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

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  • 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:

  • 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:



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”

  • 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



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



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

  • 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


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