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Overview of restructuring and insolvency activity

i Economic overview

Over the past year, from 1 May 2021 to 1 May 2022, the US economy experienced unprecedented growth but also suffered unprecedented inflation over the latter half of the period. In particular, the strong US post-pandemic economic recovery that began in the second half of 2020 and continued throughout the first quarter of 2021 accelerated through the remaining calendar year. Real gross domestic product (GDP) increased 5.7 per cent – the strongest economic growth since 1984 – compared with a 3.4 per cent decrease in calendar year 2020.2 Trillions of dollars in federal covid-19 relief spending and the development and widespread distribution of the covid-19 vaccine, which significantly alleviated covid-19 restrictions, largely fuelled the recovery and resulting economic gains in 2021.3

The equity markets similarly remained hot in calendar year 2021, continuing the remarkable bull market seen in the latter half of 2020. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite each turned in solid performances, gaining 26.9 per cent, 18.7 per cent and 21.4 per cent, respectively, in calendar year 2021. These results show that investors largely discounted several negative developments during the year, including the contested presidential election, supply chain disruptions, increasing inflation, and the effects of the delta and omicron covid-19 variants, which threatened to slow the stock market gains.

However, the first quarter of 2022 has shown that the record economic recovery seen in 2021 might be slowing. US GDP fell at a 1.4 per cent annualised pace in the first quarter of 2022, missing the Dow Jones estimate of a 1 per cent gain for the quarter and a sharp decline from the 1.7 per cent growth seen in the final quarter of 2021.4 Inflation, which has been increasing since March 2021 and accelerated in October 2021, is at an overall level of about 6 to 7 per cent on a year-over-year basis, and supply chain issues have persisted.5 Facing continued increases in the first half of 2022, the Federal Reserve (the Fed) has pivoted from a decade-long monetary policy and begun to raise interest rates and withdraw emergency stimulus programmes in a bid to cool inflation. However, the Fed's recent moves to cool inflation, including an interest rate increase of 0.5 per cent in early May – the Fed's most aggressive move since 2000 – and a tapering of bond purchases, have sent jitters into the stock market.6

The lasting effects of the current war in Ukraine on the US economy remain to be seen, but continued impacts on global oil prices, lower demand from Europe for US exports and an increase in the price of the US dollar are expected by some analysts to create short-term issues.7 Gas prices in the United States are now approximately US$4.60 per gallon on average at the time of writing, up 46 cents from just a month prior. Although many of the underlying market dynamics that powered mergers and acquisitions (M&A) activity in 2021 are still present in 2022, increased regulatory scrutiny, particularly in respect of transactions involving special purpose acquisition vehicles (SPACs), might moderate the pace. SPAC transactions accounted for more than US$600 billion in transaction value and about 10 per cent of global deal volumes in 2021, but activity has cooled due to such increased regulatory oversight and pressure on the performance of SPAC initial public offerings in the latter half of 2021 and into 2022.8 Despite these factors, expectations for continued economic growth and dealmaking activity in 2022 remain strong.

In contrast, distressed debt levels remained particularly low after falling significantly in the latter half of 2020 into early 2021. Distress ratios for leveraged loans and high-yield bonds peaked above 30 per cent by issuer count in mid-2020 but stood at 1.6 per cent and 2.5 per cent, respectively, by the end of calendar year 2021.9

The robust market growth and resulting easy access to capital seen in the first half of 2021 continued to drive M&A activity in the United States, in line with the global deal market, through the second half of 2021 and into 2022. The US M&A market reached new highs in calendar year 2021, accounting for US$2.9 trillion in transaction value – up 55 per cent from US$1.9 trillion in 2020, when US deal value fell by 18 per cent over the prior year. US dealmaking ultimately accounted for nearly 60 per cent of all global deals with announced values in 2021 compared with less than 50 per cent in 2020.10

ii Restructuring trendsOverall filing and industry trends

The substantial economic growth and availability of capital over the last year have led to a slowdown in the restructuring market and demonstrated a recent trend towards mass tort filings among the large corporate bankruptcies, discussed in further detail below. Corporate bankruptcy cases hit recent lows in calendar year 2021, continuing a drop-off in filings that began towards the end of 2020. According to federal data, there were 14,347 business filings in calendar year 2021 compared with 21,655 in 2020, reflecting a 34 per cent drop, and 4,836 Chapter 11 filings compared with 8,333, a nearly 60 per cent drop.11 Industry analysts reported only 275 cases involving filers with at least US$10 million in reported liabilities in 2021, which was the first year in at least six years to record fewer than 300 such cases.12 The sharp decline in filings in 2021 follows 2020, which was the busiest year in the same six-year period.

