International Insolvency: Considerations and Strategies. Davis Polk & Wardwell LLP

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Eustacia Campbell
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1 International Insolvency: Considerations and Strategies Davis Polk & Wardwell LLP

2 Introduction When a foreign issuer or a domestic issuer with significant assets outside of the United States seeks to restructure, investors may later face issues that were not expected or foreseen at the deal stage As emerging markets face continued challenges from low commodity prices, unfavorable currency exchange rates and slower-than-projected growth, investors should be prepared for a growing wave of restructurings that implicate foreign issuers or domestic issuers with significant foreign assets Even if a deal is structured like a typical U.S. deal and the documents are predominantly governed by U.S. law, investors ought to consider: Negotiation dynamics with counterparties whose goals, business culture and legal frame of reference may be very different than a typical domestic issuer Even if financing documents provide for a straight-forward mechanism for enforcing on collateral, this mechanism may be steeped in U.S. approaches and laws, and interaction (or lack thereof) with the laws of various jurisdictions can frustrate any enforcement efforts The ability to utilize U.S.-law restructuring options for foreign issuers or domestic issuers with assets primarily outside of the United States Local advisors can provide valuable insight and strategy advice to investors in these types of restructuring situations 1

3 Negotiation Considerations Negotiating with a foreign-issuer counterparty can present challenges beyond the obvious language differences and cultural differences Within the last ten years, there has been a wave of financing supported by a revenue stream from government concessions, and these situations can raise multiple issues: Will negotiations jeopardize the concession? Was the concession won through a transparent bidding process or are there allegations that the concession was won through bribery For example, many of the companies allegedly involved in the Lavo Jato scandal in Brazil have issued securities in the Untied States, primarily high-yield notes in the private placement transactions If lenders have to enforce remedies, will the concession be terminated? Some large foreign issuers are also family-owned businesses with deep emotional ties to their companies. The equity holders may: Exert significant control and view management as advisors, but not ultimate decision makers Deny that their company is financially distressed Be unwilling to give up equity, but at the same time also be unwilling to pledge personal assets or inject additional capital Seek a foreclosure fee for cooperating in the enforcement of remedies Corporate separateness may not be as strictly adhered to in certain jurisdictions as it is in the United States, which can make restructuring negotiations more difficult, especially in the diligence stage. Cash may be comingled and it may be difficult to trace proceeds of the financing transaction and from the collateral. 2

4 Enforcing Liens on Collateral in Foreign Jurisdictions Hypothetical: A Cayman issuer issues U.S. dollar denominated securities governed by New York law and secured by a Panamanian mortgage on a Panamanian-flagged vessel owned by a Delaware company, but operating off the coast of Nigeria. Whose law applies? Situations like this are not uncommon in cross-border deals, especially in project finance transactions. In an enforcement situation, a lender will have to consider the interplay between these various legal regimes, including: Has an event of default occurred under the New York law financing document? Will the Panamanian mortgage be recognized in Nigeria? Will Nigerian authorities cooperate with an enforcement action? Would a bankruptcy sale order from a Delaware bankruptcy court be enforceable in Nigeria? Could a Cayman scheme of arrangement release liens and bind creditors? In the OSX bankruptcy case, a Brazilian appellate court held that a Liberian mortgage was not recognized in Brazil and was unenforceable based on a treaty from 1926 The OSX case underscores the importance of understanding the interplay between the various legal regimes relevant to a particular transaction Secured creditors should understand if there are ways to improve their position in jurisdictions where their mortgages are vulnerable to non-recognition, such as through registration in local registries 3

5 Chapter 15 In 2005, the Unites States adopted the UNCITRAL model law and added Chapter 15 to the Bankruptcy Code UNCITRAL is an international restructuring cooperation regime A Chapter 15 proceeding is an ancillary proceeding where a U.S. court can recognize a foreign proceeding A foreign representative of the debtor commences a Chapter 15 proceeding Upon recognition of a foreign main proceeding, the automatic stay applies to the debtor and its property within the territorial jurisdiction of the United States A Chapter 15 proceeding can: Protect U.S. assets from creditor attack Confirm binding effect of procedures for U.S. creditors to file proofs of claim against foreign debtor Confirm binding effect against U.S. creditors of foreign plan of reorganization Facilitate lien-free sale of U.S. assets approved in foreign proceeding Permit foreign debtor to use cash collateral held by U.S. creditors Facilitate discovery against parties subject to U.S. jurisdiction 4

6 Chapter 15 Basic Structure Mandatory relief Petition for recognition of the foreign proceeding Order granting recognition Main proceeding Non-main proceeding U.S. voluntary case Discretionary relief Discretionary relief assets that should be administered in foreign proceeding Relief may be granted on filing of petition Mandatory cooperation with foreign court/foreign representative Concurrent proceedings 5

