INSOL International
Global Insolvency Practice Course
Module A
Virginia Woolf Room
Hotel Russell
Monday 7th SeptemberWednesday 9th September 2015
Day One
Welcome
G. Ray Warner, Course Leader
St. John's University School of Law Of
Counsel, Greenberg Traurig LLP, USA
Core Committee
Course Leader: G. Ray Warner, St. John's University
School of Law Of Counsel, Greenberg Traurig LLP, USA
Jan Adriaanse, Leiden University, The Netherlands
Scott Atkins, Henry Davis York, Australia
(Board Director INSOL International)
Ian F. Fletcher, University College London
Rosalind Mason, Queensland University of Technology,
Australia
Paul Omar, Nottingham Trent University, UK
Michael Veder, Radboud University Nijmegen,
The Netherlands
Group of Thirty-Six
AlixPartners LLP
Allen & Overy LLP
Alvarez & Marsal LLC
Baker & McKenzie LLP
BDO LLP
BTG Global Network
Cadwalader, Wickersham & Taft LLP
Chadbourne & Parke LLP
Clayton Utz
Cleary Gottlieb Steen & Hamilton LLP
Clifford Chance
Davis Polk & Wardwell
De Brauw Blackstone Westbroek
Deloitte
Dentons
DLA Piper
EY
Ferrier Hodgson
Freshfields Bruckhaus Deringer
Goodmans LLP
Grant Thornton
Greenberg Traurig LLP
Hogan Lovells
Huron Consulting Group
Jones Day
Kaye Scholer LLP
King & Wood Mallesons
Kirkland & Ellis LLP
KPMG LLP
Linklaters LLP
Morgan, Lewis & Bockius LLP
Norton Rose Fulbright
Pepper Hamilton LLP
PPB Advisory
PwC
Rajah & Tann Asia
RBS
RSM
Shearman & Sterling LLP
Skadden, Arps, Slate, Meagher & Flom LLP
South Square
Weil, Gotshal & Manges LLP
White & Case LLP
Housekeeping
• Coffee Breaks and Lunch – timing
• Mobile telephone & Blackberry switched off
• Assessment forms – completion & return
Session One
A Framework for, and
Concepts and Instruments of
International Insolvency
Lecturer:
André Boraine
University of Pretoria, South Africa
Framework for discussions
• Section A: General Background
• Section B: Sources and nature of
international insolvency
• Section C: Harmonization of National
insolvency laws
A. GENERAL BACKGROUND
•
•
•
•
•
•
Framework: 1. A - M
Core terminology: 2
History: 3.1
Comparative aspects: 3.2
Classification of insolvency systems
Different classes of creditors
A.1. Framework
– A. Essence/ nature
– B.Policy considerations
– C.Sources
– D.Similarities/ differences Corporate v
Consumer
– E.Gateways and commencement
A.1. Framework
– F.Effects
•
•
•
•
•
•
F.1.Automatic stay (moratorium)
F.2.Estate assets (local & foreign)
F.3. Personal effects and liability
F.4.Executory contracts
F.5.Set-off and netting
F.6.Avoidable dispositions
– A.2. Terminology
A.3.2 Some global developments
• America
–
–
–
–
Review commission 1973
1978 Bankruptcy Code (Unified Act)
Fresh start
Reform late 1990’s –
• 2005 Amendments: chapter 15 –CBIL (adopted version of
UNCITRAL Model Law on Cross-Border Insolvency)
• England
–
–
–
–
Cork report of the 1980’s
Insolvency Act of 1986 (Unified At)
Insolvency Act 2000 and Enterprise Act 2002
CBIL: s 426, Ins R 2006(Model Law), EU Ins R
• EU
A.2. Some global developments
• The Netherlands
– Faillissementswet of 1897
– Fresh start – Shuldsaneringsregeling
– Insolvency Reform
• Africa
• South Africa
–
–
–
–
Insolvency Act of 1936
Not unified Act and Mixed legal system
Reform
Dual CBI law system (CBIL)
• Western Africa: OHADA
A.2.Some global developments
• Australia
– Harmer Report
– Not single unified Act
– CBI: 2008 Model CBIL
• ASIA
– China: 2006 PRC Bankruptcy Law
– Asian Development Bank (ADB)
– Hong Kong: English insolvency laws:
• Personal: amended in 1996
• Companies: under review
A.2.Some global developments
• Former Eastern European countries:
– Russia : 2002 Insolvency Act
– Some even adopted Model CBIL, i.e.
Poland
– ERDB
• South – America
– Brazil: Bankruptcy and Restructuring
law of 2005
– Mexico: Model CBIL
– Cross-border treaties: Montevideo
A.1.2.B. Policy -Classification of
insolvency systems
• Wood:
– Pro-creditor
– Pro-debtor
– Not interested
• Advantage of creditors
• Rescue culture
A.1.2.A. Essentials of insolvency
systems
• Wood:
– Pooling of assets (universal concept)
– Creditors are paid pari passu (?)
