International Insolvency & Restructuring Report 2019/20

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www.homburger.ch InternationalInternational Insolvency Insol vency Focused. & Restructuring& Restructuring Report Report Effective. Precise. 2019/20 2017/18 We provide Swiss made advice and representation to enterprises and entrepreneurs in a global environment in transactions, Contributors disputes and complex legal, tax and regulatory matters. Drinker Biddle & Reath LLP Ernst & Young LLP Fellner Wratzfeld & Partner Rechtsanwälte GmbH Felsberg Advogados Arbitration Gilbert + Tobin Banking and Finance GLAS Capital Markets Competition | Regulatory Homburger AG Compliance International Insolvency Institute Corporate | M&A Loyens & Loeff Crisis Management Milbank LLP Employment Law and Executive Compensation Peña Briseño, Peña Barba, Palomino Abogados IP | IT PUNUKA Attorneys and Solicitors Insurance Skadden, Arps, Slate, Meagher & Flom (UK) LLP Investigations and Enforcement UNCITRAL Secretariat, Office of Legal Affairs, United Nations Litigation Walkers Private Clients White & Case Real Estate Restructuring | Insolvency Tax Technology and Digital Economy White Collar Crime

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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 proceedings Milbank LLP

Developments in Australian insolvency law: 17 Combatting illegal phoenixing Gilbert + Tobin

Restructuring trusts: A viable structure for securing 22 and restructuring financing in Austria Fellner 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 Luxembourg Loyens & Loeff

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

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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

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

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. 1

CAP8908 II&RR_p01_Foreword.indd 1 30/05/2019 16:37 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. 2

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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 comments Most 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 script It 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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CAP8908 II&RR_p01_Foreword.indd 3 30/05/2019 16:37 The current work by UNCITRAL in the area of insolvency law

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

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.

Overview of UNCITRAL texts in itself, the Commission adopted the Guide to the area of insolvency law Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency in 2013. Since the early 1990s UNCITRAL has adopted a Throughout the 2000s, UNCITRAL worked number of different legislative texts in the field on its Legislative Guide on Insolvency Law of insolvency law, addressing both domestic and addressing key aspects of insolvency law, such cross-border aspects of insolvency. Those texts as commencement standards, avoidance and have been used worldwide as a benchmark for liquidation and reorganisation proceedings. insolvency law reform. Parts one and two of the UNCITRAL Legislative The first of the UNCITRAL insolvency text Guide on Insolvency Law dealing with those was the UNCITRAL Model Law on Cross-Border key issues were adopted in 2004. They were Insolvency with its Guide to Enactment (1997) (the MLCBI), which focuses on providing a legal supplemented by part three addressing framework to assist the conduct of cross-border treatment of enterprise groups in insolvency in insolvency cases involving a single debtor. It 2010 and by part four on directors’ obligations in establishes straightforward requirements for the the period approaching insolvency in 2013. recognition of foreign insolvency proceedings, In addition to the legislative texts, UNCITRAL which aim at minimising formality, time, costs has authored a number of practical tools of a and disputes and promoting predictability of particular relevance to judges in response to the outcomes in cross-border insolvencies. The experience with the use of the MLCBI. In 2009, MLCBI has been used as the basis for enacting UNCITRAL adopted the Practice Guide on Cross- domestic cross-border insolvency legislation Border Insolvency Cooperation, which expands in 48 jurisdictions2 and to the knowledge of on article 27 of the MLCBI, discussing the various the UNCITRAL secretariat, several States are ways in which cooperation in cross-border currently considering enacting the MLCBI, insolvency cases can be achieved and compiling including India, Ireland and Thailand. experience with the use of cross-border Some case law on MLCBI has raised insolvency agreements. In 2011, “The UNCITRAL questions relating to the interpretation of Model Law on Cross-Border Insolvency: The certain provisions of the MLCBI, in particular, Judicial Perspective” was adopted, which was the meaning of “centre of main interests” subsequently updated in 2013. It identifies issues (COMI), the scope of the public policy exception that may arise on an application for recognition in article 6 and application of the relief or cooperation under the MLCBI and discusses provisions in articles 19, 20 and 21. To provide approaches that courts have taken in countries additional information and clarify those issues that enacted the MLCBI. of interpretation and application, the 1997 The 2018 UNCITRAL Model Law on Guide to Enactment accompanying the MLCBI Recognition and Enforcement of Insolvency- was revised, and on the basis of a revised text, Related Judgments (MLIJ) with its Guide to without changing the substance of the MLCBI Enactment is a recent addition to the UNCITRAL 4

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insolvency texts, and in July 2019, UNCITRAL The MLIJ defines an insolvency-related is expected to add thereto texts on enterprise judgment as one that arises as a consequence group insolvency (a model law with its guide of or is materially associated with an insolvency to enactment and a text addressing obligations proceeding (whether or not that proceeding of directors of enterprise group companies) has closed) and was issued on or after the (see below). commencement of the insolvency proceeding. The UNCITRAL secretariat assists States It does not include a judgment commencing an with the use of UNCITRAL texts, in particular insolvency proceeding, since it would be covered by providing technical assistance with drafting by the MLCBI, but the Guide to Enactment legislation based on those texts. Harmonised makes it clear that some of the orders made interpretation of UNCITRAL legal texts is at the time of commencement, those that are facilitated by the Case Law on UNCITRAL Texts referred to in some jurisdictions as first day (CLOUT) system, under which the UNCITRAL orders, would fall within the definition. secretariat publishes abstracts of judicial The MLIJ specifies certain conditions and decisions (and, where applicable, arbitral the procedure for recognition and enforcement awards) that interpret conventions and model of an insolvency-related judgment and effect laws emanating from UNCITRAL in the six of a recognised judgment in the recognising official languages of the United Nations and State. It allows recognition and enforcement of the full, original decisions are available, upon a severable part of a judgment and granting a request. There are currently 118 cases on the provisional relief. MLCBI in the system. With the enactment of the MLIJ also identifies grounds for refusal MLIJ by States and ensuing case law, the CLOUT of recognition and enforcement, including: system is expected to be enriched by MLIJ- (a) if recognition and enforcement would related case law as well. 3 be manifestly contrary to the public policy,

including the fundamental process of procedural Most recent developments fairness; (b) if basic due process requirements The 2018 UNCITRAL Model Law on Recognition (e.g. proper notification) were violated in the and Enforcement of Insolvency-Related proceeding giving rise to the judgment; (c) Judgments (MLIJ) with Guide to Enactment where the judgment was obtained by fraud; UNCITRAL took up the work on the topic of (d) where the judgment is inconsistent with a recognition and enforcement of insolvency- judgment issued in the recognising State in a related judgments in order to address both the dispute involving the same parties or with an lack of an international instrument covering earlier judgment issued in another State in a the recognition and enforcement of these dispute involving the same parties on the same judgments, as well as some uncertainty as to subject matter, provided that that judgment is whether articles 7 and 21 of the MLCBI explicitly capable of being recognised and enforced in provides the necessary authority for such the recognising State; and (e) where concerns recognition and enforcement. arise over the administration of the debtor’s The resulting MLIJ, with its Guide to insolvency proceedings, over protection of Enactment, complements the MLCBI by allowing interests of creditors and other interested any foreign insolvency-related judgment to persons or over the jurisdiction of the be enforced, including a judgment relating to originating court. the recovery of assets of the debtor located in a jurisdiction whose insolvency proceedings An upcoming adoption of texts on enterprise would be neither a main nor a non-main group insolvency proceeding under the MLCBI. Article X of the Recognising that the MLCBI focuses on cross- MLIJ is specifically addressed to States that border insolvency proceedings relating to a have enacted legislation based on the MLCBI single debtor and that insolvency of multiple explicitly clarifying that, notwithstanding any debtors members of the same enterprise group prior interpretation to the contrary, the relief may require a different treatment, UNCITRAL available under article 21 of the MLCBI includes commenced work on the insolvency treatment recognition and enforcement of a judgment. of enterprise groups in 2006. That work resulted 5

CAP8908 II&RR_p04_Uncitral.indd 5 30/05/2019 16:38 in part three of the UNCITRAL Legislative Guide development and implementation of the group on Insolvency Law, adopted in 2010, which insolvency solution; and (d) the treatment includes both domestic provisions to facilitate of foreign creditor claims in the jurisdiction the conduct of enterprise group insolvencies, that commences insolvency proceedings in as well as provisions on cooperation and accordance with the law applicable to those coordination in the cross-border context. The claims (often referred to as “synthetic” latter extend the cooperation and coordination measures). principles of chapter IV of the MLCBI to multiple New terms introduced include, in addition debtors connected by membership of an to “group insolvency solution” discussed above: enterprise group. “group representative”, being a person or The work on the topic subsequently body including one appointed on an interim proceeded with the intention to prepare a basis authorised to act as a representative model law on enterprise group insolvency. of a planning proceeding; and “planning At its 54th session, in December 2018, the proceeding”, being a proceeding commenced Working Group completed its work on a draft in respect of an enterprise group member in model law on enterprise group insolvency the State where that member has the COMI, (the draft MLEGI), and transmitted the text for provided: (i) one or more other group members finalisation and adoption by UNCITRAL at its are participating in that proceeding for the forthcoming annual session in Vienna, in July purposes of developing and implementing a 2019. The draft MLEGI was also circulated group insolvency solution; (ii) the enterprise in January 2019 for comment by States group member subject to the proceeding and relevant international organisations. is a necessary and integral part of the Any comments received by the UNCITRAL group insolvency solution; and (iii) a group secretariat will be put before UNCITRAL representative has been appointed. for consideration together with the draft The text is based upon several widely-agreed MLEGI. It is anticipated that at that session foundational principles: preservation of the the Commission will be in the position to jurisdiction of the State in which each group finalise and adopt the UNCITRAL model law on member has its COMI; preservation of the enterprise group insolvency on the basis of the ability to commence insolvency proceedings in draft MLEGI. respect of a group member as and when such This will be a step further in providing to proceedings might be required; and protection States a legislative template for addressing of the interests and expectations of creditors enterprise group insolvencies. The draft MLEGI and other interested persons. extends the recommendations contained in In parallel with its work on the draft MLEGI, part three of the Legislative Guide, particularly the Working Group has been working on two as they relate to the cross-border context, by other closely related texts: a draft guide to allowing a certain degree of centralisation of enactment to accompany the model law and insolvency proceedings relating to multiple a supplement to part four of the UNCITRAL debtors of the same enterprise group with Legislative Guide on Insolvency Law addressing the goal of protecting, preserving, realising obligations of directors of companies that are or enhancing the overall combined value members of an enterprise group. of group members. Such centralisation is The work on the guide to enactment achieved through mechanisms that allow is expected to be finalised at the Working (a) the negotiation of a proposal or a set of Group’s session in May 2019 and afterwards proposals in the planning proceeding for the transmitted to the Commission so that it reorganisation, sale or liquidation of some could consider it together with the draft or all of the operations and assets of one or MLEGI. The text addressing specific obligations more enterprise group members (a “group of directors of enterprise group members insolvency solution”); (b) approval domestically, participating in the development of a group and cross-border recognition, of the planning insolvency solution was finalised by the proceeding and the group insolvency solution; Working Group at its December 2018 session. (c) provision of appropriate relief to assist It will be before the Commission for finalisation 6

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and adoption at the same time as the draft Practicability, flexibility, time- and cost- MLEGI and its guide to enactment. efficiency and maintaining a balance between the interests of debtors and creditors and other Insolvency of micro, small and medium-sized interested persons were cited as essential enterprises (MSMEs) considerations to keep in mind in devising any The Working Group is currently working on simplified insolvency mechanism. It was also developing appropriate mechanisms and recognised that many mechanisms that would solutions to address the insolvency of MSMEs, facilitate the resolution of financial difficulties focusing on both legal and natural persons of micro and small business debtors would be engaged in commercial activity. At the Working found outside the insolvency law framework. Group session in December 2018, the prevailing They would comprise educational, taxation, view was that work should focus on the needs in the first instance of individual entrepreneurs and banking and institutional measures, including micro and small businesses of an essentially enabling the completion of many procedural individual or family nature with intermingled steps online using readily available templates business and personal debts. and providing access to low-cost professional The UNCITRAL Legislative Guide on advice on debt restructuring. Insolvency Law was used as the starting point The form that the work of UNCITRAL on for discussion and the Working Group identified MSMEs’ insolvency might take is still to be issues that were not addressed in the Legislative decided. Various proposals are considered, Guide. Personal guarantees and parallel including preparation of a supplement to the proceedings for managers and MSMEs debtors UNCITRAL Legislative Guide on Insolvency Law were given as examples of issues not addressed or a stand-alone text. in the Legislative Guide but that, in the view of some delegations, would require detailed Notes: 1 treatment in the context of MSMEs insolvency. The views expressed in this article are those The Working Group also looked into issues of the author and do not necessarily reflect that would justify different treatment in the those of the United Nations. context of MSMEs insolvency in the light of 2 As of March 2019, Bahrain was the latest factors that usually discourage micro and small enacting State. A list of enacting jurisdictions business debtors from seeking timely solutions is available at uncitral.un.org. to their financial difficulties. Those factors 3 Available at http://www.uncitral.org/clout/ include, in addition to costs, complexity and the search.jspx?f=en%23cloutDocument. lack of knowledge, a risk of loss of control over textTypes.textType_s1%3aModel%5c+Law%5c the business and the social stigma of insolvency. +on%5c+Cross%5c-Border%5c+Insolvency%5 The Working Group considered various options c+%5c(1997%5c). 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 Author: as the default, a quick discharge, imposition of Samira Musayeva, Legal Officer, fewer restrictions on professional and financial Secretary, Working Group V (Insolvency Law) activities of a discharged debtor and other International Trade Law Division mechanisms to facilitate a fresh start. It was (UNCITRAL secretariat) acknowledged that appropriate safeguards Office of Legal Affairs would need to be in place to prevent and punish United Nations abuses of a simplified insolvency regime. Website: uncitral.un.org

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

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.

Pre Pre-Pack the Group to be placed into administration via In March 2017 the Group initiated a thorough a Pre-Pack. This preserved jobs and ensured strategic review to undertake a detailed the continuation of the business as a going examination of all possible options to address concern. the £220m debt burden of the Group. The Group comprised the largest publisher of UK Pre-Pack regional newspapers and was owner of the “i”, Under the Pre-Pack, all of the Group’s the digital version of the former Independent businesses and substantially all of the Group’s newspaper. In particular the review considered assets were sold to a newly-incorporated the financing options in relation to a refinancing group of companies controlled by holders or restructuring of its senior secured bonds of the Original Bonds through JPI Media. (the “Original Bonds”). Given the debt burden, Holders representing the required majority a pension deficit and the fact that the group of the Original Bonds contractually agreed operated in an industry in strategic decline, to support the transaction. The Company’s the board of directors (the “Board”) explored ordinary shares were cancelled from listing multiple options for the Group including a debt on the London Stock Exchange. Bondholders for equity swap, third-party equity and/or debt wrote off approximately 70% of the Original refinancing and a regulated apportionment Bonds, reducing this to £85m from £220m. arrangement of the group’s defined benefit New notes (the “New Notes”) were issued as pension scheme as well as a formal sales well as new equity (the “New Equity”) plus new process for the entire Group. money injected into JPI Media. Through a well The Company announced in October 2018 organised and executed process the Pre-Pack that the Board had decided to seek offers for was implemented in accordance with the pre- the purchase of the Company. However, after arranged steps and timetable. careful consideration, the Board concluded As the Company was listed it was necessary that none of those offers would result in net to consider the requirements of the London proceeds sufficient to enable the Group to Stock Exchange and ensure confidentiality repay the amounts owed by it in respect of of the transaction. Therefore, administration its Original Bonds. Based on the valuation of orders were obtained outside ordinary Court the Group implied by those offers and given hours in England, Scotland and Northern the level of liabilities in the Group, the Board Ireland following the company’s announcement concluded that there was no longer any value in on the afternoon of November 17, 2018. the ordinary shares of the Company. The Board In addition to the practical expertise therefore concluded that it was necessary for enabling GLAS to provide services across the 8

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restructuring, its internal legal team worked • Value of company may be higher. Assets closely with advisers to provide a proactive and of a company in financial difficulty may be commercial approach facilitating a smooth sold at a higher price since the insolvency restructuring. practitioner can negotiate with potential buyers before he/she has been formally Pros and cons of Pre-Packs appointed as administrator compared with Although not a new restructuring strategy, pre- a lengthy negotiation for a sale after the pack administrations have become very popular company goes into administration. in the last few years. They are a process through Criticisms which a company is put into administration and • Lack of transparency. Though secured its business or assets (or both) are immediately creditors will usually be consulted in sold by the administrator under a sale that advance (because their consent is needed was arranged before the administrator was to the release of their security), unsecured appointed. It may involve a sale of a company’s creditors will not usually be informed of a business on a going concern basis or just some Pre-Pack until after it has completed so of the assets with the remainder of the business have no opportunity to protect their interests or assets being sold separately or liquidated. by considering and voting on the Pre-Pack Advantages proposal. • Cost. It is less expensive than a traditional • A lack of accountability. The decision to administration as the business is transferred execute a Pre-Pack is a matter for the to the buyer immediately or shortly after commercial judgment of the administrator. administration, so the administrators are not Accordingly, the administrator can sell assets required to run the business. of the company before his proposals have • Return for creditors. It is likely to provide a been agreed by creditors and without court better return for creditors than a liquidation. sanction (however additional regulation in • Avoids receivership and bankruptcy. Pre- this area may make this less of a concern). Packs prevent secured creditors from • Pre-Packs do not necessarily maximise enforcing a charge against the company’s returns for unsecured creditors. The value property or assets which allows the company of a business could be destroyed if its to avoid receivership and bankruptcy. financial difficulties are leaked. As a result, • Retention of jobs. It is less likely that there an administrator selling the business and/or will be job losses and there are important assets of a company in a Pre-Pack will legal protections for employees. This should not necessarily test the market value of limit redundancies, reducing the number the business by wide advertising for of and value of preferential and unsecured interested buyers. claims. • The proposed administrator has an • Maintains value of the company. It protects inherent conflict of interest. The proposed the value of the company by completing the administrator may be introduced to the Pre-Pack before news of insolvency reaches company by its directors in the context of the market avoiding customers and suppliers a Pre-Pack proposal that the directors losing confidence in the company. have begun to formulate. If the relevant • Business not interrupted. It facilitates insolvency practitioner wants to be continuation of the business as the appointed as the company’s administrator, administration process is pre-negotiated, so he has an incentive to agree to implement business operations are not interrupted or the Pre-Pack. detrimentally affected. • Writing off liabilities using a Pre-Pack • Removes burden of historical debt. In theory is a short-term fix.A Pre-Pack sale of a the newco should have a better chance of business and assets does not itself subject survival without the burden of historical debt the business being sold to a restructuring, and any new investment will be applied to which is often necessary if the business is to develop and expand the business. survive in the long term. 9

CAP8908 II&RR_p08_GLAS.indd 9 30/05/2019 16:39 Role of an independent agent in creditors are not able to hold the new debt. a Pre-Pack The Calculation Agent will be able to assist in determining each creditors entitlement in each Under a Pre-Pack there are many roles that type of new debt being issued. an independent Corporate Trust and Agency provider can fulfil which adds value in the Holding Period Trustee whole process, especially with the operational One of the last stages of a Pre-Pack. Creditors mechanics, so it is advisable to discuss with and may hold off claiming their new debt (or involve such a provider from the early stages ‘entitlements’) and those entitlements can be of structuring a Pre-Pack. Every Pre-Pack has held by the Holding Period Trustee in Trust its own nuances and depends on what original for those creditors. Upon receipt of a creditor debt the existing creditors are holding but some requesting their entitlements, the Holding typical Corporate Trust and Agency roles in a Period Trustee can then deliver these to the Pre-Pack are: creditor. It is important that the Holding Period Trustee is aware what the entitlements are Lock-Up Agent and in what markets they may be asked to hold Required when a group of creditors are the new debt. For example, can they hold local signing up to a further agreement with the equity and what are the local requirements issuer/borrower usually in the form of an of being the registered owner of that equity, implementation agreement. The creditors especially if it is a majority stake? Therefore, the are ‘locking up’ their debt which is usually Holding Period Trustee would seek to carve out processed outside of any Clearing System for any voting requirements on its holding. bond debt. When this occurs, proof of holding of bond debt will be required which can be a Trustee long and laborious task for the Lock-Up Agent A vital role in any Pre-Pack with existing debt to process. and/or security and any new debt and/or security being issued or granted. The Trustee will need Information and Tabulation Agent to consider what is beneficial for all its trust An ‘event’ is usually launched to all creditors beneficiaries and will play an active role through providing them with the information to decide the whole process with all interested parties whether to participate in the event and also to including any administrators and valuers. The claim any future entitlements. The Information Trustee will need to show proactiveness and Agent will be able to provide information and commerciality, so it is important the Trustee is assistance to the creditors by, for example, onboard at an early stage in a Pre-Pack process. supplying the appropriate legal documents. During the end stages of a Pre-Pack, the Roles on the Johnston Press Tabulation Agent is required to tabulate or count votes from the creditors and to collate Pre-Pack Ashurst LLP advised the Group, Latham & this information to provide to the issuer/ Watkins advised the committee of bondholders borrower. These votes are typically made via the and White & Case LLP advised GLAS in Clearing Systems for bonds. It is important to conjunction with its internal legal team. provide documentation in time to the Clearing GLAS companies had numerous roles Systems before the start of the process which demonstrating the breadth of our offering and the Tabulation Agent can assist with to ensure offers a single point of contact for multiple roles smooth operational processing. in complex restructurings: Calculation Agent • Note Trustee and Security Agent on the With most Pre-Packs, a defined amount of Original Bonds acting under the rights and new debt will be issued to creditors and this obligations and instructions made pursuant can take many forms, for example new bonds, to the Original Bond documents. equity, loans and cash. Creditors may be • Information and Tabulation Agent in relation able to pick and choose what they would like to the voting and instructions by Original to receive or alternatively it may be a fixed Bondholders processed by way of an event amount. This can cause issues if existing held through Euroclear and Clearstream. 10

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• Lock-up Agent in relation to the lock-up GLAS continues to advise on the Original arrangement applying prior to grant of Bonds and New Bonds and to distribute the administration processed by way of consideration to the Original Bondholders. confirmations received from bondholders outside of Euroclear and Clearstream. • Holding Period Trustee and Calculation Agent in relation to distributing non- Authors: cash consideration payable to Original Simon Schiff, Legal Counsel Bondholders including cash realised from Paul Cattermole, Head of Trustee and the sale of such non-cash consideration Escrow Services via a broker. Also holding the non-claimed GLAS non-cash consideration for a period of one 45 Ludgate Hill year, waiting for Bondholders to claim these London EC4M 7JU entitlements. UK • Agent and Security Agent in relation to the Tel: +44 20 3597 2940 New Notes. Email: [email protected] • Escrow Agent in relation to the new money [email protected] provided by certain Original Bondholders. Website: www.glas.agency

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CAP8908 II&RR_p08_GLAS.indd 11 30/05/2019 16:39 Cross-border restructuring in the US: Chapter 15 approval of third-party releases granted in foreign proceedings

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

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.

