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Expert Guide Bankruptcy & Restructuring

March/April 2013

Clifford Chance - Ogier - Akerman - Dickinson Wright LLP - Otterbourg, Steindler, Houston & Rosen


Chief Executive Officer Osmaan Mahmood Managing Director Andrew Walsh Editor in Chief James Drakeford Publishing Division Jake Powers, John Hart, Tom Carlton

Contents The Americas 6-9

The Limits of Comity in CrossBorder Insolvency

10 - 13

Chapter 11 Venue: The Interest of Justice

14 - 17

To Gift or Not to Gift: Chapter 11 Plans in the 2nd and 3rd Circuits

18 - 19

The Danger of Cramdown For Secured Creditors in Chapter 11 Bankruptcy

20 - 25

Chapter 11 Cramdown Interest Rate: Till’s Prime Strands Bank in Texas Grand Prairie

26 - 27

Cayman Islands – The Focal Point of Cross Border Insolvency

Production Manager Sunil Kumar

28 - 31

Account Managers Ibrahim Zulfqar, Norman Lee, Sarah Kent, Omar Sadik, Michael Raggett, Vince Draper

Debtor-In-Possession Financing In Canada

32 - 35

Snapshot - Top Ten US Bankruptcies in 2012

36 - 37

Corporate Restructuring In The Netherlands

38 - 41

Spanish Financings & Events Of Default: When Is A Default Really A Default?

42 - 45

Guernsey Restructuring Law – A Modern Regime

46 - 49

The New Ukrainian Insolvency Law: Key Issues

Art Director Adeel Lone Senior Designer Natalie Kate Reigel Designer Ben Rogers Staff Writers Sean Mahon Contributing Organizations Reinhart ¦ Cole, Schotz, Meisel, Forman & Leonard, P.A. ¦ Soewito Suhardiman Eddymurthy Kardono ¦ Otterbourg, Steindler, Houston & Rosen ¦ Cuatrecasas, Goncalves Pereira ¦ Clifford Chance ¦ Afridi & Angell Legal Consultants ¦ Akerman ¦ Katzen & Schuricht ¦ Ogier ¦ Zaid Ibrahim & Co ¦ Dickinson Wright LLP ¦ HEUSSEN ¦Walkers ¦ Marketing Manager Sylvia Estrada Research Manager David Bateson

Competitions Manager Arun Salik Administration Manager Nafisa Safdar Accounts Assistant Jenny Hunter Editorial Enquiries editor@corporatelivewire.com Advertising Enquiries advertising@corporatelivewire.com General Enquiries info@corporatelivewire.com Corporate LiveWire The Custard Factory Gibb Street Birmingham B9 4AA United Kingdom Tel: +44 (0) 121 270 9468 Fax: +44 (0) 121 345 0834 www.corporatelivewire.com

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Europe


Middle East

50 - 51

Restructuring and Insolvency - Restructuring and Insolvency in the UAE: Legal Framework

52 - 57

Malaysia’s New Financial Services Architecture

58 - 61

A Brief Look at Suspension of Debt Payment Obligations in Indonesia

62 - 63

The Americas

64 - 65

Europe

66 - 67

Middle East & Asia

10

Asia

20 Expert Directory

50

28

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Introduction By James Drakeford

D best.

ecember 2012 marked the fifth anniversary of the beginning of the Great Recession, which officially began in December 2007. Five years down the road and recovery continues to be shaky at

Although positive signs are emerging from the United States, there is still a long way to go before the world’s largest economy is restored to sustainable growth and a positive outlook. And in Europe, the economic side effects of the European sovereign debt crisis and limited prospects for global growth in 2013 and 2014 continue to provide obstacles to full recovery.

the verge of an unprecedented triple-dip recession at the turn of the year following a dire January for the nation’s struggling manufacturers. Spain also experienced a year to forget. On 30 March 2012, the Spanish government announced an annual budget that includes €17.8 billion in fresh spending cuts for the central government, one day after it faced a nationwide general strike and said it would continue its increasingly unpopular austerity drive. Shortly afterward, Spain, which faces record unemployment of more than 25 percent, officially joined seven other Euro zone nations in recession.

The trend towards austerity measures continues to paint a bleak outlook for the global economy. Researchers at the International Monetary Fund studied 173 episodes of fiscal austerity in developed countries between 1978 and 2009, finding that austerity policies created economic contraction and made unemployment worse. In the United States, the federal budget for fiscal year 2013 was cut by about $85 billion with the alleged goal of cutting federal spending and borrowing by about $1 trillion or $100 billion per year for 10 years. The latest cuts are concentrated in defence and in domestic discretionary spending, but Medicare also faces $10 billion in new cuts, on top of the $700 billion already imposed by the Obama administration. Austerity measures implemented by Greece, Spain, Italy, Britain, and Portugal, among others, have proved to be both unpopular and unsuccessful. In a popular backlash against austerity measures, voters in France ousted the pro-austerity administration of Nicolas Sarkozy and elected Francois Hollande as the first Socialist president of France since 1995. Official figures released by the British government at the end of April 2012 indicated that Britain fell into its first double-dip recession since the 1970s, while reports suggested the UK was on 4 - Expert Guide : Bankruptcy & Restructuring

According to Eurostat, the EU’s statistics office, the 17 countries that use the euro ended 2012 at a record high unemployment rate of 11.8 percent (more than 26 million), the highest level since the euro was launched in 1999. S&P downgraded the credit ratings of France, Italy, Spain, and six other European countries in 2012 – a reminder that Europe’s economic woes are far from over. The only Euro zone nations retaining their top AAA ratings are Germany, the Netherlands, Finland, and Luxembourg. The outlook for 2013 in the U.S. business bankruptcy world looks much as it did in each of the past two years. Low interest rates and freer credit markets mean that troubled companies (as well as their lenders) are less likely to opt for a reorganisation strategy that incorporates a garden-variety bankruptcy filing. For the fourth year running, the U.S. ran a deficit


in excess of $1 trillion for the fiscal year (“FY”) ending September 30. Also, in a reprise of 2011, the U.S. reached its legal borrowing limit on 31 December, giving Congress just four months (as extended pursuant to a deal reached in late January) before it must raise the debt ceiling (again), or (again) risk causing the government to default on its bills and financial obligations. As in years past, pre-packaged or pre-negotiated chapter 11 cases and quick-fix section 363(b) sales are likely to be the norm. Bankruptcy prognosticators have highlighted the health-care, real estate, retail, shipping, energy, and professional sports sectors as having companies deemed “most likely to fail.” Restructuring professionals do not expect much increase in big bankruptcies this year, but they aren’t letting signs of a strengthening economy get them down. During 2012, we witnessed 14 bankruptcies worth in excess of $1 billion, which was up from 10 in 2011, but below 2009s level of 19. However, there were 14 percent fewer Americans filing for personal bankruptcy than in 2011, and the fewest since 2008, according to Epiq Systems, Inc. Despite stalled U.S. economic growth, an intensifying European debt crisis, and a slowdown in China, Japan, and India – there is still plenty of promise. Whatever we see over the coming months will be sure to provide plenty of talking points.

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The Limits of Comity in Cross-Border Insolvenc By Hon. Melanie L. Cyganowski, James M. Cretella & Lloyd M. Green

I.

Introduction

Chapter 15 of the Bankruptcy Code is the domestic codification of the Model Law on Cross Border Insolvency. Under Section 1506, 1 courts have discretion to abstain from acting under Chapter 15 if such action would be “manifestly contrary” to United States public policy. This public policy exception can make it difficult for foreign representatives to obtain judicial assistance in Chapter 15 following initial recognition of the foreign proceeding and courts have not hesitated to scrutinise post-recognition applications for relief for consistency with United States law. In this regard, traditional concepts of comity and judicial deference do not necessarily guarantee post-recognition relief from the courts, especially when it is difficult to harmonise rules of foreign legal systems with domestic law. II. The Public Policy Exception Determining what actions or practices are “manifestly contrary to the public policy of the United States” remains an evolving process. Among the Bankruptcy Code provisions and public policies that have been afforded protection are the automatic stay, 2 property rights, industrial competitiveness 3 and electronic privacy. 4 In contrast to the relatively straightforward process of initial recognition of a foreign bankruptcy proceeding, requests for other forms of judicial assistance in a Chapter 15 proceeding are subject to heightened judicial discretion. 5 III. Section 1506 and Initial Recognition The public policy exception contained in Section 1506 applies to both the initial recognition of a foreign proceeding and to requests for additional assistance after recognition of the foreign proceeding has been granted. Section 1517 governs the grant of initial recognition of a foreign proceeding, and expressly conditions recognition upon the public policy test contained in Section 1506. Recently, the District Court for the Southern District of New York in In re Ashapura Minechem 6 - Expert Guide : Bankruptcy & Restructuring

Ltd. 6 summarised the rule as follows: “‘Recognition [under section 1517] is not a rubber stamp exercise, and any such presumption is rebuttable upon the Court’s examination of any and all relevant facts.’” 7

Still, initial recognition is a relatively commonplace event and the public policy exception generally does not prevent the grant of relief under Section 1517. Thus, in In re British Am. Isle of Venice (BVI), Ltd., 8 the bankruptcy court recognised an insolvency proceeding pending in the British Virgin Islands, and disregarded differences in the conflicts of interest rules pertaining to the appointment of bankruptcy professionals. 9 IV. Public Policy and Granting Post-Recognition Assistance Courts are more inclined to grant post-recognition relief when no specific American statute would be violated and post-recognition relief has even been granted when the relief in question would not have otherwise been available in a domestic Chapter 7 or Chapter 11 case. Faced with no objection, the bankruptcy court in Metcalfe recognised restructuring orders and non-party releases approved by a Canadian tribunal. 10 The fact that the “Second Circuit imposes significant limitations on bankruptcy courts ordering non-debtor releases and injunctions in confirmed chapter 11 plans” was not determinative. 11 In Collins v. Oilsands Quest, Inc., 12 the district court recognised a Canadian insolvency proceeding and then proceeded to enforce a stay granted by the Canadian court protecting the debtor and


ncy its officers. Recognising the systemic differences, while respecting the purpose of Chapter 15, the court declined to hold that the stay would violate a fundamental United States policy. 13 Similarly, in CT Inv. Mgmt. Co., LLC v. Carbonell, the district court stayed a guaranty action that was pending before it at the request of a Chapter 15 representative of a Mexican debtor, despite the fact that a non-debtor was also a defendant in the action. The district court determined that enforcement of the foreign order was “mandatory” under the provisions of Section 1509. 15 14

V. Public Policy and Denying Assistance and/or Relief According to the court in Ad Hoc Group of Vitro Noteholders v. Vitro SAB De C.V. (In re Vitro, S.A.B. de C.V.), 16 the public policy exception should be narrowly construed. That same court, however, has demonstrated an apparent willingness to deny a request for assistance. In Vitro, the bankruptcy court declined to enforce provisions of a plan of reorganisation that would have extinguished guarantees executed by the debtor’s nondebtor subsidiaries. It determined that giving force and effect to the release of liability on a non-party guarantee violated a fundamental tenet of public policy. 17 On a direct appeal, the Fifth Circuit declined to decide the issue of whether the doctrine limiting non-consensual third party releases constituted a fundamental public policy. Instead, it affirmed the bankruptcy courts determination based upon the lower courts alternate holding that such relief was unavailable under Chapter 15 and prior Fifth Circuit precedent which held such releases to be non-enforceable. In the Sivec 18 case, the bankruptcy court declined to grant comity to an Italian insolvency proceeding on the grounds that, under Italian law, an American creditor seeking to exercise its right of set-off against retainage property would be deprived of the status of a secured creditor. Instead, the court lifted the stay against the assets of the debtor to allow the judgments entered in an American ac-

tion to offset each other. The court also denied a request by the Italian tribunal for the turnover of funds because the bankruptcy court was dissatisfied with the protections provided to a judgment creditor under Italian law. The court in Elpida19 analysed a proposed sale of patents located within the United States and determined that the sale was subject to de novo (i.e., full and complete) review in light of Section 363(b), which governs the disposition of property outside the normal course of business and is expressly enumerated at Section 1520(a)(2). Although the patent transactions had received prior approval by the Japanese court supervising Elpida’s restructuring, the bankruptcy court declined to defer to the Japanese court. 20 Rather, the court determined that the transaction would be reviewed under the business judgment rule contained in Section 363. 21

In Qimonda, 22 the bankruptcy court initially recognised the German insolvency proceeding as the main bankruptcy proceeding for the purposes of Chapter 15 and the German Insolvent Company Administrator as the representative. However, the bankruptcy court also expressly subjected the foreign administrator to various Bankruptcy Code provisions, including Section 365, which governs the termination of executory contracts and protects the rights of patent licensees.23 Thereafter, the foreign administrator successfully moved to remove Section 365(n) as a source of binding legal authority. 24 On appeal, the district court vacated the bankruptcy court’s order and held that comity was to be applied in the context of the public policy exception. 25 On remand, the bankruptcy court announced that it would enforce Section 365(n) and denied the request of the foreign representative. 26 The court posited two factors to be considered in determining whether relief was “manifestly contrary” to public policy -- procedural fairness and “severe” impingement of a “statutory or constitutional right . . . .” 27 Expert Guide : Bankruptcy & Restructuring 2013 - 7


The bankruptcy court ultimately held that industrial and competitive concerns are fundamental policy interests. 28 VI. Conclusion As Vitro, Elpida, Sivec and Qimonda illustrate, foreign policies and practices determined by U.S. courts to be at odds with express statutory provisions of U.S. law or established case law are subject to greater scrutiny. How this development will impact cross-border insolvencies remains unclear, but these cases signal a greater willingness on the part of American courts to give effect to Congressional enactments in cross-border insolvencies. Hon. Melanie L. Cyganowski (Ret.), formerly Chief Judge of the US Bankruptcy Court, EDNY, is a partner at Otterbourg, Steindler, Houston & Rosen, PC, New York City. Melanie L. Cyganowski can be contacted by phone on +1 212 905 3677 or alternatively via email at mcyganowski@oshr.com James M. Cretella is a partner at Otterbourg in the Restructuring Department. James M. Cretella can be contacted by phone on +1 212 905 3611 or alternatively via email at jcretella@oshr.com

Lloyd M. Green can be contacted by phone on +1 212 905 3620 or alternatively via email at lgreen@oshr.com

With thanks to John C. Wright, associate in the Insolvency Department; jwright@oshr.com 1 - Unless otherwise stated, section reference are to sections of the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 2 - In re Gold & Honey, Ltd., 410 B.R. 357, 371-72 (Bankr. E.D.N.Y. 2009). 3 - In re Qimonda AG, 462 B.R. 165, 185 (Bankr. E.D. Va. 2011). 4 - In re Toft, 453 B.R. 186, 198 (Bankr. S.D.N.Y. 2011). 5 - See 11 U.S.C. § 1517(a); see also In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685, 697 (Bankr. S.D.N.Y. 2010). 6 - Armada (Singapore) Pte Ltd. v. Shah (In re Ashapura Minechem Ltd.), 480 B.R. 129 (S.D.N.Y. 2012). 7 - Id. at 135 (quoting Gold & Honey, 410 B.R. at 366); see also In re ABC Learning Centres Ltd., 445 B.R. 318, 332 (Bankr. D. Del. 2010), reconsideration granted in part, 445 B.R. 318 (Bankr. D. Del. 2011). 8 - 441 B.R. 713 (Bankr. S.D. Fla. 2010).  9 - Id. at 718; see also In re Gerova Fin. Group, Ltd., 482 B.R. 86 (Bankr. S.D.N.Y. 2012). 10 - 421 B.R. at 697-98. 11 - Id. at 694. 12 - 2012 U.S. Dist. LEXIS 182647 (S.D.N.Y. Dec. 27, 2012). 13 - Id. at *10.

