The evolution of cross-border restructurings has progressed faster than many expected, as corporate transactions have become increasingly reliant upon international synergies, particularly as they face unprecedented macroeconomic issues.
Recent evolutionary themes include contrasting approaches to intercreditor/subordination arrangements (ICAs) and trends in insolvency venue selection.
Most European deals utilise ICAs to regulate creditors’ rights and solve outcome unpredictability across jurisdictions. As a result, European lenders rely heavily on out-of-court enforcement tools when dealing with cross-border transactions, in lieu of a one-size-fits all insolvency regime. ICAs help regulate creditor relationships by contractually replicating the certainty offered by the US Bankruptcy Code (the Code).
European ICAs typically include the following provisions:
Standstill periods that limit junior creditors’ rights to commence enforcement ahead of senior creditors (particularly over guarantees), in lieu of the Code’s automatic stay.
An express contractual release provision of junior creditors’ claims upon a distressed sale subject to fair value protections. Under this provision, the collateral agent releases all junior, intra-group and investor, i.e., sponsor, liabilities to allow for a clean sale if those value safeguards are met. Examples include requiring disposals to be run by competitive auction process, or with an independent fairness opinion to properly ascertain fair market value.
Debt purchase options, whereby junior classes of creditors can buy out senior classes at par before, or simultaneously with, enforcement to preserve perceived value.
Although ICAs play a vital role in disciplining contractual subordination in Europe, creditors must be mindful of ensuring there is a single point of enforcement in a creditor-friendly jurisdiction. Questions may arise in relation to statutory protections that are offered to borrowers under recent insolvency reforms, such as the new automatic moratorium introduced by the UK Corporate Insolvency and Governance Act 2020 (CIGA). It is, however, too soon to predict the impact of this enactment, given current uncertainties regarding its jurisdictional reach and implementation post-Brexit.
Unlike European out-of-court restructurings, US insolvency proceedings often involve a formal, court- approved process governed by the Code. This provides debtors, creditors, and parties in interest with a variety of built-in statutory protections, including an automatic stay, rules for sales of debtor assets, and plan confirmation requirements. Although utilised in restructuring transactions, US ICAs are not typically as extensive as European ICAs because the Code provides many of the same protections as the European ICAs.
Certain US ICA provisions will therefore likely differ from their European counterparts:
Narrower standstill provisions: liens are enforced only against shared collateral, usually last approximately 90-180 days, and commence once the junior creditor provides written notice of default to the senior creditor.
Limited signatories: US ICAs usually only bind first lien creditor(s), second lien creditor(s), borrower(s), and various guarantors (if applicable), while European ICAs typically bind an expansive list of parties, including ancillary lenders and hedge counterparties.
Waivers: second lien creditors typically waive certain bankruptcy-related rights, such as rights to object to debtor-in-possession financing, sale of debtor assets, request of relief from the automatic stay, etc.
Limited subordination: US ICAs subordinate proceeds of shared collateral only, not intra-group or investor debt, while European ICAs subordinate numerous “hollow tranches”.
Venue Selection Considerations
Chapter 15 Recognition Proceedings
It has become increasingly common for international debtors to seek US recognition of insolvency proceedings through chapter 15 of the Code. Like chapter 11 bankruptcies, a chapter 15 recognition proceeding provides an automatic stay of legal actions against a foreign debtor’s assets in the United States, providing injunctive relief against litigation in US courts that could interfere with a foreign bankruptcy proceeding.
Notably, this relief is automatically available only for foreign main proceedings. With foreign non-main proceedings, a stay of legal actions may be granted upon a debtor’s showing that such relief is necessary to i) protect debtor assets or creditor interests, and ii) carry out the purposes of chapter 15.
To be deemed a main proceeding, the foreign proceeding must be pending in the country where the debtor has its centre of main interests (COMI). In contrast, a non-main proceeding is one that is pending in a country where the debtor merely has an “establishment”, i.e., a place of operations. Although the debtor’s registered office is often presumed (subject to rebuttal) to be the applicable COMI in European jurisdictions, US courts consider a variety of factors to determine COMI, including the location of the debtor’s headquarters, its managers, its primary assets, and its creditors.
US ICAs are not typically as extensive as European ICAs.
To initiate a chapter 15 recognition proceeding, a “foreign representative” must file a petition, along with other documentation, including the decision appointing the representative and commencing the foreign proceeding. Foreign representatives should carefully consider the appropriate forum for filing a chapter 15 petition, as US jurisdictions have diverging views on whether or not the property requirements of Section 109(a) of the Code apply to foreign recognition proceedings. The Second and Ninth Circuits require a foreign debtor to have property in the US, e.g., domicile, residence, place of business, or tangible assets, a requirement subsequently lessened to include intangible property. Courts in the Third Circuit, however, have declined to enforce this same requirement in foreign recognition proceedings.
COMI Shifting and Insolvency/Pre-Insolvency European Reforms
The European approach to COMI differs from the US, especially in the treatment of the registered office presumption, timing (i.e., the reference date to determine COMI), and recognition of judgments. The EU Recast European Insolvency Regulation (REIR) has enhanced the application of the presumption that a debtor’s registered office is its COMI for the purpose of reducing abusive forum shopping across Europe. This has created a high bar for the rebuttal, requiring sufficient evidence to prove that a COMI is elsewhere.
In the United Kingdom, shifting COMI for venue selection purposes is a traditional method of establishing jurisdiction for English law schemes of arrangement. Sponsors should, however, consider potential tax and timing implications when introducing UK co-obligors into existing structures as, for example, Hema and Nyrstar have done. Changing the underlying documents’ governing law to English law has also been used for venue selection purposes. With the CIGA introducing a “significant connection” test in relation to the new Restructuring Plan, which is a permissive, rather than restrictive test, more overseas companies may be able to benefit from a forum advantage.
At the same time, insolvency/pre-insolvency tools available in certain European jurisdictions are increasingly bridging the gap between the Code and the features of chapters 11 and 15.
Dutch “super schemes” combine features from UK schemes of arrangement and chapter 11.
The UK Restructuring Plan, modelled on the existing scheme of arrangement, introduced the possibility of a cross-class cram-down under the new Part26A of the Companies Act, inspired by chapter 11 and the increasing trends in this direction in Belgium and the Netherlands. The omission of such measures from the UK restructuring framework was seen by many as the scheme’s major limitation. Despite its recent adoption, several market participants, such as Virgin Atlantic and PizzaExpress, have already taken advantage of it.
In contrast, Dutch “super schemes” combine features from UK schemes of arrangement and chapter 11 to reduce the need for forum shopping; for example, COMI must be in the Netherlands but recognition may be achieved under REIR.
French borrowers that are solvent but face difficulties (financial or otherwise) that they cannot overcome are encouraged to rely on the French safeguard or sauvegarde proceedings, (as Comexposium did), which again feature an automatic stay.
Familiarity with the benefits and detriments of these various regimes can assist both European and US companies with selecting the appropriate insolvency venue. Recently, US companies have opted for pursuing UK and European arrangement schemes rather than filing their main bankruptcy proceedings in the United States. For instance, in 2019, syncreon Group Holdings B.V. successfully used an English arrangement scheme to restructure its US-issued debt before seeking relief or recognition in the United States.
Even when comparing only a few aspects of cross- border insolvency, an increasing convergence emerges: the US approach accommodates cross-border capital structures better than ever, and the European approach focuses primarily on going-concern value protection without compromising creditors unless there is good cause to do so. The ever-growing sophistication of distressed and special situations investors, lenders, and sponsors means that there is likely to be some stress- testing of these concepts as markets continue to evolve.