Restructuring & Insolvency in the USA

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Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The primary statute that governs restructuring and insolvency proceedings in the United States is the Bankruptcy Code, which is codified as Title 11.

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

Although the United States is often referred to as debtor friendly, it is on the whole fairly balanced. The fact that the debtor remains in possession in Chapter 11 cases (ie, it stays under the control of its existing board and management), and for an initial period retains the exclusive right to propose a plan of reorganisation, is a principal reason that the United States is considered debtor friendly. In addition, the Bankruptcy Code provides several tools that promote a fresh start, such as automatic stay, discharge and the ability to cram down creditors and equity interest holders. However, balancing the powers of the debtor is the protection of a creditor’s rights under the code, including through:

strict priority of distributions to creditors and equality of distributions to similarly situated creditors;
honouring of subordination agreements; and
limiting the duration of a debtor’s exclusive right to propose a plan.

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Specific entities are not eligible to file for relief under the Bankruptcy Code, including insurance companies (to which state law applies) and certain banking institutions. In addition, certain entities are entitled to file only for Chapter 7 (liquidation) relief, including broker dealers and commodity brokers (each of which has its own separate federal statues under which they may liquidate) and certain uninsured banks. Railways are eligible only for Chapter 11 reorganisations. Although there are no sector-specific regimes relating to corporate insolvencies, certain types of case may result in additional parties becoming involved. Defined pension plans are subject to regulation by the Pension Benefit Guarantee Corporation, which can act to terminate plans, even when the sponsoring corporation is a debtor under the Bankruptcy Code.

Reform

Are any reforms to the legal framework envisaged?

The American Bankruptcy Institute established the Commission to Study the Reform of Chapter 11 to comprehensively evaluate US business reorganisation laws. On December 8 2014 the commission released its final report and recommendation. The commission’s recommendations aim to:

reduce barriers to entry;
facilitate certainty and more timely resolution of disputes;
enhance exit strategies for debtors; and
promote efficiencies and reduce litigation costs by resolving uncertainty and circuit splits under current law.

Although congressional hearings have been held on the proposed reforms, no specific legislation is pending and it is unclear whether it will gain any traction in the new 2017 Congress session.

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

Directors of a solvent corporation generally owe two duties to the corporation and its shareholders:

duty of care; and
duty of loyalty.

Duty of care requires acting in the best interests of the corporation, generally by making decisions on an informed and rational basis. Duty of loyalty requires that a director perform his or her function without conflict between his or her fiduciary duties and self-interest, by refraining from engaging in activities that permit the receipt of an improper personal benefit from his or her relationship to the corporation.

The potential for insolvency heightens the scrutiny of all parties in the directors’ decision-making process. Directors of a solvent corporation generally owe fiduciary duties exclusively to the corporation’s shareholders. However, when a corporation is insolvent the board’s fiduciary duties may extend to the corporation’s creditors, and the general duties owed by directors expand to include an obligation to maximise the value of the enterprise for the entire community of interests. Courts generally require that directors and officers of an insolvent corporation exercise the care and skill that a person of ordinary prudence would exercise in dealing with his or her own property.

Defences

What defences are available to a liable director or parent company?

The business judgement rule protects directors by granting judicial deference to their business decisions. There is a rebuttable presumption that directors of a corporation have acted on an informed basis, without self interest, in good faith and in the honest belief that the actions taken were in the best interests of the company. This presumption imposes a significant burden on a plaintiff to show that a company’s board of directors has acted in a manner inconsistent with their fiduciary duties or that their actions were irrational. The presumption can be overcome by demonstrating that there has been a breach of fiduciary duties, or in cases of fraud, bad faith, gross negligence or self-dealing. If the protection of the business judgement rule is lost, the burden shifts to the director to demonstrate the fairness of the challenged transaction.

Due diligence

What due diligence should be conducted to limit liability?

Practically speaking, a director should be well informed about the corporation’s business direction, financial condition and plans for growth. A director also should attend board meetings regularly, attentively review written materials prepared for the meetings and analyse management assumptions and strategic initiatives. Board deliberations should consider the possible effect of alternative options on stockholders and creditors. Directors may rely in good faith on management and expert advice of outside advisers, including counsel, that are reasonably believed to be qualified to provide the advice that they are giving. However, directors possessing a particular area of expertise may not rely blindly on an opinion of an expert and should challenge that opinion to the extent that their expertise dictates.

