2019 guide to Foreign Private Issuer status
A company organized outside the US subject to provisions of the US federal securities laws receives benefits if it qualifies as an FPI.
Chapter 15 of the U.S. Bankruptcy Code provides a mechanism for obtaining recognition and other relief in aid of a foreign bankruptcy, insolvency, liquidation, or debt restructuring (i.e., a foreign proceeding) in the U.S. Interesting cross-border issues that implicate comity and other considerations often arise in Chapter 15 cases. This past year, U.S. courts addressed several such issues.
One of the more interesting decisions involved the restructuring of Oi S.A., the Brazilian telecommunications company. Facing approximately BRL $65 million in debt, Oi and certain affiliates filed for bankruptcy in Brazil in 2016, and thereafter commenced ancillary proceedings in the United States, England, the Netherlands, and Portugal. Norton Rose Fulbright US LLP attorneys were heavily involved in the Oi restructuring, which was contentious and resulted in multiple decisions by the courts in Brazil, the Netherlands, and the United States. See Review of Chapter 15 Cases in 2017: COMI Shifting is Still Possible, US Financial Restructuring Newswire at 15 (Spring 2018).
Earlier this year, the United States Bankruptcy Court for the Southern District of New York issued an order enforcing Oi’s restructuring plan, which had previously been overwhelmingly approved by creditors and confirmed by the Brazilian court, over the objection of a shareholder group. See Chapter 15 Does Not Provide Back Door For Appeals Of Confirmed Restructuring Plans, Zone of Insolvency Blog (July 27, 2018). The bankruptcy court rejected the shareholders’ argument that the U.S. court should delay enforcement of the restructuring plan until appeals pending in Brazil became final. According to the bankruptcy court, a delay would be equivalent to granting a stay that the Brazilian court had previously denied. The court also noted that the shareholders could seek relief in the U.S. if they were successful on their appeals in Brazil. The bankruptcy court entered an order enforcing the restructuring plan in the U.S. despite the pending appeals in Brazil.
In addition to Oi, there were several other significant Chapter 15 decisions issued this past year. The following is a brief discussion of some of the more interesting aspects of certain decisions, organized by subject matter.
The United States Court of Appeals for the Second Circuit, which includes New York, requires that an entity must be eligible to be a debtor under section 109(a) of the U.S. Bankruptcy Code before its foreign proceeding can be granted recognition. See Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238, 247 (2d Cir. 2013). Section 109(a) states that “only a person that resides or has a domicile, a place of business, or property in the United States. . . may be a debtor.” 11 U.S.C. § 109(a). Following the Second Circuit’s decision, lower courts have regularly concluded that an attorney retainer deposited in a bank account in the U.S., as well as causes of action located in the U.S., satisfy section 109(a)’s requirements.
Despite the relative ease of satisfying section 109(a), a former director of the debtor objected to recognition of the Australian liquidation of B.C.I. Finances Pty Ltd. and certain affiliates solely on the basis that the BCI companies were not eligible to be debtors. See In re B.C.I. Finances Pty Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018). The liquidators of the BCI companies obtained a judgment in Australia for breach of fiduciary duty against certain former directors.
Following the judgment, some of the former directors moved to the U.S. The Australian liquidators then filed petitions for recognition of the liquidation proceedings in the U.S. to, among other things, seek discovery against the former directors that reside in New York. One of the directors opposed recognition on the basis that the BCI companies were not eligible to be debtors in the U.S. According to the liquidators, each of the BCI companies was eligible to be a debtor because it had property in the U.S. in the form of (1) a retainer in the amount of $1,250, and (2) breach of fiduciary duty claims against the former directors that reside in the U.S.
The objecting director asked the court to deviate from existing case law and find that the retainers did not satisfy the debtor eligibility requirement because the retainers were established solely to manufacture Chapter 15 eligibility and in bad faith. The court rejected that invitation and found that the plain meaning of section 109(a) did not require an inquiry into the circumstances surrounding the companies’ property. Because the retainers were property of the BCI companies in the U.S., the BCI companies were held eligible to be debtors.
The bankruptcy court also found that the fiduciary duty claims against the former directors that moved to New York were located in United States. The bankruptcy court applied New York choice law rules and concluded that Australian law governed the location of the claims because Australia had the “greatest interest” in the litigation for the following reasons: (i) the liquidators were appointed in Australia, (ii) the former directors were Australian citizens, (iii) the claims arose from acts committed in Australia, and (iv) any recovery would be distributed to creditors in the Australian liquidation.