•
•
•
•
•
•
Initiation process
Administrator
Publication (notification)
Powers of administrator
Creditors participation
Supervision
A.1.2.A. Essentials of insolvency
systems
• Sealy and Hoolley:
– Individuals – protect, fresh start/
discharge
– Corporations – preserve business or
viable parts
– Pari passu – except priorities
• Fletcher:
– Common denominator - collectivity
A.1.2.A. and H. Essentials of
insolvency systems
• Distribution rules: Wood:
– Super-priority
– Priority creditors
– Pari passu creditors
– Deferred creditors
– Expropriated creditors
Section B: THE SOURCES AND
NATURE OF INTERNATIONAL
INSOLVENCY:
B4 & 5: INTRODUCTION
• What is Int Ins law/ CBIL ?:
– No universal set of laws
– National legal systems differ• Bankruptcy/ insolvency and
• The general law (rights)
• Wessels: insolvency rules which cannot
be fully enforced…
• Fletcher: …insolvency that transcends a
national legal system… regard to other
systems than domestic
• Quest: predictability
Section B4 & 5: Context of
international insolvency:
Introduction
• General:
–
–
–
–
–
–
–
Economic affairs with foreigners
Interests in property in more than one country
Contractual obligations in various countries
Free markets/ different national laws
Absence global - court, parliament, law
Territorial: jurisdiction, local laws
Approaches:
• Insular
• Cooperate
B.5.Context of international
insolvency
– Sources for cooperation
•
•
•
•
Comity (reciprocity)
Court’s discretion
Legislation
Treaty
– Risk of multiple insolvencies:
• Weaker creditors may loose out
• Risk of fraud, asset dissipation across borders
– Thus: dealings various jurisdictions, assets
different jurisdictions, companies, groups
B.5.Context of international
insolvency
• Scenario 1:
• ABC Co. Incorporated in USA
• Branches in England and SA
– (business operations)
– Treatment of branches?
• Order in USA?
– England, SA?
B.5.Context of international
insolvency
• Scenario 2:
• ABC Co. holding company of X Co.
in England and Y Co. in SA.
– Difference?
• Structure for dealing with crossborder matter
B.5. Context of international
insolvency: Terminology
• Main proceeding: domicile; principal
office? (COMI) – universalilty
– What law will regulate?
• Non main proceeding: (secondary
proceeding) – modified universality
– Local law will apply
• Concurrent proceeding
– Different bankruptcy proceedings
running concurrently
B.5. Some general difficulties in
cross-border context
• Recognition of foreign judgments
• Technical meaning of insolvency
– Balance sheet/ cash flow
•
•
•
•
•
•
•
Priorities/ preferential claims
Avoidance law
Labour dispensation
Estate representative and structure
Prior-acquired rights: securities
Rescue v liquidation
Funding/ contributions
B.5. Some general difficulties in
cross-border context: early
thoughts
• Lex mercatoria
• Jabez argued in 1825 for uniform system
of insolvency in Europe
• Henry 1827 – stumble block absence of
general consent
• Jitta end 19th century:
• World law and federal parliament
(unattainable)
• Assimilation of national laws based on set
of rules
B.5. Some general difficulties in
cross-border context: early
thoughts
• Jitta - treaty with minimum
requirements:
– Jurisdiction
– Publicity
– Avoidance law rules
– Equality of creditors
– Jurisdiction – domicile
• secondary places of interest
B.5. The essence of a crossborder insolvency case
• Fletcher poses 3 questions:
– In which jurisdiction must procedure be
opened?
– Which system must rule elements of
diversity?
– International effects to proceedings in a
particular forum?
• Two aspects:
– Comity: recognition
B.5.The essence of a crossborder insolvency case
– Choice of law (Private international law
‘PIL’)
• PIL gives direction amidst diversity’
• PIL principles universal?
• But not even uniform PIL principles
– jurisdiction
– choice of law
– international recognition
B.5.Different approaches/
theories
• Universality (Fletcher, Omar &
Friman)
– One procedure (unitary), co-ordination
– Covers all the assets
– Problems: administer worldwide scale,
[lex concursus v lex loci]
• Territoriality (‘grab rule’)
– Procedure in each jurisdiction (plurality)
• Unitary: one procedure
• Plurality of proceedings
B.5.Different approaches/
theories
• Shades of theories:
• Modified universality (Westbrook)
• Cooperative territorialism (LoPucki)
– Conventions
– Problem: Local asset protection
• Contractualism (Rasmussen)
– Company, articles of incorporation, nor
real contract
B.5.Different approaches/
theories
• Internationalist principle (Fletcher)
• Pragmatic approach to achieve
– Treaty etc or in absence PIL
– Universality must complement Territoriality
– Cooperation between courts
• Internationalist principle aspires to realise:
• Ideals of collectivity maximum dividend on equal
basis universally (equality of creditors)
• Respect for pre-required rights in CB matters
• Evolutionary process to attain global common pool
B.5.Different approaches/
theories
• Universality effects:
– ‘Rough wash’ (swings and
roundabouts)
– Net gain – indirect advantages
commerce, lowers costs, increase trade
B.5. Some further directions and
difficulties
• Omar:
– Multiplicity of Proceedings-take more
funds
– Exercise control by limited number of
courts desirable
– Security over assets based on location
of assets
– Priorities
– Rescue – one court best
B.5.Some further directions and
difficulties
• Nadelmann:
– Discriminatory rules regarding the
treatment of foreign creditors
– Lack of proper notice proceedings
– Race of diligence – rush to enforce and
execute
• Omar: also lack of knowledge of
foreign procedures, language time
distance and cost
B.5. Point of departure with
cross-border case
• Case (PIL) determinants:
– Type of assets
– Location
– The court first issuing the order
• Adhere: universalism or territorialism
B.5. Important terms
• Main proceeding (COMI)
– Main place of business
• Non main proceeding
– Establishment
• Presumption registered office or habitual address in case of
individual.
• An “establishment” is “a place of operations where the
debtor carries out non-transitory economic activity with
human means or goods”
• Westbrook Modified universalism.
– Two primary factors:
• Predictability
• Optimal..substantive law.
• Big four bankruptcy policies that should be governed by the
law of the main proceeding: control; priority; avoidance and
reorganisation.
B.5. Important terms
• COMI: Other than place of incorporation, either
headquarters (real seat) or its operations (like
business, main assets.)
• DUAL COMI: Maxwell case: headquarters
England but assets in USA (but prefer
headquarters.)
