Cross-jurisdictional Filing An Alternative International Bankruptcy Strategy

<p>Bankruptcy professionals
are increasingly challenged to develop a successful reorganization
strategy that crosses international borders. The complexity arises from the
relationship between U.S. bankruptcy laws and local foreign bankruptcy
laws. Filing for bankruptcy in the United States does not afford a foreign
affiliate or subsidiary protection within its own borders and vice versa.
Often, filing an entity in one country can constitute grounds for
precipitous actions against its foreign affiliate within its respective
jurisdiction. Therefore, bankruptcy professionals are forced to determine
a bankruptcy strategy that protects the debtor entity throughout its
geographic base.

</p><p>Conventional wisdom suggests that the company files
locally in each country where it seeks to protect assets. However,
alternative strategies may emerge, provided the correct circumstances
exist, whereby the company can achieve similar, if not better, results by
filing foreign entities cross-jurisdictionally within the United States
rather than locally.

</p><p>This article focuses on the set of circumstances or
"leverage points" that can determine whether filing a foreign
entity within the United States can provide the stay sought locally and
protect foreign-based operations. Although each bankruptcy situation has
its own case-specific details, understanding the key leverage points can
facilitate a quick assessment of whether a cross-jurisdictional filing
provides the desired protection, and will often determine the success of
the filing of a foreign entity within a U.S. bankruptcy court.

</p><h4>Leverage Point #1: Identification of Asset Jurisdiction</h4>

<p>If the largest foreign creditors have U.S.-based
assets or conduct material business in the United States, filing a foreign
entity within the U.S. bankruptcy courts can create significant leverage.
The degree of leverage is directly related to the size of creditor's
assets in the United States (versus the size of its assets elsewhere), ease
of identification and transferability. Small amounts of highly liquid
assets will create less leverage than the existence of a complete operating
division within U.S. borders.

</p><p>The existence of creditor assets within the United
States can create a pseudo-foreign automatic stay within the U.S. courts.
The debtor's demonstrated knowledge of and preparation on these
issues can materially impact negotiations. Once debtors disclose a clear
knowledge of the facts of the filing, most creditors' counsel
understand the dynamic that will allow the debtor the short-term protection
needed to bring about the reorganization. If a creditor has business
interests in the United States, violation of the stay could result in harsh
penalties mandated by the court.

</p><h4>Leverage Point #2: Process Comparisons</h4>

<p>A comparison of the underlying bankruptcy laws in the
United States with foreign bankruptcy laws will present possible avenues
for creating leverage. Two key factors to compare are (1) the general
outcome of a local filing and (2) the relative strength and effectiveness
of protection by the automatic stay provisions.

</p><p>If the general outcome of a local filing is adverse
compared to a U.S. bankruptcy filing, then this fact alone can help create
leverage with local creditors. If the average bankruptcy within the foreign
local jurisdiction is long, expensive and provides low recovery or results
in liquidation, then these factors can be used to develop leverage for
dialogue with the largest creditors. The dialogue should highlight how a
cross-jurisdictional filing, workaround, or combination of both can produce
better-than-average results, which can translate into either preserving the
assets or increasing recovery.

</p><p>In some countries, the equivalent of the automatic
stay provision doesn't create similar levels of protection for the
debtor entity as in the United States. Creditors may be able to continue
collections on debt and may also be able to accelerate payment. In many
countries, the local automatic stay is ineffective against standard
default, acceleration and cancellation clauses. This is fundamentally the
antithesis of bankruptcy law in the United States, where the intent of
bankruptcy law is to allow the greatest opportunity for reorganization of
the distressed debtor. Therefore, in the United States, the automatic stay
overrides many precipitous contractual provisions.

</p><p>For example, consider Brazil's bankruptcy
process, <i>concordata.</i>
Generally, <i>concordata</i> results in liquidation or extremely low recovery (factor
#1). Therefore, the largest creditors of a Brazilian-based debtor are more
likely to discuss a workaround that will avoid a local filing with the
intent to develop a consensual strategy that will offer a more positive
outcome.