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14 - 2012 U.S. Dist. LEXIS 3356 (S.D.N.Y. Jan. 6, 2012). 15 - Id. at *14. 16 - 701 F.3d 1031, 1069 (5th Cir. 2012), affirming Vitro, S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro, S.A.B. de C.V.), 473 B.R. 117 (Bankr. N.D. Tex 2012).   17 - Vitro, 473 B.R. at 131. 18 - In re Sivec SRL, 476 B.R. 310 (Bankr. E.D. Okla. 2012). 19 - In re Elpida Memory, Inc., 2012 Bankr. LEXIS 5367 (Bankr. D. Del. Nov. 16, 2012). 20 - Id. at *24-30. 21 - Id. at *30. 22 - In re Qimonda AG, 2009 Bankr. LEXIS 3786 (Bankr. E.D. Va. Nov. 19, 2009), vacated and remanded in part, In re Qimonda AG Bankr. Litig., 433 B.R. 547 (E.D. Va. 2010). 23 - Quimonda, 2009 Bankr. LEXIS at *1. 24 - Id. at *7. 25 - Qimonda, 433 B.R. at 565. 26 - Qimonda, 462 B.R. at 185. 27 - Id. 28 - Id.

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Chapter 11 Venue: The Interest of Justice By Peter C. Blain

V

enue of Chapter 11 cases is governed by section 1408 of title 28, which provides in part that a case under the Bankruptcy Code (11 U.S.C. § 101 et seq) may be commenced in the district in which the person’s “domicile, residence, principal place of business… or principal asset” are located, or “in which there is a pending case …of such person’s affiliate.” In In re Ocean Properties of Delaware, Inc., 95 B.R. 304 (Bankr. D. Del. 1988), the court determined that the state of incorporation is sufficient domicile for venue, notwithstanding where the debtor maintains its principal place of business or its principal assets. After Ocean Properties and similar decisions, a majority of the largest and most complex business entities in the country used the state of incorporation basis for venue to file Chapter 11 cases in the Southern District of New York (“SDNY”) or the District of Delaware (“Delaware”). Those that support this trend argue that concentrating the adjudication of complex Chapter 11’s in these districts enhances efficiency, accessibility, predictability and takes advantage of those courts’ superior knowledge of corporate law principles. The courts in Delaware and the SDNY have developed critical special expertise that is not found in bankruptcy courts elsewhere, and this expertise, they argue, enhances the prospect for success. See generally Harvey R. Miller, Chapter 11 Reorganization Cases and the Delaware Myth, 55 Vand. L. Rev. 1987 (2002). Critics of this trend argue that courts in Delaware and the SDNY entice companies to file there because those courts employ reorganisation requirements less stringently. As a consequence, companies confirming reorganisation plans in those districts are more likely to fail post-Chapter 11 than are companies which are reorganised in other jurisdictions. See Lynn M. LoPucki & Sara D. Kalin, The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a “Race to the Bottom,” 54 Vand. L. Rev. 231 (2001). Bankruptcy judges in other jurisdictions, say these critics, are just as able as those in Dela-

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ware and New York, and statistically, they have a better overall track record of success. In addition, those courts are more accessible to local creditors, including employees and retirees, and those creditors are more likely to fully participate in a case filed where the business is located.

Under section 1412 of title 28, a court may transfer venue to a different bankruptcy court “in the interest of justice” and for the “convenience of the parties.” Recently, in In re Patriot Coal Corp., 482 B.R. 718 (Bankr. S.D.N.Y. 2012), a bankruptcy judge applied section 1412 to transfer the Chapter 11 venue of one of the largest coal companies in the United States from the SDNY to the Eastern District of Missouri. In early June 2012, two subsidiaries of the main debtor, Patriot Coal Corporation, were incorporated in New York. The entities had no operations in the state and conducted no business there. On July 9, 2012, relying on the affiliate provisions of section 1408, Patriot Coal Corporation and ninety-eight of its subsidiaries filed Chapter 11 petitions in the SDNY. The United Mine Workers of America (“UMWA”) promptly filed a motion to change venue to the Southern District of West Virginia. This motion was joined by a number of creditors. Thereafter, the US Trustee filed a motion to change venue, but did not specify a jurisdiction. This motion was also joined by a number of creditors. Both motions were opposed by the debtors, the unsecured creditors committee and a number of creditors. In her decision, Bankruptcy Judge Shelley C. Chapman started by enumerating all of the connections of the various constituencies to various states. The debtors’ headquarters are in St. Louis,


Missouri, and its operations are principally located in West Virginia, Missouri and Kentucky. In addition to these states, the debtors’ leases coal fields in Illinois, Indiana, Ohio and Pennsylvania. The debtors’ largest bond holders and secured creditors are located in New York. A majority of the debtors’ 4,000 employees and almost 12,000 retirees live in West Virginia and the Illinois Basin region. The debtors’ largest unsecured creditor is located in Delaware, and other large creditors are located in various states, including West Virginia and California. In analysing the motions to change venue, the court noted that a debtor’s selection of venue is entitled to deference and that the Patriot Coal petitions were not filed in bad faith. Given the existing venue statute, the petitions were filed in compliance with the strict letter of the statute. In fact, the court noted that the debtors’ likely had a fiduciary obligation to consider all possible venues. However, literal compliance with the venue statute is not sufficient. Relying upon the federal tax law concept of substance over form first described in Gregory v. Helvering, 293 U.S. 465 (1935), the court said it must not only consider whether the statute was complied with, but it must also take into account how it was complied with. Creating affiliate shell subsidiaries weeks before the petitions were filed manufactured venue where none existed. The court, citing Gregory, said “what was done was not ‘the thing which the statute intended’.” The court concluded that the venue of the case must be transferred. In considering where to transfer venue under section 1412 and the dual prongs of “interest of justice” and “convenience of the parties”, the court rejected arguments made by the movants to transfer venue to West Virginia and the objecting parties to retain jurisdiction in the SDNY. The court acknowledged that the debtors’ lenders and most of the professionals in the case were located in New York. However, the debtor had no meaningful presence in New York and to “bootstrap” venue based upon the location of the professionals in the case did not comport with the interest of justice

prong. The UMWA argued that judges in West Virginia who “live near coal miners, grew up with them, worship with them and break bread with them” understand coal miners. Consequently, the debtors’ employees and retirees would be more accepting of such court’s decision as opposed to a “court very far away” where the “financiers and the bankers” are located. The court responded that selecting a forum such as West Virginia which would give one group of constituents a seeming advantage would be worse than retaining jurisdiction in the SDNY.

However, literal compliance with the venue statute is not sufficient. Relying upon the federal tax law concept of substance over form first described in Gregory v. Helvering, 293 U.S. 465 (1935), the court said it must not only consider whether the statute was complied with, but it must also take into account how it was complied with.

Finally, while the court acknowledged that transferring venue would require additional cost, she said that cost imposed by doing justice is sometimes required to ensure the integrity of the nation’s laws. The court said that whether the costs of transferring venue were de minimus or material they must be borne. After considering the alternatives, the court transferred venue of the cases to the Bankruptcy Court for Eastern District of Missouri. The debtors’ headquarters are located in St. Louis, where the court sits, and that city is accessible to the majority of the debtors’ employees and retirees. Expert Guide : Bankruptcy & Restructuring 2013 - 11


Using the state of incorporation of the debtor or an affiliate is considered a “loophole” by many who maintain that finding that venue is not illegal does not mean that it is fair. These parties maintain that the venue statute should be changed to require a petition filing in the district where the debtor’s principal place of business or principal assets are located, or in the district where an affiliate which owns a majority of the equity of the petitioner is a debtor. In 2011, H.R. 2533, 112th Cong. (2011) was introduced to do just that. The bill wasn’t enacted, however, and supporters of the existing venue statute argue that this fact is evidence that Congress is aware of the proposed venue “loophole” and has declined to remedy it. Opponents, who continue to actively lobby for venue reform, dismiss this argument, observing that like almost everything else today, bankruptcy venue reform is a politically charged topic and failure to pass particular legislation is no reflection on its merit. Reform may be an elusive goal, however. Senator Chris Coons (D-Del.) was recently appointed as Chairman of the Judiciary Committee’s Subcommittee on Bankruptcy and Courts. Senator Coons has publically supported the existing venue statute and lauds the expertise of Delaware bankruptcy courts in handling complex Chapter 11 cases. Mr. Coon’s appointment makes it highly unlikely bankruptcy venue reform will occur in the near future. Until then, decisions like Patriot Coal may have to serve as a shield against intentional abuse of the venue statute. Peter C. Blain is the head of the Corporate Reorganization Practice Group of the Milwaukee, Wisconsin law firm of Reinhart Boerner Van Deuren, s.c. He is a Fellow in the American College of Bankruptcy and has been included in Best Lawyers in America since 1987. Currently, he is Co-Chair of the Bankruptcy Subcommittee of the Eastern District of Wisconsin Bar Association and has served as past Chair of the Bankruptcy Insolvency and Creditors Rights Section of the Wisconsin Bar Association and Chair of the Bankruptcy Section of the Milwau12 - Expert Guide : Bankruptcy & Restructuring

kee Bar Association. Mr. Blain frequently speaks and writes on bankruptcy topics. Peter can be contacted by phone on +1 414 298 8129 or alternatively via email at pblain@reinhartlaw.com


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To Gift or Not to Gift: Chapter 11 Plans in the 2 By Norman L. Pernick, David R. Hurst & Therese Scheuer

I

n a chapter 11 case, a senior claimholder may seek to share recovered property with junior stakeholders, to promote a speedy and cooperative reorganisation. This “gifting” may be allowed under certain circumstances. Official Unsecured Creditors Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993) (holding that, in chapter 7 case, secured creditor could gift property to unsecured creditors over objection of priority creditor). However, the Second and Third Circuits have held that absent consent, “gifting” pursuant to a chapter 11 plan violates the so-called “absolute priority rule.” Dish Network Corp. v. DBSD N. Am., Inc. (In re DBSD N. Am., Inc.), 634 F.3d 79 (2d Cir. 2011); In re Armstrong World Indus., Inc., 432 F.3d 507 (3rd Cir. 2005). Title 11 of the United States Code (the “Bankruptcy Code”) sets forth a waterfall for paying claims and interests. 11 U.S.C. section 507. Pursuant to the “absolute priority rule” codified in section 1129(b)(2)(B) of the Bankruptcy Code, a chapter 11 plan cannot be confirmed over the vote of a dissenting class of claims unless (i) the dissenting class receives the full value of its claims or (ii) no classes junior to that class receive property under the plan on account of their junior claims or interests. 11 U.S.C. § 1129(b)(2)(B); DBSD, 634 F.3d at 95. Put simply, unless senior creditors agree otherwise, they must be paid in full before junior stakeholders receive any distribution under a chapter 11 plan. The Third Circuit addressed the conflict between the gifting doctrine and the absolute priority rule in Armstrong. In Armstrong, the chapter 11 plan provided that the debtor’s unsecured creditors would not be paid in full, but also provided that the debtor’s direct and indirect equity interest holders would be issued warrants to purchase common stock in the reorganised debtor valued at approximately $35-$40 million dollars. If a class of unsecured creditors rejected the plan, a coequal class of unsecured creditors would receive and automatically transfer the warrants to the debtor’s equity interest holders. The court held that because the chapter 11 plan would make a 14 - Expert Guide : Bankruptcy & Restructuring

distribution to equity without fully paying off unsecured claims, it could not be confirmed over the objection of the unsecured creditors. 432 F.3d at 513-14. The court reasoned that “[a]llowing this particular type of transfer would encourage parties to impermissibly sidestep the carefully crafted strictures of the Bankruptcy Code, and would undermine Congress’ intention to give unsecured creditors bargaining power in this context.” Id. at 514-15.

Similarly, in Dish Network Corp. v. DBSD North America, Inc., the Second Circuit held that the distribution of shares and warrants to the debtor’s equity holder violated the absolute priority rule where a senior class voted against the plan. 634 F.3d at 101. In DBSD, the chapter 11 plan proposed that the holders of unsecured claims would receive shares estimated to be worth between 4% and 46% of their original claims, and the current equity holder would receive shares and warrants. The bankruptcy court characterised the equity holder’s receipt of shares and warrants as a “gift” from second lien debt holders, who were senior to the objecting creditor, but would not be receiving the full value of their claims. The bankruptcy court reasoned that the second lien holders could “voluntarily offer a portion of their recovered property to junior stakeholders” without violating the absolute priority rule. The Second Circuit disagreed, citing the long history of case law prohibiting equity holders from receiving a distribution before creditors have been paid in full. The court noted that “a weakened absolute priority rule could allow for serious mischief between senior creditors and existing shareholders.” Id. at 100. The court


2nd and 3rd Circuits adopted the Third Circuit’s view in Armstrong and held that the bankruptcy court erred in confirming the chapter 11 plan. Id. at 100-01. In DBSD, a class senior to the class receiving the “gift” voted against the plan. Note that if all voting classes accept the plan, the gifting can likely be accomplished, because the Court can confirm the plan under section 1129(a) and does not have to make a finding under section 1129(b)(2)(B) that the plan complies with the “absolute priority rule.” Although gifting pursuant to a chapter 11 plan is not permitted in the Second or Third Circuit, debtors and senior creditors who seek the cooperation of junior stakeholders may be able to accomplish gifting property pursuant to pre-plan settlements. In the Second Circuit, parties must clearly articulate the reasons for approving a settlement that does not appear to comply with the absolute priority rule. See, e.g., In re Iridium Operating LLC, 478 F.3d 452, 464-65 (2d Cir. 2007); In re Dewey & LeBoeuf, LLP, 478 B.R. 627 (Bankr. S.D.N.Y. 2012). In the Third Circuit, parties should consider whether a settlement can be structured so that junior stakeholders receive non-estate property. See, e.g., Deangelis v. Official Comm. of Unsecured Creditors (In re Kainos Partners Holding Co.), 1:10-cv-00560-LPS, 2012 WL 6028927 (D. Del. Nov. 30, 2012) (settlement amount was from a carve-out of the secured creditor’s collateral); In re TSIC, Inc., 393 B.R. 71 (Bankr. D. Del. 2008) (unsecured fund came from settlement of claims with stalking horse bidder); In re World Health Alts, Inc., 344 B.R. 291 (Bankr. D. Del. 2006) (money paid to unsecured creditors came from carve-out of the secured creditor’s collateral). Norman Pernick is Co-Chair of the Bankruptcy & Corporate Restructuring Department of Cole, Schotz, Meisel, Forman & Leonard, P.A.and heads the firm’s Wilmington, DE office. Mr. Pernick practices many aspects of bankruptcy and workouts, primarily representing debtors, but also represents creditors’ committees, major creditors, and trustees. He

has served as lead debtor’s counsel in numerous major Chapter 11 cases, including Owens Corning, Leslie Controls, Ritz Camera Centers, Cadence Innovation, J.G. Wentworth, Fedders Corporation, Barzel Industries, BNA Subsidiaries, and Open Range Communications. He serves as co-counsel for Tribune Company. He is also lead counsel for the Official Committee of Unsecured Creditors in the Monitor Group case. Mr. Pernick is a Fellow of the American College of Bankruptcy. He is the author of the Bankruptcy Deadline Checklist, which is published by the Business Law Section of the American Bar Association. Mr. Pernick is very active in community activities, and is currently the Chair of the Boards of Directors of Downtown Visions and Wilmington Main Street (the largest certified Main Street program in the United States), which are the umbrella organizations for a community-wide effort to revitalize downtown Wilmington, Delaware. Mr. Pernick can be contacted by phone on +1 302 651 2000 or alternatively via email at npernick@coleschotz.com David Hurst is a partner in the Bankruptcy and Corporate Restructuring Department, and is resident in both Cole Schotz’s New York and Wilmington, Delaware offices. Mr. Hurst has represented numerous public and private companies in out-of-court restructurings, “prepackaged” bankruptcies and traditional chapter 11 cases. He also has represented creditor committees, lenders, secured and unsecured creditors and asset purchasers in a wide variety of bankruptcy and restructuring matters. Expert Guide : Bankruptcy & Restructuring 2013 - 15


