Abengoa Sets the Stage for Future Disputes Concerning Recognition of Pre-Insolvency Proceedings Under Chapter 15

[1]Under chapter 15 of the Bankruptcy Code, recognition of a foreign proceeding is required to obtain a stay of proceeding against the property of the foreign debtor located in the United States, to entrust such property to the representative of the foreign debtor, and to receive other important protections and rights. Recognition is often the most important relief obtained in a chapter 15 case, but when does a foreign insolvency action constitute a foreign proceeding under chapter 15 of the Bankruptcy Code? Some foreign countries have enacted pre-insolvency regimes more closely resembling out-of-court agreements. The recent recognition of a standstill agreement under section 5bis of the Spanish Insolvency Act as a foreign proceeding in the Abengoa S.A. chapter 15 case by the United States Bankruptcy Court for the District of Delaware illustrates the uncertainty underpinning this inquiry and highlights potential future issues.  

Foreign Proceedings Defined

A foreign representative bears the burden of satisfying each requirement of the three-step test for obtaining recognition of a foreign proceeding by a United States bankruptcy court under chapter 15. First, the court must determine whether the relevant action is a “foreign proceeding” as defined by Bankruptcy Code section 101(23).[2] Next, the court must determine whether the relevant action meets the requirements for recognition under section 1517(a).[3] Lastly, the court must consider whether recognition is manifestly contrary to the public policy of the United States under the public policy exception found in section 1506.[4] The dispute in the Abengoa case largely centers on the first issue.

Only a few cases have explored the boundaries of what constitutes a foreign proceeding under chapter 15. Section 101(23) of the Code defines a foreign proceeding as “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.”[5] Courts have divided this definition into seven necessary elements, the most litigated of which are profiled below.[6]

The three most litigated elements in determining a foreign proceeding are whether the action is a proceeding, whether it is collective in nature, and whether the debtor's assets and affairs are subject to the control or supervision of a foreign court. When determining if an action is a proceeding, the focus is on whether the debtor’s actions are limited by statutory boundaries.[7] In order for an action to be collective, it must be instituted for the benefit of creditors generally[8] — rather than principally for the benefit of a single creditor or class of creditors — and all the debtor’s assets and liabilities must be treated.[9] Both the assets and affairs of the debtor must be controlled or supervised by a foreign court. In other words, the foreign court must take a significant role in the action.[10]

The New Spanish Pre-Insolvency Regime

On March 7, 2014, Spain reformed its insolvency laws by, inter alia, enacting a pre-insolvency notification known as Article 5bis. In Spain, a debtor has a general obligation to file for insolvency within two months from the date it can no longer pay its debts as they become due. This rule does not apply, however, if the debtor notifies the competent insolvency court that it has initiated negotiations with some of its creditors (the “5bis Notice”). Despite this notification, the court does not intervene into the debtor’s affairs and insolvency proceedings are not opened. The 5bis Notice stays enforcement actions against the debtor’s assets by financial or private creditors but not by public creditors. In sum, the 5bis Notice is four-month reprieve for financially troubled companies during which they can negotiate a refinancing agreement with their creditors without filing for insolvency relief. Following the 5bis Notice, a debtor has three months to obtain a negotiated standstill agreement with creditors representing at least 51% of financial liabilities. At such time, the debtor may attempt to obtain a homologation (court approval) of its standstill agreement. Only later will the debtor file a viability plan (similar to a plan of reorganization) binding all creditors.

Abengoa

Abengoa S.A. and its affiliate debtors are multi-national engineering and technology companies that, among other things, design, engineer, construct, and operate thermos-solar plants, solar-gas hybrid plants, conventional energy generation plants, and large-scale desalination plants and transmission lines. In connection with business operations, Abengoa is required to post certain financial guaranties to various counterparties to ensure payment and/or performance under the related contracts. A number of sureties (the “Sureties”) issued surety bonds (the “Surety Bonds”) on behalf of Abengoa to ensure the performance of these obligations. The sum of these Surety Bonds exceeded $250 million. In consideration for the issuance of these Surety Bonds, Abengoa and some of its subsidiaries jointly and severally agreed to indemnify the Sureties from and against any loss suffered as a result of the Sureties having issued the Surety Bonds.

Following months of financial turmoil, Abengoa filed a 5bis Notice with the Commercial Court No. 2 in Seville, Spain (the “Spanish Court”) on November 25, 2015. During the next four months, Abengoa negotiated with some of its stakeholders, resulting in Article 5bis standstill agreement (the “Standstill Agreement”). On March 18, 2016, Abengoa filed an application for homologation of the Standstill Agreement (the “Homologation Request”) in the Spanish Court. However, the Sureties were not included in these negotiations.

Abengoa S.A. and certain of its non-U.S. subsidiaries and affiliates (the “Foreign Debtors”) sought recognition in Delaware bankruptcy court of the Standstill Agreement and the Homologation Request as a foreign main proceeding under chapter 15 of the Bankruptcy Code. The Sureties objected to Abengoa’s petition for recognition. The objection focused on whether the Standstill Agreement and accompanying Homologation Request constituted a foreign proceeding within section 101(23). The Sureties asserted that the Homologation Request and the Standstill Agreement did not involve all of Abengoa’s stakeholders and the process was more akin to an out-of-court restructuring. Additionally, public creditors were bound by neither the 5bis Notice nor the Standstill Agreement. Given that significant creditor constituencies were not considered, the Sureties argued that neither the Homologation Request nor the Standstill Agreement were collective in nature. Additionally, the Standstill Agreement contemplates limitations on Abengoa’s ability to manage its affairs and assets, but these limitations are self-imposed. The Foreign Debtors asserted that a collective proceeding need not bind or affect all creditors. Additionally, the supervision of the Spanish Court allegedly constituted sufficient oversight and supervision. 

Judge Carey overruled the objection in a short bench ruling and granted the petition for recognition. He agreed with the Foreign Debtors’ assertions concerning the level of judicial oversight and the collectiveness of the Homologation Request and Standstill Agreement. As of publication, this ruling is on appeal. Prior to this ruling, no United States bankruptcy court has recognized a pre-insolvency restructuring as a foreign proceeding of any kind. In Europe alone, at least fifteen countries have enacted pre-insolvency or hybrid insolvency/pre-insolvency legislation. Undoubtedly, parties will contest whether pre-insolvency and hybrid proceedings constitute foreign proceedings within section 101(23). The dispute in the Abengoa case likely portends future litigation to determine the boundaries of this definition as applied to pre-insolvency proceedings.