</p><p>At the same time, <i>concordata</i> does not stay secured debt collections or invalidate
cancellation clauses in contracts (factor #2). Therefore, if a company
should file locally, its suppliers have the ability to cancel services to
the debtor. These factors present a tremendous disincentive to filing
locally in Brazil. At the same time, the existence of cancellation clauses
without stay protection may negatively affect a cross-jurisdictional
filing. Therefore, a workaround can offer the most reasonable plan to
address an insolvency situation in Brazil. Although a workaround is not a
cross-jurisdictional filing, the opportunity to avoid a local liquidation
and the lack of stay enforcement still produces the needed leverage for
productive debtor-creditor discussions.

</p><h4>Leverage Point #3: Local Relief</h4>

<p>U.S. critical vendor motions and other pre-petition
relief motions are highly contested topics in today's bankruptcy
courts. In cross-jurisdictional filings, the importance of vendor relief
increases exponentially. Smaller local creditors without assets in the
United States may find it in their interests to initiate local legal
action. Such actions may gather local legal support due to the U.S. filing.
For example, Argentinian courts can use the filing of a local entity in the
United States as the basis to rule in favor of a local creditor seeking to
place the debtor into liquidation. The most direct way to avoid such
precipitous actions is to obtain court approval to continue payments in the
ordinary course. However, creating leverage within the U.S. courts for the
debtor to disburse relief is challenging.

</p><p>One tool for establishing significant strategies to
garner support for relief is a "creditor examination." A
creditor examination is a detailed analysis of the nature of the
debtor's ordinary course business versus the functionality of its
creditors. It allows the professional team to develop strategies that offer
the debtor the opportunity to operate the business without interruption and
creditors relief for some—or all—of their outstanding debt.

</p><p>Some of the possible examples of creditor categories
that may develop from the creditor examination are:

</p><ul>
<li><i>Customer:</i> Some creditors may also comprise a substantial
customer base for the debtor's business, creating a unique dynamic
either to support a motion for relief or a workaround. Examining the net
position between the two could prove that the debtor owns a net positive
relationship with its creditor, helping to support a petition for relief.

</li><li><i>Supplier:</i> Some cases involve debtors whose assets are most
valuable while continually operating (rather than being liquidated), like
telecommunications companies. If a group of creditors is essential to
continuing the debtor's operations, and thus the valuable customer
base, intact, then seeking relief is a benefit to the creditors as well.

</li><li><i>Tax Collector:</i> In some cases, the creditor may be a vehicle for
collection of taxes by the local government, effectively making the debtor
a tax collector on behalf of the government—thereby supporting a
motion for payment of third-party taxes.
</li></ul>

<h4>Leverage Point #4: Communication</h4>

<p>Communication with internal and external
constituencies provides a vital link in cross-jurisdictional
filings—particularly when the local equivalent of chapter 11 would
result in liquidation. The need for increased levels of communication is
exacerbated by the need to address medium-to-small creditor concerns rather
than have them act precipitously.

</p><ul><li><i>Internal
communication:</i> To launch and maintain a
successful, consistent communication strategy, it is essential that
management is educated on the laws that govern the jurisdiction of the
filing. Senior management should provide local management with materials to
develop an understanding of the U.S. process, as well as answer those
questions that surface during the process. Preparing all employees will not
only help to ensure that no legal violations of the law of the jurisdiction
occur, but will also allow the debtor's employees to focus with
confidence on a normal course of business.

</li><li><i>External communication:</i> The need for external
communication increases when a cross-jurisdictional filing occurs.
Creditors and customers may know the laws within their local jurisdiction,
but will generally have a very limited understanding of U.S. chapter 11
laws. Understanding the "fresh start" intent of the chapter 11
process, the impact on the normal course of business and the expected
outcome will significantly enhance the relationship with
cross-jurisdictional creditors and customers, and will aid in increasing
the probability of a successful proceeding.