The benefits of obtaining such a broad release such as chapter 11 plans and schemes and for non-debtor parties is clear, but its availability plans sanctioned in foreign jurisdictions. is limited. In fact, many foreign jurisdiction There is no consensus as to the availability companies will choose to commence of third-party releases. The US circuit courts restructuring proceedings in the US or under of appeals are split as to whether a bankruptcy an English law-based regime in order to secure court has the authority to approve, over an the benefits of such a third-party release. objection, chapter 11 plan provisions that However, such third-party releases are release non-debtors from liability or enjoin often a source of controversy regardless of dissenters from asserting claims against the jurisdiction where they are sought. This is non-debtors.4 Even those courts that believe the case in the US, where, notwithstanding its that such authority exists would only approve prevalence in chapter 11 plans, such provisions such releases under limited circumstances, often draw objections and can be heavily where (i) these releases are “essential” to the litigated, specifically in the context of whether reorganisation; (ii) the parties being released such releases can be granted absent the are making a substantial financial contribution grantee’s actual consent. Some courts in the to the reorganisation; and (iii) the affected US have flatly rejected the availability of non- creditors overwhelmingly support the consensual third-party releases. In contrast, it chapter 11 plan.5 appears to have become less and less difficult to Similar controversy has arisen in other obtain recognition and enforcement of third- jurisdictions. While third-party releases are party releases granted in foreign jurisdictions in generally allowed in UK schemes of arrangement cases commenced under chapter 15 of the US and comparable regimes in other commonwealth Bankruptcy Code.3 countries, such as Canada and Australia,6 each In several recent cases, commencing with of France, Germany and Italy prohibit granting Metcalfe in 2010 and continuing through Avanti third-party releases in connection with schemes in 2018, recognition and enforcement in the or similar arrangements under their respective US have been granted to third-party releases insolvency laws.7 contained in foreign schemes and plans even where such releases might not have been Favourable treatment in granted in a plenary US case. chapter 15 cases In chapter 15 cases, however, with growing Third-party releases outside of frequency third-party releases approved by chapter 15 cases foreign courts have been recognised and Favourable chapter 15 treatment of third-party deemed enforceable by US courts, with little to releases must be viewed against the backdrop of no consideration of the concerns that have made the treatment of such releases in other contexts, them controversial in chapter 11 cases. These 12

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decisions appear to follow a line of decisions and enforcement of the Third-Party Releases by Judge Martin Glenn of the United States authorised by the UK court. Judge Glenn held Bankruptcy Court for the Southern District of that it was unnecessary to analyse the US New York. court’s authority to approve third-party releases under chapter 11 as no chapter 11 case had Avanti been filed and, in a chapter 15 case, principles The most recent example of this trend is of comity and enforcement of foreign judgments the April 9, 2018 decision in In re Avanti were paramount, more pressing concerns (he Communications Group PLC,8 where Judge also pointed out that only a small number of Glenn held, among other things, that non- creditors impaired by the Scheme would be consensual third-party releases included in a UK bound by the Third-Party Releases). scheme of arrangement were enforceable in the Judge Glenn pointed out that the issues US under chapter 15 of the Bankruptcy Code. presented by third-party releases in chapter 15 In that case, Avanti Communications Group cases are different than those courts have to plc (“Avanti”), a satellite operator, undertook to grapple with in chapter 11 cases, the focus being restructure its senior secured debt consisting on whether the foreign court had the proper of more than US$890m in senior secured authority to grant the releases and, accordingly, notes maturing in 2021 and 2023 (the “Notes”) whether to enforce the release approved by guaranteed by certain of Avanti’s direct and the foreign court was “appropriate relief” and indirect subsidiaries. Avanti and an ad hoc “additional assistance” authorised by sections group of the holders of the Notes entered into a 1507 and 1521(a) of the Bankruptcy Code. restructuring support agreement, which formed Judge Glenn distinguished In re Vitro S.A.B. the basis for a scheme of arrangement under de C.V., 70 F.3d 1031 (5th Cir. 2012), the one UK law (the “Scheme”) that included releases of, reported case where a US court declined to among others, the Guarantors, which were to be recognise a third-party release approved by a granted without the consent on the dissenting foreign court. In Vitro, the Fifth Circuit declined noteholders (the “Third-Party Release”). to grant comity and enforce the Mexican Avanti initiated a proceeding before the court’s order approving a concurso plan that High Court of Justice of England and Wales for released non-debtor affiliates’ guarantees. In approval of the Scheme, which, after convening distinguishing Vitro, Judge Glenn noted both that a creditors’ meeting at which 98.3% of the third-party releases are generally not available noteholders voted in favour of the Scheme, in the Fifth Circuit, and, more importantly, that sanctioned the Scheme, finding jurisdictional, Vitro “had a number of very troubling facts,” statutory and fairness requirements to such as the fact that the creditor approval of the be satisfied. Thereafter, Avanti’s foreign concurso plan was achieved only by counting representative commenced a chapter 15 case insiders’ votes, which would not have been in the US court seeking, among other relief, the counted to approve a chapter 11 plan pursuant enforcement of the Scheme in the US, including to section 1129(a)(10) of the Bankruptcy Code. the Third-Party Releases. It was this misalignment of the Vitro’s concurso Judge Glenn granted the relief sought, proceeding with fundamental US policy – concluding that the Scheme, including the Third- which was not an issue in Avanti or any of the Party Releases, was entitled to recognition in other cases discussed here – that was chiefly the US because (i) it satisfied the requirement of responsible for the Vitro court refusing to chapter 15 of the Bankruptcy Code; (ii) it did not recognise the non-debtor releases approved by prejudice the rights of US citizens or violate US the Mexican court. domestic public policy; and (iii) the Third-Party Releases were necessary to give practical effect Metcalfe to the Scheme. Judge Glenn has reached a similar conclusion While acknowledging the controversy with in In re Metcalfe & Mansfield Alternative respect to approval of third-party releases by Investments, 421 B.R. 685 (Bankr. S.D.N.Y. US bankruptcy and appellate courts, Judge 2010). In that chapter 15 case, the court Glenn decided he could grant recognition agreed to provide “additional assistance” to 13

CAP8908 II&RR_p12_Milbank.indd 13 30/05/2019 16:39 a Canadian debtor by enforcing a Canadian Unreported decisions court’s order confirming a restructuring Taking their lead from Judge Glenn, a number of plan that contained third-party releases, other courts have undertaken similar analyses even though it was far from clear whether in chapter 15 cases and approved third-party such releases would have been approved in a releases granted by foreign courts. See, e.g. In chapter 11 case. re Emeco Holdings Ltd., No. 16-13080 (MKV), The Metcalfe court took comfort in the Transcript of March 8, 2017 Hearing, at 8:1- following: (i) the third-party release provisions 19 (Bankr. S.D.N.Y. Nov. 30, 2016) (Australian had been contested and fully litigated in scheme releases recognised as “type of injunctive the Canadian court; (ii) the Canadian court relief [that] has regularly been granted in Chapter expressly found that it had jurisdiction to 15 cases” and found enforceable); In re Boart grant the releases; and (iii) the Canadian Longyear Ltd., No. 17-11156 (MEW), Verified plan received a very high level of non-affiliate Petition [Docket No. 2] (Bankr. S.D.N.Y. Aug. 30, creditor support. Id. at 699-700. 2017) (enforcing releases granted in Australian In the end, Judge Glenn concluded, as he did scheme because “‘[t]he equitable and orderly in Avanti, that any uncertainty about the validity distribution of a debtor’s property requires of third-party releases was of little significance assembling all claims against the limited assets in a chapter 15 case, and that “principles of in a single proceeding; if all creditors could not enforcement of foreign judgments and comity be bound, a plan of reorganisation would fail’”) in chapter 15 cases strongly counsel approval (quoting Victrix S.S. Co., S.A. v. Salen Dry Cargo of enforcement in the United States of the A.B., 825 F.2d 709, 713-14 (2d Cir. 1987)); In re third-party non-debtor release and injunction Magyar Telecom B.V, No. 13-13508 (SHL), Verified provisions included in the Canadian Orders, Petition ¶ 154 [ECF No. 26] (Bankr. S.D.N.Y. Dec. even if those provisions could not be entered in 11, 2013) (recognition of the third-party releases a plenary chapter 11 case.” Metcalfe, 421 B.R. granted because “the Scheme cannot function at 696. without such releases”).

Sino-Forest Summary In In re Sino-Forest Corp., 501 B.R. 655 (Bankr. Based on these cases, it appears that, in the S.D.N.Y. 2013) – a third decision by Judge Glenn absence of egregious facts like those in the Vitro on this issue – the court employed the same case, foreign debtors should assume that they rationale articulated in Metcalfe, recognising will be highly likely to obtain recognition and and enforcing, as a form of “additional enforcement of the protections against dissenting assistance” under section 1507, a Canadian stakeholders granted by their home jurisdictions court-approved settlement containing a from US courts in chapter 15 cases. third-party release. Because the issue of the As a result, despite the prevalence of propriety of the third-party releases had been third-party releases in US chapter 11 cases, “fully and fairly” litigated in the Canadian to the extent a third-party release is an courts, the court found that it could recognise integral component of a foreign company’s and enforce restructuring, it may prove advantageous the releases in the United States under the for foreign companies to avail themselves of comity principles set forth in section 1507. Id. another court’s jurisdiction in obtaining approval at 664. of a third-party release and, thereafter, seek The court also noted that approving the recognition of the plan or scheme approved by release did not violate section 1506 of the the foreign court under chapter 15. Bankruptcy Code (which prohibits enforcement of a foreign judgement if doing so would be Notes: “manifestly contrary to the public policy of the 1 Abhilash M. Raval and Lauren C. Doyle are United States”) because comparable relief was partners, and Dennis C. O’Donnell is of available in the Second Circuit (albeit “rarely”) counsel, at Milbank LLP. and seven other judicial circuits. Id. 2 Third-party releases generally release a 14

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specified set of claims against the “Released negotiation, formulation, preparation or Parties,” which typically include a broad consummation of the Plan (including the array of debtor-related parties, including the Plan Supplement), the Definitive Documents, debtor’s directors, officers, professionals, or any related agreements, instruments or lenders, and contract parties, etc. The parties other documents, or the solicitation of votes providing such releases – the “Releasing with respect to the Plan, in all cases based Parties”– include a comparably broad upon any other act or omission, transaction, group of debtor-related parties, including agreement, event or other occurrence taking all of the foregoing, but, most relevantly, place on or before the Effective Date. (Id.) also include “(i) the holders of Impaired 3 Chapter 15 of the US Bankruptcy Code, which Claims who abstain from voting on the is derived from the Model Law on Cross- Plan or vote to reject the Plan but do not Border Insolvency, (i) furnishes “effective opt-out of these releases on the Ballots” mechanisms for dealing with cases of cross- (Second Amended Joint Chapter 11 Plan border insolvency with the objectives of of Reorganisation of Tops Holding II Corp . . . cooperation between courts of the and Its Affiliated Debtors (with Technical United States . . . and the courts and other Modifications), In re Tops Holding II Corp., et competent authorities of foreign countries al., Case No. 18-22279 (RDD) (Bankr. S.D.N.Y. involved in cross-border insolvency cases”; Nov. 8, 2019), at 73.) The claims released and (ii) is focused on rendering “assistance” run an equally broad gamut, absolving the to “foreign debtors” seeking to protect assets Released Parties of liability for “any and all in the US. 11 U.S.C. § 1501(a)(1),(b)(1). Chapter claims, obligations, rights, suits, damages, 11, by contrast, addresses all aspects of a Causes of Action, remedies, and liabilities statutory regime for US and foreign debtors whatsoever (including contract claims, seeking to reorganise or liquidate in a plenary claims under ERISA and all other statutory case in US bankruptcy court. claims, claims for contributions, withdrawal 4 The minority view, held by the Fifth, Ninth, liability, reallocation liability, redetermination and Tenth Circuits, bans such nonconsensual liability, interest on any amounts, liquidated releases on the basis that section 524(e) damages, claims for attorneys’ fees or any of the Bankruptcy Code, which provides costs or expenses whatsoever), including generally that “discharge of a debt of the any derivative claims, asserted or assertable debtor does not affect the liability of any other on behalf of a Debtor, whether known or entity on, or the property of any other entity unknown, foreseen or unforeseen, liquidated for, such debt,” prohibits them. See Bank of or unliquidated, matured or unmatured, N.Y. Trust Co. v. Official Unsecured Creditors’ contingent or fixed, existing or hereinafter Comm. (In re Pac. Lumber Co.), 584 F.3d 229 arising, in law, equity or otherwise, that such (5th Cir. 2009); In re Lowenschuss, 67 F.3d Entity would have been legally entitled to 1394 (9th Cir. 1995); In re W. Real Estate Fund, assert in its own right (whether individually Inc., 922 F.2d 592 (10th Cir. 1990). However, or collectively) based on or relating to, or in the majority of circuits to consider the issue – any manner arising from, in whole or in part, the Second, Third, Fourth, Sixth, Seventh, and the Debtors, the Estates, the Restructuring, Eleventh Circuits – have found such releases the Chapter 11 Cases, the purchase, sale and injunctions permissible under certain or rescission of the purchase or sale of any circumstances. See In re Drexel Burnham Security of the Debtors or the Reorganised Lambert Grp., 960 F.2d 285 (2d Cir. 1992); In Debtors, the subject matter of, or the re Cont’l Airlines, 203 F.3d 203, 214 (3d Cir. transactions or events giving rise to, any 2000); In re A.H. Robins Co., 880 F.2d 694 (4th Claim or Interest that is treated in the Plan, Cir. 1989); In re Dow Corning Corp., 280 F.3d the business or contractual arrangements 648 (6th Cir. 2002); In re Airadigm Commc’ns, between any Debtor and any Released Party Inc., 519 F.3d 640 (7th Cir. 2008); SE Prop. (other than assumed contracts or leases), Holdings, LLC v. Seaside Eng’g & Surveying, the restructuring of Claims and Interests Inc. (In re Seaside Eng’g & Surveying, Inc.), before or during the Chapter 11 Cases, the 780 F.3d 1070 (11th Cir. 2015); see generally 15

CAP8908 II&RR_p12_Milbank.indd 15 30/05/2019 16:39 4 Collier on Bankruptcy ¶ 524.03(a) (outlining the Deal Through: Germany (Restructuring & scope and basis for circuit split as to third- Insolvency) ¶ 8; R. Lener, G. Rosato, Getting party releases). the Deal Through: Italy (Restructuring & 5 See 4 Collier on Bankruptcy ¶ 524.03(a) Insolvency) ¶ 8. (outlining applicable standard). Also often 8 In re Avanti Commc’ns Grp. PLC, 582 B.R. 603 litigated in this context is whether a third- (Bankr. S.D.N.Y. Apr. 9, 2018). 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 Authors: “opt into”/“opt out of” the release regardless Abhilash M. Raval of whether they vote in favour of or against Financial Restructuring Partner the plan. See Christy L. Rivera, Consensual Tel: +1 212 530 5123 Third-Party Releases: What Constitutes Email: [email protected] “Consent”? ZONE OF INSOLVENCY (Aug. 17, 2015) (enumerating consent requirements in Lauren C. Doyle plan voting context); see, e.g. In re Aegean Financial Restructuring Partner Marine Petroleum Network Inc., Case No. Tel: +1 212 530 5053 18-13374 (MEW) (Bank. S.D.N.Y), Transcript Email: [email protected] of Feb. 14, 2019 Hearing, at 29 (rejecting “opt out” approach to third party releases because Dennis C. O’Donnell “[i]f we’re going to seek consent, it ought to Financial Restructuring Of Counsel be real consent, and it should be on an opt-in Tel: +1 212 530 5287 basis, not an opt-out basis.”) Email: [email protected] 6 See C. Balmond & K. Crinson, Getting the Deal Through: England and Wales Milbank LLP (Restructuring & Insolvency) ¶ 9. 55 Hudson Yards 7 See F. Grillo, L. Mabilat, S. Corbiere, Getting New York, NY 10001 the Deal Through: France (Restructuring & US Insolvency) ¶ 9; Aleth & N. Derksen, Getting Website: www.milbank.com

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Developments in Australian insolvency law: Combatting illegal phoenixing

by Peter Bowden and Anna Ryan, Gilbert + Tobin

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.

