International companies look to US restructurings for COVID-19 relief | Skadden, Arps, Slate, Meagher & Flom LLP

0

Many foreign companies in financial difficulty due to the COVID-19 pandemic have used the US bankruptcy system to restructure. In 2020, major airlines in Chile, Colombia and Mexico availed themselves of Chapter 11 protections. The oil and gas sector, already struggling with a multi-year fall in commodity prices that has worsened with the pandemic, has also seen an increase in Chapter 11 filings by foreign entities. The world’s largest offshore drilling and wells company, based in London, filed for Chapter 11 in August 2020; and an offshore drilling contractor incorporated in Bermuda followed suit in February 2021. Three months later, the contractor confirmed a Chapter 11 plan that restructured its balance sheet and allowed it to continue operations.

Foreign companies are attracted by the main advantages offered by the United States Bankruptcy Code. Perhaps most importantly, there is a worldwide stay of actions against the debtor while a Chapter 11 case is pending; and management generally retains control of the company, unlike in many jurisdictions, where a liquidator is appointed. U.S. and foreign companies struggling financially should consider whether a Chapter 11 case (or its threat) can help resize their balance sheets.

A foreign entity needs only minimal ties to the United States to receive relief under its bankruptcy laws. Section 109 of the Bankruptcy Code provides that “only a person who resides or has a domicile, establishment or property in the United States, or in a municipality may be a debtor”. Ownership requirements under Section 109 have proven to be relatively easy to meet, making bankruptcy protection in the United States a viable option for many businesses incorporated elsewhere, even if they have little or no business. of business activity in the United States.

A minimal or intangible property in the United States can serve as a “passport” to a foreign entity in the event of bankruptcy in the United States, because the Bankruptcy Code does not specify any minimum amount or threshold. Courts (including in New York) have held that US de minimis property meets the eligibility criteria. Bank accounts with even small balances have served as an easy and common means of satisfying §109(a). Installments paid to professionals (for example., lawyers and financial advisers) may also be the basis of jurisdiction. Intangible assets were also validated, including claims or causes of action against US entities or assets.

Additionally, Chapter 11 can be a viable and effective restructuring tool for foreign entities with US creditors, such as secured creditors and bondholders, who must comply with US court orders.

In addition, filing for bankruptcy in the United States may provide a foreign entity with several other benefits (depending on applicable laws in the entity’s host country), including the global reach of the automatic stay, the absence of insolvency requirement, the ability of existing management to remain in place, and the potential use of a pre-packaged or pre-arranged reorganization plan to complete a rapid and effective balance sheet restructuring. Even the threat of US bankruptcy can convince recalcitrant parties to negotiate an out-of-court restructuring.

Importantly, a foreign debtor will only benefit from bankruptcy in the United States if the bankruptcy court’s orders are enforceable against the debtor’s creditors or are recognized in foreign jurisdictions. For a US bankruptcy filing to be a viable option, creditors must be subject to US jurisdiction and therefore unwilling to violate a US court order for fear of sanctions or other penalties. In addition, certain foreign jurisdictions may recognize and give effect to US orders in their jurisdictions.

Foreign entities that continue to deal with the impact of the COVID-19 crisis can, and in many cases should, use sophisticated, debtor-friendly U.S. reorganization laws to help resolve their business issues.

Download PDF

Share.

Comments are closed.