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The grant of a security interest or lien by an obligor in an agreement or pursuant to a statute typically is not enough to provide a creditor with protection from the loss of its collateral. A creditor must also take certain actions to perfect its security interest or lien, which provides notice to other parties of the existence of its security interest. Once perfected, subsequent security interests cannot take priority over the earlier-filed interest, with limited exceptions (eg, with the creditor’s consent or if the creditor allows its filing to lapse).

In the United States, the perfection of security interests is governed by state law. The perfection of security interests in most forms of personal property, including intangible property, is governed by the Uniform Commercial Code. To perfect a security interest under the code, a creditor must record a Uniform Commercial Code financing statement with the secretary of state of the state of incorporation of the obligor granting the security interest.

Under the code, security interests in cash, accounts or investment property cannot typically be perfected through a central Uniform Commercial Code filing. Instead, perfection of such security interests requires possession or control, which may be by an agreement that provides the creditor with control over the property. One common example of perfection in that form is perfection of a cash account through a deposit account control agreement.

The code does not apply to real property. Accordingly, if the security interest or lien applies to real property, it must be perfected under the individual state in which the property is located. Although state laws on the perfection of security interests can vary widely, they typically require that a mortgage or deed of trust be recorded in the country in which the real property is located.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The Bankruptcy Code establishes the following hierarchy for distribution of a debtor’s assets:

secured claims (to the extent of the creditor’s interest in the property);
administrative claims;
priority unsecured claims;
unsecured claims; and
equity interests.

The absolute priority rule provides a basic framework for ensuring fair distribution of the debtor’s assets by mandating that claims of higher priority are paid in full before claims and interests of lower priority may realise any recovery.

Can this ranking be amended in any way?

Claim holders may agree to treatment different from that established by the Bankruptcy Code’s absolute priority rule. For example, a class of creditors may negotiate to give part of its recovery to an immediately junior class in order to facilitate the confirmation of a bankruptcy plan.

Foreign creditors

What is the status of foreign creditors in filing claims?

Foreign creditors should file claims in the same manner as domestic creditors and be treated in the same manner, in accordance with the claim’s priority.

Unsecured creditors

Are any special remedies available to unsecured creditors?

As a general rule, all creditors play a limited role in a liquidation under either Chapter 11 or Chapter 7 of the Bankruptcy Code, because sales are free and clear of liens and claims, with any liens and claims attaching to the proceeds of the sale, and until the sale and automatic stay remain in effect. In a Chapter 11 case, a creditors’ committee is usually appointed (and retains professionals at the expense of the estate). That body will help to oversee the process to ensure that the highest and best price for the assets is obtained and can intervene in court if necessary. In a Chapter 7 case, a creditors’ committee may be (but rarely is) elected; however, its professionals are not reimbursed for fees and expenses from the estate.

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

State law provides creditors with the right to foreclose on real or personal property in which the creditor holds a security interest.

Real estate foreclosure is a court-supervised process governed by the law of the state in which the real property is located. Typically, a secured creditor must commence an action in a state court seeking to foreclose on the real property in which the creditor has a perfected security interest. If the court enters a judgment allowing foreclosure on the obligor’s property, a court-supervised sale of the assets will be held, in which the secured creditor may be able to credit bid the outstanding debt owed to it as some or all of the purchase price for the property.

Personal property foreclosures are governed by the Uniform Commercial Code or other state law. Once an obligor has defaulted on its debt obligations, a creditor may obtain possession of the obligor’s non-real estate collateral, by either judicial order or outside any court process, so long as there is no breach of the peace in so doing. A secured creditor also may foreclose on collateral with the consent of the obligor (known sometimes as a ‘friendly foreclosure’) and choose either to retain the property in full or partial satisfaction of the debt, or dispose of the collateral through a private sale or public auction.

A deed in lieu of foreclosure conveys the obligor’s interest in mortgaged real property to a secured lender in order to avoid a foreclosure proceeding. The deed is given in satisfaction of the entire mortgage obligation and may be an attractive option for a creditor if the value of the real property is close to or less than the value of the obligation of the obligor and no other secured creditors hold a senior security interest in the property.

Is trade credit insurance commonly purchased in your jurisdiction?

