The Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) issued an opinion on April 9, 2018 recognizing and enforcing a scheme of arrangement that contained non-consensual releases of non-debtor subsidiary guarantors under chapter 15 of the Bankruptcy Code. The Bankruptcy Court held that, in certain situations, such non-debtor releases may be approved and enforced in chapter 15 proceedings based upon principles of comity, even where similar arrangements would be impermissible in a chapter 11 proceeding.
The case, In re Avanti Communications Group plc, 582 B.R. 603 (Bankr. S.D.N.Y. 2018), signals the continuation of a trend, particularly in the Bankruptcy Court for the Southern District of New York, that considerations of comity in chapter 15 cases may result in the approval of non-consensual non-debtor affiliate releases in such cases, notwithstanding the fact that such non-debtor releases are extraordinarily rare, if not completely impermissible, in chapter 11 proceedings.1 Indeed, Avantifollows, among others, two other recent decisions in the Bankruptcy Court for the Southern District of New York enforcing non-consensual non-debtor releases of U.S. affiliates in chapter 15 cases. In In re Mood Media Corporation, 569 B.R. 556 (Bankr. S.D.N.Y. 2017), the Bankruptcy Court recognized and enforced a Canadian plan of arrangement and held that, even though the Canadian debtor’s U.S. subsidiaries could not themselves be considered “debtors” within the meaning of chapter 15 for recognition purposes merely because their rights were affected by the plan of arrangement, those U.S. subsidiaries were nonetheless entitled to rely on the provisions of the Canadian plan of arrangement that released their guarantee obligations as to certain notes and enjoined creditors from taking any action against those U.S. subsidiaries pursuant to any debt instruments or contracts on account of the insolvency proceedings.2 Similarly, in In re Boart Longyear Limited, No. 17-11156 (MEW) (Bankr. S.D.N.Y. Aug. 30, 2017), the Bankruptcy Court recognized and enforced an Australian scheme of arrangement, which contained non-consensual releases of, among others, U.S. non-debtor subsidiary guarantors and enjoined creditors from taking any enforcement actions against the U.S. subsidiaries or their assets even though the U.S. subsidiaries were not debtors in any insolvency proceeding.3
Principals of Comity Permit Granting Non-Consensual Non-Debtor Releases Even Though Such Releases Would be Disfavored in a Chapter 11 Case
Avanti concerned the restructuring of a public limited company incorporated in England and Wales that had non-debtor subsidiaries incorporated in various countries, including England, Germany, Sweden, Turkey and South Africa.4
In order to restructure its debt and create a more sustainable long-term capital structure, on December 13, 2017, the Debtor negotiated a scheme of arrangement with certain of its creditors which sought to equitize the Debtor’s 12 percent/17.5 percent Senior Secured Notes due 2023 (2023 Notes). The scheme of arrangement called for the exchange of the approximately $557 million outstanding aggregate principal amount of the 2023 Notes for 92.5 percent of the Debtor’s share capital. Pursuant to the scheme of arrangement, the 2023 Noteholders were to release any claim or liability against the Debtor or any of the subsidiary guarantors of the 2023 Notes in connection with the 2023 Notes or the 2023 Notes Indenture.5 As with many non-debtor affiliate releases, the subsidiary guarantor releases were designed to prevent any of the 2023 Noteholders from getting around the scheme by attempting to recover under the guarantees of the 2023 Notes provided by certain of the Debtor’s subsidiaries.