Mr. Hurst’s previous representations include Autobacs Strauss Inc., Chart Industries, Inc., Eagle Food Centers, Inc., EBG Holdings LLC, Exodus Communications, Inc., Fletcher International, Ltd., GenTek Inc., Genuity Inc., Lang Holdings, Inc., Mrs. Fields’ Original Cookies, Inc., New Century TRS Holdings, Inc., Owens Corning, Refco Inc., ResMAE Mortgage Corporation, Sterling Chemicals Holdings, Inc., and The Delaco Company. Mr. Hurst can be contacted by phone on +1 646 563 8952 or alternatively via email at dhurst@coleschotz.com Therese Scheuer is an associate in the firm’s Bankruptcy & Corporate Restructuring Department in the Wilmington office. Ms. Scheuer has experience representing debtors, bondholders, creditors’ committees, and other interested parties in chapter 11 reorganisations and out of courtrestructurings. Ms. Scheuer has also represented creditors and other interested parties in chapter 15 ancillary proceedings. During law school, Ms. Scheuer served as a summer judicial intern to the Honorable Douglas P. Woodlock, District Court Judge for the District of Massachusetts. Prior to joining Cole Schotz, Ms. Scheuer was an associate in the bankruptcy department of a prominent Bostonbased law firm. Ms. Scheuer has volunteered for the M. Ellen Carpenter Financial Literacy program for the Boston Bar Association and has also served on the board of directors of the Boston Dance Alliance. Ms. Scheur can be contacted by phone on +1 302 651 2003 or alternatively via email at tscheuer@coleschotz.com

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The Danger of Cramdown For Secured Credito By Jules Cohen

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hen banks and other lenders make a loan, they often obtain collateral from the borrower to secure repayment of the loan. The collateral may be a mortgage or deed of trust on real estate or a security interest in business assets such as accounts receivable, inventory and equipment. This makes the lender a secured creditor. If the borrower does not repay the loan, the secured creditor may sell the collateral to satisfy the debt. American bankruptcy law provides for a procedure known as Chapter 11. The purpose of Chapter 11 is to give the borrower, now called a debtor in bankruptcy terms, an opportunity to restructure its finances and save its business or to make an orderly liquidation of its assets, usually as a going business. When a debtor files Chapter 11, that immediately stops all creditors from taking action to collect their debts outside the bankruptcy by virtue of a provision in the Bankruptcy Code called the automatic stay. Bankruptcy Code §362(a). The automatic stay stops secured creditors from foreclosing on their collateral and enforcing deeds of trust and security interests. In Chapter 11, the debtor proposes a plan of reorganisation. The plan divides creditors into classes. Each secured creditor is put into a separate class according to the collateral it holds. There is usually a class of unsecured creditors. The plan may propose to change any of the terms of the secured debt. It may propose to lower the amount of principal, the interest rate, the maturity date, the monthly payment and any other term of the loan. Generally, the plan must provide that the secured creditor will retain its lien on the collateral. In regard to the unsecured creditors, the plan may propose to pay them 100% in cash in full on confirmation of the plan, 10 cents on the dollar in cash in full settlement of their claims, or 50% paid over time, or the plan may offer them an ownership in18 - Expert Guide : Bankruptcy & Restructuring

terest in the debtor or any variation of these terms. Each class votes on whether it accepts the plan. If the secured creditor is displeased with the terms for payment of its claim, it may reject the plan. If the unsecured class or any other impaired class accepts the plan, the bankruptcy court may force the terms of the plan on the secured creditor even though the lender rejects the plan. Bankruptcy Code §1129(b)(2)(A). This forcible action by the court is commonly called a “cramdown.”

For example, suppose a lender made a loan for $1 million dollars secured with a mortgage on real estate providing for interest at 9% with monthly payments of $8,500 with the balance to be paid in full in five years. The borrower was unable to pay the balance in full at the end of five years, filed Chapter 11, and proposed in its plan to pay the $1 million, but lower the interest rate to 5%, and lower the monthly payments to $4,800 with the full balance to become due in an additional five years. The lender rejects the plan. The unsecured creditors, being happy with the proposed payment to them, accept the plan by the required two-thirds in dollar amount of the unsecured class and 51% of those voting. The debtor then requests that the court cram down the plan on the lender. The lender has certain protections. For example, the plan must be fair and equitable to it, must not discriminate unfairly against the lender, must pay the lender at least a current market rate of interest, must give the lender at least as much as it would get in a liquidation of the assets and must be fea-


ors in Chapter 11 Bankruptcy sible for the debtor to perform. Assuming the debtor meets these requirements, the bankruptcy court has the power to cram down the plan on the Lender and make it legally binding on the lender, superseding the previous terms of the loan. Thus, a lender, which thought it was making a five year loan at 9% interest, now has a ten year loan at 5% interest. Suppose in this example that since the original loan was made, the value of the real estate, which is the collateral, has decreased and is only worth $700,000 when the bankruptcy is filed. The debtor can request that the bankruptcy court determine that the value of the property is only $700,000 and that the lender has a secured claim for only $700,000 and an unsecured claim for the $300,000 balance. In that case, the lender will hold a new mortgage for only $700,000. The debtor will have to pay interest on only $700,000. The lender will receive on the $300,000 unsecured claim only the percentage which the plan provides for the unsecured creditors, which is likely to be less than 100%. If the debtor obtains the required votes of the unsecured class the court can cram down this plan on the lender. Fortunately, there has been added to the bankruptcy law a provision to give the lender some protection from this result. The lender can make an election to have its claim allowed as a fully secured claim of $1 million. Bankruptcy Code §1111(b)(2). The result is that the lender continues to hold a $1 million mortgage. The debtor can pay interest on only $700,000 but when the time comes for the debtor to pay off the mortgage at the end of another five years, the debtor must pay $1 million minus the total principal and interest payments the debtor has made during the five years. So in the end, the lender will receive at least its $1 million original amount of principal.

a borrower about a loan in default, and the borrower threatens to file bankruptcy, it is important for the lender to know what can happen to the lender in Chapter 11 and to weigh that risk in deciding what to do about the delinquent loan.

In Chapter 11, the debtor proposes a plan of reorganisation. The plan divides creditors into classes. Each secured creditor is put into a separate class according to the collateral it holds. There is usually a class of unsecured creditors.

Jules S. Cohen is a shareholder with Akerman Senterfitt’s Bankruptcy and Reorganisation Practice Group. He has practiced Bankruptcy Law for more than 30 years. He regularly represents banks and other lenders as secured creditors in bankruptcy proceedings in all types of businesses. In addition, he represents buyers of assets from bankruptcy cases and defendants in preference suits. He has been listed in The Best Lawyers in America since its beginning 17 years ago and is Board Certified in Business Bankruptcy Law. Jules S. Cohen can be contacted by phone on +1 407 423 4000 or alternatively by email at jules.cohen@akerman.com

As you can see, when a lender is negotiating with Expert Guide : Bankruptcy & Restructuring 2013 - 19


Chapter 11 Cramdown Interest Rate: Till’s Prim Bank in Texas Grand Prairie By David I. Katzen

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ankruptcy reorganisation can empower a debtor to change secured loan terms despite lender opposition.1 Colloquially, the court’s approval or “confirmation” of such a Chapter 11 plan is said to “cram” the unwelcome treatment “down” the throats of rejecting creditors. But Congress conditioned cramdown, generally requiring that claimants receive deferred cash payments worth at least the current value of their lien rights.2 This economic equivalence depends upon the interest to accrue on amounts due3, and fixing that rate is critical. Obviously, the lower the necessary rate, the less real value the lender gets (and the more the debtor keeps), and vice versa. A commonly used formula approach, often referred to as the “prime-plus” or “Till rate,” likely skews outcomes to subsidise debtors.

rality favoured the objective (rather than subjective or creditor-specific) prime rate as the starting point. It reasoned that this readily accessible rate expresses the financial market’s current evaluation of a loan’s opportunity costs (i.e, inability to invest the same funds elsewhere), the inflation prospects, and a baseline risk of default. This made the prime rate preferable to a retrospective contract-based benchmark (as the situation has changed) and to the burden of establishing a market for comparable loans to borrowers outside bankruptcy (an inquiry the plurality characterised as “far removed from [bankruptcy] courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans”).7

Supreme Court’s Till Ruling To plumb this problem, one must begin with the Supreme Court’s splintered decision in Till v. SCS Credit Corporation.4 In that case, the bankruptcy court had ruled that a Chapter 13 plan afforded present value on installment payment of $4,000 (the secured portion of a purchase-money used truck loan) by providing interest of 9.5% (the then-national prime rate5 for banks’ commercial loans to creditworthy borrowers, plus 1.5% for the debtors’ greater default risk); the district court reversed, requiring a “coerced loan” rate of 21% (what the creditor could earn if it foreclosed and redeployed the sale proceeds in a comparable subprime loan); and a Seventh Circuit appellate panel instead held that the parties’ original contract (also 21%) set a “presumptive rate,” which could be increased or reduced to account for bankruptcy-specific risks or benefits. (A dissenting circuit judge proposed yet another yardstick—the “cost of funds” for the lender to obtain equivalent dollars elsewhere.)6 Till effectively approved the prime-plus or formula approach, with a plurality opinion from the Court’s four-member liberal wing and a limited concurrence by a usually conservative justice. The plu20 - Expert Guide : Bankruptcy & Restructuring

For the plurality, an upward adjustment from prime, probably in the 1% to 3% range, would compensate for a bankruptcy debtor’s greater risk of default in light of the estate’s circumstances, the nature of the creditor’s security, and the proposed plan’s duration and feasibility—factors bankruptcy courts commonly consider and which turn on information often disclosed within the bankruptcy (or, as to things like collateral depreciation or liquidity, on data accessible to creditors motivated to adduce it). In the plurality’s view, modest risk adjustments align with the bankruptcy judge’s threshold finding (as a condition of confirmation) that the debtor will be able to make prescribed payments, and performance doubts that evoke an “eye-popping” interest rate suggest the plan really isn’t feasible and thus shouldn’t be approved at all.8 For the concurring jurist, the prime-plus approach was more than sufficient, because he read the statutory text to require only that the present


me Strands value of the “property to be distributed” equal the secured claim—not that the “promise” to distribute have that value. Therefore, the risk of default was irrelevant.9 The four Till dissenters believed that the primeplus formula would systematically under compensate secured claimants. They argued that the going rate for subprime loans (as reflected in the parties’ original contract) provided the more apt presumptive cramdown interest, because it reasonably accounted for risk as the predominant cost of comparable credit.10 By contrast, the plurality did not consider the subprime market reliably competitive (citing usury and other regulatory efforts as indicia of subprime abuses), and the virtually tautological lack of a “free market” for cramdown interest in Chapter 13 obligated courts to derive a fair rate from first principles.11 However, although the plurality indicated that essentially the same approach would likely apply when determining interest under the Bankruptcy Code’s other present-value provisions, the opinion’s oftreferenced Footnote 14 distinguished Chapter 11, where lenders may well advertise debtor financing, so that an “efficient market” might reflect the appropriate cramdown interest.12 Till’s Troubling Aftermath, and a Cautionary Fifth Circuit Case Despite Till’s Chapter 13 context and internal divisions, many courts cite the case to support a two-step analysis for Chapter 11 cramdown: If an “efficient market” pegs a rate for loans like the reorganization plan proposes, that market should establish suitable cramdown interest, but otherwise the prime-plus formula applies.13 In practice, it appears that courts often find no efficient market and then approve rates of 1% to 3% over prime.14 A recent ruling from the Fifth Circuit’s Court of Appeals illustrates how the prime-plus model can yield distortion.

the parties stipulated that Till’s prime-plus regimen should govern the cramdown rate. 15 Their experts also agreed that prime was 3.25% and that debtors’ management and operating results and the collateral attributes were favourable. Since the plan would be tight but feasible, debtors’ expert considered the chance of default “‘just to the left of the middle of the risk scale,’” which supported a 1.75% adjustment under Till’s 1% to 3% range. 16 In contrast, the bank’s expert sought to gauge the risk component by looking first to the market for comparable funds through tiered financing—specifically, a $23,448,000 first mortgage at 6.25% interest, junior or “mezzanine” debt at 11%, and an equity layer with a return or constructive rate of 22%—which translated to blended interest (a weighted average for the three tranches) of 9.3%. 17 To reconcile this “‘market influenced” analysis with Till, he posited an upward adjustment from prime of 6.05%, then tweaked it 1.5% downward for the estate’s favourables and 1% upward for tight feasibility, to wind up with an 8.8% cramdown rate.18 The bankruptcy court rejected this approach as contrary to Till, determined that debtors’ expert correctly applied the prime-plus formula, and therefore approved the 5% cramdown rate. 19 On appeal, the Fifth Circuit recounted the parties’ agreement to the prime-plus standard, but declined to treat Till as necessarily controlling in Chapter 11, where the need to reduce litigation expenses is less acute than in Chapter 13.20 That said, debtors’ expert had properly applied the stipulated formula method to support a 5% cramdown rate (3.25% prime, plus 1.75% for extra risk).21 The bank’s expert, however, effectively began with a different market rate, extrapolated from the tiered financing he posited, doing this even though the court said Till’s plurality rejected such a search for comparable loan markets. 22

In Texas Grand Prairie Hotel Realty, the debtors proposed to pay a bank’s secured claim of $39,080,000 over seven years at 5% interest, and Expert Guide : Bankruptcy & Restructuring 2013 - 21


Till may support recourse to “efficient markets” for Chapter 11 cramdown analysis, but authorities adopting that threshold inquiry have said markets are only “efficient” if they offer a loan with term, size, and collateral like the plan proposes, and here the bank’s expert admitted nobody would lend $39 million to the debtors with a 100% loan-to-value ratio. 23 Thus, given the prime-plus approach endorsed by Till’s plurality, followed by most bankruptcy courts and accepted by the bank, the 5% cramdown wasn’t clearly erroneous, but rather a straightforward calculation.24 Although the market for smaller, over-collateralized loans to similar borrowers was charging more than 5%—a result the bank called “absurd”—the court said this was “the natural consequence of the prime-plus method, which sacrifices market realities in favor of simple and feasible bankruptcy reorganizations.”25 “However,” the Fifth Circuit concluded, “we do not suggest that the prime-plus formula is the only—or even the optimal—method for calculating the Chapter 11 cramdown rate.” 26

cramdown interest not be tied to any fraught market, with the debtor forced to drag an elevated or stratospheric rate earthward. But shouldn’t proof of a conventional market for loans less risky than the plan’s set the cramdown floor, with compensatory upward adjustments a la Till? In other words, if a commercial loan of roughly the same size and length as the plan’s—but requiring more security and a stronger borrower—would carry interest above prime, doesn’t it make sense to work up from that rate, with allowances for the plan’s higher risk?

As Texas Grand Prairie shows, prime-plus can be a creditor’s straightjacket. An artificially low cramdown rate seems inevitable if prime is already at least 3% below market interest for safer commercial loans. Till notwithstanding, a benchmark derived from interbank overnight lending wouldn’t intrinsically reflect the opportunity cost and inflation perils of a multi-year fixed-rate loan: Quite apart from the definitional low risk of default, a discount seems “baked in” whenever prime is substantially beneath historical averages and therefore likely to rise over time.

Though theoretically logical, such a “closest common-denominator” benchmark (that is, a regular competitive market for loans no more aggressive than the plan’s) appears impractical in Chapter 13, where litigation expenses would usually be disproportionate to the modest time-value of the money involved, 27 so a simple prime-plus formula arguably is the fairest functional model. But in Chapter 11, transaction costs to establish a more probative market may well be justified for six- to nine-figure claims potentially payable over a decade or more. Clearly, Till’s plurality envisioned the possibility of an “efficient market” for financing in Chapter 11, but if there is no actual access to funding there, does the almost schizophrenic opinion (“efficient markets” are good guides, but searching for comparable loan markets is foreign territory) preclude evidence of interest rates for analogous—or, at least, safer—loans that are generally available outside bankruptcy? After Texas Grand Prairie, the answer in the Fifth Circuit is no, Till’s plurality ruling in Chapter 13 doesn’t govern cramdown rates in Chapter 11 (unless one stipulates to it), and even without a perfectly matched “efficient market” for reorganising debtors, courts elsewhere may also take a more flexible approach than strict prime-plus. 28

In Till, the rejected contract/forced-loan rate came from a market the plurality suspected was rigged against borrowers. Since payment plans in both Chapter 11 and 13 are intended to rehabilitate, and since financial distress often begets hyperconservatism, it is reasonable that the presumed

Nevertheless, in proposing a cramdown floor above prime, lienholders should be wary of overreaching. Since a plan can only be confirmed if the court finds it feasible (i.e., further reorganisation or liquidation is unlikely),29 it won’t make sense to invoke a “hard money” or “loan to own” market,

Instead of Sterile Prime, Build Rate on Most Analogous Lower-Risk Market

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where default is virtually welcomed.30 Also, while some courts accept evidence of tiered financing like that presented in Texas Grand Prairie, 31 many consider such constructs too hypothetical, with the equity layer’s hefty return portending a windfall for the creditor. 32 To be compelling, the substitute for “prime” in prime-plus should be a demonstrated source of similar debt financing that has risk (and, therefore, reward) expectancies no greater than the plan’s proposed treatment.

