into his bankruptcy estate. Only in this scenario will the proposed new rules regarding segregation of crypto assets become relevant. Here, the client has no access of its own and the bankrupt third-party custodian at the same time has all the keys to access the crypto asset directly. Consequently, the crypto asset will be included in the custodian’s bankruptcy estate and the client will therefore need to claim that he has the better right, i.e. is the owner of the crypto assets in question.The Swiss federal government, however,

foresees that a segregation right shall only exist if it is possible to unambiguously assign the crypto assets in question to a specific creditor. Accordingly, it is of importance whether the crypto assets held by the bankrupt custodian can at all time be assigned individually to the entitled party, i.e. the owner. Here, the details of how the crypto assets are stored are crucial. If each client’s credit balance may be tracked to a specific blockchain address and is registered directly on the blockchain, such crypto assets are according to the explanatory report of the DLT Draft Law individually attributed in the DLT register to the relevant owner. In such cases it is possible at any time and without additional technical arrangements to allocate the crypto assets to the individual client for whom the custodian holds the tokens.

The proposed new segregation regime will apply both to “cryptobased means of payment”, i.e. payment tokens, as well as other tokens, such as utility and asset tokens, provided the latter qualify as so-called “DLT Rights”.


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The concept of “DLT Rights” shall be introduced with the DLT Draft Law and will allow for the legally sound tokenisation of rights. In particular, utility and asset tokens may in the future be issued in the form of “DLT Rights” and would hence also be in the scope of the new segregation regime outlined above. However, as “DLT Rights” already benefit from protection in an insolvency of the custodian based on general principles of Swiss insolvency law, we believe that this part of the Draft DLT Law should be limited to “cryptobased means of payment”, i.e. payment tokens.

Segregation of dataNot only crypto assets but also digital data is often stored by third-party custodians. If such a custodian, e.g. a cloud storage provider, becomes insolvent, it is currently not clear under Swiss law, whether the data may be segregated from the bankruptcy estate. The Swiss federal government therefore proposes to introduce a new provision in the DEBA, which establishes a right to request segregation of data if a custodian becomes insolvent. The party requesting such segregation must demonstrate that it has a particular entitlement to the data to be segregated, e.g. on a statutory or contractual basis. Examples relevant in this context include company data (such as for example client files or accounting data) that is stored in a cloud and can no longer be accessed in the event of bankruptcy of the cloud provider.

OutlookThe consultation period on the Draft DLT Law lasts until the end of June 2019. The draft bill will then be submitted to the Swiss parliament and it remains to be seen to what extent the proposed new rules will be amended or changed in this process.

If the new rules enter into force as currently planned, they will significantly increase legal certainty concerning segregation of crypto assets especially payment tokens and data and hence further improve Switzerland’s legal framework applicable to digitised business models.

Authors:Stefan Kramer, Partner


Urs Meier, AssociateEmail: [email protected]

Homburger AGPrime Tower

Hardstrasse 2018005 ZurichSwitzerland

Tel: +41 43 222 1000Website: www.homburger.ch


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by James Falconer and Olivia Bushell, Skadden, Arps, Slate, Meagher & Flom (UK) LLP

Proposed reforms create cross-border opportunities in the UK

Background On August 26, 2018 the UK Government published its response to the March 2018 Consultation Paper in relation to Insolvency and Corporate Governance.1 In addition to responding to the March 2018 consultation, the UK Government’s response sets out its proposals for reform following its 2016 Review of the Corporate Insolvency Framework.

The UK Government proposes three reforms, which appear to have taken particular inspiration from certain commonly discussed features of the US Chapter 11 process, even adopting US terminology in their discussion. Specifically, the proposals are for a new moratorium on creditor enforcement during a rescue or restructuring process, a prohibition on enforcement of contractual termination clauses conditioned on the occurrence of insolvency proceedings (“ipso facto clauses”), and the introduction of “cram-down” within a new restructuring procedure modelled on the scheme of arrangement.

The reforms put forward by the UK Government appear to align with the recently approved European directive on preventative restructuring frameworks which seeks to implement, inter alia, a moratorium period and restructuring plans. It therefore seems that, even following Brexit, the UK’s restructuring regime will be closely aligned to the harmonised regimes of European member states.

