‘Good’ and ‘bad’ reasons for the opening of parallel restructuring proceedings

By Ilya Kokorin (Leiden University)

Introduction

It is often the case that financial distress of a firm is addressed in several proceedings opened in different jurisdictions. Once a multinational enterprise faces financial distress, the question arises: how should this financial situation be handled to preserve value and protect the interests of various stakeholders involved? In academic literature, it is suggested that, at least for integrated and interconnected firms, the strategy of jurisdictional and procedural centralisation should be pursued (see here). Such centralisation promotes efficient administration of insolvency estate(s), helps avoid irreconcilable judgments in connected actions, preserves group synergies, and is likely to facilitate restructuring efforts.

In practice, however, the opening of multiple parallel proceedings – each playing an independent role but contributing to the overall restructuring – is common. For example, the restructuring strategies in cases concerning the shipping group Vroon and the provider of financial and retail technology solutions Diebold combined Dutch WHOA plans with an English scheme of arrangement and the US Chapter 11 respectively. Another recent case falling into this category is the restructuring of Cimolai, an Italian construction group. It combined the Italian concordato preventivo and the English Part 26A restructuring plan. Other notable cases worth mentioning here are the restructurings of the oil and gas engineering group McDermott (a US Chapter 11 plan in 2020, followed by a Dutch WHOA plan and an English Part 26A restructuring plan in 2024), the cinema chain operator Cineworld (a Chapter 11 plan and the English administration) and the Hong Kong-based airline Hong Kong Airlines (a Hong Kong scheme of arrangement and an English Part 26A restructuring plan).

In my recent article titled ‘Parallel Restructurings: Challenges and Opportunities’, published in Tijdschrift voor Insolventierecht and available as a working paper on SSRN, I examine the key drivers or reasons behind the practice of parallel insolvency and restructuring proceedings. Do these reasons promote the principles of (cross-border insolvency) law, such as equal treatment of creditors and estate value preservation and maximisation? Are there ‘good’ and ‘bad’ reasons for the existence of parallel proceedings? In my opinion, answering these questions illuminates the areas of law that warrant revision and improvement.

Why parallel proceedings can be problematic

The downsides of having to administer parallel schemes are clear.

 ·       The opening of separate proceedings in different jurisdictions increases transaction costs (eg legal fees, translation and travel costs). For example, the professional fees in McDermott amounted to approximately USD 150 million. While approving the restructuring plan, Justice Michael Green noted that he was “horrified to discover that the Plan Company has spent around US$150 million on professional fees in negotiating with its secured creditors from December 2022 and then putting forward the Plan and taking it to this hearing.”

·       The alignment or dovetailing, and coordination of simultaneous proceedings may fail, especially in the absence of court-to-court communication. It becomes increasingly common for restructuring plans to be contractually interdependent. This type of contractual conditioning of restructuring plans was used in Cimolai, Diebold and Vroon. Thus, if one piece of the ‘restructuring puzzle’ fails, the whole restructuring endeavour might be in danger.

·       Pursuing parallel proceedings could pose a difficulty for judicial authorities. They may not readily sanction a plan which faces substantial opposition in another court. Alternatively, they can be reluctant to refuse the plan if the other court has deemed it fair and necessary to prevent an adverse outcome. These factors could induce both courts to ‘delay’ their decisions until one of them delivers its judgment. This can result in a temporary judicial deadlock, as happened in Vroon.

·       Finally, with more proceedings, there is more room for dissenting creditors and shareholders to raise their concerns and disrupt restructuring efforts. In other words, the more proceedings, the more potential points of failure. The duplication of proceedings gives an additional opportunity to dissenting creditors and shareholders to exercise their holdout leverage. For example, in Vroon, the shareholders whose stake in the business was to a substantial extent wiped out actively objected in both English and Dutch proceedings on the ground that there was no fair distribution of the reorganisation value. Opposing the English scheme, they claimed that for the calculation of value, the relevant comparator was not an insolvent liquidation (as was the case under Dutch law) but an orderly wind-down and sale of the debtor’s assets on a solvent basis.

With so much on the downside, I was curious to explore why the opening of parallel proceedings was nevertheless so widespread, particularly in view of the advancements achieved in the area of international insolvency law.

