Restructuring

As the Wall Street Journal reported last month, UK restructurings have been gaining traction as an alternative to chapter 11, with at least three U.S.-listed companies, including Fossil Group, choosing London as the venue to restructure their debts in the past year.

Fossil Group¹ pioneered this strategy of using a “UK stapled exchange” to restructure its debt in a much less costly and less disruptive manner than a chapter 11 would have been for the company. The strategy typically involves:

• creating a new UK subsidiary (and/or using an existing UK subsidiary),
• making that subsidiary a guarantor of the U.S. parent debt,
• (sometimes) changing the law governing the debt from New York law to UK law,
• (sometimes) attempting an out-of-court exchange,
• filing a UK proceeding for the UK subsidiary only,
• the inclusion of a non-consensual third-party release in the UK scheme/plan of the U.S. issuer/affiliates’ obligations under the debt documents, and
• chapter 15 recognition of the UK scheme/plan.

New Fortress Energy Inc. (“NFE”) is the most recent company to implement the strategy successfully, reducing its debt from $5.7 billion to less than $1 billion.  And, for the first time since this trend caught fire, a bankruptcy court has issued an opinion discussing the analytical framework it applied to consider approval of the UK debtors’ restructuring plans.

Following entry of the recognition order in NFE, Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York issued a 57-page opinion explaining his reasoning.  Judge Glenn used the term “COMI tourism” to describe the growing trend of U.S.-based companies establishing a UK affiliate specifically for the purpose of pursuing a foreign restructuring solution followed by a chapter 15 case.  The court discussed certain “cautionary principles” a chapter 15 court should consider before recognizing a foreign plan or scheme in such a case. The key issue is whether the strategy is being used to “circumvent the requirements of the U.S. Bankruptcy Code to disadvantage some creditors.” After getting comfortable that NFE was using the strategy appropriately, the court approved this example of “good forum shopping” and granted all requested relief.

Key Takeaway:  With this strategy now blessed by several prominent bankruptcy courts, U.S. distressed companies and their creditors should consider whether they can achieve their restructuring goals more efficiently and with greater certainty by looking “across the pond” for their solution. 

Analysis

The intricacies of chapter 15 recognition are beyond the scope of this article.  We briefly address the court’s discussion of the issues central to its primary COMI tourism concern—the use of the strategy to disadvantage creditors.  The court highlighted the following considerations in this context:

COMI.  To obtain recognition and enforcement of cross-border cases as a “foreign main proceeding” under chapter 15, a foreign debtor must establish that its center of main interests or “COMI” at the time of the chapter 15 filing is in the foreign jurisdiction.  A debtor’s registered office is presumed to be the debtor’s COMI under the Bankruptcy Code.  However, if COMI is disputed, that presumption may be overcome through the consideration of several factors.  These factors “should be viewed in light of chapter 15’s emphasis on protecting the reasonable interests of parties in interest pursuant to fair procedures and the maximization of the debtor’s value.”  In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006).

In NFE, the court found the foreign debtors’ COMI was England, where they were incorporated and had their registered office.  No factors in the record refuted the COMI presumption, and certain additional factors supported COMI in England: the location of the debtors’ books and records, bank accounts, the identity of the corporate secretary, and the citizenship and residency of the debtors’ foreign representative (who was also a director). 

COMI Manipulation.  The court did not stop at a typical COMI analysis, however.  Instead, the court held that in approving the restructuring plan in cases involving “bankruptcy tourism,” a court should analyze “COMI manipulation.”  Specifically, a court should “scrutinize COMI closely to be sure the Scheme or Plan has not been used unfairly to favor one group of creditors over others to achieve a result that could not be achieved in a chapter 11 case.”

Judge Glenn carefully reviewed the record and found that the UK restructuring plans at issue were not the “result of exploitation or untoward manipulation.”  He cited creditor support for the plans and the lack of objections as evidence weighing in favor of recognition.  Increased creditor recoveries also weighed in favor of recognition.

Sufficient Protection Guardrail.  Enforcing a scheme or plan is discretionary relief.  Judge Glenn stated that U.S. courts should closely examine requests to recognize a foreign scheme or plan in cases where a domestic entity established a foreign affiliate, with particular attention to the requirements of section 1522(a) of the Bankruptcy Code.  That section provides that certain discretionary chapter 15 relief may only be granted “if the interests of the creditors and other interested entities . . . are sufficiently protected.”

In examining the “sufficient protection” requirements, courts consider:

• just treatment of creditors (showing that the applicable foreign insolvency law “provides for a comprehensive procedure for the orderly and equitable distribution of [the debtor]’s assets among all of its creditors”),
• protection of U.S. claimants (against “prejudice and inconvenience in the processing of claims” in the foreign proceeding),
• distribution of estate proceeds (“substantially in accordance with the order prescribed by U.S. law”), and
• balancing of interests. 

The court found that those factors were satisfied in the NFE case and, therefore, recognized the UK restructuring plans, including the third-party releases of the U.S. affiliates’ obligations under the funded debt. 

Conclusion

Judge Glenn’s opinion in NFE provides valuable insight into the level of scrutiny bankruptcy courts may give to UK (or other foreign) debtors formed to restructure the debt of their U.S. affiliates through a UK (or other foreign) plan or scheme.  This opinion reaffirms that the UK stapled exchange approach Fossil and other U.S. companies pursued can be an effective restructuring tool when used for the right reasons—to benefit creditors rather than to create an unfair advantage.  Some courts have called this “good forum shopping.”

We can be certain that other companies will attempt to utilize this strategy given its advantages over chapter 11.  It remains to be seen whether COMI tourism will withstand a hotly contested battle.  We will be watching closely.