1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
- At the federal level, the main US legislation governing the substantive law of restructuring and insolvency is the US Bankruptcy Code, codified at 11 USC §§ 101–1532. The Bankruptcy Code comprises several chapters governing different types of bankruptcy cases, as follows:
- Chapter 7 (liquidation);
- Chapter 9 (municipalities);
- Chapter 11 (reorganisation);
- Chapter 12 (family farmers or fishermen);
- Chapter 13 (individuals with regular income); and
- Chapter 15 (ancillary and other cross-border cases).
- Certain types of businesses are not eligible for relief under the Bankruptcy Code, such as insurance companies and savings banks. The code further contains special provisions addressing the insolvency of stockbrokers, commodity brokers, clearing banks and railroads.
- Procedural legislation is contained in the Federal Rules of Bankruptcy Procedure.
- Legislation governing the appointment and terms of bankruptcy judges, the organisation of the bankruptcy courts and various other administrative and ancillary aspects are contained in other parts of the US Code:
- Title 28 (Judicial Code);
- Title 26 (Internal Revenue Code); and
- Title 18 (Crimes and Criminal Procedure).
- State law is applied in bankruptcy cases to determine:
- property rights;
- contract rights; and
- other non-bankruptcy matters that are in dispute in a bankruptcy case.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
The United States adopted the UNCITRAL Model Law on Cross-Border Insolvency in 2005 as Chapter 15 of the Bankruptcy Code.
Section 1782 of Title 28 of the US Code provides a separate and independent basis to seek and obtain discovery in the US for use in a foreign proceeding (28 USC §1782).
The United States is party to the Hague Convention providing for service of process and other documents on parties in other countries that are party to the convention without going through formal diplomatic channels.
1.3 Do any special regimes apply in specific sectors?
Certain municipalities and businesses are not eligible for relief under the Bankruptcy Code, as follows:
- states and the District of Columbia;
- insurance companies; and
- most banks.
There is no insolvency or restructuring regime for states or the District of Columbia.
In 2016, the US Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), providing an insolvency regime for Puerto Rico, which is a US territory. PROMESA contemplates that other US territories may be designated as being covered by the law.
The insolvency of insurance companies is governed by state law, principally under one of three model laws:
- the Uniform Insurers Liquidation Act;
- the Insurers Rehabilitation and Liquidation Model Act; and
- the Insurer Receivership Model Act.
Bank insolvencies are generally governed by the Federal Deposit Insurance Act (Title 12 of the US Code).
As noted in question 1.1, the Bankruptcy Code contains special provisions for the liquidation of stockbrokers, commodity brokers, and clearing banks. These provisions incorporate other federal laws – namely:
- the Securities Investor Protection Act (for stockbrokers);
- the Commodity Exchange Act (for commodity brokers); and
- the Federal Deposit Insurance Act and the Federal Deposit Insurance Corporation Improvement Act (for clearing banks).
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
The Bankruptcy Code seeks to strike a balance between the rights of creditors and debtors. However, a principal tenet of the code is to provide an honest debtor with 'breathing room' from the collection efforts of its creditors and a 'fresh start' to continue operating its business.
The code provides extraordinary powers to debtors that are not available outside of bankruptcy, such as:
- keeping management in place as debtor in possession (unless cause exists to appoint a trustee);
- imposing an automatic stay that enjoins most creditor enforcement action;
- rejecting burdensome contracts and leases;
- avoiding (ie, unwinding) certain pre-bankruptcy transactions;
- extending maturities and modifying repayment terms of secured debt; and
- having an exclusive period in which to propose a restructuring plan.
Creditors may seek to limit certain of the debtor's extraordinary powers if they are being abused or not exercised in good faith. Creditors also have rights to protect their interests in a bankruptcy case, including:
- the formation of an unsecured creditors committee;
- the right to pro rata treatment with similarly situated creditors;
- the right to receive at least as much in reorganisation as in liquidation;
- the priority of claims arising during bankruptcy;
- adequate protection of secured creditors' interest in collateral;
- the right of secured creditors to receive the 'indubitable equivalent' of the amount of their secured claim under a plan;
- the right of lessors to receive current rent during a bankruptcy case;
- the right of parties to certain financial contracts to terminate and offset claims; and
- the right of aircraft lessors and financers to recover their equipment.
