A recent chapter 15 decision by Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) suggests that third-party releases susceptible to challenge or rejection in chapter 11 proceedings may be recognized and enforced under chapter 15. This decision provides companies with cross-border connections a path to achieve approval of non-consensual third-party guarantor releases in the U.S.
Background
The company, Avanti Communications Group (“Avanti”), was a Ka-band satellite operator, providing wholesale satellite data communications services throughout Europe, the Middle East and Africa. (In case you didn’t already know, the Ka band [pronounced as either “kay-ay band” or “ka band”] is a portion of the microwave part of the electromagnetic spectrum. The 30/20 GHz band is used in communications satellite uplinks and high-resolution, close-range targeting radars aboard military airplanes. Some frequencies in this radio band are used for vehicle speed detection by law enforcement, or at least that’s what Wikipedia tells us.) Headquartered in London, Avanti was incorporated under the laws of England and Wales as a public limited company.
Prior to its restructuring, Avanti had approximately $1 billion in funded debt obligations, comprised of approximately $118 million in outstanding super-senior term loans maturing in 2020 (the “Term Loans”), $323 million in outstanding senior secured notes maturing in 2021 (the “2021 Notes”), and $557 million in outstanding senior secured notes maturing in 2023 (the “2023 Notes,” together with the 2021 Notes, the “Notes”). The issued debt was guaranteed by Avanti and each of its direct and indirect subsidiaries.
In late 2017, Avanti faced increasing financial pressures due to an overleveraged capital structure and delays in manufacturing and procurement. Avanti and an ad hoc group of holders of its Terms Loans and Notes entered into preliminary discussions for a comprehensive balance sheet restructuring.
Subsequently, Avanti entered into a restructuring support agreement (“RSA”) with creditors comprising 62% of its outstanding 2021 Notes, and 55% of its outstanding 2023 Notes. The RSA set out the terms of a debt-for-equity swap of Avanti’s 2023 Notes and the amendment of its 2021 Notes, which was to be implemented pursuant to a scheme of arrangement under the UK Companies Act 2006 (the “Scheme”). In order to effectuate the Scheme, it had to first be sanctioned by the High Court of Justice of England and Wales (the “English Court”).
The Sanctioning of the Avanti Scheme
Avanti initiated a proceeding before the English Court for approval of the Scheme. The English Court considered the application and issued a Convening Order, requiring the meeting of the impaired creditors (i.e., holders of the 2023 Notes). Because the impaired creditors were comprised exclusively of holders of the 2023 Notes, the Scheme consisted of one voting class.
The Avanti Scheme granted third-party releases, including releases of guarantors of the 2023 Notes (the “Guarantor Releases”). The proposed Guarantor Releases prohibited creditors from seeking recovery against Avanti or its subsidiary guarantors.
At the meeting, the impaired creditors, holding 98.3% of the outstanding 2023 Notes, attended and voted in favor of the Scheme. None of the impaired creditors voted against the Scheme. As a result, the English Court sanctioned the Scheme, finding jurisdictional, statutory and fairness requirements to be satisfied. To protect its reorganization efforts and ensure fair and efficient administration of the restructuring, Avanti sought to then have the Scheme recognized in the U.S. under chapter 15 of the Bankruptcy Code.
U.S. Chapter 15 Proceeding
A U.S. chapter 15 case, unlike chapter 11, is ancillary to a primary proceeding in a foreign jurisdiction. The chapter 15 case is recognized by the Bankruptcy Court, rather than independently commenced. In seeking assistance from U.S. courts, chapter 15 requires that the foreign proceeding be brought by a foreign representative. The Bankruptcy Court must first recognize the foreign proceeding.
For a U.S. chapter 11 restructuring to commence, a debtor must meet the eligibility requirements of § 109(a) of the Bankruptcy Code. In In re Barnet, the Second Circuit affirmed that the eligibility requirements for debtors under § 109(a) of the Bankruptcy Code apply equally in chapter 15 restructurings. A debtor must show that it has either (i) domicile, (ii) a place of business, or (iii) property in the U.S. as a condition of eligibility. Notably, immediately following the decision in In re Barnett, the Delaware Bankruptcy Court, in In re Bemarmara Consulting, took a different view, holding that the requirements of § 109(a) did not apply to debtors seeking recognition under chapter 15.
Avanti had neither domicile nor a place of business in the U.S. The Bankruptcy Court did, however, deem a $100,000 retainer deposited for Avanti’s counsel in a U.S. bank sufficient to meet the Bankruptcy Code’s eligibility requirements. Having met the procedural requirements of chapter 15, as determined by the Second Circuit, Avanti asked the Bankruptcy Court to recognize and enforce the Scheme.
Upon achieving recognition of foreign main proceedings, § 1521(a) of the Bankruptcy Code authorizes the court to grant any appropriate relief, effectuating the objective of chapter 15. Relief in this instance may be narrowly limited by the public policy exception. For example, whether the third-party releases so greatly offend principles of U.S. public policy.
Avanti Gets its Releases Approved
While acknowledging the inconsistent approval of third-party releases by U.S. bankruptcy courts, Judge Glenn ultimately decided he could, nonetheless, grant recognition and enforcement of a foreign order authorizing such third-party releases. Importantly, it was not necessary for the guarantors to commence a case (either in the U.K. or in the U.S.) to obtain the benefit of the third-party releases; the Guarantor Releases provided in the Scheme were sufficient.
Avanti’s facts were unique, distinguishing it from other cases where third-party releases were denied, including in the chapter 15 context. Although principles of comity were integral to Judge Glenn’s decision, the specific facts of the Avanti favored third-party releases.
- First, no objections were filed in the Bankruptcy Court against the Scheme and it had near-unanimous support from voting-impaired creditors.
- Second, the U.K. procedure proceeded in accordance with U.S. due process concepts, strengthening the argument for recognition.
- Lastly, unlike chapter 11, the U.K. Companies Act 2006 authorizing schemes does not provide a mechanism for “cramming down” dissenting classes of creditors. All that is required is that 75% of the voting shares of the creditor class vote in favor of the scheme. This threshold was overwhelmingly surpassed in Avanti. Further, third-party releases are not categorically prohibited and, therefore, are not contrary to public policy in the U.S. Under § 1521 of the Bankruptcy Code, the Bankruptcy Court has discretion to provide any appropriate relief, where necessary to effectuate the purpose of chapter 15.
The Bankruptcy Court determined that the Scheme was capable of recognition in the U.S. so long as it did not prejudice the rights of U.S. citizens or violate U.S. domestic public policy. Additionally, he deemed the Guarantor Releases as being necessary to give practical effect to the Scheme. He expressed concern that failure to enforce the Guarantor Releases would otherwise have significantly prejudiced creditors to the detriment of the reorganization.
Judge Glenn took care to distinguish the case on its facts before recognizing the Scheme, thereby, enforcing the Guarantor Releases in the U.S. Further, not all companies will be able to avail themselves of the Scheme process in the U.K. (or other analogous jurisdictions). It is unlikely that this decision harbingers a sea change in complex corporate restructuring, but the outcome in Avanti does present companies with an additional avenue to address their restructuring requirements, should the circumstances allow.
Weil summer associate Mary Seraj contributed to this post.