Yes.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

A Chapter 7 debtor may be an individual, corporation, partnership, trust, non-profit organisation or unincorporated association. Railways, insurance companies and some financial institutions cannot be Chapter 7 debtors.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

A debtor can liquidate in a Chapter 11 case and then use the proceeds to confirm a Chapter 11 plan. For most corporate debtors of any size, a Chapter 11 liquidation is preferable to a liquidation under Chapter 7 of the Bankruptcy Code, because in Chapter 11 the debtor remains in possession, meaning that the debtor’s management and board control the case and the sale process.

In a Chapter 7 case, a Chapter 7 trustee administers the bankruptcy estate.

How are liquidation procedures formally approved?

All sales under the Bankruptcy Code, including sales of substantially all of a debtor’s assets, require bankruptcy court approval under Section 363 of the Bankruptcy Code. Typically, the debtor must show that it has obtained the highest and best bid for its assets through an auction process. In most cases, the debtor will obtain approval in advance of bid procedures, often with a stalking horse bidder already selected. When a stalking horse is used, the bid procedures approved by the court in advance will typically include a break-up fee and expense reimbursement if a higher and better bid is obtained in the sale process.

What effects do liquidation procedures have on existing contracts?

Executory contracts (ie, contracts for which material performance remains outstanding for both sides) can be typically assumed and assigned to a purchaser, notwithstanding anti-assignment provisions in a contract. Major categories of contract that cannot be assigned in contravention of an anti-assignment provision include contracts in the nature of a personal services contract and certain IP contracts.

What is the typical timeframe for completion of liquidation procedures?

The timeline for a liquidation will vary depending on the company, but traditionally takes between 90 and 180 days.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

If a Chapter 7 case is commenced by the filing of a bankruptcy petition, or if the case is converted from a Chapter 11 case where no Chapter 7 trustee has been appointed, then an interim Chapter 7 trustee is appointed by the US trustee from a pre-selected panel of private trustees. A permanent Chapter 7 trustee may be elected at a creditors’ meeting held pursuant to the Bankruptcy Code, where creditors holding at least 20% of the allowable, undisputed, fixed, liquidated, unsecured claims may request and vote in an election (however, insider claimants and creditors with interests that are materially adverse to the other unsecured creditors may not request an election or vote). If no permanent Chapter 7 trustee is elected, then the interim Chapter 7 trustee becomes the permanent Chapter 7 trustee.

A Chapter 7 trustee’s primary obligation is to protect creditors’ interests. The Chapter 7 trustee must:

locate and collect all property of the debtor’s estate;
convert the property to cash by selling it following notice to parties in interest and a hearing by the bankruptcy court;
make distributions to the creditors in the order specified by the Bankruptcy Code; and
liquidate the estate as expeditiously as possible.

Additionally, to guarantee that its fiduciary obligations are met, among other things, a Chapter 7 trustee:

investigates the debtor’s financial affairs;
examines proofs of claim and objects to improperly allowed claims;
objects to the debtor’s discharge where appropriate;
provides information requested by parties in interest unless the court orders otherwise;
files periodic reports and summaries of the operation of the business, including statements of receipts and disbursements; and
provides a final report and files a final account of the administration of the estate with the US trustee and the court.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The bankruptcy court’s principal role is to adjudicate and preside over liquidations in order to ensure that a full and fair auction has been conducted and that the buyer satisfies the requirements of the Bankruptcy Court.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

Because a Chapter 7 trustee is appointed to administer the bankruptcy estate, the debtor’s role in a Chapter 7 case is much more limited than in a Chapter 11 case. Unless the bankruptcy court authorises a Chapter 7 trustee to do so, the debtor will not continue to operate its business. A bankruptcy court will authorise the operations of a debtor’s business only if it is in the best interest of the estate and if the operation is consistent with the orderly liquidation of the estate. In a Chapter 7 case, the debtor must:

attach schedules of assets and liabilities to the Chapter 7 petition;
provide information regarding the operation of its business; and
appear at a creditors’ meeting held pursuant to Section 341 of the Bankruptcy Code.

The debtor must also make available its financial statements, income statements, books and records to the Chapter 7 trustee.

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

Subject to certain exceptions, any entity may be a debtor under any chapter of the Bankruptcy Code if the entity – which includes a corporation, limited liability company or partnership – resides or has a domicile, place of business or property in the United States. These general requirements to be a debtor are broad, and include having a place of business (though not necessarily a principal place of business) or assets (which may be only de minimis assets) in the United States. For example, courts have found that bankruptcy jurisdiction exists where the debtor’s only connection to the United States was property in the form of a bank account or stock in a US corporation. The Bankruptcy Code does not require a debtor to be insolvent at the time of the filing of a Chapter 11 petition.

