The power of trends in international insolvency law
Bob Wessels, Professor emeritus of International Insolvency Law, University of Leiden, The Netherlands [could not attach this comment to my blogs 2018-03-doc2 and 2018-03-doc3, so here it finally is]
1 The Oi Brasil case has been, without doubt, one of the most complex international insolvency cases of the last two years, involving many insolvency practitioners and counsel as well as courts in Brazil, the USA and Netherlands. The Oi Group is a family of Brazilian telecommunications companies with over 140 000 direct and indirect employees in Brazil and a 34.5% market share of fixed-line services including network usage, television and data transmission. In summer 2016 the Oi Group initiated consolidated restructuring proceedings in Brazil (‘recuperaçaõ judicial’, the New York court refers to them as Brazilian RJ Proceeding). These proceedings cover among other entities also Oi Brasil Holdings Coöperatief U.A. (Coop), a Netherlands incorporated subsidiary of a Brazilian parent company Oi S.A. Coop was incorporated in 2011 as a special purpose vehicle (SPV) specifically to provide the Oi Group with access to the international capital markets. Since its formation, Coop has only performed two functions: (i) borrowing, or issuing or assuming notes; and (ii) on-lending to the Oi Group, raising billions of euros from debt capital markets and other currencies from issuances by Brazilian entities. I understand from the case, that this Brazilian RJ proceeding is a debtor-in-possession proceeding, rather similar to a US Chapter 11 proceeding in that the Brazilian proceeding leads to a creditor vote on a plan of reorganisation. Rather uniquely, however, the Brazil RJ proceeding does allow substantive consolidation of the entities within the corporate group. The consequence is that all the assets and liabilities of all of the entities are pooled resulting in a pari passu distribution to creditors of the same class. From the case it becomes clear that the whole issuer and guarantee structure is not uniform. Therefore, in insolvency matters, creditors under one debt issuance might expect to realise more or to realise less, depending on the terms of the issuance, than creditors under other issuances.
2 On June 20, 2016, Oi, and six affiliates, including the Netherlands-incorporated SPV, Coop, commenced a jointly administered reorganization proceeding. Collectively the New York court refers to them as ‘Brazilian RJ Debtors’. The proceeding takes place in the Seventh Business Court of Rio de Janeiro (7a Vara Empresarial do Rio de Janeiro, the ‘Brazilian RJ Court’). Experiencing financial distress caused by increased interest rates, and ‘chilled foreign investment in Brazil’ caused by national corruption scandals, the foreign representative for the whole group filed a petition for recognition under Chapter 15 U.S. Bankruptcy Code. This is done in the New York court, Southern District, for four of the entities, including Coop, the following day. Chapter 15 is the USA version of the UNCITRAL Model Law on cross-border insolvency (‘Model Law’). On the Model Law, see Wessels International Insolvency Law Part I 2015/10181b and onwards. For the way the USA has adopted its version of the Model Law, see also Martin, United States, in: Look Chan Ho (ed.), Cross-Border Insolvency. A Commentary on the UNCITRAL Model Law, 4th ed., London: Globe Law and Business 2017, 597ff.
3 On June 21, 2016, one day after the Brazilian proceeding was filed, a Brazilian trustee filed a Chapter 15 petition in the USA, seeking recognition as a foreign main proceeding. A month later the New York court grants the request, concluding that ‘… the integrated Oi group enterprise is managed, directed, and monitored as a strategic whole in Brazil … the Oi group headquarters is the corporate nerve centre here’. The court also draws the conclusion that Brazil was also the centre of main interest (COMI) for the Netherland incorporated Coop, because ‘… the COMI of an SPV turns at a location of the corporate nerve centre and the expectation of creditors’. At that time Aurelius Capital Management (‘Aurelius’), a US hedge fund who is a holder of notes issued by Coop, participated in the New York recognition proceedings as an ‘interested party’ and it did not object to Brazil being identified as the COMI for Coop, or for any of the other debtors.
