Previously published in the Global Insolvency & Restructuring Review 2012/13
It is very difficult for those practising in the field of cross-border insolvency and restructuring not to notice the significant moves towards international comity by various jurisdictions around the world. This is to a substantial degree influenced by the enactment of statutory frameworks for co-operation such as section 426 of the English Insolvency Act 1986 or the UNCITRAL Model law on Cross-Border Insolvency adopted by the UK and the US. Despite these statutory routes to co-operation, the use of a court's inherent jurisdiction has remained important, particularly for offshore jurisdictions such as Bermuda which has no similar statutory basis for recognising another jurisdiction's insolvency representatives or restructuring regimes. The courts in offshore jurisdictions, by the very nature of the international business in those jurisdictions, are asked very regularly to deal with cross-border issues including the extent to which they should grant remedies for the benefit of foreign appointed insolvency representatives or make orders implementing in their own jurisdiction the court approved restructuring which has taken place in a foreign jurisdiction.
The Supreme Court of Bermuda has embraced the developing law in this respect, for the most part derived from the decision of the Privy Council in Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 ("Cambridge Gas"). Cambridge Gas marked a watershed in the approach of the English-based common law to international comity in cross-border insolvency; that is, that under the common law there should be a single insolvency proceeding, be it domestic or foreign, and that therefore a foreign insolvency representative must be extended recognition and assistance by the court. The purpose of recognising and assisting the foreign representative is to permit this to happen without the trouble of having to commence a parallel domestic insolvency proceeding.
On the facts of Cambridge Gas this meant that a plan implemented under Chapter 11 of the US Bankruptcy Code in respect of an Isle of Man company could be given effect by a Manx court, at the request of a New York court, because the company and its creditors could have entered into a compromise and arrangement under Manx law which would have achieved the same result as that under the Chapter 11 plan.
The controversy arises when it comes to how far the court can go under its inherent jurisdiction in providing assistance. It is worth bearing in mind that on the facts of Cambridge Gas, in reality, there was no directly equivalent mechanism for achieving in a Manx Scheme of Arrangement what had been achieved under the Chapter 11 Plan because of the need for the consent of certain shareholders who would have had to be treated, and voted as, a separate class and whose wishes could not have been crammed down by the wishes of creditors. Yet the effect of the court's order was to treat the two mechanisms as being equivalent.
The Bermuda Court has in this same vein been increasingly willing to apply the principles in Cambridge Gas liberally; for example, in Re Founding Partners Global Fund Ltd (No2) [2011] SC (Bda) 19 Com, the Bermuda Court expressed the view that its powers under Cambridge Gas were wider than applying domestic insolvency law and could extend to empowering foreign liquidators (appointed in the Cayman Islands in that case) "to assert in Bermuda whatever claims are available under Caymanian law, provided that (a) the foreign substantive law to be applied is broadly similar to local insolvency law, and (b) the specific relief which is sought is available under local law."1
In the context of a restructuring, in In the Matter of Contel Corporation Limited [2011] Bda LR 12, the Bermuda court was asked on an ex parte application to recognise, in accordance with Cambridge Gas, a scheme of arrangement confirmed by a foreign court. The company concerned was listed on the Singapore Stock Exchange. It was incorporated in Bermuda but no parallel scheme was sought in Bermuda. The court approved the scheme relying on the "extremely wide" jurisdiction referred to in Cambridge Gas. The court appeared to be influenced by the fact that the requisite majority for approval of the scheme would have been the same as that for a scheme under Bermuda law and that there was an "extraordinarily high level of creditor participation". The court also noted that there appeared to be no indication that the absence of a parallel scheme in Bermuda was "a deliberate attempt to avoid any consequences of Bermuda law". Further, the court took into account that the scheme involved a "simple debt for equity swap", was one often approved by the Bermuda court in cross-border schemes of arrangement, and that there was no question under Bermuda law that creditors can agree this type of compromise.
Contel has not been considered in any subsequent cases; however, it would be wrong to consider it as authority for the proposition that the Bermuda court will routinely approve schemes of arrangement made in other jurisdictions. Had there been an issue as to whether the creditors would have voted differently in a Bermuda scheme, or that there was some feature of the compromise or arrangement which meant it may not have been approved by the court if it were a Bermuda scheme, then there would be a convincing basis for the court refusing to approve it.