Background to illegal phoenixing insolvency, and regularly results in the relevant Phoenix activity is not defined under Australian company being ultimately deregistered. This law and can encompass both legitimate business makes recourse against the company and/or its recovery measures, as well as illegitimate directors problematic. manipulation of insolvency processes to seek an Over the last three years a series of reforms outcome that avoids paying creditors. Generally have been introduced to the Australian speaking, there is a negative connotation with insolvency landscape. The Insolvency Law respect to phoenix activity as it is ordinarily Reform Act 2016 (Cth) was the first step in the associated with illegal phoenixing. process of this reform, modernising the previous A common example of illegal phoenix activity framework to improve confidence in the system is the transfer of company property to another and reduce the costs associated with insolvency. corporate entity for undervalue (i.e. less than The second major step was marked by the market value) by directors and shareholders, enactment of the Treasury Laws Amendment often with the assistance of an advisor to the (2017 Enterprise Incentives No. 2) Act 2017 stakeholders such as a “pre-insolvency advisor”.1 (Cth) (Enterprise Incentives Act), which aimed to The transaction occurs with the intention of promote entrepreneurial turnaround and create defeating creditors and often takes place when breathing room for distressed companies.3 the company is nearing insolvency. Where More recently, in what could be described this occurs, the directors usually proceed to as the third step on the path to reform, the appoint a voluntary administrator very shortly Australian Government has sought to address after the phoenix transaction has taken place. illegal phoenix activity as part of its ongoing Such activity has immediate consequences for modification of the Australian corporate many stakeholders, including employees and insolvency regime. In this respect, in February suppliers, who are often left with little recourse 2019, the Australian Government introduced the to recover their debts. Illegal phoenix activity Treasury Laws Amendment (Combating Illegal also affects statutory bodies (e.g. the Australian Phoenixing) Bill 2019 (Cth) (the Bill). Following a Taxation Office) and has had significant impacts period of public consultation, the Bill is currently at a systemic level; it has been estimated that being considered by the Australian Government. the direct cost to business, employees and Once it is passed,4 the Bill will aim to combat government in Australia in 2015-16 was between illegal phoenix activity at the systemic level. A$2.85bn and A$5.13bn.2 Upon enactment, it will introduce four significant Illegal phoenixing activity is often hard to reforms affecting the Australian insolvency and monitor and prevent as it takes place at a time tax regimes:5 when the company is insolvent, or approaching • Phoenix offences: Schedule 1 of the Bill 17

CAP8908 II&RR_p17_Gilbert and Tobin.indd 17 30/05/2019 16:40 introduces offences to prohibit dispositions liquidators and ASIC to combat creditor- of property that are creditor-defeating; defeating dispositions of company assets. penalise persons who engage or facilitate The new laws such dispositions; and enable liquidators and If passed, the Bill will see the introduction of a the Australian Securities and Investments new section 588FE(6B) into the Corporations Act. Commission (ASIC) to recover property that is The new section will provide that a transaction the subject of creditor-defeating dispositions. is voidable if it is a creditor-defeating disposition • Director accountability: Schedule 2 of the of the company’s property, and the transaction Bill prevents directors from improperly was made when the company was insolvent or backdating resignations or ceasing to be the transaction causes the company to become a director when to do so would leave the insolvent or enter external administration company with no directors. within the following 12 months.9 Liquidators will • GST liability: Schedule 3 of the Bill enables bear the onus of demonstrating that the the Commissioner of Taxation to collect disposition contributed (directly or indirectly) to estimates of, and in certain circumstances the company entering external administration.10 make directors liable for, outstanding Goods and Services Tax (GST) liabilities. The proposed new section 588FE(6B)(c) provides • Taxation powers: Schedule 4 of the Bill that a transaction will not be voidable where authorises the Commissioner of Taxation to it was entered into under a compromise or retain tax refunds where a taxpayer has failed arrangement approved by a Court under section to lodge a tax return to ensure taxpayers 411 of the Corporations Act; occurred pursuant satisfy their obligations and pay outstanding to a deed of company arrangement; or where it amounts before being entitled to a refund. was entered into by an administrator, liquidator 11 In this article, we will discuss those reforms or provisional liquidator. These exemptions are affecting the Australian insolvency regime and in place to ensure that legitimate restructuring the Corporations Act 2001 (Cth) (Corporations efforts can still take place. Act), namely Schedules 1 and 2 of the Bill. The term “creditor-defeating disposition” is defined in the proposed new section 588FDB Phoenix offences to the Corporations Act as “a disposition of Background and rationale company property for less than its market The Australian insolvency regime attempts value (or the best price reasonably obtainable) to balance the ability of directors to take that has the effect of preventing, hindering or reasonable and commercial risks with the significantly delaying the property becoming interests, and the protection, of creditors. available to meet the demands of the company’s 12 Part 5.7B of the Corporations Act, amongst creditors in winding-up”; intent is irrelevant. other things, enables liquidators to seek The Bill also proposes to give ASIC specific compensation from directors for insolvent powers to apply for an order to recover property trading6 and to recover voidable transaction disposed of under a voidable creditor-defeating claims on behalf of insolvent companies disposition for the benefit of a company’s and their creditors.7 In 2017, the Enterprise creditors. The purpose behind expanding this Incentives Act introduced a “safe harbour” power is to allow ASIC to intervene where it forms defence to insolvent trading for directors of the view that the liquidator is not fulfilling his or distressed companies, aimed at encouraging her duty to the company’s creditors to recover early engagement with financial distress and property on the basis that the liquidator may have reasonable risk-taking to facilitate financial been complicit in the illegal phoenix activity. recovery.8 This defence is subject to some strict Liquidators may also apply to ASIC seeking limitations that make it unattractive for those such an order.13 Notably, Courts retain the engaging in illegal phoenix activity. power to set aside an ASIC order within In line with the legislative “balancing act” 60 days under the proposed new section (referred to above), the Bill proposes new 588FGAE of the Corporations Act. criminal offences and civil penalty provisions Importantly, the Bill seeks to also impose to improve the mechanisms available to both a duty on an officer of a company to prevent 18

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creditor-defeating dispositions. The Bill Application of the new phoenixing offences provides that an officer of the company must As the Bill is still being considered by the not engage in conduct that results in a creditor- Government, it is premature to speculate as to defeating disposition. A contravention of these how the Courts may apply the new laws regarding sections would constitute a criminal offence phoenixing offences. As noted above, the Bill with recklessness being the fault element. seeks to provide a new mechanism for targeting To be held criminally responsible, the officer illegal phoenix activity by including creditor- must be reckless as to the result of his or her defeating dispositions as voidable transaction conduct.14 The Bill would also introduce a civil claims. As such, it is expected that there will be a penalty provision on similar terms (other than significant increase in enforcement work referred the reckless fault element). To establish a by liquidators, especially in the Australian contravention of the civil penalty provision, it is construction industry.22 sufficient to establish that a reasonable person If passed, the new phoenix offences described would know the result of their conduct would above will come into operation the day after be the company making a creditor-defeating Royal Assent. disposition that prevents, hinders or significantly delays the disposed property becoming available Improving the accountability of 15 to creditors (a negligence standard). resigning directors The Bill further provides for the same criminal Background and rationale offence and civil penalty regime in relation to The Corporations Act regulates the appointment facilitators; any natural or legal person involved and removal of directors. Under the Corporations in a contravention. The basis for culpability in Act, a director may be removed by a unilateral this case is specific conduct to procure, incite, resignation or by resolution of the members. induce or encourage the company to make the A company must notify ASIC within 28 days if relevant disposition.16 Compensation may also be a person is appointed as, or ceases to be, a sought for a contravention of these provisions. director.23 The rationale for extending the offence to Directors engaging in illegal phoenix activity capture facilitators of illegal phoenix activity is often exploit the rules around appointment and to ensure that dispositions undertaken during resignation of directors to escape liability for external administration by an administrator or the company’s activities. For example, a former liquidator (other than those undertaken as part of an arrangement with creditors) are scrutinised director may backdate the effective date of and improper dispositions intended to defeat their resignation to escape liability or implicate creditors are penalised. a recently appointed director in respect of a The Bill also seeks to expand the “safe contravention of the legislation. Often, directors harbour” defence17 to apply to creditor- will resign without an incoming director, defeating dispositions where it is shown that abandoning the company and rendering it such a disposition is made in connection with unable to notify ASIC of the resignation. This a course of action that is “reasonably likely leaves the company registered with ASIC, to lead to a better outcome for the company” possibly accumulating debt until creditors or than proceeding immediately to voluntary ASIC commence winding up proceedings. administration or winding up.18 Similarly, the The Bill introduces new provisions dealing other statutory defences have been amended with the illegitimate backdating of director to encompass creditor-defeating dispositions.19 resignations and the abandonment of Creditor-defeating dispositions will not incur companies by directors where doing so leaves civil liability if it can be shown that a disposition the company without oversight by a natural was made where a defendant had reasonable person. grounds to expect, and did expect, the company The new laws was solvent and would remain solvent despite The Bill introduces a new section 203AA to the disposition;20 and where a person took the Corporations Act providing that where a all reasonable steps to prevent the company director’s resignation is reported to ASIC more making the creditor-defeating disposition.21 than 28 days after the purported resignation, 19

CAP8908 II&RR_p17_Gilbert and Tobin.indd 19 30/05/2019 16:40 the resignation will take effect on the day it is a director on the ASIC public register. reported.24 The Explanatory Memorandum of the Bill The Bill further provides that where a sets out that the abandonment provisions will resignation would result in the company be subject to an “end of day test” (that is, the having no other directors, it will have no effect resignation does not take effect at the “end of the unless the company is being wound up.25 day” if the company does not have at least one A similar provision is included for where a director).28 A potential issue with the application resolution of the members would result in the of the proposed sections 203AB and 203CA is the company having no other directors (including circumstance in which a company’s constitution a similar carve out for where the company has contains a legal impediment to appointing commenced a winding up).26 a replacement director before the outgoing director may leave their office. The amendments Application of the new resignation laws therefore apply at the end of the day on which the By way of illustration it is understood that the director purports to resign. If another director is new back dating provisions would operate as appointed the same day as the resignation, the summarised below: resignation is effective. The same applies where (i) John is the sole director of XYZ Pty Limited there are multiple resignations. (XYZ). In May, XYZ enters into a loan These amendments, as well as the agreement at a time when XYZ is insolvent. backdating amendments, will commence on In June of the same year, the funds advanced the day following Royal Assent, except for those to XYZ are transferred, together with other relating to director resignations and resolutions assets of XYZ, to another company controlled to remove directors (which will take effect on or by John, known as XYZ Pty Ltd after the day 12 months following Royal Assent). (No 2) (XYZ No 2). (ii) Two months after XYZ transfers the loan Concluding remarks funds and its assets to XYZ No 2, a third-party Broadly, these reforms are a welcome and creditor of XYZ commences proceedings much-needed addition to the Australian seeking to wind up XYZ and a liquidator is insolvency landscape. The proposed phoenixing appointed to XYZ in October. offences should better equip liquidators to (iii) Shortly after the appointment of the pursue creditor-defeating dispositions of liquidator, in November, John lodges a form company property, ensuring that dispositions with ASIC resigning as director of XYZ and falling outside of the previous types of voidable asserting that he was replaced by Jim. transactions are recoverable for the benefit of Under the new back dating provisions, John’s creditors. resignation is taken to be effective from the date The insertion of a criminal and civil penalty the form is lodged with ASIC and, on that basis, regime specifically targeting creditor-defeating he may be liable for a breach of duty to prevent behaviour should have a strong deterrent effect the company from trading while insolvent and on persons engaging, or seeking to engage in for causing the company to make a creditor- illegal phoenix activity. This is enhanced as the defeating disposition. offences and civil penalty provisions apply not A director may apply to ASIC within 56 days of only to officers of the company, but also the the purported date of resignation or to the Court facilitators of illegal phoenix activity; the persons within 12 months (or longer where the Court who, in most cases, encourage, propose and permits) for the proper resignation date to be facilitate creditor defeating dispositions. fixed; on application, a legitimate backdating can be effected.27 Notes: A former director bears the onus of adducing 1 There is no definition of “pre-insolvency clear evidence to substantiate their position advisor” under Australian law. Many pre- that they had ceased to be a director on the insolvency advisors are not associated purported date in order to avoid a possible claim with illegal phoenixing activities and have for breach of duty where a creditor defeating legitimate intentions in respect of the entities disposition occurs while the director is listed as they act for. However, certain pre-insolvency 20

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advisors have gained a reputation in the harbour defence only relates to insolvent industry for using phoenixing as a means trading claims. by which companies can avoid paying 18 See section 588GA of the Corporations Act; their debts. Schedule 1, Items 25 and 34-41 of the Bill. 2 PricewaterhouseCoopers, The Economic 19 Schedule 1, Items 45 – 54 of the Bill. Impacts of potential Illegal Phoenix Activity, 20 An expectation of solvency must be supported prepared July 2018. by facts that point to a high degree of 3 For discussion on the ‘safe harbour’ and certainty. A mere hope, possibility or ‘ipso facto’ reforms, see: Bowden, P. & Ryan, suspicion that the company is solvent is A., Revitalising Australian restructurings: insufficient. Explanatory Memorandum to the Developments in Australian insolvency law, Bill, 2.97, 31. CMI International insolvency & Restructuring 21 Explanatory Memorandum to the Bill, 2.100- Report 2018/19, 2018. 101, 32. 4 At the time of writing this article, the 22 Senate Economics References Committee, Bill has been considered by the House Insolvency in the Australian construction of Representatives and then referred to, industry (2015). and considered by, the Senate Economics 23 Explanatory Memorandum to the Bill, Legislation Committee and the Senate 3.2-3.11, 41-2. Standing Committee for the Scrutiny of Bills. 24 Explanatory Memorandum to the Bill, 3.16, Unfortunately, the Bill did not pass prior to 43; Schedule 2, Item 2 of the Bill. the dissolution of the Australian Parliament 25 Explanatory Memorandum to the Bill, 3.24, ahead of the Federal election in May 2019. As 45; Schedule 2, Item 2 of the Bill. is the usual process where a Bill has lapsed, 26 Explanatory Memorandum to the Bill, 3.27, the Bill will be re-introduced to Parliament 45; Schedule 2, Item 3 of the Bill. following the election. It is the authors’ 27 Schedule 2, Item 2 of the Bill; Explanatory expectation that the Bill will be reintroduced Memorandum to the Bill, 3.21, 44. in mid-late 2019. 28 Explanatory Memorandum to the Bill, 5 Explanatory Memorandum to the Bill, 3-4. 3.25, 45. 6 Section 588M of the Corporations Act. 7 Section 588FF of the Corporations Act. 8 Section 588GA of the Corporations Act. Authors: 9 Schedule 1, Item 20 of the Bill. Peter Bowden, Partner 10 Explanatory Memorandum to the Bill, Anna Ryan, Senior Lawyer 2.33, 19. Gilbert + Tobin 11 Above n 9. L35, Tower Two 12 Explanatory Memorandum to the Bill, 2.12, International Towers Sydney 15; also see Schedule 1, Item 18 of the Bill. 200 Barangaroo Avenue 13 Schedule 1, Item 25 of the Bill. Barangaroo 14 Explanatory Memorandum to the Bill, 2.69, NSW 2000 26; Schedule 1, Item 33 of the Bill. Australia 15 Explanatory Memorandum to the Bill, 2.76, Tel: +61 2 9263 4000 28; Schedule 1, Item 33 of the Bill. Email: [email protected] 16 Ibid. Email: [email protected] 17 Until the enactment of the Bill, the safe Website: www.gtlaw.com.au

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CAP8908 II&RR_p17_Gilbert and Tobin.indd 21 30/05/2019 16:40 Restructuring trusts: A viable structure for securing and restructuring financing in Austria

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

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.

The starting point for restructuring and is the administration of the participation considering restructuring trusts as a potential conferred by the shares, and the security instrument to align lenders’, shareholders’ component, which covers the potential to and the debtor company’s interests or at realise the value embedded in the shares in least to find the lowest common denominator case of an event of default or other events among them, is usually when the debtor faces defined in the restructuring trust and finance a severe financial crisis and credit institutions agreements. or other lenders lose further trust in the skills Following the execution of the restructuring of the shareholders and the debtor company’s trust agreement and the transfer of shares, management. Even in a situation where lenders’ the restructuring trustee is independent collateral package already includes the shares from the shareholders and the lenders in in the debtor company, enforcement in a administering and executing the predetermined debtor’s financial crisis will usually generate restructuring and sales process. This typically substantially lower recovery compared to a sale also avoids deadlock situations in restructuring in a structured sales process. and enforcement scenarios while the usual For setting up a restructuring trust, the basic strategic goal of the structure remains lenders and the shareholders jointly appoint to avoid an insolvency scenario (by maintaining a restructuring trustee (Treuhänder) with the or increasing the lenders’ financing position) mandate to accept, hold and, if certain criteria and to allow a structured sales process for the are satisfied, to sell or re-transfer the shares in debtor company. the debtor company. The restructuring trustee The key element for a restructuring trust becomes the owner of the full rights of the agreement is the agreement that the shares (Vollrechtstreuhand) and therefore has restructuring trustee is not bound by the power to exercise all rights arising from the instructions from the lenders and the shares, including the right to sell the shares. shareholders (Weisungsfreiheit). On the In the underlying restructuring trust one hand, this is crucial for making the agreement, the lenders and the shareholders restructuring trust an instrument that agree with the restructuring trustee on general continues to be effective even after the opening guidelines for the trusteeship, such as certain of insolvency proceedings and, on the other triggers for initiating the sales process in hand, is also vital for risk avoidance. relation to the shares, milestones and timing, With respect to the first aspect of the waiver as well as other terms, such as corridors for a of the right to give instructions, in case of the minimum purchase price and representations opening of insolvency proceedings over the and warranties. assets of a trustor, trusteeships with such The “double-sided restructuring trust” trustors generally cease and the object of the combines an administrative component, which trust is returned to the general estate of the 22

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trustor. However, in respect of double-sided or restructuring trustee under the restructuring multi-party trusteeships, the Austrian Supreme trusteeship may constitute detrimental Court has confirmed that such trusteeships do transactions pursuant to Section 31 para 1 of not automatically cease as a consequence of the Austrian Insolvency Act, provided, however, the opening of insolvency proceedings over the that this basis for voidance also requires that assets of a trustor. the risk of the detriment occurring to the The administrator’s right to terminate not creditors was objectively foreseeable. completely fulfilled contracts only applies to Therefore, one of the concepts underlying bi-lateral contracts, which do not include restructuring trusteeships is that fire sales double-sided or multi-party trusteeships. are avoided and structured sales processes To qualify as a double-sided or multi-party in relation to shares or other assets become trusteeship in the view of insolvency law, it possible and should per se not be considered would be insufficient if the lenders and the detrimental. shareholders agree to mandate a restructuring Apart from insolvency aspects, one trustee. It is particularly essential that the additional crucial aspect for granting and parties agree that the restructuring trustee restructuring financing are the effects has an obligation to safeguard the interests of the Austrian Equity Replacement Act of multiple parties (e.g. the lenders, the (Eigenkapitalersatz-Gesetz – EKEG). This shareholders of the debtor company and the law concerns equity-replacing shareholder debtor company itself) and that rights and transactions and stipulates that loans that are obligations are irrevocably assigned to the granted by a “shareholder” to its subsidiary restructuring trustee. in times of a “crisis” of such subsidiary may The entering of a restructuring trusteeship be qualified to be equity replacing and are and the measures undertaking a restructuring blocked from being repaid until the recovery trustee might be voidable pursuant to from such a “crisis”. The subsidiary is in a Austrian insolvency law. Voidance on “crisis” if it is unable to pay its debts as they grounds of intentional discrimination of the fall due (zahlungsunfähig), or is over-indebted creditors (Section 28 Austrian Insolvency Act; (überschuldet), or where its equity ratio is less Insolvenzordnung - IO) would only be possible than 8% and the fictitious debt repayment term if the satisfaction of the creditors is delayed exceeds 15 years and where these financial or hampered and, in particular, does not parameters are evident from the last prepared apply if the restructuring trusteeship financial statements or would have been constitutes from the perspective of the debtor evident if timely prepared or the shareholders company – from an ex ante point of view knew or should have known thereof. even objectively not correct – a promising In respect to the question whether the restructuring concept. lenders in their capacity as trustors as well as In most instances a voidance because of the restructuring trustee may be considered a a gratuitous transaction (Section 29 para 1 “shareholder” within the meaning of the law, Austrian Insolvency Act) will not be applicable Section 7 of the Austrian Equity Replacement since restructuring trusteeships are entered Act provides that if a shareholder holds shares into predominantly in consideration of granting as a trustee for a third party, such a third additional funds or the prolongation of existing party shall be considered for purposes of the lines. A voidance pursuant to Section 30 et seq effects of the Austrian Equity Replacement of the Austrian Insolvency Act is only possible Act a shareholder, unless the trusteeship was if the debtor company was already materially disclosed in the credit agreement. insolvent under Austrian insolvency law at However, whether restructuring trusteeships the time of the transaction. For this purpose, are qualified as trusteeships within the it should be considered to obtain a positive meaning of Section 7 of the Equity Replacement going concern prognosis before entering Act has not been decided yet. Pursuant to into a restructuring trusteeship, because the Section 5 para 1 cif 3 of the Equity Replacement execution of the restructuring trusteeship Act, lenders, even if they are not direct or as well as individual measures of the indirect shareholders of the debtor company, 23

