The Dubai World Tribunal and the Global Insolvency Crisis

By Jayanth Krishnan (Indiana—Bloomington)

In 2009, as markets from the United States to Europe to the Global South shook, one country—the United Arab Emirates—found itself on the brink of economic collapse.  The U.A.E’s Emirate of Dubai was contemplating defaulting on $60 billion of debt it had amassed.  Recognizing that such a default would have cataclysmic reverberations across the globe, the government of Dubai turned to a small group of foreign consultants for assistance.  The resulting legal experiment demonstrates how aspects of American corporate bankruptcy law can be imported into and prove useful in the context of a foreign legal tradition. During the crisis, insolvency lawyers from the U.S. law firm of Latham & Watkins, analysts from the New York-based investment bank Moelis, and accountants from PwC – together with local domestic counterparts and experts from the U.K.– devised a highly sophisticated plan that helped the Emirate address the economic crisis in which it found itself.  As part of this plan, Chapter 11 and Chapter 15 principles from the U.S. Bankruptcy code, the 2/3 cram down technique on hold-out creditors, and an Anglo-American insolvency tribunal were introduced into Dubai in order to bring about economic stability and handle the highly complex cases that arose during the financial crisis. By respecting and interpreting U.A.E. law, the tribunal has maintained its legitimacy in the eyes of the Dubai government even as it has drawn on Anglo-American insolvency concepts.

On December 13, this study will be formally presented at a public event in Dubai by Indiana-Bloomington’s Center on the Global Legal Profession, where insolvency experts and policymakers from the U.S., Dubai, and the U.K. will be present.

The full article can be found here.

Restructuring Sovereign Debt after NML v. Argentina

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton) and Mitu Gulati (Duke University School of Law)

 

The decade and a half of litigation that followed Argentina’s sovereign bond default in 2001 ended with a great disturbance in the Force. A new creditor weapon had been uncloaked: The prospect of a court injunction requiring the sovereign borrower to pay those creditors that decline to participate in a debt restructuring ratably with any payments made to those creditors that do provide the country with debt relief. For the first time holdouts succeeded in fashioning a weapon that could be used to injure their erstwhile fellow bondholders, not just the sovereign issuer. Is the availability of this new weapon limited to the aggravated facts of the Argentine default or has it now moved permanently into the creditors’ arsenal? Only time (and future judicial decisions) will tell. In the meantime, however, sovereigns will occasionally find themselves in financial distress and their debts will occasionally need to be restructured. Venezuela already casts this chilly shadow over the sovereign debt market. If, in a galaxy not too far away, sovereign debt workouts are to have any chance of an orderly completion, a method must be found to neutralize this new weapon.  Judging by the secondary market prices of different series of Venezuelan sovereign bonds, large amounts of money are being wagered that this cannot be done.

Argentina’s holdouts argued that they must be paid in full if Argentina wanted to make any payments to the creditors that accepted the country’s restructuring offers in 2005 and 2010. Those creditors had accepted a roughly 75 percent haircut in the value of their claims. But the holdouts were not offering to share with those old creditors any portion of a preferential recovery that the holdouts might be able to extract from Argentina. Why? Because the bonds that had been tendered in the restructurings of 2005 and 2010 had been canceled. The clause in those instruments that the holdouts now pointed to as the basis for their demand for a “ratable” payment whenever Argentina made a payment to its restructured lenders had been extinguished in the bonds previously held by those old lenders. So no contractual basis existed for the old creditors to assert a reciprocal claim against the holdouts.

It didn’t have to be this way. A future workout of New York law-governed sovereign bonds could be structured so that any bonds tendered by participating creditors are kept alive in a kind of deep freeze, available to assert a reciprocal claim against any holdouts who subsequently extract a preferential recovery from the sovereign issuer. The sauce that is flavorful for the goose thus becomes an equally suitable condiment for the gander.

The full article may be found here.

When Do Laws and Institutions Affect Recovery Rates on Collateral?