For this and other reasons, those seeking to restructure an insolvent debtor incorporated in an offshore jurisdiction such as Bermuda, or with liabilities governed by Bermuda law, should not simply assume that they can dispense with the need for parallel proceedings in that jurisdiction. As a matter of English law (which would almost certainly be followed by the courts in Bermuda and similar British territories), whether a contractual obligation is discharged under a foreign bankruptcy law depends on the law governing that contractual obligation.2 Similarly, a discharge from a liability in tort would be valid only if it was discharged under the law governing the tort. As a consequence, a Bermudian law governed contract is not discharged as a result of a discharge in foreign insolvency proceedings, even though the discharge took place in that party's country of domicile.
The authority for this principle was laid down in a case in 1890 but does not appear to have been considered by the Bermuda courts.3 It was recently considered and upheld in the English case of Global Distressed Alpha Fund 1 Ltd Partnership v PT Backrie Investindo [2011] EWHC 256 (Comm). The case was heard by a High Court judge who regarded himself as bound to follow Gibbs, a Court of Appeal decision. The case concerned a company incorporated in Indonesia which had provided a guarantee governed by English law to which the claimant, Global, was entitled. A debt reorganisation plan in respect of the company under Indonesian law was approved by creditors and confirmed by the Indonesian court. Global could not, therefore, enforce its guarantee in Indonesia and so it commenced proceedings in England. It argued that, in accordance with the principle of Gibbs, the guarantee could only be discharged under English law and that the Indonesian plan was not effective to do so. The court accepted that the Gibbs principle was open to criticism in light of Cambridge Gas however followed it and held that the guarantee had not been discharged. The wider consequence is that a parallel restructuring process would have had to be implemented in similar circumstances in England in order to discharge an English law governed liability.
Given its liberal approach to Cambridge Gas, it would be interesting to see whether the Bermudian Court would be willing to follow Gibbs. However if the court regards Gibbs as good law, then it is possible that this could affect the exercise of the court's discretion as to the nature of the order giving assistance to a foreign restructuring.
Conceptually, the order recognising the Plan in Cambridge Gas can at the very least be regarded as serving the practical purpose of recognising a transfer in the property of those shares at the place of incorporation where the shares in the Manx company are registered. The company in Contel was a Bermuda incorporated company and presumably the order must have been directed to a similar aim, that is, to recognise that the creditors bound by the scheme had swapped their debt for equity and thereby become shareholders. It is not clear from the judgment in Contel whether the order approving the Singapore scheme in that case was intended to have some additional effect.
No doubt the debts of the company which were governed by Singapore law would be discharged by the approval of the scheme in Singapore. This would prevent such creditors proceeding against assets of the company in that and any other jurisdiction which follows the rule in Gibbs. However, where the governing law of the company's debts is a different jurisdiction, there may be a question as to whether the company's liabilities were properly discharged. Such creditors may sue in their own courts to enforce their claims against a company despite the scheme of arrangement. It would be a mistake to assume therefore that the order had the same effect for all purposes as if a parallel scheme had been implemented in Bermuda; for example, a creditor from the US, with a debt governed by US law, and not within the jurisdiction of the Singapore court, could conceivably enforce its debt in Bermuda, perhaps by appointing a liquidator over the company. It could conceivably enforce its claim against assets outside of Singapore and Bermuda.
As Lawrence Collins J (as he then was) said in the English case of In re Drax Holdings Ltd [2004] 1 WLR 1049: "In the case of a creditor's scheme, an important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made, not only by the court in the country of incorporation, but also (as here) by the courts of the country whose law governs the contractual obligations. Otherwise dissentient creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation."