Of the 275 large Chapter 11s, the real estate sector had the largest number of filings, with 28 per cent of the total. This was followed by consumer discretionary at 20 per cent, healthcare at 10 per cent, energy at 9 per cent, industrials at 8 per cent and financials at 5 per cent. The historically low number of filings in calendar year 2021 was not limited to a particular industry, however. Filings across all industries in 2021 were down 43 per cent year over year from 2020. Each sector saw a drop in filings compared with 2020, except for real estate, which equalled the number of filings in 2020, and utilities, which rose 57 per cent year over year, largely due to the impact of an unprecedented winter storm on power producers in Texas.13

Of the three most active venues for business Chapter 11 cases – the District of Delaware, the Southern District of New York and the Southern District of Texas – Delaware continued to see the most large Chapter 11 filings, with a little over 15 per cent. However, among the three venues, the Southern District of Texas had the largest share of cases with over US$1 billion in liabilities, with approximately 35 per cent of such cases, consistent with increases in large filings in that district over the past several years.

The results show that the pressures affecting most industries in 2020 remained the same in 2021, but with much less impact, and the booming economic outlook during the year allowed many distressed companies to avoid bankruptcy and restructure out of court, as many lenders were willing to forbear and extend maturities on loans, there was increased access to the capital markets, and third-party financing or direct government support was often readily available.14 Low interest rates also contributed to a favourable borrowing environment. The Fed essentially slashed interest rates to near zero, with a 0.25 per cent fund rate from March 2020 through December 2021.15 But this has changed: according to the central bank's minutes, the Fed is expected to consistently increase rates to cool the effect of inflation on the economy16 and, as noted above, has already increased interest rates by half a percentage point in 2022.

The slowdown in business filings has largely continued in the first few months of 2022, with total commercial Chapter 11 filings coming in at 720, compared with 1,272 during the same period in 2021, a 43 per cent decrease.17 Despite these trends, however, an increase in business filings is widely anticipated in 2022, largely due to forecasted increases in default rates, borrowing costs and federal interest rates, and the effects of the sustained increases in inflation over the course of the past year.18

General introduction to the restructuring and insolvency legal framework

i Statutory overview

Title 11 of the United States Code (i.e., the Bankruptcy Code) governs bankruptcy cases filed in the United States.19 The Bankruptcy Code is premised on the principle that an honest debtor deserves a fresh financial start and thus relief from its unsecured debts. The Bankruptcy Code endeavours to allow for this fresh start while at the same time balancing the rights of the debtor's various constituents as fairly and equitably as possible.

The filing of a petition by a debtor (for business entities, this is usually a petition for relief under either Chapter 7 or Chapter 11 of the Bankruptcy Code) commences a bankruptcy case. There is no requirement that a debtor be insolvent to commence a voluntary bankruptcy case. Rather, case law has developed to require only that a petition be filed in good faith. Immediately on filing a petition, a debtor obtains the benefit of an automatic stay. The stay prohibits most creditors from taking actions against the debtor and its property on account of pre-petition liabilities or agreements, without express authorisation from the bankruptcy court.20 Thus, the stay gives the debtor the necessary breathing space to complete its reorganisation or orderly liquidation consistent with the terms of the Bankruptcy Code.

