NCBJ-ACB Joint International Program
September 29, 2015 (Sign-up for this session through your NCBJ regular registration!)
Moderator, Edward J. Janger, David M. Barse Professor, Brooklyn Law School
Hon. David Richards, British High Court
Christopher Redmond, Husch and Blackwell
Agustin Berdeja-Prieto, Berdeja y Asociados, S.C.
Daniel Glosband, Goodwin Procter/CBInsolvency LLC
Hon. Allan Gropper, Bankruptcy Judge S.D.N.Y. (ret.)
Title: “The Emerging Architecture for Coordinated Restructuring of International Corporate Groups”
For the last thirty years, bankruptcy lawyers have been working to facilitate the cross-border restructuring of multinational enterprises. From Maxwell to Nortel, courts have been developing techniques for coordinating bankruptcy cases across national lines. Law reform efforts both in the EU and through multilateral organizations such as UNCITRAL’s Working Group V have sought to facilitate these developments, promulgating a variety of soft and hard law instruments. In particular, the EU Regulation on Insolvency Proceedings, The UNCITRAL Model Law on Cross-Border Insolvencies, and the UNCITRAL Legislative Guide on Insolvency. These instruments have moved the ball forward considerably.
The focus, until recently, however, has been on facilitating the cross-border administration of a single entity from the court based at the debtor’s center of main interest (“COMI”) — creating a framework for cooperation by courts located in jurisdictions where the debtor has assets or an establishment. This is a necessary building block for the legal regime, but it is incomplete. Many, if not most, multinational enterprises are structured as corporate groups. The group structure can simplify some cross-border issues, clarifying entitlements by locating claims and assets within a single entity and legal regime. The group structure can, however, also complicate matters. In particular, the concept of COMI, that works to centralize a case where a single firm is involved, can pull a group case in multiple directions, as each member may have its own COMI. This, in turn, may frustrate efforts to achieve a coordinated restructuring or going concern sale of the enterprise.
This panel will focus on recent developments in in the EU, at UNCITRAL, and in practice that frustrate or facilitate governance and administration in the insolvency of corporate groups. This short essay will explain those developments, and will briefly describe the presentations to be made during the panel discussion.
Existing Instruments and the Problem of Corporate Groups
Two principal existing international instruments seek to coordinate the insolvency of a multinational firm across national boundaries: The EU Insolvency Regulation and the UNCITRAL Model Law on Cross Border Insolvency (the “Model Law,” or “Chapter 15” in the US). Both follow the approach known as “Modified Universalism,” where a “main” bankruptcy case, opened at the debtor’s center of main interest (“COMI”), coordinates and administers the assets of the debtor. Where assets, operations and creditors are located in other jurisdictions (the “Receiving Jurisdiction” or “Receiving Court”), the EU Regulation and UNCITRAL Model Law provide a mechanism for recognizing a representative of the debtor and providing assistance through the opening of a “secondary proceeding” under the EU Regulation or “ancillary proceeding” under the Model Law. These instruments have made real advances, but, again, are all focused on single firms.
Where a corporate group is involved, the single firm focus of these instruments and the concept of COMI may cause mischief. The COMI of the various subsidiaries may be at the nerve center of the group, but often it will be in the jurisdiction of registration. This is, for example, the presumption in the EU after the Eurofoods decision. The answer in any given case is, therefore, uncertain.
Emerging Tools and Approaches
Thus, in a group, the concept of COMI can help centralize the case, or it can prove a disruptive and disorganizing force. Additional tools were (and are) necessary to address this problem. First through case-law, and now through efforts to reshape the existing international instruments, a number of tools and concepts have emerged to address the problems posed by corporate groups. The panel will discuss this emerging architecture.
Informal Synthetic Treatment – Collins and Aikman
A principal exemplar of the emerging approach to groups can be found in the Collins and Aikman case under the EU Regulation. In that case an automobile parts supplier with subsidiaries throughout the EU opened a case in the UK. Creditors of group members located in other EU countries asserted that they would be entitled to priority treatment under local law if a secondary proceeding was opened. In order to save the cost and disruption of opening a secondary case, the UK administrator promised the creditors that it would grant them a distribution at least as good as the treatment they would have received in a territorial case. The UK court allowed the administrator to honor this agreement, even though it was inconsistent with the choice of law rule contained in Article 4 of the EU Regulation. This approach has been followed in subsequent cases and has proven useful.
