By Jeremy Hollembeak, Randall Arthur and Stephanie Hauser, From Corporate Counsel
This year’s lessons for foreign companies filing under Chapter 11 or 15.
In our global marketplace, a failed company may have business activities, assets, creditors and potential recovery targets spread among multiple jurisdictions. Many of these distressed foreign companies, having instituted or been placed into insolvency proceedings in home jurisdictions, come to the United States to protect or pursue targeted recovery of their local assets through an ancillary Chapter 15 proceeding. For strategic reasons, some companies choose to avoid the insolvency schemes available in their home jurisdictions and instead attempt to reorganize in the U.S. directly by filing for Chapter 11.
Though Chapter 15 and Chapter 11 are both important tools, they serve different purposes. Chapter 11 is a primary proceeding used to help a company reorganize its debt while avoiding a shutdown of the business. Chapter 15 is a secondary proceeding that allows debtors-in-possession (DIP) and liquidators who have already initiated proceedings in a foreign jurisdiction to gain access to the U.S. court system in furtherance of their primary foreign reorganization or liquidation proceedings.
Over the past year, several significant decisions clarified the scope of relief and assistance available to distressed foreign companies. These will undoubtedly influence a distressed foreign company’s insolvency strategy, particularly in forum selection, and underscore to their decision makers the importance of having a coordinated global team managing the matter.
Baha Mar, Chapter 11 and Considerations for Foreign Debtors
The jurisdictional bar to commence Chapter 11 is low. Even foreign debtors having no prior business or assets in the U.S. can become eligible by placing a small amount of assets in the U.S. prior to filing. But eligibility alone does not guarantee that a foreign debtor will be able to complete Chapter 11 reorganization. U.S. bankruptcy courts have the authority to dismiss or abstain from any Chapter 11 case if “the interests of creditors and the debtor would be better served by such dismissal or suspension.” In a Chapter 11 commenced by a distressed foreign company, creditors or other interested parties who would prefer that the company be restructured or liquidated under the laws of its home country often ask the U.S. bankruptcy court to exercise this authority.
In In re Northshore Mainland Services Inc., the debtors owned and were in the process of developing a $3.5 billion luxury casino and resort called Baha Mar, located in the Bahamas. In the summer of 2015, with the project nearly complete, the bank refused to lend amounts remaining under the project’s secured construction financing facility, halting construction and leaving the debtors in dire need of additional funding.
The debtors filed for Chapter 11 in Delaware and entered into a post-insolvency (aka DIP) financing facility with their equity sponsor to borrow up to $80 million on a junior secured basis (i.e., subject to the bank’s floating charge on substantially all project assets). As a requirement, the debtors commenced an ancillary proceeding in the Bahamas seeking recognition and enforcement of the Chapter 11 automatic stay.
The debtors expected the government of the Bahamas (GOB) to support their strategy—or at worst remain neutral—in light of the certainty of new funding and the additional negotiating leverage over the bank and contractor that Chapter 11 provided. Instead, the GOB appeared before the Bahamian court and successfully opposed Chapter 11 enforcement of the stay, and then took steps to place the debtors into provisional liquidation under Bahamian law.
Ultimately, the Delaware court dismissed the Chapter 11 cases, despite acknowledging that the debtors were eligible and had acted with good faith. It noted that Chapter 11 would have been “an ideal vehicle” to restructure, if all stakeholders had been willing. In dismissing, the court agreed with a prior finding of the Bahamian court that most stakeholders expected a proceeding in the Bahamas. The court further found that all stakeholders, including the debtor, would be treated fairly in the provisional liquidation commenced by the GOB.
Following Northshore, distressed foreign companies considering a Chapter 11 should first consider the insolvency options available in their home and other more appropriate jurisdictions, and should also evaluate potential opposition of key stakeholders—particularly home governments. Even if a company is eligible for Chapter 11, a negative reaction from a major creditor or government may have tremendous impact, particularly if the company has tenuous connections to the U.S.