4 Around the same time, the New York Court summarises in its decision of December 2017 (page 3), that a number of Coop’s creditors began to take actions against Coop in the Netherlands: ‘After months of litigation in the Dutch court system, the Supreme Court of the Netherlands in July 2017 upheld the jurisdiction and propriety of Coop’s bankruptcy proceedings under Dutch law. When justifying its finding, the court simply stressed the fact that Coop was established in the Netherlands on the basis of Dutch corporate law and that its separate legal personality should be respected.’ The preceding history in the Netherlands is, that five days after the Chapter 15 recognition was granted for the Brazil RJ proceeding, Coop petitioned for the appointment of a ‘silent administrator’ for the SPV in the Netherlands. These proceedings, Judge Lane of the New York court knows, are ‘… primarily used to gather information about an entity while preparing it for an insolvency proceeding’. The Amsterdam District Court appoints Jasper Berkenbosch as this administrator. A few weeks later Coop petitioned in the Dutch court for a suspension of payments (‘surceance van betaling’ or SOP) to instate a moratorium on actions by unsecured creditors and also to restrict other debtors from administering or disposing of the estate without the administrator’s consent. The Dutch court issued a commencement order to facilitate a restructuring of the debtor and it appoints Berkenbosch as the SOP administrator. In the days to follow – according to the New York judge – Berkenbosch was subjected to a ‘campaign of frequent and aggressive contact’ by Aurelius, in an effort to convince him to withdraw the SOP proceedings and have it converted into a Dutch bankruptcy liquidation proceeding. A subsequent petition to convert the proceedings was rejected by the Amsterdam district court, but on an appeal from four creditors, including Aurelius, the Court of Appeal overturned this decision and initiated bankruptcy liquidation proceedings. See Court of Appeal Amsterdam 19 April 2017, ECLI:NL:GHAMS:2017:1325. On July 7, 2017, the Dutch Supreme Court affirmed the Dutch Court of Appeals decision, says the New York court. For the Supreme Court’s decision see ECLI:NL:HR:2017:1280.
5 This latter decision allows to make a side-step. The Dutch Supreme Court has no doubts and concludes that to these Dutch proceeding the Netherlands Bankruptcy Act applies to Oi Coop as a company established in the Netherlands. According the Dutch Supreme Court, this means that the rules of the Bankruptcy Act are in principle in full applicable to Coop (and another company), including in the case of surseance van betaling Article 228 of the Act, which means that the debtor has the power of managing and disposal of his assets together with the administrator, so the debtor alone cannot act without its cooperation, authorization or assistance. The Supreme Court concludes: ‘In the absence of an (applicable) international or special national arrangement to the contrary, there is no reason to make an exception as a result of the fact that Oi Coop … belong[s] to an international group of related companies which has its centre of main interest abroad and against which in a foreign jurisdiction a restructuring proceeding, such as the RJ-procedure is pending. The latter fact, however, can be taken into account where the law does leave room for it, such as the balancing of interests which has to take place on the basis of Article 242 section 1 of the Act in connection to the cancellation of the suspension of payment proceeding. Furthermore, the insolvency practitioners in a case like this in fulfilling their task may take into account the interests of the group as a whole and the creditors of the group as a whole. However, as a starting point, also in insolvency proceedings the individual legal personality of members of a group applies.’
It is noted that in the earlier judgment of the Court of Appeal it was decided that Coop’s centre of main interest (COMI) was the Netherlands. In cassation the question has not been raised anymore. In that respect the Supreme Court automatically ties the question regarding applicable law to the fact that Coop is a legal person, incorporated or established on the basis of Dutch corporate law. This follows from the application of Article 4 of the EU Insolvency Regulation 1346/2000.
6 Back to the Coop case. On the same day the Supreme Court provides its decision, July 7, 2017, Berkenbosch filed a Chapter 15 petition with the New York bankruptcy court, requesting the recognition of the Dutch proceedings, and asking the court to ‘terminate or modify’ the court’s earlier recognition of the Brazilian proceedings. Under its ‘Conclusions of law’, the New York court starts with making detailed remarks about Chapter 15 and COMI generally (p. 34). The UNCITRAL Model adopts a similar concept of COMI as does the EU Insolvency Regulation (EIR). The drafting of the Model Law was affected by other instruments in the area of international insolvency law, including the 1995 Convention on Insolvency Proceedings (the never adopted predecessor of the EIR), both of which used the concept of COMI. Article 16(3) of the Model Law (and Section 1516(3) U.S. Bankruptcy Code) almost literally repeats the wording provided in the former EIR 2000, which now are included in Article 3(1) EIR Recast, prescribing that in the absence of proof to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be the debtor’s COMI. The New York court highlights the major difference relating to the treatment of the registered office presumption. Although both the Insolvency Regulation and the U.S. Bankruptcy Code (Section 1516(c)) contain similarly worded presumptions, the value assigned to them seem to vary significantly. Whereas under the EIR Recast, a registered office gives a strong indication for determining COMI (see e.g. CJEU 20 October 2011, C-396/09 (Interedil Srl v Fallimento Intredit Srl, Intesa Gestione Crediti Spa), ECLI:EU:C:2011:671, to which case the New York court refers) , for Chapter 15 purposes it just applies ‘… for speed and convenience in instances in which the COMI is obvious and undisputed’ (In re Creative Fin., 543 B.R. at 514–15). Moreover, the presumption ‘… is especially inappropriate in a case where there is a substantial dispute’ (In re Creative Fin., 543 B.R. at 517).