In practice, and considering the overriding goal of giving an honest debtor a fresh start, bankruptcy judges interpreting and applying the Bankruptcy Code tend to be deferential toward debtors, unless there are clear reasons not to be.
1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?
The US legal regime and infrastructure for restructuring and insolvency are very well established.
The Bankruptcy Code was enacted in 1978 and has had only two significant changes:
- in 1984, to address the jurisdiction of bankruptcy courts following a US Supreme Court ruling (Northern Pipeline Constr Co v Marathon Pipeline Co); and
- in 2005, principally to address certain consumer bankruptcy issues.
There is a large, well-developed, stable, consistent and reliable body of bankruptcy jurisprudence under the code such that legal practitioners, advisers and parties can have a good sense of the strengths and weaknesses of their positions in negotiating to restructure obligations of financially distressed businesses.
Chapter 11, which governs reorganisations under the code, has been a model for bankruptcy law reforms in other countries.
Bankruptcy courts are specialised and function as adjuncts to the US district courts in the US federal judicial system. Bankruptcy judges are also specialised and preside exclusively over bankruptcy cases, although they also decide non-bankruptcy matters that arise in or are related to bankruptcy cases.
Most full-service law firms have specialised bankruptcy practice groups and there are many bankruptcy boutique law firms that only practise bankruptcy law. Most investment banks and financial advisory firms also have specialised bankruptcy and restructuring teams.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
A very wide variety of real and personal property serves as collateral security in the United States, including:
- contract rights;
- intellectual property;
- developed and undeveloped real estate; and
There is almost no property that cannot be used as collateral security in the United States.
There is some controversy about whether legal claims (causes of action) can be used as collateral security; but the current trend and the growth of the legal funding industry suggests that they can, provided that certain ethical guidelines are present in these transactions.
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
Security interests in personal property are generally enforced pursuant to provisions in Article 9 of the Uniform Commercial Code (UCC). The UCC is a model law that has been adopted, with some modifications, in all 50 US states. Upon a default by a debtor, Article 9 of the UCC, titled "Secured Transactions", allows a secured creditor to sell personal property collateral in a "commercially reasonable manner" without judicial oversight. Unless the property is a type that is sold on a recognised market where values are easily ascertained, the sale must be public. The creditor is allowed to credit bid its claim at such public sale. If the sale is to a third party for an amount greater than the creditor's claim, the debtor is entitled to the excess proceeds.
Real property foreclosure procedures vary from state to state and almost always involve judicial process.
Factors that could complicate or prevent a creditor from exercising default remedies include the following:
- A bankruptcy filing gives the debtor an automatic stay (ie, injunction) immediately stopping enforcement actions;
- The debtor can go to court seeking to enjoin a UCC sale;
- After a UCC sale, the debtor can commence legal action claiming that the sale was not commercially reasonable; and
- Because real property foreclosure is a judicial process, the debtor has an opportunity to respond to and challenge a foreclosure action in court.
3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?
Informal workouts are available and are frequently used in the United States. Informal workouts may be used in tandem with, and as a predicate to, formal proceedings.
Informal workouts may be initiated by the debtor or by one or more major creditors working as an ad hoc committee. Ad hoc committees typically comprise a debtor's largest bondholders and/or syndicated bank lenders. If there is a large number of holders and lenders, the ad hoc committee will designate a steering committee to negotiate with the debtor and report back to the group. The committees engage counsel to advise on legal rights and help document forbearance and restructuring agreements; and financial advisers run financial models to formulate and test restructuring proposals.
Because informal workouts are confidential and involve sharing material non-public information about the debtor, participating investment firms must take measures to ensure that their firms are not restricted from trading. These measures include screening procedures between the trading desk and the workout team, and can also require the debtor to 'cleanse' the information by making it public on an agreed date if a restructuring has not been agreed by then.
Out-of-court workouts often result in a restructuring support agreement (RSA) in which the major creditor constituents agree to support a restructuring plan. If the number of creditors and/or amount of debt signing up to the RSA is insufficient to bind all creditors pursuant to the bond indenture or credit facility, the parties agree to a voluntary bankruptcy filing of the debtor where the plan can be confirmed over the objection of dissenting creditors.