CAP8908 II&RR_p22_Fellner Wratzfeld Partner.indd 23 30/05/2019 16:40 might be qualified as “shareholders” within the interest of lenders, often includes a limitation meaning of the Equity Replacement Act if they of certain rights conferred to the debtor have a dominant influence on the management. company’s management. This may give rise Such influence might arise from the fact of the to liability for lenders, if the lenders exercise financing itself; only lender’s typical rights, their rights to issue instructions indirectly via such as information and book-insight rights, the restructuring trustee or matters within are excepted. Pursuant to Section 8 para 1 cif the scope of authority of the management 1 of the Equity Replacement Act those lenders of the company. While outside the crisis of who have the possibility (even if not exercised) a company, individual directives by lenders to exercise a controlling interest by having generally do not create liabilities, the the right to give directives to the restructuring standards for potential liabilities in a crisis are trustee to nominate and replace the majority much stricter. of the members of the management are also In a crisis, individual actions, in particular included in the “shareholder” definition of the the implementation of restructuring actions Equity Replacement Act. by the restructuring trustee upon instructions Collateral, which has been provided during of the lenders, may give rise to liability. It has the crisis by a “shareholder” in addition has the to be clarified that even persons who are not effect that if such collateral secures existing shareholders may act as de facto managing claims of the debtor company, the lenders directors and therefore instructions to the cannot claim repayment of such claims but trustee through financing banks may potentially rather must first request from the shareholder give rise to liability. the repayment (Section 15 et seq of the Equity In respect to the question if only persons Replacement Act). or even corporate bodies can act as de facto Whether the restructuring privilege managing directors, the Federal Court of (Sanierungsprivileg) pursuant to Section Justice of Germany stated that this is only 13 of the Equity Replacement Act, which possible in respect to natural persons. In provides that the acquisition of shares Austria, such opinion would probably not against the grant of new credit lines is not be assumed by the Supreme Court, when considered equity replacing, is applicable taking similar decisions by the court into to restructuring trusteeships has not been account. For instance, the Supreme Court has decided yet. Therefore, a diligent drafting of established legal precedant that in respect the restructuring trust agreement must seek to partnerships, corporate bodies can act as to avoid application of the Equity Replacement managing directors; a distinction would hardly Act and detrimental effects on the lenders, be understandable for lenders. by including inter alia the aforementioned Liability for delay in applying for insolvency waiver of the right to provide instructions to proceedings arises if the managing director the trustee in relation to the shares and the fails to comply with his obligation to apply shareholder rights. for insolvency proceedings once the criteria From the lenders’ point of view, particular for insolvency are met. The Supreme Court caution is required when structuring double- has already decided that a de facto managing benefit trusts in view of the potential liability director has such an obligation in accordance risks associated with them, in particular with Austrian corporate law and he has to at those arising from the case law on de facto least instruct the management to apply for management (faktische Geschäftsführung) the opening of an insolvency proceeding. In and liability for delay in applying for insolvency case of a restructuring trusteeship structure, proceedings (Insolvenzverschleppung). the lenders (assuming that they are de facto The de facto managing director (faktischer managing directors) would have to apply Geschäftsführer) is a person managing the for insolvency proceedings themselves or company without, however, having been they would have to influence the trustee (as formally appointed to the management body shareholder) and/or the managing directors of the company. The interests of parties to to do so. The damage, which is to be a restructuring agreement, in particular the compensated if the delay in applying for 24

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insolvency proceedings occurs, consists of Lawyers, fwp can rely on an international the operational loss that has arisen due to referral network in more than 110 countries. the absence of or late applying for insolvency The insolvency law & restructuring team proceedings. led by Markus Fellner and Florian Kranebitter Furthermore, the Austrian Criminal Code advises clients in all areas of reorganisation (Strafgesetzbuch) also contains provisions on and restructuring as well as with respect to insolvency proceedings. The most important national and cross-border insolvency law provisions are (i) grossly negligent interference issues and includes the most prominent cases with creditors’ interests; (ii) fraudulent ever related to the Austrian market, such as intervention with a creditor’s claim; (iii) the insolvency of the world-wide active ALPINE preferential treatment of creditors; and (iv) group or Steinhoff-Group. fwp’s work in this withholding of social security payments. area is also boosted by the team members’ high degree of economic understanding and About fwp therefore also includes numerous successful Fellner Wratzfeld & Partner Rechtsanwälte transactions in relation to distressed assets GmbH (fwp) is one of Austria’s top business including their reorganisation and their return law firms, both at a national and international to profitability. level. fwp employs approximately 70 lawyers and over 120 employees in total. fwp successfully Authors: applies a dual consultancy approach, relying on Dr. Markus Fellner, Partner both legal expertise and well-founded business Dr. Florian Kranebitter, LL.M., Partner know-how. Our major fields of specialisation Fellner Wratzfeld & Partner include, among others, reorganisation and Rechtsanwälte GmbH restructuring, banking & finance, corporate Schottenring 12 law, M&A, capital market law, real estate and A-1010 Vienna construction law, infrastructure and public Austria procurement law, litigation and arbitration Tel: +43 1 537 70 311 as well as competition and antitrust law. As a Email: [email protected] member of the international law firm network [email protected] TerraLex and the Association of European Website: www.fwp.at

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CAP8908 II&RR_p22_Fellner Wratzfeld Partner.indd 25 30/05/2019 16:40 The insolvency scenario in Brazil: Certain relevant issues

by Thomas Felsberg, FELSBERG Advogados

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.

The Probability of the UNCITRAL judges for recognition of foreign processes; Model Law being approved in the cooperation between foreign authorities and representatives; and specific regulations for Brazil in 2019 processes running concurrently in Brazil Proposals are under way in the National and overseas. Congress for a reform of the Insolvency Law Despite the positive changes proposed, several (LFRE). Bill of Law nr. 10.220/2018, tabled in legal experts have expressed their concern in May 2018 by the Administration, adopts, among relation to certain alterations addressed in other other provisions, the model law on cross-border chapters of the Bill, especially the increase of insolvencies of the United Nations Commission the prerogatives conferred on the tax authorities on International Trade Law (UNCITRAL). in insolvency proceedings. In addition, the After almost 15 years in effect, expectations Bill addresses matters which are efficiently in relation to reforms in the LFRE are high, addressed by current legislation and case law considering that several provisions no longer and do not require change. meet the current needs of the business world. These difficulties may jeopardise the approval The absence of specific legislation in the of the Bill in the 2019 legislature and delay the international area has led Brazilian courts to adoption of the Model Law. apply current Brazilian law to cross-border conflicts, considering the rise in the number of The representation of cases of insolvency that cross national borders. Legal certainty and recognition of foreign bondholders in the General insolvency decisions, however, have been subject Meetings of Creditors and the to vagaries inconsistent with the requirements of individualisation of their credits modern inter-dependent economies. The raising of financial resources through the With the intention of overcoming this issuance of trade currency on the international legislative gap, the Bill contains a chapter markets has become common practice in Brazil dedicated to international insolvency and since the 1990s. According to available data, proposes the adoption of the UNCITRAL hundreds of billions of US dollars has been rules, created in 1997, with the purpose of raised by companies or government entities in providing greater strength to nations in their the past few years through the issuance of fixed ability to resolve cases involving insolvency of income securities, including bonds, medium- transnational nature. term notes and securitisation transactions.1 In addition to the general provisions relating Brazilian case law permits bondholders to to international insolvency, the Bill also presents be represented by their indenture trustees or specific rules concerning access to Brazilian to individualise their right to vote on the credits jurisdictions by foreign representatives; the involved in an insolvency proceeding. equal standing of the rights held by foreign and As an example, in the restructuring of the Brazilian creditors in insolvency processes; OGX Group,2 the 4th Commercial Court of Rio de provisions addressing requests to Brazilian Janeiro approved the adoption of a procedure 26

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proposed by the trustee, by means of which Government credits against the bondholders could opt to individualise companies under judicial their proofs of claim to vote on the judicial reorganisation plan during the general meeting reorganisation of creditors. The same happened in the Oi,3 Law 11.101/05 establishes that the processing Rede4 and Aralco5 cases, amongst others. of judicial reorganisation shall not suspend the 6 In 2015, the ‘II Jornada de Direito Comercial’ course of tax enforcements filed against the debtor (art. 6, §7) and, in parallel, the National approved Statement nr. 76, which established Tax Code (art. 187, lead paragraph) excludes tax that “in the cases of issuance of debt securities credits from any insolvency proceeding. by a company under reorganisation, in which Thus, in relation to tax credits there can be there exists a fiduciary agent or similar figure no doubt: these are not subject to the judicial representing a collective group of creditors, reorganisation proceedings and the foreclosure it is the responsibility of the fiduciary agent may proceed in the specialised courts in which to exercise the vote at the general meeting of they have been filed. Only the enforceable acts creditors, under the terms and by means of the designed to constrict or expropriate the assets authorisations provided in the issuance deed, of a company under judicial reorganisation subject to the power of any final investor to file must be previously submitted to the proper with the judicial reorganisation court a request restructuring court.7 for the break-up of the right to a voice and a vote However, government non-tax credits, have at a general meeting to exercise such individually, received different treatment by the courts, solely by means of judicial authorisation.” because statutory law is not clear in this respect. The foreclosure of credits In the Celpa and Oi8 (0057446-63.2017.8.1 which are not subject to a court 9.0000) cases, penalties imposed by their reorganisation respective regulators have been classified as Creditors that hold title to assets or rights unsecured credits in insolvency proceedings. which were granted by an insolvent company Yet in the Viracopos case, according to the Court as security are, in principle, not affected by an of Appeal of São Paulo, these same credits were insolvency filing and are therefore authorised to treated as tax credits, overturning a contrary enforce their rights². decision made by the lower court. Courts have, however, been resistant It is important to stress, however, that the to applying this rule, in its strictest sense, Higher Courts have still not made their position whenever the enforcement of such rights clear with respect to this issue, and there is a during the stay period could jeopardise the recent precedent from São Paulo recognising reorganisation of the insolvent company. Several that a public credit arising from contractual theories have emerged to justify this position, non-compliance should be subject to the judicial amongst which are the “essentiality” of the reorganisation of the Libra Group. asset, the lack of “individualisation” of the credit, the recognition that the acceleration clause of Credits in foreign currency within such a debt is subject to the filing, or even the the judicial reorganisation partial enforcement of the rule. The Brazilian Insolvency Law establishes that, in Although the STJ has positioned itself, in the general meetings of creditors, for decisions an isolated decision, as being contrary to such on any matters that are incidental to the judicial flexibility, the Court of Appeal of São Paulo reorganisation proceeding, the creditor’s vote (AgInt nr. 22369790) recently recognised that shall be proportional to the sum of their credit a creditor may not remove its security if it is (art. 38, lead paragraph). In relation to the essential to the debtor’s activities. decisions for approval or rejection of the judicial These matters are being discussed at all reorganisation plan, this regulation also applies levels in the state courts and a final definition for the purposes of calculating the quorum for has yet to be handed down by the Superior Court all the classes of credits, except for the credits of Justice in Brasilia. from classes I (labour) and IV (micro-companies 27

CAP8908 II&RR_p26_Felsberg Advogados.indd 27 30/05/2019 16:41 and small companies), the quorums of which are matters are being dealt with in this country. calculated by a simple majority of the creditors For all those involved in insolvency matters in present, regardless of the value of their credits Brazil – creditors, debtors, consultant, lawyers, (art. 45, §2º). professors and legal scholars – there is a But if the creditors belonging to other classes common link, which could be summarised by that are not I or IV (that is, the holders of in-rem the expression “never a dull moment”. guarantees [class II] and unsecured creditors [class III]) vote, in all cases, the issue rests The author wishes to acknowledge the upon how foreign-denominated credits should support of his team at Felsberg Advogados, be treated, given the natural fluctuation in especially Beatriz Leite Kyrillos and Ronaldo exchange rates. Mendes de Souza. The sole paragraph of article 38 regulates the matter, establishing that, in judicial Notes: reorganisation procedures, for the exclusive 1 into local currency using the exchange rate on 2 In re OGX, Case nr. 037762056.2013.8.19.0001, the eve of the date upon which the meeting takes 4th Lower Commercial Court of Rio de place. However, the law does not define the rate Janeiro. that should be applied to this conversion. 3 In re Oi S.A., Case nr. 0203711- There exist different interpretations on 65.2016.8.19.0001, 7th Lower Commercial this matter in legal doctrine. For some, Court of Rio de Janeiro. considering that the currency has a sale price 4 In re Rede Energia, Case nr. 0067341- and a purchase price, the conversion should be 20.2012.8.26.0100, 2nd Lower Commercial performed in accordance with the currency sale Court of São Paulo. price. The best understanding, however, seems 5 In re Aralco, Case nr. 1001985- to be that defended by other scholars, who 03.2014.8.26.0032, 2th Lower Civil Court of suggest the equity criteria applicable in Brazilian Araçatuba. law to overcome the legal gaps, defending that 6 Judicial process of foreclosure for an average market rate should be applied, such satisfaction of a tax or non-tax debt. which corresponds to the average sum falling 7 On the other hand, the debtor should between the purchase rate and the sale rate. present a certificate of good tax standing In relation to the payment conditions, the when requesting ratification of its judicial current Insolvency Law is favourable to a debt reorganisation plan, precisely so that its expressed in foreign currency: the legislation restructuring, although having an impact establishes that the exchange rate variation on the charging of the tax credits, does not shall be the parameter of indexation of the end up providing defence for those under liability, unless the amounts owed should come restructuring against their tax creditors. to be otherwise determined by the creditor 8 Court of Appeals of Rio de Janeiro, (art. 50, §2). In other words, unless the foreign Interlocutory Appeal n. 0057446- currency creditor expressly agrees to the 63.2017.8.19.0000 (2017). provision of the judicial reorganisation plan that alters the parameters of the calculation of their credit when payment is effectively made, Author: the rate of conversion should necessarily be Thomas Felsberg, Founding Partner observed as a parameter for the establishment FELSBERG Advogados of their credit. Av. Cidade Jardim, 803 - 5º andar The abovementioned issues are but a few São Paulo - SP of those which are being discussed by the 01453-000 – Brazil legal and business community, as well as Tel: +55 11 3141 9101 in our courts and universities. They reflect Email: [email protected] the vibrant atmosphere in which insolvency Website: www.felsberg.com.br 28

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

by Neil Lupton, Fiona MacAdam and Siobhan Sheridan, Walkers

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.

Whilst originally implemented as a minority vote to approve the Cayman scheme.2 Cayman protection mechanism aimed at protecting Islands schemes of arrangement are frequently smaller shareholders from decisions pushed used to implement cross-border and multi-level through by larger shareholders with more debt restructurings by varying or cramming significant stakes (and more significant down the rights of the relevant creditors and/ financial resources), there is an argument that or shareholders of a company and have become in today’s world, the headcount test is no longer the restructuring tool of choice in the Cayman fit for purpose. Islands given its flexibility and predictability. This article examines the concerns with respect A Cayman scheme enables a company to to the continued application of the headcount enter into a binding compromise or arrangement test and considers whether, in comparing the with its creditors and/or shareholders without approaches taken in certain other jurisdictions, it the need to enter into an individual and is now time for reform in the Cayman Islands. separate contract with each and every affected stakeholder and provides companies with a Cayman Islands scheme of tried and tested mechanism to implement an arrangement where it is not possible or practical arrangement to obtain a fully consensual deal. A Cayman The Cayman Islands legislation for schemes scheme will only become effective in accordance of arrangement is derived from 19th century with its terms and binding on the company and English legislation. The concept of the scheme all members of the relevant classes (including of arrangement (together with the requisite any dissenting stakeholder and regardless of approval thresholds to be attained) was first whether or not they voted) once the Cayman introduced into the Cayman Islands by the Court has sanctioned the scheme and the court Companies Law in 1961 (replicating Section 206 sanction order has been filed with the Cayman of the English Companies Act 1948).1 Islands Registrar of Companies. A Cayman Islands scheme of arrangement is When schemes of arrangement were first a court-sanctioned compromise or arrangement introduced in England over 100 years ago, between a company and its creditors and/ members and creditors typically held their or shareholders (or any class of them) which interests both beneficially and legally so there binds all affected stakeholders (including any was little difference between the persons whose dissenting creditors and/or shareholders) name was entered onto the register of members provided that: (i) a majority in number; and of a company (or equivalent) and the person (ii) 75% in value of each class of stakeholder beneficially entitled to those interests. In its present and voting at the court ordered meeting, historical context, the statutory majority test 29

CAP8908 II&RR_p29_Walkers.indd 29 30/05/2019 16:41 operated as an appropriate check and balance of creditors (who must have “rights not so – the headcount test prevented a minority with dissimilar as to make it impossible for them to a large stake prevailing over a majority with consult together with a view to their common a smaller stake; and the value test prevented interest”7 to form a class) a few small creditors a numerical majority with a small stake holding a minimal percentage of the relevant prevailing over the minority with a large stake. debt could vote against a Cayman Islands As summarised by Brooking J, the dual majority scheme of arrangement, causing the scheme test ensures that “mere numbers on a count of to fail (as the relevant headcount test threshold heads will not carry the day at the expense of may not be met) and thereby preventing the the amount invested and on the other hand that implementation of an otherwise commercially the weight of invested money may not prevail reasonable scheme of arrangement approved against the desires of a sizeable number of by larger creditors holding a more significant investors.”3 portion of the relevant debt. However, this is no longer the case – It is not clear why minority members and/ stakeholders’ interests are now often held or creditors with the same rights (forming part beneficially though nominees, custodians (such of the same class) should be granted additional as The Depositary Trust Company in the United control over the outcome of any vote which is States or HKSCC Nominees Limited in Hong tantamount to a right of veto. The circumstances Kong), clearing houses or other third parties. If are in direct contrast to the protections only registered holders and/or shareholders are afforded to members and/or creditors with considered for the purposes of the headcount different rights who form a separate class – in test, then any headcount is unlikely to accurately that scenario, rightly, if the relevant class of reflect the wishes of the underlying stakeholders members and/or creditors reject the Cayman who ultimately hold the real economic interest scheme then the Cayman Court does not have in the debt instrument or equity. the appropriate jurisdiction to sanction the Importantly, Cayman Islands law provides a Cayman scheme and the Cayman scheme will unique feature in this regard in that the Cayman therefore fail. Court, in determining whether the relevant statutory majorities have been met, must “look Minority creditors and/or shareholders are through the register”4 and more specifically, already effectively protected by the statutory “the majority in number will be calculated on the process for Cayman Islands schemes of basis of the number of clients or members giving arrangement instructions to the custodian or clearing house.”5 The Cayman statutory procedure for schemes However, given the complex arrangements in of arrangement provides minority shareholders which shares and debt instruments are held and creditors with sufficient protections. today, looking through a single layer of ownership For example, the Cayman Court has broad – usually to a custodian or nominee – may not discretion to sanction (or not to sanction) necessarily be enough and the same criticisms a Cayman Islands scheme of arrangement apply. It is also worth noting that there have been notwithstanding that it has been approved by calls for the practice of “looking through the each class of members and/or creditors. The register” to be reformed.6 Cayman Court retains discretion to refuse to sanction any Cayman scheme where there is The headcount test – no longer fit (or may be) abuse of the minority and furthermore, may even impose conditions on for purpose? its sanction of the Cayman Islands scheme of The debate regarding the appropriateness of the arrangement (for example, where it is concerned headcount test centres on the following points: that the terms of the Cayman scheme are not The headcount test gives minority creditors in the best interests of the members and/or and/or members too much power to reject a creditors). As noted by Chadwick L.J. in Re Hawk Cayman scheme, whatever its merits Insurance, “the safeguard against minority It is currently the position, as a matter of oppression… is that the court is not bound by Cayman Islands law, that within one class the decision of the [scheme] meeting…” and the 30

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Cayman Court retains the ultimate discretion The headcount test does not reflect how as to whether or not to sanction the Cayman shares/debt instruments are held in the scheme at the sanction or fairness hearing. modern context The Cayman Court’s approach to sanction As noted above, whilst historically legal and was most recently summarised by Parker J in beneficial interests were not divided, today Re Ocean Rig UDW Inc. as follows: the Cayman nominees, custodians and trustees (or other Court “should be slow to differ from the vote financial institutions or vehicles) may hold [of the scheme creditors] recognising that it is debt instruments and intermediaries operating the creditors who are clearly the best judges of through clearing houses may hold uncertificated what is in their commercial interests” but that shares for a large number of beneficiaries. In “the [Cayman] court is not a rubber stamp… many jurisdictions, each nominee, custodian, [and] even where the scheme has the support trustee or intermediary (as applicable) is either of an overwhelming majority of the creditors… treated as a single head for the purposes of the court can differ from the vote, but only if the headcount test, or is given a “yes” and a it is satisfied that an honest, intelligent and “no” vote which cancel each other out. Such an reasonable member of the class could not have approach materially fails to reflect the number voted for the scheme…”8 of persons and value of claims represented. If the headcount test were to be abolished, The Cayman Court’s more nuanced the Cayman Court may need to take on a more approach was considered in In re Little Sheep 11 active role in considering the commercial Group Limited. It was held that a custodian benefits of any Cayman Islands scheme of or clearing house would be treated as a arrangement as it would not, necessarily, be “multi-headed member” for the purposes appropriate to take a view that the majority of determining the count for the number of decision is appropriate in all circumstances. votes. The Cayman Court held that the number Furthermore, under Cayman Islands law any of participants (i.e. entities or brokers giving person who voted at the scheme meeting(s) or instructions to the custodian in relation to voting gave voting instructions to a custodian or clearing for the scheme of arrangement) from whom the house to vote at the scheme meeting(s) is entitled custodian received instructions (both for and to appear and be heard at the sanction hearing.9 against) would determine the number of votes This goes further towards protecting a minority attributable to the custodian for the purpose of group from an oppressive majority in ensuring determining whether the majority in number had been achieved. that any person with an economic interest in the This approach only goes so far – looking relevant Cayman scheme has an opportunity to through a single layer of legal ownership to bring to the Cayman Court’s attention any issue the custodian/nominee does not operate to relating to the Cayman scheme. ensure that votes accurately reflect the views The headcount test is not line with modern of underlying beneficiaries – in reality the Cayman Islands company law policy/approach ownership structure may be far more complex to voting and involve numerous layers of ownership. In the context of shareholdings, Cayman Islands Furthermore, some critics consider the law historically required shareholder decisions Cayman approach to be of limited use and to be made by way of numerosity and headcount practical effect: first, neither the chairman of approvals.10 However, modern law has moved the Cayman scheme meetings nor the Cayman away from this approach and provides that, Court is likely to be able to verify the validity of subject to a Cayman company’s articles of instructions. It is often the case that custodians association, the position in determining any will not disclose copies of voting instructions shareholder decision is calculated on a “one to the chairman of the scheme meeting or to share one vote” basis. From a policy perspective, the Cayman Court; second, it may be difficult to it is not clear why Cayman Islands schemes of apply in practice. Looking further through the arrangement adopt a different approach. No register to apply the headcount test may require similar comparison can be drawn for creditor scheme companies to have an impossible decision-making. level of understanding and knowledge of the 31

