INSOL International Global Insolvency Practice Course Module A
INSOL International Global Insolvency Practice Course Module A Royal Suite Grange St. Paul’s Hotel Monday 7 th November Wednesday 9 th November 2016
Day One
Welcome G. Ray Warner, Course Leader St. John's University School of Law Of Counsel, Greenberg Traurig LLP, USA
Core Committee Course Leader: G. Ray Warner, St. John's University School of Law Of Counsel, Greenberg Traurig LLP, USA Jan Adriaanse, Leiden University, The Netherlands Scott Atkins, Henry Davis York, Australia (Fellow & Board Director INSOL International) Ian F. Fletcher, University College London Rosalind Mason, Queensland University of Technology, Australia Paul Omar, Barrister (non-practising), UK Michael Veder, Radboud University Nijmegen, The Netherlands
Group of Thirty-Six Alix. Partners LLP Allen & Overy LLP Alvarez & Marsal LLC Baker & Mc. Kenzie LLP BDO LLP BTG Global Advisory Cadwalader, Wickersham & Taft LLP Chadbourne & Parke LLP Clayton Utz Cleary Gottlieb Steen & Hamilton LLP Clifford Chance Conyers Dill & Pearman Davis Polk & Wardwell De Brauw Blackstone Westbroek Deloitte Dentons DLA Piper EY Ferrier Hodgson Freshfields Bruckhaus Deringer Goodmans LLP Grant Thornton Greenberg Traurig LLP Hogan Lovells Huron Consulting Group Jones Day Kaye Scholer LLP King & Wood Mallesons Kirkland & Ellis LLP KPMG LLP Linklaters LLP Morgan, Lewis & Bockius LLP Norton Rose Fulbright Pepper Hamilton LLP Pinheiro Neto Advogados PPB Advisory Pw. C Rajah & Tann Asia RBS RSM Shearman & Sterling LLP Skadden, Arps, Slate, Meagher & Flom LLP South Square Weil, Gotshal & Manges LLP White & Case LLP
Housekeeping • Coffee Breaks and Lunch – timing • Mobile telephone & Blackberry switched off • Assessment forms – completion & return
A Framework for, and Concepts and Instruments of International Insolvency Andre Boraine University of Pretoria South Africa
Framework for discussions • Section A: General Background • Section B: Sources and nature of international insolvency • Section C: Harmonization of National insolvency laws
SECTION A: GENERAL BACK-GROUND • Framework • Core terminology • Comparative aspects
A. 1. Framework – A. Essence / nature – B. Policy considerations – C. Sources – D. Similarities / differences Corporate v Consumer – E. Gateways and commencement
A. 1. Framework – F. Effects • • • F. 1. Automatic stay (moratorium) F. 2. Estate assets (local & foreign) F. 3. Personal effects and liability F. 4. Executory contracts F. 5. Set-off and netting F. 6. Avoidable dispositions – A. 2. Terminology
A. 3. 2 Some global developments • America – – Review commission 1973 1978 Bankruptcy Code (Unified Act) Fresh start Reform late 1990’s – • 2005 Amendments: chapter 15 –CBIL (adopted version of UNCITRAL Model Law on Cross-Border Insolvency) • England – – Cork report of the 1980’s Insolvency Act of 1986 (Unified At) Insolvency Act 2000 and Enterprise Act 2002 CBIL: s 426, Ins R 2006(Model Law), EU Ins R • EU: Regulation and reforms (Recast)
A. 2. Some global developments • The Netherlands – Faillissementswet of 1897 – Fresh start – Shuldsaneringsregeling – Insolvency Reform • Africa – South Africa • • Insolvency Act of 1936 Not unified Act and Mixed legal system Reform Dual CBI law system (CBIL) – Western Africa: OHADA
A. 2. Some global developments • Australia – Harmer Report – Not single unified Act – CBI: 2008 Model CBIL • ASIA – China: 2006 PRC Bankruptcy Law – Asian Development Bank (ADB) – Hong Kong: English insolvency laws: • Personal: amended in 1996 • Companies: under review
A. 2. Some global developments • Former Eastern European countries: – Russia : 2002 Insolvency Act – Some even adopted Model CBIL, i. e. Poland – ERDB • South-America – Brazil: Bankruptcy and Restructuring law of 2005 – Mexico: Model CBIL – Cross-border treaties: Montevideo
SECTION B: THE SOURCES AND NATURE OF INTERNATIONAL INSOLVENCY: B 4 & 5: INTRODUCTION • What is Int Ins law/ CBIL ? : – No universal set of laws – National legal systems differ • Bankruptcy/ insolvency and • The general law (rights) • Wessels: insolvency rules which cannot be fully enforced… • Fletcher: …insolvency that transcends a national legal system… regard to other systems than domestic • Quest: predictability re rules that apply
Section B 4 & 5: Context of international insolvency: Introduction • General: – – – – Economic affairs with foreigners Interests in property in more than one country Contractual obligations in various countries Free markets/ different national laws Absence global - court, parliament, law Territorial: jurisdiction, local laws Approaches: • Insular • Cooperate
