Restructurings are becoming ever more international, as a result of a growing tendency for companies in financial difficulties to look beyond the obvious jurisdiction to select a beneficial restructuring regime. In a number of cases this has worked successfully. However, it is crucial to bear in mind the domestic impact of any foreign regime, which will determine success and determine whether a parallel process is required at home.
There have been a number of recent high-profile cross-border cases that provide lessons for the future. Included are the Global Crossing and Cenargo cases, between which there was a huge difference. In Global Crossing there was a genuine need for parallel proceedings in the US and Bermuda, whereas Cenargo was an example of unsuccessful forum shopping that led to a transatlantic jurisdictional dispute involving what is thought to be the first ever telephone conference between US and English judges in a case of this kind.
Global Crossing’s business was conducted primarily from the US, but the parent and some intermediate holding companies were incorporated in Bermuda. When filing for Chapter 11 protection, Global Crossing applied for the appointment of joint provisional liquidators (JPLs) in Bermuda, and the JPLs’ powers were tailored to a parallel Bermudian restructuring.
These parallel proceedings provided protection from creditor action in the jurisdiction of the Bermudian companies’ incorporation, whereas the purported worldwide stay under Chapter 11 can, in practice, only be enforced against parties subject to the US jurisdiction, and so non-US parties with which Global Crossing traded might have taken action in Bermuda. In addition, the proceedings enabled consistent compromise procedures for the $10bn (£5.64bn) restructuring in the two jurisdictions – Global Crossing exited from insolvency via a US plan of reorganisation and parallel Bermudian schemes of arrangement.
In contrast, there was no need for a Chapter 11 filing in Cenargo.
Cenargo is a shipping group comprising of mostly English companies, with services across the English Channel, the Irish Sea and the Mediterranean. On encountering financial difficulties, it filed for Chapter 11 protection. However, it did not carry on business in the US, nor did it have any assets located there except for two bank accounts opened shortly before the filings. The only connection to the US was that most of the bondholders, to whom bond debt of some $175m (£98.8m) was due, were based in the US.
The Chapter 11 filings gave rise to a number of problems. As Cenargo did not have its business in the US, the Chapter 11 stay could not be enforced against a majority of creditors. Also, any exit via a plan of reorganisation would not bind creditors who were not subject to the US jurisdiction. This case did not require parallel proceedings such as Chapter 11 coupled with administration. Bearing in mind the European nature of the business, the extra cost of parallel proceedings was not warranted, and indeed the restructuring was ultimately achieved through administration only.
The inadequacy of the Chapter 11 proceedings was highlighted by the actions of a major leasing creditor, which felt that the Chapter 11 filings were made primarily to frustrate its contractual rights and were inappropriate – the US stay prevents the termination of contracts such as leases. This creditor applied to the English courts for the appointment of JPLs acknowledging that its actions did not sit squarely with the Chapter 11 stay. The English court appointed JPLs observing that the Chapter 11 filings were an abuse, and gave power to the JPLs to seek administration orders and apply to the US court to dismiss the Chapter 11 proceedings. The court also granted an injunction that prevented the directors or their agents from taking further steps in the Chapter 11 proceedings without the creditor’s consent.
Upon learning of the English orders, the US court ordered the JPLs not to take any steps in the provisional liquidations and made an order to show why the petitioning creditor and the JPLs were not in contempt of the US court for having breached the US stay. This caused a jurisdictional stand-off because under English law the directors were divested of authority upon the JPLs’ appointment, whereas the US order prevented the JPLs from doing their job.
It became increasingly clear that Cenargo needed the protection of administration to benefit from a Europe-wide moratorium invoked by the EC Regulation on Insolvency Proceedings 2000. After a short interval and with the consent of the US court, the companies entered into administration in the UK. Shortly afterwards, the US court suspended the Chapter 11 proceedings, determining that the “centre of gravity” of the cases was in the UK, but it retained jurisdiction to rule on the contempt issue and on what amount of fees should be paid to the Chapter 11 advisers.
The continued dispute – in which there were allegations of contempt in both jurisdictions – highlighted the differing approaches of the courts to contempt. The US court encouraged the contempt proceedings as it was concerned about a principle being established that foreign parties can take unilateral action in foreign jurisdictions, notwithstanding a Chapter 11 stay. Conversely, the English court thought it unproductive to fall back on contempt in trans-national insolvency proceedings.
A turning point came when the US and English judges held a telephone conference with all parties in attendance. Prior to the conversation, the English judge had sent a letter of request to the US judge, stating that if favourable consideration was given to his request that the US contempt proceedings be withdrawn, he would consider imposing no penalty if it was determined there had been a contempt of the English court. During the telephone conversation, the English judge made his views about invoking the contempt jurisdiction clear.
Ultimately, the contempt litigation was dismissed by the US court at the same time as it ruled on the Chapter 11 advisers’ costs. As there was insufficient cash in the US to meet the Chapter 11 fees, the US court asked the English court to order that the allowed Chapter 11 fees be paid as administration expenses. In the event, a settlement was reached on this issue. However, whether comity would have been given is arguable. While the English court had been asked to give comity, the US court made some unpalatable findings, including that the Chapter 11 proceedings were not an abuse and that the English court’s orders appointing the JPLs were void. The English court had previously made clear that the propriety of the Chapter 11 filings from an English perspective was very significant in deciding the extent to which comity should be given.
All in all, the Cenargo case is a cautionary tale for those seeking to forum shop on a non-consensual basis. This jurisdictional dispute added substantially to the costs of an otherwise successful restructuring through administration exited by probably the most complex creditors voluntary arrangements yet to be put in place under the Insolvency Act 2000. The dispute also obscured a number of other interesting features, in particular the operation of the European regulation in relation to Cenargo’s activities outside the UK.
Susan Moore is a partner in the reconstruction and insolvency group at Denton Wilde Sapte