With the growth of international commerce, the world desperately needs a uniform law to facilitate cross border insolvencies of multinational corporations, as vividly shown in an opinion by Bankruptcy Judge James L. Garrity, Jr. of New York.
Fortunately, the United Nations Commission on International Trade Law, or UNCITRAL, is on the road to promulgating a model law to aid the liquidation or rehabilitation of multinational companies. Perhaps as soon as next year, UNCITRAL’s working group on insolvency law will produce a draft of a model law for multinational companies that could become part of chapter 15, the U.S. version of UNCITRAL’s Model Law on Cross Border Insolvency.
Judge Garrity is presiding over the chapter 11 cases initiated in late June by China Fishery Group Ltd. (Cayman) and 15 affiliates. His opinion on Oct. 28, calling for the appointment of a chapter 11 trustee, shows the patchwork approach that judges must take in the absence of a model law putting a court in the driver’s seat when a widespread enterprise needs bankruptcy relief simultaneously in different countries.
Judge Garrity’s debtor companies are mostly dormant or non-operating. A few are holding companies for three nondebtor operating affiliates in the anchovy fishing business that control a significant percentage of the anchovy fishing quotas fixed by the Peruvian government. The operating companies are the subject of involuntary insolvency proceedings in Peru.
The debtors and their nondebtor affiliates in turn are a “small part” of Hong Kong-based Pacific Andes Group, whose 150 operating and non-operating entities around the globe constitute the world’s twelfth-largest fishing company, according to Judge Garrity.
While the debtors were in default to their lenders and had committed to selling the Peruvian operating businesses, Judge Garrity said that the family controlling the group surreptitiously planned bankruptcy filings in the U.S. and Peru.
Since the Peruvian companies lacked certified financial statements, they were ineligible to file voluntary petitions. Instead, they arranged for friendly creditors with about $1.1 million in claims to file an involuntary petition in Peru on the same day as the chapter 11 filings in New York. The “putative” foreign representatives, according to Judge Garrity, sought recognition of the Peruvian proceedings under chapter 15 in New York.
Although not all institutional lenders were in agreement, several foreign bank creditors with more than $400 million in unsecured claims filed a motion for appointment of a chapter 11 trustee under Section 1104(a)(2). They claimed that the controlling family was “disincentivized from selling the Peruvian business” because they would lose their equity and “gut” the Pacific Andes Group.
Although Judge Garrity did not buy all their arguments, he agreed with enough to justify appointing a trustee. He laid out the usual presumption in favor of retaining a debtor-in-possession, alongside the mantra that appointing a trustee is the “exception, rather than the rule.”
Even though the banks did not persuade Judge Garrity that the debtors were “untrustworthy,” he said that the lenders had shown “a number of good reasons” for losing “all confidence in the debtors.” He cited precedent justifying appointment of a trustee when there is sufficient “acrimony” and pointed to the “surreptitious planning of global bankruptcy and insolvency filings” coupled with “several billion dollars in unexplained intercompany transactions.”
The banks wanted a chapter 11 trustee to terminate the Peruvian insolvency proceedings by paying the $1.1 million owing to the petitioning creditors. Judge Garrity didn’t agree. He directed the trustee to “assess the highest and best use of those assets in the context of the resolution of these chapter 11 cases.”
Judge Garrity saw no reason to have a trustee for all 16 debtors. Instead, he directed the appointment of a trustee only for the debtor that is the direct and indirect owner of the Peruvian operating companies.
The opinion by Judge Garrity shows skepticism about companies that pursue chapter 11 relief when they have “no meaningful contacts” with the U.S. He said the debtors had no assets in the U.S. aside from retainers paid to their U.S. professionals.
Under the circumstances, Judge Garrity said it was “incumbent” on the debtors “to articulate a cogent and viable reorganization strategy.” He said they “failed to do so” after initiating bankruptcies that were “completely at odds” with their previous commitment to sell the Peruvian businesses.
Former New York Bankruptcy Judge Allan L. Gropper is a U.S. representative to the UNCITRAL working group developing a model law for multinational corporate insolvencies. At the annual meeting of the National Conference of Bankruptcy Judges in San Francisco in late October, ABI interviewed Judge Gropper, who spoke about the UNCITRAL model law effort. To watch the video, click here.
For UNCITRAL’s website on model insolvency laws, including the multinational corporate project, click here.