Cross-Border Restructuring Update
Proposed Amendments to Chapter 15 of the Bankruptcy Code
On August 20, 2018, the National Bankruptcy Conference (the "NBC"), a voluntary, nonpartisan, not-for-profit organization composed of approximately 60 of the nation's leading bankruptcy judges, professors, and practitioners, submitted a letter (the "Letter") to representatives of the House Subcommittee on Regulatory Reform and the House Committee on the Judiciary that proposed certain technical and substantive amendments to chapter 15 of the Bankruptcy Code. Chapter 15, which is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), was enacted in 2005 and establishes procedures governing cross-border bankruptcy and insolvency proceedings. To date, the Model Law has been enacted by the U.S. and more than 40 countries and overseas territories.
In August 2019, the International Committee of the American College of Bankruptcy (the "ACB") issued its own report (the "ACB Report") responding to the NBC proposals.
The Proposed NBC Amendments
A more detailed discussion of the amendments proposed by the NBC, most of which are not controversial, can be accessed here. The following is a summary of the proposals in the Letter that are controversial:
Abstention and Dismissal. Section 305 of the Bankruptcy Code provides that a foreign representative may seek dismissal or suspension of a recognized foreign proceeding if "the purposes of chapter 15 . . . would be best served by" dismissal or suspension. The Letter proposes that "there should be a clear statutory basis for the dismissal of cases involving debtors whose center of main interests [("COMI")] is outside of the United States when those cases either conflict with the purposes of chapter 15 or involve a debtor or assets over which the court does not have effective control." The Letter accordingly recommends that, to prevent abusive and otherwise inappropriate chapter 15 filings, section 305 be revised to authorize a foreign representative to seek dismissal or suspension of a recognized foreign proceeding on the additional basis that "the debtor's center of main interests is not the United States and the court cannot exercise effective control over either the debtor or the debtor's material assets."
Date for Determining Center of Main Interests and Establishment. A growing number of courts have ruled that a foreign debtor's COMI or the existence of an "establishment" (necessary for recognition of a foreign nonmain proceeding) should be determined as of the date of the filing of its chapter 15 petition for recognition in the U.S., rather than the date upon which its foreign proceeding was commenced, as the U.S. Court of Appeals for the Second Circuit ruled in In re Fairfield Sentry Ltd., 714 F.3d 127 (2d Cir. 2013), and most other U.S. courts have held. The NBC takes the position that this is contrary to the Model Law and a recent revision to the Model Law's Guide to Enactment, both of which measure COMI and the existence of an establishment as of the date of the commencement of the foreign proceeding. The Letter accordingly recommends that sections 1502(a)(4) and (5) and 1517(b) be amended to provide that COMI or the existence of an "establishment" is to be determined as of the date of commencement of the debtor's foreign proceeding rather than the date on which a chapter 15 petition is filed. If adopted, such a change would likely impede the ability of foreign provisional liquidators to effectuate "COMI shifting" or "COMI migration."
Venue of Cases Commenced Under Other Chapters. The Letter recommends that section 1511 of the Bankruptcy Code and 28 U.S.C. § 1408 (specifying venue requirements for bankruptcy cases) be amended to provide that, upon recognition of a foreign proceeding under chapter 15, the foreign representative may commence an involuntary case under chapter 303 or a voluntary case under section 301 or 302 in the court presiding over the foreign debtor's chapter 15 case. These provisions do not currently specify the venue for filing such cases under other chapters of the Bankruptcy Code.
The ACB Report
The ACB Report states that the ACB does not endorse the NBC's proposals, as follows:
Abstention and Dismissal. The ACB Report states that NBC's proposed amendment to section 305(a) is "confusing, unnecessary, and perhaps unwise." The ACB Report notes that: (i) the more general language of the existing provision—"the interests of creditors and the debtor would be better served by such dismissal or suspension"—provides adequate authority for courts to abstain from abusive and otherwise inappropriate filings; and (ii) elevating the concept of COMI by introducing it into section 305—a stand-alone section that applies in cases under all chapters of the Bankruptcy Code—"could lead to unfortunate unanticipated consequences."
Date for Determining Center of Main Interests and Establishment. The ACB Report explains that UNCITRAL's assumption in enacting the Model Law in 1997 was that a substantial economic presence in the country of the foreign proceeding would be a prerequisite to recognition as a foreign main proceeding under chapter 15, and that UNCITRAL clarified its position in 2013 in favor of measuring COMI as of the date of the commencement of the foreign proceeding. It also acknowledges that "bankruptcy tourism" (shifting COMI or the location of an establishment to find a favorable venue) can be a problem. However, the ACB Report states that a degree of flexibility and discretion must be preserved for bankruptcy courts to deal with specific situations on their particular merits. Instead of fixing the date for determining COMI or the existence of an establishment on the commencement date of a foreign proceeding, the report states that the "better course in this dynamic environment in which the ground underlying the concepts of main and nonmain proceedings may be shifting" is to establish a statutory presumption modeled on the section 1516(c) presumption of COMI in favor of the registered office "in the absence of evidence to the contrary." New section 1516(d) would provide that: "In the absence of evidence to the contrary, it is presumed that the center of the debtor's main interests and the presence of an establishment should be determined as of the date of the commencement of the foreign proceeding."
