More Multi-National Companies Take Advantage Of Flexible US Restructuring Process
By Van C. Durrer, II
Posted: 21st February 2014 09:00
While the scope of multi-national companies’ use of US restructuring techniques remains unclear, the anecdotal evidence seems to be mounting—Hibu PLC, Lone Pine Resources, Zlomrex International Finance SA (an affiliate of Cognor SA), Maxcom Telecomunicaciones S.A.B. de C.V., and XChange Technology Group LLC have all commenced US insolvency proceedings in recent months. Many of these multi-national companies have headquarters located outside of the US or their operations are conducted largely overseas or otherwise globally. Nonetheless, the maturity and flexibility of US restructuring processes may offer these companies a credible means of enhancing the success of their overall restructuring. Some multi-national companies prefer Chapter 11 because, among other advantages, incumbent management remains in control of the restructuring process, there is an automatic stay of collection actions against the debtor, the debtor has the power to “cramdown” dissenting creditors and the proceedings are conducted before specialised bankruptcy judges. An alternative technique, Chapter 15, requires a foreign proceeding pending elsewhere, but offers certain key advantages of Chapter 11 with respect to property of the debtor located within the US.
Under the US Bankruptcy Code, eligible debtors include an entity that has “resides or has a domicile, a place of business, or property in the United States.” 11 U.S.C. Section 109(a). A Chapter 11 case may be commenced in a venue where such domicile, residence or principal place of business is located. 28 U.S.C. Section 1408. In many states, such as Delaware, where many companies are incorporated, the stock of a company is deemed to be located in its state of incorporation. Accordingly, a multi-national company that owns a subsidiary that is incorporated within the US will typically have “property in the United States” and thus have a basis for bankruptcy jurisdiction in the U.S.
Jurisdiction alone, however, is insufficient to support a viable Chapter 11 reorganisation. The debtor must also be capable of consummating a reorganisation. This requires, among other things, that the plan of reorganisation be proposed in good faith. 11 U.S.C. Section 1129(a)(3). In analysing the existence of good faith, courts typical examine the nexus between the United States laws and courts and the obligations the debtor seeks to restructure. Because it is not unusual for a multi-national company to access the U.S. capital markets for debt or equity capital, it should no come as a surprise to creditors or equity holders that such an entity would seek to restructure those same obligations in the US courts, and such a nexus in fact exists. In fact, given the maturity, sophistication and predictability that the US Bankruptcy Courts enjoy in the marketplace, it is likewise not unusual for a debtor’s stakeholders to prefer a US Chapter 11 to overseas alternatives.
Whereas Chapter 11 involves a plenary, stand-alone reorganisation case, Chapter 15 contemplates a foreign proceeding or proceedings, pending in another country, and the debtor or a trustee or administrator appointed in that foreign proceeding requires the cooperation of the US courts in order to implement the overall restructuring. Among other requirements, the foreign proceeding must be a proceeding that is judicial or administrative in character, collective in nature, for the purpose of reorganisation or liquidation where the debtor’s assets and affairs are subject to the control or supervision of a foreign court. 11 U.S.C. Section 101(23). The debtor or a representative of the debtor appointed in the foreign proceeding must seek recognition of the foreign proceeding before the automatic stay and other protections under the US Bankruptcy Code apply, although the debtor can request that certain interim protections be applied on a provisional basis while recognition is sought. US courts will not grant recognition where such recognition would violate US public policy. 11 U.S.C. Section 1506. The attraction of Chapter 15 is that many of the procedural and technical burdens of a full plenary proceeding do not apply, but the Chapter 15 can be utilised to extend insolvency protection for a foreign company’s US assets as well as facilitate an insolvent multi-national company’s transactions involving US assets.
One of the most important considerations in determining whether a multi-national corporation can undertake a reorganisation in the U.S. is the ability to enforce the restructuring transaction (and, pending approval, the automatic stay) on foreign creditors. In other words, an order confirming a Chapter 11 plan of reorganization is of little utility if it cannot be effectively enforced overseas. First, the potential debtor must examine the law of the jurisdictions in which it operates. If the law where the debtor operates will enforce the order of a US Bankruptcy Court, a Chapter 11 can be successful.
Where the debtor’s home jurisdiction would not enforce the order of a US Bankruptcy Court, but US courts would enforce orders of the debtor’s home jurisdiction, Chapter 15 might be more suitable. Even assuming that the debtor’s overseas jurisdictions would not enforce the order of a US Bankruptcy Court, however, the debtor may yet be able to effectuate a viable Chapter 11—the debtor must next examine the creditors and other stakeholders it seeks to bind by its plan of reorganisation. If the debtor can enforce the confirmation order against those stakeholders within the US, then the Chapter 11 can still work. For this analysis, the debtor must determine if the creditor or stakeholder does business or otherwise has assets within the U.S. For instance, many banks around the world have operations or branches within the U.S. Bankruptcy Courts will often permit a debtor to enforce their confirmation orders against such U.S. branches. In this way, a debtor can achieve effective enforcement of a confirmation order such that its plan of reorganisation remains viable. Again, in the absence of such indirect methods of enforcement, a Chapter 15 might still help the debtor accomplish its goals.
Of course, the debtor may need to make calculated choices about how to restructure. For example, the debtor may be able to right-size its capital structure by converting public debt in the U.S. into equity, but it might face substantial challenges in rejecting contracts with overseas vendors who do not have sufficient nexus in the United States. In those situations, the debtor will make strategic decisions about whether the efficient balance sheet restructure in the U.S. is a better pathway than a more traditional insolvency proceeding in its “home” jurisdiction where it can also impair trade debt and contracts. Techniques to impair trade debt and contracts are not automatically available in Chapter 15, but they may be requested from the US Bankruptcy Court under appropriate circumstances.
We anticipate seeing more and more multi-national companies utilise Chapter 11 and Chapter 15 as a viable restructuring tool, regardless of the country of their organisation. Of course, all debtors must still undertake careful planning and seek out thoughtful advice regarding alternatives as well as any pitfalls of pursuing a formal reorganisation process in the US.