The benefit of informal workouts is the ability of the parties to control the outcome in private, confidential negotiations. Drawbacks include:
- the ability of minority holders/lenders whose agreement is needed to 'hold out' and demand better treatment; and
- 'free riders' that do not participate, but gain the post-restructuring benefit of a financially healthier debtor.
3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
Formal restructuring proceedings in the United States for most business types are under Chapter 7 (liquidation) and Chapter 11 (reorganisation) of the Bankruptcy Code. The benefits of formal proceedings under the Bankruptcy Code include:
- the ability to bind dissenting minority creditors;
- a central judicial forum with nationwide jurisdiction for resolving all disputes arising in or related to the proceeding; and
- a well-developed body of law.
The drawbacks include:
- uncertainty as to how a particular judge will rule in a close case or where the law is unsettled;
- the presence of a public forum in which creditors and other parties have standing to disrupt an otherwise consensual restructuring; and
- delay in jurisdictions where courts have voluminous dockets.
3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
Formal restructuring proceedings can be commenced voluntarily by the debtor or involuntarily by creditors. In either case, the filing of a bankruptcy petition must be made in good faith, although the Bankruptcy Code does not define what constitutes 'good faith'.
While insolvency is not a requirement for a voluntary bankruptcy, the debtor must have a legitimate need to restructure its debts – for example, it may:
- have upcoming maturities;
- be experiencing adverse market conditions; or
- otherwise have a valid reason to seek relief.
Debtors should not be able to maintain a bankruptcy case solely as a litigation tactic or to frustrate the legitimate rights of creditors.
An involuntary bankruptcy may be commenced:
- by three or more creditors holding claims in an aggregate amount of at least $15,775 if the debtor has 12 or more creditors; or
- by fewer than three creditors holding aggregate claims in such amount if the debtor has fewer than 12 creditors.
The debtor may file a response challenging the involuntary petition, in which case the court will conduct a hearing to determine whether the case should proceed or be dismissed.
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
Filing of a bankruptcy petition in the United States, whether voluntary or involuntary, gives rise to an automatic stay immediately enjoining most creditor enforcement actions. The debtor has the exclusive right to file a restructuring plan during the first 120 days of the case, unless the court terminates exclusivity for cause upon request of a creditor.
Certain types of creditors have special rights to be paid current during the bankruptcy case such as landlords and aircraft lessors and financers. The costs of goods and services provided to the debtor during the bankruptcy case are treated as administrative claims with priority over general unsecured claims and must be paid in the ordinary course of business during the case or on the effective date of a plan.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Yes, the commencement of formal bankruptcy proceedings by filing a petition gives rise to an automatic stay effectively enjoining most creditor enforcement actions.
There are numerous exceptions to the stay. The most common exceptions include:
- actions to enforce domestic support obligations and other matrimonial proceedings;
- enforcement of government police or regulatory powers;
- contractual rights of counterparties to certain financial contracts to terminate, net and offset claims; and
- certain tax proceedings.
Creditors may ask the court to lift or modify the stay upon a showing of cause.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
Formal bankruptcy proceedings under Chapter 11 of the Bankruptcy Code typically begin with 'first-day' substantive and administrative motions such as:
- approval for financing (debtor-in-possession financing and/or use of cash collateral);
- joint administration of affiliated debtor cases;
- retention of counsel and other professionals;
- payment of pre-bankruptcy employee wages up to a prescribed amount; and
- other motions needed to maintain the debtor's business and facilitate a smooth transition to Chapter 11.
Within the first several days of a Chapter 11 case, the Office of the United States Trustee (a division of the Department of Justice) will appoint an official committee of unsecured creditors comprising the largest creditors willing to serve. The size of the creditors' committee depends on the size of the case – there may be as few as three or as many as 11 or more – but there is ordinarily an odd number to avoid voting deadlocks.
During the first 120 days of the case, the debtor has the exclusive right to propose a restructuring plan. Courts will typically extend the debtor's 'exclusivity period', but the Bankruptcy Code prohibits extending it longer than 18 months after the date on which the case was commenced. The parties may also seek to terminate exclusivity if the debtor is not making progress on formulating a plan.