By Hans Degryse, Vasso Ioannidou, Jose Maria Liberti, and Jason Sturgess

The effect of bankruptcy laws and institutions governing enforcement on firm borrowing, investment, and growth has been studied extensively in the economics and finance literature using mainly country-level data. Due to the lack of micro-level data, the same literature has been silent on the underlying economic channels through which weak laws and institutions affect debt contracting.

In order to fill this gap, we study how laws and legal institutions that shift bargaining power between creditors and debtors in the event of default affect expected recovery rates on assets pledged as collateral in secured lending transactions. In particular, we study empirically the determinants of expected recovery rates on different types of collateral using a detailed loan-level dataset of secured loans made by a single bank across emerging market countries. We are able to pin-point the actual mechanism through which better law and stronger enforcement of secured loans can translate into lending: the effect of creditor rights and asset types on the bank’s expected recovery rates.  Our results suggest collateral that is movable (machinery, equipment, inventory, and accounts receivable), more asset specific, more susceptible to agency concerns, or faster to depreciate exhibits lower expected recovery rates since they are more vulnerable to laws and institutions.

For the full article, please click here.

S.D.N.Y. Holds that Avoidance Powers Can be Applied Extraterritorially

By Fredric Sosnick, Douglas P. Bartner, Joel Moss, Solomon J. Noh and Ned S. Schodek of Shearman & Sterling LLP

On January 4, 2016, in one of the recent decisions In re Lyondell Chemical Company, et al., the U. S. Bankruptcy Court for the Southern District of New York deviated from S.D.N.Y. precedent and held that, despite the absence of clear Congressional intent, the avoidance powers provided for under Section 548 of the Bankruptcy Code can be applied extraterritorially. As a result, a fraudulent transfer of property of a debtor’s estate that occurs outside of the United States can be recovered under Sec. 550 of the Bankruptcy Code.

The lack of clear Congressional intent that avoidance powers apply to foreign transactions was the basis for prior decisions in the S. D. N. Y., which took the opposite view and held that the avoidance powers only apply domestically.  Those courts reasoned that if Congress intended for the avoidance powers to have extraterritorial reach, it could have so stated either the relevant statutory provisions governing avoidance actions under the Bankruptcy Code or in Sec. 541 itself.  In the current decision In re Lyondell, judge Gerber expressed his respectful disagreement to the extent that his decision is inconsistent with prior decisions recognizing the general presumption against extraterritoriality absent explicit language to the contrary. This ruling furthers uncertainty in the S. D. N. Y. as to whether transfers that occur abroad may be avoided in a Chapter 7 or 11 case.

The full memo is available here.

Restructuring the European Business Enterprise: The EU Commission Recommendation on a New Approach to Business Failure and Insolvency

By Horst Eidenmueller and Kristin van Zwieten, University of Oxford

In 2014, the European Commission issued a recommendation on the design of restructuring laws in EU Member States (the “Restructuring Recommendation,” or RR). It was followed in 2015 by the enactment of a recast version of the European Insolvency Regulation (EIR). These initiatives were intended to be complementary: the former was designed to improve the procedures available under national law for the restructuring of business debtor liabilities; the latter to improve the efficacy of these procedures in cross-border cases. Both initiatives have been driven by the view that the existing legal infrastructure for (cross-border) business restructurings in Europe is inadequate.

In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that although the two initiatives were intended to be complementary, they do not dovetail perfectly: procedures of the kind contemplated in the RR will not necessarily be eligible to fall within the scope of the recast EIR, so as to benefit from its rules on recognition and enforcement in cross-border cases.

In relation to the RR, we find that the Commission is right to push towards some level of harmonisation in Member States’ restructuring laws – regulatory competition is not a sensible regulatory alternative. However, we criticise both the methodology and scope of the RR, which leaves significant room for residual diversity in Member States’ laws, and ignores the complicated interaction between Member States’ existing insolvency laws and the restructuring procedures contemplated by the Commission.

We also take issue with some of the substantive recommendations made for the design of such procedures, arguing that the Commission wrongly requires evidence of financial difficulties or a likelihood of insolvency as the entry test, and that the process it contemplates is susceptible to abuse by sophisticated financial creditors at the expense of outside creditors and/or the debtor. We propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency provided that it is economically viable and that the filing is not abusive.