A company hoping to reorganise or liquidate with its management in place will file a petition under Chapter 11; a company with no option but to liquidate will commence a Chapter 7 case. Unlike many insolvency regimes in other countries, in a Chapter 11 case, the debtor's management and directors generally remain in place and continue to manage the business and guide the restructuring (the filing entity is referred to as a debtor in possession).21 A trustee is rarely appointed to oversee a Chapter 11 debtor's operations except in extreme circumstances such as fraud or mismanagement.22 By contrast, in a Chapter 7 case, a trustee is appointed to manage the liquidation.

The bankruptcy judge is typically heavily involved in the bankruptcy case. Indeed, many of the debtor's activities (e.g., financing, major asset sales and plan of reorganisation) must be brought to the bankruptcy court judge for approval. In a Chapter 11 case, the debtor in possession's actions will often be subject to scrutiny by one or more official committees appointed by the Office of the United States Trustee (the US Trustee), a governmental bankruptcy watchdog.23 The US Trustee handles the appointment of official committees to represent the interests of similarly situated stakeholders in the case. The most common official committee is one composed of unsecured creditors. The committee typically retains its own professionals (including counsel) to represent the unsecured creditors' interests, and the debtor's estate pays for the cost of these professionals.

The goal of a debtor in commencing a Chapter 11 case is to confirm and consummate a Chapter 11 reorganisation plan. Before a debtor can solicit votes on its reorganisation plan, it must provide creditors with a disclosure statement (generally, one that has been approved by the bankruptcy court). Following approval of the adequacy of the disclosure statement, the debtor may solicit votes from creditors and equity holders entitled to vote on the plan.24 If the requisite votes are received, the debtor will seek confirmation, or approval, of the plan by the bankruptcy court.

Aside from the required votes, the most critical requirement of the Bankruptcy Code for the plan is the 'best interests of creditors test'. This test requires that each impaired (i.e., affected) creditor and equity holder either accept the plan or receive under the plan a distribution at least as much as it would receive if the debtor were to liquidate rather than reorganise.25

Another critical requirement is that at least one class of claims votes for a plan if there is a class of impaired – or affected – claims. A class will be deemed to accept the plan if two-thirds in amount and more than 50 per cent in number of voting creditor class members vote in favour of it. In the event that equity security holders are proposed to receive a distribution, classes of equity security holders must vote for the plan by at least two-thirds in amount.26

Usually, at least one class will either affirmatively reject or be deemed to have rejected the plan because that class is not slated to receive a distribution under the plan. In those cases, the debtor can confirm its plan by cramming down these creditors or equity security holders. Cramdown generally requires the debtor to prove that the plan follows the absolute priority rule, as outlined below, and that it does not unfairly discriminate against creditors of equal priority (i.e., provide materially different treatment under a proposed plan without adequate justification for doing so).

Confirmation of a reorganisation plan provides a reorganising Chapter 11 debtor with a discharge enjoining creditors and equity security holders from looking to the debtor for satisfaction of claims owed to them prior to the commencement of the Chapter 11 case. Their sole source of recovery is the distribution proposed to be made to them under the plan.

ii Absolute priority rule

A basic premise under the Bankruptcy Code is that, in the absence of consent (obtained through the votes of classes of claims and interests), distributions to creditors must follow the absolute priority rule.27 In applying this rule, lower-priority creditors may not receive a distribution unless the Chapter 11 plan provides that each holder of a claim in a dissenting senior class is paid in full. Secured creditors are first in the priority scheme. Secured claims typically include pre-petition collateralised loans. Administrative expense claims are second in priority. Included in this bucket are claims relating to the post-petition operations of the debtor. Next in order of priority come priority claims, which include certain pre-petition wages and commissions and taxes.

General unsecured claims, in terms of priority, come after secured claims, administrative expense claims and priority claims, but before subordinated debt claims.28 Equity interests (including equity-related damage claims that are treated as equity) are lowest on the distribution waterfall and, as a result, equity holders rarely receive a bankruptcy distribution. As mentioned above, if a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan must accept the plan for it to be confirmed by the bankruptcy court (determined without including any acceptance of the plan by any insider).29