•
•
•
•
•
•
Ancillary or secondary proceedings
Concurrent jurisdiction and cooperation
Foreign representative
Recognition
Lex concursus
Lex loci rei sitae
B.5.4. Operation of some CB
systems: RSA
• Dual system in theory:
– Common law: comity, convenience
– Adopted model law (not operable yet)
– No treaties (SADC ?) Boraine & Olivier
• Common law:
• Outward bound request:
– Letter of request but?
– Foreign jurisdiction will dictate
B.5.4. Operation of some CB
systems: RSA
• Inward bound request for recognition
• Movable/ immovable assets
–
–
–
–
–
–
Approach local high court
Discretionary (comity) grant recognition
Except for precedents no predictability
Powers determined by court order
Surplus go to foreign proceeding
Foreign tax claims (no basis)
• Opening of local insolvency proceeding:
must comply SA law
B.5.4. England and Wales
• England and Wales: s 426 IA Act
– S 426(4) Courts in UK or any ‘relevant’
country, shall assist.
– Relevant countries: 20 (not USA!)
– Courts assist outside s 426 (common
law)
– Adopted Uncitral Model Law on CrossBorder Insolvency
– EU Regulation
B.5.4. USA
• Former s 304 of the USA BR Code
– Universal effect, modified universality
– Inward and outward requests
– Factors for relief:
• Comity: international duty and convenience
(Hilton v Guyot) but sometimes not
granted:
– Public policy: Cost order English court
– Where recognition inimical to US interests
– Since 2005, Chapter 15 adopted Model
Law
43
B.5.4. Pragmatic solutions:
judicial and legislative:
Applications to Court
• Discretion of courts
– See SA, (UK)
– Comity
– Forum conveniens/ non conveniens
• Discretionary powers derived from
legislation
– unilateral statutory regulation
– USA and Germany
• Direct application without court’s
discretion ?
B.5.4. Pragmatic solutions:
judicial and legislative:
Applications to Court
• Protocol approach: coordination and
cooperation
– Maxwell example
– IBA, Committee J: Concordat Guide
• Principle 1: Single forum, primary
responsible
• Principle 2: Main forum to coordinate
collection and distribution of assets, no
discrimination, discharge
• Principle 3: Multi forums, notification and
participation
B.5.4. Pragmatic solutions:
judicial and legislative:
Applications to Court
• England and Wales: s 426 of the
Insolvency Act of 1986
– S 426(4) Courts in UK or any ‘relevant’
country, shall assist.
– Relevant countries: 20 (not USA!)
– Courts assist outside s 426 (common
law)
– Adopted Uncitral Model Law on CrossBorder Insolvency
B.5.4. Management by treaty
• Treaty
– Conventional way to set uniform
approach
– Even out procedure and minimise
exceptions re:
•
•
•
•
•
Priorities
Avoidance rules
Revenue claims
Classes of creditors
Asset recovery
B.5.4. Management by treaty
• Types of initiatives
– Limited: bilateral and multinational
– Regional
• Bilateral initiatives
• Europe
– Many like
• Treaty of Verona of 1204
• Franco Swiss of 1869 (modern bilateral)
B.5.4. Management by treaty
• Bilateral initiatives
• Europe
– Superseded or abrogated: Brussels
Convention of 1968 and EU Reg of 2000
• Regional or wider multilateral initiatives
resulting from conferences:
– Montevideo
– Havana (Bustamante)
– Nordic
• Use of treaties? Lack of data, Fletcher
B.5.4. Global initiatives
•
•
•
•
•
•
•
World Bank
IMF (International Monetary Fund)
Asian Development Bank (ADB)
OECD (Org for Economic Development)
UNCITRAL(UN Com on Int Trade law)
IBA, committee J of IBA
More regional:
– EU, American Law Institute (ALI, NAFTA),
OHADA
-Stability of international financial systems-
B.6.Various international
instruments: General
• Wessels para 1 - 35
• These instruments cover:
– Cross-border aspects
– Establishing international guidelines for
local insolvency reform (harmonisation)
– Related topics, like securities (general
law)
B.6. Various international
instruments: General
Omar:
Cross-border insolvency issues will not
be resolved by leaving it to individual
States. We need coordination on an
international level.
B.6. Various international
instruments: General, Wessels
para 1 - 35
1. World Bank and IMF
• After 1997-1998 Asian Financial crisis,
measures to improve stability
• IMF 1999 policies to design insolvency
system
• World Bank Principles and Guidelines for
Effective Insolvency and Creditor right
Systems, 2001(2005)
– Legal framework for creditor rights (principles
1-5)
– Legal framework for insolvency (p 6-16)
B.6. Various international
instruments:CBI, EU Reg Wessels
para 1 - 35
22. EU Regulation
• Uniform jurisdictional rules to be
applied by all MS (except Denmark)
• Choice of law provisions
• Recognition of the proceedings and
the liquidator
• Addressing concerns of creditors
(exceptions)
B.6. Various international
instruments:CBI, ALI Guidelines
Wessels para 1 - 35
18. Note also ALI’s Guidelines Court to
Court Communications
• 18A. UNCITRAL Model Law on
Cross-Border Insolvency: the judicial
perspective [pre-release] (2011)
• 18.B. UNCITRAL Practice Guide on
Cross-Border Insolvency
Cooperation (2009)
• 18.C. CoCo guidelines
SECTION C: THE HARMONISATION OF NATIONAL INSOLVENCY LAWS
How far will we come with cross border
rules if we don’t harmonise national
insolvency and related laws?
