Third party releases are provisions that release non-debtors, such as officers, directors, shareholders, or non-debtor affiliates, from claims and causes of action held by creditors or other non-debtor parties. Third party releases are often analyzed in chapter 11 cases, but are also dealt with in chapter 15 cases. The courts of appeal for the Fifth, Ninth, Tenth and the District of Columbia Circuits have held that third party releases in a chapter 11 reorganization case can only be issued with the consent of the affected creditors, while the courts of appeal for the Second, Third, Fourth, Sixth, Seventh and Eleventh Circuits have held that third party releases are permissible in chapter 11 cases without the consent of creditors in limited circumstances, which vary by circuit.
A recent holding by the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) confirmed that third party releases embodied in a UK scheme of arrangement can be enforced in United States chapter 15 cases. In In re Avanti Communications, the Bankruptcy Court found third party releases in a UK scheme of arrangement enforceable under sections 1521 and 1507 of the United States Bankruptcy Code. The opinion emphasized the overwhelming approval by creditors for the debtor’s restructuring proposal. The court found that enforcing the third party releases in this case would non-consensually bind only a small number of creditors who abstained from voting.
Chapter 15 of the Bankruptcy Code provides a mechanism for a foreign debtor or a foreign representative to seek recognition of a foreign insolvency, liquidation, or bankruptcy proceeding and the enforcement of a foreign court’s orders issued in such proceedings in the United States. Avanti focuses on whether a UK court order authorizing third party releases in a scheme of arrangement should be enforced under chapter 15, which reflects principles of comity, a doctrine by which the laws and rulings of one country are recognized by the courts of the United States. The Bankruptcy Court held the third party releases ordered by the UK court should be recognized and enforced in the United States.
Background on Avanti Communications Group PLC
Avanti Communications Group PLC (the “Debtor” or “Avanti”), a company incorporated in England and Wales, is headquartered in London and operates satellites in and around Europe, Western Asia, and Africa. The satellites are used in markets such as broadband and government.
Avanti financed its satellite construction and operation with a loan facility and issued senior secured notes to creditors maturing in 2021 (the “2021 Notes”) and 2023 (the “2023 Notes,” collectively, the “Notes”). In 2017, Avanti encountered delays with two satellites, which resulted in financial hardship for Avanti. Due to the financial strain, Avanti began to discuss a scheme of arrangement for its capital structure. Avanti ultimately decided on a scheme of arrangement that would amend the 2021 Notes and equitize the 2023 Notes (the “Scheme”).
The Scheme of arrangement
The Scheme provided that the 2023 Notes would be exchanged for 92.5% of Avanti’s share capital. The share capital was to be distributed pro rata, according to the principal amount of 2023 Notes each creditor held. The Scheme also provided that the creditors were to approve the third party releases, including releases in favor of Avanti’s direct and indirect subsidiaries that guaranteed the 2023 Notes. The releases barred creditors from pursuing any claims or liability in connection with the 2023 Notes against Avanti or its non-debtor affiliate-guarantors (the “Third Party Releases”). Avanti also solicited consent from the noteholders (the “Consent Solicitations”), to amend, among other things, the maturity date and interest rate of the 2021 Notes, and the jurisdiction provision of the 2023 indenture. The Consent Solicitations were approved by holders of 98.09% of the aggregate principal amount of the 2021 Notes, and holders of 87.73% of the aggregate principal amount of the 2023 Notes (the “2023 Noteholders”).
In connection with the restructuring, Avanti commenced a proceeding in the UK (the “UK Proceeding”) to seek approval of the Scheme from the High Court of Justice of England and Wales (the “UK Court”). Upon Avanti’s request, the UK Court issued an order convening a meeting of the creditors of the Scheme, namely, the 2023 Noteholders (the “Scheme Creditors”), and authorizing the appointment of a foreign representative to represent Avanti in a chapter 15 case in the United States. Thereafter, Avanti solicited votes from the Scheme Creditors. At the meeting of creditors, Scheme Creditors holding 98.3% by value of the outstanding 2023 Notes voted in favor of the Scheme. None of the Scheme Creditors voted against the Scheme. Avanti therefore requested an order from the UK Court sanctioning the Scheme. Finding that all the requirements for sanction were met, the UK Court sanctioned the Scheme.