</li><li><i>Medium-to-small creditor communication:</i> Typically in
U.S. filings, conversations with medium-to-small creditors consist of
informational discussions about the nature of post-petition practices
between the debtors and creditors. Many creditor services are not
exclusive. Most are familiar with the process, and as a result, the debtor
may be in the position to dictate the tone of communication.
</li></ul>

<p>In a cross-jurisdictional filing, the debtor has less
leverage to shape the discussion with creditors. Management must allocate
extra attention to creditor concerns while educating them about the U.S.
bankruptcy process. The debtor should extract the underlying issues
regarding the creditors' willingness or unwillingness to cooperate.
For example, the debtor's understanding of the initial objective of a
creditor may be that they want to get paid on their pre-petition debts.
However, through a broader dialogue, the debtor may come to understand that
the real issue centers on the creditor's short-term cash-flow gap. By
examining the post-petition payables, it may be possible to briefly modify
post-petition payments and address the creditor's cash-flow issues.

</p><h4>Leverage Point #5: Notable Process Challenges</h4>

<p>The emphasis in foreign countries on
employees' and officers' liability may conflict with U.S.
bankruptcy provisions and requires extensive discussions with creditors and
advisors.

</p><ul><li><i>Severance and Key Employee Retention Plans (KERP):</i> Foreign
governments may have set minimum payments for severance calculations based
on employee years of service or rank, often exceeding those normally
provided in a U.S. chapter 11 proceeding. Furthermore, in tight liquidity
situations, the cost may limit the level and nature of the terminations.
Other times, these costs alone may dictate the direction of the case and
whether a filing is feasible or not. Communicating these requirements to
key stakeholders early reduces the challenges faced in developing a KERP
and provides an approach to implementing cost reductions.

</li><li><i>Director and Officer Liabilities:</i> In many foreign
countries, director and officer liabilities extend beyond the corporate
boundaries and into personal liabilities, which can sometimes carry
criminal charges. Certain corporate obligations incurred beyond the point
when a company is deemed insolvent may become the personal obligations of
senior managers. Therefore, when developing a strategy for reorganization,
the laws addressing director and officer liabilities must receive detailed
attention.

</li><li><i>Joint Administration:</i> If a single jurisdiction
is chosen, then a joint administration pleading can significantly reduce
the cost and time needed to manage the debtor's cases within court.
If successful, this pleading will minimize the time and cost for all
participants: the court, trustee, all creditors and the debtors. It will
contribute in maximizing the possible recovery within the case.
</li></ul>

<h4>Conclusion</h4>

<p>With the proper leverage points, a
cross-jurisdictional bankruptcy filing—although challenging—can
achieve a successful reorganization for a debtor with a more streamlined
and controlled bankruptcy process than independent local filings. Below is
a recap of leverage points:

</p><ul><li>The existence of U.S.-based assets can create a
pseudo-automatic stay with large international creditors.

</li><li>A comparison of anticipated recoveries in the
U.S. process vs. a local foreign process opens a discussion and potential
cooperation from creditors to maximize recovery.

</li><li>Local relief strategies can be developed
through a creditor examination to assist in avoiding local precipitous
legal actions.

</li><li>Communication will be vital to manage the
additional complexities of a cross-jurisdictional filing.

</li><li>Concentration on employee and officer
liabilities will determine and shape key bankruptcy negotiations.

</li><li>Joint administration can streamline the
logistics of the filing.
</li></ul>

<p>As international bankruptcies continue to challenge
the sometimes-arcane bankruptcy laws of individual countries, today's
turnaround professional must assertively use creative measures to deliver
effective international bankruptcy strategies with the most effective and
efficient results for his or her clients.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Stacey Hightower is an associate with AlixPartners LLC in New York. He can be contacted at 9 West 57th St., Suite 3420, New York, N.Y., 10019, telephone: (212) 490-2500, fax: (212) 490-1344. <a href="#1a">Return to article</a>