This year, companies around the world and across various industries have faced a new and novel test. The covid-19 pandemic has had a widespread effect on the economy, impacting small, local businesses and large, multinational corporations alike. Entire industries have been disrupted, forcing otherwise successful companies into insolvency.
Covid-19 has tested the resilience of not just business enterprises but also the existing insolvency regimes around the world. This Restructuring Review contains insightful chapters regarding domestic insolvency laws around the world, including notable case highlights and legislative developments. While insolvency laws are regularly adopted and amended in order to serve as more useful restructuring tools, in the current environment these changes are particularly exciting. This volume also reviews recent trends in the restructuring space, trends that we expect will continue given the disruption triggered by the current pandemic.
Innovation continues to be a key feature of the insolvency world
In the realm of restructuring, innovation has always been a predominant force and as economies continue to suffer from the impacts of covid-19, we may expect even more creativity as companies, governments and practitioners alike adapt to the ever changing needs of the global economy. For example, the authors of ‘Debt Equity Conversions in Venezuela’ explore the ways in which a debt to equity conversion could be used in Venezuela to reinvigorate the economy and foreign direct investment into the country. While debt to equity conversion is a conventional tool in restructuring, various legal, political and cultural issues in Venezuela make successful implementation complex and, therefore, such a conversion would require greater ingenuity.
Relatedly, the authors of ‘Investment Fund Activity in Chapter 11’ note that investment funds are particularly nimble actors. The authors detail how, in the previous economic downturn in 2008, investment funds became particularly active in corporate restructurings. In particular, investment funds, which are subject to significantly less regulation than banks and other traditional lenders, stepped in to provide distressed and debtor in possession funding when other financial institutions were not able undertake such financings at the same level as they had previously. In addition to serving as liquidity providers for debtor-in-possession (DIP) lending or exit financing in bankruptcies, investment funds also have taken an increasingly active and strategic role as creditors in the restructuring process. As creditors, investment funds may be able to facilitate an out of court workout, avoiding the costs and other administrative burdens associated with a formal, in-court Chapter 11. In court, in addition to participating in the bankruptcy proceedings, investment funds may fund litigation trusts where they see particular value that may be realised from pursuing specific estate claims. Third-party funding of litigation trusts has been a growing resource over the past several years and, as the authors note, this type of funding was used in the restructuring of General Motors to fund certain avoidance claims. In addition, investment funds seek to pursue value in other ways, including providing backstops for plan rights offerings (which are often offered at a discount) or acquiring positions in credit default swaps for companies in potential distress in order to profit from flaws or breaches in a company’s credit agreement. In sum, investment funds are gifted a great amount of flexibility in the types of investments they may undertake and, with that flexibility, they are able to quickly adapt to the changing economic and legal landscapes.
On a higher level, there are a number of jurisdictions that pride themselves on their flexibility and successful approach to restructuring, which must always be responsive to the needs of time. The authors of the ‘Cayman Islands’ chapter discuss important developments and hypothesise that the Cayman Islands’ effective insolvency regime will continue to be a top jurisdiction for companies looking to restructure. The authors of the ‘Canada’ chapter similarly review novel solutions reached, which were made possible through Canada’s flexible and creative insolvency framework. Meanwhile, the authors of the ‘Argentina’ chapter discuss the ways that the Argentine government has attempted to enact legislation in response to the covid-19 pandemic.
Countries around the world continue to review and reform insolvency laws while new insolvency regimes are beginning to be tested
Additional restructuring and reorganisational opportunities will also arise as countries around the world continue their efforts to develop new, or update existing, insolvency regimes. For example, in July 2019, a directive from the European Union mandating Members States to implement certain changes to their domestic insolvency regimes came into effect. The authors of ‘Chapter 11 and Its Comparisons to the EU’ explore how this directive has encouraged certain domestic European insolvency regimes to move closer to the United States’ existing Chapter 11 framework. The comparative analysis highlights key features of the Chapter 11 process, such as the automatic stay and access to post-petition financing, and then looks at how governments in the United Kingdom, Germany and the Netherlands have decided to implement similar features or declined to do so. While the authors point out that the Chapter 11 process is certainly the most well-tested procedure available, the new tools made available in the United Kingdom, Germany and the Netherlands through these legislative updates will provide businesses seeking to restructure with potential alternatives to the Chapter 11 process.