Chapter 15 and the Necessity of Cross-Border Legal Strategy
An international company can be incorporated in one jurisdiction, access capital in another and conduct business in a third. When it falls into distress and then liquidation, a liquidator may have to venture beyond the country of the main proceeding to a court with the power to recognize the foreign insolvency and allow the office holder to conduct investigations, recover assets and pursue proceedings against third parties. While Chapter 15 precludes a foreign liquidator from invoking the federal bankruptcy law’s avoidance and clawback authority, recent decisions demonstrate a willingness by U.S. bankruptcy courts to entertain similar claims under state or foreign law.
In two recent decisions from the Chapter 15 case of In re Hellas Telecommunications, the debtor, a Greek telecom that was incorporated in Luxembourg and that operated out of En­gland, Italy, Germany and the U.S., was eventually placed into compulsory liquidation in England. Starting in 2012, the English liquidators sought a Chapter 15 adversary proceeding in New York bankruptcy court to claw back the proceeds of alleged fraudulent transfers from defendants allegedly subject to U.S. jurisdiction. In early 2015, certain defendants moved to dismiss, arguing that the court lacked personal jurisdiction over them and that the liquidators lacked standing under Chapter 15 to pursue the fraudulent transfer claims.
This summer, the New York court ruled that jurisdiction was proper as long as the defendants had sufficient contacts with the U.S. as a whole, as opposed to the forum state—even where the claims arise solely under state law. This ruling sets the stage for foreign representatives to sue U.S.-based defendants that are located in different states in a Chapter 15 adversary proceeding in a single U.S. jurisdiction.
The liquidators’ fraudulent transfer claims did not fare as well in a ruling on standing, and the New York court dismissed the claims. The Hellas liquidators filed anew under the U.K. Insolvency Act, and the defendants again moved to dismiss. This time, the New York court allowed the claims to continue, finding that English law applied and that the liquidators had standing to pursue the asserted claims through an adversary proceeding under Chapter 15.
The Hellas decisions, if followed by other U.S. bankruptcy courts, will enable foreign liquidators to obtain recovery by utilizing insolvency provisions from other jurisdictions. They may also lend support for foreign liquidators pursuing creditor claims under U.S. state law, provided that the liquidators are authorized to do so by governing law or court order in the foreign insolvency proceeding they represent.
Until recently it was not uncommon for representatives of foreign liquidation proceedings to commence a Chapter 15 case and conduct third-party discovery under the protection of seal and gag orders. This enabled former company insiders and affiliates to be investigated for fiduciary breaches and fraud without their knowledge.
Recently, however, a Florida bankruptcy court issued a decision in In re Petroforte Brasileiro de Petroleo Ltda., holding that a “secret” investigation of a Brazilian gas distributor was not warranted. This cast doubt on whether the practice should ever be permitted under the U.S. bankruptcy law absent evidence of “a clear and immediate risk that assets will be dissipated.” It likely will be difficult for future foreign representatives to conduct Chapter 15 discovery without alerting the alleged corporate “bad actors” being targeted. As a result, foreign representatives should strategize with local counsel before launching public discovery campaigns to minimize the chance that “bad actors,” or the corporate assets they absconded with, escape the reach of the Chapter 15 court’s jurisdiction. Alternatively, foreign representatives should consider filing an ex parte Section 1782 action as another means to issue subpoenas under seal.
Every year U.S. bankruptcy courts issue new decisions that refine the relief available under U.S. bankruptcy law to distressed foreign companies and their liquidators. A common thread of these decisions is the increasing importance of strategic cross-border insolvency planning.
Jeremy Hollembeak is a litigator with Kobre & Kim who focuses on cross-border bankruptcy and debtor-creditor disputes. Randall Arthur, qualified in Hong Kong, focuses on insolvency litigation and offshore asset recovery. Stephanie Hauser also concentrates on cross-border bankruptcy and debtor-creditor disputes.
For more on this story go to: http://www.corpcounsel.com/id=1202743376113/CrossBorder-Insolvency-When-Foreign-Companies-File-Under-Chapter-11-or-15#ixzz3szVahjw8