Introduction
Nonconsensual third-party releases in the Chapter 15 context may be gaining traction following a recent decision by Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York. In Avanti Communications,1 Judge Glenn found that enforcement of the nonconsensual third-party releases contained in a restructuring plan formulated under the laws of the United Kingdom was appropriate. The ruling signals that comity and cooperation with foreign courts of law will be given due, but not necessarily dispositive, consideration by U.S. Bankruptcy Courts considering the recognition and enforcement of restructuring schemes under Chapter 15 of the Bankruptcy Code.
Background
Avanti Communications Group, headquartered in London, with subsidiaries across Europe and Africa, sold satellite data communications services to government and enterprise service providers. Avanti had issued senior secured notes maturing in 2021 and 2023 and had borrowed under a senior term loan.2 When the launch of two Avanti satellites was delayed, Avanti was faced with increasing financial pressure, and eventually entered into discussions with a group of its creditors in an effort to restructure its heavily levered balance sheet. The fruit of these discussions was a restructuring agreement, whereby the parties proposed to equitize the notes due 2023, and amend the notes due 2021.
This “scheme of arrangement,” as such restructuring plans are called in the United Kingdom, contemplated the exchange of Avanti’s notes due 2023 for 92.5% of Avanti’s then-issued share capital, which would be allocated on a pro rata basis to the holders of the 2023 notes. In addition to certain amendments to the indenture governing the 2021 notes, the scheme contemplated that the holders of the 2023 notes would grant releases, including the release of claims against Avanti and the guarantors of Avanti’s notes.
On Feb. 15, 2018, Avanti approached the U.K. court to effectuate the proposed scheme of arrangement and sought permission from the court to convene a meeting of creditors to consider the scheme. With the permission granted, the scheme was approved by an overwhelming 98% of the holders of the 2023 notes, the only creditors affected by the scheme. The U.K. court then sanctioned the scheme, finding, among other things, that the restructuring plan complied with applicable statutory requirements, fairly represented creditors and was one that “an intelligent and honest man, acting in respect of his interest as a creditor, might reasonably approve.”3
In order to help implement the restructuring and to prevent parties from seeking to interfere with the scheme of arrangement in U.S. courts, Avanti, through its “Foreign Representative,” turned to the Southern District of New York Bankruptcy Court and sought an order from Judge Glenn in Avanti’s Chapter 15 case recognizing and enforcing the scheme.
Court Ruling
As a preliminary matter, the Bankruptcy Court concluded that Avanti’s Foreign Representative, through its moving papers and accompanying declarations, had satisfied the gatekeeping requirement that the debtor have “either a domicile, a place of business, or property in the United States.” Avanti had paid a retainer, which was held in a New York account, to the law firm representing the Foreign Representative and the debtor. The court also noted that the indenture for the 2023 notes was governed by New York law. The court found that “[b]oth of these satisfy the ‘property in the United States’ requirement for eligibility under section 109(a).”4
After concluding that certain other procedural requirements had been met by the Foreign Representative, the court turned to the question of whether to enforce the scheme of arrangement.
Against the backdrop of the unsettled state of the law on the treatment of third-party releases in the Chapter 11 context, the Avanti court analyzed the releases under the Bankruptcy Court’s statutory authority to order relief to foreign representatives in Chapter 15 cases. The court highlighted the potentially confusing interplay between Section 1507 and Section 1521. On the one hand, Section 1521 provides, without qualification, that the Bankruptcy Court may “grant any appropriate relief” to effectuate the purpose of Chapter 15, including staying certain actions against the debtor’s property. 11 U.S.C. §1521. On the other hand, Section 1507 permits the Bankruptcy Court to “provide additional assistance” to a foreign representative if, “consistent with the principles of comity,” such relief will ensure the “just treatment of all holders of claims” and the “distribution of proceeds of the debtor’s property substantially in accordance with the order” prescribed by the Bankruptcy Code, among other things. 11 U.S.C. §1507(a), (b).