Formalizing Synthetic Treatment in Group Cases
From this example emerge several key concepts that are the focus of current reforms in the EU and of harmonization efforts at UNCITRAL. The first concept is the replacement of the COMI concept with the concept of a “Coordinating Court” for the group. In the case pending in the Coordinating Court, the members of the group would all have standing to participate, and the members of the group can hammer out a coordinated “Group Solution” that maximizes the value of the enterprise. The second concept has a variety of names. It is variously called “Synthetic,” “Virtual,” “As-if,” or “No-worse Than” treatment. As a practical matter it means that the Coordinating Court has the power to disapply its local priority rules and instead match the treatment that creditors of a group member would have received if a territorial case was opened at the member’s COMI.
The first two concepts: “Group Solution” and “As-if” treatment are tools in the hands of the Coordinating Court. The third concept focuses on the Receiving Court – the court that is the COMI of the group member. It mirrors the concept of cooperation and assistance provided for under the Model Law, but it is tailored to the group context. This emerging third concept is that their must be a procedure through which the Receiving Court can elect to defer to and/or ratify the proceedings pending in the Coordinating Court if it is satisfied that participating in a group solution is in the best interest of the group member. Such a procedure may involve an undertaking by a representative of the Coordinating Court, a formal suspension of proceedings by the Receiving Court and a ratification of a group solution in the Receiving Court, or it may involve none of the above, where the law of the group member’s COMI allows the group member to participate voluntarily in the group solution without opening a secondary or ancillary case.
This vision is the motivation behind a series of recently adopted amendments to the EU Regulation, and to efforts under way at UNCITRAL to draft text for the Model Law and Legislative Guide to deal with groups. There are important differences in how a Group Solution might be implemented in a case under the EU Regulation as it is currently being amended, or under the emerging approach being discussed by UNCITRAL in Working Group V. The panelists will each take on a piece of this puzzle.
Corporate Groups Under the EU Insolvency Regulation
Hon. David Richards, a Judge of the British High Court, will describe the recent amendments to the EU Insolvency Regulation. In particular, he will focus on the provisions in the Regulation that allow the administrator in the Coordinating Case to enter into a binding undertaking to apply distributional rules of a group member’s COMI jurisdiction rather than the priority scheme of the forum court. He will also discuss new provisions that allow the court of the group member’s COMI to decline to open a secondary proceeding so long as the above-mentioned undertaking is respected.
Corporate Groups – UNCITRAL Working Group V
Christopher Redmond, a partner at Husch and Blackwell, is a member of the US delegation to UNCITRAL Working Group V. He will explain the related efforts at UNCITRAL to supplement the existing Model Law and Legislative Guide. First, these efforts seek to allow for the creation of a Coordinating Court that to facilitate the creation of a group solution, and to provide for the court at a member’s COMI to cooperate with and/or provide assistance in implementing a group solution where to do so is in the best interests of the group member.
Corporate Groups – Duties of Officers and Directors, The Mexican Example
Agustin Berdeja-Prieto, a partner at Berdeja y Asociados, S.C., will discuss the problems faced by the officers and directors of group members when a firm is in the zone of insolvency, especially when it must consider whether to participate in a Group Solution. He will also discuss the recent amendments to the Mexican insolvency law, with special attention to group issues.
Avoidance and Extraterritoriality
Finally, Dan Glosband will explore recent developments with regard to avoidance and extraterritoriality in cross-border cases. To skirt the prohibition against use of most of the Bankruptcy Code avoidance powers in a chapter 15 case, foreign representatives have attempted avoidance and recovery by deploying the avoidance law of the foreign proceeding, principles of international comity, state avoidance law and state common law remedies. Along the road to success or failure, they encountered the obstacles of personal and subject matter jurisdiction, extraterritorial application of U.S. law, standing and (for common law claims) the in pari delicto defense. If a foreign representative, or a trustee in a case under another chapter of the Bankruptcy Code, does obtain an avoidance judgment, enforcement in other countries may be problematic. Several recent decisions illuminate these issues.
Judge Allan Gropper will conclude the formal presentations by exploring the practical effects, if any, of these developments, taken together, on cross-border practice.