B. 5. Context of international insolvency – Sources for cooperation • In absence of legislation, treaty etc • Approach foreign court – Letters of request – Comity (reciprocity) – Court’s discretion • Legislation [discretion] • Treaty – Risk of multiple insolvencies: • Weaker creditors may loose out • Risk of fraud, asset dissipation across borders – Thus: dealings various jurisdictions, assets different jurisdictions, companies, groups
B. 5. Context of international insolvency • • Scenario 1: ABC Co. Incorporated in USA Branches in twenty jurisdictions Order in USA: effect? – How will/ may jurisdictions respond
B. 5. Context of international insolvency • Scenario 2: • ABC Co. holding company of affiliates/ subsidiaries in various jurisdictions – Difference? • Structure for dealing with crossborder matter
B. 5. Context of international insolvency: Terminology • Main proceeding: domicile; registered office; principal office? (COMI link) – universalilty – What law will regulate? • Non main proceeding: (secondary proceeding – establishment link) – modified universality – Local law will apply
B. 5. Context of international insolvency: Terminology • Concurrent proceeding – Different bankruptcy proceedings running concurrently • Various insolvency/ bankruptcy procedure opened ito respective local laws
B. 5. Some general difficulties in cross-border context • General topic: recognition of foreign judgments in absence of cross-border insolvency dispensation – PIL/ conflict or choice of laws • Technical meaning of insolvency – Balance sheet/ cash flow • Priorities/ preferential claims • Avoidance law • Rescue v liquidation • Funding/ contributions
B. 5. Context of international insolvency: Terminology • Labour dispensation • Estate representative and structure • Prior-acquired rights: securities
B. 5. Some general difficulties in cross-border context: early thoughts • Lex mercatoria • Difficulty to deal with this – absence world parliament and court • Inward v outward bound: approach court – Locus standi; access; recognition; relief; cooperation/ coordination • Treaty:
B. 5. Some general difficulties in cross-border context: early thoughts • Jitta - treaty with minimum requirements: – Jurisdiction – Publicity – Avoidance law rules – Equality of creditors – Jurisdiction – domicile • secondary places of interest
B. 5. The essence of a crossborder insolvency case • Fletcher poses 3 general questions: – In which jurisdiction must procedure be opened? – Which system must rule elements of diversity? – International effects to proceedings in a particular forum? • Two aspects: – Comity: recognition
B. 5. The essence of a crossborder insolvency case – Choice of law (Private international law ‘PIL’) • PIL gives direction amidst diversity’ • PIL principles universal? • But not even uniform PIL principles – jurisdiction – choice of law – international recognition
B. 5. Different approaches/ theories • Universality (Fletcher, Omar & Friman) – One procedure (unitary), co-ordination – Covers all the assets – Problems: administer worldwide scale, [lex concursus v lex loci] • Territoriality (‘grab rule’) – Procedure in each jurisdiction (plurality) • Unitary: one procedure • Plurality of proceedings
B. 5. Different approaches/ theories • Shades of theories: • Modified universality (Westbrook) • Cooperative territorialism (Lo. Pucki) – Conventions – Problem: Local asset protection • Contractualism (Rasmussen) – Company, articles of incorporation, nor real contract
B. 5. Different approaches/ theories • Internationalist principle (Fletcher) – Pragmatic approach to achieve • Treaty etc or in absence PIL • Universality must complement Territoriality • Cooperation between courts – Internationalist principle aspires to realise: • Ideals of collectivity maximum dividend on equal basis universally (equality of creditors) • Respect for pre-required rights in CB matters • Evolutionary process to attain global common pool
B. 5. Different approaches/ theories • Universality effects: – ‘Rough wash’ (swings and roundabouts) – Net gain – indirect advantages commerce: lowers costs
B. 5. Some further directions and difficulties • Omar: – Multiplicity of Proceedings-take more funds – Exercise control by limited number of courts desirable – Security over assets based on location of assets – Priorities – Rescue – one court best
B. 5. Some further directions and difficulties • Nadelmann: – Discriminatory rules regarding the treatment of foreign creditors – Lack of proper notice proceedings – Race of diligence – rush to enforce and execute • Omar: also lack of knowledge of foreign procedures, language time distance and cost
B. 5. Point of departure with crossborder case • Case (PIL) determinants: – Type of assets – Location – The court first issuing the order • Adhere: universalism or territorialism
B. 5. Important terms • Universality: Law of Main proceeding should apply and regulate: – control; – priority; – Avoidance; and – reorganisation • Territoriality • Inward bound request • Outward bound request