Entities that are not eligible for Chapter 11 relief include insurance companies, banks, credit unions, certain small business investment companies, stockbrokers and commodities brokers. The reorganisation or liquidation of these excepted entities is governed by other applicable federal or state laws.

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

The confirmation of a Chapter 11 plan – whether a plan of reorganisation or liquidation – is the ultimate goal of a Chapter 11 case.

The Bankruptcy Code provides a debtor with an initial 120-day period within which it has the exclusive right to file a Chapter 11 plan and another 60 days in which to solicit acceptances of the plan. This period can be extended or reduced by the bankruptcy court for cause (but cannot be extended more than 18 months from the commencement of the Chapter 11 case).

The Bankruptcy Code provides that, among other things, a plan must:

classify claims and interests (other than priority and administrative claims);
identify any class that is impaired under the plan;
specify the treatment of such claims and interests;
provide the same treatment for each claim or interest in a particular class;
provide adequate means for the plan’s implementation (eg, provide for the retention of property, around which the debtor will reorganise, or the sale of all or any part of the property of the debtor’s estate); and
contain only provisions consistent with the interests of creditors, equity holders and public policy with regard to the selection of any officer, director or trustee under the plan.

The plan confirmation process begins with the plan proponent serving creditors and equity holders with:

a copy of the plan;
a court-approved disclosure statement describing the plan; and
ballots for voting on the plan.

If the requisite number of stakeholders vote in favour of the plan, a hearing to confirm the plan will take place (with no less than 28 days’ notice to parties in interest). The Bankruptcy Code provides that a court can confirm a Chapter 11 plan only if certain requirements are met, including that:

the plan and the plan proponent have complied with the applicable provisions of the Bankruptcy Code and the plan has been proposed in good faith;
there are classes that are impaired under the plan, where applicable;
at least one impaired class has voted to accept the plan;
subject to the cram down requirements, each class has accepted the plan or is unimpaired;
the plan is in the best interests of the holders of claims or interests of any impaired class; and
the plan is feasible.

Unlike a debtor that files a plan of reorganisation, a debtor pursuing a plan of liquidation will not receive a discharge of the claims against it.

How are restructuring plans formally approved?

A Chapter 11 plan must be confirmed (ie, approved) by the bankruptcy court. A judge confirms a plan by signing and entering on the docket an order, referred to as the confirmation order.

What effects do restructuring procedures have on existing contracts?

A Chapter 11 debtor (like a Chapter 7 debtor) has three options with respect to an executory contract in a bankruptcy case:

to assume the contract;
to assume the contract and assign it to a third party; or
to reject the contract.

Because all three options require court approval, the debtor must file a motion requesting the court’s authorisation and providing the debtor’s justification for assuming, assuming and assigning or rejecting the contract. The counterparty will then have an opportunity to object and be heard at the hearing on the motion.

After a petition has been filed, but before assumption or rejection of the contract, both parties must continue to perform under the contract as they otherwise would. A debtor is not required to cure pre-petition defaults unless and until it assigns the contract. A non-debtor counterparty to a pre-petition contract or lease generally may not terminate or modify a pre-petition contract or lease, if its basis for terminating or modifying is the financial condition of the debtor or the filing of the bankruptcy case. Subject to the automatic stay, a non-debtor counterparty may terminate or modify a contract pursuant to its terms if it does so based on a non-bankruptcy or financial condition default of the debtor that occurred before the petition date.

What is the typical timeframe for completion of restructuring procedures?

There is no typical timeframe for the completion of a non-prepackaged Chapter 11 case. However, most cases typically have a plan confirmed within the 18-month period of plan exclusivity discussed above.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

The bankruptcy court must approve all transactions outside the ordinary course of the debtor’s business. The court must find that there is a good business reason to authorise the proposed action. If the debtor articulates a valid business justification, there is a strong presumption that the directors and officers acted in good faith, on an informed basis and in the honest belief that the action is in the best interest of the estate.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

The Bankruptcy Code provides for the creation of an official committee of unsecured creditors in order to represent the interests of all general unsecured creditors for the purpose of maximising returns to those creditors. The creditors’ committee is appointed by the US trustee and typically consists of holders of the seven largest unsecured claims against the debtor that are willing to serve. Considered a party in interest in the case, the committee has the right to be heard on any issue that arises. In larger bankruptcy cases, the creditors’ committee usually plays an active role and may be tremendously influential.