C.7. The harmonisation of
national insolvency laws
• Some problems re CBI
– No global parliament or court
– National laws differ: both insolvency
and general
– Terminology
• Initiatives to harmonise
– World Bank Principles
– IMF principles
– OECD
C.7. The harmonisation of
national insolvency laws
– Various regional initiatives: EU, ABD,
IBA, ERBD, OHADA
– UNCITRAL Guidelines 2004
• Comprehensive addressing basically all
core aspects
• Related initiatives: securities
– Regional: EU, ADB
– UNCITRAL: Securities
C.9. The harmonisation of
national insolvency laws
Regulation of insolvency representatives
• EBRD Principles:
–
–
–
–
P 1 – Qualifications & licensing generally
P 2 – Appointment in an insolvency case
P 3 – Review of office holder appointment
P 4 – Removal, resignation & death office
holder
C.9. The harmonisation of
national insolvency laws
– P 5 – Replacement of office holder
– P 6 – Standards professional conduct
– P 7 – Reporting and supervision
– P 8 – Regulatory and disciplinary
– P 9 – Remuneration and expenses
– P 10 – Release of office holder
– P 11 – Insurance and bonding
– P 12 – Code of ethics
Coffee
Benjamin Suite
Session Two
Introduction: UNCITRAL Model
Law on Cross-Border Insolvency
Law
Lecturer :
Prof. G. Ray Warner
St. John's University School of Law,
Of Counsel, Greenberg Traurig LLP, USA
Lots of Variety Around the
Globe
• What types of Systems?
– Typically liquidation systems
– Modern trend
• Rescue or reorganization systems
– Many are modeled on U.S. Chapter 11
The World is Small
• Assets can be moved easily
– For legitimate or illegitimate reasons
• Cross-border fraud is common
– Recovery is difficult
– Creditors may not want to fund
uncertain efforts
The World is Small II
• Business is global
– Creditors, suppliers, investors & customers are
global
• Businesses are global
–
–
–
–
–
Example – U.S. Corporation
NY headquarters & U.S. patents
Korean parts manufacturing plant
Mexican & Greek assembly plants
German, UK, Canada & U.S. stores
How Do You Liquidate a
Global Business?
• Seven or more separate bankruptcy
cases
• What if each has different rules?
Value Preservation
• What if assets are worth more if sold
together
– E.g., the Korean parts plant with the
Mexican & Greek assembly plants and
the U.S. patents
Worse – How Do You Save It?
• Where should you reorganize a
global company?
• Can you do it?
– What if Korea lacks a reorganization
system?
– What if it has critical differences?
• E.g., no Debtor in Possession
• Or different rules for patent licenses
Problem of Multi-National
Companies
• Name one that isn’t!
• What are the bankruptcy options
– Territoriality vs. Universality
• Territoriality –
• U.S. case deals with U.S. assets, Mexico
case deals with Mexico assets, etc.
• Universality –
• one case deals with all assets and all
creditors
Which One is Better?
• Can you ever get to universality?
– Loss of sovereignty
– But – effect of convergence
• If the law is the same everywhere, how much
do you care about choice of law?
• Still have problem of enforcement of foreign
orders
EU Insolvency Regulation
• EU faced this problem first
– How do you deal with a common
market and multiple different insolvency
systems?
– You need jurisdictional and choice of
law rules
• UNCITRAL Model Law
– Much less ambitious
UNCITRAL Model Law on
Cross-Border Insolvency
• Why a Model Law?
• Why not a treaty?
– Too difficult politically
– Also easier to make local variations
• Trade off - less uniform but wider
adoption
– Adopted in 23 jurisdictions
EU & UNCITRAL Adopt
Modified Universality
• Which nation’s insolvency
proceeding should be the main one?
– The main proceeding should be the one
pending where the company’s main
interests are centered
• COMI - “center of main interest”
Main vs. Non-Main Proceedings
• Proceeding pending in the COMI is a
“foreign main proceeding”
• Other proceedings are “foreign nonmain proceedings”
– But only if pending where the company
has an “establishment”
• What if no establishment there?
– Model Law does not address it
Main vs. Non-Main
• This matters a lot in the EU since
main proceeding orders may be
binding in other EU nations
• Not as critical under Model Law
– Nothing is “binding”
What is COMI
• COMI - “center of main interest”
– Not defined in Model Law
– But start with presumption it is the registered
office
• Interpretation rules
– International origin & uniformity
• Can look to EU Regulation
– EU Test – Nerve center
• Plus – “ascertainable by third parties”
– Why? Creditor expectations
COMI Reconsidered
• Nerve center + ascertainable
• What is the COMI of a corporate group?
• What is the COMI of an Irish subsidiary of
Apple?
• How easy is it to change COMI?
– And get a different bankruptcy outcome
– EU “bankruptcy tourism” to the UK
What Does the Model Law Do?
• Not much
– But that is still an astounding
development in international
bankruptcy law
The Major Features
• Access to local courts
• Recognition
• Relief
• Communication and Co-Ordination
First - Access
• For insolvency administrators
– Both inbound and outbound
• Express authority for local administrator to appear in
foreign courts
• Procedures for foreign representative to appear in
local courts
Access to Local Courts
• Foreign representative can sue and
defend in debtor’s stead
• Foreign representative can institute a
local insolvency proceeding
– Insolvency is presumed
• Foreign representative can participate in a
pending local insolvency proceeding
Access of Foreign Creditors
• Insolvency laws often treat local creditors better
– May not even permit foreign creditors to participate
• Model Law gives foreign creditors notice and
“same rights” as local creditors
• Right to distribution
• Foreign creditors may be treated worse
– But not worse than general unsecureds
– Option to exclude foreign tax and social
security claims
Second - Recognition
• Simply local court recognition
(confirmation) that:
– There is a foreign insolvency proceeding involving this
entity, and
– The Foreign Representative is the right person to
represent that estate's interests
• This is the first issue in the case
– Model Law says it should be quick and easy
• But it is where you need to fight hard if you want to
block local enforcement of the foreign proceeding
What is a “Foreign Proceeding”
•
•
•
•
Collective
Judicial or administrative proceeding
Law relating to insolvency
Subject to supervision of
– Foreign judicial or other authority
• Purpose of liquidation or reorganization
Effects of Recognition
• Portal to appear in local courts
• May participate in a local insolvency
proceeding
• May obtain insolvency-related relief
from local courts
What Relief is Available?
