Restructuring

Contributed by Yvanna Custodio
In resolving a motion for leave to file an amended complaint to add new claims, the United States Bankruptcy Court for the Southern District of New York in Hosking v. TPG Capital Management, L.P. (In re Hellas Telecommunications (Luxembourg) II SCA) delved into a complex analysis of English and Luxembourgish (yes, that’s a word) insolvency law, and concluded that while two of the English fraud-based claims could proceed, the Luxembourgish claim allowing creditors to attack fraudulent transactions could not. 
The plaintiffs, the joint compulsory liquidators and authorized foreign representatives of Hellas Telecommunications (Luxembourg) II SCA, sought to avoid and recover, in an adversary proceeding commenced in the debtor’s chapter 15 case, an initial transfer of approximately €1.57 billion by Hellas II to its parent and subsequent transfers of approximately €974 million to certain private equity firms that owned the sponsors of the ultimate parent.  The assailed multi-step transaction (referred to as the “December 2006 Transaction” in the decision) was allegedly aimed at extracting returns from the debtor “under the guise of a purported ‘refinancing’ of its debt.”  First, the debtor issued €960 million and $275 million of subordinated notes; second, related Hellas entities issued additional notes, the proceeds of which were transferred to the debtor; third, the debtor transferred a total of approximately €1.57 billion to its parent, around €974 million of which was paid to redeem convertible preferred equity certificates that the ultimate Hellas parent issued a year before.  The ultimate Hellas parent was wholly owned by eight investment funds that were, in turn, formed by the private equity firms that were the alleged subsequent transferees in the December 2006 Transaction.
In 2009, the debtor moved its center of main interests from Luxembourg to the United Kingdom in anticipation of a restructuring, was placed into administration by the High Court of Justice of England and Wales, and, in 2011, was placed under compulsory liquidation.  In 2012, the case found its way across the pond through a chapter 15 petition for recognition filed in the bankruptcy court.
Unsurprisingly, the private equity firms named as the defendants in the original complaint argued that the amended complaint could not survive a motion to dismiss and would be futile.
First, with respect to the English fraudulent transfer-type claim, the defendants argued that, among other things, the bankruptcy court lacked subject matter jurisdiction over the claim because under English insolvency law, only the English High Court or another court with jurisdiction to wind up the debtor could grant the relief requested.  The plaintiffs countered, however, that the section at issue “is a purely procedural English venue statute” and the bankruptcy court would not be bound to apply it.  After analyzing the statute and case law, as well as reviewing the declarations of the parties’ experts on English law, the bankruptcy court concluded that it had subject matter jurisdiction over the claim, finding that applicable federal law (and not a foreign statute) determined whether the court had subject matter jurisdiction and whether venue was proper.  Although the court observed that it was “bound to apply the substantive law of the UK to adjudicate the [English fraudulent transfer-type claim] . . ., it is not bound to follow UK procedural law.”
Second, with regard to the fraudulent trading-type claim (i.e., carrying on a business with the intent to defraud creditors) the defendants argued that, among other things, Luxembourgish law applies under choice of law principles, but because Luxembourgish law has no equivalent fraudulent trading-type claim, then amending the complaint would be futile because no relief could be granted.  Relying on the “interest analysis,” which is the test used in New York to determine which jurisdiction’s law applies to the claim, the plaintiffs argued that England has the “greatest interest in seeing its law applied.”  Luxembourg’s relationship to the transfers was “relatively insignificant,” according to the plaintiffs, and they alleged a number of facts showing that the December 2006 Transaction included an English “hook,” such as the location of the planning and execution of the December 2006 Transaction, the transfer of funds involving English bank accounts, and the location of the executives who signed the transaction documents.  Acknowledging that the answer was not clear-cut, the bankruptcy court held that the United Kingdom had “the greater interest in having its substantive law govern.”  In so holding, the court pointed to the allegations in the complaint demonstrating “that a substantial amount of the actions relating to the December 2006 Transaction were taken by entities and individuals located in countries outside Luxembourg.”  Notably, the court observed that the nominal registration status of the Hellas entities in Luxembourg was insufficient to “tip the interest analysis” toward Luxembourgish law.
On the third major issue, the Luxembourgish claim allowing creditors to attack fraudulent transactions, the bankruptcy court found for the defendants that the claim would be futile because the plaintiffs lacked standing.  The court agreed with the defendants’ assertion that the claim belonged solely to the debtor’s creditors, observing that the plaintiffs did not submit any authority demonstrating that a receiver or liquidator of a foreign debtor could bring an action on behalf of the creditors in a foreign court.
Although this post only touches upon the meat-and-potatoes of the Hellas decision (a mere crumpet, if you will), the case highlights the vulnerability of a complex, multi-step transaction to fraudulent transfer claims, particularly in light of allegations that the refinancing was merely a way for the investors to realize returns on their investments.  If a fraudulent transfer analysis is conducted as part of the diligence process in structuring a transaction, Hellas demonstrates that the relevant inquiry will include not only the law of the jurisdiction in which the debtor is incorporated, but could potentially implicate jurisdictions in which a substantial amount of the actions relating to the transaction took place.
¹ Eau de vie is a type of liquor for which Luxembourg is known.