11, however, there’s room for secured creditors to argue that the present-value exercise must begin with the ballpark cost of commercially available loans akin to what the plan proposes, but safer and yet almost certainly commanding rates above prime. This measured stance, unlike either acquiescing in the prime-plus formula or demanding a tranche with venture capital returns, can help level the playing field before haggling over debtor-specific risks.

Given such a surrogate above-prime floor, upward adjustments to arrive at the cramdown rate would depend (as in Till) on assessing the additional risks posed by the plan’s treatment of a secured claim. These could include greater collateral risks (little or no cushion, likely depreciation or market volatility), longer duration, higher general debtservice to earnings ratios, notable management concerns (quality or stability issues), clouded industry prospects, or the like.

David I. Katzen is a partner with Katzen & Schuricht in Walnut Creek, California.

Nevertheless, in proposing a cramdown floor above prime, lienholders should be wary of over- reaching. Since a plan can only be confirmed if the court finds it feasible

If available, and lest add-ons become needlessly arbitrary numbers drawn from a hat, empirical data showing how markets actually price particular differences should help calibrate the magnitude of proposed increases. While this could resemble the “tiered” format that seems to raise judicial hackles, the suggested increments wouldn’t be presented as a weighted-average mandate or mathematical vice, but rather as factors intended to inform exercise of the trial court’s discretion.33

He has concentrated on commercial insolvency work for over 30 years and is Board Certified in Business Bankruptcy Law by the American Board of Certification and also recognised by the State Bar of California Board of Legal Specialization as a Certified Specialist in Bankruptcy Law. Mr. Katzen is “AV” rated in the Martindale-Hubbell Law Directory and has perennially been selected as a Northern California “Super Lawyer” in the Bankruptcy & Creditor/Debtor Rights field. David can be reached by phone at +1 925 831 8254 or by email to katzen@ksfirm.com

In sum, if cramdown interest just means adding 1% to 3% onto the prime rate, debtors will often enjoy bargain-basement financing. In Chapter Expert Guide : Bankruptcy & Restructuring 2013 - 23


1 - See 11 U.S.C. (hereafter, “Code”) §§ 101(49)(A)(i) (security defined to include notes), 1123(a)(5)(H) (plan can modify security’s maturity, interest rate, or other terms); 1129(b)(2)(A) (main standard for confirmation without secured claimant’s acceptance). 2 - See Code § 1129(b)(2)(A)(i)(II). Under Code § 506(a)(1), a claim may be split into a secured component to the extent of the collateral’s value (which could depend on lien priority) and, if more is owed, an unsecured piece for the shortfall. Thus, with a fully secured debt, the value of the lien rights is equal to the allowable claim, but their value is less for an undersecured claim. (When a debtor would retain collateral, secured claims are capped at the cost to replace property, not its liquidation value. See Associates Commerial Corp. v. Rash, 520 U.S. 953 (1997).) Note that although an undersecured creditor can sometimes avert bifurcation by electing to treat the entire claim as secured under Code § 1111(b), so that the lien continues to cover the full amount, the lien rights (in “Code-speak,” the “value of the holder’s interest in the estate’s interest in such property”) are still worth no more than the collateral position. See, e.g., In re Brice Rd. Devs., LLC, 392 B.R. 274, 285 (B.A.P. 6th Cir. 2008). 3 -See Rake v. Wade, 508 U.S. 464, 472 n.8 (1993) (“When a claim is paid off pursuant to a stream of future payments, a creditor receives the ‘present value’ of its claim only if the total amount of the deferred payments includes the amount of the underlying claim plus an appropriate amount of interest to compensate the creditor for the decreased value of the claim caused by the delayed payments.”) (emphasis added). 4 - 541 U.S. 465 (2004). 5 - “In the U.S., the prime rate runs approximately 300 basis points (or 3 percentage points) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements.” Wikipedia, Prime rate, available at http:// en.wikipedia.org/wiki/Prime_rate (as visited Mar. 22, 2013). 6 - 541 U.S. at 471-73. 7 - Id. at 477-79. 8 - Id. at 479-80. 9 - Id. at 485-86, 491. 10 - Id. at 492, 498-99. 11 - Id. at 476 n.14, 481-82. 12 - Id. at 474, 476 n.14. Of course, if “efficient market” means the debtor has access to comparable commercial financing, one might wonder why plan proponents would instead incur the risks and burdens of a cramdown fight. 13 - See, e.g., Bank of Montreal v. Official Comm. of Unsecured Creditors (In re American HomePatient, Inc.), 420 F.3d 559, 567-68 (6th Cir. 2005), cert. denied, 549 U.S. 942 (2006). 14 - E.g., In re Pamplico Highway Dev., LLC, 468 B.R. 783, 795 (Bankr. D.S.C. 2012) (collecting cases). 15 - Wells Fargo Bank N.A. v. Texas Grand Prairie Hotel Realty, L.L.C. (In re Texas Grand Prairie Hotel Realty, L.L.C.), No. 11-11109, ___ F.3d ___, 2013 U.S. App. LEXIS 4514 at *2-3 (5th Cir. Mar. 1, 2013).

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16 - Id., 2013 U.S. App. LEXIS 4514 at *23. 17 - Id. at *24 & n.56. 18 - Id. at *24-25. 19 - Id. at *26-27. 20 - Id. at *3, *12-15. 21 - Id. at *27. 22 - Id. at *25 n.57, *28. 23 - Id. at *30-33. 24 - Id. at *33. 25 - Id. at *29. 26 - Id. at *33. 27 - Chapter 13 is generally reserved for individuals or couples with aggregate secured debts capped at $1,149,525 (as of April 1, 2013). Code § 109(e). Typically, the larger secured claims are home mortgages, but they are ordinarily immune from modification. See Nobelman v. American Sav. Bank, 508 U.S. 324, 329-30 (1993). Assuming a relatively high modifiable claim of $50,000 and payments amortized over five years, a 3% interest rate swing would amount to $3,750. Given such stakes, significant litigation would rarely be worth the candle. 28 - Gary W. Marsh & Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 Am. Bankr. L.J. 209, 217-19, 229-30 (2010) (summarizing Chapter 11 cases that, though Till’s formula presumptively applies, have used other market considerations). 29 - Code § 1129(a)(11). 30 - See In re American Trailer & Storage, Inc., 419 B.R. 412, 438 (Bankr. W.D. Mo. 2009) (to condemn debtors to “vulture lenders . . . charging sky high interest rates, just waiting . . . [to] swoop in and liquidate the collateral, is akin to holding that no Chapter 11 cramdown is feasible”). 31 - See, e.g., In re North Valley Mall, LLC, 432 B.R. 825, 832 (Bankr. C.D. Cal. 2010); Pacific First Bank v. Boulders on the River, Inc. (In re Boulders on the River, Inc.), 164 B.R. 99, 105 (B.A.P. 9th Cir. 1994). 32 - See, e.g., Bank of Montreal v. Official Comm. of Unsecured Creditors (In re American HomePatient, Inc.), 420 F.3d 559, 569 (6th Cir. 2005), cert. denied, 549 U.S. 942 (2006). 33 - For a case paying lip serice to Till’s prime-plus formula but actually relying on a market more nearly analogous to the plan’s contemplated payment program, see In re Northwest Timberline Enterprises, 348 B.R. 412 (Bankr. N.D. Tex. 2006), where the court added 5.75% to the thenprime, for a 13.75% cramdown rate.


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Cayman Islands – The Focal Point of Cross Bo By Neil Lupton

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hen examining the key issues and trends dominating cross-border insolvency work, the Cayman Islands is as good as any place to start. Virtually every case we come across in the Cayman Islands has at least one cross border element (if not several) which means that the international aspect is interwoven into our everyday work, in dealing with courts, office holders and legal counsel in various jurisdictions. In many circumstances, one should appreciate that companies may be involved in more than one insolvency process and the courts in the Cayman Islands, as well as the BVI are very flexible in this regard, with the ability to hold joint hearings with courts in the US and elsewhere by video or teleconference where appropriate. Insolvency practitioners in the Cayman Islands are also well used to companies that are registered here but operate elsewhere, so the international dynamic is an important part of everything we do. In terms of the objectives we are trying to achieve, the primary legal issues in an insolvency situation often reflect the commercial considerations. When a company is in distress there will usually be a number of different stakeholder groups who are all looking for different outcomes and have different priorities. With all of these stakeholders having their own legal rights (which may differ considerably amongst one another), typically alongside a substantial financial interest, these rights must be examined in a commercial context. At Walkers, we regularly advise all of the major insolvency practitioners (who act as official liquidators) in the Cayman Islands and the BVI with respect to such issues. We regularly advise all forms of Cayman Islands and BVI domiciled vehicles (including hedge funds, exempted limited partnerships and other special purpose vehicles) and their directors and managers in connection with complex insolvency issues, particularly in the grey area as to whether a company may not be insolvent on a pure cash flow basis (the applicable legal test in the Cayman Islands), but may have serious balance sheet issues due to increasingly illiquid investments and/or high levels of unmet redemption requests. The sheer number of hedge fund and private equity clients in our Corporate department means that we

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tend to be involved in the lion’s share of the largest (by value) and most interesting work. In addition, we have widespread experience acting for companies, funds and other investors in disputes relating to their investments with other funds. We have continued to see elevated levels of winding up petitions (both creditor and shareholder) in the Courts and one must always be mindful that – in contrast with bipartite litigation – these are class action remedies which requires consideration of their effect not just on the petitioner, but on all relevant stakeholders. For example, whilst a client may be very keen to initiate proceedings in order to either protect or enforce their legal rights or otherwise obtain maximum leverage (within the confines of applicable legal and equitable rules), taking pre-emptive action may sometimes be counterproductive if that step then triggers defaults under the relevant company or fund’s underlying external contracts which, in turn, may cause value destruction for all stakeholders. Dynamic Work Flow Clearly the impact of the global financial crisis on the insolvency sector has been profound and workflow in the Cayman Islands and the British Virgin Islands has been consistently busy from the initial spike over the past four years. The first wave of work following the crisis featured a range of problems from hedge fund insolvencies to more traditional restructuring work, which was followed by a jump in bank and bondholder-led enforcement work. Now we are seeing litigation coming out of these insolvency proceedings, for example the litigation in the Weavering directors’ duties case which made the headlines in 2011 was from a 2009 bankruptcy. Another evident trend is that of investors beginning losing patience with funds which sought to restructure, suspend or side-pocket their illiquid portfolios over the past few


order Insolvency years and we anticipate a further uptick in contentious work of this nature. Another form of litigation taking centre stage has been the emergence of clawback claims, involving the recovery of money that has been paid out to investors by a fund in the period leading up to a formal insolvency filing, usually because of improperly calculated net asset values (“NAV”). Typically these claims are harder to achieve in the Cayman Islands or BVI than in the US where a specific and detailed statutory regime is in place under the US Bankruptcy Code. We have also seen first-hand the interplay between the US and Caribbean approaches by the actions taken by Mr Irving Picard, the SIPC Trustee of the Madoff estate, in seeking to enforce such avoidance claims against funds in the Cayman Islands and the BVI. This will certainly be an area to watch as participants in Cayman and BVI continue to examine ways to achieve clawbacks, especially as we now have a specific regime in the Cayman Islands under our Companies Winding Up Rules which provide liquidators with some guidance in terms of restating NAV where fraud has occurred and rectifying the register of members accordingly (although such claims often involve complex issues which are very likely to be tested before the courts in the short to medium term). Elsewhere, we are seeing claims made against service providers, such as directors, just like with the Weavering case, as well as auditors and administrators. I have no doubt that we will continue to see more claims along these lines. Lately we have not seen as many of the so-called “loss of substratum” just and equitable winding up petitions whereby a minority investor alleges that a permanent or indefinite suspension of redemptions by a fund with a view to returning assets through a “soft wind-down” is inappropriate and the fund ought to be wound up by the court instead. However, given the present divergence in the law of the Cayman Islands and the BVI in this regard, I would be surprised if we do not see some further cases which are then taken to appellate level. For most of our clients, typical challenges include

dealing with a lack of working capital, a sharp fall in profitability, unsustainable costs and the likely breach of loan covenants. Often events in a restructuring process can move extremely quickly with assets being dissipated. It is crucial to avoid the destruction of value and the underlying assets in the restructuring process, underlining the need for specialist assistance at an early stage.For Walkers, we are certainly operating in mature markets, which bring its own challenges. Walkers has a dedicated Insolvency and Corporate Recovery Group which is well resourced with specialist Cayman Islands and British Virgin Islands attorneys. We have also considerably expanded our ICR practice in Hong Kong over the past 12 months, where the team have been extremely active. The flexibility of the courts in Cayman and BVI is another important factor and in particular the introduction of the Financial Services Division in the Cayman Islands with a number of specialist judges that are experienced in fast paced cross border insolvency disputes. The jurisdiction is also pleased to have the presence of specialist and experienced insolvency practitioners acting as liquidators who perform this role day-in, day-out. With an international aspect never far from the centre of every important insolvency case, this cross-border expertise will ensure that Cayman and BVI remain at the heart of the restructuring universe. Neil Lupton is based in Walkers’ Cayman Islands office and is a partner in the Global Insolvency and Corporate Recovery Group. Neil specialises in complex restructurings, contentious and non-contentious insolvencies and distressed situations, advising existing stakeholders and creditors, debtors, private equity and hedge funds, insolvency practitioners and other advisors. Neil also has broad experience in general contentious matters. Mr. Lupton can be contacted by phone on +1 345 914 4286 or alternatively via email at neil.lupton@walkersglobal.com Expert Guide : Bankruptcy & Restructuring 2013 - 27


Debtor-In-Possession Financing In Canada By Lisa S. Corne and David P. Preger

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ebtor-in-possession (“DIP”) financing is an important tool used by insolvent companies undergoing reorganization proceedings under Canada’s Companies’ Creditors Arrangement Act (“CCAA”), or Bankruptcy and Insolvency Act (“BIA”). DIP loans permit insolvent debtors to obtain capital required in order to continue operations and pay certain creditors, on the theory that the debtor’s business is worth more as a going concern than would be the case if its assets were liquidated. DIP Financing Pursuant to the CCAA The CCAA is a statute designed to allow debtor companies with indebtedness of $5,000,000 or more to restructure. The CCAA is a flexible statute which allows debtors and creditors to come up with creative solutions to address the concerns of all stakeholders involved in the restructuring, including secured creditors, unsecured creditors, employees, and shareholders. The process is court supervised, and court approval is required for all major decisions affecting stakeholders.

tify the court and allow such creditors to be independently represented at the court hearing to seek approval of a DIP priority charge.

The amount of the DIP loan is assessed by the court in light of the debtor’s cash flow forecast over the course of the restructuring. There are a number of additional factors which the court must consider when deciding whether to grant a DIP loan, including:

One of the most important features of a DIP loan is that the DIP lender may be granted a priority charge over all of the debtor’s assets, in priority to existing secured creditors and statutory deemed trusts, provided that notice is given to the affected creditors. This priority charge does not secure debts incurred prior to the CCAA proceeding. DIP loans are frequently used to pay major suppliers on a go forward basis, and to pay the professionals assisting with the restructuring process.

(a) the period during which the company is expected to be subject to proceedings under the CCAA; (b) how the company’s business and financial affairs are to be managed during the proceedings; (c) whether the company’s management has the confidence of its major creditors; (d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company; (e) the nature and value of the company’s property; (f) whether any creditor would be materially prejudiced as a result of the security or charge; and (g) the monitor’s report, if any.