B. 5. Important terms • COMI: Other than place of incorporation, either headquarters (real seat) or its operations (like business, main assets. ) • DUAL COMI: Maxwell case: headquarters England but assets in USA (but prefer headquarters. ) • Ancillary or secondary proceedings • Concurrent jurisdiction and cooperation • Foreign representative • Recognition • Lex concursus • Lex loci rei sitae
B. 5. 4. Operation of some CB systems: RSA • Dual system in theory: – Common law: comity, convenience – Adopted model law (not operable yet)
B. 5. 4. England Wales • England Wales: s 426 IA Act – S 426(4) Courts in UK or any ‘relevant’ country, shall assist. – Relevant countries: 20 (not USA!) – Courts assist outside s 426 (common law) – Adopted Uncitral Model Law on Cross. Border Insolvency – EU Regulation ? ?
B. 5. 4. USA • Former s 304 of the USA BR Code – Universal effect, modified universality – Inward and outward requests – Factors for relief: • Comity: international duty and convenience (Hilton v Guyot) but sometimes not granted: – Public policy: Cost order English court – Where recognition inimical to US interests – Since 2005, Chapter 15 adopted Model Law
B. 5. 4. Pragmatic solutions: judicial & legislative: Applications to Court • Discretion of courts – See SA, (UK) – Comity – Forum conveniens/ non conveniens • Discretionary powers derived from legislation – unilateral statutory regulation – USA and Germany • Direct application without court’s discretion ?
B. 5. 4. Pragmatic solutions: judicial and legislative: Applications to Court • Protocol approach: coordination and cooperation – Maxwell served as example – IBA, Committee J: Concordat Guide • Principle 1: Single forum, primary responsible • Principle 2: Main forum to coordinate collection and distribution of assets, no discrimination, discharge • Principle 3: Multi forums, notification and participation
B. 5. 4. Management by treaty • Treaty – Conventional way to set uniform approach – Even out procedure and minimise exceptions re: • • • Priorities Avoidance rules Revenue claims Classes of creditors Asset recovery
B. 5. 4. Management by treaty • Types of initiatives – Limited: bilateral and multinational – Regional • Bilateral initiatives • Multi-lateral
B. 5. 4. Global initiatives: Instruments (Soft law) • World Bank • IMF (International Monetary Fund) • Asian Development Bank (ADB) • OECD (Org for Economic Development) • UNCITRAL(UN Com on Int Trade law) • IBA, committee J of IBA • More regional: – EU, American Law Institute (ALI, NAFTA), OHADA -Stability of international financial systems-
B. 6. Various international instruments: General • Wessels and Boon Chapter 1 • These instruments cover: – Cross-border aspects – Establishing international guidelines for local insolvency reform (harmonisation) – Related topics, like securities (general law)
B. 6. Various international instruments: General, Wessels 1. World Bank and IMF • After 1997 -1998 Asian Financial crisis, measures to improve stability • IMF 1999 policies to design insolvency system • World Bank Principles and Guidelines for Effective Insolvency and Creditor right Systems, 2001(2005) – Legal framework for creditor rights (principles 1 -5) – Legal framework for insolvency (p 6 -16)
B. 6. Various international instruments: CBI, EU Reg Wessels 22. EU Regulation • Uniform jurisdictional rules to be applied by all MS (except Denmark) • Choice of law provisions • Recognition of the proceedings and the liquidator • Addressing concerns of creditors (exceptions)
B. 6. Various international instruments: CBI, EU Reg • Revision (Wessels and Boon) – “[T]he need for five main shortcomings that her proposal aims to address: • The EIR excludes pre-insolvency proceedings, hybrid proceedings, and certain personal insolvency proceedings; • Application of the COMI principle has led to some difficulties as well as to allow forum shopping by relocating COMI;
B. 6. Various international instruments: CBI, EU Reg • Opening of secondary proceedings has shown to disturb efficient administration of the debtor’s assets; • There is currently no obligation to publicise the opening of proceedings, for lodging of claims; • creditors need to be aware of an insolvency proceeding; and • The EIR does not deal with the insolvency of groups of companies”
B. 6. Various international instruments: CBI, ALI Guidelines Wessels and Boon 18. Note also ALI’s Guidelines Court to Court Communications • 18. A. UNCITRAL Model Law on Cross. Border Insolvency: the judicial perspective [pre-release] (2011) • 18. B. UNCITRAL Practice Guide on Cross -Border Insolvency Cooperation (2009) • 18. C. Co guidelines
SECTION C: THE HARMONISATION OF NATIONAL INSOLVENCY LAWS How far will we come with cross border rules if we don’t harmonise national insolvency and related laws?
