G. Ray Warner, Course Leader St. John's University School of Law Of Counsel, Greenberg Traurig llp, usa

• Day One

• G. Ray Warner, Course Leader

• St. John's University School of Law Of Counsel, Greenberg Traurig LLP, USA

Course Leader: G. Ray Warner, St. John's University School of Law Of Counsel, Greenberg Traurig LLP, USA

• 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

• (Board Director INSOL International)

• Ian F. Fletcher, University College London

• Rosalind Mason, Queensland University of Technology,

• Australia

• Paul Omar, Nottingham Trent University, UK

• Michael Veder, Radboud University Nijmegen,

• The Netherlands

AlixPartners LLP

• AlixPartners LLP

• Allen & Overy LLP

• Alvarez & Marsal LLC

• Baker & McKenzie LLP

• BDO LLP

• BTG Global Network

• Cadwalader, Wickersham & Taft LLP

• Chadbourne & Parke LLP

• Clayton Utz

• Cleary Gottlieb Steen & Hamilton LLP

• Clifford Chance

• 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

• Coffee Breaks and Lunch – timing

• Mobile telephone & Blackberry switched off

• Assessment forms – completion & return

Lecturer:

• Lecturer:

• André Boraine

• University of Pretoria, South Africa

Section A: General Background

• Section A: General Background

• Section B: Sources and nature of international insolvency

• Section C: Harmonization of National insolvency laws

Framework: 1. A - M

• Framework: 1. A - M

• Core terminology: 2

• History: 3.1

• Comparative aspects: 3.2

• Classification of insolvency systems

• Different classes of creditors

• A. Essence/ nature
• B.Policy considerations
• C.Sources
• D.Similarities/ differences Corporate v Consumer
• E.Gateways and commencement

F.Effects

• 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

America

• 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

The Netherlands

• 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

Australia

• 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

Former Eastern European countries:

• 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

Wood:

• Wood:

• Pro-creditor
• Pro-debtor
• Not interested

• Advantage of creditors

• Rescue culture

Wood:

• Wood:

• Pooling of assets (universal concept)
• Creditors are paid pari passu (?)

• Initiation process

• Administrator

• Publication (notification)

• Powers of administrator

• Creditors participation

• Supervision

Sealy and Hoolley:

• Sealy and Hoolley:

• Individuals – protect, fresh start/ discharge
• Corporations – preserve business or viable parts
• Pari passu – except priorities

• Fletcher:

• Common denominator - collectivity

Distribution rules: Wood:

• Distribution rules: Wood:

• Super-priority
• Priority creditors
• Pari passu creditors
• Deferred creditors
• Expropriated creditors

What is Int Ins law/ CBIL ?:

• 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

General:

• 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

Sources for cooperation

• Sources for cooperation
• Comity (reciprocity)
• Court’s discretion
• Legislation
• 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

Scenario 1:

• Scenario 1:

• ABC Co. Incorporated in USA

• Branches in England and SA

• (business operations)
• Treatment of branches?

• Order in USA?

• England, SA?

Scenario 2:

• Scenario 2:

• ABC Co. holding company of X Co. in England and Y Co. in SA.

• Difference?

• Structure for dealing with cross-border matter

Main proceeding: domicile; principal office? (COMI) – universalilty

• Main proceeding: domicile; principal office? (COMI) – universalilty

• What law will regulate?

• Non main proceeding: (secondary proceeding) – modified universality

• Local law will apply

• Concurrent proceeding

• Different bankruptcy proceedings running concurrently

Recognition of foreign judgments

• Recognition of foreign judgments

• Technical meaning of insolvency

• Balance sheet/ cash flow

• Priorities/ preferential claims

• Avoidance law

• Labour dispensation

• Estate representative and structure

• Prior-acquired rights: securities

• Rescue v liquidation

• Funding/ contributions

Lex mercatoria

• Lex mercatoria

• Jabez argued in 1825 for uniform system of insolvency in Europe

• Henry 1827 – stumble block absence of general consent

• Jitta end 19th century:

• World law and federal parliament (unattainable)

• Assimilation of national laws based on set of rules

Jitta - treaty with minimum requirements:

• Jitta - treaty with minimum requirements:

• Jurisdiction
• Publicity
• Avoidance law rules
• Equality of creditors
• Jurisdiction – domicile
• secondary places of interest

Fletcher poses 3 questions:

• Fletcher poses 3 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

Choice of law (Private international law ‘PIL’)

• 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

Universality (Fletcher, Omar & Friman)

• 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

Shades of theories:

• Shades of theories:

• Modified universality (Westbrook)

• Cooperative territorialism (LoPucki)

• Conventions
• Problem: Local asset protection

• Contractualism (Rasmussen)

• Company, articles of incorporation, nor real contract

Internationalist principle (Fletcher)

• 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

Universality effects:

• Universality effects:

• ‘Rough wash’ (swings and roundabouts)
• Net gain – indirect advantages commerce, lowers costs, increase trade

Omar:

• 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

Nadelmann:

• 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

Case (PIL) determinants:

• Case (PIL) determinants:

• Type of assets
• Location
• The court first issuing the order
• Adhere: universalism or territorialism

Main proceeding (COMI)

• Main proceeding (COMI)

• Main place of business

• Non main proceeding

• Establishment

• Presumption registered office or habitual address in case of individual.

