In recent times, global businesses based all over the world have often turned to chapter 11 or the English scheme of arrangement to implement their debt restructurings, often due to the failure of local restructuring and insolvency laws to provide an adequate or optimal restructuring solution. This has led to the development of “restructuring hubs” or “nodal” jurisdictions, and forum-selection has become a necessary part of devising a restructuring strategy in many cross-border situations in order to deliver the best outcome.
As we now look to the post-pandemic future and the restructuring activity that is anticipated as state aid packages around the world start to be wound down, this article considers where the action will be in future cross-border restructuring situations.
For the last 15 months or so, restructuring professionals around the world have anticipated a very large uptick in work in light of the fallout from the pandemic, as businesses either fail, need to address an unsustainable debt burden, and/or need to “right-size” to align with medium- and long-term changes in consumer and other behaviors. There have been a number of marquee names that have gone through restructurings, as well as significant restructuring activity in specific sectors (such as aviation). However, so far the extent of anticipated activity overall has not materialized, in very large part due to the unprecedented extent, both in terms of scope of support and breadth of countries involved, of the economic stimulus provided by governments around the world. There are a range of views about what comes next — and when — but we do know that the scaling back of government support is now on the horizon or imminent in many countries, and in others it will cease as a matter of necessity at some point.
As businesses look to restructure their debts, a question facing the restructuring markets in jurisdictions considered to be the main restructuring hubs is whether they will continue to benefit from forum-selection and have their procedures utilized by debtors based in historically cumbersome jurisdictions for restructuring, as they have done previously.
This question arises because of the widespread changes in the legal landscape in the context of cross-border restructurings in recent times. The pandemic has prompted many temporary legal changes (such as the relaxation of directors’ duties, or at least the relaxation of the consequences for a breach of such duties, and restrictions on enforcement action) to help businesses survive, but there has also been a plethora of permanent changes and improvements to restructuring regimes around the world. Many such permanent changes were in the planning stages prior to the pandemic, and in a number of cases the implementation of those changes has been accelerated by the pandemic. In general terms, there has been a move toward more debtor-friendly regimes facilitating pre-insolvency debtor-in-possession restructurings, borrowing heavily from chapter 11 concepts. What remains to be seen is whether the various changes will mean that the center of gravity for cross-border restructurings will shift away from the more traditional choices.
By way of illustration, some of the legal changes are as follows.
There has been a great deal of change across Europe. Prior to the pandemic, changes were planned due a European directive designed to harmonize restructuring frameworks across Member States, which required all Member States to make changes to existing domestic restructuring law by July 2021 to satisfy certain minimum criteria to provide a “preventive restructuring framework” in each Member State. These criteria included providing for a moratorium, facilitating debtor-in-possession restructuring, providing for the cramdown of creditors, and providing for an increased use of specialized practitioners, judges and courts. Some examples of the changes that have ensued are:
- the implementation in January 2021 of a new Dutch scheme of arrangement procedure that allows a debtor-in-possession restructuring through a scheme of arrangement, based on elements of the popular English scheme of arrangement procedure but also borrowing concepts from chapter 11;
- the introduction in summer 2022 of a new German scheme of arrangement procedure, which has many similarities to the Dutch scheme;
- the introduction of a pre-pack insolvency procedure in Belgium; and
- a clarification and harmonization of insolvency regulations in Spain.
Looking East, Singapore has for several years been promoting itself as a new restructuring hub to compete with New York and London for cases arising out of Asia and indeed beyond. In 2017, it introduced new laws that it considered to be a combination of the best parts of chapter 11 and English schemes of arrangement, and those laws were developed further in 2020 to (among other things) introduce a new stay on the use of ipso facto clauses in certain situations. The new procedures have been marketed heavily abroad, and a number of groups have successfully taken advantage of them including, recently, Indonesian and Malaysian groups such as Nam Cheong Limited and PT Modernland.
Other jurisdictions in Asia have followed suit: India has seen ground-breaking reform to its restructuring laws, Malaysia has introduced two rescue mechanisms, and there have been developments in Hong Kong to further develop judge-made law to facilitate restructurings.
In the U.K. we have also seen significant changes, with the introduction of a moratorium pending a restructuring, a regime for the protection of contracts similar to the executory contracts regime under chapter 11, and the introduction of a new restructuring tool for companies in “financial difficulties,” known as a restructuring plan, which has many similarities to a scheme of arrangement but which also facilitates cross-class cramdown and eases the voting rules.