The proposed reforms have been cautiously welcomed by the UK restructuring profession,

notwithstanding certain reservations having been raised in relation to the specifics of particular proposals. Subject to such concerns being addressed, the reforms can be expected to provide valuable additional tools for both local and foreign companies seeking to restructure in the UK.

MoratoriumThe UK Government has proposed the introduction of a moratorium period, initially for up to 28 days but with the possibility for an extension for a further 28 days or longer where there remains a good prospect of achieving a better outcome for creditors than might otherwise be possible. The moratorium period will be available for distressed companies which meet the eligibility tests and qualifying conditions, during which time creditors would not be able to take action against the company.

The details of the moratorium, including the eligibility tests and qualifying conditions, are subject to on-going comment from local practitioners and professional bodies, but it is nonetheless clear that the proposal is intended to address what has been an unhelpful limitation on UK restructuring processes to date.

Under the current regime, other than for certain small companies, a moratorium is only available for companies entering administration, not for companies seeking to avoid insolvency through the use of a

In August 2018 the UK Government published a proposal for three significant reforms to the insolvency and restructuring landscape in the UK. The reforms, which include the creation

of an entirely new restructuring procedure, promise significant strengthening of the rescue culture in the UK. The proposed reforms in the UK will contribute valuable additional

techniques to the growing list of rescue-focused options, promising to keep the UK at the forefront of developments in insolvency and restructuring regimes worldwide. This article

describes the proposed reforms and, by reflecting on the current uses of English procedures in international transactions, examines their potential value for the restructuring of cross-

border businesses.

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company voluntary arrangement or scheme of arrangement. Debtors proposing a scheme of arrangement have been able to achieve a limited form of moratorium in respect of English proceedings, by requesting the court hearing the relevant proceedings to order a stay as a matter of case management, pending the outcome of the scheme.2 However, no option for a broader court supervised moratorium existed. The proposed moratorium will address this limitation, particularly for English debtors, and will be of value where foreign companies need to stave off English enforcement action (particularly in relation to English law governed obligations) during a scheme process.

In cross-border cases, adoption of the US approach to enforcement of the moratorium could result in a substantial increase in the effectiveness of the moratorium for both foreign companies and English companies with foreign assets. The US courts treat moratorium as an in personam order directed at and enforceable against creditors, prohibiting enforcement action throughout the world. By contrast, the English approach to the insolvency moratorium, at least to date in respect of the administration process, is largely procedural and territorial, as it does not restrict a creditor’s ability to take enforcement action against assets of a company located abroad.

The reforms will present an opportunity for the UK to significantly enhance the effectiveness of the moratorium by making clear that (subject to jurisdictional and comity considerations) it applies to actions taken outside of the UK, and that compliance may be enforced by injunction, which it is to be hoped will be considered.

Ipso facto clausesThe second proposal is a prohibition on enforcing termination clauses in contracts for the supply of goods or services or for contractual licences that are triggered by the entry of a contracting party into formal insolvency proceedings, a pre-insolvency moratorium process, or a restructuring plan process. To ensure that suppliers are not disadvantaged, suppliers will be able to apply to court for permission to terminate a

contract where the supplier’s own solvency is threatened by the continued supply.

While this reform has the potential to substantially improve the ability of distressed companies to maintain the operation of their business, and to thereby preserve value, through a restructuring process, the viability of the process to assist in cross-border cases is more limited. The primary difficulty will relate to the enforceability of the prohibition outside of the UK. For example, for English companies with foreign assets, or which are part of groups of companies with dispersed assets, enforceability of the prohibition will likely depend on either the willingness of the relevant foreign jurisdictions to implement the prohibition, or on the desire of foreign suppliers to participate in the UK proceeding (and to thereby submit to the jurisdiction). For operations or assets in EU member states, the outcome is unclear due to Brexit, which at the time of writing remains unresolved.

For English and foreign companies with English operations or assets, however, there is scope for the prohibition to provide a valuable additional tool when proposing a scheme of arrangement or plan of arrangement, as these companies may be able to take advantage of the prohibition to enhance certainty of outcome and value preservation in respect of its UK operations.

Restructuring plan The third, and potentially most significant, proposal is the creation of a new restructuring plan procedure that may be proposed by solvent or insolvent companies, and which will be modelled on the existing process for schemes of arrangement. This proposal provides for creditors to be grouped into classes based on similarity of rights or treatment, and the creditors will then vote within their classes on the restructuring plan. Subject to the below, the court would be able to approve a plan where it has the support of 75% in value of the voting creditors in each class, and a majority of the total value of unconnected creditors. Importantly, the requirement for a majority of creditors by number, applicable to schemes of arrangement, would not apply.