CAP8908 II&RR_p29_Walkers.indd 31 30/05/2019 16:41 structures (and arrangements) in which debt or Singapore share instruments are held. It may also cause In Singapore, which is a jurisdiction that has in issues with overseas nominees / custodians recent years made a number of legal reforms who may not be willing to disclose the level of in its bid to become a leading international debt information required; and third, it is patently restructuring centre, has also made certain inconsistent (in the context of shares) with the changes to the headcount test for schemes Cayman Islands law approach in determining of arrangement. In 2014, the Companies ownership of shares that is, persons entered (Amendment) Act was passed in Singapore, onto the register of members being prima facie modifying the language of the headcount test evidence of ownership.12 requirement, which now provides that while a “majority in number” of creditors is required, The headcount test is at risk of manipulation this is now qualified by the caveat unless“ the Members and/or creditors may split their court orders otherwise.”15 relevant holding across multiple entities or persons in order to acquire a disproportionate Australia level of influence on the Cayman scheme. This Similarly, in Australia, the headcount test has can be very difficult to detect – for example, been retained, but the court has discretion to an objecting party may not have access to the dispense with it. In other words, a scheme must register of members. It is also not clear how still be approved by 75% of the votes cast on the far the chairman of a Cayman scheme meeting resolution, but the courts in Australia can order must go to ensure that vote-splitting has not for the majority in numbers of shareholders test occurred (in such a way as to inappropriately to be dispensed with.16 affect the outcome of a scheme meeting). New Zealand In the case of notes, “splitting” may be more As for New Zealand, the judiciary has perhaps difficult to achieve. However, the trading of notes been the most radical in terms of the headcount until the voting record date is not unusual, it is test, which was abolished altogether in 1993. perfectly acceptable for a particular creditor The legislation of New Zealand now does not to seek to acquire a controlling stake in a set out a specific test for approving a scheme particular class. of arrangement, and instead the shareholders are only required to approve the proposed Approaches in other jurisdictions arrangement, amalgamation or compromise In some jurisdictions (including New Zealand, in such manner and on such terms as the Canada, India and South Africa) that have court may specify.17 Although the headcount imported the scheme of arrangement from test was re-introduced in the context of certain English law, a headcount test is not a requirement listed entities by the 2014 amendment to the for the purposes of member schemes. However, Companies Act,18 this statutory requirement only the headcount test (in some form) is incorporated applied to “code companies.”19 for the purposes of creditor schemes in Singapore, Hong Kong, Australia, BVI, Bermuda Time for reform? and South Africa. We outline below the approach England and Wales taken in certain jurisdictions which have adopted In England and Wales, the question of whether a modified approach to the headcount test. the headcount test should be abolished Hong Kong was twice considered by UK Parliament In Hong Kong, for takeover offers and general when preparing the Companies Act 2006. offers, the headcount test was replaced in 2014 The Company Law Review Steering Group by a 10% objection test, which requires the votes recommended that the headcount test be cast against a scheme of arrangement to not abolished noting that, “the requirement for exceed 10% of the total voting rights attached majorities in number as well as three-fourths in to all disinterested shares.13 For all other value has become irrelevant and burdensome, arrangements or compromises, the headcount particularly in relation to shareholders and test is still required but the Hong Kong court against the background of increasing use of has the discretion to dispense with the test.14 nominees and possible artificial sub-division of 32

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nominal shareholdings to reach the requisite discretion to sanction Cayman schemes and the majority in number.” Parliament however, ability for affected shareholders to be heard at elected to continue to include the headcount test the sanction or fairness hearing. By comparison, in the English Companies Act 2006. the headcount test in Cayman creditor schemes On the first attempt, Lord Goldsmith (in his is more easily conducted (particularly in capacity as Attorney General) stated that whilst conjunction with the Cayman Court’s approach the proposed changes (to remove the headcount in Little Sheep) to accurately reflect underlying test) “would facilitate schemes for companies beneficiaries’ views on a scheme. and large creditors and members, [but] would In any case, the issues surrounding the do [so] at the expense of the interests of small headcount test in both member and creditor minority members and creditors [and that] schemes in the Cayman Islands are not therefore, the Government are not persuaded insurmountable. The Cayman Islands continue that the amendment strikes the right balance.”20 to be a leading jurisdiction of choice to The second attempt was put forward on implement complex cross-border restructurings the basis that “the majority in number [test], by way of scheme of arrangement thereby focusing on a majority of registered holders ensuring that a proper balance is struck is an anachronism, now that most retail between the effective compromise of claims holders hold through CREST nominees, where and protection for both majority and minority one registered holder may represent many stakeholders. thousands of beneficial owners. It is also open to abuse by shareholders who could subdivide Notes: their holding thought a number of nominee 1 Section 83 of the Companies Law 1961. companies.”21 However, the proposal was again 2 Section 86 of the Companies Law (2018 rejected this time, largely on the basis that the Revision). “theoretical possibility”22 of potential abuse 3 ANZ Executors and Trustees Ltd. V Humes through share splitting was an inadequate basis Ltd [1990] VR 615 at paragraph 622. for removing the protection. 4 Cayman Islands Grand Court Rules 1995 Given recent attempts at share splitting in (Revised Edition) (the “Grand Court Rules”, Dee Valley 23 and the reported intention (pre- Order 102, r.20(6) and see also Practice dating Brexit) for radical insolvency reform in Direction No. 2 of 2010, paragraph 4. England and Wales, the issue may once more be 5 Practice Direction No. 2 of 2010, considered. paragraph 4.4. 6 See per Cresswell J in re Alibaba.com Ltd, Conclusion Unreported, 20 April 2012. There is strong argument that the headcount 7 per Bowen LJ in Sovereign Life Assurance Co test currently required in Cayman Islands v Dodd [1892] 2 QB 573; and, in the Cayman schemes of arrangement is ripe for reform. Islands, In Re Euro Bank Corporation (In The Cayman Court does appear to be willing to Liquidation) [2003] CILR 205 adopting the take steps to address the problematic issues test set out by the Hong Kong Court of Final of determining the intentions of underlying Appeal in UDL Argos Engr. & Heavy Indus. beneficiaries,24 however, more legislative Co. Ltd v Li Oi Lin. See also the recent change is required to allow the Cayman Court to Cayman Court case of Ocean Rig UDW Inc. progress further. & Others Cause No. FSD 100, 101, 102 and An appropriate compromise would be to 103 of 2017 per Parker J at paragraph 44: “In remove the headcount test for Cayman member every case the court will consider whether schemes given that the Cayman Court’s ability it is appropriate to convene class meetings to “look through” the register can sometimes and, if so, the composition of the classes so be impractical/unworkable; and the current as to ensure that each meeting consists of approach being inconsistent with modern the shareholders or creditors whose rights Cayman company law. Members would continue against the company which are to be released to have sufficient protection through, amongst or varied under the scheme, or the new rights other things, the Cayman Court’s ultimate which the scheme gives in their place, are 33

CAP8908 II&RR_p29_Walkers.indd 33 30/05/2019 16:41 not so dissimilar as to make it impossible for reject the votes of any person who acquired them to consult together with a view to their shares from the disgruntled employee. common interest [emphasis added].” See also Re PCCW Ltd. [2009] 3HKC 292, a 8 See per Parker J in Re Ocean Rig UDW Inc. similar case involving share-splitting in Hong at paragraph 89. Kong. In Re PCCW a controlling shareholder 9 Grand Court Rules, Order 102, r. 20(10). sought to manipulate the outcome of a 10 See Section 57 of the Companies Law 1961. takeover (by way of scheme of arrangement) 11 In re Little Sheep (Unreported, Jones J, 20 by distributing shares to individuals who January 2012). would vote in favour of the takeover scheme. 12 See Section 48 of the Companies Law The Hong Kong court was not satisfied (2018 Revision) and see also definition of that the vote was a true reflection of the “registered shareholder”. shareholders’ will. The court disregarded (at 13 Section 673 of the Companies Ordinance the sanction stage) the votes of the shares No. 28 of 2012. subject to the share split and, as a result, the 14 Section 674 of the Companies Ordinance scheme failed. Note this decision pre-dates No. 28 of 2012. the changes to legislation detailed above. 15 Section 210 (3AB) of the Companies 24 See for example, Cresswell J in re Alibaba. (Amendment) Act. com Ltd, Unreported, 20 April 2012 stated (in 16 Section 411 Part 5.1 of the Corporations the context of the practice of “looking through Act 2001. the register”: “in light of my ruling of 20 April 17 Section 236 of the Companies Act 1993. 2012 the opportunity might be taken 18 Section 236A of the Companies Act 1993. (if thought appropriate) to confirm or 19 Code companies being a listed issuer that has re-consider Practice Direction 2 of 2010.” financial products that confer voting rights quoted on a licensed market, or has Authors: 50 or more shareholders and 50 or more Neil Lupton, Partner share parcels (as defined by the Takeovers Tel: +1 345 914 4286 Act 1993). Mob: +1 345 525 8027 20 per Lord Goldsmith HL Deb 28 March 2006, Email: [email protected] GC326. 21 HL Deb 16 May 2006, col 217. Fiona MacAdam, Senior Counsel 22 per Lord Goldsmith HL Deb 16 May 2006, Tel: +1 345 914 4273 vol 682, cols 216-217. Mob: +1 345 516 6362 23 Re Dee Valley Group Plc [2017] EWHC 184 Email: [email protected] (Ch) – In Dee Valley a minority stakeholder sought to manipulate the headcount test Siobhan Sheridan, Associate by using a share splitting strategy to defeat Tel: +1 345 814 4558 a scheme of arrangement. In that case, Mob: +1 345 925 4558 a disgruntled employee sought to derail Email: [email protected] a takeover scheme by transferring single shares to hundreds of people for the purpose Walkers of manipulating the “no” votes against the 190 Elgin Avenue scheme. The company, aware of the changes George Town, Grand Cayman made, by reference to its company books, KY1-9001 sought (and obtained) a court order enabling Cayman Islands the chairman of the scheme meetings to Website: www.walkersglobal.com

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Selected restructuring issues in continental Europe – An illustration with Luxembourg

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

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.

Group concept or lack thereof Lack of efficient in-court Luxembourg, like many other European restructuring options for global jurisdictions, does not recognise the concept of corporates group in a restructuring or insolvency context. Bankruptcy as the only in-court option Each member of the group is considered in Luxembourg individually and so are their estates, except There are a number of restructuring in certain situations where the corporate veil proceedings which are statutorily provided may be pierced, and the insolvency extended for under Luxembourg law such as controlled as means of a sanction to the shareholder or management, composition with creditors and director at fault. suspension of payments.1 These procedures are, The Regulation (EU) 2015/848 of May 20, however, very rarely used as they (in addition 2015 on insolvency proceedings (recast) to not catering for the possibility to consider does cater for rules regarding insolvency the group debt as opposed to the individual proceedings but their effects are mainly Luxembourg entity’s debt) lack the necessary limited to allowing a coordination of the flexibility, are lengthy and thus costly, and involve insolvency proceedings opened in several some kind of publicity. As a result, bankruptcy juridictions regarding entities of the same proceedings in Luxembourg are by far the most group and does not provide for the possibility frequent procedures applied to distressed to open a group-wide cross-border procedure companies and the chances of a recovery or before one and the same court. As a result, restructuring being done in-court are extremely when creditors enter into restructuring limited for a Luxembourg company. dicussions with a corporate group which has a A Luxembourg entity may be declared European presence, they may need to consider bankrupt by the court when the following two each entitiy individually instead of seeing criteria are met: the group as one entity and one estate with • when the company has ceased payments and a single point of (bankruptcy) risk. They will is unable to meet its commitments (cessation also need to assess to which entity they can de paiements), that is, the company cannot, be linked and whether the group debt needs or does not, fully pay its due, certain and to be fitted to the expectation by the creditors liquid debts as they fall due; and to have a larger exposure than just to one or a • when the company has lost its few of the group entities. creditworthiness (ébranlement de crédit), 35

CAP8908 II&RR_p35_Loyens and Loeff.indd 35 30/05/2019 16:42 that is, the company is unable to obtain credit Creditor’s struggles to control or influence from any source. the proceedings The first criteria above is very often the In many continental European jurisdictions, bankruptcy trigger event in European civil insolvency proceedings are purely court-led, law jurisdictions. The Luxembourg legislator with creditors not being able to influence or added the second criteria, which in practice determine the appointment of the relevant has emerged as paramount in the context trustee or administrator, participate to credit of restructuring negotiations to avoid abrupt bids or even sit at the discussion table via bankruptcy filing requirements and value the putting in place of creditor groups or destruction. committees, which would have direct access It is unclear how the lack of to the court or trustee. This is the case in creditworthiness is measured under Luxembourg where creditors, directors and Luxembourg law and remains untested shareholders have, in principle, no control before Luxembourg courts in an ongoing over the bankruptcy receiver’s appointment restructuring scenario. It is however generally and its management of the liquidation of the recognised that clear prospects of additional bankruptcy estate. credit or a refinancing of existing debt or Bankruptcy receivers in Luxembourg have to ongoing restructuring negotiations with represent the interests of both the creditors and the bankrupt company and their mission is to creditors may help establish a company’s liquidate the estate of the bankrupt company. A creditworthiness and Luxembourg courts Luxembourg company put into bankruptcy would would assess each situation on a case-by-case therefore not recover from the proceeding, as basis. These grounds are often also used by opposed to, for instance, a company filing for a boards of directors to assess whether their “recovery” proceeding, such as a Chapter 11 (US), statutory bankruptcy filing obligation has safeguard (France) or RJ (Brazil). started to run. There is little guidance as to how and how The obligation for directors/managers to far the receiver may go in accomplishing its file for bankruptcy within one month of the mission. Also, a receiver would normally apply insolvency is subject to criminal sanctions, the equal treatment of creditors’ principle when which, in practice, can put a strain on the managing the bankruptcy so that it could not restructuring discussions and influence the follow the instructions of a creditor without being structuring of the new money injections in the in violation of its duties to the company and the distressed corporate group. In jurisdictions other creditors. This and the fact that the most like Germany, where the filing time period is common insolvency proceeding in Luxembourg very short (21 days) and the liability applied is the bankruptcy proceeding leads to creditors more strictly than in other jurisdictions, the being very attentive to the Luxembourg insolvency insolvency tests and governance of the relevant test not being met as regards the Luxembourg entities must be very closely watched early on companies of the group being restructured so as in the discussions and monitored throughout to avoid having to file for (or running the risk to be the restructuring process. put into) bankruptcy. There are several consequences for Whether or not a creditor or shareholder directors if they are found to have acted can bid for the assets of a bankruptcy estate unreasonably in light of the circumstances is not provided for under Luxembourg law having resulted in bankruptcy (i.e. extension of and will greatly depend on the receiver. Some a company’s bankruptcy to a director; liability receivers will want to secure a third-party for the company’s debts; ban on carrying out valuation for each sale of assets and might commercial activities). In addition to these prefer to go through a public auction to avoid specific liabilities in the event of bankruptcy, any liability issues. Others are happy to involve ordinary civil liability will also apply to the other creditors or shareholders to ensure a swift director’s actions in the context of a company’s liquidation of the assets at a reasonable price. financial difficulties (see above), and directors As to the taking into account of insolvency may also incur criminal liability. proceedings affecting foreign subsidiaries of 36

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the bankrupt Luxembourg entity, a Luxembourg only apply if the registered office has not been trustee would normally look into existing moved to another Member State within the proceedings affecting the “assets” of the three-month period prior to the request for the company and decide whether it makes more opening of insolvency proceedings.” sense (again from the perspective of the Secondary insolvency proceedings may also company and the creditors as a whole and be initiated before the courts of another Member looking at value) to sell the structure or to wait State of the European Union against the same until the proceedings lower down the structure debtor if the latter possesses an establishment have settled to either sell the structure or within the territory of that other Member State. liquidate the assets one by one. Receivers have However, the effects of these proceedings significant powers in Luxembourg, and it is are limited to the assets situated in the latter generally difficult to predict which route they will Member State. favour as this will be predominantly dependant It results from the above that insolvency on the identity of the receiver and the factual proceedings may be initiated in Luxembourg situation existing at the time it is appointed. against a company, if, in view of the factual By way of illustration, in the Oi restructuring circumstances, the company’s centre of main proceeding, which is still ongoing, a Dutch interests is situated in Luxembourg. insolvency court ultimately appointed a Furthermore, even after the company has liquidator and refused to recognise that the migrated from Luxembourg to another Member restructuring proceedings had commenced State of the European Union, creditors would, in Brazil in respect of a Dutch company. in principle, not be prevented from starting Major differences between the Dutch and the insolvency proceedings against the company if Luxembourg bankruptcy regimes that could be it can be demonstrated that its centre of main relevant in a similar case to the Oi case is that interests remains in Luxembourg. (i) the Dutch insolvency test does not include the However, if the company moves from lack of creditworthiness (a Dutch company is Luxembourg to a state which does not fall within insolvent when it has ceased its payments); and the scope of the Regulation, Luxembourg courts (ii) Dutch law does not recognise any would, in principle, no longer have jurisdiction foreign bankruptcy or insolvency proceedings from a Luxembourg law perspective to open in respect of Dutch entities as they have not bankruptcy proceedings against such company. implemented the principle of unicity and Foreign (non-EU) insolvency proceedings universality of bankruptcies, which are applied If a Luxembourg court were to consider that the by Luxembourg courts. company was required to file for bankruptcy in Luxembourg and the directors had not done The local recognition of so, then in principle the commencement of foreign in-court restructuring foreign insolvency proceedings would not be proceedings sufficient to prevent bankruptcy proceedings in EU proceedings Luxembourg and civil/criminal penalties being Pursuant to article 3.1 of the Regulation eventually ordered by a Luxembourg court. (EU) 2015/848 of May 20, 2015 on insolvency Luxembourg courts have generally held that proceedings (recast), the state of the company’s courts in the jurisdiction (outside the scope of centre of main interests (i.e. the place where the Regulation) of the principal establishment of the company conducts the administration of the insolvent company should be competent to its interests on a regular basis and which is open insolvency proceedings. This entails that ascertainable by third parties) has jurisdiction foreign insolvency or restructuring proceedings for opening insolvency proceedings. This pertaining to a Luxembourg company could be provision further states that “in the case of recognised by the Luxembourg courts if the a company or legal person, the place of the principal establishment of that company was registered office shall be presumed to be the located in the jurisdiction of the foreign court. centre of its main interests in the absence of There are very large differences in local laws in proof to the contrary. That presumption shall continential Europe in this area: some countries 37

CAP8908 II&RR_p35_Loyens and Loeff.indd 37 30/05/2019 16:42 do not reognise any insolvency proceeding Note: pertaining to their national companies, others 1 Note, however, the bill of law N°6539 which for instance recognise the jurisdiction based on is meant to reform insolvency proceedings in location of assets. Luxembourg and add bankruptcy prevention Notwithstanding these limitations, it remains tools to the existing framework. 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 Authors: arrangement), based of course on the governing Anne-Marie Nicolas, Partner law of the debt but also, most importanty, using Alvaro Garrido Mesa, Senior Associate the restructuring tools and court procedures Loyens & Loeff available in these jurisdictions. It remains, 18-20, rue Edward Steichen however, largely untested whether those L-2540 Luxembourg procedures in respect of continental European Tel: +352 466 230 314 companies would be recognised locally if such Email: [email protected] recognition were sought or contested. Website: www.loyensloeff.lu

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Insolvency and restructuring in Mexico

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

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.