On the face of it, the myriad legal changes in different parts of the world give rise to a whole host of new options. However, looking forward, one can understand why the notion of restructuring hubs is likely to continue by focusing on some of the features and realities that are important for a regime to be effective, and how those factors may be influential in any given case.
Some features are simply a function of analysis of the relevant procedure — such as:
- the sufficiency of the platform for stability pending the restructuring: whether it provides a sufficient moratorium, and whether the business will be adequately protected through a regime such as an executory contracts regime;
- whether the procedure deals with all types of creditors whose debts need to be restructured; for example, certain of the new procedures cannot be used to deal with specific groups, such as employees;
- voting thresholds and availability of cramdown (both horizontal and vertical) — again, there are differing rules in this regard; and
- ability to raise rescue or DIP financing.
However other factors go beyond the assessment of a specific procedure and can potentially be more influential, such as:
- the speed and cost of the process. Clearly, speed can be critical, and if a faster solution that achieves the same objectives is available elsewhere, that might be determinative. Likewise, cost will play a part;
- predictability. This is also critical, and procedures with a good body of case law that adopt and follow consistently applied and well-known criteria must retain a significant advantage over lesser used or untested procedures, where case law remains to be developed;
- specialist courts and specialist judges. The importance of this point shouldn’t be understated, the quality of the judiciary being closely linked to predictability. This issue is also closely linked to speed;
- familiarity of stakeholders with process. Often, key creditors or other stakeholders whose support is critical may have a preference based on their experiences;
- availability of specialist professionals in sufficient numbers — another factor to take into account in any large case where there are many stakeholders all needing separate representation;
- recognition of the restructuring elsewhere. The availability of frameworks or procedures to obtain recognition, or be satisfied that the restructuring will be given effect in relevant jurisdictions, is likely to be key. There are a variety of possibilities, such as the use of local enactments of the UNCITRAL Model Law, the EC Insolvency Regulation, common law and comity, and the operation of private international law; and
- ability to restructure English law-governed debt. The so-called “rule in Gibbs,” which derives from English case law, provides that a restructuring in an overseas jurisdiction of English law-governed debt will not be recognized in England unless the creditor in question has submitted to or is otherwise subject to the court of the overseas jurisdiction. (This somewhat antiquated rule has recently been reconsidered by the courts in England, and remains good law.)
It can be seen from all of the above that, despite the various legal changes, we are unlikely to see a demise of restructuring hubs, or major shifts in the identity of the hubs. Clearly, there are now serious new options to be considered and there will undoubtedly be cases that utilize those options, or even, where cost and time allow, a combination of different options, although it may be the more domestic cases that use the new options in the early days following change. In cross-border cases where forum-selection is appropriate to craft an optimal solution, cases will still gravitate toward the existing hubs, and the rise of Singapore as a restructuring hub should be acknowledged. Evidencing this, there are recent examples of overseas debtors selecting the U.S. and U.K. in which to restructure. For example, Malaysia Airlines recently used an English scheme of arrangement to restructure liabilities to aircraft lessors, and several overseas entities have sought chapter 11 protection, such as Ezra Holdings.
So while the various changes are unquestionably welcome and should facilitate a rescue of many businesses and jobs in many domestic situations, the key options remain available and popular, albeit the merits of certain new procedures may have to be weighed up alongside them. While crystal ball-gazing is speculative, this author considers that we will continue to see overseas debtors opting to use chapter 11 proceedings and English procedures in the years to come, with many cases in Asia gravitating toward Singapore.
Lastly, a postscript about Brexit: There has been a great deal of discussion about whether the English scheme of arrangement (or indeed the new restructuring plan) will retain its popularity given the changes to the recognition landscape within Europe post-Brexit. This issue is entirely fact-specific. While there are some changes to the recognition landscape within Europe in light of Brexit, the point should not be overplayed. Schemes of arrangement were never afforded automatic recognition by the EU Insolvency Regulation.
Furthermore, in recent years, the English courts have heard evidence from numerous jurisdictions that an English scheme that restructures English law-governed debt in respect of an entity from that (overseas) jurisdiction will be given effect as a matter of private international law. They also benefit from chapter 15 recognition and other recognition procedures around the world. The U.K. remains very much in the game and is open for business.