A principal feature of the restructuring plan is the availability of so-called “cross-class


55


cram down” (that is, a plan may be approved notwithstanding the 75% threshold not being met within all classes). The court will apply the following tests, adapted from US Chapter 11 provisions, to determine whether a class can be crammed down: (i) the plan is in the best interests of the creditors as a whole, through recognising that the economic rights of the creditors are no worse off than they would be following liquidation; and (ii) the claims of the creditors in the dissenting class will be paid in full before a more junior class can receive any return under the restructuring plan – in effect, a modified version of the US absolute priority rule.

Interestingly, under the proposal, the court can also confirm a plan even where the absolute priority rule is not satisfied, provided that: (i) it is necessary to achieve the aims of the restructuring; (ii) it is just and equitable in the circumstances; and (iii) at least one impaired class of creditors has voted in favour of the plan.

The availability of cram-down will provide additional flexibility, but also pose challenges to be navigated by foreign debtors. At present, the common mechanism in an English restructuring to deal with out-of-the money stakeholders is to transfer assets through a pre-pack administration sale, so that the out-of-the money creditors are effectively left behind, with the assets and restructured debt transferred to a newly capitalised company. This process can be cumbersome for a foreign debtor which may be able to establish a “sufficient connection” for a scheme of arrangement, but not be able to establish jurisdiction for an administration. Shifting the centre of main interests (“COMI”) of the relevant debtor is one option, however this can be time consuming and complex, particularly where the debtor is not merely a holding company.

Foreign debtors will have to examine carefully the relevant rules in their jurisdiction of incorporation to determine whether a UK plan of reorganisation by which shares are cancelled will be recognised. Similar difficulties have long faced foreign debtors in Chapter 11, with local recognition or parallel implementation procedures often required.

A potentially significant additional benefit of the restructuring plan for cross-border

restructurings is that the added flexibility will likely permit parallel proceedings to be more easily aligned across jurisdictions.

Although the features of the proposed restructuring plan procedure appear to create valuable additional options for cross-border restructurings, a key factor which remains unclear is the jurisdictional requirement to access the procedure. The UK Government has stated that it has not yet decided whether companies that do not have their COMI in the UK should be eligible for the new procedure, but that it will continue to consider the issue of jurisdiction in the context of Brexit.

It is to be hoped that the proposed restructuring plan preserves the “sufficient connection” test applicable to schemes of arrangement. This test has proved sufficiently flexible to enable the use of schemes of arrangement to implement transactions where other options have not been available, while avoiding overreach due to the court’s insistence that there be evidence of the effectiveness, whether through recognition proceedings or otherwise.

In the event that the ultimate outcome of Brexit involves some type of negotiated participation in the EC Insolvency Regulation, it would be possible that jurisdiction to commence the proceeding for companies incorporated in member states would be limited to where the company has its COMI in the UK. Restricting access to the process in this way would limit the availability of the process for European companies with English law debts which, particularly in light of the rule in Gibbs,3 have in the past looked to schemes of arrangement in order to achieve a binding compromise.

ConclusionThere is as yet no indication of when the UK Government expects to implement the proposals, although it might be expected that the UK Government will press ahead as part of a range of post-Brexit reforms. Nevertheless, the proposals are well timed, demonstrating a commitment to increase flexibility and promote a rescue culture, thereby maintaining the UK’s position as an attractive, and constructive, jurisdiction in which to implement cross-border transactions.


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Notes:

1 Corporate governance aspects of which were discussed by Lance Ashworth QC et. al. in these pages last year.

2 See e.g. Bluecrest Mercantile BV v Vietnam Shipbuilding Industry Group [2013] EWHC 1146.

3 Antony Gibbs & Sons v Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399. See also McCahill, D “The rule in Gibbs: An update”, International Insolvency and Restructuring Report 2018/19, p15.