Venue of Cases Commenced Under Other Chapters. The ACB Report states that amending the bankruptcy venue statute, 28 U.S.C. § 1408, to require that all cases commenced by a foreign representative be filed in the court that entered the chapter 15 recognition "is not necessary and likely to provoke controversy." According to the report, "A fact of life in Congress is that bankruptcy venue is a lightning rod for controversy for reasons not related to the merits of the NBC proposal," and amendment of the venue provision "does not appear to be necessary to accomplish the purposes of chapter 15."
Other restructuring professionals and organizations, including the International Insolvency Institute, have also weighed in on the NBC proposals. The National Conference of Bankruptcy Judges considered these proposals and recommendations at its annual meeting in Washington, D.C. from October 30 through November 2, 2019.
Landmark syncreon Cross-Border Restructuring Completed
On September 19, 2019, the Ontario Superior Court of Justice added the final chapter to a landmark cross-border restructuring when it entered an order recognizing the restructuring of syncreon Group Holdings B.V. ("syncreon") and its subsidiaries (collectively, the "debtors") under the Canadian Companies' Creditors Arrangement Act (the "CCAA"). Recognition of the restructuring in Canada followed the English High Court's approval on September 10, 2019 of schemes of arrangement for syncreon's Dutch and English subsidiaries, and recognition on September 11, 2019 of the schemes under chapter 15 of the Bankruptcy Code by the U.S. Bankruptcy Court for the District of Delaware. The debtors' reorganization is widely considered to be the first-ever use of an English scheme of arrangement to restructure debt issued by a U.S.-based global enterprise. It also appears to be the first time that an English scheme has been recognized under the CCAA.
The debtors are global providers of specialized logistics and supply chain solutions to multinational automotive and technology sector companies. Prior to the restructuring, the debtors had approximately $1.1 billion of debt under a secured credit facility, senior notes, liquidity loan facilities and an asset-based lending facility. A substantial number of obligors on the debt were organized in jurisdictions where chapter 11 or other "U.S.-based" options were not possible or could not provide the relief necessary to implement a comprehensive restructuring. For these reason, the debtors amended the agreements governing the credit facility and the notes to change the governing law from New York law to English law.
Pursuant to the restructuring, the debtors: (i) reduced their funded debt by approximately $690 million; (ii) repaid their existing asset-based lending facility; (iii) gained access to $125.5 million in additional liquidity from a group of ad hoc lenders; and (iv) entered into a new $135 million asset-based lending facility.
The restructuring was implemented by means of English schemes of arrangement for syncreon's Dutch subsidiary, syncreon Group BV, and its English subsidiary, syncreon Automotive (UK) Ltd., followed by recognition of the schemes under chapter 15 of the Bankruptcy Code and the CCAA. Pursuant to the terms of the schemes: (i) the $225 million secured credit facility was reinstated, and the lenders (the "senior lenders") received 80% of the equity (the "new equity") in a newly-established Dutch holding company; and (ii) noteholders received a 4.5% interest in, and warrants for, the new equity. In addition, senior lenders and noteholders that timely entered into a restructuring support agreement with the debtors received a lock-up payment equal to an additional 5.5% and 2.5% of the new equity, respectively. Anticipated recoveries from the schemes have been estimated to be as much as 72% for the senior lenders and as much as 10% for noteholders.
In addition, although not part of the schemes: (i) lenders under the new $125.5 million liquidity facility received 2.5% of the new equity; and (ii) lenders that agreed to backstop the new liquidity facility received 5% of the new equity.
The schemes were overwhelmingly supported by the senior lenders and the noteholders at a meeting of creditors convened in London on September 3, 2019. As noted, the English High Court sanctioned the schemes on September 10, 2019. Notably, the English court concluded that amendment of the law governing the senior credit facility and the notes to English law created a sufficient connection with England to confer the court with jurisdiction. The court also noted that, by entering into the restructuring support agreement, more than 95% of both the senior lender and noteholder classes had submitted to the jurisdiction of the English court. See Syncreon Group BV, Re  EWHC 2412 (Ch) (September 10, 2019) at ¶ 29. Finally, the court wrote that "use of the English jurisdiction and the scheme process is regarded as the only viable route for restructuring the scheme companies on a going concern basis." Id.
The debtors' global footprint and the presence of guarantors in jurisdictions other than the U.K. meant that judicial recognition of the schemes in certain key jurisdictions was a crucial part of the restructuring. With recognition of the schemes in the U.S. and Canada, the restructuring has been successfully completed. The landmark restructuring is a testament to the importance of comity and cooperation among the courts of various nations in connection with cross-border restructurings and bankruptcies.
Jones Day represented an ad hoc group of secured term loan and revolver lenders in the global restructuring of syncreon.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.