Notable court rulings regarding cross-border debt
January 2013 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE
The fourth quarter of 2012 has produced several significant rulings from courts construing the rights and obligations of debtors – both sovereign and corporate – or their representatives, in connection with cross-border restructurings and bankruptcy cases. We briefly summarise some of these developments.
Sovereign debt restructurings
On 26 October 2012, the US Court of Appeals for the Second Circuit upheld a lower court order enjoining the Republic of Argentina from making payments on restructured debt without making comparable payments to bondholders who did not participate in the restructurings.
In 1994, Argentina began issuing bonds subject to an ‘equal treatment’ clause providing that “[t]he payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.” Following a 2001 default on the bonds, Argentina offered bondholders new exchange bonds in 2005 and again in 2010. Argentina continued to make payments to holders of the exchange bonds, but pursuant to a ‘temporary moratorium’ renewed each year since 2001, has not paid holdout bondholders. The holdouts sued Argentina in district court in New York to collect $1.33bn in unpaid principal and interest. In February 2012, the district court held that Argentina’s conduct violated the pari passu clause and enjoined further payments to exchange bondholders without corresponding payments to old bondholders.
The Second Circuit upheld that ruling in NML Capital, Ltd. v. Republic of Argentina, 2012 BL 283459 (2d Cir. Oct. 26, 2012). The court was careful to predicate its ruling on the totality of Argentina’s conduct, which included enacting legislation rendering the defaulted bonds unenforceable in Argentina. Even so, broadly speaking, the decision reflects judicial dissatisfaction with a sovereign debtor that for many years has flouted judgments entered by US courts, notwithstanding the debtor’s possession of resources sufficient to pay such judgments. It is expected that Argentina will seek to appeal the ruling to the US Supreme Court.
The Second Circuit remanded the case below for the purpose of clarifying how the injunction was to operate. On 21 November 2012, the district court ordered Argentina to pay holdout bondholders approximately $1.33bn. However, Argentina received a reprieve of its obligation to make the payments on 28 November 2012, when the Second Circuit stayed the ruling until it has an opportunity to hear Argentina’s appeal, which has been scheduled for argument on 27 February 2013. The emergency stay quelled investor fears of a default by Argentina on 15 December when some $3.3bn in debt repayments is due. On 4 December, the Second Circuit denied an emergency motion by old bondholders to modify the stay by requiring Argentina to post $250m in security.
Enforcement of foreign insolvency judgments
On 24 October 2012, the English Supreme Court handed down judgments in Rubin v Eurofinance SA and New Cap Re v A E Grant  UKSC 46, two unrelated cases, in both of which insolvency practitioners were seeking to enforce foreign (non-EU) court judgments arising from insolvency proceedings in their jurisdictions through the English courts against English defendants. The majority held that Cambridge Gas Transportation Corporation v Official Committee of Navigator Holdings plc  UKPC 26, which promoted the idea of universality of recognition in insolvency proceedings, was wrongly decided. Instead, the Supreme Court held that insolvency judgments are subject to the standard common law principles relating to recognition and enforcement. Specifically, the Supreme Court held that a foreign judgment cannot be enforced under the Cross Border Insolvency Regulations 2006 (enacting the Model Law on Cross-border Insolvency (the Model Law) in the UK) or under s426 of the Insolvency Act, as it was considered that in both cases the legislation was not designed to provide for the enforcement of judgments.
In light of this decision, there is no ‘special treatment’ for judgments arising from insolvency proceedings. Parties wishing to enforce insolvency judgments in England through the English courts will have to rely on the traditional common law body of cases, and, where appropriate, the EC Regulation on Insolvency Proceedings, which makes foreign judgments falling within the ambit of the EC Regulation enforceable automatically in the UK. The decision is likely to have significant consequences for cross-border insolvencies. At a minimum, it will make it more difficult to enforce foreign insolvency judgments in England and it may lead to an increase in the volume of parallel insolvency proceedings filed in English courts in cross-border bankruptcy cases (for example, ‘non-main’ proceedings under the Model Law) for the purpose of enforcing such judgments.
Recognition of foreign judgments under the Model Law
In In re Elpida Memory, Inc., 2012 BL 302570 (Bankr. D. Del. Nov. 16, 2012), the US Bankruptcy Court for the District of Delaware handed down an important ruling in a case under Chapter 15 of the US Bankruptcy Code, which implements the Model Law. The court held that, when evaluating a transfer of assets located in the US as part of a ‘global’ transaction previously approved by a foreign court in a bankruptcy proceeding recognised under Chapter 15 of the US Bankruptcy Code, the US bankruptcy court must review the transaction to the extent it impacts assets located in the US under the legal standards applied to a proposed transfer by a bankruptcy trustee outside the ordinary course of the debtor’s business under Section 363(b) of the US Bankruptcy Code. This means that the court will authorise the transaction only if it represents a sound exercise of the trustee’s business judgment.
According to the court, requiring a US bankruptcy court to defer in all instances to a foreign court decision would “gut” Section 1520 of the Bankruptcy Code, which makes Section 363 applicable to proposed transfers of US assets. The court reasoned that its conclusion is bolstered by the legislative history of Chapter 15 as well as the Model Law, “which 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.”
On 28 November 2012, the US Court of Appeals for the Fifth Circuit upheld a US bankruptcy court’s decision refusing, as a matter of US public policy, to enforce releases of non-debtor affiliates contained in the reorganisation plan of Mexican glassmaker Vitro SAB de CV (Vitro). In In re Vitro SAB de CVV, No. 12-10542 (5th Cir. Nov. 28, 2012), the Fifth Circuit ruled that such releases could be enforceable in the US under Section 1507 of the Bankruptcy Code as a form of ‘additional assistance’ to a foreign representative in a foreign bankruptcy proceeding recognised by a US bankruptcy court under Chapter 15 of the Bankruptcy Code, but only under ‘exceptional circumstances’ not present in the case before it.
The evidence showed that, under Vitro’s reorganisation plan, equity retains substantial value whereas creditors will receive 40 cents on the dollar. Moreover, the affected creditors did not consent to the plan, but were classified together with (and outvoted by) insider voters manufactured by reshuffling Vitro’s intercompany obligations. Because the plan was clearly repugnant to the distribution scheme under US law, the Fifth Circuit ruled that the releases should not be enforced as a matter of comity.
Corinne Ball, Kay V. Morley and Paul D. Leake are partners at Jones Day. Ms Ball can be contacted on +44 (0)20 7039 5136 or by email: firstname.lastname@example.org. Ms Morley can be contacted on +44 (0)20 7039 5156 or by email: email@example.com. Mr Leake can be contacted on +1 (212) 326 3482 or by email: firstname.lastname@example.org.
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Corinne Ball, Kay V. Morley and Paul D. Leake