Authors: James Falconer, Counsel


Olivia Bushell, AssociateTel: +44 20 7519 7015


Skadden, Arps, Slate, Meagher & Flom (UK) LLP40 Bank Street, Canary Wharf

London E14 5DS, UKWebsite: www.skadden.com


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by Stacy Lutkus, Drinker Biddle & Reath LLP

Proposed amendments to Chapter 15

Article I, Section 8 of the United States Constitution gives Congress the authority to “establish…uniform Laws on the subject of Bankruptcies throughout the United States.”1 It was the Bankruptcy Act of 1898 (the “Act”),2 however, that first marked the beginning of the era of permanent federal bankruptcy legislation in the United States. In effect for 80 years, the Act was amended numerous times prior to its repeal and replacement by the Bankruptcy Reform Act of 1978,3 which, as amended, comprises the United States Bankruptcy Code (the “Bankruptcy Code”) in its current form.4 Congress’s most sweeping reforms to the Act took effect in 1938, with the enactment of the Chandler Act.5 It was in connection with the drafting of the Chandler Act that the National Bankruptcy Conference (NBC) was created.6

The NBC is an invitation-only, voluntary, non-partisan, not-for-profit organization composed of approximately 60 leading bankruptcy scholars, practitioners and judges.7 It has served as a resource to Congress on every significant piece of bankruptcy legislation since its formation.8 The NBC’s most recent commentary on the Bankruptcy Code was submitted as an August 2018 letter9 to US congressional leaders10 regarding proposed revisions to Chapter 15 of the Bankruptcy Code in order “for Chapter 15 to fulfil its purposes, as set forth in section 1501(a), and to function and be interpreted in light of its international origin and consistently with the application of similar statutes adopted by foreign jurisdictions, as set forth in section 1508.”11

In connection with a suggested revision regarding eligibility for filing a Chapter 15 petition, the August 2018 Letter focuses on a much-criticized decision by the United States Court of Appeals for the Second Circuit (the “Second Circuit”) in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet).12 The Barnet matter involved a petition by the liquidators of Octaviar Administration Pty Ltd. (“Octaviar”), as foreign representatives, for recognition of Octaviar’s liquidation proceeding in Australia as a foreign main proceeding.13 The United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) entered an order granting recognition.14 Drawbridge Special Opportunities Fund LP (“Drawbridge”), a lender and defendant that had opposed the petition for recognition based upon the argument that the requirements set forth in section 10915 of the Bankruptcy Code – i.e., that debtor must reside or have a domicile, a place of business, or property in the United States – apply in cases under Chapter 15 and that Octaviar did not satisfy those requirements, filed a notice of appeal.16 The foreign representatives and Drawbridge subsequently filed a joint application seeking certification for a direct appeal to the Second Circuit.17

In its opinion granting the application, the Bankruptcy Court explained that it had determined to certify its recognition order for direct appeal based upon its conclusions that:1. there was no controlling precedent governing

its holding “that a debtor within the meaning of Chapter 15 is not required to have a

The National Bankruptcy Conference (the “NBC”) has acted as a resource to the United States Congress on every significant piece of bankruptcy legislation since the passage of the

Chandler Act in 1938. In an August 2018 letter to representatives of the House Subcommittee on Regulatory Reform and the Senate Committee on the Judiciary, the NBC proposed certain

technical and substantive amendments to Chapter 15 of the Bankruptcy Code. The changes suggested by the NBC aim in part to correct at least one judicial decision that it submits interpreted Chapter 15 incorrectly. This article examines that decision and the changes

proposed by the NBC to remedy the asserted incorrect interpretation.

CAP8908 II&RR_p57_Drinker Biddle.indd 57 30/05/2019 16:45

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domicile, residence, place of business or property in the United States”;

2. the same issue was “a matter of public importance” that would “dramatically impact the jurisdiction of the United States bankruptcy courts and the use of Chapter 15 to assist in the administration of cross-border insolvency cases and the legitimate investigation of claims and assets in the United States”; and

3. a direct appeal would “materially advance the progress of this Chapter 15 case.”18 Applying the plain meaning rule of statutory

interpretation, the Second Circuit first observed that section 103(a) of the Bankruptcy Code provides that, other than with respect to an exception not relevant to the matter before it, Chapter 1 “of this title … appl[ies] in a case under Chapter 15.”19 The court went on to conclude that because section 109 “of course[] is within [C]hapter 1 of [t]itle 11[,]” it is applicable to petitions filed under Chapter 15 “by the plain terms of the statute[.]”20 Thus, the court (i) vacated the Bankruptcy Court’s recognition order based on the absence of a showing that the debtor satisfied the requirements of section 109(a), and (ii) remanded to the Bankruptcy Court for further proceedings.21

