For the benefit of our clients and friends investing in European distressed opportunities, our European Network is sharing some current developments.
The UK, Luxembourg and the US—On 29 January 2015, the US Bankruptcy Court presiding over the chapter 15 case of London-based Hellas Telecommunications (Luxembourg) II SCA ("Hellas"), which formerly owned one of the largest mobile phone operators in Greece, partially dismissed fraudulent transfer claims asserted by Hellas's UK liquidators against private equity giants TPG Capital Management LP and Apax Partners LLP. See Hosking v. TPG Capital Management LP (In re Hellas Telecommunications (Luxembourg) II SCA),Adv. Proc. No. 14-01848 (MG) (Bankr. S.D.N.Y. Jan. 29, 2015). Hellas's liquidators filed a chapter 15 petition with the US Bankruptcy Court in 2012 seeking recognition of the company's UK liquidation proceeding. The liquidators also requested an injunction preventing the continuation of certain lawsuits pending against Hellas in New York State court. In separate litigation commenced in the bankruptcy court, the liquidators alleged, among other things, that the defendants were the recipients of fraudulent transfers after they purchased Hellas and then siphoned more than US$1.3 billion out of the company, leaving it saddled with debt. The court ruled that the causes of action alleging "constructive" fraudulent transfers, as distinguished from transfers made with the intent to defraud, must be dismissed under choice of law principles because an actual conflict exists between the laws of New York State and the laws of the UK and Luxembourg, which do not recognize a constructive fraudulent conveyance cause of action, and because the UK and Luxembourg have a more significant interest in applying their laws in the case. The court also held that, given its conclusion that the constructive fraudulent transfers must be dismissed on other grounds, it need not decide whether New York State's fraudulent transfer law may be given extraterritorial effect or whether the liquidators could assert the avoidance claims in light of section 1521(a)(7) of the US Bankruptcy Code, which expressly precludes a US bankruptcy court from granting relief under the US Bankruptcy Code's avoidance provisions.
The European Union—On 4 December 2014, the European Commission issued a press release stating that amendments to Council Regulation 1346/2000 on Insolvency Proceedings will be implemented. The proposed amendments follow the consultation of Member States, institutions and experts conducted by the Commission in 2012, and they aim to move Europe toward a rescue-oriented approach to insolvency. They are expected to be adopted by the Council and the European Parliament by May 2015 and to come into force 24 months later. Key amendments include: (i) greater restrictions on a debtor's ability to migrate its centre of main interests ("COMI") in response to concerns over "forum shopping", where a debtor shifts its COMI to a jurisdiction with an insolvency regime more favourable to it (in particular, the presumption that a company's COMI is located in the same jurisdiction as its registered office will not apply where the registered office has been shifted between jurisdictions in the three months prior to insolvency); (ii) expansion of the types of "main proceedings" and "secondary proceedings" that can be recognised to include, respectively, 19 new European insolvency or pre-insolvency rescue proceedings (excluding UK schemes of arrangement) and local rescue (as distinguished from winding-up) proceedings; (iii) changes that would allow "synthetic secondary proceedings", whereby the insolvency practitioner in the debtor's main proceedings could offer to treat local creditors as if secondary proceedings had been opened in that jurisdiction, thereby avoiding the cost and complications of actually doing so; and (iv) the introduction of a new regime in cross-border restructurings of multinational corporate groups that would, on a voluntary basis, allow for the appointment of a "group coordinator" who is able to present a global restructuring plan.
Global—The United Nations voted 128 to 16 on 29 December 2014 to formally begin negotiations to create a global bankruptcy process. The resolution comes after the UN General Assembly voted in favor of a legal bankruptcy framework for countries in September 2014. The UN legal framework could prevent global financial crisis, minimize sovereign debt defaults and prevent predatory behavior. Sixteen nations voted against the resolution, including the United States, Japan, Australia and much of the European Union. Although these nations expressed support for improving debt restructuring and stopping predatory funds, they advocated that such measures should be discussed at the International Monetary Fund or the Paris Club rather than the UN.
Global—On 4 December 2014, Argentina offered some of its bondholders an early cash payout on bonds due in 2015, in a new effort to bolster its financial credibility while continuing to defy US court orders directing Argentina to pay holdout bondholders from its 2005 and 2010 debt restructurings. In accordance with the exchange order, holders of 7 percent dollar-denominated debt received 97 cents on the dollar when they agreed to swap their bonds for new bonds due in 2024 bearing a coupon rate of 8.75 percent and governed by Argentine law. However, Argentina ultimately received offers worth just US$286 million, far below the US$3 billion of "Bonar24" paper offered by the government.
On 23 December 2014, the US Court of Appeals for the Second Circuit upheld a lower court's order directing Argentina and several banks to disclose information to holdout bondholders about the country's assets, including diplomatic and military property, rejecting Argentina's claims of sovereign immunity. Argentina's claim that it need not comply with such discovery requests under the Foreign Sovereign Immunities Act had already been rejected by the US Supreme Court. Argentina further argued that its diplomatic property and documents were protected under the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations. The Second Circuit held that Argentina should voice objections on this basis when holdout bondholders actually attempt to execute on such property. Argentina's "self-serving legal assertion of immunity", the court wrote, "does not entitle it to withhold otherwise discoverable information".
On 31 December 2014, the "rights upon future offers" ("RUFO") clause in indentures governing bonds that were not exchanged as part of Argentina's 2005 and 2010 debt restructurings expired, paving the way for a potential settlement between Argentina and holdout bondholders. The RUFO clause prevented Argentina from settling with holdout bondholders on more favourable terms than those accepted by exchange bondholders in the debt restructurings. Argentina has stated that the RUFO clause could have triggered as much as US$120 billion in new claims if the nation settled with the hedge fund holdouts. A settlement would clear the way for Argentina to resume payments on its international debt that have been blocked since July 2014, when a US District Court ruled that Argentina must pay holdout bondholders before servicing its other bonds. Argentina has been locked out of overseas capital markets since its US$95 billion default at the end of July 2014.
The US, the UK and Canada—On 18 December 2014, the US Bankruptcy Court for the District of Delaware approved a settlement between the US arm of defunct telecom Nortel Networks Corp. ("Nortel") and crossover bondholders that caps post-petition interest on their notes at US$1 billion, rejecting myriad arguments raised by Nortel's Canadian units. Nortel's US units and crossover bondholders reached the deal in June 2014, agreeing to designate a compromise post-petition interest rate and stop interest accruing as of June 2015, thus capping the maximum payment at just more than US$1 billion. Nortel's Canadian units opposed the settlement on numerous grounds, arguing, among other things, that it amounts to a "sub rosa" chapter 11 plan. The court rejected this contention, noting that resolving the issue without litigation will result in a "significant savings of expense, inconvenience and delay". Moreover, the court explained, the settlement provides value by halving a potential liability of the US estate, which would be obligated to pay more than US$2 billion in post-petition interest by the end of 2015 at the bondholders' sought-after rate. See In re Nortel Networks, Inc., No. 09-10138, 2014 BL 356939 (Bankr. D. Del. Dec. 18, 2014). The monitor for Nortel's Canadian debtors appealed the order on 31 December 2014. Nortel Retirees and Former Employees Protection Canada joined in the appeal.