Relying on the liquidators’ Australian law expert, the court found that a cause of action is generally located where the defendant resides. A breach of fiduciary duty claim would likely be located where a director resides, and not where the breach occurred, as posited by the objector. The court further noted that “as a general matter, where a court has both subject matter and personal jurisdiction, the claim subject to the litigation is present in that court.” Under that general principle, the claims are located in New York because the former directors reside in New York and the bankruptcy court has jurisdiction over matters affecting the debtors. The bankruptcy court found that the BCI companies were eligible to be debtors because they had property in the U.S. in the form of retainers and causes of action.
Until 2018, no court outside the Second Circuit had apparently imposed section 109(a)’s debtor eligibility requirement in a Chapter 15 case. Indeed, Delaware and Florida bankruptcy courts disagreed with the Second Circuit’s decision in Barnet. See In re Bemarmara Consulting A.S., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013); In re MMX Sudeste Mineracao S.A., Case No. 17-16113 (Bankr. D. Fla. Nov. 1, 2017). But in February 2018, the United States District Court for the Northern District of California adopted the Barnet rationale and held that a foreign debtor must satisfy section 109(a)’s debtor eligibility requirements for its foreign proceeding to be recognized under Chapter 15. See Jones v. APR Energy Holdings Ltd. (In re Forge Group Power Pty Ltd.), 2018 WL 827913 (N.D. Cal. Feb. 12, 2018).
Following his appointment in Australia, the liquidator of Forge Group Power Pty Ltd. filed a petition for recognition under Chapter 15 with a California bankruptcy court. In connection with the Chapter 15 filing, the liquidator transferred $100,000 to be held as a retainer by a law firm in California. Certain creditors objected to recognition, arguing that the retainer alone was insufficient to satisfy the debtor eligibility requirements. The bankruptcy court agreed finding that “property suggests something more than depositing money with a law firm and then filing.”
On appeal, the district court affirmed the bankruptcy court’s conclusion that the debtor eligibility requirements under section 109(a) apply in Chapter 15 cases. But the district court concluded that a properly established retainer that is property of the debtor at the time of the Chapter 15 filing will satisfy section 109(a)’s debtor-eligibility requirement. The district court remanded to the bankruptcy court to determine if the retainer was property of the debtor or some other type of arrangement that was not the debtor’s property. On remand, the creditors withdrew their objection and the bankruptcy court granted recognition to the Australian liquidation.
After recognition of a foreign proceeding, a court may issue an order enforcing a debtor’s debt adjustment, restructuring plan or similar arrangement in the U.S. under Chapter 15. Such an order will typically include or be accompanied by an injunction to ensure that the plan can be implemented without interference from creditors or other parties in the U.S. In general, a court can grant such an injunction if (i) the traditional standards for injunctive relief are satisfied, and (ii) “the interest of the creditors and other interested entities, including the debtor, are sufficiently protected.” See 11 U.S.C. §§1521(e), 1522.
Earlier this year, the United States Bankruptcy Court for the District of Delaware issued an injunction in connection with an order enforcing an Italian restructuring. See In re Energy Coal S.P.A., 582 B.R. 619 (Bankr. D. Del. 2018). Energia Coal S.p.A. was a debtor in a “Concordato Preventivo” under the Italian Insolvency Law pending before the Tribunale di Genova, Sezione Fallimentare (the “Genoa Court”). At the request of the debtor’s foreign representative, the Delaware bankruptcy court entered an order granting recognition to the Concordato Preventivo as a foreign main proceeding under Chapter 15.
The debtor proposed a restructuring plan under which administrative expenses would be paid in full and unsecured creditors would receive 1% to 7% depending on the class of the claim. Following approval of the plan by the Genoa Court, the foreign representative requested an order enforcing the plan and an injunction enjoining creditors from commencing lawsuits against the debtor in the U.S.
Two counterparties to contracts with the debtor objected, arguing that they should not be enjoined from pursuing their contract claims against the debtor, which were governed by Florida law, before a court in Florida in accordance with the terms of their contracts. The counterparties argued that they should not have to incur the substantial cost for asserting their claims in Italy, which would put them in “financial peril.” Instead, a Florida court should determine the amount of their claims and the priority of their claim and the amount of their recovery. The foreign representative agreed that a Florida court could determine the amount of the claims, but not the amount to be distributed on account of them. So the only issue in dispute was which court would determine the priority of and the amount to be distributed on account of the counterparties’ claims.