The August 2018 Letter is critical of the Second Circuit’s “ostensibly ‘plain meaning’ interpretational approach” in Barnet.22 It describes the concept of a plain meaning analysis as “rigid,” and notes that “[i]n the United States … there is a decades long jurisprudential tradition of applying the principle of ‘plain meaning’ as the first (and often the only) rule of statutory interpretation when considering provisions of the Bankruptcy Code.”23 As for Barnet itself, the August 2018 Letter states simply, “Barnet is wrong[.]”24 The NBC asserts that, contrary to the holding in Barnet, only the requirements specified in section 1517 of the Bankruptcy Code must be satisfied for recognition of a Chapter 15 case.25

Section 1517 of the Bankruptcy Code addresses orders granting recognition, and provides, in relevant part, that:(a) Subject to section 1506 [allowing courts to

refuse to take an action governed by chapter 15 if the action would be manifestly contrary to the public policy of the United States], after notice and a hearing, an order recognizing a

foreign proceeding shall be entered if:1. such foreign proceeding for which

recognition is sought is a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502;

2. the foreign representative applying for recognition is a person or body; and

3. the petition meets the requirements of section 1515 [imposing requirements regarding the attachment of certain documents to the petition for recognition, the submission of a statement identifying all foreign proceedings with respect to the debtor, and English translations of the foregoing].26

The mandatory language in section 1517 – shall be entered – together with guidance from the Supreme Court that “Congress says in a statute what it means and means in a statute what it says there”27 certainly supports a conclusion that nothing is required beyond what is set forth therein. Since Barnet, however, bankruptcy courts within the Second Circuit have imposed the requirements set forth in section 109 on debtors in cases under Chapter 15.28 Moreover, at least one court outside the Second Circuit has expressly adopted the Barnet holding and upheld the imposition of the section 109 requirements on a debtor in a Chapter 15 proceeding.29 Other courts have declined to adopt the Second Circuit’s holding.30 Leading scholars also have disagreed with Barnet; the August 2018 Letter refers Congress to an article by two Conferees “who were actively involved in drafting both the [United Nations Commission on International Trade Law (UNCITRAL)] Model Law [on Cross-Border Insolvency] and Chapter 15” that explains “in detail why Barnet is wrong.”31

It is arguable that the additional burden section 109(a) places on Chapter 15 debtors is inconsequential. It is a generally accepted view among courts that the smallest amount of property in the United States satisfies the requirements imposed by section 109(a). This is because section 109 “does not appear to be vague or ambiguous, and it seems to have such a plain meaning as to leave the Court no discretion to consider whether it was the intent of Congress to permit someone to obtain a bankruptcy discharge solely on the basis of having a dollar, a dime or a peppercorn located


59


in the United States.”32 On remand from the Second Circuit in Barnet, the Bankruptcy Court found that the foreign debtor’s “claims or causes of action” against US entities comprised “property in the United States” sufficient to satisfy the requirements of section 109(a).33 The Bankruptcy Court also noted that section 109(a) does not “direct that there be any inquiry into the circumstances surrounding the debtor’s acquisition of the property.”34

It likewise is arguable, however, that, as the August 2018 Letter asserts, “the contrived property transfer solely to satisfy section 109(a) exposes the recognition petition to a challenge that it was not filed in good faith or was ‘manifestly contrary to public policy’.”35 Indeed, Drawbridge made that exact argument on remand in Barnet.36 As did the Bankruptcy Court on remand in Barnet, the court In re Suntech Power Holdings Co.37 rejected an argument that the establishment of a US bank account on the eve of filing a petition for recognition under Chapter 15 was improper, explaining that “[i]nterpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed Chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interest [ ] and rescue financially troubled businesses.”38

In the August 2018 letter, the NBC submits that Suntech “is an exemplar of all that is bad about the Barnet ruling.”39 According to the NBC, “by creating an artificial but permeable obstacle to recognition, [Barnet] inadvertently invites venue shopping” based on newly deposited assets.40 In addition to the foregoing, imposing the requirements of section 109(a) on petitions for recognition under Chapter 15 may thwart a primary purpose of the UNCITRAL Model Law – that is, to allow for the use of an ancillary proceeding to ensure global enforcement of the outcome of the main proceeding. This purpose is (or, at least, should be) independent of the debtor’s property.41