The Chapter 15 case
In order to ensure that the Scheme would be enforced in the United States, Avanti filed a petition for recognition under chapter 15. In the Second Circuit, where New York is located, a debtor must satisfy the requirements of Section 109(a) of the Bankruptcy Code to be eligible for chapter 15 relief. Under Section 109(a), a debtor must have either a domicile, residence, a place of business, or property in the United States. The Bankruptcy Court found that Avanti satisfied the property requirement, as the foreign representative’s counsel held funds from Avanti as a retainer, and the 2023 indenture was governed by New York law and provided that New York was the forum for any disputes. The Bankruptcy Court further found that the UK Proceeding and the chapter 15 petition satisfied the requirements for recognition, and that Avanti’s representative satisfied the “foreign representative” requirement. Consequently, the Bankruptcy Court granted recognition to the UK Proceeding. The Bankruptcy Court acknowledged that schemes of arrangement under UK law have been routinely recognized as foreign proceedings in chapter 15 cases. Finding that the requirements of sections 1507(b) and 1521(a) were satisfied and furthered the goals of a chapter 15, the Bankruptcy Court entered an order enforcing the Scheme.
The Avanti Court’s decision
Section 1521(a) of the Bankruptcy Code grants a bankruptcy court the power to grant “any appropriate relief” in a chapter 15 case “where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interest of the creditors.” Additionally, section 1507(b) of the Bankruptcy Code permits a bankruptcy court to grant “additional assistance” under chapter 15 if, among other things, the just treatment of creditors is ensured. Section 1507(b) centers around the principle of comity, by which foreign proceedings and judgments are recognized and respected by United States courts. In Avanti, the Bankruptcy Court held that the Third Party Releases should be recognized and enforced under chapter 15 because the UK Proceeding afforded creditors a full and fair opportunity to vote on the Scheme in a manner similar to that required by US due process standards. While some United States courts have previously ruled similarly to Avanti in chapter 15 cases, third party releases are not always recognized in chapter 15 cases.
In In re Vitro, a Fifth Circuit case, the court declined to grant a third party release in a chapter 15 case. The Avanti court distinguished Vitro by focusing on the lack of consent by non-insider creditors for the third party releases in Vitro. In Vitro, creditors holding 74.67% of the principal amount of the voting claims approved the reorganization plan. However, over 50% of the votes were from creditor subsidiaries of Vitro considered by the court to be insiders. Under 11 U.S.C. § 1129(a)(10), insider votes are not counted towards the vote needed to approve a chapter 11 reorganization plan. The misalignment of the insider votes in Vitro’s Mexican proceeding with the fundamental policies of the United States legal system designed to protect against insider manipulation of the vote resulted in the Vitro court refusing to grant the third party release.
In Avanti, the Scheme was overwhelmingly approved by non-insider creditors who held the 2023 Notes. Unlike Vitro, (non-insider) holders of 98.3% in value of the outstanding 2023 Notes voted to approve the Scheme, and the vote bound only a small number (1.7%) of non-consenting creditors.
In the United Kingdom, not less 75% in value of each class of creditors must approve a scheme of arrangement. In Avanti, there was a single class of creditors and the Scheme Creditors holding 98.3% in value of the 2023 Notes voted to approve the Scheme. The vote met the UK requirement and did not present the insider issues found in Vitro, as the vote did not disenfranchise creditors who would be negatively impacted by the Scheme, other than the 1.7% who abstained from voting on the Scheme and the Third Party Releases.
The Avanti court decided to enforce the Third Party Releases. The decision appears to have hinged on the near unanimous support by the creditors. No objections were filed against the Scheme in the United States court, likely demonstrating implicit acceptance by the creditors for the Third Party Releases. Overall, the Avanti opinion recognizes the importance of the affected creditors’ support of the scheme of arrangement. Indeed, this appears to be a critical factor for the ruling. Although third party releases are met with the least resistance when the creditors unanimously approve the releases, Avanti shows that support from a large majority of impacted creditors may be sufficient.
Please visit our Zone of Insolvency blog where you can subscribe to receive the latest news and trends in bankruptcy and financial restructuring and insolvency.