Proposed legislation may trip-up international bankruptcy filings in the United States

Since enactment, Chapter 11 under the United States Bankruptcy Code has proven a safe haven for international debtors. The opportunity to restructure an entity’s debts in the United States has been a particularly effective device, prompting international corporations to file in the US in lieu of local insolvency proceedings, in large part due to the advantages of the US court system and Chapter 11’s proven track record. However, recently proposed legislation geared towards reforming the US Bankruptcy Code’s venue statute may have the unfortunate, even if unintended, consequence of restricting an international debtor’s ability to file bankruptcy in the US. 

For years, international corporate debtors have sought out protection under the US Bankruptcy Code because it provides protections that are (or at least were) otherwise unavailable in many other jurisdictions around the globe. Notably, a restructuring in the US allows management to stay in control of the company, envisions an immediate and worldwide injunction against all creditor actions, encourages and facilitates new financing, and allows restructuring plans to move forward without unanimous creditor support. Moreover, beyond the US Bankruptcy Code itself, US Bankruptcy Courts tend to move more quickly and be more reorganization friendly than those in other jurisdictions.

A large driver of the US Bankruptcy Courts’ popularity has been ease of access. The statutes that define the parameters of who can be a Chapter 11 debtor, and what court may oversee the restructuring, are extremely broad. Any entity that is domiciled in the US, has a place of business in the US, or has property in the US, may avail itself of Chapter 11. See 11 U.S.C. § 109. A debtor further may file its petition in any venue where it is domiciled (i.e. incorporated), where its principal place of business in the US is located, where its principal assets in the US are located, or in any venue where any of its affiliates can file. See 28 U.S.C. § 1408. In contrast to other countries, the debtor need not be a domestic company to file for bankruptcy in the US Importantly, no threshold or minimum amount of assets located in the US is required to qualify. In fact, courts have considered bank accounts, attorney retainers, and even causes of action owned by a foreign debtor as property in the US for purposes of eligibility. This has allowed many international companies to restructure their debts in the US even though they hold very little assets in the US.

Proposed changes to the venue requirements in the US Bankruptcy Code could threaten the US Bankruptcy Courts’ command of international restructurings, and do so at a time when many of the US’ perceived competitive advantages are diminishing. Specifically, on June 28, 2021, H.R. 4193 was introduced with the purpose of amending the venue statute and modifying these venue requirements. On September 23, 2021, its Senate companion bill was announced with substantially identical language. Both propose to eliminate the ability to “forum shop” by excluding a debtor’s place of incorporation from the venue analysis, and—alarming to international debtors—excluding cash or cash equivalents from the “principal assets” equation. Additionally, any equity interest in an affiliate will be deemed located in the same location as the principal.

Support for this venue reform has been fueled, in part, by testimony in Congress. Generally, this testimony has been focused on controversial third party release provisions implemented in recent mass tort cases such as Purdue Pharma, Boy Scouts of America, and many Catholic diocese bankruptcies. These provisions frequently force creditors to release non-debtor third parties as part of the debtor’s plan of reorganization, even though such releases are arguably not permitted, at least in some circuits, by the Bankruptcy Code. Testimony before Congress asserts that, because of the generous nature of the current venue provisions, debtors are able to manufacture jurisdiction in favorable courts merely by setting up bank accounts or securing a mailing address in the venue of their choice. In effort to stamp out this behavior, the proposed legislation claims to limit “forum shopping” by prohibiting entities from filing in any venue except where their corporate headquarters or principal physical assets—excluding cash and equity interests—are located. Ostensibly, these bills would promote the filing of Chapter 11 cases in other US districts, and steer cases away from the favored courts in New York, Delaware and Texas. In so doing, creditors and stakeholders purportedly will be afforded more opportunities to participate in the bankruptcy proceedings.

Despite their laudable purpose, these proposed amendments could have unexpected and potentially adverse consequences when viewed from an international restructuring prospective. While congressional testimony and other commentators assume that venue reform would merely ensure that domestic companies would file in a different jurisdiction within the US, it is a distinct possibility that international debtors may pass on the US Bankruptcy Courts altogether.

First, some international debtors may simply be denied access to US Bankruptcy Courts. Without the consideration of cash accounts as an avenue toward eligibility, many foreign corporations without tangible assets in the US may not qualify to file a Chapter 11 bankruptcy in any US jurisdiction. Second, even if they do qualify, international debtors may not be able to count on access to the usual and convenient reorganization friendly jurisdictions. Instead, being tied to the location within the US of their tangible assets, foreign entities may be forced to rely less frequented bankruptcy jurisdictions to guide their restructuring. Given the complex issues frequently at play in an international restructuring case, this may cause the debtor and creditors some uncertainty. This uncertainty, in turn, may motivate international debtors to file in their own countries, or in other more advantageous countries, instead.

