Honorable Martin Glenn, United States Bankruptcy Judge in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”) granted Avanti Communications Group PLC’s (“Avanti”) request to recognize the UK court-sanctioned scheme of arrangement and enforce the guarantee releases provided by Avanti’s affiliates on certain debt.
Avanti’s Business and Capital Structure
Headquartered in the United Kingdom, Avanti provided satellite services to customers in Europe, the Middle East, and Africa, and for several years, worked to expand its satellite fleet. Avanti’s debt structure included a term loan and two senior secured notes.
In October 2013, Avanti issued approximately $557 million aggregate principal amount of senior secured notes that were due to mature in 2023 (the “2023 Notes”). In January 2017, Avanti issued approximately $323 million aggregate principal amount of senior secured notes that were due to mature in 2021 (the “2021 Notes”).
Avanti was party to a super-senior term loan facility agreement (as amended and restated, the “Term Loan Facility”) with a stated maturity date in 2020. As of Avanti’s Chapter 15 petition filing, the Term Loan Facility had an outstanding balance of approximately $118 million. In connection with the issuance of the 2021 Notes, the lenders and noteholders to the Term Loan Facility, 2023 Notes and 2021 Notes entered into an intercreditor agreement wherein the parties agreed that Avanti’s obligations to the lenders to the Term Loan Facility would be senior to those of the noteholders of both the 2023 Notes and 2021 Notes. Affiliates of Avanti were guarantors to each of the 2023 Notes, 2021 Notes and Term Loan Facility.
Restructuring Terms Under the Scheme of Arrangement
Avanti experienced unforeseen financial difficulties related to manufacturing and procurement of its satellites. In an effort to prevent events of default under the Term Loan Facility, 2023 Notes, and 2021 Notes and establish a sustainable capital structure, in December 2017 Avanti entered into a restructuring agreement with certain lenders and noteholders to amend certain terms of the 2021 Notes and convert the 2023 Notes into common shares of Avanti. Avanti then entered into a scheme of arrangement in order to execute the terms of the December 2017 restructuring agreement (the “Scheme”).
Under the terms of the Scheme, the Avanti affiliate guarantors would be released from their guarantees under the Term Loan Facility, 2023 Notes, and 2021 Notes.
To effectuate the Scheme, Debtor applied to the High Court of Justice of England and Wales (“UK Court”) for permission to convene a meeting of its creditors to consider and approve the Scheme. The UK Court considered the application at the hearing and among other things, ordered (1) the convening of meeting of the holders of the 2023 Notes (the “2023 Noteholders”); (2) the notice of the Scheme, an explanatory statement, and proxy forms, be made available to the creditors; and (3) authorized the appointment of a foreign representative to file a Chapter 15 case in the United States Bankruptcy Court.
Because only the 2023 Noteholders were affected by the Scheme, the 2023 Noteholders constituted the only voting class of the Scheme.
Avanti convened a meeting of the 2023 Noteholders on March 20, 2018. At the meeting, 2023 Noteholders—representing 98.3% by value of the outstanding 2023 Notes—attended either in person or by proxy and voted in favor of the Scheme. No 2023 Noteholders voted against the Scheme.
Thereafter, the UK Court sanctioned the Scheme in a proceeding commenced by Avanti under the Part 26 of the Companies Act 2006 (“UK Proceeding”). Avanti then sought recognition under Chapter 15 of the United States Bankruptcy Code because the 2023 Notes were governed by New York law, and a minority creditor had previously challenged a prior consensual out-of-court restructuring by bringing an action in New York State Court.
The Bankruptcy Court’s Decision
The Bankruptcy Court granted Avanti’s unopposed request for recognition of the Scheme and enforcement of the affiliate-guarantee releases, which would be binding against the small number of non-voting impaired creditors.
Avanti Was Eligible To Be a Debtor Under 11 USC § 109(a)
As a condition to eligibility for Chapter 15 protection, a foreign representative must show that the debtor has either (i) a domicile, (ii) a place of business, or (iii) property in the United States.
The Bankruptcy Court found that the “property in the United States” requirement for eligibility under § 109(a) was satisfied by the $100,000 retainer held by counsel to Avanti and its foreign representative, in an account at a bank located in New York. Further, the Bankruptcy Court found that the property requirement was met because the indenture governing the 2023 Notes included a choice of law provision designating New York law.
Avanti Satisfied the Legal Standard for Recognition under 11 USC § 1517.
Under 11 USC § 1517(a), three requirements must be met before a foreign proceeding will be recognized:
(1) such foreign proceeding for which recognition is sought is a foreign main proceeding . . . within the meaning of section 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the petition meets the requirements of section 1515.
The Bankruptcy Court determined that § 1517(a)’s requirements were met to recognize the foreign proceeding.
First, the Bankruptcy Court found that the UK Proceeding constituted a “foreign main proceeding” within the meaning of § 1502. Section 1502(4) defines a “foreign main proceeding” as “a foreign proceeding pending in the country where the debtor has the center of its main interests.” Under 11 USC § 101(23), a foreign proceeding is a “collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.”
The Bankruptcy Court found the UK Proceeding, including the Scheme, satisfied the §101(23)’s definition of a “foreign proceeding” because it was held under a law that allowed Avanti to restructure its capital debt structure. The proceeding was pending in the UK, which the Court determined constituted Avanti’s “center of main interests.” Accordingly, the UK Proceeding—sanctioning the Scheme—qualified as a “foreign main proceeding.”