C. 7. The harmonisation of national insolvency laws • Some problems re CBI – No global parliament or court – National laws differ: both insolvency and general – Terminology • Initiatives to harmonise – World Bank Principles – IMF principles – OECD
C. 7. The harmonisation of national insolvency laws – Various regional initiatives: EU, ABD, IBA, ERBD, OHADA – UNCITRAL Guidelines 2004 • Comprehensive addressing basically all core aspects • Related initiatives: securities – Regional: EU, ADB – UNCITRAL: Securities
C. 7. The harmonisation of national insolvency laws • EU initiatives – Harmonise • Insolvency • Rescue • Related
C. 7. The harmonisation of national insolvency laws • Harmonise local laws? (OHADA) • Difficult areas for harmonisation, like: • voidable dispositions; • labour contracts; Special cases: i. e. labour contracts?
C. 7. The harmonisation of national insolvency laws • Types of claims: -Secured (securities) -Priorities • Next evolutionary step in EU?
SECTION D: Regulation of insolvency representatives • EBRD Principles: – P 1 – Qualifications & licensing generally – P 2 – Appointment in an insolvency case – P 3 – Review of office holder appointment – P 4 – Removal, resignation & death office holder – P 5 – Replacement of office holder – P 6 – Standards professional conduct – P 7 – Reporting and supervision
SECTION D: Regulation of insolvency representatives – P 8 – Regulatory and disciplinary – P 9 – Remuneration and expenses – P 10 – Release of office holder – P 11 – Insurance and bonding – P 12 – Code of ethics • EU Principles
Coffee Break
Introduction of UNCITRAL Model Law on Cross-border Insolvency Law G. Ray Warner St. John’s University of Law of Counsel. Greenberg Traurig LLP, USA
Lots of Variety Around the Globe • What types of Systems? – Typically liquidation systems – Modern trend • Rescue or reorganization systems – Many are modeled on U. S. Chapter 11 62
The World is Small • Assets can be moved easily – For legitimate or illegitimate reasons • Cross-border fraud is common – Recovery is difficult – Creditors may not want to fund uncertain efforts
The World is Small II • Business is global – Creditors, suppliers, investors & customers are global • Businesses are global – – – Example – U. S. Corporation NY headquarters & U. S. patents Korean parts manufacturing plant Mexican & Greek assembly plants German, UK, Canada & U. S. stores 64
How Do You Liquidate a Global Business? • Seven or more separate bankruptcy cases • What if each has different rules?