The bankruptcy court concluded that a forum selection clause in a contract does not trump the comity afforded a foreign main proceeding. Although the counterparties could litigate the amount of their claims in Florida, they could not contest the priority or the amount of their recovery in the U.S. Instead, much like a foreign creditor would be required to file a claim in the U.S. to recover from a U.S. debtor’s bankruptcy estate, the counterparties would be required to submit their claim to the Genoa Court to receive a distribution, despite the purported cost associated with seeking a distribution in Italy.
In the U.S., a Chapter 11 plan of reorganization generally provides for a discharge of the debtor. Similarly, a foreign debt restructuring or similar arrangement will also provide for the discharge or other release of the debtor. A restructuring plan may also sometimes contain a release for the benefit of certain third parties (e.g., guarantors). Such so-called “third party releases” are controversial in the U.S., especially when they are nonconsensual. The United States Court of Appeals for the Fifth, Ninth, Tenth, and D.C. Circuits prohibit third party releases in Chapter 11 cases absent creditor consent. The United States Court of Appeals for the Second, Fourth, Sixth, Seventh, and Eleventh Circuits have held that a third party release may be given in a Chapter 11 case without consent in limited circumstances. The consideration for granting a third party release in a Chapter 15 case is different than in a Chapter 11 case because it is discretionary and subject to comity considerations.
Avanti Communications Group PLC issued certain notes, including senior secured notes due 2023 that were guaranteed by certain of its subsidiaries. See In re Avanti Communications Group PLC, 582 B.R. 603 (Bankr. S.D.N.Y. 2018). Facing financial difficulties, Avanti proposed a restructuring of the 2023 notes to be implemented pursuant a scheme of arrangement under Part 26 of the Companies Act of 2006 of England and Wales. Under the scheme, (1) the 2023 notes would be exchanged for equity in Avanti, and (2) creditors would release the debtor and the non-debtor subsidiary guarantors from any claims under the 2023 notes. Creditors holding 98.3% of the outstanding 2023 notes voted in favor of the scheme. The High Court of Justice of England and Wales then sanctioned the scheme.
Avanti’s foreign representative filed a Chapter 15 petition in the United States Bankruptcy Court for the Southern District of New York and requested an order granting comity and giving full force and effect to the scheme, including the releases. The bankruptcy court noted that English schemes and the related English proceedings have routinely been recognized under Chapter 15. The court further noted that third-party releases have also been enforced in Chapter 15 cases under section 1507, which generally provides that a court may grant additional assistance “consistent with the principles of comity.”
In deciding to enforce the subsidiary guarantor releases, the bankruptcy court focused on four key aspects of the scheme and the releases. First, third-party releases are permissible under English law and are common in English schemes. Second, creditors had a “full and fair opportunity” to vote on and be heard on the scheme consistent with U.S. due process. Third, the scheme was approved by the overwhelming majority of the single class of creditors affected by the scheme, and the scheme, including the releases, was binding on all members of the class regardless of their individual vote. Fourth, the failure to enforce the scheme and the third party releases could prejudice creditors and prevent the efficient restructuring of Avanti. The bankruptcy court extended comity to the scheme and entered an order enforcing it and the releases in the U.S.
At the end of October, the United States Bankruptcy Court for the Southern District of New York issued an order enforcing a foreign restructuring plan, including third party releases, even though other countries might later refuse to recognize the underlying foreign proceeding or enforce the plan. See In re Agrokor D.D., 591 B.R. 163 (Bankr. S.D.N.Y. 2018).
The Agrokor Group is the largest private company by revenue in Croatia. When Agrokor fell into financial distress, the Croatian government passed a specialized insolvency law applicable only to companies of systemic importance to Croatia, including Agrokor. Following the filing of a proceeding under the new Croatian law, Agrokor’s foreign representative obtained an order from the New York bankruptcy court granting recognition to the Croatian proceeding. Courts in England and Switzerland also recognized the Croatian proceeding. Similarly, the European Parliament enacted legislation that resulted in automatic recognition of Agrokor’s Croatian proceeding throughout the European Union. But courts in Bosnia-Herzegovina, Montenegro, Serbia, and Slovenia denied recognition to the Croatian proceeding, principally because the new Croatian law appeared to be more concerned with protecting Croatian interests and economy rather than the interests of creditors as a whole.