Given the importance of DIP loans to the restructuring process, the CCAA was amended in 2009 in order to codify the circumstances in which courts will allow DIP loans, and now expressly requires that notice be provided to all creditors who are likely to be primed, before a priority charge to secure a DIP loan may be granted. In addition, if a debtor is acting in the role of fiduciary for any creditors (such as in the context of a debtor acting as a pension administrator), the debtor must no-

These factors are not exhaustive and must be interpreted in a broad and liberal fashion. In considering these factors, the court considers whether there is cogent evidence that the benefit of the proposed DIP financing clearly outweighs the potential prejudice to secured creditors. The court is concerned with the “broader picture,” not the negative effect on one creditor or another. Even in a situation where substantially all of the creditors oppose a DIP loan, such a loan may be ap-

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proved where it furthers the remedial purpose of the CCAA and is likely to assist the debtor in making a viable compromise or arrangement. DIP Financing Pursuant to the BIA The BIA is generally used to reorganize companies with debt in an amount below the $5,000,000 threshold required to qualify under the CCAA. In addition, the BIA applies to individuals who wish to make a proposal to creditors. The circumstances in which DIP loans may be approved and the factors considered by the courts in authorizing DIP loans are identical under the BIA and CCAA. Cross-Border Considerations In today’s globalized economy, many companies operate in numerous jurisdictions simultaneously, and have subsidiaries which lend funds to one another, provide guarantees for one another on loans from third parties, or whose operations are so closely interrelated that it becomes difficult to separate the business activities of one from another. To take this new business reality into account, the CCAA and BIA now incorporate the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvencies regarding administration of cross-border insolvencies. The purpose of these provisions is to promote cooperation with foreign jurisdictions and to ensure fairness to creditors located in different countries. If the operations of a multi-national business are sufficiently separate that two DIP loans can be provided, one in the foreign jurisdiction and one in Canada, then there is no issue of intermingling of assets, and the cross-border aspects of the restructuring have no bearing on the DIP. However, in most cases, there are inter-company loans and guarantees, and the multi-national business is run, through subsidiaries, on a consolidated basis. In such circumstances, DIP lending becomes more complicated.

In certain cases where Canadian and U.S. operations were closely integrated, Canadian courts have allowed the assets of a Canadian debtor to serve as collateral for a guarantee of a DIP loan to its U.S. parent company. In these cases, the Canadian company was dependent on the U.S. DIP loan in order to continue to operate as a going concern. Factors to be considered when considering whether the assets of a Canadian debtor may be used to guarantee the obligations of a foreign related company include: (a) the need for additional financing by the Canadian debtor to support a going concern restructuring; (b) the benefit of the breathing space afforded by CCAA protection; (c) the availability (or lack thereof) of any financing alternatives, including the availability of alternative terms to those proposed by the DIP lender; (d) the practicality of establishing a stand-alone solution for the Canadian debtor; (e) the contingent nature of the liability under the proposed guarantee and the likelihood that it will be called on; (f) any potential prejudice to the creditors of the entity if the request is approved, including whether unsecured creditors are put in any worse position by the provision of the cross-guarantee; (g) the benefits that may accrue to the stakeholders if the request is approved and the prejudice to those stakeholders if the request is denied; and (h) a balancing of the benefits accruing to stakeholders generally against any potential prejudice to creditors.

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Unlike in the United States, roll-up DIP loans (where the priority charge secures pre-filing debts) have never been a part of Canadian insolvency proceedings and run contrary to statutory provisions in the CCAA. Nevertheless, in a recent Canadian case, the court approved a “creeping roll-up DIP loan” which originated in Chapter 11 proceedings in the U.S. The court in this case decided that it would not second guess the decision of a court in the U.S., or declare the creeping roll up DIP contrary to Canadian public policy. Lisa S. Corne is a Partner at Dickinson Wright LLP in Toronto. Ms. Corne has extensive experience in the practice of commercial insolvency and restructuring law, with particular expertise conducting real time litigation arising in the insolvency context. She regularly appears as counsel before the civil courts in Ontario and primarily before the Commercial List representing debtors, creditors, receivers, trustees, officers and directors in a wide variety of commercial matters, including cases under the Companies’ Creditors’ Arrangement Act, Bankruptcy and Insolvency Act, and Business Corporations Act. Lisa S. Corne can be contacted via email on lcorne@dickinsonwright.com and via telephone on +1 416 646 4608 David P. Preger is a Partner at Dickinson Wright LLP in Toronto. Mr. Preger’s primary focus is acting in complex Courtsupervised real estate workouts, primarily for Court-appointed receivers and senior mortgage-lenders. In addition to bankruptcy, insolvency, real estate and security enforcement, his practice draws 30 - Expert Guide : Bankruptcy & Restructuring

upon such varied areas as construction, land development, municipal, condominium, finance, environmental and aboriginal law. He regularly appears before the Commercial List of the Ontario Superior Court of Justice in Toronto. Many of the cases Mr. Preger has successfully argued have been reported in prominent reporting series including the Canadian Bankruptcy Reports and the Real Property Reports. David P. Preger can be contacted via email on Dpreger@dickinsonwright.com and via telephone on +1 416 646 4606


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Snapshot - Top Ten US No.10: United Western Bancorp, Inc. Assets: $2.5 billion Bankruptcy Date: 2nd March 2012

The Denver-based holding company that formerly owned United Western Bank filed for Chapter 11 last March and also filed a lawsuit against the Office of Thrift Supervisions citing an abuse of power. Although the company’s most recent public financial statements listed $2.5 billion in assets, UW Bancorp scheduled assets valued at no more than $10 million in its bankruptcy filings.

No.10: Houghton Mifflin Harcourt Publishing Company Assets: $2.7 billion assets and $3.5 billion in debt Bankruptcy Date: 21st May 2012

With a history dating to 1832, Houghton Mifflin said its products serve 60 million students in 120 countries. Along with 20 affiliates, Boston-based Houghton Mifflin publishes textbooks used at all grade levels. It also publishes novels, nonfiction books, children’s books, and reference works, including such classics as J.R.R. Tolkien’s The Lord of the Rings and H.A. and Margret Rey’s Curious George books for children.

No.8: Hawker Beechcraft, Inc. Assets: $2.8 billion assets and $3.7 billion in debt Bankruptcy Date: 3rd May 2012

Based in Kansas, this company is a manufacturer of business, special mission, and trainer/attack aircraft as well as parts and aviation products. Nine months after seeking bankruptcy court protection from a mountain of debt, Beechcraft Corp. announced Feb. 19 that the company has emerged from Chapter 11, minus the “Hawker” name and the business jet production lines attached to that name.

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S Bankruptcies in 2012 No.7: First Place Financial Corp. Assets: $3.2 billion Bankruptcy Date: 28th October 2012

First Place Bank was a federally chartered stock savings association with more than 40 branches in Ohio, Michigan, Indiana, and Maryland. FPF entered into an agreement to sell First Place Bank to Talmer Bancorp (“Talmer”) as a means of complying with certain directives issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision (“OTS”). The bankruptcy court approved the sale of First Place Bank to Talmer on December 14, 2012. Although FPF’s most recent public financial statements showed $3.2 billion in assets, the company listed only $175 million in assets and $64.5 million in debt in its bankruptcy filings.

No.6: ATP Oil & Gas Corporation Assets: $3.4 billion assets and $3.1 billion in debt Bankruptcy Date: 17th August 2012

This Texas-based company acquires, develops, and produces oil and natural gas assets. ATP stated that it filed for chapter 11 to manage debt it incurred in large part during the offshore drilling suspension following the Gulf of Mexico oil spill in 2010. Prior to its bankruptcy filing, ATP had estimated net proved reserves of 118.9 million barrels of crude oil equivalent and 241.5 billion cubic feet of natural gas.

No.5: Patriot Coal Corp.

Assets: $3.8 billion assets and $3.1 billion in debt Bankruptcy Date: July 9, 2012 Patriot Coal is a Missouri-based producer and marketer of coal products in the eastern United States that had struggled in recent years as a result of the decreased demand for coal, due largely to an increase in natural gas and other energy sources. Patriot Coal filed for Chapter 11 along with 98 affiliates.

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No.4: Overseas Shipholding Group Inc. Assets: over $4 billion in assets and $2.7 billion in debt Bankruptcy Date: 14th November 2012

As one of the world’s largest publicly traded tanker owner, OSG owns and operates 111 vessels that transport oil, refined products, and natural gas worldwide. OSG and other crude oil shippers have been buffeted in recent years by slowing demand for oil, combined with a sharp fall in shipping rates for international crude and product vessels. In addition, OSG has ongoing tax problems that rendered its last three years of financial statements unreliable and created a potential for default under its loan agreements.

No.3: Eastman Kodak Company Assets: $6.24 billion in assets and $7.3 billion Bankruptcy Date: 19th January 2012

The New York-based imaging pioneer that invented the digital camera nearly 40 years ago was unable to sell 1,100 digital-imaging patents that could have forestalled a bankruptcy filing. In January 2013, the bankruptcy court approved the sale of Kodak’s digital-imaging patents for $527 million to a consortium that included Apple Inc., Microsoft Corp., Google Inc., Adobe Systems Inc., Research In Motion Ltd., Samsung Electronics Co., Fujifilm Corp., and Facebook Inc. The sale is a key element of the company’s plans to shift its focus to commercial packaging and printing from photography.

No.2: Edison Mission Energy Assets: $8.3 billion assets and $3.7 billion in debt Bankruptcy Date: 17th December 2012

Through its subsidiaries, Edison Mission Energy sells or trades energy from coal-fired generating facilities, natural gas-fired generating facilities, and renewable energy facilities, including one of the largest portfolios of wind projects in the U.S. The company has suffered financial losses amid low energy prices, high fuel costs, relatively weak power demand, and low power generation at coal-fired plants run by Midwest Generation, an Illinois-based subsidiary. Edison Mission is a subsidiary of Edison International, which did not file for bankruptcy.

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No.1: Residential Capital, LLC Assets: $15.7 billion assets and $15.3 billion in debt Bankruptcy Date: 14th May 2012

ResCap is a wholly owned subsidiary of GMAC Mortgage Group, LLC, which in turn is wholly owned by Ally Financial Inc. (“Ally�), the former finance arm of General Motors Co. once known as GMAC. ResCap was one of the biggest subprime-mortgage lenders in the country and was hit hard by the financial crisis. When the Minnesota-based company filed for Chapter 11 with $15.3 billion in debt, it was the 35th largest filing of all time based on asset value.

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Corporate Restructuring In The Netherlands By Tim B. Schreuders

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f an enterprise grows both functionally and geographically, there is often a need for operational, tax, legal and practical reasons to set up a group structure consisting of different legal entities. If the expansion of the business activities includes conducting the business abroad, foreign companies will become part of the group. As much as there is a need to create a group structure, there is from time-to-time a need to restructure and reorganise an existing group structure. Although there are many different reasons why the management of a certain group would decide to make changes to the existing group structure, most corporate restructurings are conducted for one or more of the following reasons: - Cost Saving: the maintenance of a group structure, especially if the group consists of companies located in many different jurisdictions, requires that considerable costs are incurred. For this reason, it can be decided that the number of companies that are part of the group are decreased as much as possible without jeopardising the group’s effectiveness from a legal, tax and operational perspective. - Tax Reasons: it can be advisable to change an existing group structure in order to establish a fiscally more beneficial structure. Tax motives for corporate reorganisations are especially important for multi-national groups which will have to take into account that tax legislation and tax treaties are constantly changing and can have a considerable impact on the tax costs that the group will incur. - Operational Reasons: examples of such operational motives are separating holding activities from operational activities and streamlining the group structure after one group has acquired another group. If cross-border corporate restructuring projects are being implemented many different executives and professionals in often many different jurisdictions will be involved and they all have their different but important roles to play. One of the main challenges that arise in practically all cross36 - Expert Guide : Bankruptcy & Restructuring

border corporate structuring projects is to make certain that all legal, tax and regulatory formalities under the laws of all jurisdictions that are involved in the relevant project are duly and timely performed. This includes obtaining all governmental and internal approvals for each of the contemplated restructuring steps. An important factor that should be considered in any project involving different jurisdictions is the language factor. It is noted that although in cross-border corporate restructuring projects the relevant documentation and all communication, both orally and in writing, will typically be in English, the English language will usually not be the native language of all persons involved in the project. This should be taken into account as it may otherwise lead to misunderstanding among some of the persons involved.

Another important factor that should be considered when implementing a cross-border corporate restructuring project is the time difference. This will be important particularly when certain steps need to occur in a specific order and the implementation needs to occur in different time zones. In order to make certain that all the challenges that are being faced when implementing a crossborder corporate structuring project are efficiently and successfully handled, it is important that all parties involved know exactly what is expected of them and when they must deliver. Equally important, however, is to monitor progress and compliance. In order to be able to achieve this, effective project management is essential. In practice, work plans, action lists or step plans are prepared and updated regularly, which provide a description of each of the relevant steps in often great detail and will provide who will be responsible for preparing the relevant document or taking the relevant


action, when the step is due, who the signatories will be etc. Furthermore, it is common practice to hold regular telephone conferences and meetings to monitor progress and compliance. This will enable the parties involved in the restructuring to identify important issues that have come up during the implementation phase of the restructuring project and to determine how such issues will be handled.

the BV’s issued capital, has been abolished. Distributions to shareholders may be made without any requirement for a minimum amount of equity to remain within the company, except for the reserves which must be maintained by law or under the articles.

Recent Developments in the Netherlands

- It is possible to deviate in the articles from the basic statutory rule that the number of votes that a shareholder may cast is proportional to the par value of the shares that the shareholder holds.

On 1 October 2012 the new Act on the simplification and flexibilisation of the rules applicable to Dutch BVs (private companies with limited liability) entered into force. The new Act is part of a broader package of rules and legislation aimed at modernising Dutch company law, which includes the most recent development; the introduction of a “one-tier board” in Dutch corporate law (effective as of 1 January 2013). The new BV rules make it a far more flexible legal entity and very attractive for use in the international corporate practice, including the cross-border corporate restructuring practice. The new BV rules include the following: - The statutory minimum capital has been abolished. - Although it is still required that all shares have a par (nominal) value, the par value may be denominated in a currency other than euro. - It is possible for a BV to have shares without voting rights and shares without profit rights attached. It is noted that it is not possible for a BV to have shares that have neither voting rights, nor profit rights. - In case of contributions in kind, an auditor’s certificate concerning the value of the assets contributed is no longer required. - The financial assistance prohibition, prohibiting a BV from providing assistance to a third party by way of providing security and restricting the granting of loans for the purpose of acquiring shares in

- The rules on convening and holding shareholders’ meetings have become more flexible.

As the Netherlands is the preferred jurisdiction of many international companies and enterprises for establishing their international holding companies, and the Dutch BV is the legal entity most commonly used in the Netherlands for this purpose, the new rules will make it possible to implement corporate structuring projects in a more efficient and cost effective manner. HEUSSEN B.V. (“HEUSSEN”) is a Dutch law firm with its offices in Amsterdam. It is associated with the German law firm HEUSSEN Rechtsanwaltsgesellschaft mbH and with the Italian law firm HEUSSEN Italia Studio Legale e Tributario. HEUSSEN is an internationally oriented firm. We have vast experience in both domestic and cross-border transactions and projects. Our client base comprises large and medium sized national and multinational companies. Tim B. Schreuders (1966) is a partner in the corporate law practice and one of the firm’s founders. He is a specialist in cross-border corporate restructuring and has more than 20 years of experience in this area. Mr. Schreuders be contacted by phone on +31 (0) 20 312 2818 or alternatively via email at tim.schreuders@heussen-law.nl Expert Guide : Bankruptcy & Restructuring 2013 - 37


Spanish Financings & Events Of Default: Whe Is A Default Really A Default? By Íñigo Rubio & Ignacio Bu

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eneral overview of Spanish case law with respect to Event of Default/Early Termination clauses

In the current economic context, many Spanish borrowers and lenders are closely looking at the events of default set forth in their financing agreements to carefully assess whether they are in the verge of entering into any of those events which would allow the lenders to accelerate their facilities. In this regard, as it is international market price, financings under Spanish law include a wide array of events of default which range from, for example, breach of payment, breach of financial covenants (loan to value – LTV – or indebtedness ratios), breach of negative covenants (such as general prohibition to sell assets) or even filing for insolvency protection (including pre-insolvency under section 5bis of the Spanish Insolvency Act). A frequent question asked to Spanish counsel is; what is the “real” ability of the lender to call on the default of the loan based on the contractual events of default mutually agreed by the parties to the contract. Applying these events of default will grant the lender the ability to terminate the contract and initiate those contractual or legal actions which may be necessary to enforce its rights and get repaid (i.e., enforcement of that collateral granted as security). Even if the intuitive answer is that the contract should be the law when it comes to address the relationship between the parties and, therefore, the lender should be able to call on the default based on the early termination clauses set forth in the contract, the Spanish Supreme Court (“SSC”) case law is restrictive when it comes to admit the validity of certain events of default. In this regard, the SSC has generally admitted the validity of contractual events of default under article 1.255 of the Spanish Civil Code (principle of free will of the parties) as long as such clauses are fair (justa causa) and represent a “true and express breach of an essential obligation” under the applicable contract (i.e, the borrower defaults on payment). 38 - Expert Guide : Bankruptcy & Restructuring

In light of this general rule, the SSC has declared null and void those event of default clauses which are based on facts which constitute an irrelevant breach of contract, which exclusively depend on the lender’s will and arbitrary determination of the existence of such fact or that if applied as set forth in the contract would result on a disproportionate and unfair detriment to the borrower. Therefore, the SSC is not only focused on the literality of the clauses to determine its validity but, instead, closely analyses how these clauses are applied by the lender depending on the specific facts at hand (that is, if those clauses are applied either in a licit or abusive way).

