Restructuring

In Judge Glenn’s recent lengthy decision recognizing and enforcing a restructuring plan in the chapter 15 proceedings of In re Agrokor¹, a Croatian company in Croatian insolvency proceedings, he highlighted that the concept of comity – respect for rulings in other countries – remains an important U.S. judicial policy in insolvency proceedings, seemingly more important here than in certain other countries. ProTip: This decision provides a good overview of chapter 15 and a deep discussion of comity principles for anyone who wants to learn more about these interesting topics.

Background

When Agrokor, the largest private company in Croatia by revenue, experienced financial distress, the Croatian government passed a special insolvency law for “systemically important companies” (defined with reference to the size of debt and number of employees). Among other provisions, the law provided for the appointment of an administrator (the Extraordinary Commissioner) selected by the Croatian government, but in many other respects, the law incorporated concepts similar to those in U.S. chapter 11 proceedings, such as notice to creditors and achieving certain creditor voting thresholds before the restructuring plan could become effective.

Judge Glenn had previously recognized the Croatian insolvency proceeding as a foreign main proceeding (a typical step in chapter 15 proceedings) and now faced a request by the foreign representative² to recognize the restructuring plan itself. A decision by Judge Glenn to recognize the restructuring plan would make it binding and enforceable in the United States.

Potential Obstacles to Recognition

Although there were no objections to the relief requested by the foreign representative, the court noted several potential obstacles to granting the requested relief.

The first interesting obstacle faced by Agrokor was that courts in several countries had already refused to grant recognition to Agrokor’s Croatian insolvency proceedings, including Bosnia-Herzegovina, Serbia, Slovenia and Montenegro. These courts seemed bothered by what they perceived as a law that was enacted to benefit the government of Croatia, rather than benefit creditors. It should be noted that the proceeding was recognized in England and Wales, Switzerland, and (seemingly) the European Union (despite Slovenia’s denial of recognition).

The second interesting obstacle was the “Gibbs Rule” in England and Wales, which was originally adopted in the late 1800s, but continues to be applied by courts in England and Wales in 2018. The Gibbs Rule provides that the courts in England and Wales will not enforce a foreign insolvency proceeding as it applies to English- law governed debt documents. Interestingly, in this case, the court in England and Wales had granted recognition to the Croatian insolvency proceedings themselves, but had not yet decided whether to grant recognition to the restructuring plan, including as it applied to Agrokor’s English-law governed debt.

Overcoming the Obstacles

Agrokor is not the first case in which a U.S. bankruptcy court has had to determine whether to recognize a restructuring plan derived from bespoke laws enacted in a foreign jurisdiction as a result of a local crisis. The United States Bankruptcy Court for the District of Delaware has also been faced with similar circumstances in the chapter 15 case of the Irish Bank Resolution Corporation, the entity created to liquidate certain distressed Irish banks pursuant to the Irish Bank Resolution Corporation Act 2013.

Ultimately, and like its sister court in Delaware, the U.S. Bankruptcy Court for the Southern District of New York was not swayed by the aforementioned foreign decisions and rules, and was instead guided by longstanding precedent in the United States in favor of comity. The court noted that the insolvency proceeding was generally procedurally fair and shared many of the same creditor protections available in the United States, including creditor rights to meaningful participation and an ability to vote on a restructuring plan. The fact that the Croatian process differed somewhat from what would be permitted in a U.S. chapter 11 case did not mean the restructuring plan was not to be granted comity, as recognition would not be “manifestly contrary to U.S. public policy” (a standard in section 1506 of the Bankruptcy Code). Similarly, the fact that other courts might not recognize the restructuring plan, including due to the Gibbs rule, was not a reason to deny chapter 15 recognition and enforcement in the United States.

Agrokor demonstrates that despite what one may think based on recent events in other spheres, respect for rulings in other countries remains live and well in bankruptcy courts in the United States.