Agrokor’s foreign representative asked the New York bankruptcy court to enter an order enforcing Agrokor’s restructuring plan in the U.S. The plan, which was approved by the requisite majorities of creditors and a Croatian court but remained subject to appeals in Croatia, generally provided for the restructuring of all of Agrokor’s debt, including New York and English law-governed obligations. The plan also released certain non-debtor guarantors and an indenture trustee from their liabilities. The bankruptcy court was generally not troubled by the request to enforce the plan in the U.S. given that there was no objection filed in the U.S., the Croatian proceeding was procedurally fair, creditors had proper notice, and more than 78% of non-insiders by claim amount voted in favor of the plan. But the court noted that an English court might refuse to enforce the plan because of an English common law rule known as the “Gibbs rule.”
According to the Gibbs rule, contractual obligations can be changed or discharged only in accordance with the law governing those obligations. Consequently, a creditor of Agrokorwith claims arising from English law-governed contracts that did not vote in favor of the Croatian plan could sue Agrokor and other released parties in England notwithstanding the terms of the plan. Given the amount of English law governed debt, the bankruptcy court noted that the English court’s refusal to enforce the plan would cause Agrokor’s restructuring to fail. Despite this problem, the bankruptcy court found that the plan, including the third party releases, should be extended comity in the U.S. under Chapter 15. The bankruptcy court concluded that it would enforce Agrokor’s plan in the U.S. But unlike the court in Oi, the bankruptcy court delayed entry of its order enforcing the plan until the plan’s approval became final in Croatia.
A foreign representative in a Chapter 15 case may request authority to compel broad discovery from any person “concerning the debtor’s assets, affairs, rights, obligations or liabilities.” See 11 U.S.C. §1521(a)(4). Bankruptcy courts routinely grant such relief, which is available both prior to and after recognition of a foreign proceeding.
The United States Bankruptcy Court for the Southern District of New York issued an order granting recognition to the Cayman Islands liquidation of Platinum Partners Value Arbitrage Fund L.P. and certain affiliates, and authorized the liquidators to conduct discovery in the U.S. See In re Platinum Partners Value Arbitrage Fund L.P., 583 B.R. 803 (Bankr. S.D.N.Y. 2018).
The Cayman liquidators then requested discovery from the debtors’ former accountant, including work papers and other documents and communications concerning the services performed. The accountant objected, arguing that the requested discovery was not available under Cayman law (the law governing the liquidation). According to the accountant, Cayman law precludes liquidators from obtaining an accountant’s work papers because they are not the debtor’s property.
The bankruptcy court was not convinced that the discovery sought was prohibited by Cayman law. And, even if the discovery was not available under Cayman law, “the scope of discovery available in the foreign jurisdiction is not a valid basis upon which this Court, in the exercise of its discretion must limit relief available to the Liquidators.” The court noted that comity would weigh in favor of granting the liquidator’s motion unless the Cayman court would be “actively hostile” or prevent the liquidators from using the discovery obtained. Citing a decision from the Cayman Islands Court of Appeal, the bankruptcy court found that Cayman courts are receptive to evidence obtained through U.S. discovery even if the evidence would not available under Cayman law.
The bankruptcy court summarily dismissed the accountant’s other arguments, including that the liquidators were required to first seek discovery in the Cayman Islands and that the discovery dispute was subject to arbitration under the terms of the engagement letter, and issued an order compelling the accountant to produce its work papers. The bankruptcy court’s decision is currently on appeal to the district court.
Section 1506 of the Bankruptcy Code provides that a court may refuse "to take an action governed by [Chapter 15] if the action would be manifestly contrary to the public policy of the United States." Courts have construed this exception very narrowly given that the legislative history indicates that this exception should be limited to the most fundamental public policies of the United States. The United States Bankruptcy Court for the District of New Jersey addressed this exception in connection with the Hong Kong liquidation of Manley Toys Ltd., at one time the seventh largest toy company in the world. See In re Manley Toys Ltd., 580 B.R. 632 (Bankr. D. N.J. 2018).
