Cross-border restructuring and discharge of non-debtor guarantors: update of chapter 15

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Third party releases, especially releases from affiliated non-debtor guarantors, are generally a key feature of a successful cross-border restructuring. In American restructurings, where New York law generally governs the arrangements between a borrower, its lenders / noteholders and its guarantors, the restructuring or discharge of the principal obligor does not, without more, result in the restructuring or discharge. the obligations of the guarantors in respect of the guarantees. For this reason, in US Chapter 11 cases, filing debtor entities can include both principal debtors and a plethora of affiliated guarantors.

Processing of third-party versions outside the United States

Outside of the United States, on the other hand, the rules can be (and often are) very different. In English law, for example, where the English court orders the discharge of the principal debtor who has filed a plan of arrangement, the court will usually order as part of the plan that the creditors also release the collateral, even though the surety companies have not deposit. The reasoning behind the English approach is that failure to discharge the guarantors would, if the creditors claim under the guarantees, lead to “ricochet” subrogation requests from the guarantors against the principal debtor, thus compromising the restructuring of the principal debtor. .

In cross-border restructurings, the debtor’s ability to obtain recognition and enforcement in the United States of third party releases incorporated in its non-U.S. Restructuring plan, and approved by the non-U.S. Court with primary jurisdiction over the restructuring, will often be essential to the success of cross-border restructuring. To facilitate this recognition and enforcement in the United States, the debtor will generally file a case under Chapter 15 of the US Bankruptcy Code (regarding ancillary and cross-border restructurings) for the express purpose of obtaining recognition and enforcement by the debtor. US bankruptcy court for non-US restructuring proceedings, restructuring plan and third party press releases incorporated into the restructuring plan.

The New York bankruptcy court has usually approved third-party discharges in restructurings that benefit very substantial creditors support

As a preliminary point, it should be mentioned that even in Chapter 11 cases, bankruptcy courts in the United States take different approaches when considering whether or not to approve third party discharges. Under appropriate circumstances, such versions may be approved in the Second, Third, and Sixth Circuits, while the Fifth, Ninth, and Tenth Circuits generally do not allow third-party versions in Chapter 11 cases.

In recent years, the United States Bankruptcy Court for the Southern District of New York (the “”Bankruptcy court”) Authorized third-party publications in the context of Chapter 15 cases where the non-US restructuring has been shown to have very substantial support from creditors (excluding votes from insiders). See About Agrokor, 591 BR 163 (Bankr. SDNY 2018) (78.52% support); In re Avanti Commc’ns Grp. API, 582 BR 603 (Bankr. SDNY 2018) (98% support); In re Metcalfe & Mansfield Alternative Invs., 421 BR 685 (Bankr. SDNY 2010) (96% support).

What if there isn’t overwhelming support from creditors? Will Bankruptcy Court Approve Third Party Discharge?

In In re PT Bakrie Telecom TBK, April 15, 2021 (Case No. 18-10200) (SHL) (Bankr. SDNY), regarding an Indonesian restructuring, the bankruptcy court set out the ground rules for the approval of third party discharges in a case of Chapter 15 where these releases are contested and the non-US restructuring has not enjoyed overwhelming support from creditors. In Bakrie Telecom, the foreign representative applied for recognition of Chapter 15 of Bakrie’s insolvency proceedings in Jakarta PKPU (the “Indonesian procedure“) in the Indonesian court (the”Indonesian court“) as well as the execution of the debt restructuring plan approved by the Indonesian Court (the”Indonesian map“), which included third-party versions. Bakrie related to $ 380 million New York Law Notes that had been issued by a wholly owned subsidiary of the Debtor (the “”Transmitter”), And guaranteed by the debtor and some of its subsidiaries. Certain note holders (the “Bondholders“) had taken legal action (the”New York litigation) In New York State court against the Issuer and the subsidiary guarantors with respect to the Notes. The Indonesian plan was approved with 94.6% of total unsecured debt voting in its favor. However, 56% of the total unsecured claims were voted in favor of the Indonesian Plan by the Issuer – despite objections from the conventional trustee for the notes and opposing noteholders, who argued that the conventional trustee had the exclusive right to vote on these demands and who would have opposed the plan. Other creditors holding 38.6% of total unsecured debts have approved the Indonesian plan. See Bakrie to 10. The third-party versions involved in Bakrie were controversial because, if they were enforceable in the United States, they would effectively end New York’s litigation against the issuer and the subsidiary guarantors.

While the bankruptcy court granted recognition of the Indonesian proceeding as a foreign main proceeding without too much difficulty, third party discharges were more problematic. The bankruptcy court ruled that in deciding whether to extend comity to implement the Indonesian plan, it should consider whether the Indonesian procedure met “basic standards of procedural fairness as demonstrated by a clear and formal file. “ Bakrie at 28 (emphasis added). The bankruptcy court concluded that the record did not adequately address the following:

  1. whether or how the Indonesian court in the Indonesian proceedings took into account the rights of creditors when considering third party discharges;
  2. how the third-party press releases were presented to the Indonesian court for review;
  3. whether creditors have been heard or have had the opportunity to be heard in relation to the discharges of third parties; and
  4. an explanation as to the justification for third party releases.

See Bakrie to 37.

Observations

The bankruptcy court of Bakrie was careful to state explicitly that “releases in a foreign Chapter 15 proceeding need not be the same as a US court would approve in a Chapter 11 case.” Bakrie at 40. Nonetheless, the bankruptcy court expressly held that “in order to grant courtesy to the [Indonesian] Plan and his release by a third party, there must be at least a rudimentary record in the foreign proceeding as to the basis for these releases and the procedural fairness of the underlying process. Bakrie at 41. Although the bankruptcy court refused to recognize and apply the Indonesian plan on the basis of the record before it, the bankruptcy court said the parties were free to return to the Indonesian court to further develop the dossier on these issues.

Bakrie should not be viewed as a departure from the lineage of cases in which third party authorizations were recognized and enforced in Chapter 15 cases, but rather as a manual of instructions for foreign representatives seeking approval from authorizations by third parties and what they should ensure to include and develop on the record of the non-US restructuring proceeding. Such an instruction manual becomes even more important in circumstances where non-US restructuring does not enjoy overwhelming support from creditors.


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