For the full article see here.

A Constitutional Review of the Draft ‘Macron’ Law Introducing Shareholder Eviction under French Law: The Revolution that Didn’t Happen

By Sophie Vermeille, Jérémy Martinez & Frank-Adrien Papon

In a politically controversial attempt to modernize the French economy, French Minister of the Economy Emmanuel Macron had passed a sweeping law earlier this year, reforming many areas of French business law, including bankruptcy law.  For the first time under French law shareholder removal from decisionmaking will be available for decisions affecting the future of a distressed company.  This law is a step in the right direction to force shareholders to absorb the company’s losses and allow new shareholders to invest fresh money.

Unfortunately, the French government failed to use modern, world-class economic standards to govern a shareholder removal under the new law.  First, by retaining an antiquated trigger of liquidity crisis instead of actual insolvency, the law fails to consider the enterprise value of the company as the proper economic basis to recognize that shares have become worthless, an essential element to provide legitimacy for their removal.   Second, by requiring that a judge justify their removal by finding a “public necessity” to avoid a risk of “serious loss to the economy”, the law offers a weak constitutional safeguard for property rights, a loosely defined public interest standard, and little guidance for a judge to avoid arbitrary decisions and political pressure. This lack of economic and conceptual basis has unfortunately transformed a genuinely potentially useful attempt to reform French law into an inadequate and possibly even unconstitutional new law.

To read the full article see here.

Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?

By Daniel M. Glosband, Goodwin Procter LLP, and Jay Lawrence Westbrook, The University of Texas School of Law

Glosband_M_Daniel WestbrookIn a recent case, In re Barnet, 737 F. 3d 238 (2d Cir. 2013), the Court held that section 109(a) of the Bankruptcy Code bars a foreign bankruptcy proceeding from recognition under Chapter 15 unless the debtor in the foreign proceeding also has a presence in the United States. The Court professed to use a plain meaning rule, but its plain meaning approach and its conclusion that section 109(a) applied to recognition were inappropriate for several reasons:

1) since the term “debtor”  is defined differently in Chapter 15 than in section 101(13), it cannot have a “plain” meaning for Chapter 15 purposes;

2) while it is plain that section 103(a) applies Chapter 1 to Chapter 15, the way in which section 109(a) functions in relation to Chapter 15 is not straightforward and requires a structural analysis that the Court sidestepped;  and

3) the Congressional mandate in section 1508—which requires that, in interpreting Chapter 15, courts shall consider its international origin and the need to promote an application that is consistent with the needs of international insolvency practice—requires flexibility, not rigid literalism.

Section 109(a) should not apply to recognition of a foreign proceeding. The Barnet decision represents a stubborn adherence to literal statutory interpretation when the statutory provisions at issue prima facie were not susceptible to literal interpretation and when Congress instructed courts to look beyond the statute for guidance in harmonizing Chapter 15 with the Model Law.

This is a brief summary of a much longer article forthcoming in the International Insolvency Review. For the full article see here. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd.

Corporate Bankruptcy Tourists

By Oscar Couwenberg & Stephen J. Lubben

Insolvency procedures are not designed for corporate group, but for individual debtor corporations. This becomes an especially important issue when corporations have international operations.

When such a corporate group becomes financially distressed, then different national insolvency procedures will claim jurisdiction over assets and debts of the corporation, the consequence of which is an uncoordinated wealth-destroying piecemeal sale of assets. The obvious solution is to look for a single forum that can address an entire firm’s financial distress.

In this paper we argue that chapter 11 of the United States Bankruptcy Code, and to a lesser extent also the UK scheme of arrangement under the Companies Act 2006, can be considered such bankruptcy havens for corporate bankruptcy tourists.

We construct a database of foreign debtors initiating a chapter 11 case over the period 2005 to 2012. In total our dataset includes 316 corporate debtors, organized in 49 corporate groups.

