In August I presented on cross-border insolvency at the joint Federal Court of Australia and Law Council of Australia conference on corporations law. The audience consisted of over 30 Federal Court judges and a range of other experienced corporate and insolvency lawyers. I decided to present a case study, a major part of which was considering whether a hypothetical deed of company arrangement (DOCA) could be recognised and given the force of law in the US and Canada under their legislation based on the UNCITRAL’s Model Law on Cross-Border Insolvency (Model Law) in order to prevent US based creditors seeking court orders against assets in the US and Canada. This sparked sufficient interest that I was then asked to present the same paper at the annual conference of the Insolvency and Reconstruction Law Committee of the Law Council of Australia a few weeks ago. I thought I would share some insights from the paper in this blog.
Preventing overseas creditors seeking orders in their local courts
A DOCA is binding on the company and all its unsecured creditors and members. Often a deed of company arrangement will compromise creditors’ claims in return for a dividend under the DOCA and prevent them from taking any further action against the company or its assets in respect of those claims. But what if some of the creditors are located overseas? In particular, what if the company has assets in the jurisdiction where the overseas creditors are located, which the overseas creditor could seek to enforce against by seeking orders in their local courts? What is to prevent them doing so?
A lot of thought is commonly applied to the terms of a proposed DOCA to make sure it meets the requirements to be enforceable under the Corporations Act 2001 (Cth) and under relevant case law, however, little thought is generally given to whether the DOCA will be binding and enforceable in practice against overseas creditors. Where there are overseas creditors and a risk they will not accept and agree to be bound by the DOCA, thought should be given at an early stage to whether the DOCA can, if necessary, be enforced against those creditors and how that may be done.
The experience to date
As far as I am aware, there are no reported decisions where US or Canadian courts had recognised and given force to a DOCA. On the other hand, there are a number of cases where US courts have recognised and given force to restructuring plans from other jurisdictions, such as plans under the Canadian Companies’ Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act (BIA), plans under the Mexican Bankruptcy Act (Ley de Concursos Mercantiles) and plans under the judicial reorganization procedure (recuperação judicial) under the Brazilian Bankruptcy and Reorganization Law.
Likewise in Canada there are a number of cases where the Canadian courts have recognised and given force to US Chapter 11 plans of reorganization.
An analysis of the US cases reveals that the key issues which the US courts will consider when deciding to recognise and give force to a DOCA under the Model Law are:
- whether doing so would be manifestly contrary to the public policy of the US
- whether the interests of US creditors and other stakeholders are sufficiently protected, and
- whether the DOCA will reasonably assure:
- just treatment of all creditors and shareholders
- distribution of proceeds of the debtor's property substantially in accordance with that prescribed under the US Bankruptcy Code.
Similarly, in Canada, the courts will consider whether it would be contrary to public policy to recognise and enforce the DOCA. In answering this, the courts would likely consider:
- whether the recognition and enforcement of the DOCA is necessary for the protection of the debtor’s property or the interests of creditors
- whether the differences in the process that generated the DOCA are so radically different from the process in Canada under the CCAA or BIA that it should not be recognised and enforced, and
- whether the DOCA and its terms treat creditors and shareholders so different from the bankruptcy and insolvency laws of Canada that it should not be recognised and enforced.
Both the US and Canadian courts have made it clear that the foreign laws under which the plan has been approved and the way the plan treats creditors do not have to be identical to those in the US and Canada.
Clear differences in processes according to jurisdiction
However, there are clear differences in the process used in Australia, the US and Canada to approve restructuring plans. In Australia, DOCAs are voted on by creditors in a single class, can be approved by the chair of the meeting where there is a deadlock and there is no court approval required. In the US and Canada, plans are voted on by creditors split into classes (similar to schemes of arrangement) and then approved by the court if they meet other requirements set down by relevant law. In the US, plans can be approved via a cram down against the vote of certain classes if at least one class whose rights are being compromised under the plan vote in favour (as long as the plan meets other requirements of fairness and equitable treatment). In Canada there is no cram down procedure and a plan will fail if not approved by all classes.
There are also clear differences in how creditors can be treated under a DOCA and under a US or Canadian plan. For example, under a DOCA there can be some level of discrimination between creditors even if they are of a similar ‘class’ (i.e. unsecured creditors) as long as all will get more than they would in a liquidation. In the US, there is a prohibition against "unfair discrimination" which requires the holders of similar claims or interests (which includes holders of equity) to be treated similarly. Under a DOCA, you could theoretically have lower ranking creditors or even equity holders getting a return even though higher ranking creditors do not. In the US, this could contravene the absolute priority rule which provides, as a general rule, junior classes cannot receive anything unless and until senior classes are paid in full, or voluntarily agree to different treatment as part of a consensual plan.
Early consideration is key
Accordingly, even though a DOCA may be approved in Australia, there is no guarantee that it would have been approved in the foreign jurisdiction in which you are seeking to ask the court to recognise and enforce it, had it been subject to their procedures for voting and plan approval. This could mean that the court will not recognise and approve the DOCA. To minimise the risk of this happening, consideration should be given when formulating a DOCA proposal as to whether a plan in similar terms could be approved in the foreign jurisdiction you will need to seek to enforce the DOCA in.
If you are interested in a more in-depth discussion of these issues, click here to read my detailed case study paper.