The Restructuring Report

For several decades, domestic international bankruptcy laws in many countries are becoming more similar – convergence – and have been changing from a liquidation model to a rescue model. In a liquidation model, the failing of the business is assumed to be the consequence of fraud and mismanagement, and early displacement of management, liquidation of assets under supervision, and distribution of the proceeds to creditors honors creditors rights and protects creditors from further loss.

The opposite model is the rescue model, which supports the view that many failing businesses can be rescued and rehabilitated and that the going concern value should be captured and will accrue to the benefit of all creditors and of society. Chapter 11 in the U.S. is considered the global standard of rescue statutes. The change toward that model is encouraged by the World Bank. Countries making changes toward the rescue model presents that country as a possible host for the resolution of the international cases, those cases which affect economic interests in more than one country. Several countries are considered to be in competition to be the host country for those cases. This short report will highlight a few of the changes.

Mexico

Mexico had a reasonably modern reorganization statute but suffered an embarrassment in the reorganization case of Vitro, a large telecommunication company. When the Mexican reorganization law was presented for recognition under Chapter 15 of the Bankruptcy Code, that recognition was denied for several reasons.

In 2014, Mexican bankruptcy law was revised in a number of ways to address the Vitro problems. One change involves eligibility to file a reorganization case. Previously, a company seeking reorganization needed to first prove to a court that it was already insolvent before it could even file a petition to start the rescue process. Now the company may file a declaration that the insolvency is imminent, within the next 90 days. (In the United States, there is no insolvency prerequisite.) The rescue argument is that, to have a reasonable chance of success, the rescue process must start early enough. The 2014 change in Mexico is a tentative half-step but one indicative of a rescue rather than a liquidation mentality.

England

England has long had a liquidation model and that is still evident in many parts of its law. But in its complex legal system, there are also rescue components. A characteristic of the English system is there are a variety of laws and procedures that have evolved over time, some of which are sometimes used in combination. The restructuring process often used is called a “Scheme of Arrangement.” The scheme is not a bankruptcy law process but a corporate law process that is used in financial (as opposed to operational) restructurings in which a class of creditors, such as the holders of corporate bonds, can bind a minority in a deleveraging transaction. It is used in many of the largest cases internationally.

One of the primary criticisms of the scheme is that, because it is not a court process, it does not provide any kind of stay, such as the automatic stay available in Chapter 11 cases in the United States. As of 2020, the English system now has a new separate court proceeding called a “Restructuring Moratorium” (the English term for stay) which can be used together with a scheme to hold the businesses together during the scheme process. The new law may be more limited than needed to address every situation, but it is a significant step to make the scheme useful in more situations.

Choice of Jurisdiction

One might think that a reorganization case would have to be filed in the country of the business’ principal place of business. Within the European Union, that requirement is explicit in its Insolvency Regulation. The business must file where it has its “Center of Main Interests” (COMI).

However, businesses sometimes change their COMI by changing their registered offices and some of the functions to a preferred country, which has often been England. This COMI movement is often called pejoratively “Bankruptcy Tourism.” With Brexit, it is not clear whether England will maintain its lead as an international magnet for reorganization. Countries, such as the Netherlands and Spain, have been taking steps to attract reorganization cases that England may lose by changing their laws to make a moratorium or stay available to assist reorganizations.

In contrast to the EU, the U.S. does not require that companies seeking reorganization under Chapter 11 have its principal place of business or COMI here. A small amount of property, as little as a retainer in the office of its U.S. attorney, is enough to invoke the U.S. bankruptcy law and court system. Many businesses located all around the world are coming to the U.S. to initiate their reorganization.

With that, businesses seeking to reorganize likely have several locations to choose from among the many countries actively encouraging venue in their jurisdictions. In 2017, Singapore adopted reorganization laws modeled closely to U.S.’s Chapter 11 and is now actively seeking to host international reorganization cases. Worldwide, the leaders in this venue competition are thought to be London, Hong Kong, Singapore, Delaware and New York.

We can expect substantive bankruptcy law and preferred venues for the international cases to continue to change as well.

Note: The University of Minnesota and about 10 other U.S. law schools offer two credit courses on international bankruptcy designed and presented by the American College of Bankruptcy.