‘Good’ and ‘bad’ reasons for the existence of parallel proceedings

Applying the principle-based approach, we can think of ‘good’ reasons as those promoting the principles of cross-border insolvency law, such as the estate value preservation and maximisation, equal treatment of creditors, modified universalism and procedural efficiency. In contrast, ‘bad’ reasons fail to uphold these principles and are influenced by other considerations, including political and legal constrains. This division of reasons for the opening of parallel proceedings is not meant to be rigid. Neither does it claim to be exhaustive, as there are certainly other reasons that were not included in my overview.

There are numerous valid reasons for the opening of parallel proceedings. For example, such proceedings may be appropriate if the firm is not integrated, and the businesses of group members are neither aligned, dependent, nor synergistic (ie decentralised groups). Moreover, parallel proceedings can be desirable if the restructuring is operational, and the insolvency estates of debtor companies are too complex to administer as a unit from a single jurisdiction. The initiation of a separate proceeding in a different country could also be necessary for accessing a special legal regime (eg DIP financing or a world-wide stay) for the benefit of creditors and other stakeholders. Conversely, jurisdictional and procedural centralisation tend to be more suitable for situations where the enterprise is closely integrated, group entities are interlinked through cross-entity liability arrangements (eg cross-guarantees) and the restructuring only concerns financial liability, so that trade and involuntary creditors and the operational side of the business are not affected.

Yet the opening of parallel proceedings is frequently driven by non-efficiency-related factors. One such factor pertains to the limitations imposed by national legal provisions related to the recognition of foreign proceedings and restructuring plans. The well-known rule in Gibbs is an example of such a provision (for the discussion of the rule in Gibbs and arguments pro and contra, please listen to the episode of INSOL Talks). Under the Gibbs rule, and subject to a few exceptions, debt should be discharged in accordance with the law governing this debt. As a result, to guarantee cross-border effectiveness of the restructuring of, inter alia, English-law or Hong-Kong-law governed debt, debtors might have no other choice but to run parallel proceedings in the UK or Hong Kong, respectively, to compromise or discharge such debt. Due to the Gibbs rule, some creditors can effectively impose additional costs on other creditors. Compliance with this rule was the major reason for Vroon, Cimolai and Hong Kong Airlines to seek parallel proceedings in different jurisdictions.

Territorialist, underdeveloped or unpredictable national insolvency law can also impede the centralised resolution of financial distress and have an effect akin to the rule in Gibbs. Due to the risk of a restructuring plan not being recognised abroad, such as in the jurisdiction of incorporation or presence of substantial assets, an enterprise may be compelled to start a parallel proceeding in that jurisdiction. By way of example, the lack of a clear and efficient cross-border insolvency law framework in the Netherlands, as well as the general limitations of international insolvency law (such as the strict jurisdictional requirement of COMI or establishment for recognition purposes), directed the Diebold group to initiate a WHOA scheme in parallel to the US Chapter 11. In these cases, the best alternative to a full centralisation could be to minimise the number of parallel proceedings – eg to have one ‘European’ proceeding and one ‘American’ proceeding.

Other limitations may stem from company law of the jurisdiction of the debtor’s incorporation. If the restructuring entails a debt-to-equity swap, alters the constitution and share capital of an overseas company, or otherwise requires changes to be made in a foreign company register, the opening of a proceeding in the jurisdiction of incorporation could be mandated to effectuate such changes. This creates an obstacle to a centralised resolution of financial distress, comparable in effect to the Gibbs rule. In practice, there might be alternatives to the opening of a full-scale proceeding in the jurisdiction of incorporation. For example, English courts sanctioned plans compromising shareholder rights in foreign companies, as long as it was shown that such plans would be effective in the jurisdiction of incorporation (see eg Re Smile Telecoms Holdings Ltd [2022] EWHC 740 (Ch)).

Conclusion

Many parallel restructurings of recent years are success stories, thanks in no small part to practical and commercially oriented lawyers and judges. However, these cases serve as a litmus test, revealing the fundamental challenges and opportunities of international insolvency law. They also highlight the areas of law that should be revisited to ensure the efficient administration of international insolvencies and compliance with the principles of cross-border insolvency law. 

* I would like to thank Géza Orbán, Sid Pepels and Niels Pannevis for their valuable comments on the earlier draft of the article. Special thanks go to Rolef de Weijs for inviting me to attend the NACIIL seminar on 23 November 2023 and for encouraging me to write this article. I am also grateful to the participants of the INSOL International Academics Colloquium in San Diego (21-22 May 2024) for great discussions.