Official committees of unsecured creditors may perform any services in the interest of the creditors represented by the creditors’ committee, including:

retaining attorneys, accountants or other agents to represent or perform services for the committee (whose fees will be paid by the debtor);
consulting with the debtor concerning the administration of the case;
investigating the acts, conduct, assets, liabilities and financial condition of the debtor;
evaluating the desirability of continuing the debtor’s business and any matter relevant to the case or formulation of a plan of reorganisation or liquidation; and
participating in the formulation of a plan.

The filing of a Chapter 11 petition automatically triggers an injunction known as the ‘automatic stay’, which prohibits any action to collect, assess or recover a claim against the debtor that arose before the Chapter 11 filing. The automatic stay also bars parties from:

commencing or continuing a lawsuit against the debtor;
enforcing judgments against the debtor or estate property issued before the commencement of the case;
attempting to obtain possession or control over property of the estate;
attempting to create, enforce or perfect a lien against estate property; and
setting off any debts payable to the debtor that arose before the case against any claim against the debtor.

Under what conditions may dissenting creditors be crammed down?

If all of the confirmation requirements set forth in Section 1129(a) of the Bankruptcy Code are met, other than the requirement that all impaired classes vote in favour of the plan, the bankruptcy court can confirm the plan if at least one impaired class votes to accept the plan, provided that the plan does not discriminate unfairly and is fair and equitable with respect to each dissenting class of claims or interests that is impaired under the plan. A plan unfairly discriminates if it provides for treatment of the claims of a class of creditors that is not consistent with the treatment being provided to holders of claims or interests in other classes with comparable claims or interests. A plan is fair and equitable (a test that is typically referred to as the ‘absolute priority rule’) if each holder of a claim in the class will receive or retain property equal in value to the allowed amount of its claim, or no class junior to unsecured claims receives any distribution. The court will cram down the plan on a class that voted to reject the plan, which means that it will approve the plan notwithstanding the rejection if the plan meets those requirements, and the rejecting class of creditors will be bound by the terms of the plan.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

The board of directors continues to meet regularly and sometimes more frequently during a bankruptcy case. The board continues to be responsible for the company’s strategic decisions and continues to have the same ability to authorise corporate action in bankruptcy as outside of bankruptcy. However, any of its decisions authorising the debtor’s use of its assets outside the ordinary course of business will be subject to the approval of the bankruptcy court.

Shareholders’ rights on major decisions (eg, a sale or merger of the company) are derived from the company’s organisational charter document and bylaws. In bankruptcy, those rights are effectively superseded by the bankruptcy process, and strategic decisions that would be subject to a shareholder vote outside bankruptcy are instead made by the directors and officers for the benefit of the entire estate, often in consultation with a creditors’ committee or other key constituents, and are subject to approval of the bankruptcy court.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

The Bankruptcy Code allows debtors to avoid both fraudulent conveyances and preferential transfers. Generally, a fraudulent conveyance is a transfer of property by the debtor for less than reasonably equivalent value at a time when that debtor was insolvent. A preferential transfer is a transfer by the debtor to another person or entity within the 90 days before the commencement of the bankruptcy case (or one year if the recipient is an ‘insider’ of the debtor) that allows the recipient to receive more than it would have if a hypothetical Chapter 7 liquidation had occurred on the date of the transfer. The Bankruptcy Code provides certain limitations on a debtor’s avoidance powers, including time limitations and limitations to protect certain types of safe-harboured securities and derivatives transactions.

The strong-arm clause of the Bankruptcy Code provides debtors with the right and power to avoid any transfer of property or obligation of the debtor that is voidable outside of bankruptcy under applicable non-bankruptcy law. This power is significant for fraudulent conveyance attacks because it allows the debtor to take advantage of a longer look-back period (which is typically five years in most states, but could be significantly longer under certain theories) than exists under the Bankruptcy Code’s two-year look back for fraudulent conveyances.

The debtor, or a Chapter 11 trustee if one has been appointed, may seek to avoid a transfer. To avoid a transfer, a debtor must commence an adversary proceeding (a lawsuit within the bankruptcy case) against the party from which the debtor wishes to recover property or avoid an obligation.