Analysis of the validity of frequent event of default clauses under Spanish law We will now analyse specific event of default clauses which are of general use in Spanish financings (subject to Spanish law) and how Spanish case law has assessed the validity of these in light of the SSC general doctrine with respect to events of default: Breach of payment. Events of default based on breach of payment are accepted by Spanish case law, even if such breach of payment is solely with respect to one payment installment and is a punctual breach (i.e., SSC 16 December 2009 [RJ 2010/702]). However, this same case law provides that it is not valid to call on the default of a facility based exclusively on the mere delay of payment by the borrower. Breach of LTV ratio. Clauses for early termination resulting from a drop in value of the collateral granted as security (breach of LTV ratio) are


en

uil Aldana also accepted by Spanish case law (i.e., Provincial Court of Madrid, 12 November 2002 [JUR 2003\24010] and 11 May 2005, [AC 2005\832]). To keep throughout the life of the facility a proper level of security is considered to be an essential obligation of the borrower and, therefore, events of default based on LTV breaches (which precisely tackle this obligation) satisfy the criteria set forth by the SSC when assessing the validity of events of default. Moreover, as the breach of LTV ratios normally results in the obligation by the borrower to anticipatory repay the principal of the facility up to the amount necessary to rebalance the breached ratio, generally a breach of a LTV ratio can also imply the breach of a payment obligation under the relevant contract (which is, in turn, also an event of default). In contrast, the breach of other financial ratios (i.e., net financial debt/EBITDA, debt service coverage ratio) may not be considered as a valid ground for accelerating a facility because these ratios are not related to the borrower’s obligation to keep throughout the life of the facility a proper level of security and, therefore, breaching these ratios they cannot be considered an essential breach of the borrower’s obligations under the financing agreement. Material Adverse Effect/Change. Events of default based on MAE/MAC clauses are not seen favorably by Spanish case law due to its general broad terms and because it is understood that the determination of whether a MAE/MAC applies in a specific case generally depends on the lender’s sole discretion. As explained above, Spanish case law is reluctant to admit the validity of event of default clauses which are based on facts that rely heavily on the individual or arbitrary determination by the lender. Borrower’s insolvency. “Ipso facto” clauses are not accepted by section 61.3 of the Spanish Insolvency Act and are, instead, considered null avoid. However, some scholars have argued that while the borrower’s insolvency cannot operate as an automatic termination event of the facility (in light

of the general prohibition set forth by the Spanish Insolvency Act) it can be a valid event of default. However, from recent decisions it appears that the SSC is following the criteria pursuant to which section 61.3 applies both to automatic termination and events of default. Breach of negative covenants consisting on prohibition of asset disposals. In general, pursuant to the rules set forth by the Spanish Mortgage Act (Ley Hipotecaria), generic prohibitions to dispose of mortgaged assets and absolute prohibitions of asset disposals are null and void, as they are deemed to be against imperative legal rules set forth by the above referenced Act. These clauses can, instead, be accepted if included in contracts where no consideration exists, even if in these cases restrictions must be limited in time. However, certain non-absolute prohibitions to dispose of assets can be valid according to Spanish case law even if such prohibitions will have no access to the applicable property registry (sin trascendencia real) and will only have effects between the contract parties (inter partes) and not with respect to third unrelated parties (no erga omnes effect). Breach of representations (“reps”) and warranties. Spanish case law has understood that events of default based on the breach of reps and warranties are valid if this breach relates to those reps and warranties which were essential to build up the will of the lender to grant the financing (i.e., Provincial Court of Cádiz, 22 July 2004 [JUR 295712]. Cross-default. The validity of events of default based on cross-default will depend on the specific facts at hand and the relevance that the breach of that other contract by the same borrower may have for the lender and for the general confidence among the parties that should preside the life of the contract and which absence may justify the acceleration.

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Breach of other obligations under the financing agreements. Those events of default which are generic and based on the breach by the borrower of any obligations that may exist under the financing agreement, even if such obligations are not principal but secondary, are generally not accepted by Spanish case law. Conclusion Events of default based on essential obligations under the relevant financing agreements raise no concerns when it comes to call on the default of agreements subject to Spanish law. Within this category we can find the breach of payment or the breach of those ratios which tackle the minimum value that the security package must have with respect to the whole outstanding amounts under the facilities (LTV ratios). However, when it comes to other events of default, and despite the fact that they are widely use in Spanish law financings and can be considered market practice, should litigation arise in connection with these other clauses the outcome is much more uncertain. In these cases, Spanish courts would do a two-fold analysis based on the actual wording and literality of the clauses and, above all, would scrutinise how these clauses have been, or will be applied, by the lender and if such application can potentially constitute an unfair prejudice to the borrower. Therefore, even if Spain remains to be a “borrower friendly” jurisdiction (being the referenced case law an example of this assessment) it is also true that the reality of the Spanish financial practice is growingly resulting in a wider acceptance of international market standards by Spanish courts and case law which will likely result in further developments with respect to the different issues related to the validity of contractual events of default analysed in this article.

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With almost a century of professional practice and an excellent reputation, Cuatrecasas, Gonçalves Pereira provides legal advice in all areas of business law, including advice relating to financial restructuring processes, advising both debtors and creditors on issues including preliminary analysis of debt to be restructured and the options in a financial distress situation. The firm participates in all stages of Spanish and cross-border complex deals involving reorganisations, restructurings, workouts, liquidations and distressed acquisitions. For more information, visit www.cuatrecasas.com Iñigo Rubio is a partner at Cuatrecasas, Gonçalves Pereira’s London office. Mr. Rubio specialises in advising on the financing of infrastructure projects (public private partnerships and private finance initiatives) and real estate projects, whether simple, syndicated or structured (e.g., sale-and-leaseback and off-balance sheet transactions). He also has ample experience in corporate and asset finance, and debt restructuring transactions, having participated in several of the most important and complex refinancing processes in recent years. Since joining Cuatrecasas, Gonçalves Pereira in 2000, Mr. Rubio developed most of his career in the firm’s Madrid office before transferring to the London office in January 2010. Mr. Rubio can be contacted on +44 (0)20 738 20400 or by email at inigo.rubio@cuatrecasas.com Ignacio Buil Aldana is a senior associate at Cuatrecasas, Gonçalves Pereira’s Madrid office. Mr. Buil Aldana has extensive experience in financing transactions and debt restructuring operations (both judicial and out-of-court) and negotiation of financing and refinancing agreements with respect to a wide range of capital structures including the


refinancing of LBO financings, project finance, real estate finance and corporate finance. Ignacio represents both borrowers and lenders and advises financial institutions, hedge funds and private equity funds in financing and refinancing transactions and distressed investing strategies. Ignacio has also participated in several national and multijurisdictional financing transactions. Mr. Buil Aldana can be contacted on +34 915247603 or by email at ignacio.buil@cuatrecasas.com

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Guernsey Restructuring Law – A Modern Regi By Mathew Newman

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ince 2008, Guernsey has had an up to date and flexible statutory restructuring regime which is capable of dealing with all different types of modern day reorganisation and turnaround strategies. Both regimes are court-led and in our experience the Royal Court of Guernsey is more than capable of understanding the often complex arrangements that are proposed to be put in place and giving sanction to those schemes as long as creditors and members derive maximum benefit from them. Guernsey law also caters for restructurings that do not go according to plan by providing a relatively comprehensive liquidation regime that is supported by the Royal Court’s willingness to exercise its inherent jurisdiction in most circumstances where necessary to assist a liquidator in the performance of his statutory and common law functions. These regimes can perhaps be contrasted with the position prior to the coming into force of the Companies (Guernsey) Law, 2008 (“Companies Law”) when Guernsey insolvency law was largely limited in statute and relied heavily on the customary law which derives from la coutume de Normandie, the customs of medieval Normandy that still survive today. These customary law procedures have however be supplemented and, to a large extent, superseded, by the new statutory regimes that are much more recognisable to the modern day restructuring and insolvency professional. This shows a willingness and determination on the part of the Guernsey legislature and policy makers to adapt and change our legislation to suit the growing needs and requirements of the financial services industry in Guernsey. There are two principal restructuring regimes for companies in Guernsey which this article will examine in brief. We will also look summarily at the liquidation procedures available in Guernsey and the position of non-cellular companies.1

1 - Incorporated cell companies and protected cell companies. “Normal” companies are known as non-cellular companies.

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Scheme of Arrangement Guernsey law does not provide for formal company voluntary arrangements, as can be found in other jurisdictions, and a Scheme, governed by part VIII of the Companies Law, represents an excellent way of a Guernsey company reaching a formal arrangement or compromise with creditors or members in order to achieve a stated turnaround/ rescue or reconstruction strategy. The Guernsey legislation is borrowed heavily from the UK Companies Act 2006, with the same concepts and a similar process. As such, English authorities and commentary will be very persuasive and scheme documentation in Guernsey looks very similar to the sort of documentation that one would expect to see in England.

A scheme can either be creditor led or member led but what is crucial is that a proposal is put to the relevant stakeholders through a meeting summoned at the direction of the Royal Court for the purpose of approving that proposal. As in other jurisdictions, 75% of the stakeholders (or class) needs to vote in favour of the proposals and the proposals then require sanction by the Royal Court in order for them to be binding on all of the stakeholders regardless of whether they voted or not. There are specific provisions regarding company mergers and it is also possible to use a scheme to amalgamate, migrate or convert companies. Solvency is not an issue here although specific provisions are made if the company is in liquidation or administration and is proposing a scheme. Although this has not been tested yet, by doing a scheme it may be possible under the legislation for a company


ime in administration to avoid liquidation altogether and go straight into dissolution, making this the one exception to the general rule under Guernsey insolvency law that a company in administration should be placed into liquidation if the purpose of the administration order is not achieved. Administration This is an insolvency process for companies which are, or are likely to become, insolvent either on a cash flow or balance sheet basis (or both). The Guernsey procedure is based loosely on the English process as it was before 15 September 2003, whereby an application must be made to the Royal Court for an order that the company be placed into administration in order to satisfy the purposes of the survival of the company or any part of its undertaking or a better realisation than would be effected on the winding up of the company. If the court grants an application, it will appoint a nominated person to act as administrator whose job it is, as the Company’s agent, to manage the business and affairs of the company in accordance with a raft of powers set out at schedule 1 to the Companies Law. The directors’ powers do not cease but they must cooperate with the administrator and must provide a statement of the company’s affairs within 21 days. The key point about administration is that it provides the company with a moratorium from the company’s creditors. There are two important exceptions here. The first is that the moratorium does not prevent secured creditors enforcing their security rights and interests as against the company’s property, and the second is that the moratorium does not prevent creditors with rights of set off from exercising those rights as against the company and thus gaining a priority over other unsecured creditors. Therefore, the moratorium, in reality, only prevent unsecured creditors without set off rights, from taking action against the company without consent of the administration or permission of the Royal Court. In addition the company may not be wound up against without such consent or permission. The administrator’s principal function is to achieve the

purposes of the administration order and so, depending on what that is, he will either manage the business and/or attempt to maximise realisations of the company’s assets. Under Guernsey law, he has no power to distribute the company’s assets however (although the Royal Court has permitted distribution in limited circumstances). The practice has developed in Guernsey recently for the Royal Court to limit the term of the administration order to between 9 months and a year (with extensions permitted with good reason) and for the administrators to be permitted to draw their remuneration on a time costs basis without further reference to the Court. The administrator can secure his release from liability at the end of the administration when he applies to discharge the administration order, and, depending on whether the purpose of the order has been achieved, a distribution to creditors can either be effected by the company itself (acting by the directors or through a scheme of arrangement) or by a duly appointed liquidator. Liquidation If the restructuring or rescue process fails, then in normal circumstances the best course would be to place the company into liquidation. Whether the liquidation is voluntary, by way of a special resolution, or compulsory, by way of a court order, depends on whether the failure of the strategy arises out of a member-led scheme (on the one hand) or a creditor-led scheme or administration (on the other). In both circumstances though a liquidator is appointed and the company must cease to trade and conduct business unless expedient for the beneficial winding up of the company. Winding up is a terminal process and as such the liquidator’s primary function is to realise the assets and distribute to creditors pari passu and then to members in accordance with their respective rights. Generally speaking, secured creditors sit outside the liquidation and can deal with their secured assets in accordance with their security rights.

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A Guernsey liquidator of an insolvent company has express statutory powers to bring actions for preference (against, inter alia, creditors), wrongful trading, fraudulent trading and breach of fiduciary duty against directors and he also has the power to commence or continue actions that the company might otherwise have brought in its own name. He may seek directions from the court in order to perform his functions and this (potentially) may extend to seeking orders of the court compelling directors and third parties to provide him with documentation and information owned by and even relating to the company in question. The liquidator may also bring an application to disqualify directors from acting as directors of Guernsey companies.

Guernsey law does not provide for formal company voluntary arrangements, as can be found in other jurisdictions, and a Scheme, governed by part VIII of the Companies Law, represents an excellent way of a Guernsey company reaching a formal arrangement or compromise with creditors or members in order to achieve a stated turnaround/rescue or reconstruction strategy.

Liquidation is an absolute terminal process. As Guernsey law presently stands, a company which has been in liquidation and which is dissolved cannot be restored to the Register (unlike in other jurisdictions where restoration is possible). This very obvious limitation in Guernsey law is now being remedied by the legislature and reform is expected in the next 12 months.

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A Note on Cellular Companies The Companies Law provides for insolvency regimes for cellular companies as well as non-cellular companies. In most respects the regimes are the same with minor differences to take into account the cellular structure. However, cells of protected cell companies may enter into what is, perhaps misleadingly, called “receivership”, which is, in essence, akin to a liquidation. A receiver has the same powers that a liquidator has to realise assets, bring actions and distribute to creditors of the cell and the receivership is a terminal process with the cell ultimately being dissolved. Conclusion This brief note has shown that Guernsey law, and the Guernsey court, is very capable at providing a mechanism and procedure by which companies may be restructured in a formal way that is robust, stands up to scrutiny and ensures that no stakeholders can claim to be prejudiced by the proposal. Equally if things do not work out the way that was planned, Guernsey law provides an excellent winding up regime with all the modern day tools that one would expect a liquidator to have to perform his functions to the highest possible standards. Mathew Newman is a partner of Ogier Guernsey and can be contacted via email on

Mathew.newman@ogier.com

and via telephone on +44 1481 721672


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The New Ukrainian Insolvency Law: Key Issues By Olexiy Soshenko & Andrii Grebonkin

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n 19 January 2013 amendments to the insolvency laws in Ukraine became effective. While the general framework for insolvency proceedings remained the same, a number of significant amendments were made. Below we set out a summary of the most important changes. We note that the President of Ukraine requested that the government revise certain sections of the amended law and so there is a likelihood that further changes of the law will occur in the future.

or not to approve the plan if anybody does not buy out claim(s) of the dissenting secured creditor(s). The same procedure now applies to overcoming the veto of secured creditors as to an amicable settlement agreement executed during insolvency.