The key milestones in a Chapter 11 case are as follows:
- Petition date: The date on which a bankruptcy petition is filed commencing a case.
- First day hearing: Usually a day or two after the petition date.
- Formation of unsecured creditors' committee: Usually within the first seven to 10 days after the petition date.
- Bar date: The deadline for creditors to submit proofs of claim. Failure to submit a claim by the bar date results in forfeiture of the claim, unless the creditor can demonstrate 'excusable neglect', which is a high bar.
- Submission of plan and disclosure statement.
- Confirmation hearing.
- Effective date of the plan.
There is no typical or likely length of time for a Chapter 11 case. While statistics show that the average Chapter 11 case take between seven and 10 months, some cases have been confirmed as quickly as one day, while others take years. In recent years, debtors, bankruptcy attorneys and other advisers started negotiating plans with creditors and obtaining the necessary votes for confirmation before filing a bankruptcy petition, and then asking the court to confirm the case. Notable cases include:
- Roust Corp (one week);
- Sunguard Availability Services (20 hours); and
- FullBeauty Brands (22 hours).
3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.
In informal restructuring, a proactive debtor will engage with its creditors and facilitate the formation of an ad hoc creditor group to negotiate a resolution of its debt obligations. In most Chapter 11 cases, the debtor's management remains in place as 'debtor in possession' (DIP) during the case, unless a trustee is appointed due to fraud or mismanagement.
(b) Directors of the debtor
Directors maintain their positions and their governance rights during restructuring and in formal bankruptcy proceedings. There is case law in the United States limiting directors' governance rights when they exercise them in ways that interfere with the restructuring. Under the law of most (if not all) states, directors must affirmatively authorise management to commence a voluntary bankruptcy case and pass other resolutions authorising retention of professionals and financing for the case.
(c) Shareholders of the debtor
Shareholders generally do not have a role in a restructuring unless they can demonstrate that the shares have or may have value if certain claims are reduced or eliminated. In Chapter 11 cases where such a showing is made, the bankruptcy court may appoint an official equity committee to represent the interests of all shareholders.
(d) Secured creditors
Secured creditors – especially those with liens on substantially all the debtor's assets – play a significant role in restructuring. Secured lenders are often a source of DIP financing and in most cases their consent is required for the debtor to use cash collateral. Secured creditors are entitled to 'adequate protection' from decline in the value of their collateral during a bankruptcy case. Secured creditors are also entitled to receive the 'indubitable equivalent' of the value of their collateral on the effective date of a plan.
(e) Unsecured creditors
Unsecured creditors also have a significant role in a bankruptcy case. In Chapter 11, the interests of unsecured creditors are represented by an official committee with standing to be heard on nearly all issues. Unsecured creditors must file proofs of claim to participate in distributions under a Chapter 11 plan.
For a debtor that is an operating company, employees are essential to the continuation and thus the reorganisation of the debtor. In addition to their pre-bankruptcy wages being entitled to priority over general unsecured claims, debtors in Chapter 11 often seek approval of retention and incentive plans to keep employees from leaving during bankruptcy.
(g) Pension creditors
The interests of pension creditors are largely represented by the Pension Benefits Guaranty Corporation (PBGC), an agency of the federal government. In cases where debtors have significant pension obligations, PBGC is often appointed to the official unsecured creditors' committee
(h) Insolvency officeholder
There is no specifically designated 'insolvency officeholder', but many companies in restructuring appoint a chief restructuring officer. In Chapter 11 cases where management has committed fraud or mismanagement, a trustee can be appointed. In cases under Chapter 7, a trustee is always appointed to liquidate the debtor's assets.
The bankruptcy court presides over the administration of the case and serves as a central forum:
- resolving all disputes;
- ruling on all motions;
- assuring that the case proceeds at an appropriate pace; and
- ultimately confirming a plan.
Chapter 11 plans frequently provide that the bankruptcy court retains post-confirmation jurisdiction to resolve ongoing disputes (ie, claims resolution) and enforce the plan.
3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?