Value Preservation • What if assets are worth more if sold together – E. g. , the Korean parts plant with the Mexican & Greek assembly plants and the U. S. patents
Worse – How Do You Save It? • Where should you reorganize a global company? • Can you do it? – What if Korea lacks a reorganization system? – What if it has critical differences? • E. g. , no Debtor in Possession • Or different rules for patent licenses
Problem of Multi-National Companies • Name one that isn’t! • What are the bankruptcy options – Territoriality vs. Universality • Territoriality – • U. S. case deals with U. S. assets, Mexico case deals with Mexico assets, etc. • Universality – • One case deals with all assets and all creditors
Which One is Better? • Can you ever get to universality? – Loss of sovereignty – But – effect of convergence • If the law is the same everywhere, how much do you care about choice of law? • Still have problem of enforcement of foreign orders
EU Insolvency Regulation • EU faced this problem first – How do you deal with a common market and multiple different insolvency systems? – You need (1) jurisdictional and (2) choice of law rules • UNCITRAL Model Law – Much less ambitious
UNCITRAL Model Law on Cross-Border Insolvency • Why a Model Law? • Why not a treaty? – Too difficult politically – Also easier to make local variations • Trade off - less uniform but wider adoption – Adopted in 41 States and 43 jurisdictions – But many have variations from uniform text
EU & UNCITRAL Adopt Modified Universality • Which nation’s insolvency proceeding should be the main one? – The main proceeding should be the one pending where the company’s main interests are centered • COMI - “center of main interest”
Main vs. Non-Main Proceedings • Proceeding pending in the COMI is a “foreign main proceeding” • Other proceedings are “foreign non-main proceedings” – But only if pending where the company has an “establishment” • What if no establishment but only assets? – Model Law does not address it
Main vs. Non-Main • This matters a lot in the EU since main proceeding orders may be binding in other EU nations • Not as critical under Model Law – Nothing is “binding”
What is COMI • COMI - “center of main interest” – Not defined in Model Law – But start with presumption it is the registered office • Interpretation rules – International origin & uniformity • Can look to EU Regulation – EU Test – Nerve center • Plus – “ascertainable by third parties” – Why? Creditor expectations
COMI Reconsidered • Nerve center + ascertainable • What is the COMI of a corporate group? • What is the COMI of an Irish subsidiary of Apple? • How easy is it to change COMI? – And get a different bankruptcy outcome – EU “bankruptcy tourism” to the UK 76
What Does the Model Law Do? • Not much – But that is still an astounding development in international insolvency law
The Major Features • Access to local courts • Recognition • Relief • Communication and Co-Ordination
First - Access • For insolvency administrators – Both inbound and outbound • Express authority for local administrator to appear in foreign courts • Procedures foreign representative to appear in local courts
Access to Local Courts • Foreign representative can sue and defend in debtor’s stead • Foreign representative can institute a local insolvency proceeding – Insolvency is presumed if “Main” • Foreign representative can participate in a pending local insolvency proceeding
Access of Foreign Creditors • Insolvency laws often treat local creditors better – May not even permit foreign creditors to participate • Model Law gives foreign creditors notice and “same rights” as local creditors • Right to distribution • Foreign creditors may be treated worse – But not worse than general unsecureds – Option to exclude foreign tax and social security claims
Second - Recognition • Simply local court recognition (confirmation) that: – There is a foreign insolvency proceeding involving this entity, and – The Foreign Representative is the right person to represent that estate's interests • This is the first issue in the case – Model Law says it should be quick and easy • But it is where you need to fight hard if you want to block local enforcement of the foreign proceeding
What is a “Foreign Proceeding” • • Collective Judicial or administrative proceeding Law relating to insolvency Subject to supervision of – Foreign judicial or other authority • Purpose of liquidation or reorganization
Effects of Recognition • Portal to appear in local courts • May participate in a local insolvency proceeding • May obtain insolvency-related relief from local courts
What Relief is Available? • Main gets more than Non-Main – Lots of focus in literature • Automatic relief if Main – Art. 20 – Stay of proceedings and executions • Subject to local stay exceptions – e. g. secured credit may not be affected – Suspension of debtor’s power to transfer property
Discretionary Relief • But the same stay is available in Non-Main – Just not automatic – Art. 21 • So how great is the difference? • Also pre-recognition relief allowed – All Art. 21 relief – Available in Main or Non-Main
What Else Can You Get? • Discovery • Entrustment – –Entrust local assets to foreign representative! –Entrust distribution to foreign representative!! • Local court collects assets and sends them to foreign court to distribute under a different set of rules!
Local Insolvency Powers • Art. 21 - "any appropriate relief“ available to a local insolvency administrator • Art. 23 use of local avoiding powers – US – Can’t use U. S. powers • Strategy consideration – – (1) file a full local proceeding, or – (2) seek recognition and exercise local powers • US – Choice of avoiding law?
Limitations in Art. 21 & 22 • • • Court “may” grant relief “Appropriate” relief Local creditors must be “adequately protected” All parties must be “adequately protected” May impose “appropriate” conditions • Lots of discretion!
Main vs. Non-Main • Relief granted should reflect the nature of the foreign proceeding – Relief may be more restricted in Non-Main – E. g. does it relate to assets that “should be administered” in the foreign Non-Main proceeding?
Additional Powers • Finally Art. 7 - may "provide additional assistance" under other local laws – U. S. version includes enforcement of foreign insolvency orders • E. g. , enforce foreign reorganization plan against local creditors
Manifestly Contrary to Local Public Policy • All relief subject to Art. 6 "manifestly contrary” to local public policy – Should be very narrow • Goal is to facilitate foreign proceeding – Often raised but rarely applies • Real limitation is discretion – Threatens to undermine goals of the Model Law
Using Foreign Law • Can I use a more favorable foreign law to reorganize and then use the Model Law to enforce it locally? • How different can the foreign law be? • Issue – Must relief be available under forum’s law, other law or both?