An individual creditor or creditors’ committee does not have standing to seek to avoid a transfer because the debtor is vested with the duty and standing to pursue actions on behalf of the estate. However, most courts have held that a creditor or a creditors’ committee has derivative standing to bring actions on behalf of the debtor’s estate if the creditor or committee meets certain circuit court specific criteria, which usually include the creditor having requested that the debtor commence the avoidance action and the debtor having declined to do so.

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

In Chapter 11, a company’s directors and officers operate and make management decisions for the company unless a Chapter 11 trustee is appointed.

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

Yes. To access credit in an insolvency proceeding, the debtor will seek debtor-in-possession (DIP) financing. The Bankruptcy Code is designed to encourage lenders to extend credit to Chapter 11 debtors and authorises a debtor to grant liens on its property that are senior to existing liens, so long as the existing lenders are adequately protected. In addition, to the extent of any deficiency in the collateral value securing the DIP loan, the DIP lender is generally granted a super-priority claim, which ranks ahead in priority of general pre-petition and post-petition unsecured debt. The Bankruptcy Code requires that the debtor obtain court approval before it incurs indebtedness, creates a lien or grants a creditor a super-priority claim outside the ordinary course of business.

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

A debtor may not pay employee wages, salaries, commissions or benefits earned pre-petition or make contributions to benefit plans in respect of pre-petition periods without court approval. Debtors therefore often seek bankruptcy court approval in first-day orders to pay employee pre-petition wages and certain benefits, based in part on the priority under the Bankruptcy Code for wages, salaries and commissions earned within 180 days of the bankruptcy filing, to the amount of $12,475 per employee. That priority status extends to accrued benefits such as vacation, severance and sick leave.

A debtor may pay post-petition wages, salaries, commissions and benefits incurred in the ordinary course of business. These expenses enjoy administrative expense status. Non-ordinary course, post-petition employee transactions (eg, new employment agreements with executives, new severance programmes or new incentive programmes) require bankruptcy court approval.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

Chapter 15 of the Bankruptcy Code allows for a foreign representative to seek US recognition of a foreign proceeding. Recognition of a foreign proceeding is defined in the Bankruptcy Code as the entry of an order recognising a foreign main proceeding or a foreign non-main proceeding (depending on the location of the foreign debtor’s center of main interests). Recognition of a foreign proceeding is considered ancillary relief that allows the US Bankruptcy Court to enforce orders of foreign courts.

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

A foreign company is eligible for relief under the Bankruptcy Code if it has either a place of business or property in the United States. Such requirements apply to both plenary Chapter 11 and ancillary Chapter 15 relief. A foreign company is considered to have a place of business in the United States if it maintains a physical location in the United States where it conducts business. The property requirement may be met by having any property in the United States. As is the case for obtaining Chapter 11 jurisdiction, the test for having assets located in the United States for purposes of Chapter 15 relief is a relatively low bar, and can be found in the form of accounts (including retainers paid to professionals in which the company retains an interest) and stock. At least one court has found that an interest in a New York law-governed indenture is a sufficient property interest for purposes of Chapter 15 jurisdiction.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

The term ‘centre of main interests’ is not specifically defined in the Bankruptcy Code. However, it is an essential component of determining whether a bankruptcy court will view a foreign proceeding as a foreign main proceeding or a foreign non-main proceeding, which determination affects the type of relief available to a foreign representative. There is a statutory presumption that if there is no evidence to the contrary, the debtor’s registered office is its centre of main interests. However, courts will review many factors to determine the centre of main interests of a debtor, including which jurisdiction’s laws would apply to most disputes, as well as the locations of the debtor’s headquarters, management, primary assets and creditors.

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

In a Chapter 15 case, the Bankruptcy Code mandates that courts, trustees and other persons authorised by a court cooperate to the maximum extent possible with foreign courts and foreign representatives. A protocol in a cross-border case or dual proceeding (typically when there is a Chapter 11 case and a foreign plenary proceeding) is an arrangement that provides for the cooperation of courts in different countries and the coordination of their respective proceedings by describing how matters will be handled between the courts. Among other things, a protocol allows courts to coordinate schedules and hearings and avoid inconsistent rulings. Chapter 15 of the Bankruptcy Code also instructs courts to cooperate and communicate with foreign courts and foreign representatives subject to interested parties’ rights to notice of and participation in any communication.

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Restructuring & Insolvency in the USA

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