Cramdown is available in Chapter 11 cases. The Bankruptcy Code provides certain safeguards to protect the value of secured claims, assure that unsecured creditors receive at least as much in reorganisation as in liquidation and no creditor is subject to unfair discrimination
A plan can be confirmed even if a class of claims rejects it provided that another class of claims that is 'impaired' (not receiving 100% payment) votes to accept it.
Creditors are separated into classes for purposes of voting on a Chapter 11 plan. The Bankruptcy Code provides that a claim can be placed in a class only if it is substantially similar to other claims in the class. For example, a general unsecured claim can only be classified with other general unsecured claims. However, the code does not, by its terms, require that all similar claims be placed in the same class. Debtors and other plan proponents have used this to manipulate or 'gerrymander' classification in attempts to disenfranchise certain creditors.
Subject to cramdown, confirmation of a Chapter 11 plan requires that creditors holding at least two-thirds in amount and more than one-half in number of claims in each class that vote have accepted the plan.
Cross-class cramdown is not available in the United States.
3.9 Can restructuring proceedings be used to compromise secured debt?
Yes. Under the Bankruptcy Code, the amount of a secured creditor's secured claim is limited to the value of the collateral securing it. The amount of the claim that exceeds such value is unsecured. Secured creditors are entitled to 'adequate protection' against a decline in the value of collateral during the bankruptcy case.
A Chapter 11 plan can:
- extend the maturity of secured debt;
- reduce interest rates; and
- modify interest and amortisation payments over the objection of secured creditors, provided that the present value of such modified debt on the effective date of the plan is equivalent to the secured amount of the claim.
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
Yes. The Bankruptcy Code gives the debtor the ability to assume (continue to perform) or reject (disclaim) executory contracts and unexpired leases. The phrase 'executory contracts' is not defined in the Bankruptcy Code, but is generally understood to mean a contract on which material performance remains due by both parties.
If the debtor rejects a contract or lease, it is treated as having been breached at the moment before the bankruptcy petition was filed giving the counterparty an unsecured claim for damages. If the debtor assumes the contract or lease, the debtor must cure all monetary defaults and continue to perform the contract or lease as written; and any post-assumption breach entitles the counterparty to an administrative priority claim that is paid ahead of general unsecured claims.
The debtor may also assume and assign contracts and leases to third parties, in most cases even if the contract or lease contains an anti-assignment provision.
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
Generally, the discharge of a debtor's liability in bankruptcy does not affect the liability of guarantors or co-obligors. Also, most Chapter 11 plans include exculpation provisions prohibiting claims against the debtor's advisers for activities during the bankruptcy case.
The propriety and enforceability of so-called 'third-party' releases of the debtor's principals, shareholders and affiliates are currently highly controversial and unsettled issues in the United States.
3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?
Yes. DIP (or post-petition) financing is specifically authorised under the Bankruptcy Code. Claims of DIP lenders are entitled to 'super-priority' status, meaning that they must be paid ahead of all other claims.
3.13 How do restructuring proceedings conclude?
A Chapter 11 case is concluded when a plan becomes effective – that is, when all conditions to effectiveness have been satisfied or waived and distributions to creditors have been made. The plan may provide that the bankruptcy court retains jurisdictions to hear and determine certain ongoing matters (ie, claims resolution) and to enforce the plan.
4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
Businesses can wind down and dissolve under state law or file for liquidation under Chapter 7 of the Bankruptcy Code. Liquidation is also possible under Chapter 11. State law dissolution varies from state to state, with varying degrees of protection for principals, shareholders and affiliates. Chapter 7 may be more expensive than state dissolution, but it offers greater protection as bankruptcy courts have nationwide jurisdiction and provide a central forum for resolving all disputes.
Liquidation under Chapter 7 always requires the appointment of a trustee; whereas liquidation under Chapter 11 allows management to remain in place as debtor in possession (DIP).
4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?
The initiation of liquidation is the same as restructuring. Chapter 7 trustees are usually appointed by the bankruptcy court.
4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
Same as restructuring.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Same as restructuring.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
Same as restructuring but with fewer milestones. There is no creditors' committee in Chapter 7 and the plan is a simple liquidation of the debtor's assets, release of collateral to secured creditors and pro rata distribution to unsecured creditors.