• An “establishment” is “a place of operations where the debtor carries out non-transitory economic activity with human means or goods”

• Westbrook Modified universalism.

• Two primary factors:
• Predictability
• Optimal..substantive law.

• Big four bankruptcy policies that should be governed by the law of the main proceeding: control; priority; avoidance and reorganisation.

COMI: Other than place of incorporation, either headquarters (real seat) or its operations (like business, main assets.)

• 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

Dual system in theory:

• Dual system in theory:

• Common law: comity, convenience
• Adopted model law (not operable yet)
• No treaties (SADC ?) Boraine & Olivier

• Common law:

• Outward bound request:

• Letter of request but?
• Foreign jurisdiction will dictate

Inward bound request for recognition

• Inward bound request for recognition

• Movable/ immovable assets

• Approach local high court
• Discretionary (comity) grant recognition
• Except for precedents no predictability
• Powers determined by court order
• Surplus go to foreign proceeding
• Foreign tax claims (no basis)

• Opening of local insolvency proceeding: must comply SA law

England and Wales: s 426 IA Act

• England and 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

Former s 304 of the USA BR Code

• 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

Discretion of courts

• 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 ?

Protocol approach: coordination and cooperation

• Protocol approach: coordination and cooperation

• Maxwell 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

England and Wales: s 426 of the Insolvency Act of 1986

• England and Wales: s 426 of the Insolvency Act of 1986

• 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

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

Types of initiatives

• Types of initiatives

• Limited: bilateral and multinational
• Regional

• Bilateral initiatives

• Europe

• Many like
• Treaty of Verona of 1204
• Franco Swiss of 1869 (modern bilateral)

Bilateral initiatives

• Bilateral initiatives

• Europe

• Superseded or abrogated: Brussels Convention of 1968 and EU Reg of 2000

• Regional or wider multilateral initiatives resulting from conferences:

• Montevideo
• Havana (Bustamante)
• Nordic

• Use of treaties? Lack of data, Fletcher

World Bank

• 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-

Wessels para 1 - 35

• Wessels para 1 - 35

• These instruments cover:

• Cross-border aspects
• Establishing international guidelines for local insolvency reform (harmonisation)
• Related topics, like securities (general law)

• Omar:

• Cross-border insolvency issues will not be resolved by leaving it to individual States. We need coordination on an international level.

1. World Bank and IMF

• 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)

22. EU Regulation

• 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)

18. Note also ALI’s Guidelines Court to Court Communications

• 18. Note also ALI’s Guidelines Court to Court Communications

• 18A. 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. CoCo guidelines

How far will we come with cross border

• How far will we come with cross border

• rules if we don’t harmonise national

• insolvency and related laws?

Some problems re CBI

• 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

Various regional initiatives: EU, ABD, IBA, ERBD, OHADA

• 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

Regulation of insolvency representatives

• 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 5 – Replacement of office holder
• P 6 – Standards professional conduct
• P 7 – Reporting and supervision
• 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

• Lecturer :

• Prof. G. Ray Warner

• St. John's University School of Law,

• Of Counsel, Greenberg Traurig LLP, USA

What types of Systems?

• What types of Systems?

• Typically liquidation systems
• Modern trend
• Rescue or reorganization systems
• Many are modeled on U.S. Chapter 11

Assets can be moved easily

• 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

Business is global

• 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

Seven or more separate bankruptcy cases

• Seven or more separate bankruptcy cases

• What if each has different rules?

What if assets are worth more if sold together

• 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

Where should you reorganize a global company?

• 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

Name one that isn’t!

• 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

Can you ever get to universality?

• 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 faced this problem first

• EU faced this problem first

• How do you deal with a common market and multiple different insolvency systems?
• You need jurisdictional and choice of law rules

• UNCITRAL Model Law

• Much less ambitious

Why a Model Law?

• 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 23 jurisdictions

Which nation’s insolvency proceeding should be the main one?

• 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”

Proceeding pending in the COMI is a “foreign main proceeding”

• 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 there?