Changes in the Status of Secured Creditors Before 19 January 2013 it was not entirely clear whether a secured creditor could enforce its security once insolvency proceedings had commenced and the moratorium was in place. This was due to inconsistencies between the wording of the insolvency law and the enforcement law. The amendments to the insolvency laws resolved the issue by allowing a secured creditor to enforce its security after the commencement of insolvency proceedings, irrespective of the moratorium. However, in order to do this the secured creditor would need to obtain the consent of the insolvency court. Before 19 January 2013 there were no express rules on whether secured creditors were allowed to vote at creditors’ meetings. This resulted in different interpretations of the law by the courts. Under the amended law, secured creditors are explicitly prevented from voting. Under the amended law, in addition to the currently existing right to veto the amicable settlement agreement which is preserved in the amended law, the secured creditors will also have the right to veto the rehabilitation plan if the latter is prepared during the rehabilitation stage. Under the new law, should any of the secured creditors not agree with the plan, the other secured creditors may decide either to sell the collateral and satisfy the claim of such dissenting creditor or to buy the claim. The same options now exist for unsecured creditors if a secured creditor does not agree with the plan. Eventually, the court will decide whether 46 - Expert Guide : Bankruptcy & Restructuring

New Concept of Hardening Periods The amended insolvency law introduced a completely new procedure for determining which transactions made before the commencement of insolvency proceedings may be set aside. The court may, following an application from the insolvency manager or any competitive creditor, invalidate any transaction made by the debtor during the period of one year before the date of the preparatory hearing, if such transaction resulted in the debtor: • alienating its assets, incurring undertakings or waiving its proprietary claim(s) without consideration from the other party; • performing its obligations before they became due (in our view, this should not include an acceleration or mandatory prepayment of a loan but would include a voluntary prepayment of a loan); • entering into obligations as a result of which it became insolvent. This means that if a loan agreement is invalidated on this ground, the security and guarantees/sureties provided in connection with that loan will fall away; • alienating or acquiring assets not at their market value and as a result of which the debtor became insolvent; • making any cash payments or receiving payments in kind at a time when the amount of credi-


s tors’ claims exceeds the value of the debtor’s assets. This would mean that (re)payments under loans and suretyships would potentially be challengeable in the event when the value of the debtor’s assets is lower than the aggregate amount of the creditor’s claims; and • granting security.

secondary liable before third party creditors of the insolvent party if:

The amended law does not require that any additional criteria for invalidation of such transactions arise, for example, it does not expressly require evidence that the transaction resulted in preferential treatment.

Replacement of Assets as a New Restructuring Method

The result of such invalidation will be that the relevant creditor will need to release the security (if any) or return the assets it received from the debtor or compensate the debtor for the market value of such assets (should it be impossible to return them in kind) and, in the case of a loan, the debtor would need to repay the loan to the creditor. The interesting new development in the law is that creditors who have claims against a debtor as a result of the invalidation of their transaction would rank in the first rank of creditors irrespective of whether or not they had security. In particular, this would mean that if shareholders’ unsecured loans (which qualify for the 4th rank) and any secured loans are invalidated pursuant to the above provisions, then claims of both shareholders and former secured creditors would fall under the same first rank. However, if their security has fallen away, the creditor will not be treated as a “secured creditor” and so would lose its ability to block rehabilitation plan and amicable settlement agreement. On the other hand, it is not entirely clear under the insolvency law whether such former secured creditor would be able to benefit from voting rights as a result of the mentioned transformation of the claim during insolvency.

• the assets of the debtor are insufficient to satisfy the creditors’ claims in full; and • the actions of such director, shareholder or any other person resulted in the debtor’s bankruptcy.

The new law introduces a procedure for the replacement of a debtor’s assets as one of the rehabilitation options. In order to be able to implement the replacement of assets, the creditors must ensure that such arrangement is included to the rehabilitation plan which is approved by the court. This would work by permitting the debtor, during the rehabilitation phase, to incorporate a subsidiary and become its sole shareholder. In return for the shares in such entity, the debtor will be able to contribute all its assets and all its liabilities (save the liabilities to the competitive creditors) to the share capital of such entity. Subsequently, these shares may be sold and the proceeds received out of such sale used for satisfaction of the claims of the competitive creditors. On one hand, the described procedure could ease the process of satisfaction of the creditors’ claims. However, on the other hand, it would require significant preliminary work to be carried out (e.g., incorporation of a new entity, inventorying the debtors’ assets, sale of shares in the newly established subsidiary).

‘Piercing the Corporate Veil’ The new law establishes a rather revolutionary concept according to which the shareholders along with directors of the debtor may be found Expert Guide : Bankruptcy & Restructuring 2013 - 47


Olexiy Soshenko is a counsel in Clifford Chance Kyiv office and specialises in cross-border finance. Olexiy’s practice focuses on banking and finance, capital markets and secured transactions, including restructuring and refinancing. Olexiy Soshenko has over 15 years of experience of practicing law in Ukraine representing both lending institutions and borrowers in various types of financings including debt capital markets, project finance, real estate financings, acquisition finance and preexport finance, as well as M&A transactions in the banking sphere. Olexiy can be contacted by phone on +380 443 902 213 or alternatively via email at olexiy.soshenko@cliffordchance.com Andrii Grebonkin, a senior associate in Clifford Chance Kyiv. Andrii specialises in real estate transactions, bankruptcy procedures, merger & acquisitions through acquiring real estate, basic corporate matters in spheres of real estate and bankruptcy.Andrii can be contacted by phone on +380 443 902 231 or alternatively via email at Andrii.Grebonkin@cliffordchance.com Clifford Chance is one of the world’s leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The Firm has unrivalled scale and depth of legal resources across the five major regions of Africa, the Americas, Asia Pacific, Europe and the Middle East, and focuses on the core areas of commercial activity: capital markets; corporate and M&A; finance and banking; real estate; tax, 48 - Expert Guide : Bankruptcy & Restructuring

pensions and employment; litigation and dispute resolution. Clifford Chance has 35 offices in 25 countries with some 3,400 legal advisers. Clifford Chance has been advising leading local and international companies in Ukraine since 1990. In 2008 the firm has expanded its presence in the market by opening an office in Kyiv. Today Clifford Chance is one of the leading law firms in Ukraine. The Kyiv office of Clifford Chance is comprised of partners and lawyers qualified in Ukrainian and English law, who have extensive experience advising on all core areas of commercial activity, including banking and finance, debt restructurings, corporate/M&A and real estate. For further information about Clifford Chance see www.cliffordchance.com


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Restructuring and Insolvency in the UAE: Lega By James Bowden

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he legal framework governing insolvency in the UAE is primarily set out in UAE Federal Law No. 18 of 1993 promulgating the Code of Commercial Practice (the “Commercial Code”), and it has remained essentially unchanged since then. The insolvency regime set out in the Commercial Code is still largely untested in practice, because debtors and creditors tend to opt for commercially agreed solutions outside of the courts, as the court process is lengthy and cumbersome. There is an ongoing attempt to overhaul the insolvency regime in the UAE to make it more accessible, modern and efficient. This much talked about initiative is the development of a new insolvency law for the UAE which is expected to replace the existing legislation as and when it comes into force. The new legislation is expected to introduce substantial changes, including the establishment of a specialised tribunal to hear and oversee insolvency proceedings. A draft of the law has not been released publicly at the time of writing, as it has only been circulated for comment to the UAE Ministry of Finance. Our expectation is that it will be at least another 1-2 years before it is finalised and comes into force, possibly longer. Interestingly, there has been much written about the new law and conferences on the changes it will usher in have become popular in recent months. It should be borne in mind that the draft law is still at an early stage, and feedback will be provided by the Ministry of Finance as well as from each Emirate before the law is finalised, so discussions on the law and its effect are, necessarily at this stage, purely speculative. The primary challenge with this area in the UAE is the trepidation around how the UAE courts would apply and administer the provisions of the Commercial Code relating to insolvency in each case, and how long it would take for such proceedings to take their course. The regime in the Commercial Code is aimed at preventing individual proceedings against the debtor, verifying creditor claims, prioritising them and then encouraging agreement on a settlement plan among creditors. It is a time consuming process, especially so if the creditors do not agree on the settlement plan (and in

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such case liquidation of the debtor is the only option prescribed, under the supervision of a court or creditor appointed trustee). As a consequence, creditors and debtors have historically preferred to keep the negotiation and settlement process outside of the courts to the extent possible. Some anticipated benefits of the new law that practitioners are optimistic about are improved transparency and accessibility of the UAE’s insolvency regime, which, it is hoped, will also be more attractive for struggling debtors by offering an effective debtor protection mechanism. A struggling debtor will generally be more inclined to voluntarily subject itself to a statutory restructuring regime if the regime is aimed at continuity of business (under protection from creditors), so that debtors will not wait “until it is too late” (i.e., beyond saving through an effective protected restructuring) before seeking protection.

One additional challenge worth noting in the UAE is a fear of potential criminal consequences for managers or directors in an insolvency scenario, as the UAE Criminal Code provides that such individuals are subject to potential criminal liability punishable by fines and imprisonment when any of a broad spectrum of acts or oversights are committed preceding or during a bankruptcy proceeding. There is a general perception that it is better to avoid the risk of criminal liability by avoiding the bankruptcy judgment in the first place. There is also a cultural aversion to submitting to insolvency proceedings or to declaring bankruptcy which cannot be overlooked, as there is a stigma associating business failure with personal failure.


al Framework There is currently no expectation that these criminal consequences will be changed, but if struggling debtors take advantage of voluntarily applying for protection relatively early on, the pressures that give rise to poor (potentially criminal) decisions could be alleviated. What to Expect In our view it is unlikely that there will be significant developments in this practice area in the UAE in the next 3-5 years. The possible exception to this that we are aware of is the new insolvency law noted above which is currently still in draft. It is hoped that the new law will create a more accessible, predictable and transparent insolvency regime, including a component aimed at creditorprotected compositions or restructurings. Once the new law comes into force, there is no certainty that it will be well used, as parties in the UAE may continue to prefer to negotiate settlements out of court regardless of the prevailing legislation; however, at this stage the content and impact of the new law is purely speculation. James Bowden is a senior associate in the Dubai office of Afridi & Angell, a full service law firm based in the UAE. As one of the longest established firms in the UAE, Afridi & Angell has become an integral part of the country’s legal landscape, and one of the premier law firms in the region. The firm advises local, regional and international clients on a wide range of transactions and legal issues. James advises on a broad range of corporate and commercial, M&A and technology outsourcing matters in the UAE. He also co-authored the UAE chapter of The Restructuring Review 2012, among other UAE focused restructuring and insolvency articles. James Bowden can be contacted by phone on +971 4 330 3900 or alternatively via email at jbowden@afridi-angell.com Expert Guide : Bankruptcy & Restructuring 2013 - 51


Malaysia’s New Financial Services Architectur By Paul P Subramaniam

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he Malaysian financial sector is poise to experience major changes in the way financial institutions operate when the Islamic Financial Services Act 2013 (“IFSA”) and the Financial Services Act 2013 (“FSA”) come into force on their appointed date which is expected to be sometime soon.

• Stricter rules on shareholding • New and wider powers of intervention for the Bank • Greater overall corporate governance requirements on individuals and institutions

This write-up will focus only on some of the salient changes brought about by the FSA, and its effects on the non-Islamic financial services sector of Malaysia.

• Imposition of prudential requirements • Codification of directors’ duties • New criteria vis-à-vis shareholder suitability and entitlement to shareholding • Expanded reporting obligations for auditors • Consumer Protection & Proper Business Conduct • New and wider powers of intervention for the Central Bank

The FSA is a consolidation of four Acts of Parliament, now repealed (the Banking and Financial Institutions Act 1989, Payment Systems Act 2003, Insurance Act 1996 and the Exchange Control Act 1953). The new Acts, modelled after the Basel Core Principles for Effective Banking Supervision architecture a new set of dynamics for the financial services in Malaysia focussed at a greater level of transparency, accountability and governance in the management and operation of both conventional and Islamic banking in Malaysia. The FSA will also see a greater role by the Central Bank of Malaysian (Bank Negara Malaysia [“the Bank”]) in terms of regulating and supervising financial institutions, payment systems, and other relevant entities including the oversight of the money market and foreign exchange market to promote financial stability and compliance with the Shariah.

Some of the salient provisions of FSA to effect the above changes, are:

Prudential Requirements

The FSA regulates non-Islamic or conventional financial goods and service providers. Among others, directly affected by the provisions of this new Act are conventional banks, investment banks, insurance companies, payment systems operators and financial holding companies. The Act would undoubtedly impact businesses and the way they conduct themselves due to the following implications of the Acts:

Under the previous regime governed by the Banking and Financial Institutions Act 1989 (“BAFIA”), prudential requirements referred only to the maintenance of net assets depending on the nature and scale of the institution’s operations, the interests of the depositors or potential depositors, and the risks inherent in those operations, and in the operations of any other related corporation of the institution. This is now governed by Section 12 of the FSA (Requirements on minimum capital funds or surplus of assets over liabilities).

• Stricter requirements vis-à-vis consumer protection • Imposition of standards of business conduct on financial institutions etc.

The FSA regime on the other hand constitute a stepjump in regulation for the Malaysian financial system. In line with the Financial Sector Blueprint 2011 and new international standards as a result of global

Financial Services Act 2013 (FSA)

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re financial crisis, the Bank now has power to dictate what is appropriate for an institution in respect of its: • Capital adequacy • Liquidity • Corporate governance • Risk management • Related party transactions • Maintenance of reserve funds • Insurance funds • Prevention of an institution from being used, intentionally or unintentionally for criminal activities. The Bank also has the power to dictate standards which relate specifically to capital market products or capital market services (jointly with the Securities Commission of Malaysia). The FSA requires institutions to ensure that its internal policies and procedures reflect the Bank’s standards on prudential requirements. Where no standard is set by the Bank, the institution is expected to manage its business, affairs, and activities in a manner consistent with sound risk management and governance practices which are effective, accountable and transparent. The FSA expressly requires EVERY director and officer of an institution at all times to comply with such internal policies and procedures adopted. These standards will be set by the Bank in time. Directors Duties No person may be appointed as a director (or senior officer) of a licensed person without the approval of the Bank (taking into consideration the FSA’s newly expanded ‘fit and proper’ test). The Bank may decide where such requirements have been violated and may remove directors for failing to comply with the fit and proper test at any time.

ment of a licensed person may be deemed liable for any offence committed by the licensed person, where the only defence available is that the offence was committed without consent AND that due diligence was exercised to prevent its commission. Delegation to or reliance on 3rd parties is irrelevant. In addition, the FSA requires directors to disclose interests in material transactions or material arrangements to their fellow board members. The Bank may specify what constitutes a material transaction or material arrangement. Section 56 of the FSA dictates that the board of directors shall; • Set out and oversee the implementation of business and risk objectives and strategies and in doing have regard to the long term viability of the institution and reasonable standards of fair dealing; • Ensure and oversee the effective design and implementation of sound internal controls, compliance and risk management systems commensurate with the nature, scale and complexity of the business and structure of the institution; • Oversee the performance of the senior management in managing the business and affairs of the institution; and • Promote timely and effective communications between the institution and the Bank on matters affecting or that may affect the safety and soundness of the institution. Directors duties complement and do not derogate from the duties of directors under the Malaysian Companies Act 1965.