• Main gets more than Non-Main
– Lots of focus in literature
• Automatic relief if Main – Art. 20
– Stay of proceedings and executions
• Subject to local stay exceptions
– e.g. secured credit may not be affected
– Suspension of debtor’s power to
transfer property
Discretionary Relief
• But the same stay is available in
Non-Main
– Just not automatic – Art. 21
• So how great is the difference?
• Also pre-recognition relief allowed
– All Art. 21 relief
– Available in Main or Non-Main
What Else Can You Get?
• Discovery
• Entrustment –
–Entrust local assets to foreign
representative!
–Entrust distribution to foreign
representative!!
• Local court collects assets and send them to foreign
court to distribute under a different set of rules!
Local Insolvency Powers
• Art. 21 - "any appropriate relief“ available
to a local insolvency administrator
• Art. 23 use of local avoiding powers
• Strategy consideration –
– (1) file a full local proceeding, or
– (2) seek recognition and exercise local
powers
Limitations in Art. 21 & 22
• Court “may” grant relief
• “Appropriate” relief
• Local creditors must be “adequately
protected”
• All parties must be “adequately protected”
• May impose “appropriate” conditions
• Lots of discretion!
Main vs. NonMain
• Relief granted should reflect the
nature of the foreign proceeding
– Relief may be more restricted in
NonMain
– E.g. does it relate to assets that should
be administered in the foreign NonMain
proceeding?
Additional Powers
• Finally Art. 7 - may "provide
additional assistance" under other
local laws
– U.S. version includes enforcement of
foreign insolvency orders
• E.g., enforce foreign reorganization plan
against local creditors
Manifestly Contrary to Local
Public Policy
• All relief subject to Art. 6 "manifestly
contrary” to local public policy
– Should be very narrow
• Goal is to facilitate foreign proceeding
– Often raised but rarely applies
• Real limitation is discretion
– Threatens to undermine goals of the
Model Law
Using Foreign Law
• Can I use a more favorable foreign law to
reorganize and then use the Model Law to
enforce it locally?
• How different can the foreign law be?
Co-operation
• Let's talk
– Court to court communication
– Representative to representative
communication
• Authority for court and insolvency
representative to communicate with
foreign court or foreign insolvency
representative
Let's Work Together
• Courts and representatives are
directed to "cooperate to the
maximum extent possible"
Types of Co-operation
• Can a US and Canadian judge
hold a joint televised hearing?
• Can the courts approve
agreements?
– Common - called protocols
– Usually procedural
• But use of concentration account?
The Law of Nowhere?
• What law governs a cross-border case?
–
–
–
–
A little US
A little Canada
A little UK
A little protocol that is the law of neither?
• Can you predict the outcome for your
client?
Recap
• The big issues
– You can use any nation's law to handle a
global case if it purports to grant
jurisdiction
• But enforcement is the problem
– You can use the Model Law to:
• Coordinate multiple national cases
• Collect foreign assets and enforce your nation's
bankruptcy orders in some other nations
Session Three
Overview of US Chapter 11
Lecturer :
G. Ray Warner
St. John's University School of Law,
Of Counsel, Greenberg Traurig LLP, USA
Why Use Chapter 11?
• Preserves business operations
– Can retain management
– Can force retention of contracts
– Can obtain financing
• Can maximize value
• Very flexible restructuring tool
• Can sell, restructure, renegotiate, etc.
Contrary Considerations
• Significant court involvement
– Very transparent
– Disclosure & discovery
– Any party can challenge any action
• Organized creditors with Committee
– Professionals paid by estate
– Will sue over improper actions
• This makes it expensive
• Outcomes may be hard to control
Cross-Border Importance
• Only two major jurisdictions welcome
foreign debtors
– United States
– England & Wales
• Both have rescue and sophisticated
professionals and courts
Bring Us Your Failing Companies
• Entities can file if “any assets” in US
– Global Oceans – retainer sent to US
bankruptcy lawyers was enough
– But – usually only if US case is needed
• Dismissed Yukos
• Test – best interests of creditors and debtor
• Model Law (chapter 15 in the US)
may cause US courts to dismiss
more foreign cases
Worldwide Application
• US law applies extraterritorially
– Applies to worldwide assets and
operations
– But can orders be enforced?
• Yes – against US counterparties
• Yes – against any entity that has or aspires
to have valuable US assets or operations!
– Entirely local foreign entities?