4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.
Many of the roles, rights and responsibilities of stakeholders are the same in restructuring (ie, reorganisation) and insolvency (ie, liquidation) with the following differences.
In formal Chapter 7 liquidation, a trustee is appointed and assumes the debtor's duties. Although the trustee's principal duty is to liquidate the debtor's assets and distribute the proceeds to creditors, the trustee may be authorised to operate the debtor's business for a short period of time if doing so will enhance creditor recoveries. The debtor's management may be asked to assist the trustee to locate records and provide background information.
(b) Directors of the debtor
(c) Shareholders of the debtor
(d) Secured creditors
Depending on the value of their collateral, secured creditors will receive either possession of their collateral or the proceeds of a sale of their collateral by the trustee.
(e) Unsecured creditors
Same as restructuring, except there is rarely an official committee in Chapter 7 liquidation and such committees have a more limited role.
The Chapter 7 trustee administers the bankruptcy estate.
None, unless the trustee is authorised to operate the business.
(h) Pension creditors
Same as in restructuring.
(i) Insolvency officeholder
Same as in restructuring.
4.7 What is the process for filing claims in the insolvency proceedings?
The bankruptcy court will set a 'bar date' as a deadline for filing proofs of claim. Creditors that fail to file claims by the bar date forfeit their claims. Late filed claims may be permitted if the claimant did not receive notice of the bar date but are treated lower in priority.
4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?
Administrative claims (ie, claims arising during the proceedings) have highest priority, followed by unsecured claims. To the extent that funds are available, unsecured creditors may receive interest accrued during the proceedings. Any funds remaining after distribution to creditors are for the debtor. Typically, there are no 'super-priority' claims in Chapter 7 liquidation proceedings.
Equitable subordination and statutory subordination are available in both liquidation and restructuring proceedings.
4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
Generally, counterparties may not terminate contracts without obtaining relief from the automatic stay from the court. Counterparties to certain financial contracts (ie. Swaps, repurchase agreement, securities contracts) may terminate without regard to the automatic stay. Similar to restructuring, executory contracts and unexpired leases can be assumed, rejected or assigned. Set-off is enforceable in insolvency proceedings to the same extent that it is enforceable under non-bankruptcy law (ie, contractual and common law setoff is available).
4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?
Yes, pre-insolvency transactions can be challenged and set aside on various grounds including preference, fraudulent transfer and the trustee's 'strong-arm' powers. Preferences are pre-bankruptcy transfers that allow creditors to receive more than their pro rata share. The look-back period is 90 days for non-insiders and one year for insiders. Fraudulent transfers are pre-bankruptcy transfers made either with actual intent to defraud other creditors or for less than reasonably equivalent value in exchange. The look-back period is two years. The 'strong-arm' provision of the Bankruptcy Code permits trustees to use non-bankruptcy law (ie, state law) to set aside pre-bankruptcy transactions. Look-back periods vary from state to state, but are generally four to six years for fraudulent transfers.
Defences for preferences include:
- giving new value to the debtor after the transfer; or
- showing that the transfer was made in the ordinary course of business.
The defence for fraudulent transfer is that reasonably equivalent value was given in exchange for the transfer.
4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
Chapter 7 proceedings are concluded when all property of the debtor is liquidated (ie, the proceeds of sale are distributed to the creditors and any remaining property is abandoned to the debtor), and the bankruptcy court enters a discharge order and final decree. The discharge order is intended to protect the debtor from pre-liquidation liabilities.
5 Cross-border / Groups
5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?
Yes. Foreign debtors can commence ancillary proceedings in the United States under Chapter 15 of the Bankruptcy Code or plenary proceedings under Chapter 11.
5.2 Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
The UNCITRAL Model Law on Cross Border Insolvency was adopted by the United States in 2005 with the enactment of Chapter 15 of the Bankruptcy Code. The UNCITRAL Model Law on Insolvency-Related Judgments has not been adopted and there is no public information indicating that it is being considered.
5.3 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?
Under Chapter 15 of the Bankruptcy Code, a foreign proceeding will be recognised if it is a collective judicial or administrative proceeding under a law relating to insolvency or adjustment of debt, the petition is filed by a person or body authorised in a foreign proceeding to administer the reorganisation or liquidation, and the petition is accompanied by certain enumerated documents.