What we find is that corporations with mobile assets, with subsidiaries in many jurisdictions, or both, are the most frequent tourists in chapter 11. We further discuss why chapter 11 and its competitor in the UK render a trans-national insolvency system superfluous. We expect these two jurisdictions to see increasing amounts of “tourist” activity as Europe moves from its traditional reliance on bank financing to more frequent use of North American style high yield bond markets.

The full version of this article is available here.

The Evolution of European Insolvency Law Part 3: The EU Parliament’s Report on the Amendment of the European Insolvency Regulation (EIR)

By Robert Arts and Dr. Björn Laukemann (Maîtr. en droit)

Robert Arts Laukemann PicAfter the external evaluation of European Insolvency Law (Part 1) and the European Commission’s proposal for the amendment of the EIR (Part 2), the report of the European Parliament (EP) on this proposal marked the latest stage of the reform process.

While the Parliament generally supports the changes proposed by the Commission and many of its amendments simply clarify wording or align the text with the existing legislation, the draft report made some noteworthy revisions:

  1. To prevent abusive venue-shopping, the draft requires the factual circumstances of the debtor’s centre of main interests to be established three months prior to the opening of insolvency proceedings.
  2. While welcoming the introduction of synthetic proceedings (i.e. the granting of special rights to groups of local creditors in order to avoid the opening of secondary insolvency proceedings) the EP strengthens the procedural standing of the local creditors by:

(i) granting them the power to challenge any decision to postpone or refuse the opening of secondary proceedings;

(ii) allowing them to petition the court conducting the main proceeding to take protective measures, e.g. by prohibiting the removal of assets or the distribution of proceeds, or by ordering the administrator to provide security; and

(iii) empowering the court to appoint a trustee to safeguard their interests.

  1. The coordination and cooperation between administrators appointed in different proceedings within a group of companies is further enhanced by the implementation of an independent coordinator who, for instance, is empowered to present a non-binding, court-approved group coordination plan, to mediate in disputes between insolvency representatives of group members, or to request a stay of proceedings with respect to any member of the group.

As a result, the Parliament report  aims to strengthen the role of main insolvency proceedings while still sufficiently considering interests of local creditors and to improve coordination within groups of companies. The draft is expected to pass the European Council by the end of this year.

See the full report here.

Emerging Economies and Cross-Border Insolvency Regimes: Missing BRICs in the International Insolvency Architecture

By Steven T. Kargman, President, Kargman Associates

SK-Roslyn (July '14) (1) Many of the world’s major advanced economies are subject to some form of cross-border insolvency regime, such as Chapter 15 in the United States. However, despite this clear and important progress in the adoption of cross-border insolvency regimes among many advanced economies, there appears to be a glaring gap in the international insolvency architecture. Specifically, very few of the major emerging economies – and, in particular, none of the BRIC countries (Brazil, Russia, India and China) – have adopted the UNCITRAL Model Law on Cross-Border Insolvency or otherwise enacted effective alternative regimes for handling cross-border insolvencies.

With their growing integration into the global economy, these emerging economies may face a rising number of cross-border insolvencies at some point in the coming years. Nonetheless, while the current absence of cross-border insolvency regimes in major emerging economies may not represent an immediate problem in the next few years, it may pose challenges for the international insolvency framework over the longer term given that these economies are playing an increasingly important role in the global economy.

This two-part article, originally published in 2012-2013 in Insolvency and Restructuring International, reviewed the status of the adoption among major emerging economies of comprehensive insolvency regimes along the lines of the UNCITRAL Model Law and outlined possible pathways that emerging economies might pursue that could lead to the adoption of such cross-border insolvency regimes in these jurisdictions. The article also explored intermediate steps that emerging economies might adopt as a means of growing more comfortable with the concepts that are central to any meaningful cross-border insolvency regime.  Such intermediate steps might serve to pave the way ultimately for the adoption by these emerging market jurisdictions of a more comprehensive cross-border insolvency regime.

Part I of the article (September 2012) can be found here and Part II (April 2013) can be found here.  (This article was first published in Insolvency and Restructuring International, Vol. 6 No. 2, September 2012 and Vol. 7 No. 1, April 2013, and is reproduced with the kind permission of the International Bar Association, London, UK © International Bar Association.)

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