iii Cramdown

As discussed above, the Bankruptcy Code provides for a mechanism to cram down a plan of reorganisation over non-consenting creditors, including both secured and unsecured creditors, or interest holders if certain criteria are met. Specifically, if any impaired class of creditors or interest holders rejects the plan, it may still be confirmed over the objection of such a class if the debtor can show that the plan does not discriminate unfairly against any impaired, non-consenting class and the plan is fair and equitable. In respect of impaired, non-consenting secured creditors, a plan is fair and equitable if each secured creditor either (1) retains the lien securing its claim and receives deferred cash payments totalling at least the allowed amount of its secured claim (e.g., in effect, 'take-back paper' – a new secured note in a principal amount equal to the total value of its claim, secured by the same collateral package as the original debt), (2) receives the 'indubitable equivalent' of the value of its claim or (3) receives a lien on the proceeds of a sale of its collateral (free and clear of its lien) subject to its right to purchase the property by credit bidding its secured claim against the purchase price under Section 363(k) of the Bankruptcy Code.

Satisfying the fair and equitable test under the first option, whereby the creditor receives deferred cash payments, requires valuation of the creditor's interest in the collateral30 and a determination of the proper interest or discount rate to be applied.31 These issues have been addressed extensively in case law and there remain splits among the circuit courts as to the proper methodology in respect of each. Under the indubitable equivalence option, courts have generally interpreted 'indubitable equivalence' to mean a substitute benefit that is equal in value to the original collateral, which can be satisfied by, among other things, (1) the debtor returning all of the collateral to the secured creditor,32 (2) third-party equity securities with stable value and a sufficient margin between the securities' value and the amount of the creditor's claim,33 (3) a lien on substitute collateral34 or (4) a negative amortisation plan.35

In respect of unsecured creditors and equity interest holders, a plan is fair and equitable if the plan provides that either (1) for unsecured creditors, deferred cash payments are to be made, or, for interest holders, each holder generally receives or retains property having a present value equal to the greatest of the allowed dollar amount of the value of the equity interest or (2) it follows the absolute priority rule (i.e., senior classes are paid in full before any distributions are made to junior classes). To determine whether deferred cash payments to unsecured creditors satisfy the first option, the same type of present value analysis applicable to secured creditors receiving deferred cash payments under a cramdown is required. Regarding the second option requiring satisfaction of the absolute priority rule, certain courts have noted a 'gifting' exception, whereby senior creditors may 'gift' a portion of their recovery to junior creditors, as long as such a gift does not constitute estate property.36

Regarding cramdown of equity interest holders, if the debtor is insolvent, cramdown is permitted without paying anything to the equity interest holder, as the equity interest would have no value. Regarding the second prong and satisfaction of the absolute priority rule, certain courts have found that there is a 'new value' exception to the absolute priority rule for interest holders to retain some or all of their interests in exchange for making a substantial new capital contribution to the reorganised debtor.37

iv Duties of directors

In the United States, the duties of directors are defined by state law. In particular, Delaware is the most common state of organisation. Businesses can take a number of forms, including the corporation (which is under the control of a board of directors), the partnership or the limited liability company (which shares the characteristics of both a corporation and a partnership and can be managed either by the owner – member managed – or by a manager or board of managers – manager managed).

The seminal ruling in North American Catholic Educational Programming Foundation, Inc v. Gheewalla, issued by the Supreme Court of Delaware in 2007,38 explained that, for Delaware corporations, 'It is well established that the directors owe their fiduciary obligations to the corporation and its shareholders.' Shareholders rely on directors acting as fiduciaries, whereas creditors are protected by legal mechanisms including contract law (and the terms of their contracts), security interests, clawback actions and bankruptcy law. For a solvent corporation, the focus of directors is to 'discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners'.

In accordance with Gheewalla, the fiduciary duties of the directors to the corporation do not change because of the corporation's insolvency. However, the creditors 'take the place of the shareholders as the residual beneficiaries of any increase in value'. Therefore, creditors become able to sue the directors 'derivatively' (i.e., on behalf of the corporation) – but not 'directly' (i.e., on their own behalves) – for alleged breaches of fiduciary duties.

