The Continued Evolution of Cross-border Restructurings

The cross-border restructuring landscape continues to evolve apace. Multinational companies in financial difficulties have historically relied on single-jurisdiction processes and subsequent recognition by foreign courts to implement cross-border restructurings. The need to minimise recognition risk has resulted in the rise of parallel restructuring proceedings, where the restructuring is implemented through similar tools (eg, two or more schemes of arrangement) in more than one jurisdiction. The latest iteration is the use of parallel restructuring tools in different legal systems, which are inter-conditional but based on different legal principles. This creates opportunities, but also risks, for companies seeking to restructure their liabilities in a manner which prevents enforcement attempts by holdout creditors across jurisdictions.

The Rise of Parallel Proceedings

A critical element of any restructuring is certainty of implementation. A failed restructuring may result in an insolvency and, accordingly, that risk needs to be minimised to the extent possible. Using a single process to implement a holistic restructuring of a company in financial distress circumvents the risk of irreconcilable judgments, and reduces costs as well as implementation risk. Traditionally, this has most reliably been achieved through Chapter 11 proceedings under the US Bankruptcy Code or the scheme of arrangement under the UK Companies Act. These proceedings provide tried and tested mechanisms to implement restructurings, and the low jurisdictional thresholds for both processes means that it is relatively easy for foreign companies to access such proceedings.

Where the restructuring requires recognition in other jurisdictions in which significant assets are located, or where the company or guarantors are incorporated, the “primary” proceedings would typically be followed by subsequent recognition proceedings – eg, under Chapter 15 of the US Bankruptcy Code. Recognition binds creditors and enables enforcement of the restructuring in the relevant local jurisdiction.

However, using a single process may not always be sufficient. Legal requirements under national law, uncertainty regarding local recognition, or a heightened risk of a local creditor challenge may present obstacles to implementation via a single process. The consequences of the English law “rule in Gibbs” are a prime example. The rule provides that a debt governed by one law cannot be discharged or compromised by foreign proceedings unless the creditor voluntarily submits to the foreign jurisdiction. Hence, English law-governed debt cannot be discharged or compromised by foreign restructuring proceedings unless the relevant creditor has submitted to such proceedings. Similar principles apply in other common law jurisdictions. Where part of foreign restructuring proceedings involves English law-governed debt, a foreign debtor may therefore need to implement an English law process, such as a scheme of arrangement, in parallel to a local process to ensure that all relevant liabilities are effectively compromised by the proposed restructuring and to prevent holdout creditor action.

The corporate law of the jurisdiction of the debtor’s incorporation may also necessitate the opening of local proceedings – eg, if the restructuring entails a debt-to-equity swap where the debtor is incorporated in one jurisdiction but creditors are to receive equity in a holdco incorporated in another jurisdiction. This is because amending the constitution or share capital of an overseas company or changing a foreign company’s share register may only be possible through a process in the company’s jurisdiction of incorporation.

The Growing Number of Restructuring Tools

The implementation of the EU Restructuring Directive by Member States has led to a proliferation of restructuring tools across Europe with features inspired by Chapter 11 and the UK scheme of arrangement. The aim of the Directive is to provide harmonised out-of-court restructuring procedures across Member States to address financial difficulties at an early stage of distress. These include the German StaRUG, the Dutch WHOA and the Italian concordato preventive. As a result, companies are now able to choose from a much wider range of effective and debtor-friendly rescue tools.

The majority of cases initially brought under those new regimes were domestic, without the need for cross-border recognition. However, as the number of sophisticated restructuring jurisdictions has grown, so has the number of debtors utilising them as part of parallel cross-border restructurings. This is timely, particularly in the context of the use English restructuring tools, given that Brexit has complicated the recognition of English schemes of arrangement and restructuring plans in Europe. While still possible, recognition of English restructuring tools now depends on a patchwork of domestic legislation, private international law and treaties, and may lead to different outcomes depending on the jurisdiction.

As the following examples show, however, combining different rescue tools has advantages as well as disadvantages.

Vroon Group B.V.

In May 2023, the English court approved the scheme of arrangement proposed by Lamo Holding B.V., a member of the Vroon international shipping group, which ran in parallel with a Dutch WHOA for the purpose of restructuring the group’s debt. This was the first instance of a parallel WHOA and an English scheme being used in coordination, with each of the processes being conditional on the approval of the other. The purpose of the English proceedings was to bind certain foreign creditors to the plan, and also to help facilitate the recognition of the plan in Singapore (a major international shipping hub). The WHOA and the scheme of arrangement were challenged by the company’s shareholder on account of the dilution of the shareholder’s interest because of the proposed debt-for-equity-swap, highlighting an inherent risk of running proceedings in parallel – namely that opposing parties are afforded multiple forums in which to voice their objections, and thus potentially derail the restructuring process.

Notwithstanding the scheme company’s objections that this was giving the shareholder “a second bite of the cherry”, the English judge, Mr Justice Leech, decided that the hearing should be re-listed and extended by two days to give the shareholder an opportunity to challenge the evidence put forward by the company and raise objections relating to the fairness of the scheme, on the basis that the scheme (in connection with the WHOA) had a material effect on the position of the shareholder which gave the shareholder a “sufficient interest” to be heard.

