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15 April 2014
On 4 April 2006 the UK implemented the United Nations Commission on International Trade Law (Uncitral) Model Law on Cross-Border Insolvency through the enactment of the Cross-Border Insolvency Regulations 2006. The key objectives of the Model Law are to harmonise the treatment of cross-border insolvencies and to facilitate cooperation between office-holders involved with the same debtor. They do not attempt to unify local insolvency laws or affect creditors' substantive rights.
However, the regulations may alter the relationship between UK and US practitioners in Chapter 11 cross-border insolvency scenarios.
The close relationship between the US and the UK has not traditionally extended to the recognition of Chapter 11 proceedings in the UK. This has come as a surprise to US practitioners, who expected the extraterritorial, worldwide effect of Chapter 11 orders to apply in Europe. US practitioners presumed European creditors would comply with the Chapter 11 procedure for fear of acting (or being perceived to act) in contempt of the US bankruptcy court.
In the absence of a legal framework for cooperation, practitioners in certain instances have implemented court-sanctioned insolvency protocols designed to provide a framework for cooperation in multinational insolvencies. A protocol was used in 1992 in respect of the insolvency of Maxwell Communication Corporation and more recently in Federal Mogul's insolvency.
While such protocols have had some successes, they have been limited in number, largely because they are difficult to implement and are only possible where there is cooperation between the two courts and between the insolvency practitioners in each jurisdiction.
Typically, without a protocol, insolvency practitioners appointed over UK companies whose US parent is subject to Chapter 11 proceedings have effectively ignored the existence and conduct of the Chapter 11.
This often meant that, upon Chapter 11 proceedings being commenced, the directors of the local UK entity, possibly dependant on funding from its US parent, were duty-bound to place the company into some form of UK insolvency proceeding, usually administration. A necessary and unavoidable result was that the US debtor lost any control over the UK subsidiary.
As the number of global corporate groups expanded during the 1990s, and the number, magnitude and nature of corporate collapses increased, including Maxwell and Barings, so did the need for the implementation of an appropriately international cross-border insolvency recognition regime. As a consequence Europe introduced the EC Regulation on Insolvency Proceedings in May 2002 and the UN introduced the Model Law.
First adopted by Uncitral in 1997, the purpose of the Model Law is to provide a mechanism for the mutual recognition of cross-border insolvencies and otherwise assist in the coordination of proceedings concerning the same debtor. The Model Law has already been enacted in the US through Chapter 15 of the Bankruptcy Code and in 10 other jurisdictions. Each jurisdiction has implemented the Model Law with slight, but in many instances important, modifications. In the UK the Model Law is enacted through the Cross-Border Insolvency Regulations 2006.
The regulations also enable a US debtor in Chapter 11 proceedings with UK assets to seek direct access and relief from the UK courts without having to bear the full cost of a UK insolvency procedure or lose control of its UK assets.
The impact of the regulations on a particular debtor in Chapter 11 proceedings depends largely on two factors: first, whether the proceedings are 'main' or 'non-main'; and second, the timing of the application for recognition.
As to the first issue, the regulations operate by recognising a 'foreign proceeding' as either main or non-main. The definition of foreign proceeding in this context applies to collective insolvency proceedings (receivership or a foreign equivalent will not be recognised) that differs from the scope of the definition in Chapter 15, which also includes 'adjustment of debt' proceedings. Importantly, upon the recognition of a foreign main proceeding (being one that is taking place in the state where the debtor has its centre of main interests), an automatic moratorium applies. The moratorium is broad, but does not affect any right to take steps to enforce security over the debtor's property and does not prohibit local creditors from initiating or continuing insolvency proceedings in the UK in relation to the debtor when a foreign proceeding has already been recognised.
The recognition of the foreign proceeding as a foreign non-main proceeding, being where the debtor has an 'establishment' in the foreign state (a place of operations where the debtor carries out a non-transitory economic activity with human means and assets or services) does not lead to automatic relief, but certain protective and injunctive relief is available upon application.
As to the issue of timing, the regulations differentiate between the treatment of concurrent proceedings, depending on the timing and nature of the proceedings, and whether local UK insolvency proceedings are in place at the time of the recognition proceedings. This will have an impact on the strategy employed by the foreign representative, depending on the precise aims of the recognition proceedings. Where a UK proceeding and a recognised foreign non-main proceeding run concurrently, any modification or continuance of relief is subject to the UK courts' satisfaction that the relief granted to that non-main foreign proceeding is appropriate to such proceeding under UK law.
A change in process
Given the moratorium that applies automatically upon recognition of a foreign proceeding as a foreign main proceeding, we see an emerging practice in which a debtor in Chapter 11 proceedings files for recognition as a foreign main proceeding in the UK to take control of its local assets, and subsequently places the local entity into administration under UK law. The administration would then be conducted in a 'soft' manner, which in no way would derogate from the administrator(s) complying with their duties as officers of the court, but with the debtor-in-possession effectively able to retain control of the local assets as part of a coordinated international realisation strategy. This is clearly a very different situation to that which existed prior to the enactment of the regulations.
The enactment of the 2006 regulations is a welcome development, particularly given the tortured history of Chapter 11 proceedings being recognised in the UK. There are real practical benefits to be obtained immediately for debtors in Chapter 11 proceedings, notwithstanding the practical differences between the regulations and Chapter 15 and the uncertainties that will invariably be the subject of judicial clarification.
Lyndon Norley is a partner and Kon Asimacopoulos an associate at Kirkland & Ellis