While in Europe the impact of these changes remains to be seen, in the Americas, certain nascent insolvency regimes are already facing their first major tests. For example, while the Dominican Republic’s insolvency regime has been in place only for three and a half years, in that time a small number of companies already have utilised the process, which furthers the development of the law and its application to specific cases. The authors of the ‘Dominican Republic’ chapter provide a brief overview of the process and then, focusing on payment of officer fees, explain a split that has already arisen between the two reorganisation and liquidation courts in the country. Specifically, the authors describe the Santiago court’s approach to interpreting the law governing payment of officers’ fees as purposive, interpreting the law in the legal and sociological reality of the community, while the Santo Domingo court has taken a more rigid and literal approach to interpreting the law.
By contrast, Mexico’s concurso law has been in place for years, but in that time it has largely gone unused, with only 801 cases filed in the past two decades. The authors of the ‘Mexico’ chapter explore the reasons why the Mexican insolvency procedure is underused and the alternative procedures that Mexican companies turn to, including filing Chapter 11 in the United States.
Cross-border insolvencies continue to be a key feature of the insolvency world
Given the ubiquity of companies with multinational footprints, having broad, flexible insolvency and restructuring regimes that can be used to effectively reorganise such global companies remains important. When an international corporation faces liquidity constraints or is overburdened by its debt obligations, in considering a bankruptcy or reorganisation filing, the question is not just whether to file but where to file. The answer to that question requires not just an analysis of a particular country’s domestic insolvency laws, but also an analysis of whether, and to what extent, those laws will be recognised and enforced elsewhere. For example, in the United States, the bankruptcy courts purport to have statutory powers with worldwide reach, so that creditors around the world are subject to the automatic stay. However, in practice, it may not be possible to enforce the automatic stay against recalcitrant creditors in foreign jurisdictions with no ties to the United States without the aid of local courts. Therefore, businesses with collateral in multiple jurisdictions may consider how and to what extent a moratorium, such as the automatic stay imposed under Chapter 11, may be enforced if the US proceeding is recognised by a foreign court. Similarly, while courts in the United States may purport to restructure all of a company’s debt through Chapter 11, courts in the United Kingdom will not recognise any restructuring of debt obligations governed by English law unless discharged by an English process or the creditor otherwise is subject to the US court’s jurisdiction. Along with these considerations, corporations may consider whether post-petition financing would be available and, if so, if such financing could be recognised in other jurisdictions where it intends to file parallel or ancillary proceedings. The authors of the ‘Debtors-in-Possession Financing’ chapter discuss the many considerations a debtor may take into account when confronting this particular question.
Therefore, in all likelihood, large international corporations will need to file for main or ancillary relief in multiple jurisdictions in order to successfully restructure their obligations. Certain jurisdictions are already adept at coordinating such proceedings. In the United States, Chapter 15 – which is built on the UNCITRAL Model Law – has for a long time been used by corporations seeking recognition of insolvency proceedings happening outside of the United States. As the authors point out in ‘The High Burden to Satisfy the “Manifestly Contrary to Public Policy” Standard of Chapter 15’, Chapter 15 is intended to liberally give comity to foreign court proceedings and orders and parties objecting to relief on public policy grounds must overcome a formidable burden. In the ‘Bermuda’ chapter, the authors discuss, as a defining feature of Bermuda’s domestic insolvency regime, local courts’ willingness and ability to work in a coordinated fashion with foreign courts. Specifically, the Bermuda courts are able to work in parallel with foreign proceedings as well as providing assistance to foreign representatives that apply to the Bermuda court for help.
As the prevalence of international companies continues to grow, governmental institutions must consider how to handle cross-border insolvencies, which will only become more prevalent due to the covid-19 pandemic. The UNCITRAL Model Law on Cross-Border Insolvency has proven to be a powerful tool in this space, as it helps countries that codify the law move toward more standard practices with respect to recognition procedures. Notably, as discussed in their respective chapters, countries like Chile, Mexico and Colombia have adopted the Model Law, and this has already been met with some success in Chile. In particular, LATAM Airlines SA was recently able to successfully apply for recognition of its Chapter 11 proceeding in Chile, which took only three days. In that case, the US bankruptcy court and the Chilean court, as well as the Colombian and Cayman Islands courts, have agreed to a protocol for cooperation and cross-border communication similar to those adopted in other cross-border proceedings that may prove critical to the administration of the case. Meanwhile, as discussed in the ‘Argentina’ chapter, Argentina has not adopted the UNICTRAL Model Law and instead has its own principles on cross-border insolvencies.
The editors believe that this Review provides an insightful and informative overview of recent developments and current trends in insolvency regimes across the world as well as current challenges facing governments, financial institutions, companies and practitioners. The current economic climate has made this a particularly interesting time in the insolvency world and we expect to see continued innovations to meet the needs of this increasingly global economy.