Second, the Bankruptcy Court determined that the petitioner Patrick Willcocks filing for Chapter 15 relief on behalf of the Avanti qualified as a “foreign representative” because he was duly appointed by the Avanti’s board of directors as foreign representative of the UK Proceeding and authorized by the UK Court to act as a “foreign representative” in the Chapter 15 context.
Lastly, Avanti’s petition requesting Chapter 15 recognition met the procedural requirements of § 1515.
Avanti Met the Legal Standard for Enforcement under 11 USC § 1521
In addition to its request for recognition of the Scheme, Avanti also requested the Bankruptcy Court enforce the third-party releases of claims against Avanti and its non-debtor affiliate-guarantors.
Upon recognition under 11 USC § 1517 and request by the foreign debtor, the bankruptcy court should first consider the specific relief enumerated under § 1521(a) and (b). If the relief requested is not articulated in § 1521 then the bankruptcy court should consider whether the requested relief falls more generally under § 1521’s grant of any appropriate relief. If relief is still not available, then the bankruptcy court should consider whether relief would be appropriate as “additional assistance” under § 1507. In determining whether to grant “appropriate relief” or “additional assistance,” bankruptcy courts are guided by principles of comity and cooperation with foreign courts.
The Bankruptcy Court decided to enforce the release of claims against Avanti and its affiliate-guarantors for several reasons. While the Bankruptcy Court did not specify whether its decision to grant enforcement was under § 1521 or § 1507, the Bankruptcy Court found it notable that the affected creditors had a full and fair opportunity to vote and be heard on the Scheme in the UK Proceeding and they voted overwhelmingly to approve the Scheme, including releases of guarantees they held against Avanti’s affiliate guarantors. No creditor opposed Avanti’s Chapter 15 petition for recognition of the Scheme and enforcement of the third-party releases. And, the release of the affiliates’ guarantees was necessary to restructure debt under the Scheme.
If on the other hand, the foreign reorganization was not a consensual plan and did not have the support of its creditors then the bankruptcy court might not have enforced third-party releases if doing so would not “reasonably assure” the objectives set forth in § 1507(b), such as “just treatment of all holders of claims” and “protection of claim holders in the United States against prejudice and inconvenience.”
Judge Glenn correctly held that the Scheme was recognizable and enforceable under Chapter 15. Although there have been many unpublished decisions that preceded the Avanti opinion on the subject of UK schemes of arrangement, this is the first reported decision by a United States Bankruptcy Court recognizing a UK scheme of arrangement and therefore an important legal precedent for the Chapter 15 practitioner. The Court concluded that:
[S]chemes of arrangements sanctioned under UK law that provide third-party non-debtor guarantor releases should be recognized and enforced under chapter 15 of the Bankruptcy Code. Avanti’s [impaired creditors] had a full and fair opportunity to vote on, and be heard in connection with, the Scheme…The proceedings under UK law in the UK courts afford creditors a full and fair opportunity to be heard in a manner consistent with US due process standards.
Even though it had no place of business in the United States, the Bankruptcy Court granted Avanti’s request to enforce, upon recognition, non-consensual third-party releases. The Bankruptcy Court noted in Avanti that judges in the Southern District of New York often enforce third-party releases in foreign proceedings under § 1507 of the Code. This however is not always the case when dealing with cases that are commenced as domestic bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code. Third-party releases prompt significant debate in Chapter 11 cases. Circuit Courts across the United States are split on the applicable standard for approving third-party releases absent consent. The Second Circuit adopts the view “that third-party releases may be given consensually, and in limited circumstances, may be approved without consent.”
Under the Second Circuit’s In re Metromedia decision, a third party non-consensual release may be appropriate in cases where: the estate received substantial consideration; enjoined claims were channeled to a settlement fund rather than extinguished; the enjoined claims would indirectly impact the debtor’s reorganization by indemnity or contribution; the plan otherwise provided for the full payment of enjoined claims.
This begs the question: would the third-party releases in Avanti have been approved if they were proposed under a Chapter 11 plan rather than by seeking comity for a scheme of arrangement?
The Chapter 15 was commenced, in part, because a creditor had previously filed an action in New York State Court in response to an earlier restructuring effort which suggests there was active creditor interest in and opposition to a restructuring. But there was no objection to the Scheme when it was proposed in the UK Proceeding. The Avanti decision cites In re SunEdison, Inc., a case that involved third-party releases in a Chapter 11 case. The SunEdison court rejected the argument that the absence of objections to a third-party release should be interpreted to constitute consent. The court reasoned, inter alia, that Chapter 11 plans of reorganization are founded in contract theory where silence does not constitute acceptance of terms. The SunEdison decision teaches that, at least in the context of Chapter 11, the lack of an objection does not constitute acceptance of non-consensual terms. The Avanti court reasoned that it was not necessary to opine on that issue which was a correct analysis because the request for comity does not require such an analysis be performed.
This is an important and well-reasoned opinion. Avanti was able to efficiently and seamlessly use the UK scheme of arrangement coupled with a Chapter 15 proceeding to obtain approval of non-consensual third-party releases. Although there were no business operations in the United States, the extension of comity to the Scheme will provide the restructured enterprise with greater certainty going forward. Similar transactions in the future will be able to rely on this decision for its guidance and precedential value.