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Posts by: Scott Morrison

A Convergence of Insolvency Regimes – Europe in the Brexit Era

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As part of a continued effort in Europe to reform insolvency legislation, the British government issued a paper in March 2018 as a response to a draft directive published by the European Commission in November 2016. The Response proposed highly significant reforms to the current insolvency legislation which–interestingly, in this era of Brexit–if adopted, would bring the British insolvency policies closer in line with the current policies of the European Union. Learn more about the proposed reform from this recent restructuring alert, which breaks down the new proposed restructuring plan, analyzes a possible implementation timeline and compares the potential legislation to the current policies in place in the European Union.

The Rule in Gibbs: Safeguarding Creditors’ Rights or Aiding and Abetting “Hold Out” in Foreign Insolvencies?

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There is an English common law rule that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This rule is derived from a Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

The rule has been heavily criticised. Many do not consider it to be relevant in modern day cross-border insolvency proceedings following the continuing trend towards recognition of foreign insolvency proceedings (and their effects). As explained further below, some commentators see the rule as assisting creditors to “hold out” from participating in collective insolvency measures which are designed to benefit the creditor class as a whole.

The English court recently had the opportunity to review whether Gibbs still applied in Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch). The court considered an application by a foreign representative to the English court on behalf of a debtor, International Bank of Azerbaijan, for a permanent stay on a creditors’ enforcement of claims in England under an English law governed contract contrary to the terms of the foreign insolvency proceeding. Under local law, the English creditors were purportedly bound. The Azerbaijani proceedings were not “terminal” liquidation proceedings and therefore, any stay would need to apply beyond the duration of the proceedings to properly bind the English creditors and to permanently give effect to the insolvency proceedings.

The foreign proceedings were conducted in Azerbaijan and had been recognised in England under the Cross-Border Insolvency Regulations 2006 (the “CBIR“) (implementing UNCITRAL Model Law). The CBIR are a procedural mechanism whereby foreign insolvency proceedings (conducted outside the EU) can be recognised and foreign representatives can seek “assistance” from courts in other jurisdictions to effect the insolvency proceedings (subject to any restrictions on the exercise of such power under local law).

The English High Court found that the rule in Gibbs did apply to prevent the court granting a permanent (or indefinite) stay on the enforcement of creditors’ English law governed contractual claims. Any stay granted by the court would be more than simply procedural and would go to the substance of creditors’ claims – the court would, in effect, be ordering the discharge of the creditor’s claim and was prohibited from doing this, following the rule in Gibbs.

The message for creditors with English law claims which are purportedly extinguished under a foreign (non-EU) insolvency process is therefore, to adopt a “hold out” position. Following the expiry of the foreign proceedings (and any related stay on creditor action), objecting creditors may then take steps to enforce English law governed contractual claims provided however, that they have not participated in the foreign insolvency proceedings (they may otherwise be deemed to have accepted the jurisdiction of the foreign proceeding).

We note many holders of English law governed bonds issued by the Greek government adopted a “hold-out” strategy knowing that the English courts would not recognise any provision of Greek law extinguishing or amending the sovereign debt.

The “territorial” nature of the rule in Gibbs is, arguably, “out of step” with trends in modern insolvency law. In the US, for example, in proceedings under Chapter 15 of the Bankruptcy Code (the US statute adopting UNCITRAL Model Law) (“Chapter 15“), US courts have enforced foreign court judgements made in foreign proceedings, including judgements which alter or vary US law governed debts or claims. Chapter 15 does however, include important public policy protections for creditors designed to forestall recognition of clearly abusive procedures.

The US has a longstanding policy of recognising restructurings of US law governed financings of foreign companies. The Supreme Court’s 1883 decision in the famous Gebhard case (Canada Southern Railway Co v Gebhard [1883] 109 US 527) set the precedent for US recognition of foreign restructuring processes in which Chief Justice Waite endorsed the recognition of the implementation of a Canadian scheme of arrangement with the words “under these circumstances the true spirit of international comity requires that schemes of this character, legalised at home, should be recognised in other countries“.

The “public policy” exception to recognition under Chapter 15 only applies in “exceptional circumstances” and includes, for example, circumstances where a creditor was denied due process and notice of the foreign insolvency proceedings of the debtor; and the denial of privacy rights. The fact that a creditor may make a more limited recovery, and the fact that the substantive law of the insolvency proceeding was not the same as US law, were not held to be “manifestly contrary” to public policy.

We note the Gibbs rule has been disapplied in the context of EU insolvency proceedings, on the basis that English courts recognise the jurisdiction of courts in respect of insolvency proceedings in Member States under the European Insolvency Regulation (“EIR“); and similar “public policy” exceptions apply. It is difficult to justify the radically different approach English courts take to non-EU insolvency proceedings particularly given the UK’s recent decision to leave the EU.