The August 2018 letter notes that, in Barnet, the Second Circuit “essentially invited Congress to revisit the drafting of section 109(a)”42 by directing “the Clerk of Court to forward copies of [the] opinion to Congress following the specified protocol adopted by

the Judicial Conference.”43 The NBC submits that “[a]mending the statute to reverse Barnet and preclude other courts from making the same mistake should be relatively easy” and proposes the addition of a sentence reading “This subsection does not apply in a case under Chapter 15” be added to section 109(a).44

To date, Congress has not publicized any action it has (or has not) taken based on the August 18 letter, and it remains to be seen whether the proposed revision to section 109(a) or any of the other proposed revisions to Chapter 15 suggested by the NBC will lead to meaningful reform. For now, foreign debtors, foreign representatives, and their counsel should remain mindful of the requirements imposed by the Bankruptcy Code and the relevant jurisprudence in the applicable venue.

Notes:1 U.S. Const. art. I, § 8.2 Ch. 541, 30 Stat. 544 (repealed 1978).3 Pub. L. No. 95-598, 92 Stat. 2549.4 See 11 U.S.C. §§ 101 et seq.5 Ch. 575, 52 Stat. 840 (1938) (repealed 1978).6 See http://nbconf.org/about-us; see also

James Angell McLaughlin, Aspects of the Chandler Bill to Amend the Bankruptcy Act, 4 U. Chi. L. Rev. 369, 376-77 (describing the origins of the NBC to have evolved from “[t]wo referees, four lawyers, and one full time law teacher [having] met at a lawyer’s home in Wellesley, Mass., one [weekend] in June, 1932, and, pursuant to a declared intention to draft all necessary amendments to the Act by Monday next, [having] spent three days arguing about the definitions in section I”); 81 Cong. Rec. 8646 (1937) (describing, during congressional debate, the various members of the National Bankruptcy Conference and other organizations who worked on the bill that would be adopted as the Chandler Act and explaining that there is not “one word in this 290-page bill which has not had the scrutiny of some of the very best minds in [the bankruptcy] field in America”)

7 See http://nbconf.org/about-us.8 See id.9 See August 20, 2018 Letter from National

Bankruptcy Conference to Hon. Tom Marino, Hon. David Cicilline, Hon. Chuck Grassley, Hon. Dianne Feinstein (the “August 2018


60

Letter”), available at http://nbconf.org/ our-work.

10 The letter was addressed to the chairman and the ranking member of each of the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the United States House of Representatives, and the Committee on the Judiciary of the United States Senate. See August 2018 Letter at 1. The letter is an update to a letter originally sent in January 2016. See id; see also January 27, 2016 Letter from National Bankruptcy Conference to Hon. Tom Marino, Hon. Hank Johnson, Hon. Chuck Grassley, Hon. Patrick J. Leahy (the “January 2016 Letter”), available at http:://nbconf.org/ our-work.

11 August 2018 Letter at 2. For its part, the January 2016 Letter noted that, among other things, “[c]ertain revisions would correct judicial decisions that incorrectly interpreted Chapter 15.” January 2016 Letter at 2.

12 737 F.3d 238 (2d Cir. 2013).13 Id. at 241.14 See id.15 Under section 109(a) of the Bankruptcy Code,

“only a person that resides or has a domicile, a place of business, or property in the United States … may be a debtor under this title.” 11 U.S.C. §109(a).

16 See id.17 See id.18 Id. (quoting Mem. Op. in Supp. of Certification

of Direct Appeal to the Court of Appeals for the Second Circuit at 6, 9, In re Barnet, No. 12-13443, ECF No. 47 (Bankr. S.D.N.Y. Nov. 28, 2012)).

19 Id. at 247; see also 11 U.S.C. § 103(a).20 Barnet, 737 F.3d at 247.21 Id. at 251.22 August 2018 Letter at 2.23 Id. at 2, 12.24 Id. at 6.25 Id.26 11 U.S.C. § 1517(a).27 Hartford Underwriters Ins. Co. v. Union

Planters Bank, N.A., 530 U.S. 1, 6 (2000) (internal quotation marks and citation omitted).

