Do the Americans listen to the rest of the world? Looking at the argy-bargy surrounding the restructuring of T&N, you’d be tempted to say no. In three weeks’ time, Judge Lyons of the Delaware Bankruptcy Court will be presented with the Chapter 11 plan for the reorganisation of Federal-Mogul – one of the most complex ever.
But there’s a problem. The UK administrators aren’t having any of it – they’re not satisfied that it delivers more to creditors than a liquidation would. And if their objections are not taken into account, Federal-Mogul will make legal history as the first Chapter 11 plan that is unenforceable in the UK.
The Federal-Mogul situation has been going on for three years and has had a cast of thousands, all dealing with a mountainously complex set of issues, most arising from asbestos liabilities.
In the US a team from Sidley Austin Brown & Wood, led by Chicago partner Jim Conlan and supported in the UK by Robin Parsons and Patrick Corr, has been advising Federal-Mogul as debtor in possession. The UK administrator of Federal-Mogul subsidiary T&N is Kroll Buchler Phillips partner Simon Freakley, advised by Denton Wilde Sapte’s (DWS) Mark Andrews. The commercial creditors are advised by Sonnenschein Nath & Rosenthal and Ashurst; the asbestos creditors are advised by Caplin & Drysdale and Lovells; the future asbestos claimants by Young Conaway Stargatt & Taylor and Herbert Smith; and the banks have tapped Simpson Thacher & Bartlett and Clifford Chance. The T&N pension trustees – key figures on the UK side – are advised by Allen & Overy.
There have been a number of transatlantic insolvencies before, from Maxwell (relatively straightforward, but the first) to Cenargo (hilarious knockabout farce). Everyone believed that Federal-Mogul would end up with a transatlantic restructuring led by a Chapter 11 plan of reorganisation, supported by schemes of arrangement or company voluntary arrangement in the UK. But this was not to be.
However, despite some of the finest legal minds on the planet involved in this insolvency, no one has found their way around a basic conflict of laws – and the deadline is looming.
“There’s no roadmap here,” admits Freakley.
Kroll and DWS originally proposed a scheme of arrangement in tandem with the Chapter 11, but that failed to take into account the asbestos liabilities.
“By a scheme of arrangement you can make a compromise with certain classes of creditors where you can’t identify any of them,” says Andrews at DWS. “But here seven-eighths of creditors are unidentifiable.”
One issue is successor liability; under US law an asset sold out of insolvency is never free of longtail liability, whereas under English law an asset sold out of administration is clear of it.
The other horror is – no surprises here – the pensions issue, which has taken on a political dimension. The T&N pension fund has a massive $1.5bn (£81m) hole that shows no signs of being filled, and the pension fund trustees have serious objections.
The main structure of the underlying plan cannot be changed without uproar from the bondholders, so it looks like there’ll be plenty of horse-trading from now until December.
The good news is that Judge Lyons is thought by UK lawyers to be more sensitive to cross-jurisdictional issues. And he’ll need to be if the plan isn’t going to be derailed altogether.