Cross Border Restructuring and Insolvency Update - April 2015

Hosking v TPG Capital Management LP (In re Hellas Telecommunications (Luxemburg) II SCA) 2015 BL 21823

A case challenging fraudulent conveyances made by Hellas Communications (Luxemburg) II SCA ("Hellas II"), the Greek telecommunications provider that switched its COMI to the UK, has been dismissed in the US Bankruptcy Court Southern District of New York ("the Court") on choice of law principles.

In 2005, Hellas II issued 490,000 preferred equity certificates ("Certificates") to the Defendants. In 2006, the Defendants entered into a debt refinancing transaction which involved, amongst other things, the issue of a series of Floating Rate subordinated notes ("Sub Notes") in euros and dollars by Hellas II and its subsidiaries, and a transfer of €1.57 billion to its parent, Hellas I.

In 2009, Hellas II moved its COMI from Luxemburg to the UK and was ultimately wound up, with the Plaintiffs being appointed as Joint Liquidators. The Joint Liquidators obtained recognition in the US pursuant to Chapter 15 on 14 March 2012.
The Plaintiffs alleged three causes of action in the Court. They sought to avoid the initial transfer of €1.57 billion from Hellas II to Hellas I either as an "actual fraudulent transfer" ("Count I") or a "constructive fraudulent transfer" ("Count II") under New York Debtor and Creditor Law ("NYDCL").

The Court dismissed Count II on choice of law principles. The Court needed to consider whether there was an "actual conflict" between the relevant laws of the jurisdictions concerned. Whilst the parties accepted that differences between the laws exist, the impact of the differences was in dispute. Under NYDCL intent of the transferor is irrelevant, whereas under S423(3) Insolvency Act 1986 (IA) the "actual subjective purpose" of the transferor must be proven. Under article 1167 Luxemburg Civil Code (Actio Pauliana) the transferor's "actual intent to defraud" must be proven.

Having established an "actual conflict", the Court was then bound to apply the law of the jurisdiction with the greatest interest in the litigation.

The Plaintiffs asserted that New York had the greatest interest as, amongst other things, most of the Sub Notes issued were in the possession of US custodians and the dollar Sub Notes were governed by US law.

The Defendants asserted that Luxemburg's interest was greatest because amongst other things, the conveyances at issue were not the Sub Notes but the redemptions of the Certificates, which were governed by Luxembourg law and redeemed by entities based in Luxembourg. The Defendants also argued that article 4 of the Insolvency Regulation which states that the law of a debtor's COMI governs the avoidance of antecedent transactions, potentially displaced the application of Luxembourg law in favour of UK law. In any event, the Court held that either Luxembourg or UK law applied rather than New York law and therefore dismissed Count II of the complaint.

Additionally, in relation to both Counts I and II, the Court considered that the Plaintiffs lacked standing to assert their claim on behalf of creditors under UK and New York law and regrettably, despite lengthy analysis, declined to rule on whether the Plaintiffs had standing to assert their avoidance claim under section 1521(a)(7) US Bankruptcy Code.

Chapter 15 authorises a US bankruptcy Court to grant relief but does not allow a foreign representative to utilise US antecedent transaction provisions, unless the case concerning the debtor is pending under another Chapter of the Code. There is however some case law to suggest this does not preclude a foreign representative from asserting the claim under the domestic law of the foreign main proceeding, and indeed the Joint Liquidators have amended their claim to bring a claim under UK and Luxembourg law. The Courts refusal to rule on standing is regrettable and may leave foreign representatives no choice but to commence Chapter 7 cases in the US where they wish to avail themselves of the avoidance provisions.

VTB Bank (Austria) AG v Kombinat Aluminijuma Podgorica AD (in Bankruptcy)

An English recognition order in relation to the insolvency of a Montenegrin company resulted in the stay of arbitration proceedings between the company and the applicant bank. The bank applied for an order that the stay be lifted. The court found that there was no point in lifting it at present and therefore adjourned the matter.

Kombinat entered into insolvency proceedings in Montenegro, after which the applicant bank commenced arbitration proceedings in the United Kingdom. The proceedings concern agreements for the supply of aluminium, and the provision of a facility of up to $235m. The Montenegrin Trustee applied, under art 15 of Sch 1 to the Cross-Border Insolvency Regulations 2006, for Kombinat's bankruptcy to be recognised in England. The recognition order was made, resulting in the arbitration proceedings being stayed. The bank applied for an order that the stay be lifted with immediate effect.