The LCM is the only legislation effectively where its principal place of business is located; addressing the insolvency phenomenon in therefore, if the company is based in Cancún, Mexico, given that our Federal Civil Code Quintana Roo, and it has its assets and its regulates “Concurso Civil”,2 which is obsolete principal place of business in that city, even if and as it is no longer applied for it does not it has a branch in Mexico City, it cannot file for contain effective tools to solve the issue insolvency proceedings in Mexico City in the regarding non-trading individuals. first instance. The main spirit of the law is that the company Even if the merchant is incorporated in should continue to encourage restructuring over Mexico City, but its operations are carried out bankruptcy, but must consider the legitimate in another jurisdiction, at first, the Mexico City rights of the creditors. Judge is not competent. Hence, in this paper we will briefly expose the The foregoing implies that Forum Shopping is essential content of the LCM for any attorney not possible in Mexico. to understand how insolvency is regulated The exception to the above comes in in Mexico. We shall also reflect upon some bankruptcy filings by a business group, where modifications that, in my opinion, need to be the competence is set by the first company of implemented to improve the regulation on this the group to become insolvent. matter in Mexico. Legitimation to begin the process Bankruptcy proceedings may be started Basic terms of LCM voluntarily by the merchant through a request Merchant presented to the Judge,4 but the petition is According to the LCM, in order to be legally not automatic given that certain requirements declared in bankruptcy you need to be a merchant.3 are demanded (sometimes too strict for small Therefore, this is one of the first limitations in and medium-sized enterprises), which is one our country: a non-trading individual cannot file of the practical problems to quickly access the for legal and effective insolvency proceedings. proceeding. In addition to the traditional definition of a It is worth noting that, unlike other legislation, merchant, the LCM indicates that the following in Mexico there is no minimum period to force the may also be subjects entitled to be declared merchant to file for bankruptcy from the moment bankrupt: it falls into insolvency, and there is no sanction i. Estate contributed to a trust with business for not doing so. activity purposes. It may also be started involuntarily by any ii. Companies who are part of a business group, creditor of the merchant or by prosecution even though each process is carried out authorities through a lawsuit.5 separately without asset mix-up. Finally, it may be started as previously Competence. Forum Shopping agreed between the merchant and the The process is carried out before the Federal creditors representing a simple majority of Judge of the actual domicile of the merchant, its debt (pre pack).6 39

CAP8908 II&RR_p39_Pena Briseno.indd 39 31/05/2019 08:25 Insolvency events continues managing its company (Debtor in According to the Ley de Quiebras y de Suspensión Possession), and that an IP called Conciliador de Pagos (Bankruptcy and Suspension of (Conciliator) is appointed as supervisor and the Payments Act), in order to declare a merchant person in charge of achieving a negotiation and insolvent, generalised default on obligations was reaching a restructuring agreement. required. This ambiguous concept had many Contracting credits with preferential different interpretations and, therefore, there was conditions to operate the company (Fresh no legal certainty in such regard. Money) is allowed; however, strict banking Because of this, the LCM does not leave it regulation limits its execution. to the free interpretation of the Judges when At first, a simple majority vote by the the merchant falls in generalised default on creditors is required for the execution of the obligations before two or more creditors. The agreement, and there are rules for subordinated LCM defined the situation precisely in two creditors or related parties. scenarios:7 The execution of the agreement only benefits i. That more than 35% of the total obligations of the company declared in “concurso”, not its the merchant are already due when the trial joint obligors or guarantors. This should not be begins; and a problem for large enterprises, but most of the ii. Not having 80% of liquid assets to cover already companies in Mexico are small and medium- due obligations when the process begins. sized companies and their shareholders are also When this lawsuit is filed by a creditor or the their joint obligors or guarantors; therefore, if prosecution authorities, both premises must be there is not a process in which they are all being confirmed. restructured at the same time, it will be useless In case of a voluntary request by the because the creditors will execute personal merchant, at least one of the two premises must actions disregarding the business. be confirmed, and it is also possible to file the There are no limits on the amounts regarding request if it is imminent that they will occur releases or payment period. within 90 days from the request.8 Liquidation. When the merchant and its creditors cannot reach an agreement, the Judge Stages of the insolvency process shall proceed to pass the Bankruptcy Sentence, in In Mexico, the insolvency process is made up which an IP called Síndico (trustee) is appointed of three stages: verification, reorganisation and to take possession of the company and to liquidation. liquidate the assets of the company to pay the Verification. It is the first stage of the creditors in terms of preference set by the LCM. insolvency process, except in the insolvency The regular sale of the assets is carried out in this request with a prior restructuring plan.9 In stage. The Síndico can sell the assets but it has this state, before passing the sentence, the limitations. It basically has three sales methods: Judge orders an inspection by an Insolvency i. Public auction that has to be authorised by Practitioner (IP) called Visitador (Visitor), who the Judge; determines if the merchant falls into insolvency ii. Out of public auction – this is when the circumstances. Síndico believes it can obtain a better price Reorganisation. If the previous cases are for the sale of the assets, but it has to be confirmed, the Judge moves on to passing previously authorised by the Judge; and the Insolvency Sentence (concurso mercantil iii. Emergency sale – this is made directly by the sentence), which shall always begin in the Síndico, and then delivered by the Judge. reorganisation stage. The purpose of the In the above three stages, the IPs are named reorganisation stage is to reach a restructuring by the Instituto Federal de Especialistas en agreement between the merchant and its Concursos Mercantiles (IFECOM) (Federal Institute creditors. This stage can only be avoided if of Insolvency Practitioners), not the Judge. the merchant directly requests its bankruptcy declaration or if it is requested by a creditor and Responsibilities accepted by the merchant. In Mexico, there is no civil or criminal It is important to point out that the merchant responsibility for the merchant, its managers 40

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or directors for being declared in “concurso” In the latter scenario, where there are only per se, and it is not qualified as culpable or assets, the foreign Judge or IP requests the malicious. acknowledgement of foreign proceedings in There is a Title10 regarding responsibilities Mexico, as an auxiliary process for the Mexican of the managers which in a casuistic manner Judge to help them take control of the assets specifies when there is a personal responsibility and liquidate them. The Mexican Judge can even and how it should be demanded and charged. appoint the foreign IP as Síndico. There is another Title11 regarding criminal aspects of insolvency, which classifies certain Concluding thoughts insolvency crimes; however, in the 19 years in As briefly described, the foregoing points which the Act has been in force, it has not been comprise the backbone of our insolvency system applied efficiently. in Mexico. Special bankruptcy As a result, the following conclusions arise: The LCM, whose main purpose is regulating (a) In Mexico it is necessary and urgent to the insolvency of a merchant, and whose efficiently regulate insolvency of non-trading legally protected right is the preservation of debtors, of the individual, of the consumer. the company, also regulates the insolvency of (b) In Mexico it is necessary to regulate financial institutions and credit organisations the insolvency of credit institutions and credit in a few articles, whose legally protected right organisations with one specific act. It cannot be must be the investors, bank savings by the included in a law that protects the company, given public, not the banking company. that the investors (the bank savings) are those which must be protected in this kind of insolvency. While it is true it refers to the applicable (c) In Mexico it is necessary to make the financial legislation, it is also true that it LCM more flexible in favour of MSMEs (Micro, provides merchant insolvency structure to the Small and Medium Enterprises). There are insolvency of banking institutions and credit many requirements to access the insolvency organisations, and this is not ideal. process, including the verification, for example, It does not matter that, regarding credit documents, events, and when they finally access institutions, the process always starts in it may be too late. Also, the insolvency process liquidation; the regulation is not as agile and of the company must be allowed along with efficient as it should be in a type of insolvency the insolvency process of its joint obligors or which is as specialised as banking insolvency. guarantors even when they are not merchants, Cross-border insolvency given that they are normally 100% committed in Mexico was one of the first countries to adopt the whole business. the UNCITRAL Model Law regarding Cross- Since 2002 there has been a law12 in Border Insolvency. Mexico which defines whether an enterprise is Therefore, if there is an insolvency process considered to be micro, small or medium. filed abroad, the foreign court or IP may request Art. 3 of the above Mexican law uses the commencement of an insolvency process in number of employees criterion method for Mexico in two possible scenarios: distinguishing MSMEs from large enterprises.13 i. if the insolvent person has an establishment But this concept is not included in the in Mexico; and insolvency law. ii. if the insolvent person has assets only in The main problems for the MSMEs for filing Mexico. include: In the first scenario, an insolvency i. If you are filling as a debtor you need to process must start from the beginning of the verification substantial information that most process and go through all stages, including MSMEs will not have readily available.14 verification, even if the foreign proceedings ii. In most cases15 the judge will order the are reorganisation or liquidation because the verification (Visita) where a professional LCM protects local creditors. The competent audits the company to analyse if it qualifies Judge is that of the domicile of its principal for the procedure. This Visita comes at a cost place of business. for the debtor, and a lot of MSMEs cannot 41

CAP8908 II&RR_p39_Pena Briseno.indd 41 31/05/2019 08:25 afford it.16 This is also a long process before 2 Third Part, First Title. entering the restructuring process. 3 In Mexico, we find the definition of merchant iii. When you are in the restructuring process, an in the Code of Commerce, article three: insolvency profesional17 is appointed and the Article 3.– The following persons are debtor has to pay for those fees, which once considered merchants: again are expensive. I.– Individuals with legal capacity to trade iv. We do not have special courts functioning, so and who make out of commerce their if the debtor does not have legal advice it will ordinary occupation; be complicated to follow the process.  II.– Companies incorporated in accordance I think that it would be very complex to have a with commercial law; new legislation specifically designed for MSMEs. III.– Foreign companies and its branches, However, if we modified the existing legislation that perform commercial acts within to apply to MSMEs it could work: national territory. i. Automatic stay when filing and no need for 4 Article 20 LCM. the Visita. 5 Article 21 LCM. ii. Reduce at minimum the documents that you 6 Article 339 LCM. need to present. 7 Article 10 LCM. iii. Reduce the cost of the insolvency 8 Article 20 Bis LCM. professional. 9 Article 341 LCM. iv. Reduce court participation. 10 Title Ten Bis. v. Eliminate the restrictions for the banks to 11 Title Eleven. lend to companies in formal restructuring. 12 Ley para el Desarrollo de la Competitividad vi. We already have the implementation of de la Micro, Pequeña y Mediana Empresa. special courts, but they have not been 13 Micro 0-10. Small 11-50 in Industry and implemented yet. Services and 11-30 in Commerce. Medium vii. If the debtor requires, natural persons that 51-250 in Industry, 31-100 in Commerce and are collaterals should be allowed to join the 51-100 in Services. process as in a group of companies even if 14 Art. 20 LCM. they are not merchants. 15 Except if you file a prepack. viii. Allow a discharge for the natural person and 16 Around US$6,000. a fresh start. 17 Conciliador. 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 Author: agencies, so the law does not state a way in Luis Palomino, Partner which they must be treated when they are Peña Briseño, Peña Barba declared bankrupt. And even though it seems a Palomino Abogados little-used tool, the situation must be addressed. Florencia 14 Colonia Juárez, Zona Reforma Notes: Ciudad de México. C.P. 06600 1 This act replaced the Ley de Quiebras y Mexico de Suspensión de Pagos (Bankruptcy and Tel: +52 55 5426 0909 Suspension of Payments Act), which was valid Email: [email protected] in Mexico for almost 60 years, since 1943. Website: www.penabriseno.com

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Overview of insolvency and restructuring in Nigeria

by Anthony Idigbe, PUNUKA Attorneys & Solicitors

“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

Insolvency and restructuring courts, coordination of concurrent proceedings in Nigeria or communication of information. Nigeria only has a limited framework for recognition and The UK 1948 Companies Act strongly influences enforcement of an international monetary the legal framework for corporate insolvency judgment which must be final and conclusive, found in a few parts of the Companies and unchallenged on appeal and conditioned on Allied Matters Act (CAMA), a statute drafted by reciprocity. The legislative framework creates the Law Reform Commission and enacted as a dual regime for Commonwealth countries a Decree in 1990. The Decree became an Act and other countries. Foreign insolvency orders under the civilian regime and was consolidated would scarcely fulfil such requirements while in the 2004 Laws of the Federation of Nigeria. foreign judgments are recognised and enforced The Act makes provisions for the general legal through a process of obtaining leave of court framework for asset recovery or realisation. and registration of the decision. It recognises three broad types of insolvency procedures, to wit; Receivership, Liquidation/ Winding-up and Arrangement and Compromises Evaluating the process (“A & C”). The Nigerian insolvency system is unduly The insolvency procedures recognised by creditor friendly and liquidation focused. There the Act are, in that sense, either collective or is no general business rescue law save for non-collective and undertaken by Insolvency the scheme of arrangement provisions under Practitioners (“IP”). In terms of personal CAMA, which provides a window for encouraging insolvency law, there is the Bankruptcy Act business recovery. However, the jurisprudence of 1979 consolidated in the 2004 Laws of the has not taken up the challenge primarily due Federation of Nigeria, but this law has not had to the conflicting requirements on approval much impact because of its requirement for majority of 75% under CAMA and 90% under the judgment and execution levied as a condition Investment and Securities Act (ISA) for a buyout for proof of bankruptcy. Also, the ineffective of dissenting minority and the approach of the discharge provisions render bankruptcy an Securities and Exchange Commission (SEC) to unattractive option for debtors. the interpretation of those provisions. There is no specific legislation in Nigeria CAMA precludes the appointment of a for the recognition of foreign insolvency provisional liquidator before the advertisement proceedings, orders, or judgments as well as of a winding-up petition. Also, the catastrophic for co-operation between domestic and foreign decision of the Supreme Court of Nigeria in 43

CAP8908 II&RR_p43_PUNUKA - Nigeria.indd 43 30/05/2019 16:43 FMBN V NDIC [1999] 2 NWLR pt 591, 333, that the bank to continue business the next business only actions or proceedings pending or instituted day after a weekend as a new bank. in the Federal High Court (the court that has The popular view, however, is that the jurisdiction in bankruptcy cases) is prohibited AMCON Act is not an insolvency regime but by the stay provisions of s.417 of CAMA brought legislation aimed at protecting banks from uncertainty to the law around the availability sudden collapse. It cannot, therefore, be a of moratorium. The decision has effectively permanent solution in that it only purports circumscribed the automatic stay regime by the to give respite to the banks but leaves the limitation on the bankruptcy court’s inherent debtors entirely at the mercy of AMCON with power to bind everyone by a stay order on the its draconian powers. The need for a general threat of contempt. The absence of automatic insolvency and business rescue law that would stay encourages a race to the bottom as both render AMCON’s intervention unnecessary is creditors and debtors resort to various antics to thus imperative. either gain priority or moratorium. There is no effective moratorium even when the company is Legislative reform efforts in liquidation. Creditors have also found a haven The past decade has seen the Business in filing for winding-up and obtaining a Mareva Recovery and Insolvency Practitioners injunction (freezing order) when the company Association of Nigeria (BRIPAN) champion has not been found insolvent, and the petitioner the growth of insolvency and business rescue is not a security holder but ends up exercising practice in Nigeria through training, advocacy security rights over assets of the company even and law reform. This commitment resulted before judgment or winding-up order. in the drafting of a new, business rescue and Notwithstanding the above, there is the cross-border insolvency friendly Insolvency existence of a limited rescue framework in Bill for resolution of both personal and the context of regulated industries such as corporate insolvency following stakeholders’ banking and telecommunications through consultation sponsored by the UK Department the Government’s enactment of AMCON Act, for International Development (DFID). Under NDIC Act and NCC Act, establishing the Asset the current political dispensation, the ninth Management Corporation of Nigeria (AMCON), session of the National Assembly saw a private Nigerian Deposit Insurance Commission (NDIC) member’s Bill to reform only the Bankruptcy and the Nigerian Communications Commission Act, 1979, but the Bankruptcy and Insolvency (NCC) respectively. Whilst AMCON was meant Bill (“BIB”) is yet to pass into law. The BIB to be a temporary solution designed to last for was proposed to repeal the Bankruptcy Act only seven years for the purchase of eligible of 1979 (“BA”). It seeks to make provision for bank asset – toxic assets which the regulator individual insolvency, some aspects of corporate – Central Bank of Nigeria (CBN) or the bank insolvency, rehabilitation of the insolvent itself wants out of their books, it has now debtor, creation of the office of supervisor of become a draconian albatross that has refused insolvency, cross-border insolvency recognition to phase out. The NDIC Act, on the other hand, and enforcement as well as other connected was amended to enable the appointment of a matters. liquidator for a failed or failing bank or financial It is thus arguable that the Nigerian institution without the need to go through terminology relating to bankruptcy refers to the filing and advertisement of a winding-up personal or individual insolvency status while petition. insolvency refers to corporate insolvency. The In this regard, the mere withdrawal of the name of the Bill is somewhat misleading as banking institution’s operational licence by the scope is restricted since virtually all its the CBN Governor suffices to enable NDIC provisions deal with individual and not corporate to be appointed liquidator. However, banking insolvency. It is, therefore, neither general regulators have since abandoned the use of corporate insolvency nor business recovery law. the appointment of the liquidator as a tool for It merely introduces a few personal bankruptcy liquidation or restructuring of banks. They now law provisions. There is no indication that it has prefer the creation of bridge banks as it enables received presidential assent to date. 44

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The CAC initiative will bring some sanity to the current practice of About 30 years down the line, CAMA has appointment of multiple receiver-managers and recently been the subject of an arguably detailed provisional liquidators. It will be apparent that review at the instance of the Corporate Affairs the administrator would have priority, and failing Commission (CAC) set up to administer the administration the procedure will be converted Act. The CAC proposed a Bill for amendment of to liquidation with the administrator as the CAMA, with new provisions incorporating some liquidator or a separate liquidator is appointed aspects of insolvency such as administration and to take over from the administrator. The CAMA registration of insolvency practitioners including Bill therefore definitely provides a slightly the recognition of the Business Recovery & more comprehensive framework for business Insolvency Practitioners Association of Nigeria recovery and a framework for the regulation of (BRIPAN) as a certifying professional body, the insolvency profession by requiring licensing amongst others. However, although the new of practitioners by CAC and recognising BRIPAN CAMA Bill has gone through Senate approval, it as a professional body whose certification is a has also not received presidential assent. condition for licensing. The Bill earned the support of the Presidential Ease of Business Committee Leading the process (PEBEC) which is pursuing an agenda of reform On the whole, managing insolvency and business of commercial omnibus laws because of the restructuring in Nigeria in the face of the difficulty of passing laws through the National inadequate legal framework requires creativity Assembly. Consequently, the new Bill was and innovation. A combination of understanding updated by CAC with some assistance from the of the legal process and the application of the World Bank and a section added with the subtitle principles of informal workout can be of great “Business Rescue Procedure”, introducing assistance in achieving restructuring in a UK-style administration, Company Voluntary creditor-friendly and liquidation-focused system. Arrangement (CVA) and the UNCITRAL Model The creditors usually respond positively, if the Law on Cross-Border Insolvency. debtor voluntarily appoints a reputable firm Though there is no standalone insolvency to do an independent business review (IBR). or business rescue law under consideration Creditor perception of commitment to reform and at this time at the National Assembly, the CAC openness by the debtor through IBR can kickstart sponsored Bill addresses some of the current and sustain the informal workout process. shortcomings of the insolvency framework. By the provisions of the Bill, a liquidator or administrator once appointed has 28 days Current reform agenda to submit a report to the court on whether a Agitation by BRIPAN and other stakeholders creditors meeting should be summoned to have had an impact on the reform of some approve a voluntary arrangement. If the court aspects of Nigeria’s personal and corporate agrees, then the liquidator or administrator insolvency laws. The National Assembly and shall convene the meeting to sanction the existing institutions like the CAC have been arrangement. Any member of the company sensitised and seem to be working on some has 28 days to challenge the meeting, and the relevance in the reform process. Also, following court can decide whether a members’ meeting the amendment of the AMCON Act, the use of ought to hold and which of the members’ and the receiver managers by AMCON has improved creditors’ meeting to prefer. the environment for insolvency practice and Also, under the new CAMA Bill, the effect development of a business rescue culture. of administration is the dismissal of any PEBEC is considering the possibility of an winding-up petition and vacation of any receiver- omnibus Insolvency Bill to facilitate the ease of manager appointed by secured creditors or doing business and tackle challenges associated holders of floating charge. There is also an with existing legal impediments to various automatic moratorium on enforcement of business indicators, including sound business any security or repossession of goods and recovery and insolvency framework. It means premises. This law, when it becomes effective, that the CAMA Bill is a stop-gap measure. 45

CAP8908 II&RR_p43_PUNUKA - Nigeria.indd 45 30/05/2019 16:43 Further, following constant engagement insolvency and restructuring issues in Nigeria is through training and attendance at INSOL/World achievable in the not-too-distant future. Bank African Roundtable, practitioners and judges are now more commercially minded. The Author: judges are more willing to use their authority Anthony Idigbe (SAN), Senior Partner under their enabling Act and rules to direct PUNUKA Attorneys & Solicitors litigants to settle disputes amicably, encourage Plot 45, Oyibo Adjarho Street, Lekki Phase 1 business rescue through negotiations and Lagos settlement, thereby creating the environment for multi-creditors workouts. The expectation is Nigeria that with the support of the practitioners, judges Tel: +234 803 540 3030; +234 1 270 4791 and the National Assembly, a holistic solution Email: [email protected]; [email protected] that addresses the management and resolution Website: www.punuka.com

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Swedish insolvency law

by Carl Hugo Parment, White & Case

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.