The court, pointing to a growing line of bankruptcy cases in the Southern District of New York, explained that recognizing and enforcing a foreign court’s order approving a reorganization plan is an appropriate form of relief under Section 1521 or Section 1507. In its analysis, however, the court focused closely on Section 1507 and, specifically, on the “principles of comity and cooperation with foreign courts.” Looking to the underlying legislative history, the court explained that the concept of comity had originally appeared in an earlier version of the Bankruptcy Code as only a factor to be considered by the courts, but that the concept of comity had later been moved to the introductory language of Section 1507 “to emphasize its importance.”5
In recognizing and enforcing the Avanti scheme, the court emphasized that Avanti’s affected creditors “had a full and fair opportunity to vote on, and be heard in connection with” the U.K. scheme of arrangement, and that the U.K. proceedings afforded participants appropriate due process in line with U.S. standards.6 The court also noted that in the United Kingdom, “third-party non-debtor releases are common ... particularly for releases of affiliate guarantees of the debt that is being adjusted by the scheme,” as was the case for Avanti.7 And while the scheme of arrangement contemplated a nonconsensual release of third-party guarantees with respect to the 2% of nonvoting creditors, the court determined that failing to recognize and enforce the scheme “could result in prejudicial treatment of creditors to the detriment of [Avanti’s] reorganization efforts and prevent the fair and efficient administration of the [r]estructuring.”8
Key Observations
The Avanti decision serves as a useful guide to a Bankruptcy Court’s analysis of nonconsensual third-party releases in the Chapter 15 context. The Avanti court noted the deep split among the Circuits on the issue of nonconsensual releases generally. The 5th, 9th, 10th and D.C. Circuits have held that a Bankruptcy Court may not grant third-party releases without consent, while the 2nd, 4th, 6th, 7th and 11th Circuits have allowed for nonconsensual releases in limited circumstances. But rather than weighing in directly on the propriety of granting such releases, the Avanti court looked to principles of comity and the nature of the U.K. proceedings. Because the U.K. proceedings provided a full and fair opportunity for creditors to be heard in a manner that comported with U.S. due process concepts, the court reasoned that Section 1507 was authority enough to recognize the scheme and the releases.
Before drawing overly general conclusions about nonconsensual releases in Chapter 15 cases, however, it should be noted that no objections were filed in the Bankruptcy Court against the Avanti scheme, and the scheme was supported by an overwhelming number of voting creditors. In the latter regard, the Bankruptcy Court distinguished Avanti from the 5th Circuit’s decision in In re Vitro S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012). In that case involving a Mexican restructuring scheme, 75% of voting creditors favored the plan, but the vote included a significant number of insiders claims. Under the Bankruptcy Code, insider votes are not counted. See 11 U.S.C. §1129(a)(10). The Circuit Court affirmed a Bankruptcy Court’s decision declining to enforce a Mexican reorganization plan that released certain guarantees of nondebtor U.S.-based affiliates of the Mexican debtors. In contrast, the Avanti scheme received near-unanimous support from the voting creditors, and did not rely on insider votes.9
The takeaway from Avanti must therefore be nuanced. Yes, a court in Chapter 15 proceedings will consider principles of comity in recognizing a foreign reorganization that does not fully comport with U.S. bankruptcy principles, but only up to a point. Where a court draws the line will likely depend on due process considerations, the measure of departure from U.S. law, and the particular facts and circumstances under which the foreign scheme was approved.
1 In re Avanti Commc’ns Grp. PLC, No. 18-10458 (MG), 2018 WL 1725544 (Bankr. S.D.N.Y. Apr. 9, 2018).
2 Avanti’s capital structure consisted of the senior secured term loan (with approximately $118 million outstanding), the notes maturing in 2021 (approximately $323 million outstanding) and the notes maturing in 2023 (with approximately $557 million outstanding).
3 Avanti, 2018 WL 1725544 at *5.
4 Section 109(a) states that “only a person that resides or has a domicile, a place of business, or property in the United States ... may be a debtor.” 11 U.S.C. §109(a) (emphasis added).
5 Avanti, 2018 WL 1725544 at *1, 10.
6 Id. at *12.
7 Id.
8 Id. at *13.
9 See id. at *11-12.