Avanti Communications Group PLC - US Bankruptcy Court Enforces Nonconsensual Third-Party Releases in Chapter 15 Proceeding

Background

Avanti Communications Group PLC ("Avanti") are a satellite operator headquartered in London, with subsidiaries across Europe and Africa, providing fixed satellite services in Europe, the Middle East and Africa. 

Avanti had issued Senior Secured Notes maturing in 2021 and 2023 and had borrowed under a senior term loan.  Due to delays associated with two of Avanti's satellites, Avanti experienced financial difficulties, with a materially over-leveraged capital structure.

As a result, Avanti entered into discussions with a group of its creditors in an effort to restructure its indebtedness by proposing a Scheme of Arrangement in the UK.

Under the scheme there was to be an exchange of Avanti’s notes due in 2023 for 92.5% of Avanti’s then-issued share capital, which would be allocated on a pro rata basis to the holders of the 2023 notes. In addition, the scheme proposed that the holders of the 2023 notes would grant releases, including the release of claims against Avanti and the guarantors of Avanti’s notes.

The scheme was approved by 98.3% of the scheme creditors.

In order to help implement the restructuring and to prevent parties from seeking to interfere with the scheme of arrangement, Avanti, through its “Foreign Representative”, sought an order from the Southern District of New York Bankruptcy Court recognising and enforcing the scheme.

Although Avanti has no place of business in the US, it had two main connections.  Firstly, counsel held a $100,000 retainer in a non-interest bearing account at JP Morgan Chase in New York.  Secondly, the Indenture that created the 2023 notes was governed by New York Law. The Bankruptcy Court, as a preliminary matter, concluded that these connections meant that Avanti’s Foreign Representative had satisfied the gatekeeping requirement that the debtor have “either a domicile, a place of business, or property in the United States.”

After concluding that certain other procedural requirements had been met by the Foreign Representative, the court turned to the question of whether to enforce the scheme of arrangement and, in particular, whether to grant the release of claims against the guarantors of Avanti's notes.

In the US, third party releases are often problematic in Chapter 11 cases, with some circuits permitting them and others not. The issue in Chapter 15 cases primarily focuses on whether to recognise and enforce the foreign court order based on comity noting that it is well settled law in the UK to authorise third party releases in scheme proceedings.

Upon recognition of a foreign proceeding, the court noted that the interplay between Section 1507 and Section 1521 of the Bankruptcy Code was far from clear. Section 1521 provides, without qualification, that the Court may “grant any appropriate relief” where necessary to effectuate the purpose of Chapter 15 and to protect the assets of the debtor or the interests of the creditors.  On the other hand, Section 1507 permits the Bankruptcy Court to “provide additional assistance” to a foreign representative if, “consistent with the principles of comity,” such relief will ensure the “just treatment of all holders of claims” and the “distribution of proceeds of the debtor’s property substantially in accordance with the order” prescribed by the Bankruptcy Code.

The Decision

The court, using as its basis a growing line of bankruptcy cases in the Southern District of New York, explained that recognising and enforcing a foreign court’s order approving a reorganisation plan is an appropriate form of relief under Section 1521 or Section 1507. In its analysis, however, the court focused closely on Section 1507 and, specifically, on the “principles of comity and cooperation with foreign courts.” Looking to the underlying legislative history, the court explained that the concept of comity had originally appeared in an earlier version of the Bankruptcy Code as only a factor to be considered by the courts, but that the concept of comity had later been moved to the introductory language of Section 1507 “to emphasize its importance”.

Comment

In recognising and enforcing the scheme, the court emphasised that Avanti’s affected creditors "had a full and fair opportunity to vote on, and be heard in connection with the Scheme", and that the UK proceedings afforded participants to be heard consistently with US due process standards. The court also noted that in the UK, “third-party non-debtor releases are common ... particularly for releases of affiliate guarantees of the debt that is being adjusted by the scheme,” as was the case for Avanti.  While the scheme of arrangement contemplated a non-consensual release of third-party guarantees with respect to the 2% of non-voting creditors, the court determined that failing to recognize and enforce the scheme “could result in prejudicial treatment of creditors to the detriment of Avanti's reorganization efforts and prevent the fair and efficient administration of the restructuring.”