Facing declining sales and significant litigation claims in the U.S., Manley Toys went into liquidation in Hong Kong. The liquidators then filed a Chapter 15 petition with the New Jersey bankruptcy court for recognition of the Hong Kong liquidation. Two creditors objected to the petition, arguing, among other things, that recognition would be manifestly contrary to U.S. public policy. In particular, the creditors asserted that they did not have notice of the Hong Kong proceeding, recognition would result in a stay that would permit the debtor to avoid complying with other U.S. court's orders, and creditors would not be able to pursue U.S. law based fraudulent transfer claims in Hong Kong. In addition, the liquidators were, according to the creditors, not independent because they relied on funding by other interested parties. In overruling the creditor’s objection, the bankruptcy court noted that in analyzing the pubic policy exception, a court will focus on (1) the procedural fairness of the foreign proceeding, and (2) the effect of recognition on U.S. statutory or constitutional rights.
The bankruptcy court concluded that recognition would not be manifestly contrary to U.S. public policy for four principal reasons. First, creditors had notice of the Hong Kong proceeding. Creditors also had remedies available to them in Hong Kong should there be evidence of lack of notice. Second, entering into liquidation to stay or avoid U.S. court orders or litigation is not manifestly contrary to U.S. public policy. A company, even a purported “bad company,” has a right to liquidate to avoid U.S. litigation. Third, the differences between U.S. and Hong Kong law were not fundamental public policies. The fact that certain transactions could be avoided under U.S. law, but were not avoidable in Hong Kong reflected “a different way to achieve similar goals,” not conflicting public policies. Finally, the liquidators’ reliance on funding by creditors or insiders that could not be used to pursue claims against the funders did not run afoul of a U.S. public policy. Indeed, the court noted that a U.S. debtor will typically agree not to use funds borrowed to pursue claims against the lender. Consequently, the bankruptcy court was not troubled by the liquidators’ agreement not to use funds borrowed to pursue claims against the lender, especially where the liquidator acknowledged that they would seek alternative funding to pursue such claims if they found them to be viable.
As discussed in Review of Chapter 15 Cases in 2017: COMI Shifting is Still Possible, US Financial Restructuring Newswire at 15 (Spring 2018), a former shareholder of Ocean Rig UDW Inc. appealed the decision of the United States Bankruptcy Court for the Southern District of New York to enforce Ocean Rig’s Cayman Island scheme of arrangement in the U.S. The district court dismissed the shareholder’s appeal for two reasons. See In re Ocean Rig UDW Inc., 585 B.R. 31 (S.D.N.Y. 2018).
First, the shareholder was not an “aggrieved person” with standing to appeal the bankruptcy court’s decision. A person has standing to appeal an order only if the order “directly affects” the person’s pecuniary interests. Because Ocean Rig was insolvent and unable to pay its creditors in full, there was no value available for equity holders. Consequently, the scheme did not affect the out of the money shareholder, who would never be able to recover from Ocean Rig.
Second, the appeal was dismissed as equitably moot. Under the doctrine of equitable mootness, which is typically applied in a Chapter 11 case, an appeal of a restructuring plan may be dismissed where the plan has been substantially consummated and certain other facts are present. The district court concluded that the principles of finality and fairness supported the application of equitable mootness to Chapter 15 cases and dismissed the appeal as equitably moot because the scheme had been implemented and Ocean Rig’s restructuring substantially completed.
Before the enactment of Chapter 15, a foreign representative or debtor could ask a court to dismiss or enjoin a lawsuit pending before it under principles of comity. Under Chapter 15, a foreign representative's discretion to seek relief from a court before obtaining recognition by a bankruptcy court under Chapter 15 has been significantly limited. Earlier this year, the United States District Court for the Northern District of Illinois concluded that it could not stay litigation against the defendant notwithstanding that the defendant was a debtor in a Canadian bankruptcy proceeding. See Halo Creative & Design Ltd. v. Comptoir Des Indes Inc., Case No. 14-C-8196, 2018 WL 4742066 (N.D. Ill. October 2, 2018). Relying in large part on one of the earliest decisions addressing a request for a stay of litigation after Chapter 15 became effective -- United States v. J.D. Jones Construction Group LLC, 333 B.R. 637 (E.D.N.Y. 2005) -- the Illinois district court concluded that the foreign debtor must obtain Chapter 15 recognition of its Canadian proceeding before it could obtain a stay of the litigation in the district court.
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