5.4 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
US court cooperation with foreign courts is one of the principal objectives of Chapter 15 of the Bankruptcy Code, which provides that the court will cooperate "to the maximum extent possible with a foreign court" and is entitled to communicate directly with a foreign court.
5.5 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?
Bankruptcy filings by affiliated debtors are common in the United States. Although each debtor must file a separate petition, affiliated debtor cases typically are jointly administered, with one case designated as the lead where pleadings relating to any of the debtors can be filed. The jointly administered cases are presided over by one judge.
5.6 Is your country considering adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?
There is no public information indicating that adoption of the UNCITRAL Model Law on Enterprise Group Insolvency presently is being considered in the United States.
5.7 How is the debtor's centre of main interests determined in your jurisdiction?
Under Chapter 15 of the Bankruptcy Code: "In the absence of evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor's main interests." The presumption may be rebutted by evidence that a different location is the debtor's center of main interest. Courts consider factors such as:
- the location of the debtor's headquarters, managers, employees, investors, primary assets and creditors; and
- the jurisdiction whose law would apply to most of the debtor's disputes.
5.8 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
In plenary proceedings under the Bankruptcy Code, similarly situated creditors are treated in a similar manner regardless of where they are from.
6 Liability risk
6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?
While there is no clear legal standard, directors and officers of a company operating in the 'zone of insolvency' should assume that their fiduciary duties extend to all stakeholders' interests. Directors and officers of US companies do not incur personal liability for operating while insolvent. While there is no express legal obligation to commence insolvency proceedings at any particular time, directors and officers may be liable if their failure to commence insolvency proceedings is found to be a breach their fiduciary duties.
6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?
Directors and officers may be personally liable if their actions or omissions regarding the debtor's insolvency are found to be a breach of their fiduciary duties. Directors and officers may also be personally liable for taxes that are withheld from employees and not remitted to the proper taxing authorities.
6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?
Yes. Lenders may incur liability if they take actions beyond legitimate exercise of remedies or protection of their rights and affirmatively interfere with the debtor's business operations or decisions to the detriment of the debtor and its other stakeholders. Shareholder liability is rare for public companies, although majority shareholders that interfere with the debtor's business may incur liability to minority shareholders.
7 The Covid-19 pandemic
7.1 Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what is their effect and are they temporary or permanent?
Just before the COVID-19 pandemic, Congress enacted the Small Business Reorganization Act (SBRA) creating Subchapter 5 of Chapter 11 and providing a streamlined and more economically feasible alternative to Chapter 11 for small businesses. The SBRA became effective in February 2020. Initially, a business could elect restructuring under Subchapter 5 if it had non-contingent secured and unsecured debt of less than $2,725,625. In response to the pandemic, in March 2020 Congress increased the debt ceiling to $7.5 million. In June 2022, the higher debt ceiling was extended for two years.
Subchapter 5 is being used successfully by small business debtors.
8.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?
Yes. Chapter 11 cases are frequently commenced with a proposed asset purchase agreement with a 'stalking horse' bidder having been negotiated in advance. Such sales are subject to higher and better bids requiring an auction, subject to court-approved bidding procedures, if there are competing bidders. Under the Bankruptcy Code, a debtor can sell assets free and clear of liens, with the liens attaching to the proceeds of the sale.
8.2 Is "credit bidding" permitted?
Yes. The Bankruptcy Code contains a specific provision permitting secured creditors to credit bid the secured amount of their claims.
9 Trends and predictions
9.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Restructuring and insolvency work is expected to increase as inflation and rising interest rates make it more difficult for businesses to maintain profitability and refinance maturing debt.
There is currently no public indication of major legislative reforms.
10 Tips and traps
10.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?
Planning is key to successful restructuring. When possible, retain legal, financial and operational advisers early and engage with creditors well in advance of maturities. Understand the underlying reasons for financial distress – whether they be market forces, mismanagement, overleverage or a pandemic – and respond accordingly. Restructurings that fail are often the result of management's unrealistic belief that relief is right around the corner instead of facing reality and addressing the problems right away.
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