Co-Operation • Let's talk – Court to court communication – Representative to representative communication • Authority for court and insolvency representative to communicate with foreign court or foreign insolvency representative
Let's Work Together • Courts and representatives are directed to "cooperate to the maximum extent possible"
Types of Co-Operation • Can a US and Canadian judge hold a joint televised hearing? • Can the courts approve agreements? – Common - called protocols – Usually procedural • But use of concentration account?
The Law of Nowhere? • What law governs a cross-border case? – – A little US A little Mexico A little Greek A little protocol that is the law of none? • Can you predict the outcome for your client?
Recap • The big issues – You can use any nation's law to handle a global case if it purports to grant jurisdiction • But enforcement is the problem – You can use the Model Law to: • Coordinate multiple national cases • Collect foreign assets and enforce your nation's bankruptcy orders in some other nations
Overview of US Chapter 11 G. Ray Warner St. John’s University of Law of Counsel. Greenberg Traurig LLP, USA
Why Use Chapter 11? • Preserves business operations – Can retain management – Can force retention of contracts – Can obtain financing • Can maximize value • Can rewrite secured debt • Very flexible restructuring tool • Can sell, restructure, renegotiate, etc.
Contrary Considerations • Significant court involvement – Very transparent – Disclosure & discovery – Any party can challenge any action • Organized creditors with Committee – Professionals paid by estate – Will sue over improper actions • This makes it fairer BUT more expensive • Outcomes may be hard to control
Cross-Border Importance • Only two major jurisdictions welcome foreign debtors – United States – England & Wales • Both have rescue and sophisticated professionals and courts
Bring Us Your Failing Companies • Entities can file if “any assets” in US – Global Oceans – retainer sent to US bankruptcy lawyers was enough – But – usually only if US case is needed • Dismissed Yukos and Baha Mar • Test – best interests of creditors and debtor • Model Law (chapter 15 in the US) may cause US courts to dismiss more foreign cases
Worldwide Application • US law applies extraterritorially – Applies to worldwide assets and operations – But can orders be enforced? • Yes – against US counterparties • Yes – against any entity that has or aspires to have valuable US assets or operations! • Maybe – under Model Law – Entirely local foreign entities? • US courts permit 100% payment
Limiting Disruption • Insolvency not relevant – File if need to use the tools • DIP – Management remains in control absent fraud or gross mismanagement – CRO has usually replaced prior management – Examiner or CRO may be used • DIP can operate business
Liberal Use of Property • Ordinary course transactions continue without court order • Critical Vendors – • Usually can pay immediately • Secured assets – – Can use in ordinary course – Can sell in ordinary course (inventory) – But “cash collateral” requires order or consent – “first day” orders
Secured Creditors Affected • Rights are modified in chapter 11 • But entitled to “adequate protection” – Protects “value, ” not the contractual rights • Is value at risk – equity cushion – Court’s error in evaluating risk • Cash payments or additional liens – To cover potential loss in value • Court’s valuation error
Broad Stay Prevents Disruption • Automatic stay blocks most creditor action – Major reason for filing – Cash flow – stop paying debts – Secured creditors are stayed • Must have “adequate protection” • Contract counterparties can’t cancel
Contract & Lease Powers • Counterparties must continue to perform – Bankruptcy default provisions invalidated • Debtor’s Options – – Reject – “pre-petition” damage claim – Assume – Forces continued performance • This facilitates a rescue – Assume and assign – • Overrides anti-assignment clause • This facilitates a sale • Captures value in below-market agreements
Post-Petition Financing • Liberal DIP financing rules – Created a DIP financing market • Ladder of options – Ordinary trade and unsecured – Super-priority – Secured or second lien – Prime lien • Subordinates pre-petition secured creditor • Must have “adequate protection”
Many Restructuring Options • Revise the capital structure – Debt for equity swap • De-accellerate secured debt – Rebuild the business – Reduce & re-amortize the debt • Resize the business – Reject failing stores, keep successful ones – Or reject failing units, keep core business • Sell the business – Going concern or piecemeal
Chapter 11 • Single point of entry – Pre-insolvent or insolvent – Small company, large company or individual – Can reorganize or liquidate • Goal is a confirmed plan • Debtor controls the process – Exclusive option to propose plan for 180 -days • Can extend up to 18 months
Plan Process • Classify creditors – Substantially similar to others in class • Negotiate & propose plan – Creditors committee plays important role • Court approves disclosure statement – Extensive information for creditors • Solicit votes by class