Bankruptcy Private restructuring There are two different formal insolvency In addition to formal insolvency proceedings it regimes under Swedish law. The most common is also quite common with private out-of-court one is bankruptcy proceedings in accordance restructurings. Swedish law provides very with the Swedish Bankruptcy Act. The purpose few tools for accommodating such informal of a bankruptcy proceeding is the winding restructurings. Nevertheless, they are quite down of an insolvent company by way of selling common especially in cases where the scope of its assets and distributing the divestment the financial difficulties is somewhat limited. proceeds to the bankruptcy creditors and, if Among the benefits of a private out-of- all creditors have been fully paid, distribute court restructuring is that there is contractual any remaining surplus to the owners of the freedom for the involved parties as regards insolvent company. the terms and conditions for the restructuring. Another benefit of a private restructuring is Company reorganisation that the publicity associated with a formal The second insolvency regime is company insolvency proceeding can be avoided. The reorganisations pursuant to the Swedish main disadvantages with a private restructuring Company Reorganisation Act. In contrast are the lack of standstill against enforcement to a bankruptcy proceeding, the aim of a and the absence of any tools for dealing with company reorganisation is that the insolvent creditors that are unwilling to accept a partial company shall survive and continue its write-down of their claims against the insolvent debtor. business operations. The purpose of company reorganisations is therefore to achieve financial workouts of companies that are Weaknesses in the Swedish deemed to have sustainable long-term insolvency regime business prospects. A company reorganisation There has been significant criticism of certain provides – as a general rule – standstill of parts of the Swedish insolvency regime during enforcement against the insolvent debtor. the last couple of years. The main criticism Furthermore, the company reorganisation has been directed towards the rules regarding also provides a regime for debt composition company restructuring and both legal scholars where claims held by unsecured creditors and practitioners have generally agreed that are partially written-off subject to certain there needs to be certain legislative changes in consent thresholds being met among the order for the restructuring regime to be more unsecured creditors. Any dissenting successful. unsecured creditor can be “crammed down” The legislator has also looked into the issue and be forced to accept the level of write-off and found that the Swedish insolvency regime approved by the majority of the unsecured could be improved by combining company creditors. restructurings and bankruptcy proceedings into 47

CAP8908 II&RR_p47_White Case.indd 47 30/05/2019 16:43 a combined legal framework instead of having insolvency regime is that there is no specific two separate legal frameworks which is the legislation dealing with shareholders/owners current situation. However, it remains to be in financial restructurings. The Swedish seen if the legislator will adopt any such new insolvency regime primarily addresses combined insolvency regime. various creditor issues, whilst failing to Another weakness of the Swedish system provide effective tools for restructuring the is the absence of legislation accommodating equity of a financially distressed company. It general debt compositions outside the would therefore be well received if rules were framework of a formal insolvency proceeding. introduced that provide tools for restructuring The absence of any possibilities to force both debt and equity interests. non-consenting creditors to accept debt compositions outside formal insolvency Concluding remarks proceedings gives to much negotiating leverage In conclusion, the Swedish insolvency regime to the creditors. is effective, robust and rather creditor friendly. It is likely that the number of successful From a creditor perspective there are no out-of-court restructurings would increase major concerns regarding the Swedish significantly if such a framework were to be insolvency regime. introduced. However, from an investor perspective, and Finally, another thing that is commonly perhaps also from a public policy perspective, perceived to be a weakness in the Swedish 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 Author: to restructurings of financially distressed Carl Hugo Parment, Partner companies that are intended to continue White & Case to trade following the completion of the Biblioteksgatan 12, Box 5573 restructuring. SE-114 85 Stockholm It remains to be seen whether or not Sweden the legislator will address this issue by Tel: +46 8 50632 341 way of improving the regime for corporate Email: [email protected] restructurings. Website: www.whitecase.com

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CAP8908 II&RR_p47_White Case.indd 49 30/05/2019 16:43 Crypto assets and data in insolvency: Switzerland’s proposed new rules

by Stefan Kramer and Urs Meier, Homburger AG

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.

Crypto assets and data are often stored by third- tokens, therefore fall in one or more of the three party custodians. For crypto assets custodians following basic categories: are, for example, wallet providers or trading • Payment tokens are tokens, that are platforms. For data cloud providers increasingly intended to be used, now or in the future, as act as custodians. Under current Swiss law, a means of payment for acquiring goods or it is unclear whether a segregation of crypto services or as a means of money or value assets or data from the bankruptcy estate is transfer. Such tokens do not give raise to any possible, if such a third-party custodian enters claims towards an issuer or a third party. insolvency. In its draft law concerning blockchain According to prevailing Swiss legal doctrine and distributed ledger technology (“DLT Draft payment tokens are therefore “purely Law”) of March 22, 2019, Switzerland’s federal factual, intangible assets”. For example, government therefore proposes amendments to cryptocurrencies such as Bitcoin and Ether the Swiss Debt Enforcement and Bankruptcy fall into this category. Act (“DEBA”) and the Swiss Banking Act (“BA”). • Utility tokens are tokens, that are intended The proposed new insolvency rules foresee to provide access digitally to an application the following: or services by means of a DLT-based • Segregation of crypto assets for the infrastructure. benefit of creditors shall become possible, • Asset tokens represent assets such as a debt provided the relevant crypto assets are or an equity claim on the issuer. unambiguously allocated to the entitled party. Both payment tokens (which are also referred The new segregation regime shall apply to to as “native tokens”) as well as utility and all custodians, namely also to banks and asset tokens (which are also referred to as securities dealers. Therefore, the insolvency “non native tokens”) may have considerable regime for financial institutions shall be economic value. Consequently, they may amended accordingly. constitute assets from an insolvency law • Segregation of digital data in insolvency shall perspective. Creditors may try to seize tokens be facilitated. and bankruptcy administrators can realise the This article summarises key elements of value of tokens, provided there is a liquid market these proposed new insolvency rules. (such as, for example, in the case of Bitcoin, Ether and other cryptocurrencies). Segregation of crypto assets When it comes to storing tokens there are Swiss law does not define the term “crypto two basic options: Either the owner of the asset”. However, since crypto assets are tokens stores the tokens himself or the tokens ultimately tokens, i.e. pieces of information are stored by a third-party custodian such as stored in a DLT register, the classification a wallet provider or a trading platform. There introduced by the Swiss Financial Market are various reasons why the owner may choose Supervisory Authority FINMA in February 2018 to store his tokens with a third party, such as, may be followed. Crypto assets, respectively for example, the facilitated handling of private 50

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keys or improved security. However, if a third- requires several keys, which need to be used party custodian becomes insolvent, it needs jointly in order to initiate a transaction in the to be determined which assets belong to the DLT register. Such “multi-signature” set-ups bankruptcy estate. This can, in particular, be may, for example, require two private keys, difficult whenever the bankrupt custodian had one of which is held by the client and the control over assets in relation to which a third other one is held by the custodian (“two out of party asserts (beneficial) ownership. two multi-signature”). In such a set-up there Under Swiss law, it is currently not clear is no “exclusive actual power of disposal” on whether crypto assets held by a custodian the side of the custodian and therefore the on behalf of a client may be segregated in crypto assets do not fall into the bankruptcy bankruptcy, i.e. transferred back to the client. estate of the custodian. Switzerland’s federal government therefore • Only custodian holds keys: If only the custodian aims to introduce a new provision in the DEBA. holds keys, i.e. only the custodian may directly Under this new rule the owner may request dispose of the crypto asset and initiate a segregation of its crypto assets if the bankrupt transaction in the DLT register, then there is debtor had the sole power to dispose over the “exclusive actual power of disposal” on the crypto assets, provided that the crypto assets side of the custodian and the crypto asset are individually attributed in the DLT register to falls into his bankruptcy estate. Only in this the relevant owner. scenario will the proposed new rules regarding With regard to the first element, i.e. the segregation of crypto assets become relevant. bankrupt debtor (custodian) having the sole Here, the client has no access of its own and power to dispose over the crypto assets, the key the bankrupt third-party custodian at the same question is whether the debtor had “exclusive time has all the keys to access the crypto asset actual power of disposal” regarding the tokens directly. Consequently, the crypto asset will be in question or not. Usually, whoever has access included in the custodian’s bankruptcy estate to the private keys may initiate DLT-based and the client will therefore need to claim that transactions and therefore has such actual he has the better right, i.e. is the owner of the power to dispose over the tokens. Consequently, crypto assets in question. the decisive element is how the private keys The Swiss federal government, however, are being managed. Four basic set-ups may be foresees that a segregation right shall only exist distinguished: if it is possible to unambiguously assign the • Only client holds keys: If only the client holds crypto assets in question to a specific creditor. the keys, i.e. only the owner may directly Accordingly, it is of importance whether the dispose of the crypto asset and initiate a crypto assets held by the bankrupt custodian transaction in the DLT register, then there can at all time be assigned individually to the is no power of disposal on the side of the entitled party, i.e. the owner. Here, the details custodian. Consequently, the crypto asset of how the crypto assets are stored are crucial. does not fall into the bankruptcy estate of the If each client’s credit balance may be tracked to custodian in the first place. a specific blockchain address and is registered • Client and custodian hold keys separately: If directly on the blockchain, such crypto assets the client and the custodian hold keys, which are according to the explanatory report of the allows them both to initiate a transaction in DLT Draft Law individually attributed in the DLT the DLT register, it is assumed that the client register to the relevant owner. In such cases it (owner) retains actual power of disposal. is possible at any time and without additional Hence, even though there is “actual power of technical arrangements to allocate the crypto disposal” on the side of the custodian, it is not assets to the individual client for whom the exclusive and therefore the crypto assets do custodian holds the tokens. not fall into the bankruptcy estate of The proposed new segregation regime will the custodian. apply both to “cryptobased means of payment”, • Client and custodian hold keys jointly: The i.e. payment tokens, as well as other tokens, client and the custodian may agree on a such as utility and asset tokens, provided set-up, in which access to the crypto assets the latter qualify as so-called “DLT Rights”. 51

CAP8908 II&RR_p50_Homburger.indd 51 30/05/2019 16:44 The concept of “DLT Rights” shall be introduced Outlook with the DLT Draft Law and will allow for The consultation period on the Draft DLT Law the legally sound tokenisation of rights. In lasts until the end of June 2019. The draft bill particular, utility and asset tokens may in the will then be submitted to the Swiss parliament future be issued in the form of “DLT Rights” and and it remains to be seen to what extent the would hence also be in the scope of the new proposed new rules will be amended or changed segregation regime outlined above. However, as in this process. “DLT Rights” already benefit from protection in If the new rules enter into force as currently an insolvency of the custodian based on general planned, they will significantly increase legal principles of Swiss insolvency law, we believe certainty concerning segregation of crypto that this part of the Draft DLT Law should be assets especially payment tokens and data limited to “cryptobased means of payment”, i.e. and hence further improve Switzerland’s legal payment tokens. framework applicable to digitised business models. Segregation of data Not 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 Authors: segregated from the bankruptcy estate. The Stefan Kramer, Partner Swiss federal government therefore proposes Email: [email protected] to introduce a new provision in the DEBA, which establishes a right to request segregation of Urs Meier, Associate data if a custodian becomes insolvent. The party Email: [email protected] requesting such segregation must demonstrate that it has a particular entitlement to the data to Homburger AG be segregated, e.g. on a statutory or contractual Prime Tower basis. Examples relevant in this context include Hardstrasse 201 company data (such as for example client files 8005 Zurich or accounting data) that is stored in a cloud Switzerland and can no longer be accessed in the event of Tel: +41 43 222 1000 bankruptcy of the cloud provider. Website: www.homburger.ch

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Proposed reforms create cross-border opportunities in the UK

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

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.

Background notwithstanding certain reservations having On August 26, 2018 the UK Government been raised in relation to the specifics of published its response to the March 2018 particular proposals. Subject to such concerns Consultation Paper in relation to Insolvency being addressed, the reforms can be expected and Corporate Governance.1 In addition to to provide valuable additional tools for both responding to the March 2018 consultation, local and foreign companies seeking to the UK Government’s response sets out its restructure in the UK. proposals for reform following its 2016 Review of the Corporate Insolvency Framework. Moratorium The UK Government proposes three The UK Government has proposed the reforms, which appear to have taken particular introduction of a moratorium period, initially inspiration from certain commonly discussed for up to 28 days but with the possibility for features of the US Chapter 11 process, even an extension for a further 28 days or longer adopting US terminology in their discussion. where there remains a good prospect of Specifically, the proposals are for a new achieving a better outcome for creditors than moratorium on creditor enforcement during a might otherwise be possible. The moratorium rescue or restructuring process, a prohibition period will be available for distressed on enforcement of contractual termination companies which meet the eligibility tests clauses conditioned on the occurrence of and qualifying conditions, during which time insolvency proceedings (“ipso facto clauses”), creditors would not be able to take action and the introduction of “cram-down” within a against the company. new restructuring procedure modelled on the The details of the moratorium, including scheme of arrangement. the eligibility tests and qualifying conditions, The reforms put forward by the UK are subject to on-going comment from local Government appear to align with the recently practitioners and professional bodies, but it approved European directive on preventative is nonetheless clear that the proposal is restructuring frameworks which seeks to intended to address what has been an implement, inter alia, a moratorium period and unhelpful limitation on UK restructuring restructuring plans. It therefore seems that, processes to date. even following Brexit, the UK’s restructuring Under the current regime, other than regime will be closely aligned to the harmonised for certain small companies, a moratorium regimes of European member states. is only available for companies entering The proposed reforms have been cautiously administration, not for companies seeking welcomed by the UK restructuring profession, to avoid insolvency through the use of a 53

CAP8908 II&RR_p53_Skadden Arps.indd 53 30/05/2019 16:44 company voluntary arrangement or scheme contract where the supplier’s own solvency is of arrangement. Debtors proposing a scheme threatened by the continued supply. of arrangement have been able to achieve While this reform has the potential to a limited form of moratorium in respect of substantially improve the ability of distressed English proceedings, by requesting the court companies to maintain the operation of their hearing the relevant proceedings to order business, and to thereby preserve value, a stay as a matter of case management, through a restructuring process, the viability pending the outcome of the scheme.2 However, of the process to assist in cross-border cases no option for a broader court supervised is more limited. The primary difficulty will moratorium existed. The proposed moratorium relate to the enforceability of the prohibition will address this limitation, particularly for outside of the UK. For example, for English English debtors, and will be of value where companies with foreign assets, or which are foreign companies need to stave off English part of groups of companies with dispersed enforcement action (particularly in relation assets, enforceability of the prohibition will to English law governed obligations) during a likely depend on either the willingness of the scheme process. relevant foreign jurisdictions to implement In cross-border cases, adoption of the US the prohibition, or on the desire of foreign approach to enforcement of the moratorium suppliers to participate in the UK proceeding could result in a substantial increase in the (and to thereby submit to the jurisdiction). For effectiveness of the moratorium for both operations or assets in EU member states, the foreign companies and English companies with outcome is unclear due to Brexit, which at the foreign assets. The US courts treat moratorium time of writing remains unresolved. as an in personam order directed at and For English and foreign companies with enforceable against creditors, prohibiting English operations or assets, however, there is enforcement action throughout the world. scope for the prohibition to provide a valuable By contrast, the English approach to the additional tool when proposing a scheme of insolvency moratorium, at least to date in arrangement or plan of arrangement, as these respect of the administration process, is companies may be able to take advantage of largely procedural and territorial, as it does the prohibition to enhance certainty of outcome not restrict a creditor’s ability to take and value preservation in respect of its UK enforcement action against assets of a operations. company located abroad. The reforms will present an opportunity Restructuring plan for the UK to significantly enhance the The third, and potentially most significant, effectiveness of the moratorium by making proposal is the creation of a new restructuring clear that (subject to jurisdictional and comity plan procedure that may be proposed by solvent considerations) it applies to actions taken or insolvent companies, and which will be outside of the UK, and that compliance may be modelled on the existing process for schemes enforced by injunction, which it is to be hoped of arrangement. This proposal provides for will be considered. creditors to be grouped into classes based on similarity of rights or treatment, and the Ipso facto clauses creditors will then vote within their classes on The second proposal is a prohibition on the restructuring plan. Subject to the below, enforcing termination clauses in contracts the court would be able to approve a plan for the supply of goods or services or for where it has the support of 75% in value of the contractual licences that are triggered by voting creditors in each class, and a majority the entry of a contracting party into formal of the total value of unconnected creditors. insolvency proceedings, a pre-insolvency Importantly, the requirement for a majority of moratorium process, or a restructuring creditors by number, applicable to schemes of plan process. To ensure that suppliers are arrangement, would not apply. not disadvantaged, suppliers will be able to A principal feature of the restructuring plan apply to court for permission to terminate a is the availability of so-called “cross-class 54

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cram down” (that is, a plan may be approved restructurings is that the added flexibility will notwithstanding the 75% threshold not being likely permit parallel proceedings to be more met within all classes). The court will apply the easily aligned across jurisdictions. following tests, adapted from US Chapter 11 Although the features of the proposed provisions, to determine whether a class can restructuring plan procedure appear to create be crammed down: (i) the plan is in the best valuable additional options for cross-border interests of the creditors as a whole, through restructurings, a key factor which remains recognising that the economic rights of the unclear is the jurisdictional requirement to creditors are no worse off than they would be access the procedure. The UK Government following liquidation; and (ii) the claims of the has stated that it has not yet decided whether creditors in the dissenting class will be paid in companies that do not have their COMI in the full before a more junior class can receive UK should be eligible for the new procedure, any return under the restructuring plan – in but that it will continue to consider the issue of effect, a modified version of the US absolute jurisdiction in the context of Brexit. priority rule. It is to be hoped that the proposed Interestingly, under the proposal, the restructuring plan preserves the “sufficient court can also confirm a plan even where the connection” test applicable to schemes of absolute priority rule is not satisfied, provided arrangement. This test has proved sufficiently that: (i) it is necessary to achieve the aims of flexible to enable the use of schemes of the restructuring; (ii) it is just and equitable arrangement to implement transactions in the circumstances; and (iii) at least one where other options have not been available, impaired class of creditors has voted in favour while avoiding overreach due to the court’s of the plan. insistence that there be evidence of the The availability of cram-down will provide effectiveness, whether through recognition additional flexibility, but also pose challenges to proceedings or otherwise. be navigated by foreign debtors. At present, the In the event that the ultimate outcome common mechanism in an English restructuring of Brexit involves some type of negotiated to deal with out-of-the money stakeholders participation in the EC Insolvency Regulation, is to transfer assets through a pre-pack it would be possible that jurisdiction to administration sale, so that the out-of-the commence the proceeding for companies money creditors are effectively left behind, with incorporated in member states would be the assets and restructured debt transferred to limited to where the company has its COMI a newly capitalised company. This process can in the UK. Restricting access to the process be cumbersome for a foreign debtor which may in this way would limit the availability of the be able to establish a “sufficient connection” process for European companies with English for a scheme of arrangement, but not be able law debts which, particularly in light of the to establish jurisdiction for an administration. rule in Gibbs,3 have in the past looked to Shifting the centre of main interests (“COMI”) schemes of arrangement in order to achieve a of the relevant debtor is one option, however binding compromise. this can be time consuming and complex, particularly where the debtor is not merely a Conclusion holding company. There is as yet no indication of when the Foreign debtors will have to examine UK Government expects to implement the carefully the relevant rules in their jurisdiction proposals, although it might be expected that of incorporation to determine whether a the UK Government will press ahead as part of UK plan of reorganisation by which shares a range of post-Brexit reforms. Nevertheless, are cancelled will be recognised. Similar the proposals are well timed, demonstrating a difficulties have long faced foreign debtors in commitment to increase flexibility and promote Chapter 11, with local recognition or parallel a rescue culture, thereby maintaining the UK’s implementation procedures often required. position as an attractive, and constructive, A potentially significant additional benefit jurisdiction in which to implement cross-border of the restructuring plan for cross-border transactions. 55

CAP8908 II&RR_p53_Skadden Arps.indd 55 30/05/2019 16:44 Notes: Authors: James Falconer, Counsel 1 Corporate governance aspects of which were Tel: +44 20 7519 7214 discussed by Lance Ashworth QC et. al. in Email: [email protected] these pages last year. 2 See e.g. Bluecrest Mercantile BV v Vietnam Olivia Bushell, Associate Shipbuilding Industry Group [2013] EWHC Tel: +44 20 7519 7015 1146. Email: [email protected] 3 Antony Gibbs & Sons v Société Industrielle et Commerciale des Métaux (1890) 25 QBD Skadden, Arps, Slate, Meagher & Flom (UK) LLP 399. See also McCahill, D “The rule in Gibbs: 40 Bank Street, Canary Wharf An update”, International Insolvency and London E14 5DS, UK Restructuring Report 2018/19, p15. Website: www.skadden.com

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Proposed amendments to Chapter 15

by Stacy Lutkus, Drinker Biddle & Reath LLP

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.