• US courts permit 100% payment
Limiting Disruption
• Insolvency not relevant
– File if need to use the tools
• DIP – Management remains in control
absent fraud or gross mismanagement
– CRO has usually replaced prior
management
– Examiner or CRO may be used
• DIP can operate business
Liberal Use of Property
• Ordinary course transactions continue
without court order
• Critical Vendors –
• Probably can pay immediately
• Secured assets –
– Can use in ordinary course
– Can sell in ordinary course (inventory)
– But “cash collateral” requires order or consent
– “first day” orders
Secured Creditors Affected
• Rights are modified in chapter 11
• But entitled to “adequate protection”
– Protects “value,” not the contractual rights
• Is value at risk – equity cushion
– Court’s error in evaluating risk
• Cash payments or additional liens
– To cover potential loss in value
• Court’s valuation error
Broad Stay Prevents Disruption
• Automatic stay blocks most creditor
action
– Major reason for filing
– Cash flow – stop paying debts
– Secured creditors are stayed
• Must have “adequate protection”
• Contract counterparties can’t cancel
Contract & Lease Powers
• Counterparties must continue to perform
– Bankruptcy default provisions invalidated
• Debtor’s Options –
– Reject – “pre-petition” damage claim
– Assume – Forces continued performance
• This facilitates a rescue
– Assume and assign –
• Overrides anti-assignment clause
• This facilitates a sale
• Captures value in below-market agreements
Post-Petition Financing
• Liberal DIP financing rules
– Created a DIP financing market
• Ladder of options
– Ordinary trade and unsecured
– Super-priority
– Secured or second lien
– Prime lien
• Subordinates pre-petition secured creditor
• Must have “adequate protection”
Many Restructuring Options
• Revise the capital structure
– Debt for equity swap
• De-accellerate secured debt
– Rebuild the business
– Reduce & re-amortize the debt
• Resize the business
– Reject failing stores, keep successful ones
– Or reject failing units, keep core business
• Sell the business
– Going concern or piecemeal
Chapter 11
• Single point of entry
– Pre-insolvent or insolvent
– Small company, large company or individual
– Can reorganize or liquidate
• Goal is a confirmed plan
• Debtor controls the process
– Exclusive option to propose plan for 180-days
• Can extend up to 18 months
Plan Process
• Classify creditors
– Substantially similar to others in class
• Negotiate & propose plan
– Creditors committee plays important role
• Court Approves disclosure statement
– Extensive information for creditors
• Solicit votes by class
Class Acceptance
• Majority required for acceptance
• > 2/3 in $ amount of voting holders
• Majority in number of voting holders
– Vote binds dissenting class members
• “Best interest of creditors” test
• Plan can be partial
– May leave classes “unimpaired”
• Rights not altered by plan
• No right to vote
• Deemed to have accepted plan
Class Cramdown
• Can bind dissenting class if
– At least one class accepts and
– Plan is:
• “Fair & equitable” and
• Does not “discriminate unfairly”
• Unfair discrimination
– Look side to side
– 100% frequent flyers v. 10% others
Fair and Equitable I
• For unsecured and equity classes
– “Absolute priority” rule
• PV = 100% or
• Look up/look down
–Unsecureds can force equity out
»Creates negotiating leverage
Fair and Equitable II
• For secured classes
– Return collateral or
– Sell collateral
• Get bid in rights
• Lien attaches to sale proceeds
or
– Write-down - PV > value of collateral
• Rewrite face amount
• Rewrite interest rate
• Rewrite payment schedule
– Can stretch out many years
Valuation is the Key
• Court determines value
– What is the business worth?
• Risk of erroneous valuation
• This encourages negotiation
Modern Chapter 11 Process I
• Sale under §363 replaces plan
– Quicker and cheaper
– Business is preserved but entity may not be
– Contract assignment power allows going
concern value to be sold
– “Free & clear” power allows purchaser to take
assets free of claims
• Compare to English “pre-pack”
Sale Process
• Potential buyer is arranged before
filing
– Buyer may also be DIP lender
• Court approves sale process
– Generally buyer’s offer is subject to
competing bids
– Can be sold free and clear of• Liens
• Claims – including successor liability
Creative Use of Sale Power
• General Motors
– Created NewCo to purchase retained
product lines
• Assumed desired dealership agreements
• Assumed other desired agreements
• Took assets free of liabilities
• How is this different from a reorganization?
Modern Chapter 11 Process II
• US “pre-pack”
– US securities law does not permit collective
action clauses in bonds
– Can’t bind dissenting holders outside
bankruptcy
• Votes are solicited before bankruptcy
– Usually part of an “exchange offer”
• May be enough acceptances to avoid filing
Quick Chapter 11 Confirmation
• If enough votes for plan
– File chapter 11
– Use pre-petition votes for confirmation
• Confirmation binds all members of class
• Partial pre-pack –
– Only certain classes restructured
– Others left “unimpaired”
– Compare to English “scheme”
Corporate Groups
• Procedural consolidation
– All cases before same judge
• Global Oceans – even foreign entities
– Single plan involving multiple entities
• Substantive Consolidation
– Combines assets and debts
• Rarely forced by court decision
– But consensual “deemed” substantive
consolidation is common in large cases
Lunch
Hotel Russell Restaurant
Session Four
Workout Clinic
Lecturer:
Prof. Dr. Jan Adriaanse, University of Leiden,
The Netherlands
Jan Adriaanse
Professor of turnaround management at Leiden Law School
 Department of Business Studies
 TRI Leiden – “Turnaround, Rescue, Insolvency” research team
 www.tri-leiden.eu
Founder of global think tank Turnaround PowerHouse®
 Training programs and advisory including turnaround games for
turnaround professionals, bankers and management teams
 www.turnaroundpowerhouse.com
Teaching philosophy
Harvard Business School approach
•
Preaching versus teaching
•
Participant centered learning
•
Learning by sharing knowledge and experiences in discussion
•
Learning by doing things together (e.g. cases, serious gaming)
•
Based on conceptual framework “Crisis. What crisis?”
Conceptual Framework: Crisis. What Crisis?
Healthy
company
Assumption
Crisis
Small
Structural
underperformance
Large
Earnings
crisis
54%
Examples strategic crisis
Focus on shrinking markets
Underestimating new competitors
Uncontested assumptions about market/industry
Neglect of real and/or changing consumer preferences
Liquidity
crisis
17%
Scope for action
Need for action
29%
Governance crisis
Time
Large
Cause
Effect
On average companies start restructuring 16 months too late
Source: Blatz e.a. 2005 [amended by Jan Adriaanse 2005-2014]
Small
Program
13.45
Introduction
13.55
Workout Discussion
Preparation in groups [20 minutes]
Plenary presentations and discussion
14.45
The Trump Casino Workout Game
What is serious gaming?
Introducing the Workout Game
Playing the Workout Game…
17.15
Group analysis on Workout Game process and results
17.50
End of session
Workout discussion
•
•
•
Preparation in groups
Input based on your own practical workout experience
Report group conclusions on a flipchart paper + short presentation/explanation
1. What is a successful (out-of-court) “workout” according to your
definition?
