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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What You Need to Know About the Uniform Voidable Transactions Act

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Last year, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) rolled out one of its latest projects, the Uniform Voidable Transactions Act (“UVTA”).[I]  According to NCCUSL’s website,[ii] the model statute has already been enacted in eight states, including California (where it takes effect on January 1, 2016), and has been introduced in four others, including Massachusetts.

The first thing to know about the UVTA is that it is the Uniform Fraudulent Transfer Act (“UFTA”)[iii] with a new name and the legal equivalent of a fresh coat of paint. In a lengthy article about the drafting of the model statute[iv], the reporter for the NCCUSL drafting committee, Professor Kenneth C. Kettering, describes the model statute as “the UFTA, renamed and lightly amended.”  As light as the amendments may be, however, Kettering notes that they are “significant enough to warrant attention”[v]—significant enough, at least, to justify his publishing a 57-page law review article on the subject. The extensive “Official Comments” that were promulgated by NCCUSL along with the model statute also provide some insight into the thinking of the drafters, but Professor Kettering’s article is far more forthcoming about the reasoning behind the proposed statutory changes. Anyone who wants the full story should, therefore, consult Professor Kettering’s article.   We will try here instead simply to describe the most significant provisions in the new or, at least, improved model statute.

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Investing in Southern Europe

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Leaving aside the drama of the Greek crisis, Southern Europe is in recovery from a long recession.  Our recent panel of experts discussed investment opportunities in Italy, Spain and  Portugal.

Topics covered include the nature of the opportunities they are working on and the commercial environment facing investors who are looking to undertake  new money debt,  equity and distressed debt investments in the region. The audience was updated on the significant recent developments in the  insolvency laws in Spain and Italy which are designed to facilitate corporate restructuring. We also addressed some of the English law restructuring procedures which investors have used where local law measures have not proved suitable.

The live video presentation from this event is available here, and the presentation materials from this seminar are also available at this link.

Decoding the Code: Bankruptcy Code Section 510(a) – Subordination Agreements in Bankruptcy

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Once upon a time, under the Bankruptcy Act of 1898, subordination agreements entered into outside bankruptcy were generally enforced by bankruptcy courts, but the issue was left to the discretion of the courts to be determined on a case-by-case basis. Since 1979, when the current Bankruptcy Code came into effect, however, the treatment of subordination agreements in bankruptcy has been governed by statute: “A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law.” 11 U.S.C. § 510(a).

Since a bankruptcy court is supposed to enforce a subordination agreement that is enforceable under applicable nonbankruptcy law, section 510(a) closes the door on the exercise of case-by-case discretion by bankruptcy courts, but the statute nevertheless opens up a series of other issues that the courts have been grappling with for over 35 years now.  What constitutes a “subordination agreement”? Must a bankruptcy court enforce all the provisions of a “subordination agreement”?  What about rights of the parties that are not spelled out in the agreement (including rights that are derived from equitable principles) or that are dealt with in the agreement in ambiguous terms?  How are the answers to such questions affected by section 510(a)’s mandate that “subordination agreements” should be enforced in bankruptcy cases?

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Solus v. Perry: Case Update

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In May, we wrote about a number of recent cases addressing the enforceability of oral agreements in syndicated loan and bankruptcy claims trading. One of those cases, Solus v. Perry, is still active at the trial court level in New York. Last month, the court entered an order denying both parties’ motions for summary judgment.

At issue in Solus v. Perry is whether the parties agreed to all of the material terms of a transaction in which Solus would purchase Perry’s participation interests in claims against the bankruptcy estate of Ponzi schemester Bernie Madoff’s investment firm. Although Solus and Perry never signed a written contract, Solus argues that the parties agreed to all of the material terms necessary to create a binding oral agreement under New York law (i.e., asset, quantity, and price) in recorded telephone conversations, emails, and Bloomberg messages.  Perry contends that no agreement was formed because certain other terms (which Perry characterizes as material) were left open, including how litigation risks and fees would be allocated and whether Perry would have to indemnify Solus for any potential damages resulting from Perry’s bad acts.

In its decision and order, the court concluded that the evidence submitted failed to resolve all material factual issues in favor of either party.  Specifically, the following two issues must be determined before summary judgment can be entered—1) which terms were material to the trade, and 2) whether the parties agreed to all of those material terms.

A pretrial conference is scheduled for October 7, 2015. We will keep you posted.

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.

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Decoding the Code: Reclamation Under Section 546(c) of the Bankruptcy Code

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This is the second post in our “Decoding the Code” Series.  The Series intends to discuss various sections of the Bankruptcy Code in a clear and easy to understand manner.  Today’s post addresses enforcement of reclamation rights in a bankruptcy case.

Let’s decode the basics:

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First Circuit Rules Bankruptcy Code Preempts Puerto Rico’s Recovery Act

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On Monday, July 6, the Court of Appeals for the First Circuit affirmed the February 6, 2015 order and injunction of the Puerto Rico District Court and held that section 903(1) of the Bankruptcy Code preempts the Puerto Rico Debt Enforcement and Recovery Act (the “Recovery Act”).  Franklin Cal. Tax Free Trust, et al. v. Commonwealth of Puerto Rico, et al., (1st Cir. July 6, 2015) (Case No. 15-1218): On February 10, 2015, we reported on the district court’s decision holding that the Recovery Act was unconstitutional.

As a result of amendments to the Bankruptcy Code in 1984, Puerto Rico, unlike states, may not authorize its municipalities, including its public utilities like PREPA or PRASA, to seek federal bankruptcy relief under chapter 9 of the Bankruptcy Code. In considering the appeal of the district court’s order, the Court first confirmed that it had jurisdiction to consider the bondholders’ claims of preemption, that those claims were ripe and that they had become ripe immediately upon adoption of the Recovery Act. The Court then ruled that the Commonwealth’s effort to allow its public corporations to restructure their debt by enacting the Recovery Act is expressly preempted by the federal Bankruptcy Code. Rejecting the Commonwealth’s arguments that the 1984 amendments made the preemption provisions of section 903(1) of the Bankruptcy Code inapplicable, the Court stated that “§ 903(1) has applied to Puerto Rico since the predecessor of that section’s enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)’s prohibition. Op. at 4. Because the Court affirmed the district court’s order and injunction, the Court declined to consider the Commonwealth’s appeal of the district court’s order denying motions to dismiss the bondholders’ Contracts Clause and Takings Claims. Op. at 21.

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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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Implications for the Imposition of Capital Controls in Greece

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Introduction

Following the recent event over the weekend (27/28 June 2015), we set out below a short guide on the current status in Greece.

Background

Months of negotiations on a deal to restructure Greece’s debts appear to have failed. Greek Prime Minister Alexis Tsipras has called a referendum for 5 July 2015 on the draft bailout proposals (the “Proposals“) from the EU[1]. Mr Tsipras government will campaign against the Proposals which required a number of measures relating to VAT increases, budgetary restraints, pension reforms and privatisation measures.  On Saturday 27 June 2015 Eurozone finance ministers refused to extend the current EU bailout programme which expires on 30 June 2015. In response on Sunday 28th July 2015 the Greek government announced the imposition of capital controls.

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