28 See, e.g., In re U.S. Steel Can. Inc., 571 B.R. 600, 610 (Bankr. S.D.N.Y. 2017); In re Inversora Eléctrica de Buenos Aires S.A., 560

B.R. 650, 654-55 (Bankr. S.D.N.Y. 2016); In re Berau Capital Resources Pte Ltd., 540 B.R. 80, 81-82 (Bankr. S.D.N.Y. 2015).

29 See Jones v. APR Energy Holdings Ltd. (In re Forge Grp. Power Pty. Ltd.), No. 17-cv-02045-PJH, 2018 U.S. Dist. LEXIS 23660, at *24 (N.D. Cal. Feb 12, 2018).

30 In a bench ruling issued days after Barnet a judge in the United States Bankruptcy Court for the District of Delaware expressly disagreed with Barnet, which, the court noted, is not binding on courts outside the Second Circuit. See In re Bemarmara Consulting a.s., No. 13-13037 (Bankr. D. Del. Dec. 17, 2013), ECF No. 38 at 8:23-24. The Bemarmara court surmised that “there is a strong likelihood that the Third Circuit, likewise, would not agree with” the decision. Id. at 8:25-9:2. See also Batista v. Mendes, No. 17-24308-Civ-RNS, 2018 U.S. Dist. LEXIS 56239, at *2 (S.D. Fla. Apr. 2, 2018) (declining to adopt the holding in Barnet).

31 August 2018 Letter at 6 (citing Daniel M Glosband and Jay Lawrence Westbrook, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 Int’l Insolvency Rev. 28 (2015)).

32 In re McTague, 198 B.R. 428, 432 (Bankr. W.D.N.Y. 1996) (finding that a foreign individual with $194 in a U.S. bank account was eligible to be a debtor under the Bankruptcy Code).

33 In re Octaviar Admin. Pty Ltd., 511 B.R. 361, 369 (Bankr. S.D.N.Y. 2014). The Bankruptcy Court further found that, although it did not need to reach the issue, Octaviar also had property in the United States “in the form of an undrawn retainer in the possession of the [f]oreign [r]epresentatives’ counsel[,]” which retainer the foreign representatives had transferred to counsel after the Second Circuit opinion remanding the matter but before the foreign representatives filed the second petition for recognition that was before the Bankruptcy Court on remand. See id. at 372.

34 Id. at 373.35 August 2018 Letter at 5.36 See In re Octaviar Admin. Pty Ltd., 511 B.R. at

372.37 520 B.R. 399 (Bankr. S.D.N.Y. 2014).38 Id. at 412-413.39 August 2018 Letter at 5 n.14.


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40 August 2018 Letter at 5.41 See Donald S. Bernstein et al., Barnet and

Bemarmara Must a Foreign Debtor Have US

Assets to be Eligible for Relief Under Chapter

15 in the United States?, The International

Insolvency Review 9 (2d Ed. 2014).42 August 2018 Letter at 6.43 Id. (quoting Barnet, 737 F.3d at 251).44 Id.

Author:

Stacy A. Lutkus, Counsel

Drinker Biddle & Reath LLP

321 Great Oaks Blvd.

Albany, NY 12203

US

Tel: +1 518 862 7476


Website: www.drinkerbiddle.com


6262

Contributors

Drinker Biddle & Reath LLP321 Great Oaks Blvd.Albany, NY 12203USTel: +1 518 862 7476Email: [email protected]: www.drinkerbiddle.comCounsel: Stacy A. Lutkus

Ernst & Young LLP1 More London PlaceLondon SE1 2AFUKTel: +44 (0)20 7951 9898Email: [email protected] Website: www.ey.comExecutive Assistant: Lucy Clarke

Fellner Wratzfeld & Partner Rechtsanwälte GmbHSchottenring 12A-1010 ViennaAustriaTel: +43 1 537 70-311Email: [email protected] Website: www.fwp.atPartner: Dr. Florian Kranebitter, LL.M.