7 A second crucial point is that the relevant time period for localizing COMI differs. In the EIR approach, COMI is determined at the time of the request to open insolvency proceedings (since 26 June 2017 with applicable ‘suspect’ periods for COMI relocation as expressed in Article 3 EIR Recast). US courts, however, look at COMI at or around the time the Chapter 15 petition is filed (In re Fairfield Sentry, 714 F.3d at 137). The New York court seems to overlook that since 2013, the Guide to Enactment and Interpretation accompanying the Model Law (a revised version of the original one), at para. 159, explains that the reference date is the date of commencement of the foreign proceeding. Anyway, as the Oi case demonstrates, the use of analogous phrasing and similar concepts (i.e. COMI, registered office presumption) in the Model Law and the EIR Recast may in practice lead to completely opposite results. Even more strikingly, the Model Law type of COMI concept is applied differently in countries having adopted the Model Law, see for instance in Australia Ackers v Saad Investment Co Ltd. [2010] FCA 1221 (22 October 2010) in which case the Federal Court of Australia considers: ‘49. Given the importance to international commerce and, to third parties, of having an objective ascertainable basis upon which to commence and decide proceedings that will govern winding up and insolvency of a debtor under the Model Law, in my opinion, the approach adopted in Eurofood … should be followed here … That approach leads to a more predictable and orderly international outcome than the less certain approach adopted by some of the Bankruptcy District Courts in the United States …’. On this theme see Wessels International Insolvency Law Part I 2015/10281ff. In Part II 2017/10600a and onwards I further analyse COMI (‘Global Comedy of Errors’) where one concept recieves such a disappointing divergent application, which can not fully be explained with the idea that the ‘European’ COMI is an autonomous concept and the ‘Model Law’ COMI a concept which is integrated in an enacting state’s national law.
8 In the hearing following the July 7, 2017 filing for recognition, Berkenbosch argued that Coop’s COMI was in the Netherlands, stating that the US court should not make its own determination on Coop’s COMI because the Dutch courts had found COMI to be located in the Netherlands under the EU Insolvency Regulation. The New York court disagrees. Judge Lane considers that the US court did not have to defer to the Dutch courts. The task before the Dutch court was different from the one that he faced, he observes: ‘Coop’s status as an SPV was central to the Court’s prior recognition of Brazil as the location of Coop’s COMI’, Judge Lane observes, concluding: ‘It remains the backbone of the Court’s determination today that the Insolvency Trustee’s activities do not change Coop’s COMI …’. The judgment totally overlooks the well-developed system of the EU Insolvency Regulation and adheres to a concept (SPV serves as COMI) that hardly has been defended in literature and goes against the judicial approach many countries follow (every single entity is subject to its own insolvency proceedings; ‘one debtor – one estate – one insolvency proceeding’, so every entity has its own COMI). International insolvency law has not succeeded in developing a reliable and practical system for the approach of the economic reality of a group of companies. I wonder whether the SPV approach is the most promising one for the future acceptance. See also point 14 below.