7 Chapter 15 - COMI Section 1502(4) defines a foreign main proceeding as a foreign proceeding pending in the country where the debtor has the center of its main interests ( COMI ) There is a presumption that the debtor s registered office is its COMI [A] debtor's COMI is determined as of the time of the filing of the Chapter 15 petition. To offset a debtor's ability to manipulate its COMI, a court may also look at the time period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition. In re Fairfield Sentry Ltd., 714 F.3d 127, 133 (2d Cir. 2013). In In re OAS S.A., 533 B.R. 83 (Bankr. S.D.N.Y. 2015), the Bankruptcy Court for the Southern District of New York concluded that COMI for OAS Investments, an Austrian special purpose entity, was Brazil. OAS Investments was formed to issue notes and then loan the proceeds of those notes to a direct subsidiary of OAS. OAS Investments had no separate, ascertainable presence in Austria; it was part of, and inseparable from, the OAS Group located in Brazil.... [T]he 2019 Noteholders had no legitimate expectation that the Austrian courts would play any role in the determination or payment of their claims. 6

8 Chapter 15 Relief Available Upon recognition of a foreign proceeding, Section 1521 gives the court discretion to grant other appropriate relief at the request of the foreign representative Section 1521(a) authorizes the court to stay actions or proceedings concerning the debtor s assets, rights, obligations or liabilities, stay execution against the debtor s assets, and suspend the right to transfer or dispose of assets of the debtor Kinds of relief under Section 1521: Staying the commencement or continuation of an individual action or proceeding concerning the debtor s assets, rights, obligations or liabilities Staying execution against the debtor s assets Suspending the right to transfer, encumber or otherwise dispose of the debtor s assets Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor Entrusting the administration or realization of all or part of the debtor s assets within the territorial jurisdiction of the U.S. to the foreign representative Extending any preliminary relief granted under Section 1519 Granting any additional relief that may be available to a trustee (except for certain avoidance actions) But court may entertain requests for relief pursuant to avoidance actions based on foreign law 7

9 Chapter 15 Assistance to a Foreign Representative In determining whether to give additional assistance to a foreign representative, the court must consider whether such additional assistance, consistent with the principles of comity, will reasonably assure achievement of objectives, including: Just treatment of all holders of claims Protection of claim holders in the United States against prejudice and inconvenience Prevention of preferential or fraudulent dispositions of property Distributions of proceeds substantially according to the Bankruptcy Code Where appropriate, the opportunity for a fresh start for an individual Designed to permit further development of international cooperation and not to limit relief, but not intended to create an end run around restrictions provided under other sections 8

10 Chapter 15 Public Policy Exception Section 1506 of the Bankruptcy Code provides a limit on recognition and cooperation: Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States Courts apply this public policy exception narrowly, and will only do so when an action is manifestly contrary to the law of the United States The court in In re Toft, 453 B.R. 186 (Bankr. S.D.N.Y. 2011) applied 1506 and denied a foreign representative s ex parte request for discovery of a German debtor s electronic communications that were stored on a U.S. server because of fundamental principles of protecting the secrecy of electronic communications The fact that application of foreign law leads to different results than the application of U.S. law is, without more, insufficient to trigger the public-policy exception In In re Rede Energia S.A., 515 B.R. 69 (Bankr. S.D.N.Y. 2014), creditors argued that enforcing a Brazilian plan or reorganization was inconsistent with U.S. public policy because the plan deviated from the requirements of a chapter 11 plan. However, the court concluded that the the proceedings in the foreign court progressed according to the course of a civilized jurisprudence and... the procedures followed in the foreign jurisdiction meet our fundamental standards of fairness, [so] there is no violation of public policy. 9

11 Chapter 11 for Foreign Issuers A foreign issuer, even if it has no operations in the United States, may still be able to be a debtor under the Bankruptcy Code so long as it has property in the United States Even a minimal amount of property such as a small bank account or a retainer provided to a U.S. law firm may satisfy this standard Why would a foreign issuer file in the United States? If the foreign issuer is subject to litigation in the United States related to its securities, that litigation will automatically be stayed upon filing If the foreign issuer has bank accounts in the United States, the automatic stay will prevent creditors form enforcing on those accounts If a foreign issuer has significant assets subject to U.S.-based creditors security interest, the automatic stay will prevent creditors from foreclosing, even if those assets are based in a foreign jurisdiction If the foreign issuer has U.S.-based creditors, such as bondholders, a Chapter 11 plan will unquestionably bind those U.S.- based creditors Despite its purported world-wide application, not all jurisdictions recognize the U.S. automatic stay, and creditors not subject to the personal jurisdiction of a U.S. bankruptcy court may nevertheless seek to exercise remedies under local law Certain key jurisdictions, such as Brazil, have not adopted UNCITRAL so orders issued by a United States court may not be enforceable in certain jurisdictions 10

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