Article I, Section 8 of the United States In connection with a suggested revision Constitution gives Congress the authority to regarding eligibility for filing a Chapter 15 “establish…uniform Laws on the subject of petition, the August 2018 Letter focuses on a Bankruptcies throughout the United States.”1 much-criticized decision by the United States It was the Bankruptcy Act of 1898 (the “Act”),2 Court of Appeals for the Second Circuit (the however, that first marked the beginning of the “Second Circuit”) in Drawbridge Special era of permanent federal bankruptcy legislation Opportunities Fund LP v. Barnet (In re Barnet).12 in the United States. In effect for 80 years, the The Barnet matter involved a petition by the Act was amended numerous times prior to liquidators of Octaviar Administration Pty Ltd. its repeal and replacement by the Bankruptcy (“Octaviar”), as foreign representatives, for Reform Act of 1978,3 which, as amended, recognition of Octaviar’s liquidation proceeding comprises the United States Bankruptcy Code in Australia as a foreign main proceeding.13 (the “Bankruptcy Code”) in its current form.4 The United States Bankruptcy Court for the Congress’s most sweeping reforms to the Act Southern District of New York (the “Bankruptcy took effect in 1938, with the enactment of the Court”) entered an order granting recognition.14 Chandler Act.5 It was in connection with the Drawbridge Special Opportunities Fund LP drafting of the Chandler Act that the National (“Drawbridge”), a lender and defendant that had Bankruptcy Conference (NBC) was created.6 opposed the petition for recognition based upon The NBC is an invitation-only, voluntary, the argument that the requirements set forth in non-partisan, not-for-profit organization section 10915 of the Bankruptcy Code – i.e., that composed of approximately 60 leading debtor must reside or have a domicile, a place bankruptcy scholars, practitioners and judges.7 of business, or property in the United States It has served as a resource to Congress on – apply in cases under Chapter 15 and that every significant piece of bankruptcy legislation Octaviar did not satisfy those requirements, filed since its formation.8 The NBC’s most recent a notice of appeal.16 The foreign representatives commentary on the Bankruptcy Code was and Drawbridge subsequently filed a joint submitted as an August 2018 letter9 to US application seeking certification for a direct congressional leaders10 regarding proposed appeal to the Second Circuit.17 revisions to Chapter 15 of the Bankruptcy Code In its opinion granting the application, in order “for Chapter 15 to fulfil its purposes, as the Bankruptcy Court explained that it had set forth in section 1501(a), and to function and determined to certify its recognition order for be interpreted in light of its international origin direct appeal based upon its conclusions that: and consistently with the application of similar 1. there was no controlling precedent governing statutes adopted by foreign jurisdictions, as set its holding “that a debtor within the meaning forth in section 1508.”11 of Chapter 15 is not required to have a 57

CAP8908 II&RR_p57_Drinker Biddle.indd 57 30/05/2019 16:45 domicile, residence, place of business or foreign proceeding shall be entered if: property in the United States”; 1. such foreign proceeding for which 2. the same issue was “a matter of public recognition is sought is a foreign main importance” that would “dramatically proceeding or foreign nonmain proceeding impact the jurisdiction of the United States within the meaning of section 1502; bankruptcy courts and the use of Chapter 2. the foreign representative applying for 15 to assist in the administration of cross- recognition is a person or body; and border insolvency cases and the legitimate 3. the petition meets the requirements of investigation of claims and assets in the section 1515 [imposing requirements United States”; and regarding the attachment of certain 3. a direct appeal would “materially advance the documents to the petition for recognition, progress of this Chapter 15 case.”18 the submission of a statement identifying Applying the plain meaning rule of statutory all foreign proceedings with respect to interpretation, the Second Circuit first observed the debtor, and English translations of the that section 103(a) of the Bankruptcy Code foregoing].26 provides that, other than with respect to an The mandatory language in section 1517 exception not relevant to the matter before – shall be entered – together with guidance it, Chapter 1 “of this title … appl[ies] in a case from the Supreme Court that “Congress under Chapter 15.”19 The court went on to says in a statute what it means and means conclude that because section 109 “of course[] is in a statute what it says there”27 certainly within [C]hapter 1 of [t]itle 11[,]” it is applicable supports a conclusion that nothing is required to petitions filed under Chapter 15 “by the beyond what is set forth therein. Since Barnet, plain terms of the statute[.]”20 Thus, the court however, bankruptcy courts within the Second (i) vacated the Bankruptcy Court’s recognition Circuit have imposed the requirements set order based on the absence of a showing that forth in section 109 on debtors in cases under the debtor satisfied the requirements of section Chapter 15.28 Moreover, at least one court 109(a), and (ii) remanded to the Bankruptcy outside the Second Circuit has expressly Court for further proceedings.21 adopted the Barnet holding and upheld the The August 2018 Letter is critical of the imposition of the section 109 requirements on Second Circuit’s “ostensibly ‘plain meaning’ a debtor in a Chapter 15 proceeding.29 Other interpretational approach” in Barnet.22 It courts have declined to adopt the Second describes the concept of a plain meaning Circuit’s holding.30 Leading scholars also have analysis as “rigid,” and notes that “[i]n the disagreed with Barnet; the August 2018 Letter United States … there is a decades long refers Congress to an article by two Conferees jurisprudential tradition of applying the principle “who were actively involved in drafting both the of ‘plain meaning’ as the first (and often the [United Nations Commission on International only) rule of statutory interpretation when Trade Law (UNCITRAL)] Model Law [on Cross- considering provisions of the Bankruptcy Border Insolvency] and Chapter 15” that Code.”23 As for Barnet itself, the August 2018 explains “in detail why Barnet is wrong.”31 Letter states simply, “Barnet is wrong[.]”24 It is arguable that the additional burden The NBC asserts that, contrary to the holding section 109(a) places on Chapter 15 debtors in Barnet, only the requirements specified in is inconsequential. It is a generally accepted section 1517 of the Bankruptcy Code must be view among courts that the smallest amount satisfied for recognition of a Chapter 15 case.25 of property in the United States satisfies the Section 1517 of the Bankruptcy Code requirements imposed by section 109(a). This addresses orders granting recognition, and is because section 109 “does not appear to provides, in relevant part, that: be vague or ambiguous, and it seems to have (a) Subject to section 1506 [allowing courts to such a plain meaning as to leave the Court refuse to take an action governed by chapter no discretion to consider whether it was the 15 if the action would be manifestly contrary intent of Congress to permit someone to obtain to the public policy of the United States], after a bankruptcy discharge solely on the basis of notice and a hearing, an order recognizing a having a dollar, a dime or a peppercorn located 58

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in the United States.”32 On remand from the the Judicial Conference.”43 The NBC submits Second Circuit in Barnet, the Bankruptcy Court that “[a]mending the statute to reverse Barnet found that the foreign debtor’s “claims or and preclude other courts from making the causes of action” against US entities comprised same mistake should be relatively easy” and “property in the United States” sufficient to proposes the addition of a sentence reading satisfy the requirements of section 109(a).33 The “This subsection does not apply in a case under Bankruptcy Court also noted that section 109(a) Chapter 15” be added to section 109(a).44 does not “direct that there be any inquiry into To date, Congress has not publicized any the circumstances surrounding the debtor’s action it has (or has not) taken based on the acquisition of the property.”34 August 18 letter, and it remains to be seen It likewise is arguable, however, that, as whether the proposed revision to section the August 2018 Letter asserts, “the contrived 109(a) or any of the other proposed revisions to property transfer solely to satisfy section Chapter 15 suggested by the NBC will lead to 109(a) exposes the recognition petition to a meaningful reform. For now, foreign debtors, challenge that it was not filed in good faith or foreign representatives, and their counsel was ‘manifestly contrary to public policy’.”35 should remain mindful of the requirements Indeed, Drawbridge made that exact argument imposed by the Bankruptcy Code and the on remand in Barnet.36 As did the Bankruptcy relevant jurisprudence in the applicable venue. Court on remand in Barnet, the court In re Suntech Power Holdings Co.37 rejected an Notes: argument that the establishment of a US 1 U.S. Const. art. I, § 8. bank account on the eve of filing a petition for 2 Ch. 541, 30 Stat. 544 (repealed 1978). recognition under Chapter 15 was improper, 3 Pub. L. No. 95-598, 92 Stat. 2549. explaining that “[i]nterpreting the Bankruptcy 4 See 11 U.S.C. §§ 101 et seq. Code to prevent an ineligible foreign debtor 5 Ch. 575, 52 Stat. 840 (1938) (repealed 1978). from establishing eligibility to support needed 6 See http://nbconf.org/about-us; see also Chapter 15 relief will contravene the purposes James Angell McLaughlin, Aspects of the of the statute to provide legal certainty, Chandler Bill to Amend the Bankruptcy Act, maximize value, protect creditors and other 4 U. Chi. L. Rev. 369, 376-77 (describing the parties in interest [ ] and rescue financially origins of the NBC to have evolved from troubled businesses.”38 “[t]wo referees, four lawyers, and one full In the August 2018 letter, the NBC submits time law teacher [having] met at a lawyer’s that Suntech “is an exemplar of all that is bad home in Wellesley, Mass., one [weekend] about the Barnet ruling.”39 According to the in June, 1932, and, pursuant to a declared NBC, “by creating an artificial but permeable intention to draft all necessary amendments obstacle to recognition, [Barnet] inadvertently to the Act by Monday next, [having] spent invites venue shopping” based on newly three days arguing about the definitions deposited assets.40 In addition to the foregoing, in section I”); 81 Cong. Rec. 8646 (1937) imposing the requirements of section 109(a) (describing, during congressional debate, the on petitions for recognition under Chapter various members of the National Bankruptcy 15 may thwart a primary purpose of the Conference and other organizations who UNCITRAL Model Law – that is, to allow for worked on the bill that would be adopted as the use of an ancillary proceeding to ensure the Chandler Act and explaining that there is global enforcement of the outcome of the main not “one word in this 290-page bill which has proceeding. This purpose is (or, at least, should not had the scrutiny of some of the very best be) independent of the debtor’s property.41 minds in [the bankruptcy] field in America”) The August 2018 letter notes that, in 7 See http://nbconf.org/about-us. Barnet, the Second Circuit “essentially invited 8 See id. Congress to revisit the drafting of section 9 See August 20, 2018 Letter from National 109(a)”42 by directing “the Clerk of Court to Bankruptcy Conference to Hon. Tom Marino, forward copies of [the] opinion to Congress Hon. David Cicilline, Hon. Chuck Grassley, following the specified protocol adopted by Hon. Dianne Feinstein (the “August 2018 59

CAP8908 II&RR_p57_Drinker Biddle.indd 59 30/05/2019 16:45 Letter”), available at http://nbconf.org/ B.R. 650, 654-55 (Bankr. S.D.N.Y. 2016); In re our-work. Berau Capital Resources Pte Ltd., 540 B.R. 10 The letter was addressed to the chairman 80, 81-82 (Bankr. S.D.N.Y. 2015). and the ranking member of each of the 29 See Jones v. APR Energy Holdings Ltd. (In re Subcommittee on Regulatory Reform, Forge Grp. Power Pty. Ltd.), No. 17-cv-02045- Commercial and Antitrust Law of the United PJH, 2018 U.S. Dist. LEXIS 23660, at *24 (N.D. States House of Representatives, and the Cal. Feb 12, 2018). Committee on the Judiciary of the United 30 In a bench ruling issued days after Barnet States Senate. See August 2018 Letter a judge in the United States Bankruptcy at 1. The letter is an update to a letter Court for the District of Delaware expressly originally sent in January 2016. See id; see disagreed with Barnet, which, the court also January 27, 2016 Letter from National noted, is not binding on courts outside Bankruptcy Conference to Hon. Tom Marino, the Second Circuit. See In re Bemarmara Hon. Hank Johnson, Hon. Chuck Grassley, Consulting a.s., No. 13-13037 (Bankr. D. Hon. Patrick J. Leahy (the “January 2016 Del. Dec. 17, 2013), ECF No. 38 at 8:23-24. Letter”), available at http:://nbconf.org/ The Bemarmara court surmised that “there our-work. is a strong likelihood that the Third Circuit, 11 August 2018 Letter at 2. For its part, the likewise, would not agree with” the decision. January 2016 Letter noted that, among other Id. at 8:25-9:2. See also Batista v. Mendes, things, “[c]ertain revisions would correct No. 17-24308-Civ-RNS, 2018 U.S. Dist. LEXIS judicial decisions that incorrectly interpreted 56239, at *2 (S.D. Fla. Apr. 2, 2018) (declining Chapter 15.” January 2016 Letter at 2. to adopt the holding in Barnet). 12 737 F.3d 238 (2d Cir. 2013). 31 August 2018 Letter at 6 (citing Daniel M 13 Id. at 241. Glosband and Jay Lawrence Westbrook, 14 See id. Chapter 15 Recognition in the United States: 15 Under section 109(a) of the Bankruptcy Code, Is a Debtor “Presence” Required?, 24 Int’l “only a person that resides or has a domicile, Insolvency Rev. 28 (2015)). a place of business, or property in the United 32 In re McTague, 198 B.R. 428, 432 (Bankr. States … may be a debtor under this title.” 11 W.D.N.Y. 1996) (finding that a foreign U.S.C. §109(a). individual with $194 in a U.S. bank account 16 See id. was eligible to be a debtor under the 17 See id. Bankruptcy Code). 18 Id. (quoting Mem. Op. in Supp. of Certification 33 In re Octaviar Admin. Pty Ltd., 511 B.R. 361, of Direct Appeal to the Court of Appeals for 369 (Bankr. S.D.N.Y. 2014). The Bankruptcy the Second Circuit at 6, 9, In re Barnet, No. Court further found that, although it did not 12-13443, ECF No. 47 (Bankr. S.D.N.Y. Nov. need to reach the issue, Octaviar also had 28, 2012)). property in the United States “in the form of 19 Id. at 247; see also 11 U.S.C. § 103(a). an undrawn retainer in the possession of the 20 Barnet, 737 F.3d at 247. [f]oreign [r]epresentatives’ counsel[,]” which 21 Id. at 251. retainer the foreign representatives had 22 August 2018 Letter at 2. transferred to counsel after the Second Circuit 23 Id. at 2, 12. opinion remanding the matter but before 24 Id. at 6. the foreign representatives filed the second 25 Id. petition for recognition that was before the 26 11 U.S.C. § 1517(a). Bankruptcy Court on remand. See id. at 372. 27 Hartford Underwriters Ins. Co. v. Union 34 Id. at 373. Planters Bank, N.A., 530 U.S. 1, 6 (2000) 35 August 2018 Letter at 5. (internal quotation marks and citation 36 See In re Octaviar Admin. Pty Ltd., 511 B.R. at omitted). 372. 28 See, e.g., In re U.S. Steel Can. Inc., 571 37 520 B.R. 399 (Bankr. S.D.N.Y. 2014). B.R. 600, 610 (Bankr. S.D.N.Y. 2017); In re 38 Id. at 412-413. Inversora Eléctrica de Buenos Aires S.A., 560 39 August 2018 Letter at 5 n.14. 60

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40 August 2018 Letter at 5. Author: 41 See Donald S. Bernstein et al., Barnet and Stacy A. Lutkus, Counsel Bemarmara Must a Foreign Debtor Have US Drinker Biddle & Reath LLP Assets to be Eligible for Relief Under Chapter 321 Great Oaks Blvd. 15 in the United States?, The International Albany, NY 12203 Insolvency Review 9 (2d Ed. 2014). US 42 August 2018 Letter at 6. Tel: +1 518 862 7476 43 Id. (quoting Barnet, 737 F.3d at 251). Email: [email protected] 44 Id. Website: www.drinkerbiddle.com

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Drinker Biddle & Reath LLP GLAS 321 Great Oaks Blvd. 45 Ludgate Hill Albany, NY 12203 London EC4M 7JU US UK Tel: +1 518 862 7476 Tel: +44 (0)20 3597 2940 Email: [email protected] Email: [email protected] Website: www.drinkerbiddle.com Website: www.glas.agency Counsel: Stacy A. Lutkus Legal Counsel: Simon Schiff Head of Trustee and Escrow Services: Ernst & Young LLP Paul Cattermole 1 More London Place London SE1 2AF Homburger AG UK Prime Tower Tel: +44 (0)20 7951 9898 Hardstrasse 201 Email: [email protected] 8005 Zurich Website: www.ey.com Switzerland Executive Assistant: Lucy Clarke Tel: +41 43 222 10 00 Email: [email protected] Fellner Wratzfeld & Partner Website: www.homburger.ch Rechtsanwälte GmbH Partner: Stefan Kramer Schottenring 12 A-1010 Vienna International Insolvency Institute Austria P.O. Box 249 Tel: +43 1 537 70-311 Stanardsville, VA 22973 Email: [email protected] US Website: www.fwp.at Tel: +1 434 939 6003 Partner: Dr. Florian Kranebitter, LL.M. Email: [email protected] Website: www.iiiglobal.org Felsberg Advogados Administrative Director: Shari Bedker Avenida Cidade Jardim, 803 - 5º andar São Paulo - SP Loyens & Loeff CEP 01453-000 – Brazil 20, rue Edward Steichen Tel: +55 11 3141 9100 L-2540 Luxembourg Email: [email protected] Tel: +352 46 62 30 314 Website: www.felsberg.com.br Email: [email protected] Partner: Thomas Felsberg Website: www.loyensloeff.com Partner: Anne-Marie Nicolas Gilbert + Tobin Level 35, Tower Two Milbank LLP International Towers 55 Hudson Yards 200 Barangaroo Avenue New York, NY 10001 Barangaroo US NSW 2000, Australia Tel: +1 212 530 5100 Tel: +61 2 9263 4000 Email: [email protected] Email: [email protected] [email protected] Website: www.gtlaw.com.au [email protected] Partner: Peter Bowden Website: www.milbank.com Partner: Abhilash Raval Partner: Lauren Doyle

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Peña Briseño, Peña Barba, UNCITRAL Secretariat, Office of Legal Palomino Abogados Affairs, United Nations Florencia 14 Vienna International Centre Colonia Juárez P.O. Box 500 Zona Reforma 1400 Vienna Ciudad de México. C.P. 06600 Austria Mexico Email: [email protected] Tel: +52 55 5426 0909 Website: uncitral.un.org Email: [email protected] Legal Officer: Samira Musayeva Website: www.penabriseno.com Partner: Luis Femando Palomino Bernal Walkers 190 Elgin Avenue PUNUKA Attorneys and Solicitors George Town Plot 45, Oyibo Adjarho Street, off Ayinde Grand Cayman, KY1-9001 Akinmade Street, off Admiralty Way Cayman Islands Lekki Peninsula Phase 1 Tel: +1 345 949 0100 Lagos Email: [email protected] Nigeria Website: www.walkersglobal.com Tel: +234 1 270 4791 Partner: Neil Lupton Email: [email protected] Website: www.punuka.com White & Case General Manager, Practice: Angela Ezenweani Biblioteksgatan 12 Box 5573 Skadden, Arps, Slate, Meagher & SE-114 85 Stockholm Flom (UK) LLP Sweden 40 Bank Street Tel: +46 708 733 222 Canary Wharf Email: [email protected] London E14 5DS Website: www.whitecase.com UK Partner: Carl Hugo Parment Tel: +44 (0)20 7519 7000 Email: [email protected] [email protected] Website: www.skadden.com Counsel: James Falconer Associate: Olivia Bushell

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