Our view is that as part of any withdrawal treaty of the UK from the EU, the parties should look to negotiate a process for mutual recognition of insolvency proceedings based on the EIR “recognition” approach. Looking outside of its relationship with the EU, it would also seem sensible for the UK to look to adopt an approach similar to US Chapter 15, for the UK courts to recognise foreign insolvency proceedings with safeguards for creditors to avoid the application of such rules only if limited public policy reasons exist to void the application of the foreign insolvency proceedings. The English court will want to avoid “re-litigating” issues dealt with under foreign insolvency proceedings, and should not examine actual recoveries made by creditors. However, a carve out on “public policy” grounds could protect English creditors if it captured circumstances where the process was evidently “discriminatory” to foreign (English) creditors.

We acknowledge there are strong arguments to retain the Gibbs rule. By entering an English law contract, creditors may feel strongly that they wish to retain the impartiality, commerciality and due process English courts are well known for.

As we near BREXIT, in this issue as in so many others, the UK has a decision to make: adopt English “exceptionalism” or take a more ‘universalist’ view implied by the recognition of foreign insolvency proceedings exemplified by the current arrangements under the EIR? The choice is looming.

English Law Schemes of Arrangement: Class Composition

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Focus on the AB InBev and SABMiller merger

Having received the sanction of antitrust regulators in Europe, the U.S., China and South Africa, the planned merger of brewing giants AB InBev and SABMiller was scrutinised this week by the High Court in London on a topic very familiar to those acquainted with English law restructurings: class composition. The outcome of the hearing, that not all members of SABMiller should be considered to be in the same class for scheme voting purposes, raises some interesting questions around class composition because of the unusual circumstances of the proposed merger. READ MORE →

Indah Kiat – A Scheme Pulped

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On 12 February 2016 Snowden J handed down his judgment in Indah Kiat International Finance Company B.V. [2016] EWHC 246 (Ch). Indah Kiat International Finance Company B.V. (“Indah Kiat”), part of the global Asia Pulp & Paper Group (one of the world’s largest pulp and paper manufacturers), applied for an order convening a meeting of scheme creditors to consider and, if thought fit, approve a proposed scheme of arrangement (the “Scheme”) under Part 26 of the Companies Act 2006. One creditor, APPIO, opposed the Scheme on various grounds and in this hearing sought an adjournment on the basis that insufficient notice was given to the creditors of the convening hearing.

The Indah Kiat judgment neatly follows a similar judgment of Snowden J in Van Gansewinkel Groep BV [2015] EWCG 2151 (Ch) only a few months earlier. In this case Snowden J took the opportunity to review the current law on jurisdiction relating to schemes of arrangement, and, arguably, to raise the jurisdictional hurdle. He noted that in recent years, schemes of arrangement have been increasingly used to restructure the financial obligations of overseas companies that do not have their centre of main interest or an establishment or any significant assets in England, and stated that companies seeking approval of a scheme would be well advised “to ensure that greater detail is provided, both in the explanatory statement and in the evidence before the court”. Additionally, and more importantly for Indah Kiat, he commented on the judgment in re Telewest Communications plc (No 2) [2005] 1 BCLC 772 that the court will not generally sanction a scheme if it finds a “blot” in the scheme such that the scheme will not have the effect that the company and creditors intend. This is key in the underlying message of Snowden J’s Indah Kiat judgment.

Whilst schemes of arrangement have become increasingly popular to compromise creditors’ claims in a pragmatic manner which may not be available in the jurisdiction of incorporation of the relevant debtor, the judgments in Van Gansewinkel and, more specifically, in Indah Kiat, make it clear that the English courts will not compromise the integrity of this highly effective restructuring tool where the parties invoking the court’s jurisdiction act other than with the “utmost candour”.

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Orrick Launches Report on Restructuring European High Yield Bonds

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Over the past few years the European high yield bond market has been on a roll. Issuance has increased, yields have come down and the default rate has been close to zero. Institutional demand for European high yield bonds has been exceptional. Yet a near zero default rate is an historic anomaly which cannot go on forever. What happens when liquidity dries up and issuers default? How should issuers protect themselves and manage creditors threatening to enforce security? What are the key issues for stakeholders to implement a high yield restructuring? How can conflicts of law be managed where the bond is New York law governed, the intercreditor agreement is English law and the guarantors and assets are spread throughout Europe? Drawing on our European and US restructuring experience we address these issues in our report on Restructuring European High Yield Bonds.

If you would like to receive a printed copy of this report, please let us know.

Recent EU Insolvency Regulation

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The EC Regulations on Insolvency Proceedings (the “EIR“) came into force throughout the European Union (the “EU“) (except Denmark) on May 31, 2002 with the purpose of setting out the rules governing where in the EU insolvency proceedings should be opened, which law applies to the proceedings and to ensure that such proceedings are recognized across the EU. EIR provided that a company should file in the jurisdiction where its center of main interest or “COMI” is located and that there was a rebuttable presumption that this is the jurisdiction of incorporation. This led to a number of EU groups filing in the jurisdiction of the head office – for example the Rover Group had many offices around the EU but its insolvency process was run out of the UK. In addition groups frequently file where it is apparent that an insolvency procedure in a particular jurisdiction may have some advantages, for example the Eurotunnel group which has English and French companies which operate the tunnel filed in France to take advantage of a French insolvency procedure. It is often the case that European groups avail themselves of English scheme and administration procedures. In over 10 years of insolvency practice in the EU the benefits of this experience has led to a new Recast Regulation on Insolvency 2015/848 (the “Recast Regulation“), which was published by the European Parliament and Council on May 20, 2015. It came into force on June 26, 2015 and applies to relevant insolvency proceedings from June 26, 2017. This client alert addresses the key features of the Recast Regulation:

  1. a broadened scope, covering a range of commercial insolvency proceedings such as the Italian reorganization plan procedure which were not previously within the ambit of the regulation;
  2. a framework for group insolvency proceedings, which will allow for the coordination of insolvency procedures at an EU level;
  3. COMI – there is no mention of the controversial two year look-back period initially proposed by the European Parliament, but the presumption that COMI is in the place of the registered office will not apply if the registered office has shifted in the preceding three months;
  4. interconnected insolvency registers – national insolvency registers may be accessed on the European e-Justice Portal; and
  5. provisions which allow the officeholder in main proceedings to give an undertaking to foreign creditors to avoid secondary proceedings in other member states being opened.

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The Restructuring Mid-Summer Review: Europe and the Emerging Markets

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For those focused on the debt restructuring market, the Greek sovereign crisis (covered extensively in our recent updates1) has drowned out news of other debt restructuring matters this year. Our Alert below addresses key trends in Europe and the Emerging Markets this year which may have gone unnoticed given the understandable emphasis on Greece.

Opportunities for Distressed Debt Funds to buy attractively priced distressed corporate assets and work them out have been few and far between in recent terms. Prices of distressed assets have been high, and often par lenders have decided to extend and amend loans (rather than engage in loan sales to funds or effect fundamental work outs of problem loans). Risk has not been fairly reflected in the price of either primary or secondary market debt. The risk/reward dynamic has been skewed in favour of high risk and low yields; not an attractive combination. The main driver of the activities of Distressed Debt Funds is the default rate. In the 2015 Deutsche Bank Annual Default Survey, Deutsche Bank commented, ‘We can’t overstate how low defaults are…the 2010-2014 cohort [of High Yield Bonds] is the lowest 5 year period for HY defaults in modern history’. Hence, the low level of distressed debt activity.

Poor European growth rates, the difficult backdrop of the Greek debt restructuring talks, and major geopolitical risk, have yielded surprisingly few loan defaults and insolvencies in recent times. In Europe, restructuring activity has tended to be concentrated more in Southern than Northern Europe.

Read more.

Bank Resolution in Greece

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The result of Sunday’s referendum (July 5, 2015) which rejected the latest proposed bailout by the European authorities was unequivocal. The next steps in this crisis are far less clear, ranging from a swift renegotiation of the terms of the bailout together with an injection of liquidity into the Greek banking system in the most benign scenario to, at the other end of the spectrum, Greece exiting the Eurozone and attaining “pariah status” in the international capital markets.

In this client alert we focus on one aspect of the issues facing Greece – the liquidity crisis facing the Greek banks. We discuss bank resolution procedures available to the Greek authorities.

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Lehman Brothers Pension Scheme – The treatment of pensions claims in a UK insolvency process

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When the Lehman Brothers group imploded in September 2008, the impact of events on the Lehman Brothers U.K. pension scheme was not seen as a key concern for anyone other than the members themselves. Yet as time progressed, the scheme featured heavily in resolving the administration of many U.K. Lehman Brothers group entities and in the process, important legal principles relating to defined benefit pension schemes were decided. Many ancillary points were decided during the litigation (some of which are discussed below), but the most important issue, that of the priority of debts on a winding up, is of great significance.

Defined benefit schemes are a type of occupational pension scheme set up by employers for the benefit of their employees. There are generally two types of occupational pension scheme:

  • defined benefit schemes (where a defined level of benefit, usually calculated by reference to a member’s final salary, is promised on retirement); and

 

  • defined contribution schemes (where benefits payable on retirement are calculated by reference to contributions paid and returns on investment).

This article focuses on the operation of anti-avoidance pension legislation in relation to U.K. defined benefit pension schemes. In particular, we discuss the litigation over the imposition of pension liabilities on certain Lehman group companies and attempts of those companies to clarify the nature and extent of their obligations.  Read More.

Reg Cap Analytics: The Nationalisation of SNS – Lessons Learnt

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On February 1, 2013 De Nederlandsche Bank (DNB) nationalised SNS Reaal Group. The Dutch central bank used powers granted to it under the local implementation of the Bank Recovery and Resolution Directive (BRRD), the Special Measures for Financial Corporations Interventions Act.

Shareholders and subordinated creditors were expropriated without compensation as a last resort to prevent systematic contagion throughout the Dutch financial sector. Whilst the intervention act provided an important tool to prevent the collapse of SNS, some crucial aspects of the BRRD were not in place early enough to prevent the deterioration of SNS, most importantly a requirement for financial institutions to plan and prepare for scenarios that could lead to their failure, and early intervention measures allowing regulators to intervene in the management of banks.

In the light of the current regulatory framework, this article considers the background which led to the nationalisation of SNS and discusses whether the planning and preparation requirements and the early intervention measures provided under the BRRD could have resulted in a different outcome for SNS.  Read More.