This two-part article discusses how the United Kingdom and the United States have become the two main jurisdictions where debtors outside of such jurisdictions (foreign debtors) have been able to successfully restructure their businesses. Because of the flexibility of both legal systems and their focus on reorganization as opposed to liquidation, which often would be the outcome of the debtors’ domestic insolvency process, foreign debtors have used the U.K. or U.S. legal systems to restructure successfully. Thus, both jurisdictions have attracted a large portion of foreign debtors’ cross-border restructurings. The first part of this article, published in October 2014, described how foreign debtors have successfully reorganized in the U.K. This part focuses on how foreign debtors have successfully reorganized in the U.S.[1]
Both the U.K. and the U.S. have become target restructuring destinations for struggling companies located outside of their borders, primarily due to their unique attributes and debtor-friendly policies. Part I of this article discussed the characteristics of the U.K. legal system that make it an ideal jurisdiction for restructuring. Likewise, the U.S. restructuring system has several unique features that make it attractive to companies not based in the U.S. Mechanisms such as the minimal contacts required for a foreign debtor to restructure in the U.S., the imposition of the automatic stay, the ability of existing management to remain in control of the company, the treatment of outstanding contracts, and the allowance of critical-vendor payments attract global companies to the U.S. to formulate and implement a plan of reorganization.
A company commences a corporate restructuring in a U.S. bankruptcy court by filing a petition under either chapter 7 (liquidation) or chapter 11 (reorganization) of the U.S. Bankruptcy Code. The purpose of a chapter 11 restructuring is for the company to develop a plan of reorganization and emerge as a going concern with a fresh start. The restructuring provisions of chapter 11 are the most attractive to foreign companies. The premise of a chapter 11 restructuring is that the distressed company will continue to operate while it works to restructure its operations and capital structure.
First, immediately upon the commencement of a case under chapter 11, a global automatic stay is imposed, preventing any adverse action against property of the estate without authorization of the bankruptcy court. The immediate trigger of the automatic stay stops creditors’ adverse actions against the company. Litigation is stayed and seizures of collateral are halted, allowing the company to pursue favorable resolutions of creditors’ disputes and to restructure its operations and debt. In addition, the Code allows the company to grant to a post-petition lender a priority status over all creditors, thereby enabling the company to obtain post-petition financing to continue as an operating entity while in bankruptcy.
One of the most important characteristics of a chapter 11 restructuring is the “debtor-in-possession” (DIP) concept, which, among other things, allows the current management who commences the restructuring process to remain in place throughout its pendency. This ensures that the institutional knowledge and expertise necessary for a successful restructuring is not lost. Not only will the management remain in control, but, as they develop a plan of reorganization, the Code will allow them to either assume or reject executory contracts as necessary to see the plan of reorganization to fruition. It is worth noting that provisions in contracts allowing counterparties to terminate such contracts upon the company’s bankruptcy, also called ipso facto clauses, are not enforceable in the U.S.
The U.S. bankruptcy system is designed with these tools and others to facilitate a successful and lasting reorganization. Fortunately for foreign companies, these tools are easily within reach. A foreign company does not need to have its center of main interest in the U.S. to file under chapter 11. Indeed, the Code requires only minimal connections to the U.S. to qualify for a restructuring under U.S. law. The Code states that only a company with a domicile, place of business or property within the U.S. can commence a chapter 11 proceeding. The Code is silent on how much property is required, but case law indicates that very little may suffice. Courts have held that as little as an account containing working capital and an unearned retainer on deposit with a U.S. law firm can be sufficient to qualify. Moreover, once a company commences a case, U.S. courts are reluctant to cede jurisdiction to another court. Thus, it has become relatively easy for foreign companies to qualify for a U.S.-based restructuring.