2. What are advantages and disadvantages of workouts compared
to judicial bankruptcy/reorganization procedures? How do you
deal with that in practice?
3. What are cross-cultural differences and (potential) conflicts in
international workout situations?
– Your experiences? Characteristic examples/anecdotes?
– How to deal with it?
Informal workouts versus judicial reorganizations
Advantages [not limited]
•
•
•
•
•
•
•
Confidentiality
Control
Flexibility
Wide range of solutions possible
Less reliance on legislation or judiciary
Encourage commitment
‘Selffulfilling prophecy’ can be avoided due to relative silence and
‘controlled’ process
Disadvantages [not limited]
•
•
Holdout problem / free-rider risk
No instruments to force stakeholders to participate in solution
Source [amended]
Chatterji & Hedges, Loan workouts and debt for equity swaps. A framework for successful corporate
rescues, Wiley Finance, 2001
Cross-cultural differences and potential conflicts in workouts
Examples
• Settling of priorities
• Local habits and behavior
• Times of the day people work and hours in workweek
• Acceptable pay wage/fees
• Motivation of people
• Ehtical standards practiced in business
• “Rescue culture” in business community / stigma on failure (yes/no)
•
•
•
•
•
•
(direct) Involvement of governments
Influence of local labor laws and role of unions
Bankruptcy and tax laws (debtor - creditor friendliness)
Level of experience with workouts and bankruptcy (”Kosovo” example)
Sophistication of banking sector (“London Approach”)
Etc…
Source [amended]
DiNapoli (ed.) Workouts & Turnarounds II, Wiley/PriceWaterHouseCoopers, 1999
The Trump Casino Workout Game
What is serious gaming?




Simulation of real life situation – in a safe environment
Role change to better understand other actors in workout situations
In the end: what can we learn from the game to use in daily practice?
Challenging your own assumptions…
 Recent games: Zambia, Uganda, Tunisia, UK, South Africa, Suriname, Italy, Rwanda
Introducing the Trump Casino Workout Game
Five teams (“roles”) at the “Workout Game Table”
1.The Trump Casino Management Team
2.The Informal Equity Committee
3.The Informal Lenders Committee
4.The Workout Firm
5.Team Trump
Instructions
• Every team receives a sheet with specific instructions
Fair play
• No team is being manipulated – no boobytraps
• Just remember: the more serious you play, the higher the gain…
How we play the game: three rounds to come to a workout solution
• Round 1: 30 minutes to prepare with your subgroup
– State/define your position
– Initiative for 1st meeting taken by Workout Firm
• Round 2: maximum of 30 minutes to come to a standstill
agreement
• Round 3: 90 minutes to come to a written workout agreement
Your position in the game…
Be cooperative and act in good faith
yet keep close eye on your legal and
financial position at all times and
bear in mind the instructions
What if no agreement at 17.15…?
Atlantic gaming authority will then
terminate the gaming license which will
immediately lead to an uncontrolled
shutdown of the company
So, there seems to be quite a good reason for an informal
workout solution…
Plenty of time…
Welcome at the Workout Game Table
Game analysis
1. Did you come to a solution?
2. What were the hurdles to overcome?
3. What are your lessons learned?
Success and failure factors of
corporate turnarounds/workouts
Success factors (Adriaanse, 2005)
•
•
•
•
•
•
Active attitude by management and shareholders
Seeking help from professional advisors
Adequate operational turnaround measures [fixing the business]
Transparency with regard to financial situation
Injection of risk-bearing capital
Involvement of financiers (major financial and trade creditors)
Confirmed by (among others): R3 research (UK), Slatter &
Lovett (London Business School) and Franks/Sussman (UK)
Characteristics of successful turnarounds
according to Slatter & Lovett
Some management changes are almost always necessary
Use of multiple cash generating strategies (and in particular divestment)
Improved financial control systems
An understanding that cost reduction strategies are important but
insufficient by themselves
Nearly all successful strategies involve focusing resources on selected
business units and selected product-market segments
Improved operational marketing
Significant organisational change in terms of organisational structure,
processes and improved communications
[based upon Slatter & Lovett 1999]
Some examples of conflicts/bottlenecks in
turnaround/workout routes [Adriaanse, 2005]
– Principal banks putting pressure on management [tension]
– Unsecured creditors cannot be convinced and yet refuse to take
“haircut” [holdout problem]
– Investors only interested under unfavorable conditions
– Shareholders and potential investors not agreeing on sales price
– Principal bank canceling financing
– Uncontrolled “race to collect” started by creditors [frustrations among
creditors]
– Problems becoming publicly known leading to “self-fulfilling prophecy”
– Conflicts with service providers and suppliers on payment terms
– Emergency loans necessary yet shareholders and banks refusing
– “Signaling” of shareholders by not injecting additional finance [no trust
anymore]
– “Skeletons in the cupboard” leading to pressure of potential investors
towards liquidation
Among others leading to…
Failure factors [Adriaanse, 2005]
Passive attitude management and shareholders
– Started too late; “too little, too late”
– Need for strategic redirection not seen
No speedy and adequate operational restructuring
– Lack of turnaround planning based on vision, strategy, operational and
financial planning
– Too much focus on costs instead of sales
– No indications of methodical approaches towards turnaround
Important stakeholders not involved
– Banks badly informed
– Important suppliers/vendors ignored
Insufficient transparency regarding financial situation and proposed
reorganization
– MIS is disaster
– Lack of attention with regard to steering on financial key performing
indicators
Not enough efforts towards bringing in risk-bearing capital (equity)
– Too much focus on additional debt and/or workout agreements with
(unsecured) creditors
– Need for additional equity not seen by management
Summary of failure factors
Frustrations and loss of trust
Not enough attention on negotiation and
communication
No improvement in operational (financial) results
Dealing with loss of trust
Why is communication needed? With whom?