The goal of the fiduciary is to maximise long-term corporate value, rather than, for example, balancing that interest with the interests of employees or other constituents, or furthering social or environmental considerations.39

v Treatment of contracts in bankruptcy

A debtor generally has the power to determine those executory contracts and unexpired leases by which it will continue to be bound following its reorganisation. If the debtor chooses to assume (or keep) a contract, it will be bound under all the terms of the agreement. Alternatively, if the debtor no longer seeks to be bound by the agreement, it will reject it. On rejection of a contract, the debtor is no longer required to perform, and the contract is deemed breached as of the date the bankruptcy commenced. Damages resulting from such a breach are referred to as rejection damages and are generally given low status in the sequence of priority of payments (i.e., pre-petition general unsecured claims). Under certain circumstances, a debtor may be able to assign its interest in a contract or lease to a third party.40 In the event that a debtor does not assume an agreement, the default option under the Bankruptcy Code is rejection.41

vi Security interests

In the United States, Article 9 of the Uniform Commercial Code (UCC), as adopted by each of the 50 states, generally applies to any security interest created by contract in personal property and fixtures to secure payment or other performance of an obligation.42 There are three components to the creation and enforcement of a security interest under Article 9: attachment, perfection and priority. Under Article 9, a security interest attaches to collateral at the moment when the security interest becomes enforceable against the debtor. Perfection is the process by which a secured party gives public notice of its security interest in collateral. State law, generally uniform throughout the United States, will dictate the method for perfecting a consensual security interest.

In many cases, two or more creditors might have security interests in the same collateral. In such cases, Article 9 provides general rules as to the ranking of security interests (i.e., which security interest takes priority over the others). As a general rule, an earlier-secured party will prevail over later-secured creditors.

Article 9 has a critical interplay with the Bankruptcy Code. On the bankruptcy filing, the debtor steps into the role of a hypothetical lien creditor.43 This means, in general, that it may void any unperfected security interest.

vii Clawback actions

The Bankruptcy Code gives a debtor certain avoidance powers to recover property transferred by the debtor to third parties before the petition date. Generally, these avoidance actions fall into two categories: transfers having the effect of preferring one creditor over others, or transfers made for the purpose of hindering, delaying or defrauding creditors from collecting on their claims.

The most common voidable transfer is referred to as a preference. Preferences are those payments that a debtor makes to a pre-petition creditor on the eve of the bankruptcy filing44 that allow such a creditor to receive more on account of its claim than it would have received had it received its distribution in a hypothetical liquidation of the debtor. The amount that the creditor received in connection with the transfer will be voidable, subject to certain defences, such as receipt of the transfer in the ordinary course of business.

Fraudulent transfers also may be recovered if made (1) with the actual intent to hinder, delay or defraud creditors (known as actual fraud or intentional fraud), or (2) for inadequate consideration when the debtor (transferor) was insolvent, undercapitalised or unable to pay its debts as they became due (known as constructive fraud). Appropriate capitalisation is key to the Texas two-step mechanism, which is discussed in further detail below.

General introduction to the new restructuring legal framework

General introduction to the insolvency legal framework

Recent legal developments

Continued activity in mass tort cases occupied the legal landscape over the past year. Courts addressed new considerations for debtors in seeking approval of non-consensual third-party releases and the application of a state law divisional merger doctrine known as the Texas two-step in the mass torts context.

i Non-consensual third-party releases: the Purdue Pharma case

Although subject to some dispute, many courts have generally held that the Bankruptcy Code authorises bankruptcy courts, in exceptional circumstances, to grant non-consensual third-party releases (i.e., a release of creditors' claims against a non-debtor without the creditors' consent). Non-consensual third-party releases are often employed to achieve a global settlement in mass tort bankruptcy cases or other cases in which a debtor's related parties are defending claims that arise out of their relationship with the debtor and those third parties provide a 'substantial contribution' essential to a debtor's plan of reorganisation.

In particular, courts allowing for non-consensual third-party releases have held that these releases of claims may be justified when a third party makes a substantial contribution to the debtor's bankruptcy estate, when enjoined claims would impact a debtor's estate by virtue of indemnity or contribution, when such claims are paid in full under a plan, when the plan is overwhelmingly accepted by affected creditor classes or when such claims are channelled to a settlement fund rather than extinguished.45 Courts closely scrutinise non-consensual releases to ensure that they are justified based on extraordinary facts and circumstances.