Notably, this proposed venue reform comes at a time when many countries are emulating the US and revamping their own restructuring laws. As discussed in previous editions of this International Restructuring Newswire, several international jurisdictions have reformed or have proposed to reform their restructuring laws with the design of attracting international debtors:

Italy

Set to take effect in September of 2021, the Italian Code of the Business Crisis and Insolvency seeks to create a means to identify a debtor’s pending financial crisis and manage insolvency with the aim of overcoming financial distress and restoring profitability to the company. In a departure from their previous restructuring system which emphasized liquidation, the new Code’s goal is to restructure and preserve the entity as a going concern. Thus, debt restructuring agreements may be approved with as little as 30 percent approval from the overall debt. However, unlike the US, Italy’s new Code will not feature an automatic stay of enforcement actions by creditors. Instead, the debtor must request the imposition of an injunction from the court.

Canada

In February of 2021, a Canadian court extended the country’s approval of third party release provisions. In Canada, businesses generally reorganize under the traditional insolvency statutes of the Companies’ Creditors Arrangement Act (CCAA). Third party releases under the CCAA—while hotly contested in the US—are a common aspect of restructuring plans. Canadian law also provides an alternative to a CCAA restructuring via the Canada Business Corporations Act (CBCA), which offers a more streamlined approach, but without some of the benefits of the CCAA. The recent court decision makes clear, though, that despite the CBCA’s more limited nature, third party release provisions may still be acceptable. Therefore, companies may still avail themselves of a less cumbersome restructuring available under the CBCA, while still receiving the benefits of third party releases.

The Netherlands

Effective as of January 1, 2021, the Dutch Act on Court Confirmation of Extrajudicial Restructuring Plans has created a debtor-in-possession procedure conducted outside of formal bankruptcy proceedings. Based on the US’ Chapter 11 process, this scheme takes place with limited court involvement, but still allows for a debtor in possession, provides for a stay as to certain creditors, allows the debtor to invalidate ipso facto clauses, sell unencumbered assets in the ordinary course of business, and otherwise restructure its debts in a cram-down plan of reorganization.

Germany

Effective as of January 1, 2021, Germany’s new Act on the Stabilization and Restructuring Framework for Businesses provides for pre-insolvency restructuring proceedings. Prior to its enactment, German companies had no option to restructure their debts through the courts. Now, distressed companies can call upon German courts to restructure their debts and otherwise preserve the going concern value of their business by using many of the same tools available in the US, such as maintaining control of their business, imposing cram down restructuring plans, and implementing collection moratoriums.

Australia

Effective in January 2021, the Corporations Amendment (Corporation Insolvency Reforms) Act 2020 marked the most significant corporate insolvency reform in Australia in nearly thirty years. Inspired by Chapter 11 of the US Bankruptcy Code, this new structure simplifies the debtor-in-possession restructuring process largely in effort to help small and medium sized businesses. While prior law was long criticized as too expensive and too complex because of its “one size fits all” approach, this new legislation incorporates the debtor in possession model, and provides for a streamlined liquidation process when necessary.

United Kingdom

In June 2020, the United Kingdom enacted the Corporate Insolvency and Governance Act of 2020 (CIGA). Similar to other countries, the UK describes these reforms as the most wide-ranging amendments to its insolvency laws in a generation. Notably, CIGA provides for a collection moratorium, invalidates certain provisions of pre-insolvency contracts, and allows entities to propose an arrangement with shareholders and creditors, all of which permits the formation of a cram-down plan similar to what may be accomplished under Chapter 11 of the US Bankruptcy Code.

Singapore

In 2017, Singapore adopted enacted the Companies (Amendment) Act 2017 (Singapore), which made major legislative changes to the restructuring provisions of the Singapore Companies Act (Cap 50) 2006. The new legislation is modelled after Chapter 11 of the US Bankruptcy Code, and affords the benefits of an automatic stay and the granting of super priority to new financing, as well as permits both cram-down plans and pre-packaged plans. As a result, the law has significantly enhanced the restructuring tools available in Singapore courts and propelled Singapore as a leading hub for insolvency in the Asia-Pacific.

India

In May of 2016, India enacted the Insolvency and Bankruptcy Code, which completely overhauled the bankruptcy laws in India. This legislation seeks to incentivize further investment in the country by providing greater certainty and efficiency to the restructuring process. Further, in November of 2019, the Indian Government expanded the scope of the law to make more entities eligible for restructuring.

Given these recent changes, international debtors now have more options than ever. Even without the proposed restrictions on eligibility, foreign entities may less need to flock to the US as before. Further, should the US’ venue laws be amended to prevent easy filings in certain convenient and beneficial venues, international debtors may begin to consider other locales. Simply put, without careful consideration of possible unintended consequences, venue changes in the US could cause foreign entities and their creditors to take their restructurings elsewhere. 

Special thanks to Dallas associate Michael Berthiaume who prepared and authored this content under the supervision of Rebecca Winthrop, Of Counsel in our Los Angeles office.