What is good communication?
How to achieve trust, communication and
results in daily workout practice?
Harvard negotiation framework
1.
2.
3.
4.
[People] Adopting a problem-solving approach and not
allowing personality differences to side-track this [dealing with
frustrations]
[Interests] Avoiding taking and defending positions but rather
concentrating on parties’ respective interests [enlightened selfinterest]
[Options] Before making decisions, generating as many
options as possible, particularly those creating mutual benefit
[tailor made solutions]
[Criteria] Establishing objective and fair criteria for a resolution,
rather than the judgment of either party [sophisticated
turnaround plan – commercially viable future - root causes
addressed]
Harvard Principle 1: People
•
Consciousness must be present with regard to “feelings, emotions,
frustrations” of stakeholders involved
•
Resolving financial distress has a great way to do with:
– Communication
– Frustrations
– Dealing with fear of losses at various parties involved
Harvard principle 1: deal with human factor first, then move on
Harvard Principle 2: Interests
•
Negotiations often take place one-on-one
•
Important to focus on common interest of company, individual creditor and
other creditors
– Interests are related
Harvard principle 2: “pull” parties out of positions and show them
what is to be gained for all
Harvard principle 3: Options
•
Fact: companies in distress lack money
•
Yet, various options always available between direct payment and debt
write-offs [“workout”]
•
“Opportunism” to be avoided; specifically with regard to tendency to have
unsecured creditors footing the bill
Harvard principle 3: always look for various options to choose from by
creditors
Harvard Principle 4: Objective criteria
“Company viability” is a subjective fact
Holistic turnaround plan needed as basis for negotiations
Harvard principle 4: establish “objectified subjectivity”
Consensus in literature: turnaround plan (10 elements)
1. Company profile – business model + causes
2. Analysis of external environment – market analysis
3. Turnaround strategy – sales growth + retrenchments
4. Strategic intent – description of desired end-state
5. Operational analysis – formulated SWOT-issues outlined
6. Operational action plan – detailed operational plan of attack
7. Financial prognostications – profit & loss-, and cash forecasts
8. Time scheme – timetable + milestones
9. Risk analysis – best & worst case scenario, and risk reward ratio
10. Summary – `to the point` outline (e.g. for bankers steering
committee)
Lessons learned...
•
•
•
•
•
•
•
•
•
•
First of all, try to create a standstill and with that stabilize the situation
(“informal moratorium”)
Agree about “fresh money” and how to deal with it in case the company
collapses anyway (“loss-sharing agreement”)
Try to generate as many options as possible before deciding on
solutions
Make information transparent for all
Be aware of fact that some stakeholders in practice have more power
than strictly based on their legal positions
Create a negotiation atmosphere based on mutual trust and respect
Keep a close eye on legal positions: do not try to put stakeholders in a
worse off position as compared to their legal status
Use Harvard Negotiation principles and INSOL Statement to help guide
negotiations and to create some kind of “informal rules” (framework)
Make sure the company works on a turnaround plan (“fixing the
business”)
Use a little bit of humor… (indeed, research shows it helps in difficult
situations)
Rotterdam Science Tower
Marconistraat 16, 12th floor
3029 AK Rotterdam
The Netherlands
tel +31 (0) 10 204 56 70
fax +31 (0) 10 204 55 55
jan.adriaanse@turnaroundpowerhouse.com
www.turnaroundpowerhouse.com
INSOL international statement of
principles for a global approach to
multi-creditor workouts
[appendix]
Appendix II:
Statement of Principles for a Global Approach to Multi-Creditor Workouts
First Principle
• Where a debtor is found to be in financial
difficulties, all relevant creditors should be
prepared to co-operate with each other to give
sufficient (though limited) time (“stand still
period”) to the debtor for information about the
debtor to be obtained and evaluated and for
proposals for resolving the debtor´s financial
difficulties to be formulated and assessed, unless
such a course is inappropriate in a particular
case
Second Principle
• During the standstill period, all relevant creditors
should agree to refrain from taking any steps to
enforce their claims against or (otherwise than by
disposal of their debt to a third party) to reduce
their exposure to the debtor but are entitled to
expect that during the standstill period their
position relative to other creditors and each other
will not be prejudiced
Third Principle
• During the standstill period, the debtor should not
take any action which might adversely affect the
prospective return to relevant creditors (either
collectively or individually) as compared with the
position at the standstill commencement date
Fourth Principle
• The interests of relevant creditors are best
served by co-ordinating their response to a
debtor in financial difficulty. Such co-ordination
will be facilitated by the selection of one or more
representative co-ordination committees and by
the appointment of professional advisors to
advise and assist such committees and, where
appropriate, the relevant creditors participating in
the process as a whole
Fifth Principle
• During the standstill period, the debtor should
provide, and allow relevant creditors and/or their
professional advisers reasonable and timely
access to, all relevant information relating to its
assets, liabilities, business and prospects, in
order to enable proper evaluation to be made of
its financial position and any proposals to be
made to relevant creditors
Sixth principle
• Proposals for resolving the financial difficulties of
the debtor and, so far as practical, arrangements
between relevant creditors relating to any
standstill should reflect applicable law and the
relative positions of relevant creditors at the
standstill commencement date
Seventh Principle
• Information obtained for the purposes of the
process concerning the assets, liabilities and
business of the debtor and any proposals for
resolving its difficulties should be made available
to all relevant creditors and should, unless
already publicly available, be treated as
confidential
Eighth principle
• If additional funding is provided during the
standstill period or under any rescue or
restructuring proposals, the repayment of such
additional funding should, so far as practical, be
accorded priority status as compared to other
indebtedness or claims of relevant creditors
Day One Close