However, it is interesting to note that the court seemed unwedded to this position. Mr Justice Leech expressly stated that, in the absence of procedural rules requiring the court to give an opposing party a right to adduce evidence or cross-examine witnesses, this was a matter for the court in the exercise of its wider discretion. Further, Mr Justice Leech stated that, had the Dutch court handed down its judgment (against the shareholder) prior to the first hearing in the English court, he would have been unwilling to give the shareholder an opportunity to challenge the scheme as, in so doing, the English court would have, in essence, been permitting the shareholder to re-argue points that the Dutch court had already decided against.

Cimolai SpA

The case of Italian construction group Cimolai saw English restructuring plans running in parallel with – and being conditional upon – an Italian “concordato preventive” restructuring process. The English restructuring plans were required to compromise English law derivative contracts, and the Italian proceedings restructured the companies’ Italian law debts. Due to the Italian nexus, the restructuring was structured to ensure compliance with the Italian law hierarchy between different categories of creditors, where more senior creditors must receive greater returns than more junior creditors. This necessitated the exclusion of certain liabilities from the compromise, as well as an adaptation of creditor classes. The relevant mandatory Italian law provisions required that the unsecured portion of a secured creditor’s claim be reclassified as ranking between the secured creditors and unsecured creditors, thus creating a class of “demoted unsecured creditors”.

While the proposed restructuring plans were ultimately sanctioned by English judge Mr Justice Trower, it required the English court to grapple with Italian law statutory requirements relating to creditor prioritisation, and thus highlighted the complexity created by such parallel proceedings – ie, that while the statutory requirements in the first jurisdiction do not need to exactly marry up with those in the second (or, indeed, third) jurisdiction, they must be sufficiently compatible for the plan company to put forward a proposal with a reasonable chance of being approved, and one that will result in a coherent outcome. Ultimately, in the case of Cimolai, Mr Justice Trower acknowledged in his judgment that seeking to ensure the effectiveness of the concordato was a rational ground for approving the English restructuring plans, and that the commercial benefit of a consistent outcome in Italy and England was a compelling reason to agree with the classification of the creditors as proposed by the plan companies.

As an aside, this is also an interesting case study of the consequences of inter-conditionality of two distinct restructuring procedures (unlike, say, two parallel schemes in common law jurisdictions). This resulted in additional complexity when assessing the relevant alternative under the restructuring plans, as it was necessary for the English court to consider not only the potential consequences of the restructuring plans being rejected but also the scenario in which the concordato went ahead in any event. Ultimately, Mr Justice Trower found that the members of the non-consenting classes would be no worse off under the restructuring plans than in the relevant alternative, whichever relevant alternative prevailed. Mr Justice Trower also concluded that, although the outcome of the restructuring plan was dependent on the Italian court’s approval of the concordato (and not vice versa), the English court was not acting in vain because, in the likely scenario that the concordato was approved, the concordato and sanctioned restructuring plan would operate in conjunction to effect a coordinated cross-border restructuring process. However, this is not to say that the court will always come to this conclusion, and there may well be instances where the court requires inter-conditionality between the plans in order to overcome any question of the efficacy of the English court’s sanction of the proposed plan or scheme.

McDermott International Limited

A further example is the recent restructuring of U.S. construction and engineering group McDermott, which sought the sanction of the English court for a restructuring plan which was interdependent on the sanctioning of two parallel WHOA proceedings. The principal aim of the restructuring was to extend the maturities of the group’s secured debt as well as compromise certain unsecured debts. This case is a good example of the challenges faced by plan companies in circumstances where the parallel proceedings do not neatly interact. The timeline for an English restructuring plan is fairly rigid, and determined at the outset; this differs from a Dutch WHOA, which is more flexible and can be varied by the Dutch court as the case develops.

The WHOA process also contemplates the potential appointment of a restructuring expert either at the request of the debtor or its creditors, shareholders or employee representative bodies. The restructuring expert role includes assessing the valuation evidence submitted by the company to the court as well as the ability to put forward an alternative restructuring proposal. In the case of McDermott, a restructuring expert was appointed at the request of one of the unsecured creditors and this expert’s input resulted in a materially different restructuring being implemented compared to that initially proposed by the company. This is due to the outcome of the restructuring expert’s assessment of the valuation evidence and also to the fact that Dutch WHOAs require creditors to be treated according to (broadly speaking) absolute priority principles, which is not the case in UK restructuring plans. This highlights how a key legal principle applicable in only one jurisdiction can have an impact on the outcome of the restructuring as a whole.

The Path Forward

As the above examples show, combining different restructuring technologies requires careful advance planning and an appreciation of the potential pitfalls. However, for companies in need of reliable cross-border restructuring tools, the menu has significantly expanded beyond Chapter 11 and English restructuring processes. We expect that, as practitioners gain more experience in coordinating such proceedings, running parallel processes across different legal regimes will become more efficient. It is clear that these multi-jurisdictional processes are here to stay.