Felsberg AdvogadosAvenida Cidade Jardim, 803 - 5º andarSão Paulo - SPCEP 01453-000 – BrazilTel: +55 11 3141 9100Email: [email protected]: www.felsberg.com.brPartner: Thomas Felsberg

Gilbert + TobinLevel 35, Tower TwoInternational Towers200 Barangaroo AvenueBarangaroo NSW 2000, AustraliaTel: +61 2 9263 4000Email: [email protected]: www.gtlaw.com.au Partner: Peter Bowden

GLAS45 Ludgate HillLondon EC4M 7JUUKTel: +44 (0)20 3597 2940Email: [email protected]: www.glas.agencyLegal Counsel: Simon SchiffHead of Trustee and Escrow Services: Paul Cattermole

Homburger AGPrime TowerHardstrasse 2018005 ZurichSwitzerlandTel: +41 43 222 10 00Email: [email protected]: www.homburger.chPartner: Stefan Kramer

International Insolvency InstituteP.O. Box 249Stanardsville, VA 22973USTel: +1 434 939 6003Email: [email protected]: www.iiiglobal.orgAdministrative Director: Shari Bedker

Loyens & Loeff20, rue Edward SteichenL-2540 LuxembourgTel: +352 46 62 30 314Email: [email protected]: www.loyensloeff.comPartner: Anne-Marie Nicolas

Milbank LLP55 Hudson YardsNew York, NY 10001USTel: +1 212 530 5100Email: [email protected]@[email protected]: www.milbank.comPartner: Abhilash RavalPartner: Lauren Doyle

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Peña Briseño, Peña Barba, Palomino AbogadosFlorencia 14Colonia JuárezZona ReformaCiudad de México. C.P. 06600 MexicoTel: +52 55 5426 0909Email: [email protected]: www.penabriseno.comPartner: Luis Femando Palomino Bernal

PUNUKA Attorneys and SolicitorsPlot 45, Oyibo Adjarho Street, off Ayinde Akinmade Street, off Admiralty WayLekki Peninsula Phase 1LagosNigeriaTel: +234 1 270 4791Email: [email protected]: www.punuka.comGeneral Manager, Practice: Angela Ezenweani

Skadden, Arps, Slate, Meagher & Flom (UK) LLP40 Bank StreetCanary WharfLondon E14 5DSUKTel: +44 (0)20 7519 7000Email: [email protected]@skadden.comWebsite: www.skadden.comCounsel: James FalconerAssociate: Olivia Bushell

UNCITRAL Secretariat, Office of Legal Affairs, United NationsVienna International CentreP.O. Box 5001400 ViennaAustriaEmail: [email protected]: uncitral.un.orgLegal Officer: Samira Musayeva

Walkers190 Elgin AvenueGeorge TownGrand Cayman, KY1-9001Cayman IslandsTel: +1 345 949 0100Email: [email protected]: www.walkersglobal.comPartner: Neil Lupton

White & CaseBiblioteksgatan 12 Box 5573 SE-114 85 StockholmSwedenTel: +46 708 733 222Email: [email protected]: www.whitecase.comPartner: Carl Hugo Parment



... for a wealth of information on the international capital

and financial markets.If you haven’t had a chance to visit us online lately,

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wealth of information related to the international capital and financial markets including debt & equity capital markets, asset finance & leasing, securitisation & structured finance, and insolvency & restructuring, with plenty of industry news and articles all available

for you to download individually and take with you when travelling.

Visit us online...

www.capital-markets-intelligence.com


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Published by Capital Markets IntelligenceFor further information, please visit:www.capital-markets-intelligence.com


... for a wealth of information on the international capital

and financial markets.If you haven’t had a chance to visit us online lately,

you really should see what you’re missing. Go to www.capital-markets-intelligence.com to find a

wealth of information related to the international capital and financial markets including debt & equity capital markets, asset finance & leasing, securitisation & structured finance, and insolvency & restructuring, with plenty of industry news and articles all available

for you to download individually and take with you when travelling.

Visit us online...

www.capital-markets-intelligence.com


NEW CMI FPcolour-advert.indd 1 30/05/2018 11:07:28CAP8908 II&RR_p62_Contributors.indd 65 30/05/2019 16:45

June 17-18, 2019 | Barcelona, Spain

19th Annual International Insolvency Conference

Barcelona(NextGen Program June 16, 2019)

Organizing CommitteeCo-Chairs

Agustí BouProf. Ignacio Tirado

International Insolvency InstituteFor Hotel Registrationwww.iiiglobal.org/19thannualconference

3411-AC iii Barcelona Save the Date Ad.indd 1 1/11/19 3:12 PMCAP8908 II&RR_p62_Contributors.indd 66 30/05/2019 16:45

International Insolvency & Restructuring Report 2019/20

Documents

Transcript of International Insolvency & Restructuring Report 2019/20