The Debtor applied to the High Court of Justice of England and Wales (UK Court) on February 15, 2018 for permission to convene a scheme meeting in which its impacted creditors could consider and approve the scheme. After the UK Court issued its Convening Order approving, among other things, the convening of a creditors meeting and the appointment of a foreign representative for the purposes of the Debtor’s chapter 15 proceeding, creditors representing 98.3 percent of the value of the 2023 Notes met and voted in favor of the scheme.6 No 2023 Noteholder voted against the scheme.7 The UK Court sanctioned the scheme on March 26, 2018.8
Upon being sanctioned by the UK Court, the foreign representative of the Debtor sought recognition and enforcement of the scheme by the Bankruptcy Court. In his memorandum opinion granting recognition and enforcement of the scheme, including the non-debtor subsidiary releases, Judge Glenn first determined that sections 1521(a) and 1507(b) of the Bankruptcy Code authorize bankruptcy courts in the United States to recognize and enforce foreign confirmation orders in the interests of comity.9 Judge Glenn then noted that although “granting third-party releases in chapter 11 cases is controversial,” courts, particularly in the Southern District of New York, have frequently enforced such releases in the chapter 15 context.10 Such releases, Judge Glenn stated, were common in schemes of arrangement in the United Kingdom.11
Judge Glenn also distinguished the recent Fifth Circuit case In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1042 (5th Cir. 2012) in which the court affirmed a bankruptcy court’s decision not to grant comity and enforce a Mexican reorganization plan that granted releases of guarantees by non-debtor affiliates and was approved by a Mexican court. In particular, Judge Glenn stated that Vitro had “a number of very troubling facts,” including that the reorganization plan in that case created only one class of unsecured creditors and was only approved after counting the votes of company insiders who made up 50 percent of the voting claims.12 Judge Glenn also noted that the Fifth Circuit itself distinguished the situation in Vitro from those of other cases, including those in the Southern District of New York, in which such third-party releases were enforced through chapter 15 proceedings.13
Judge Glenn determined that the Debtor’s scheme did not pose the same issues identified by the Fifth Circuit in Vitro. First, Judge Glenn found that “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.”14 Specifically, Judge Glenn stated that a scheme of arrangement in the UK does not become binding on either the debtor or its creditors unless a majority representing at least 75 percent in value of each class votes in favor of the scheme.15 Further, there is no “cram-down” mechanism in the UK for dissenting creditor classes.16 If the requisite majority of votes needed to approve the scheme is reached, under UK law, the entire class is bound by the scheme’s terms, including any non-debtor affiliate releases.17
Second, consistent with the procedures required by UK law, Judge Glenn then determined that the affected creditors in the case had “a full and fair opportunity to vote on, and be heard in connection with, the [s]cheme.”18 The scheme only altered the rights of one class of creditors, the 2023 Noteholders. Of those 2023 Noteholders, 98.3 percent attended the creditors’ meeting and voted in favor of the scheme, without a single dissenting vote. Nor did approval of the scheme depend on the votes of insiders.
Finally, Judge Glenn concluded that declining to enforce the scheme and its non-debtor affiliate releases would ultimately prejudice the creditors and “prevent the fair and efficient administration” of the restructuring. Accordingly, Judge Glenn held that “[p]rinciples of comity permit a U.S. bankruptcy court to recognize and enforce the [scheme].”19
Continuing Trend of Bankruptcy Courts for the Southern District of New York to Recognize and Enforce such Non-Consensual Releases.
As mentioned, Avanti signals the continuation of a trend that considerations of comity in chapter 15 cases may result in the approval of non-consensual non-debtor affiliate releases in such cases, notwithstanding the fact that such releases are extraordinarily rare, if not completely impermissible, in chapter 11 proceedings. The Avanti decision particularly noteworthy because it outlines the factors a bankruptcy court is likely to consider in determining whether to enforce a foreign plan or scheme with such releases, including how closely the foreign jurisdiction’s proceedings comport to U.S. due process requirements, the role of insiders in approving the plan or scheme, the number of creditor classes impacted or impaired by the plan or scheme, the size of the majority of creditors within those classes that approved the plan or scheme and the releases, and the importance of the releases to the ability of the foreign debtor to successfully reorganize.
Bankruptcy Courts, particularly those in the Southern District of New York, have increasingly utilized this more permissive standard for evaluating non-consensual non-debtor affiliate releases in chapter 15 cases. The result is that individual creditors will be precluded from taking action against U.S. entities or U.S. assets that could jeopardize a foreign restructuring. Thus, should this trend continue, it will likely assist in facilitating cross-border restructurings, particularly in jurisdictions, such as England, Australia and Canada, where the legal systems closely resemble that of the United States.