The FSA requires the board of directors to have regard to the interests of depositors and policy holders over and above the interests of shareholders. Directors, controllers, officers, partners and manageExpert Guide : Bankruptcy & Restructuring 2013 - 53


Shareholder’s Suitability and Investor’s Entitlement to Shareholding The FSA provides transparent factors for the Bank’s consideration when assessing shareholder’s suitability which include; • Character and integrity of the applicant, or its reputation for being operated in a manner that is consistent with standards of good governance and integrity (if the applicant is a body corporate) • Soundness and feasibility of the plans of the applicant for the future conduct and development of the business of the licensed person • Nature and sufficiency of the financial resources of the applicant as a source of continuing financial support to the licensed person • Business record and experience of the applicant • Whether the nature, scale, and activities of the corporate group of the applicant will impede the effective regulation and supervision of the licensed person • Whether the application will be in the best interests of Malaysia, having regard to; o The effect of the investment on the level and nature of economic activity in Malaysia; o The contribution towards enhancing international trade and investment linkages between Malaysia and other countries; o The effect of the investment on the stability of the financial system including on the conduct and behaviours that could pose a risk to the financial system; or o The degree and significance of participation of Malaysians in the financial sector. Additionally, the FSA stipulates that no investor is allowed to hold more than 10% of an institution’s 54 - Expert Guide : Bankruptcy & Restructuring

shares. Where a transaction results in a holding of more than 5% of the institution’s shares, the Bank’s approval is required. Approval is also required where an investor acquires a material interest in a corporation (the Bank may specify what constitutes material interests). Thresholds for approval of shareholding changes; • Approval required where acquisition results in an aggregate holding of interest in shares equal to or exceeding multiples of 5% • Approval required where any person gains control of a licensed institution • Approval required where disposal of shares results in an aggregate holding of shares below 50% or if such disposal results in change in control of the licensed institution. Auditors Under the FSA, auditors are now statutorily bound to report to the Bank in the event that; • There has been a non-compliance of any standards which may have a material effect on the financial position of the institution • There is any weakness in the internal controls which is relevant to the financial reporting process undertaken by the institution • The financial position of the institution is likely to be or has been materially affected by any event, conduct of activity by the institution or any weakness in the internal controls of the institution. Consumer Protection & Proper Business Conduct The FSA grants the Bank authority to undertake various actions to ensure that financial services providers are fair, responsible and professional when dealing with financial customers. The Bank may specify standards on; • Transparency and disclosure requirements


• Fairness of terms in a contract for financial services/products • Promotion of financial services or products • Provision of recommendations or advice • Complaints and dispute resolution mechanism The FSA also specifies prohibited business conduct (Schedule 7 of the FSA) where contravention may result in imprisonment not exceeding 5 years and or a fine of no more than RM 10 million, or to both. Institutions are expressly prohibited from exerting undue influence and pressure on consumers to make debt repayments and to accept unsolicited offers for financial products and services. The FSA also prohibits the following; • Engaging in conduct that is misleading or deceptive in relation to the nature, features, terms or price of financial services or products • Inducing financial consumers to do an act or omit to do an act in relation to financial services or products by o Making misleading, false or deceptive statements o Dishonestly concealing or omitting material facts o Recklessly making any statement, illustration, promise, forecast or comparison which is misleading, false or deceptive • Exerting undue pressure, influence or using or threatening to use harassment, coercion, or physical force in relation to the provision of or payment for financial services or products • Demanding payments for unsolicited financial services or products unless the financial consumer has communicated his acceptance of the offer either orally or in writing

• Exerting undue pressure on, or coercing, financial consumers to acquire financial services or products as a condition for acquiring another financial service or product • Colluding to fix or control the features or terms of financial services or products to the detriment of financial consumers, except for tariff or premium rates or policy terms approved by the Bank. Powers of the Bank Under the new regime, the Bank is endowed with wide powers to intervene in ensuring sound risk management and good governance policies. The Bank’s powers are broad, including the ability to restrict the institution from carrying on with a business arm and dispose of investments and assets if it deems necessary. Through the Bank’s ability to vet directors and senior officers, the Bank may intervene in an institution’s operations. This intervention even extends to the shareholders of institutions as the Bank now has the power to order share transfers or share issues to take place. Summary of powers of the Bank under the FSA; • Power to remove directors, CEOs, senior officers, etc • Assumption of control in certain circumstances (see Section 177) • Power to appoint a receiver and manager • Power to reduce share capital of institutions • Power to provide liquidity or financial assistance to institutions • Power to apply for winding up of institutions Section 234 of the FSA empowers the Bank to take action against individuals and corporations, where any failure to comply with provisions of the Act, directions, regulations, etc. will result in administrative action.

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Furthermore, the Bank has power to prescribe monetary penalties, as well as take action on behalf of any individual or corporation.

Bank, to ensure best practices are undertaken in the firm.

Imprisonment is only available for individuals, and the FSA provides for strict liability offences. Offenders will be deemed to have committed the offence until proven that the offence was committed without his consent and he had exercised diligence to prevent its commission. Now, individuals liable for imprisonment are not restricted to senior management, but extends to anyone who forms part of the decision making process.

Paul can be contacted via email at

An offence committed by the institution is deemed to be committed by its; • Directors; • Officers; and • Anyone concerned with planning, coordinating, directing or decision making Conclusion The new Act will undoubtedly have a profound impact on the way financial services players operate under this new architecture. We see the FSA as imposing greater requirements on financial services providers; holding companies will be required to relook at their structures; Board of Directors must now demonstrate greater involvement in implementing defensive policies and programmes to ensure compliance with the FSA’s newly imposed requirements; marketing strategies and agreements would have to be re-evaluated; and more active control and supervision by the Bank needs to be anticipated. Paul P Subramaniam is the Knowledge Management & Training Partner at Zaid Ibrahim & Co., Prior to that, he practiced as a litigation lawyer for 22 years, being involved in several significant cases. Paul now keeps the lawyers and partners updated as to changes in the law and industry which would impact our clients. He also serves as editor of our publications to our clients. In addition, Paul manages a Knowledge Database and also a Precedent 56 - Expert Guide : Bankruptcy & Restructuring

paul.p.subramaniam@zicolaw.com

and via phone at +603 20879857

Effendy Othman is one of the partners in the Litigation Practice Group at Zaid Ibrahim & Co., His special focus is in the areas of corporate insolvency and receivership, rescues and reconstructions. Effendy advises and represents clients in a wide range of commercial and corporate disputes and has considerable advocacy experience before the various courts and arbitration tribunals. Effendy can be contacted via email at effendy.othman@zicolaw.com and via phone at +603 20879844 Kishore Ramdas is an associate in the Knowledge Management & Training department at Zaid Ibrahim & Co., Kishore assists in the management of the firm’s Knowledge Database and serves as editor for the firm’s knowledge updates and publications for both internal and client circulation. He also assists Paul in training programmes for the lawyers. Effendy can be contacted via email at kishore.ramdas@zicolaw.com and via phone at +603 20879961


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A Brief Look at Suspension of Debt Payment Obligations in Indonesia By Michael S. Carl and Dewi Savitri Reni

A

s part of its groundbreaking restructuring, Indonesian shipping company PT Arpeni Pratama Ocean Line Tbk in early 2012 completed a court-supervised debt moratorium and restructuring process known as a Suspension of Debt Payment Obligations (Penundaan Kewajiban Pembayaran Utang, or “PKPU”). This was just one of the highest profile examples of this debt-restructuring tool that has gained a great deal of attention from Indonesian businesses and the courts recently. PKPU is part of Indonesia’s 2004 Bankruptcy Law and provides creditors and debtors with an avenue to avoid liquidation bankruptcy. A PKPU gives a debtor the opportunity to prepare, negotiate and submit a composition plan to its creditors for their approval. The composition plan details how outstanding debts are to be restructured and typically provides, among other things, for rescheduled and extended payment terms, perhaps with a grace period, reduced interest rates and a waiver of penalties and overdue interest. More sophisticated restructurings, including debt buybacks and equity conversions, are also possible.

As regulated under the Bankruptcy Law, a PKPU may be initiated by either the debtor or a creditor. If it is the debtor which initiates PKPU proceedings, and the debtor is a limited liability company, the debtor must first obtain the approval of its General Meeting of Shareholders. If the debtor is an individual, the debtor must obtain the consent of his or her spouse unless there is a prenuptial agreement. If it is the creditor which initiates PKPU proceedings, the shareholder approval and spousal consent requirements do not apply. A debtor’s petition for a PKPU may also originate in response to a creditor’s petition to put the debtor in liquidation bankruptcy. Where a creditor submits a petition to the Commercial Court for the debtor’s liquidation bankruptcy, the debtor may respond by petitioning the Commercial Court for a PKPU. The shareholder approval and spousal consent requirements do not apply where the debtor is responding to a creditor bankruptcy 58 - Expert Guide : Bankruptcy & Restructuring

petition. If the debtor’s PKPU petition is granted, the creditor’s bankruptcy petition is automatically stayed for the term of the PKPU.

There is no insolvency test that must be satisfied to qualify for a PKPU (or for liquidation bankruptcy, for that matter) in Indonesia. However, there are nonetheless two requirements that must be satisfied. The first requirement for a successful PKPU petition (or, again, for liquidation bankruptcy) is that the debtor have at least two outstanding debts of which at least one must be due and payable but not yet paid. The second requirement is that the unpaid debt must be capable of “simple proof.” The term “simple proof ” means that the debt must not be subject to messy contract defenses requiring complicated legal proceedings to resolve.

If it is the debtor rather than a creditor which initiates the PKPU proceedings, the debtor must additionally prove to the Court that it is unable to pay the unpaid debt. This is to ensure that the proceedings are bona fide. The Bankruptcy Law requires that a PKPU petition be submitted through a licensed advocate and that both the PKPU petitioner and its advocate sign the petition. In the event the debtor is a bank, securities company, insurance company, pension fund or state-owned enterprise, a special rule applies so that only a relevant government regulatory agency, namely Bank Indonesia, the Indonesian Capital Market and Financial Institution Supervisory Agency or the Minister of Finance, may submit the PKPU petition.


In cases where it is a creditor which submits a PKPU petition, the Court must summon the debtor not later than seven days before the first hearing. If it is the debtor which submits a PKPU petition, the debtor must provide the Court with a list of its secured and unsecured creditors, the amount of each loan and evidence of the loans. Once the PKPU is registered with the Clerk of the Court, the Court must render its decision within 20 days if the petition is submitted by a creditor or within three days if the petition is submitted by the debtor. The Bankruptcy Law divides a PKPU into two stages, a Temporary PKPU (PKPU Sementara or “PKPU-S”), potentially followed by a Permanent PKPU (PKPU Tetap or “PKPU-T”). The maximum period of a PKPU-S is 45 days from the time the PKPU petition is granted by the Commercial Court. If followed by a PKPU-T, then the maximum period for both the PKPU-S and the PKPUT together is 270 days. The Bankruptcy Law is clear that there is no appeal from a Court decision granting or rejecting a PKPU petition. If the Commercial Court grants the PKPU petition, the PKPU decision will be announced in the State Gazette and two newspapers determined by the Supervisory Judge. The newspaper announcements will include the initial schedule for the conduct of the PKPU proceedings and invite creditors to register for the PKPU. Creditors have the option whether or not they wish to register for the PKPU proceedings. If they register, they will gain the right to vote on the proposed composition plan after registering their claims and providing evidence supporting their claims for verification. Whether or not a creditor chooses to register for and participate in the PKPU, the Bankruptcy Law provides that all of the debtor’s creditors (and not just those creditors who register for and participate in the PKPU) will be bound by any composition plan which is eventually approved by those creditors who do partici-

pate in the PKPU proceedings and legalised by the Commercial Court. If the debtor submits a composition plan to creditors during the PKPU-S, the debtor may choose near the end of the PKPU-S either to put that plan to a creditor vote or to request that the creditors vote to extend the PKPU-S into a PKPU-T so that the debtor may have more time to prepare and negotiate the composition plan. Whether the vote is on a composition plan or to extend the PKPU-S into a PKPU-T, the vote is conducted by class. There are two classes, secured and unsecured creditors. The Bankruptcy Law requires that a majority in number and at least ⅔ in value of the members of each class in attendance vote to approve the composition plan or to extend the PKPU-S into a PKPU-T, as relevant. These same voting requirements apply to any subsequent debtor requests to extend the PKPU-T (up to the 270-day maximum provided by law) or to approve the composition plan during the term of the PKPU-T. Each time there is a creditor vote, the Supervisory Judge will forward the vote results to the full Panel of Judges for the PKPU proceedings for ratification. A successful vote and judicial ratification means an approved composition plan or extension of the PKPU, as relevant. By contrast, any failed vote means the Panel of Judges must terminate the PKPU proceedings and must additionally place the debtor in liquidation bankruptcy. Except in very limited circumstances, there is no second chance once creditors vote against a proposal to approve a composition plan or to extend a PKPU. The debtor must therefore be very careful in determining the timing and circumstances of any vote.

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Michael Carl is a senior foreign advisor at SSEK with nearly 20 years of experience practicing law in Southeast Asia. He specialises in securities, mergers and acquisitions, and banking transactions. He led the SSEK team that served as Indonesian counsel in the restructuring of Indonesian shipping company PT Arpeni Pratama Ocean Line, one of the most complex restructurings in Indonesian history. The Arpeni project was named Asian Restructuring Deal of the Year for 2012 by the International Financial Law Review and an Asian-MENA Counsel Deal of the Year. Michael received his J.D. in 1994 from the University of California at Berkeley (Boalt Hall) School of Law and is a member of the California State Bar. He obtained an M.A. in economics from the University of Hawaii in 1990. While in Hawaii, he was a graduate fellow at the East-West Center. Prior to entering legal practice in Singapore, Michael spent a year studying Indonesian commercial law at Gadjah Mada University in Yogyakarta. He received an Indonesian law degree in 2012 from Atma Jaya University in Jakarta. He is fluent in Indonesian and proficient in Thai. Michael Carl can be contacted by telephone on +62 21 304 16700, 521 2038 and via email on michaelcarl@ssek.com Dewi Savitri Reni is a senior associate at SSEK. Her areas of practice include debt restructuring and insolvency, oil and gas, shipping law, mergers and acquisitions, and civil litigation. She was the lead associate in the PT Arpeni Pratama Ocean Line restructuring. Vitri received her LL.B. from the University of Indonesia, where she was honored as the Leading Student for both the Faculty of Law and the university. She earned her LL.M. in 2008 from the University of California at Berkeley (Boalt Hall) School of Law, which she attended on a Fulbright scholarship. Dewi Savitri Reni can be reached by telephone on +62 21 304 16700, 521 2038 and via email on dewireni@ssek.com 60 - Expert Guide : Bankruptcy & Restructuring


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USA Otterbourg Melanie L. Cyganowski +1 212 905 3677 mcyganowski@oshr.com James M. Cretella +1 212 905 3611 jcretella@oshr.com Lloyd M. Green +1 212 905 3620 lgreen@oshr.com www.oshr.com

USA Reinhart Law Peter C. Blain +1 414 298 8129 pblain@reinhartlaw.com www.reinhartlaw.com

USA Cole Schotz Norman Pernick +1 302 651 2000 npernick@coleschotz.com David Hurst +1 646 563 8952 dhurst@coleschotz.com Therese Scheuer +1 302 651 2003 tscheuer@coleschotz.com www.coleschotz.com

USA Akerman Jules S. Cohen +1 407 423 4000 jules.cohen@akerman.com 62www.akerman.com - Expert Guide : Bankruptcy & Restructuring

The Am


mericas

Canada Dickinson Wright LLP Lisa S. Corne +1 416 646 4608 lcorne@dickinsonwright.com David P. Preger +1 416 646 4606 Dpreger@dickinsonwright.com www.dickinsonwright.com

USA Katzen & Schuricht David I. Katzen +1 925 831 8254 katzen@ksfirm.com www.ksfirm.com

Cayman Islands Walkers Neil Lupton +1 345 914 4286 neil.lupton@walkersglobal.com www.walkersglobal.com

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Euro Netherlands HEUSSEN B.V. Tim Schreuders +31 (0) 20 312 2818 tim.schreuders@heussen-law.nl www.heussen-law.nl

Guernsey Ogier Guernsey +44 1481 721672 Mathew.newman@ogier.com www.ogier.com

Ukraine Clifford Chance Olexiy Soshenko +380 443 902 213 olexiy.soshenko@cliffordchance.com Andrii Grebonkin +380 443 902 231 Andrii.Grebonkin@cliffordchance.com www.cliffordchance.com

UK & Spain Cuatrecasas, Gonçalves Pereira Iñigo Rubio +44 (0)20 738 20400 inigo.rubio@cuatrecasas.com Buil Aldana +34 915 247 603 ignacio.buil@cuatrecasas.com www.cuatrecasas.com

64 - Expert Guide : Bankruptcy & Restructuring


ope

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Middle Ea UAE Afridi & Angell James Bowden +971 4 330 3900 jbowden@afridi-angell.com www.afridi-angell.com

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ast & Asia Malaysia Zaid Ibrahim & Co. Paul P Subramaniam +603 20879857 paul.p.subramaniam@zicolaw.com Effendy Othman +603 20879844 effendy.othman@zicolaw.com Kishore Ramdas +603 20879961 kishore.ramdas@zicolaw.com www.zicolaw.com

Indonesia SSEK Michael Carl +62 21 304 16700, 521 2038 michaelcarl@ssek.com Dewi Savitri Reni +62 21 304 16700, 521 2038 dewireni@ssek.com www.ssek.com

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