Global Competition in Cross-Border Restructuring and Recognition of Centralized Group Solutions

The outbreak of COVID-19 and the subsequent governmental measures to curb the spread of the virus have affected many businesses. The pandemic particularly impacted multinational enterprises dependent on global supply chains, uninterrupted liquidity flows, and consumer travel (eg airlines, automotive manufacturing, car rentals). LATAM Airlines, Norwegian Air and Hertz, all early victims of the pandemic, had to file for insolvency or restructuring — a process in which several jurisdictions and courts were engaged. The current crisis has been accompanied by the soaring global debt. By some estimates, the total global debt reached USD 296tn by the end of the second quarter of 2021, up from USD 270.9tn a year earlier. Of it, non-financial corporate debt is USD 86tn. Against this backdrop, in the years to come we may expect an increase in the number of international group insolvencies, spanning across national borders.

However, efficient administration of insolvency and restructuring proceedings in the context of enterprise groups faces many challenges. Distinct proceedings are typically opened with respect to individual group entities. Coordination of such proceedings is complicated in an international setting. The lack of harmonization of national insolvency laws and the persistence of territorialist inclinations can hamper the implementation of a coherent group-wide restructuring strategy. To reduce the risk of a piecemeal liquidation and to cut down the costs of running multiple proceedings concerning the same group of companies, a strategy of legal centralization is increasingly used.

In our recent article ‘Global Competition in Cross-Border Restructuring and Recognition of Centralized Group Solutions’ (forthcoming in the Texas International Law Journal, vol. 56, 2022), we (i) observe how various national legal regimes have gradually become an area for innovation or even competition for centralized group insolvency solutions, characterized by the rise of schemes and scheme-like procedures, (ii) explore whether this legal innovation is supported by a solid system of legal instruments at the international level, (iii) examine the ‘weak spots’ in the current international recognition regime, and (iv) share our ideas on its further development with a view to better accommodating centralized group restructurings and promoting ‘good’ global competition in insolvency.

Centralized group solutions and regulatory competition

There are different ways to structure group insolvency proceedings. Yet for closely integrated corporate groups, the most efficient way is often through some form of procedural or operational centralization. Procedural centralization involves concentration of separate proceedings in one jurisdiction or resolution of financial obligations of different group entities via a single proceeding opened with respect to one of them, by extending the effects of restructuring pursuant to so-called third-party releases. Operational centralization deals with how group entities are controlled, managed, or directed in insolvency. For example, operational centralization may be achieved by way of appointing the same insolvency practitioner in multiple proceedings. Unlike procedural centralization, operational centralization is not premised on the number or the location of proceedings but looks at the concentration of the decision-making roles and functions.

Procedural centralization may require centre of main interests (COMI) — the most common jurisdictional factor for insolvency proceedings — of all group members to be in the same country. However, we note that the divergence of approaches to COMI determination and interpretation, its inherent ambiguity and, at times, inflexibility, makes it a difficult standard to use when contemplating a centralized group restructuring. With this in mind, we highlight the rise of new schemes and scheme-like procedures, which depart from the COMI-test and also permit third-party releases. English schemes of arrangement, an efficient instrument to restructure financial obligations of enterprise groups, have in many respects inspired the recent reforms in Singapore, the Netherlands and Germany. This has manifested in the embrace of both flexible jurisdictional tests and the availability of third-party releases.

Thus, a global market for corporate restructuring may be forming. The underlying regulatory competition can serve as a driver for reforms with positive externalities (eg more efficient legal frameworks). But it could also create negative externalities. Flexible jurisdictional criteria may lead to jurisdictional plurality, whereby courts of two or more countries can (potentially) exercise jurisdiction to open proceedings. There is a risk that such jurisdictional plurality will contribute to conflicts, promote breakup of enterprises, and hinder efficient centralized group restructurings.

Cross-border recognition of centralized group solutions

We ask whether the system of UNCITRAL Model Laws for international insolvencies (ie the Model Law on Cross-Border Insolvency (MLCBI), the Model Law on the Recognition and Enforcement of Insolvency-Related Judgments and the Model Law on Enterprise Group Insolvency) effectively and fairly supports group restructurings performed via schemes. In our view, this system can accommodate centralized group solutions and ensure their cross-border recognition. But a number of ‘weak spots’ remain.

One of them stems from the fact that the UNCITRAL Model Laws, particularly the MLCBI, rely on the concept of COMI. Since schemes apply more flexible tests, there may be a mismatch between the two. This mismatch can result in legal uncertainty and complicate the recognition. A recent example is Re Hydrodec Group Plc [2021] NSWSC 755, where the New South Wales Supreme Court refused to grant recognition to the UK Part A1 Moratorium, finding that COMI of the relevant holding company was not in the UK. In the article, we outline different ways of integrating schemes into the existing recognition framework, ranging from a complete departure from the requirement of COMI as a prerequisite to recognition (which we argue is too radical), to the relaxation of rules related to its determination in a financial restructuring context, to a tailor-made international instrument for restructurings. The latter would impose a greater ex post control to ensure the entitlement baseline of objecting creditors under the law originally applicable to their claims.

Another weak spot concerns the provisions of the Model Laws on public policy and adequate protection of creditors. These provisions fulfill an important defensive function. However, especially the notion of ‘adequate protection’ has a strong destabilizing potential. This is so because the ‘adequacy’ is not defined and can be interpreted rather broadly to protect local creditors, justify territorialist biases, and hinder centralized restructuring attempts. One of the main sources of conflict are third-party releases, which receive polar opposite treatment across jurisdictions (see the proposed US Nondebtor Release Prohibition Act of 2021). On this, we note that the mere fact that the law of the recognizing state does not offer the same rule or relief, or that its application would have led to a different outcome compared to that reached abroad, should not by itself be considered a violation of creditors’ rights (or lack of adequate protection), or trigger the application of the public policy hammer.

In this respect, the way forward may be further harmonization of substantive restructuring laws, as well as greater specification as to the way in which the concept of adequate protection is and should be understood and applied in the context of a group restructuring.

Ilya Kokorin is a Meijers PhD candidate at the Department of Financial Law, Leiden University, The Netherlands.

Stephan Madaus is a Professor of Law at the Martin Luther University Halle-Wittenberg, Germany.

Irit Mevorach is a Professor of International Commercial Law at the School of Law of the University of Nottingham and the co-Director of the University of Nottingham Commercial Law Centre.