Class Acceptance • Majority required for acceptance • > 2/3 in $ amount of voting holders • Majority in number of voting holders – Vote binds dissenting class members • “Best interest of creditors” test • Plan can be partial – May leave classes “unimpaired” • Rights not altered by plan • No right to vote • Deemed to have accepted plan
Class Cramdown • Can bind dissenting class if – At least one class accepts and – Plan is: • “Fair & equitable” and • Does not “discriminate unfairly” • Unfair discrimination – Look side to side – 100% frequent flyers v. 10% others
Fair and Equitable I • For unsecured and equity classes – “Absolute priority” rule • PV = 100% or • Look up/look down – Unsecureds can force equity out » Creates negotiating leverage
Fair and Equitable II • For secured classes – Return collateral or – Sell collateral • Get bid in rights • Lien attaches to sale proceeds or – Write-down - PV > value of collateral • Rewrite face amount • Rewrite interest rate • Rewrite payment schedule – Can stretch out many years
Valuation is the Key • Court determines value – What is the business worth? • Risk of erroneous valuation • This encourages negotiation
Modern Chapter 11 Process I • Sale under § 363 replaces plan – Quicker and cheaper – Business is preserved but entity may not be – Contract assignment power allows going concern value to be captured and sold – “Free & clear” power allows purchaser to take assets free of claims • Compare to English “pre-pack”
Sale Process • Potential buyer is arranged before filing – Buyer may also be DIP lender • Court approves sale process – Generally buyer’s offer is subject to competing bids – Can be sold free and clear of • Liens • Claims – including successor liability
Creative Use of Sale Power • General Motors – Created New. Co to purchase retained product lines • Assumed desired dealership agreements • Assumed other desired agreements • Took assets free of liabilities • How is this different from a reorganization?
Modern Chapter 11 Process II • US “pre-pack” – US securities law does not permit collective action clauses in bonds – Can’t bind dissenting holders outside bankruptcy • Votes are solicited before bankruptcy – Usually part of an “exchange offer” • May be enough acceptances to avoid filing
Quick Chapter 11 Confirmation • If enough votes for plan – File chapter 11 – Use pre-petition votes for confirmation • Confirmation binds all members of class • Partial pre-pack – – Only certain classes restructured – Others left “unimpaired” – Compare to English “scheme”
Corporate Groups • Procedural consolidation – All cases before same judge • Global Oceans – even foreign entities – Single plan involving multiple entities • Substantive Consolidation – Combines assets and debts • Rarely forced by court decision – But consensual “deemed” substantive consolidation is common in large cases
Lunch – Sky Bar
Work Out Clinic Jan Adriaanse University of Leiden The Netherlands
My background § Professor of Turnaround Management, Leiden Law School § Founder of investigation company Business Failure Intelligence (BFI) www. tri-leiden. eu www. bfiglobal. com
Teaching philosophy Harvard Business School approach § Teaching versus preaching § Participant centered learning § Learning by sharing knowledge and experiences in discussion § Learning by doing things together (e. g. cases, serious gaming)
INSOL Turnaround Workout Game
Playing a game: let’s rescue the Uganda Hotel-Casino Group. Or not…?
Your important task for today… § Save a 1, 500 employees hotel-casino business § Try to come to an “informal workout agreement” (and with that the rescue of the company) § Training goal: “restructuring in the shadow of the law” i. e. rescuing without using judicial rescue procedures § Background: informal workouts create less “value destruction” than formal routes however holdout problem and free-rider behaviour of stakeholders can occur
Six stakeholder groups § § § O = Owners A = Lender-company A B = Lender-company B C = Lender-company C D = Lender-company D T = Trade creditors
Two rounds to come to a solution § Round 1: 30 minutes to prepare with your team § State/define your position § Initiative for 1 st meeting taken by Owners § Round 2: 90 minutes negotiation round to come to a (written) workout agreement
Your position in the game… § Be cooperative and act in good faith yet keep a close eye on your legal and financial position at all times § Behave the way you would behave in real life… (there are no right or wrong actions)
What if no agreement…? No problem… then company will file for bankruptcy proceedings Potential bottlenecks however… • • • Loss of control Negative effect on sales and brand (30%-50% turnover drop) Gaming authority has legal right to terminate license immediately Judge will only grant moratorium in case of “reasonable probability” that business can be saved and that rescue is better for all stakeholders as compared to immediate liquidation. . . 1. 500 employees might loose their jobs So, there seems to be a good reason for an informal solution… Game in action
A game in action
120 minutes left… good luck!