9 The New York court, leaving the COMI decision intact, then turns to the second part of the request, in which it wishes the court to ‘terminate or modify’ the court’s earlier recognition of the Brazilian proceeding. The relevant article is Section 1517 U.S. Bankruptcy Code. As indicated, the USA was a close follower of the Model Law. It however adopted a slightly different version of this provision. Article 17 of the Model Law is designed to provide a high degree of certainty concerning an application for recognition. The purpose of Article 17 is to indicate that, if recognition is not contrary to the public policy (in the meaning of Article 6 Model Law) of the enacting State and the application meets the requirements set out in the Article, recognition will be granted as a matter of course (according to Guide to Enactment and Interpretation (2013), para. 150). If the basic criteria as laid down in Article 17(1) are satisfied, the court of the enacting State has a mandate to award recognition. The Model Law requires the recognition of proceedings at the earliest opportunity after a request is made, and a foreign proceeding shall subsequently be recognized as a foreign ‘main’ or as a foreign ‘non-main’ proceeding (Article 17(2) Model Law). Article 17(4) Model Law contains a revisiting mechanism. The court’s decision to recognize a foreign proceeding can be revisited if grounds for ‘granting’ recognition were fully or partially lacking or have ceased to exist. This is, however, only permitted if the procedural law of the enacting State offers the possibility. The word ‘granting’ in Article 17(4) means ‘recognition’. The Guide to Enactment and Interpretation (2013), para. 165 and 166, provides some examples for reviewing earlier decisions on recognition. Revisiting the recognition takes the form of modification or termination of the recognition. The Guide provides the following examples of grounds for recognition which are fully or partially lacking or have ceased to exist: (i) a change of circumstances after the decision on recognition, e.g. the recognized foreign proceeding has been terminated or its nature has changed due to it being converted from a reorganization proceeding into a liquidation proceeding, (ii) new facts have arisen that require or justify a change of the court’s decision, e.g. the foreign representative has disregarded the conditions under which the court granted relief, or (iii) the requirements for recognition were not (fully) observed in the decision-making process, particularly where an appeal procedure under national law gives the appeal court the authority to review the merits of the case in its entirety, including factual aspects. See Wessels International Insolvency Law Part I 2015/10284ff.
10 Section 1517 (‘Order granting recognition’) of the U.S. Bankruptcy Code follows Article 17 of the Model Law fairly closely, with a few exceptions. One of these is that the U.S. court retains substantial discretion to modify or terminate recognition if the grounds for recognition, as Section 1517(4) U.S. Code puts it (first prong), ‘… were fully or partially lacking’ or (second prong) ‘… have ceased to exist’. Section 1517(d) adds: ‘… exist, but in considering such action the court shall give due weight to possible prejudice to parties that have relied upon the granting of recognition.’ I note that even in the case that no party files an objection to the petition for recognition, the US court has an independent obligation to assess the facts presented by the application for recognition prior to ruling.
11 On Article 1517(4), first prong, whether recognition of the Brazilian RJ Proceeding should be modified or terminated because the grounds for granting recognition ‘were fully or partially lacking’, Judge Lane rejected Berkenbosch’s arguments, stating that the key facts about Coop’s ties to the Netherlands had been disclosed in the previous Chapter 15 application. The grounds for recognition were not lacking. The court states another reservation in relation to the relief requested under Section 1517(d): the behaviour of the hedge fund Aurelius. Its failure to object at the earlier recognition hearing, the court concludes, was a strategic decision, not one based on a lack of information or some fundamental misunderstanding of the facts. Aureius’ silence, the court analyses: ‘… was part of a strategy by Aurelius based on its view that Coop’s debt was undervalued. Under that strategy, Aurelius significantly increased its holdings of Coop debt after the Prior Recognition Hearing and took action to overturn this Court’s Prior Recognition Order, notwithstanding its lack of objection at the Prior Recognition Hearing’.
12. On Article 1517(4), second prong, whether recognition of the Brazilian RJ Proceeding should be modified or terminated because the grounds for granting recognition ‘have ceased to exist’. These grounds have however not changed since entry of the earlier recognition order, the court concludes: ‘Almost all of the central facts regarding Coop have remained unchanged since the Prior Recognition Order’. Coop remains a SPV for the Oi Group with a registered office in the Netherlands. The only significant change has been the progression of the Dutch insolvency proceedings and the activities of the Insolvency Trustee (i.e. Berkenbosch) arising out of those proceedings. Although a detailed analysis of creditor expectations was not conducted at the prior recognition hearing, extensive evidence was submitted on this issue during the trial in this case, the court notes: ‘A review of that evidence confirms that a reasonable creditor would have looked to Brazil for their recovery at the time of the Prior Recognition Hearing and would still do so now’.