Though the typical process of a chapter 11 reorganization requires the DIP to formulate a plan of reorganization during the pendency of the proceeding, it has become increasingly common for foreign DIPs to file so-called “pre-packaged plans” in the U.S., where the plan of reorganization is negotiated and approved by the required number of creditors before the filing of the bankruptcy case. Such “prepack” plans allow the DIP to effectuate a speedy restructuring and avoid the costs of a lengthy chapter 11 case. Ultimately, if a chapter 11 DIP is unable to get the requisite approval of its creditors, its prospects of reorganization are remote and the plan of reorganization may end up being a liquidating plan where all assets are sold to the highest bidder. The potential for liquidation notwithstanding, the chapter 11 scheme is frequently a foreign company’s last opportunity to avoid liquidation and asset seizure in a foreign court.
While the U.S. restructuring system is attractive to companies in different industries, foreign-based shipping companies have frequently utilized the U.S. system to reorganize. The downturn in the international shipping industry has seen a dramatic increase in the number of foreign companies commencing chapter 11 reorganizations in the U.S. — some with prepackaged plans. The Code and the equitable powers afforded to the U.S. judges make the U.S. system particularly efficient at corralling creditors and collateral spread across the globe. The automatic stay prevents creditors from arresting ships and seizing assets. In this industry, it is imperative to preserve the status quo so that there is no interruption in the global supply chain. To that end, chapter 11 also permits DIPs to make payments to their critical vendors during the pendency of the proceeding to guarantee that business can continue.
Successful examples of shipping company bankruptcies have abounded in recent years. This past spring, Genco Shipping & Trading Ltd., a company incorporated in the Marshall Islands, commenced a case under chapter 11 in the Southern District of New York to restructure its outstanding debt because it was negatively impacted by weak charter rates.[2] Genco purchased a large number of vessels in the mid-2000’s but was unable to keep them utilized. Genco agreed with its creditors to file for bankruptcy and restructure its capital structure by converting its debt to equity, which ultimately did not yield any recovery for the equity security-holders. Genco’s outstanding credit facility worth $1.06 billion was converted to 81.1 percent equity, with the smaller facilities to expire in 2019 and convertible bondholders to receive 8.4 percent of equity. The existing equity interests were cancelled, and the holders of such interests were given seven-year warrants valued at $1.295 billion. After extensive litigation over the valuation of the company and the good faith of the proposed restructuring, the bankruptcy court entered an order confirming the proposed plan this summer, and Genco emerged from bankruptcy with positive prospects as a going-concern entity.
Companies in other industries have also used the U.S. system to restructure. For example, Chilean bus operators Alsacia SA and Express de Santiago Uno SA (which merged in 2011) announced that they had reached a consensual resolution with their bondholders to restructure more than $400 million in outstanding debt through a prepackaged chapter 11 reorganization in the U.S., again in the Southern District of New York.[3] Increasing operating costs and underperformance led to a liquidity crisis and a need to restructure the debt that originally funded the merger in 2011. At the time of this publication, the companies have drafted a plan of reorganization and disclosure statement, solicited the necessary votes from their creditors, and commenced their prepackaged chapter 11 case. They are currently in the process of obtaining court approval of their prepackaged plan of reorganization. The reorganization process allowed the DIP to keep all of its bus lines running as scheduled, pay all of its employees without interruption, and pay all suppliers and vendors during the case. If successful, this case will serve as a good example of how foreign debtors can make use of a U.S. chapter 11 filing to marshal a speedy restructuring.
The U.S. chapter 11 process is an accessible option for foreign companies — one with several characteristics that can help a troubled foreign company reorganize. The purpose of a chapter 11 reorganization is to facilitate a fresh start. More frequently, foreign companies use these tools to halt seizure of their assets and give them the opportunity to negotiate with their creditors to emerge as a profitable company in the future.
[1] The authors thank Peter Morrison, an associate in Squire Patton Boggs office in Cleveland, for his contributions to this article.
[2] In re Genco Shipping & Trading Ltd., Case No. 1:14-bk-11108 (Bankr. S.D.N.Y. 2014).
[3] In re Inversiones Alsacia S.A., et al., Case No. 1:14-bk-12896 (Bankr. S.D.N.Y. 2014).