Expert Article by Selinda A. Melnik
The markets long have recognized as essential to financial transactions certainty and predictability in the application of insolvency laws. Such assurance is particularly important for transactions involving multiple nations with dissimilar domestic laws. In the face of increasingly global financial transactions, frameworks designed to better ensure certainty have been developed. Notable among these is the United Nations Model Cross-Border Insolvency Law [U.N. GAOR 52d Sess., U.N. Doc. A/52/17 (1997)] and its incorporation into domestic insolvency laws, including US Bankruptcy Code Chapter 15 and UK Cross-Border Insolvency Regulations 2006.
Central to global certainty and predictability is the expectation that the court of one country will recognize an insolvency proceeding pending in another and assist in effecting relief duly granted within that foreign proceeding, including by enforcing in the host country orders and judgments rendered by the foreign court. The UN Model Law ensures swift recognition and relief in aid of foreign insolvency proceedings if certain simple predicates are met, unless it can be shown that doing so would be manifestly contrary to the fundamental public policy of the petitioned country or would render that country’s creditors insufficiently protected. In the absence of such impediments, entertaining courts are meant to defer to the foreign country’s applicable law and due determinations, even where the result might be different under local law.
The certainty and predictability of an outcome in cross-border insolvency proceedings depends on the extent to which both advocates and the courts appreciate not only the text but also the evolution and underlying principles of the UN Model Law and its progeny. Similarly, considering the relevant laws of the foreign country at the planning stage, before commencing the domestic insolvency proceeding and thereafter throughout its course, is critical to successful foreign country enforcement of domestic insolvency determinations.
Briefly discussed below are recent UK and US court decisions viewed by a number of international insolvency practitioners as having turned the clock back on certainty and predictability in cross-border insolvencies thought to have been achieved to date.
Rubin v. Eurofinance SA/Re New Cap ReinsuranceThe Supreme Court of England and Wales recently issued a judgment in conjoined appeals (Rubin v Eurofinance SA/ Re New Cap Reinsurance [2012] UKSC 46, 24 October 2012) viewed by some as having called into question the extent to which English courts may be able or willing to grant assistance to foreign insolvency proceedings within a single ancillary proceeding bottomed on the UN Model Law. In a four-to-one majority ruling, the Supreme Court reversed decisions made by the Court of Appeal and dismissed the outcome of the Privy Council Cambridge Gas decision as wrongly decided. The judgment held that neither the UK Cross-Border Insolvency Regulations based on the UN Model Law nor the Insolvency Act of 1986 provide for special recognition and enforcement of judgments rendered in a foreign insolvency proceeding. Accordingly, a separate judgment enforcement proceeding must be commenced governed by the due process and other substantive laws and procedural rules applicable to enforcement of foreign non-insolvency judgments.
The Supreme Court stated in the judgment that the UN Model Law is not designed to provide for the enforcement of judgments. It is this unqualified statement that has been particularly concerning to the UN Model Law practitioners and scholars who critically have commented on the ruling as, among other things, facilitating economical asset recovery abroad is one of the Model Law’s core objectives. Such commentators take the position that, while the Model Law does not mandate automatic recognition and enforcement of foreign judgments, it does provide for their enforcement following the ancillary court’s Global Home Related Sites Careers Search … All LOCATIONS: GLOBAL determination that doing so does not contravene fundamental local law.
In re Elpida
Similarly, a US bankruptcy judge recently expressed the view that US Chapter 15 and the UN Model Law underpinning it do not require an ancillary court to grant comity to orders of the primary proceeding court (In re Elpida, 2012 WL 5828748 (Bankr. D. Del. Nov. 16, 2012)). The US bankruptcy court refused to enforce an order of the main proceeding Japanese court sanctioning the sale of the Japanese debtor’s assets, ruling it first must subject the sale to de novo review under US law respecting assets located within the US. The court found that “following the recognition of a main foreign proceeding, the [UN] Model Law expressly imposes the laws of the ancillary forum – not those of the foreign main proceedings – on the debtor with respect to transfers of assets located in such ancillary jurisdiction.”
While the court ultimately bottomed its decision on this statutory justification, it first explored whether and when comity and deference to main proceeding orders and laws remain operative under Chapter 15 and the UN Model Law. The court’s comity analysis and conclusions have been viewed by some as unjustifiably narrow, raising concern similar to that prompted by the interpretation of the UN Model Law in Rubin. Unlike Rubin, however, the concerning views expressed in Elpida did not determine the outcome; nor were they rendered by a court of last appeal. The opinions of one US bankruptcy judge have no binding effect on any other US bankruptcy judge.
In the matter of Vitro SAB DE CV
In a 60-page opinion, the United States Court of Appeal for the Fifth Judicial Circuit recently affirmed a US bankruptcy court determination that a US$3.4 billion restructuring plan approved by a Mexican court was unenforceable in the United States under Chapter 15 because it was “manifestly contrary to the public policy of the United States” (In the Matter of Vitro SAB DE CV, 2012 WL 5935630 (5th Cir. Nov. 28, 2012). Among other reasons, the Mexican plan was found to violate the US “absolute priority rule” which provides a hierarchy of stakeholders, each rung of which must receive the equivalent of 100 percent in value on their claims unless they agree to receive otherwise before stakeholders on the next rung down may receive anything on their claims. Shareholders in a company generally are not entitled to any recovery under US bankruptcy law unless the claims of all creditors are first satisfied in full. The court found that under the Mexican plan shareholders retained more than US$500 million in value despite higher-ranking creditors receiving a recovery of only 40 percent on their claims. The court also determined that, among other things, the plan extinguished guarantee claims of US bondholders in violation of US law and that there was evidence of suspect voting on the plan.
This article was first published in ‘Global Insight’, our e-newsletter which includes news, views and analysis from our Global Restructuring Group.