13 In the final pages of the judgment, the court said that the applicants had not provided enough evidence to show the COMI of Coöp had shifted to the Netherlands. There is, however, also an independent reason for the Court to decline to exercise its authority to grant relief under Section 1517(d): Aurelius’ role in bringing about the very facts that the Movants now rely upon as a basis to modify or terminate recognition. The Court examine all these issues separately. The court reveals mercilessly the more than dubious role of Aurelius. In summary: ‘… But the evidence here presents a disturbing picture: a creditor unhappy with Brazilian insolvency proceedings decided to strategically remain silent through a Chapter 15 recognition of those proceedings by this Court while planning – and eventually executing – a strategy designed to reverse that recognition and block any restructuring in the Brazilian proceeding. As the evidentiary record reflects that this strategy existed at the time of the Prior Recognition Hearing’. The court accuses Aurelius to follow a ‘double dip’ strategy, which is generally a scenario where a creditor can increase its recovery by multiplying its allowed claim against a particular entity or asserting claims against multiple entities. This double dip strategy would have been compromised by a plan in the Brazilian RJ Proceeding that sought substantive consolidation of Oi Group debtors and eliminated intercompany claims, because such a plan would allow the noteholders only ‘one dip’, that is a single claim against the consolidated Oi Group assets. The Court does not let itself be mocked: ‘Aurelius’ actions also reflect a lack of candour before the Court. Such actions are clearly within the realm of concerns identified in the COMI manipulation cases.’ In sum, the Court does not accept the strategy pursued by Aurelius.
14 In the judgment, Judge Lane dismissed a petition brought by the Dutch admininstrator of Coop, to recognise its bankruptcy liqidation proceedings in the Netherlands as a foreign main proceeding, and to ‘terminate or modify’ the court’s prior recognition of its Brazilian bankruptcy proceedings. Movants grumble and contend that they cannot be penalized for Aurelius’ actions, but the Court observes that their argument is misdirected, as the Court has based its decision on an assessment of the facts in this case and the forward-looking policy implications generally of Aurelius’ strategy and tactics as factors in its exercise of discretion under Section 1517(d). The Court applies its discretion rather wide by stating that the actions of Aurelius are at odds with many of the goals of Chapter 15 set out in Section 1501, which promote cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor, protection and maximization of a debtor’s assets, and the rescue of financially troubled businesses. Rather than promote cooperation between U.S. and foreign courts, ‘… Aurelius seeks leverage over the Chapter 15 Debtors by attempting to block the Brazilian RJ Proceeding. Thus, Aurelius has weaponized Chapter 15 to collaterally attack both the Brazilian RJ Proceeding and the Oi Group’s proposed Brazilian RJ Plan. The result undermines the goals of maximizing the Chapter 15 Debtors’ assets and assisting in the rescue of their financially troubled business’. Furthermore, the Court continues, ‘the actions of Aurelius are inconsistent with the trend in international insolvency law’, referring a draft of the UNCITRAL working group studying cross border insolvencies of multinational enterprise groups of the kind at issue in this case. See documents-dds-ny.un.org
Aurelius’ actions here are at odds with the focus of this draft legislation on cooperation, value maximization and enterprise preservation: ‘In sum, the strategy pursued by Aurelius in these cases is a troubling one that the Court refuses to countenance’, the Court concludes.
The strength of the additional argument, which relates to non-binding rules which are still in draft, certainly can be questioned. It seems to be dragged into the argumentation, and the document referred to certainly does not include the concept of a SPV being the COMI of an ‘enterprise group’, as the working group has drafted it. The (provisional) end of the story is that Aurelius (presently also notorious for attacking the Oversight Board, acting on the basis of the Puerto Rico Oversight, Management, and Economic Stability Act, in a process to restructure the Puerto Rican government-debt crisis) with its behaviour has set aside a request for recognition and/or revision of the earlier recognition, that without this behaviour was not without reasonable chances.
15 The Court recognizes that the facts here are novel, unlike any reported decision that the Court or the parties have been able to locate. The result here is certainly not a traditional application of COMI manipulation, normally applied to a debtor with only one foreign proceeding. But the Court reaches this result, as it observes, based on the discretion granted it under Section 1517(d), the Court’s authority to address issues of bad faith and other inequitable conduct. The Oi saga will certainly continue with quiet some broken pieces allong the way. The Court is also mindful that the Movants always have the ability to come back to this Court and challenge the recognition of any plan approved in the Brazilian RJ Proceeding. A few weeks after the Court’s decision, following months of debates, skirmishes and litigation in courts around the world, a majority of creditors of the Oi Group has voted just before Christmas 2017 to approve a US$20 billion restructuring plan. The vote ended a very long days’ meeting held at the RioCentro convention centre in Rio de Janeiro, a former Olympic boxing venue that could house the more than thousand people in attendance. No doubt that the boxing match continues.