In the arbitration, the bank alleged that Kombinat, by deliberate and illegitimate actions, had caused it to be deprived of the benefit of the security it held for the repayment of loans and sought declaratory relief, damages and an indemnity. Kombinat was pursuing a counterclaim of €60 million against the bank.

The bank submitted that: (1) there was no alternative process to determine either the claim or the counterclaim outside the arbitration; (2) there would be no adverse impact on the insolvency process; (3) the arbitration had a purpose; and (4) the court should take into account Kombinat's participation in the arbitration up to November 2014 and its delay in applying for the recognition order. Kombinat opposed this, submitting that monetary claims had been accepted and determined in the bankruptcy proceedings on behalf of the bank and their acceptance meant that the arbitration had no real purpose.

The arbitration was reasonably advanced. Although costs had been and would continue to accrue in the arbitration, the court looked at the assets and liabilities of the insolvency and found that even if costs reached as high as £1m, there were sufficient funds and this would not be a significant loss to other creditors. The fact that the bank's claim was so significant was also relevant, as well as the Trustee's delay in seeking the recognition order.

Whilst weighing up the detriments of lifting the stay, the court had to assess the benefits and detriments of lifting the stay in a context where the insolvency process should offer a convenient and relatively inexpensive process to determine claims and result in more money being available to creditors.

The court ultimately ruled that, whilst numerous factors had been identified in support of lifting the stay, there simply was no point in lifting it at present. The court did not see how it could possibly benefit creditors, either individually or as a whole. It could not be a proper exercise of discretion to allow large costs and considerable time to be incurred in circumstances where it could not be shown, even on the lowest possible scale, there would be a practical benefit, either for the bank or other creditors, by continuing the arbitration. The stay could be lifted if the bank thought it was worth trying to recover its costs of the arbitration or if the Trustee still sought to pursue the counterclaim.

The case is a useful reminder that in order to lift a stay, the Court has to be satisfied that there is some utility in either satisfying the needs of the creditors or debtors.

Short Stories

Spanish Bankrupt's to be given a "second chance".

The Royal Decree-Law 1/2015 dated 27 February 2015 introduces a new mechanism whereby debtors, whose insolvency proceedings have concluded and who have acted in good faith, may apply to have their outstanding debts discharged, provided that (1) the debts of the estate have been paid in full, (2) secured creditors have received 90% of the fair value of the security (pursuant to the 9/10 rule under Royal Decree-Law 4/2014), and (3) at least 25% of ordinary debts have been paid. Alternatively, the debtor may accept a 5 year repayment schedule to be discharged from his outstanding debts. Whilst secured creditor claims may be reduced as a result, they are afforded protection in that they may apply to the Court within 5 years for revocation if the debtor's financial circumstances improve.

Update on the O'Donnells

Brian and Dr Mary Patricia O'Donnell, who were famously declared bankrupt by the High Court of Ireland in August 2013 after opposing the Bank of Ireland's application on COMI grounds, have lost yet another appeal to have their bankruptcy annulled. Despite the finding being confirmed by the Supreme Court in February, a further appeal was heard on 26 March 2015 on the basis that the Bank of Ireland was not a creditor. They alleged that their €65m borrowing was with the Bank of Ireland Private Banking, which they claim had no banking license, rather than the Bank of Ireland. In a separate application in the Court of Appeal, the O' Donnells have lost their appeal over a trespass order granted to the Bank of Ireland by the High Court. The Receiver seeks to sell their Killiney mansion to meet part of the O'Donnells' €71.5 million debt, but the couple have been granted a two week stay until 29 April 2015 to make an appeal to the Supreme Court.

Insolvency Service of Ireland introduce new protocol

The Insolvency Service of Ireland has introduced a new Personal Insolvency Application protocol which sets out the standards terms of arrangement for creditors and Personal Insolvency Practitioners ("PIPs"). Under the protocol, banks and PIPs using the insolvency process will only use agreed documentation and standard terms and conditions, reducing time spent on proposal formation and allowing PIPs to focus on working with creditors on behalf of debtors.

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