Game analysis Please take 20 minutes to evaluate the game together with your team and please answer the following five questions: 1. 2. 3. 4. 5. Did the stakeholders come to a solution? If so, what is agreed? What were the hurdles to overcome in the workout process? What’s your team’s opinion on the behaviour of the other teams (cooperative, professional, irrational, emotional etc. )? [rate on a scale 1 -10] What’s your team’s opinion on its own behaviour? [rate on a scale 1 -10] What are, if any, lessons learned for real-life?
Game analysis / presentations
Some evidence from academic research on success and failure factors of turnarounds and informal workouts
Why workout routes fail? Adriaanse, J. A. A. , & Kuijl, J. G. (2006). Resolving Financial Distress: Informal Reorganization in The Netherlands as a Beacon for Policy Makers in the CIS and CEE/SEE Regions? , Review of Central and East European Law, 31(2), 135 -154. Failure factors Examples Passive attitude management and shareholders § § Started too late: ‘too little, too late’ Lack of turnaround leadership No speedy and adequate operational restructuring § § Lack of turnaround planning based on clear vision, strategy, operational and financial planning Too much focus on retrenchment instead of entrepreneurial reconfiguration Important stakeholders not enough involved § § § Banks/lenders badly informed Important suppliers/vendors ignored Lack of effective stakeholder management (communication, negotiation) Insufficient transparency regarding financial situation and proposed turnaround § § Management information system not sufficient Lack of attention with regard to steering on financial key performing indicators Not enough efforts towards bringing in risk-bearing capital (equity) § Too much focus on additional debt and/or workout agreements with (unsecured) creditors Need for additional equity not seen by management §
How to make workout routes successful? Pajunen, K. (2006). Stakeholder Influences in Organizational Survival. Journal of Management Studies, 43(6), 1261 -1288. Stakeholder influences in organizational survival: probabilities of success 1 The more secure the continuing support of governing stakeholders in an existence-threatening crisis, the more probable is organizational survival. 2 In an existence-threatening crisis, frequent and open communication between managers and governing stakeholders will tend to enhance (rather than undermine) the continuing support of those stakeholders and increase (rather than decrease) the probability of organizational survival. 3 In an existence-threatening crisis, personal relationships between managers and governing stakeholders will tend to enhance (rather than undermine) the continuing support of those stakeholders and increase (rather than decrease) the probability of organizational survival. 4 In an existence-threatening crisis, management’s unlocked brokerage position between governing stakeholders will tend to enhance (rather than undermine) the continuing support of those stakeholders and increase (rather than decrease) the probability of organizational survival. 5 In an existence-threatening crisis, consensus on long-term goals among governing stakeholders will tend to enhance (rather than undermine) the continuing support of those stakeholders and increase (rather than decrease) the probability of organizational survival. 6 In an existence-threatening crisis, governing stakeholders’ association of management with good firm performance is positively (rather than negatively) related to the continuing support of those stakeholders and will tend to increase (rather than decrease) the probability of organizational survival.
How to make workout routes successful in real-life? Harvard negotiation framework 1. [People] Adopting a problem-solving approach and not allowing personality differences to side-track this [dealing with frustrations] 2. [Interests] Avoiding taking and defending positions but rather concentrating on parties’ respective interests [enlightened self-interest] 3. [Options] Before making decisions, generating as many options as possible, particularly those creating mutual benefit [tailor made solutions] 4. [Criteria] Establishing objective and fair criteria for a resolution, rather than the judgment of either party [e. g. by presenting a sophisticated turnaround plan]
How to make workout routes successful in real-life?
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Appendix Statement of Principles for a Global Approach to Multi-Creditor Workouts First Principle Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (“stand still period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor´s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case
Second Principle During the standstill period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the standstill period their position relative to other creditors and each other will not be prejudiced
Third Principle During the standstill period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the standstill commencement date
Fourth Principle The interests of relevant creditors are best served by coordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisors to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole
Fifth Principle During the standstill period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors
Sixth principle Proposals for resolving the financial difficulties of the debtor and, so far as practical, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the standstill commencement date
Seventh Principle Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential
Eighth principle If additional funding is provided during the standstill period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practical, be accorded priority status as compared to other indebtedness or claims of relevant creditors
Close Day One
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