For the benefit of our clients and friends investing in European distressed opportunities, our European Network is sharing some current developments.

Recent Developments

Germany—On 1 May 2014, the insolvency court of Itzehoe opened insolvency proceedings with respect to PROKON Regenerative Energien GmbH ("Prokon"). Prokon petitioned for insolvency in January 2014 because it was unable to make a coupon payment for certain participation rights (Genussrechte) it had issued to finance the development and operation of numerous wind farms. Prokon had received €1.4 billion from its issuance of various participation rights. On 1 May, the insolvency court ruled that Prokon was insolvent due to illiquidity and, thus, eligible for the proceedings. The court reasoned that, although the general terms and conditions of the participation rights offering included provisions subordinating the claims of the participation right holders, such a provision did not constitute an (implicit) agreement by the right holders to defer payment.

The question of whether or not a subordination clause in a participation rights offering includes a consent to deferral of payments is important for the liquidity test under German insolvency law. The Managing Directors of a German limited liability company must file for insolvency within a period of not more than three weeks once illiquidity has occurred. Subordinated claims which are deferred are not taken into account when determining whether a debtor is illiquid. In the Prokon insolvency, the court held that claims subordination does not necessarily entail a payment deferral. A deferral must be explicitly or implicitly agreed upon. In the event that an alleged agreement for the deferral of payments is based on general terms and conditions only, German law is particularly strict when it comes to interpreting clauses that include complex wording or are ambiguous. In Prokon, the court ruled against implied deferral due to ambiguity, different treatment of interest and principal, contradictory changes in the history of the terms and conditions involved and the short-term character of the financing instrument (a six-month minimum term).

Prokon indicates that documentation governing non-bank financing (e.g., profit-sharing rights, convertible/exchangeable bonds and similar instruments) must be drafted carefully. The legal issues regarding payment deferral and/or claim subordination should be clarified at the outset. Otherwise, management risks noncompliance with its statutory obligation to file for insolvency in a timely fashion. Furthermore, nonsubordinated creditors might mistakenly perceive that a substantial amount of subordinated claims held by participation rights holders or bondholders would become due only after the financial difficulties of the debtor have been resolved.

Global—US, UK and Canada—On 12 May 2014, the historic Nortel Networks Corp. cross-border bankruptcy trial began in Wilmington, Delaware and Toronto. Judge Kevin Gross of the US Bankruptcy Court in Wilmington, Delaware and Justice Frank Newbold of the Ontario Superior Court will decide how to allocate US$7.3 billion from the sale of patents and other assets between Nortel divisions in the US, Canada and Europe. The trial will be monitored closely because of the unusual cross-border hearing conducted using closed-circuit video cameras, a model that may forever change the way multijurisdictional litigation is handled. Each court will follow its own legal practices, including witness questioning and cross-examination rules, for the portions of the trial that it conducts. There are 56 people on the witness list for the trial, although some may not be called to testify. The main trial is expected to last until the end of June, with additional proceedings anticipated to run until the end of July to deal with issues of intracompany claims between Nortel divisions.

On 7 January 2014, Judge Gross signed an order approving a "milestone" deal reached in December 2013 between Nortel's US division, its European creditors and representatives of British pensioners settling some of the costly and contentious litigation that had been tying up the division of Nortel's liquidation proceeds. The settlement resolved nearly US$2 billion in claims. Refer to theDecember 2013 edition of EuroResource for additional information regarding the Nortel dispute.

France—On 14 May 2014, the French government issued Decree No. 2014-79, which extends the scope of Decree No. 2005-1739 dated 30 December 2005 and grants the French State the right to block foreign corporate takeovers in five new "strategic" sectors: energy, water, transport, telecoms and health care. Decree No. 2014-79 is also referred to as the "Décret Alstom" because it arguably authorizes the French State to impose obligations upon General Electric Co. in connection with its tentative bid for the energy (power and grid) activities of France-based Alstom SA. Any acquisition in these "strategic" sectors will now be subject to the approval of the French State. The other strategic sectors listed in Article R. 153-2 of the French Commercial Code—national defense, gambling, private security services, businesses dealing with wire tapping and mail interception equipment, businesses relating to the security of information technology systems and businesses relating to certain dual-use items and technology—continue to be subject to such limitations.

Global—On 27 May 2014, Argentina filed its final brief in connection with its 18 February 2014 petition seeking, among other things, an order of the US Supreme Court referring to New York State's highest court the question of whether a foreign sovereign is in breach of a pari passu, or equal footing, clause in a bond indenture when it makes periodic interest payments on performing debt without also paying on defaulted debt. The Supreme Court is scheduled to discuss whether or not it will hear the case—an appeal from the US Court of Appeals for the Second Circuit's ruling in NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012)—on 12 June 2014. 

On 21 April 2014, the Supreme Court heard oral argument inArgentina v. NML Capital, Ltd., No. 12-842, in which it has been asked to review a ruling by the Second Circuit upholding a lower court's order forcing two banks to disclose information concerning assets Argentina owns outside the US, as part of hedge fund NML Capital's efforts to enforce judgments to collect on Argentina's defaulted bonds. See EM Ltd. v. Republic of Argentina, 695 F.3d 201 (2d Cir. 2012).