• Model Law does not address it

This matters a lot in the EU since main proceeding orders may be binding in other EU nations

• 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”

COMI - “center of main interest”

• 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

Nerve center + ascertainable

• 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

Not much

• Not much

• But that is still an astounding development in international bankruptcy law

Access to local courts

• Access to local courts

• Recognition

• Relief

• Communication and Co-Ordination

For insolvency administrators

• For insolvency administrators

• Both inbound and outbound
• Express authority for local administrator to appear in foreign courts
• Procedures for foreign representative to appear in local courts

Foreign representative can sue and defend in debtor’s stead

• Foreign representative can sue and defend in debtor’s stead

• Foreign representative can institute a local insolvency proceeding

• Insolvency is presumed

• Foreign representative can participate in a pending local insolvency proceeding

Insolvency laws often treat local creditors better

• 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

Simply local court recognition (confirmation) that:

• 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

Collective

• Collective

• Judicial or administrative proceeding

• Law relating to insolvency

• Subject to supervision of

• Foreign judicial or other authority

• Purpose of liquidation or reorganization

Portal to appear in local courts

• Portal to appear in local courts

• May participate in a local insolvency proceeding

• May obtain insolvency-related relief from local courts

Main gets more than Non-Main

• 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

But the same stay is available in Non-Main

• 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

Discovery

• Discovery

• Entrustment –

• Entrust local assets to foreign representative!
• Entrust distribution to foreign representative!!
• Local court collects assets and send them to foreign court to distribute under a different set of rules!

Art. 21 - "any appropriate relief“ available to a local insolvency administrator

• Art. 21 - "any appropriate relief“ available to a local insolvency administrator

• Art. 23 use of local avoiding powers

• Strategy consideration –

• (1) file a full local proceeding, or
• (2) seek recognition and exercise local powers

Court “may” grant relief

• 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!

Relief granted should reflect the nature of the foreign proceeding

• Relief granted should reflect the nature of the foreign proceeding

• Relief may be more restricted in NonMain
• E.g. does it relate to assets that should be administered in the foreign NonMain proceeding?

Finally Art. 7 - may "provide additional assistance" under other local laws

• 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

All relief subject to Art. 6 "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

Can I use a more favorable foreign law to reorganize and then use the Model Law to enforce it locally?

• 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?

Let's talk

• 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

Courts and representatives are directed to "cooperate to the maximum extent possible"

• Courts and representatives are directed to "cooperate to the maximum extent possible"

Can a US and Canadian judge hold a joint televised hearing?

• 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?

What law governs a cross-border case?

• What law governs a cross-border case?

• A little US
• A little Canada
• A little UK
• A little protocol that is the law of neither?

• Can you predict the outcome for your client?

The big issues

• 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

• Lecturer :

• G. Ray Warner

• St. John's University School of Law,

• Of Counsel, Greenberg Traurig LLP, USA

Preserves business operations

• Preserves business operations

• Can retain management
• Can force retention of contracts
• Can obtain financing

• Can maximize value

• Very flexible restructuring tool

• Can sell, restructure, renegotiate, etc.

Significant court involvement

• 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 expensive

• Outcomes may be hard to control

Only two major jurisdictions welcome foreign debtors

• Only two major jurisdictions welcome foreign debtors

• United States
• England & Wales

• Both have rescue and sophisticated professionals and courts

Entities can file if “any assets” in US

• 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
• Test – best interests of creditors and debtor

• Model Law (chapter 15 in the US) may cause US courts to dismiss more foreign cases

US law applies extraterritorially

• 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!
• Entirely local foreign entities?
• US courts permit 100% payment

Insolvency not relevant

• 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

Ordinary course transactions continue without court order

• Ordinary course transactions continue without court order

• Critical Vendors –

• Probably 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

Rights are modified in chapter 11

• 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

Automatic stay blocks most creditor action

• 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

Counterparties must continue to perform

• 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

Liberal DIP financing rules

• 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”

Revise the capital structure

• 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

Single point of entry

• 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

Classify creditors

• 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

Majority required for 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

Can bind dissenting class if

• 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

For unsecured and equity classes

• For unsecured and equity classes

• “Absolute priority” rule
• PV = 100% or
• Look up/look down
• Unsecureds can force equity out
• Creates negotiating leverage

For secured classes

• 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

Court determines value

• Court determines value

• What is the business worth?
• Risk of erroneous valuation
• This encourages negotiation

Sale under §363 replaces plan

• 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 sold
• “Free & clear” power allows purchaser to take assets free of claims

• Compare to English “pre-pack”

Potential buyer is arranged before filing

• 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

General Motors

• General Motors

• Created NewCo 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?

US “pre-pack”

• 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

If enough votes for plan

• If enough votes for plan

• File chapter 11
• Use pre-petition votes for confirmation
• Confirmation binds all members of class
•