A jurisdiction outside of Bermuda and Singapore may not necessarily take the Bermuda court's approval as having the same effect as if there had been a Bermuda scheme; i.e. a discharge of liabilities governed by the company's place of incorporation. Much of this could depend on the analysis under the governing law as to what can amount to a discharge of such liability. The Bermuda court recognised as much in its decision in Re Loral Space & Communications Ltd [2007] Bda LR 26 where Kawaley J (as he then was) said that the court in the place of incorporation had jurisdiction to assist a US court by giving effect to a Chapter 11 Plan in general terms but that "this should not be taken as suggesting that it may not be desirable in other cases for schemes of arrangement to be formally implemented under Bermuda law to either (a) meet the contingency that certain creditors may not be bound by the US Plan or (b) to deal in appropriate detail with unique Bermuda law issues which cannot appropriately be dealt with under the Plan."4
Similarly, when it comes to the question of whether a liquidator ought to be appointed in Bermuda over a Bermudian incorporated company, great caution ought to be exercised in assuming that this can be dispensed in favour of simply an application to the Bermuda court to recognise a foreign insolvency representative of the company; for instance, under Bermuda law as in many other jurisdictions, the fact of incorporation of a company in Bermuda means that, without a Bermuda liquidation and dissolution of such company, a creditor or shareholder may re-open the affairs of the company, long after a foreign liquidation and dissolution of such a company.
That aside, the traditional view of most common law-based jurisdictions is that the place of incorporation of a company governs the entitlement of an office-holder to collect that company's assets. It goes without saying that an order of recognition by a Bermuda court will not necessarily have any effect under the law of a third jurisdiction in which assets of the company are located. In jurisdictions which have enacted the UNCITRAL Model Law, the question of the extent of the powers to be afforded to representatives appointed in foreign insolvency proceedings is resolved by reference to the location of the insolvent debtor's Centre of Main Interest (or "COMI"). The US has enacted the Model Law in Chapter 15 of the US Bankruptcy Code. Under Article 17 of the Model Law, the foreign proceeding may be recognised as (i) a "foreign main proceeding" if it is pending in the country where the debtor has its COMI or, alternatively (ii) a "foreign non-main proceeding" if it is pending in a country where the debtor just has an "establishment". There is a presumption that the place of a debtor company's registered office (i.e., its place of incorporation) is its COMI and this confers certain statutory advantages. This is an important reason to commence insolvency proceedings in the place of incorporation, even if in parallel with other proceedings.
There are indications that this will be rewarded where that jurisdiction is an offshore one such as Bermuda. For example in the US case of Millennium Global Emerging Credit Master Fund (SDNY 11-13171, Gropper J, August 26, 2011) the court recognised the Bermuda appointed liquidators as being appointed in the COMI and emphasised the need to ensure that offshore representatives generally could have access to the US judicial system. The court said that there ought not to be, in effect, a presumption against recognition of offshore foreign representatives and that an offshore jurisdiction (in this case, that of Bermuda) should be granted comity by US courts because of its sophisticated, fair and impartial legal system.
For all of these reasons, those planning strategy in cross-border insolvency or restructuring are well advised to consider carefully the steps which ought to be taken in a debtor's place of incorporation, at least in jurisdictions such as Bermuda. The decision will be driven often by the desire for efficiency and understandably so. Much will depend upon the particular circumstances of the debtor, however efficiency must be balanced against the other equally key imperatives of certainty and finality. Indeed, in the right cases, and if there are well coordinated parallel proceedings, there will be no need for any such trade-off.
Appleby is a leading offshore provider of legal services and act on a wide range of significant and high-profile cases involving insolvency, commercial litigation, trusts disputes, funds disputes and insurance usually having a multi-jurisdictional component. Our litigation team is skilled in all types of commercial resolution and advocacy and is regularly instructed by the leading US and UK law firms, financial institutions, insurance companies as well as high net worth individuals. A key part of our practice relates to insolvencies and restructuring, be they domestic, international, contentious or non-contentious.
Footnotes
1 See paragraph 59 of the Judgment. There is support for this approach in the recent English High Court case of Schmitt v Deichmann [2012] EWHC 62 where a German administrator could rely upon English statutory provisions which did not apply to the foreign jurisdiction and had no direct equivalent in the foreign jurisdiction.
2 Lawrence Collins (ed.) Dicey, Morris & Collins, The Conflict of Laws (14th edition), Rule 200.
3 Gibbs & Sons v Societe Industrielle et Commerciale des Metaux (1890) LR 25 QBD 399 (CA).
4 See paragraph 18 of the report.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
