Corporate Restructuring: United States vs. United Kingdom

Corporate Restructuring: United States vs. United Kingdom

David Stevenson, a US District Court Judge for the Northern District of Texas, has presented his analysis of the  differences between the law in the United Kingdom and the United States concerning “a debtor’s ability to approve a restructuring arrangement over the objection of creditors that disapprove.”

This is more than an academic comparison. As Judge Stevenson observes, some distressed companies with a legal and physical presence in both countries may be making the comparison prior to filing.

Before returning to Stevenson’s point, though, we need to review some background. Two years ago this spring the US Supreme Court decided the important bankruptcy case of Czyzewski v. Jevic Holding Corp.It found that absolute priority within the bankruptcy system is …. absolute. Specifically, it held that a bankruptcy court has no power to order a “priority-skipping kind of distribution scheme in connection with a Chapter 11 dismissal.”

Jevic was a trucking company. It was purchased by Sun Capital in 2006 in an LBO, a purchase made possible by a group of secured lenders led by the CIT Group.

Two years later, May 2008, Jevic essentially ceased operations and laid off most of the workforce. It filed for Chapter 11 relief in Delaware.

A group of the terminated drivers started a class action proceeding against both Jevic and Sun for federal and state violations, seeking an estimated $12.4 million in damages.  They won, and Jevic became their judgment debtor. The bankruptcy court later issued what is called a “structured dismissal” even though that meant stiffing the possessors of the judgment debt, a debt which would normally have absolute priority.

District and Bankruptcy Courts

An intuitive reading of this decision is that it makes life more difficult for investors who seek to create alpha from restructuring, both because such investors often benefit from structured dismissals and because the decision considerably strengthened the negotiating/bargaining position going forward of other parties.

One of the contributions of Stevenson’s discussion, even apart from the transnational comparison, is that he brings us up to date on how the US bankruptcy and district courts have been interpreting and applying Jevic. That decision was ambiguous on its face as to whether an absolute priority rule (APR) is to be applied now “to all distributions of estate property before confirmation of a plan,” or only to structured dismissals and the final dispositions of bankruptcy cases.

But, as Stevenson observes, the general trend has been to apply APR even in situations where the letter of Jevic does not require it and pre-Jevic practice defied it. Courts have applied APR even to settlements and arrangements early in the proceedings. In a range of situations, priority creditors must be paid in full before creditors of lower priority receive any payment on theirs, and this is so even if there are considerations of policy in favor of paying off a junior creditor in a specific instance.

Indeed, Stevenson notes that in one case, in the federal district of Delaware, a bankruptcy court struck down a structured dismissal, without focusing on whether it violated APR but simply because it held that Jevic precluded the acceptance of structured dismissals (In re Constellation Enterprises LLC).

A System with Greater Flexibility

This, Stevenson says, amounts to doctrinal rigidity. In his view it contrasts unfavorably with the more flexible approach of courts in the UK, which has “one of the oldest and most advanced bankruptcy systems in the world.”

Stevenson particularly envies the flexibility bestowed upon courts and debtors alike by the Companies Act of 2006, which allows for “schemes of arrangement,” which have been “popularized in part by companies restructuring in the wake of the global financial crisis.”

A company filing such a scheme of arrangement must show a sufficient connection to England, a reasonable possibility that there will be a benefit to those applying for the scheme, and that there are one or more persons interested in the distribution of the asset of the company who are people over whom the court can exercise jurisdiction. These are not high hurdles.

A filing then sets up a round of negotiations among affected parties, superintended by the court, One feature of the way the meetings are set up is that “small-value creditors have much less bargaining power than large-value creditors,” and the result  can “bind dissenting creditors notwithstanding their objections and without a formal insolvency hearing.”

Be Sociable, Share!

Leave A Reply

← New Study Shows Hedge Fund Investors are Quick Learners Options: When Skewness is Not on the To Do List →