Such scrutiny was on display in the Purdue Pharma case. Purdue filed for Chapter 11 bankruptcy in September 2019 after facing mounting lawsuits against it and its owners, the Sackler family, relating to their alleged role in marketing the opioid OxyContin. In its Chapter 11 case, Purdue and the Sacklers agreed to settlements with federal, state and local governments pursuant to which the Sacklers funded multibillion-dollar abatement trusts for the benefit of opioid plaintiffs. In exchange, the Sacklers would receive releases from certain of Purdue's creditors from certain Purdue-related claims. After a lengthy trial, the bankruptcy court confirmed the proposed plan in September 2021, and several dissenting states and the US Trustee appealed.

On appeal, the district court reversed the bankruptcy court, vacating the confirmation order. The district court found that the Bankruptcy Code does not authorise non-consensual third-party releases, arguing that no explicit statutory or equitable authority exists for the bankruptcy court to approve such releases. Thus, the district court vacated the bankruptcy court's confirmation of Purdue's Chapter 11 plan, upending the global settlement. The parties have further appealed the district court's decision and, at the time of writing, it is under consideration by the United States Court of Appeals for the Second Circuit.46

In the Ascena Retail Group Chapter 11 cases, the US District Court for the Eastern District of Virginia invalidated the plan's third-party releases on appeal just weeks after the district court's decision in the Purdue case. The parties had argued that the releases were consensual because they included an option for creditors to opt out. The court disagreed, finding that the releases were non-consensual,47 and ultimately held that the bankruptcy court exceeded its authority by extinguishing a wide swathe of claims in approving the third-party releases without first determining whether it had jurisdiction to do so and without conducting the analysis required for such releases.48

Notably, Congress has similarly been evaluating the propriety of third-party releases in bankruptcy. Specifically, in July 2021, Senators Elizabeth Warren (D-Mass.), Dick Durbin (D-Ill.) and Richard Blumenthal (D-Conn.), and Representatives Jerrold Nadler (D-N.Y.) and Carolyn B Maloney (D-N.Y.) introduced legislation that would prohibit the use of non-consensual, non-debtor third-party releases.49 The legislation is still pending and its prospects are uncertain.

ii Texas two-step in the mass tort context

The past year saw implementation of the state law divisional merger doctrine known as the Texas two-step in the mass tort context. In a Texas two-step, a distressed entity converts to an entity organised under Texas law. Thereafter, that entity avails itself of the Texas divisional merger statute,50 which allows a single entity to divide into two entities – one entity holding assets (an AssetCo) and the other entity holding liabilities (a LiabilityCo). Thereafter, the LiabilityCo files a Chapter 11 bankruptcy case, employing the Bankruptcy Code to restructure its tort liabilities. The AssetCo (and potentially one or more of its affiliates) agrees to fund LiabilityCo in an amount capped at AssetCo's value. The assets and operating business remain outside of Chapter 11.

In a recent challenge to the filing of an entity created by a Texas two-step, a bankruptcy court noted that the use of the bankruptcy system 'with the expressed aim of addressing present and future liabilities associated with global personal injury claims to preserve corporate value is unquestionably a proper purpose under the Bankruptcy Code'.51

Significant transactions, key developments and most active industries

Section I above provides a broad perspective on bankruptcy trends from the past year. As discussed above, industries that saw particular distress in 2021 relative to other years included real estate and utilities. The largest Chapter 11 filings in 2021 by asset size included the following, with between US$1 billion and US$8 billion in assets:52

  1. industrials: Nordic Aviation Capital (aircraft leasing) (the largest case of the year, with US$8 billion in assets), Philippine Airlines (airline), Carlson Wagonlit Travel (travel management) and Katerra (construction);
  2. utilities: Brazos Electric Power Cooperative, Alto Maipo, Stoneway Capital and Frontera Generation;
  3. real estate: Washington Prime Group, PWM Property Management, All Year Holdings, Hospitality Investors Trust and Knotel; and
  4. other: Seadrill Limited (offshore drilling), GTT Communications (information technology), Belk (department stores), Riverbed Technology (information technology), Corp Group Banking (financials) and GBG USA (footwear and apparel).

