On July 13, 2015, the Bankruptcy Court for the Southern District of New York granted recognition to the Brazilian bankruptcy proceedings of three entities from The OAS Group (“OAS”), a Brazilian infrastructure enterprise. Recognition was granted over the objection of two significant holders (the “Noteholders”) of OAS’s aggregate $875 million senior notes due 2019 (the “2019 Notes”). In a three-part series, the Weil Bankruptcy Blog is examining the court’s ruling in detail. Part I of this series reviewed the facts of the case and examined the court’s decision that Renato Fermiano Tavares qualified to serve as OAS’s “foreign representative,” as that term is defined by the Bankruptcy Code. In today’s blog post, we will consider the court’s decision to grant recognition – as a foreign main proceeding – to OAS’s Austrian subsidiary, OAS Investments GmbH (“Investments”), the issuer of the 2019 notes. Part III will consider the court’s decision not to invoke the public policy exception for OAS.
Corporate groups sometimes raise capital by incorporating separate legal entities (often in tax-friendly jurisdictions such as the Netherlands or Austria) for the sole purpose of issuing debt and lending the proceeds into the corporate group. If a corporate group seeks bankruptcy protection in the United States, it is generally not problematic to include such a financing subsidiary in the bankruptcy filing. Even if the financing subsidiary is incorporated outside of the United States, it can be a debtor under the Bankruptcy Code as long as it meets the basic requirements of section 109(a) of the Bankruptcy Code, i.e., it is a “person” and has some property in the U.S.
This was not the case in Brazil until recently. Prior to the bankruptcy cases of the OGX Petróleo e Gás Participações S.A. and its affiliates (“OGX”), it was assumed that a corporate group with financing subsidiaries incorporated outside of Brazil would not be able to include such entities in their Brazilian bankruptcy filing. And indeed, when OGX first filed in Brazil, the court of first instance held that OGX’s Austrian financing subsidiary, OGX Austria GmbH, should be excluded from the bankruptcy filing. The Brazilian Court of Appeals, however, reversed the decision and held that the Austrian financing subsidiary should be added to the filing. This was a surprising and very significant development in Brazilian bankruptcy law when it occurred in February of this year.
OAS Investments GmbH
Given this new precedent, it was less surprising when the Brazilian court overseeing OAS’s bankruptcy proceedings held that Investments could file for bankruptcy protection in Brazil along with the rest of the group. In the words of the U.S. bankruptcy court:
The Brazilian Court observed that although Brazil had not yet adopted the UNCITRAL Model Code, the center of main interests of OAS was Brazil, and the Brazilian Debtors, including those incorporated abroad, were part of the same economic group controlled from Brazil.
As the issuer of the 2019 Notes, it was essential that Investments be able to join its affiliates as a debtor in the Brazilian bankruptcy proceedings. It was equally important, for purposes of the chapter 15 cases, that the bankruptcy court in New York recognize the Brazilian proceeding for Investments as a foreign main proceeding (i.e., as a proceeding pending in a country where the debtor’s center of main interests (“COMI”) is located), as opposed to a foreign non-main proceeding (i.e., a proceeding pending in a country where the debtor has an establishment, but no COMI). Recognition as a foreign main proceeding confers considerably greater benefits to a foreign debtor, including the authority to manage the debtor’s business in the ordinary course, and immediate imposition of the “automatic stay” and other provisions of the Bankruptcy Code on property of the debtor located within the United States.
To recognize Investments’ proceeding as a foreign main proceeding, the bankruptcy court needed to find that Investments’ COMI was in Brazil as of the time of the filing of the chapter 15 petition. There is a presumption under chapter 15 that a debtor’s registered office is located in that debtor’s COMI. But the presumption can be rebutted based on a court’s consideration of “any relevant activities” of the debtor, including the location of the debtor’s headquarters, who actually manages the debtor, the location of the debtor’s assets and creditors, and the jurisdiction and law that would apply to most disputes. In addition, the Second Circuit has held that a court may consider the debtor’s “nerve center,” “including from where the debtor’s activities are directed and controlled, in determining a debtor’s COMI.”
The Bankruptcy Court’s Analysis
The bankruptcy court acknowledged that “COMI analysis when applied to a special purpose financing vehicle proves less straightforward than the typical case.” Despite its maintaining its registered office in Vienna, however, the bankruptcy court noted that Investments “does not conduct business, own assets, have a physical location, or employ anyone in Austria.” Its “predominant creditors,” the holders of the 2019 notes, are “located worldwide.” And Investments had “no other business” than paying off the 2019 notes – an objective that could only be met, according to the bankruptcy court, through the Brazilian bankruptcy proceedings of OAS (“In truth, the only source of repayment that will ultimately discharge the obligations to the 2019 Noteholders must come from the OAS Group pursuant to the reorganization of their financial affairs.”) For these reasons, the bankruptcy court found that Brazil was Investments’ COMI and “nerve center.”
The bankruptcy court found additional support in the expectation of Investments’ creditors. Investments’ offering memoranda explained that all of Investments’ directors and officers resided in Brazil and that the notes were guaranteed by OAS S.A. (the parent) and other Brazil-based affiliates. The memoranda also highlighted that Investments was a special purpose financing vehicle within Brazil-based OAS. According to the bankruptcy court, the purchasers of the notes
expected to receive repayment from the cash generated by the operations of the OAS Group, and in the event of a default, might ultimately have to enforce their rights in a Brazilian bankruptcy proceeding. OAS Investments had no separate, ascertainable presence in Austria; it was part of, and inseparable from, the OAS Group located in Brazil.
Having concluded that Investments’ COMI was in Brazil at the time of its chapter 15 filing, the bankruptcy court was able to recognize the Brazilian bankruptcy proceeding as a foreign main proceeding.
The bankruptcy court in New York has therefore made it possible for a special purpose entity registered in Austria, with its COMI and a pending bankruptcy proceeding in Brazil, to obtain the benefits of the automatic stay and other provisions of the U.S. Bankruptcy Code. The protections of chapter 15 are limited, however, to the territorial United States. The benefits that OAS ultimately reaps from chapter 15 recognition remain to be seen, and will depend on the outcome of the Brazilian proceedings and the enforceability of a Brazilian restructuring plan in the U.S. Beyond the OAS cases, the bankruptcy court’s analysis and conclusions with respect to Investments are likely to provide helpful guidance for other foreign debtors with similar special purpose financing subsidiaries.