Although the number of bankruptcy filings continues to remain low, some significant Chapter 11 cases have been filed in 2022 to date, including GWG Holdings (financials) and Talen Energy Supply (utilities).

International and future developments

International

In 2005, Congress added Chapter 15 to the Bankruptcy Code. Chapter 15 'incorporates the Model Law on Cross-Border Insolvency to encourage cooperation between the United States and foreign countries in respect of transnational insolvency cases'.53 Chapter 15 is based on a recognition standard that one court labelled 'consistent with the general goals of the Model Law'.54

A foreign representative can obtain recognition under Chapter 15 of the Bankruptcy Code 'by the filing of a petition for recognition of a foreign proceeding under section 1515'.55 Two types of recognition of a foreign proceeding are possible under Chapter 15: recognition as a foreign main proceeding or recognition as a foreign non-main proceeding. Greater relief is available to a foreign representative of a foreign main proceeding than to a foreign representative of a foreign non-main proceeding.

In a Chapter 15 recognition, a bankruptcy court may give effect to a non-US restructuring within the territorial bounds of the United States. Among other things, on recognition, a court may apply the automatic stay to the debtor and its property within the United States, authorise the examination of witnesses and taking of evidence regarding the debtor's assets and affairs, or, subject to certain exceptions, grant other relief that might be available to a debtor in a Chapter 11 case.

In connection with recognition of a non-US restructuring under Chapter 15, bankruptcy courts have also held that, in an extension of comity to a foreign tribunal, the Bankruptcy Code provides statutory authority in Chapter 15, not available in Chapter 11, to provide relief that is consistent with principles of comity, even when such relief might not be available under the Bankruptcy Code or other US law.56 Courts have since given effect to non-consensual third-party releases approved by a non-US court that might not have passed muster if they had been proposed by a debtor in a Chapter 11 case.57

Future developments

Predictions for the US restructuring market are particularly more challenging to assess than usual given the current macroeconomic climate and the events of the past two years. As discussed above in Section I, the rampant economic growth seen since the latter half of 2020 is starting to show signs of slowing down as the effects of the war in Ukraine, inflation, rising interest rates, continued supply chain disruption and increased regulatory scrutiny following record-level M&A activity in 2021 have all created a new level of uncertainty in the markets.58 At the time of writing, the S&P 500, the index consisting of the 500 largest publicly traded companies in the United States is down 13 per cent in 2022, and SPAC activity, a key driver of the M&A boom in 2021, has since receded to 2020 levels.59 These factors and their resulting effects have sparked concern among some on Main Street of the risk of an impending recession.60

The slowdown in the economy, even if not rising to recession levels, might accelerate filings for a number of companies that were distressed prior to the covid-19 pandemic but were able to weather the storm due to the widespread availability of debt financing over the past two years and the willingness of many lenders to restructure and address existing capital structure issues.61 Companies in a variety of industries that were most affected, including travel, commercial real estate, consumer, healthcare and energy, called on a variety of tools to address pandemic effects, including taking on expensive debt to extend their liquidity runway or agreeing to covenant holidays. However, labour, raw material, energy, transportation and other costs are currently rising due to inflation, supply chain issues and the Ukraine war, and many companies might not be able to sustain a growth profile that will fit their new post-covid capital structures or be able to comply with their financial covenants in new or existing debt due to lower than anticipated profitability. In addition, companies in industries that received substantial assistance from the US government, including the airline and hospitality industries, might continue to experience issues without such continued funding, in conjunction with the changed landscape of business travel after covid-19.62

Despite the macroeconomic factors leading to slowing economic growth in the first quarter of 2022, US economic activity remained largely healthy, and filings remained low as a result, as total commercial filings decreased 16 per cent year over year in April 2022.63 As a result, restructuring activity is likely not to pick up generally until the latter half or quarter of 2022, barring a more substantial halt to US economic growth.