Chapter 11: an increasingly popular tool for foreign companies seeking to restructure or liquidate

October 2021 | SPECIAL REPORT: RESTRUCTURING & INSOLVENCY

Financier Worldwide Magazine

October 2021 Issue

Foreign companies are increasingly opting to file for Chapter 11 bankruptcy protection in the US rather than utilising local insolvency regimes to restructure their business, sell assets or even liquidate. Over the past year, more than a dozen large foreign corporations, including airlines, oil drillers and satellite companies, filed bankruptcy cases in the US which, according to the Bankruptcy Research Database at the UCLA School of Law, is more than double the previous high mark set in 2002. Previously, it was more typical for foreign companies to utilise Chapter 11 to implement a prepackaged restructuring agreed with a group of the company’s creditors, but recently, major foreign companies such as large airlines in Chile, Colombia and Mexico and the world’s largest offshore and well drilling company, based in London, filed ‘free-fall’ Chapter 11 cases without having a pre-negotiated restructuring plan prior to filing. This trend seems likely to continue as foreign companies and their advisers gain greater familiarity with Chapter 11 and as foreign debtors continue to complete successful reorganisations, sales or liquidations.

Part of the attractiveness of Chapter 11 is that it is relatively easy for a foreign company to become a Chapter 11 debtor. A company merely needs to “reside or [have] a domicile, a place of business, or property in the United States”. The property prong of the eligibility criteria is particularly broad as there is no particular threshold or minimum amount of assets that are required. Bankruptcy courts that have considered the issue have found that even a minimal amount of property, such as the funds a prospective debtor has in a lawyer’s retainer account, in the US is acceptable.

Another important attraction of Chapter 11 is that management remains in control of the company and the debtor continues to control its assets and run its operations as a debtor in possession (DIP), except in extraordinary circumstances, such as fraud or mismanagement of the debtor. This is distinguishable from some countries like Canada and the UK where a court-supervised monitor is typically installed when a company files an insolvency case or in other jurisdictions where an administrator or trustee is appointed to run the company until it is sold or liquidated.

Upon a Chapter 11 filing, a debtor immediately benefits from bankruptcy’s automatic stay, which provides an injunction against actions against the debtor on a purportedly worldwide basis. The automatic stay gives the debtor breathing space so it can focus on the restructuring and thus, all creditor actions against the company outside of the bankruptcy proceeding must cease – this includes a broad stay of litigation, lien enforcement and almost all other actions that are attempts to enforce or collect prepetition claims against the debtor.

Debtors filing Chapter 11 in the US will also generally be able to access capital markets in the US to obtain financing while the company is in bankruptcy and to fund the debtor’s eventual exit from bankruptcy. The market for such DIP financing is well developed and such financing can be provided by the debtor’s existing lenders, but also may be provided by third parties. The debtor is required to obtain approval from the bankruptcy court for such borrowings. DIP financing can be senior to existing senior secured financing which means that a debtor may be able to obtain DIP financing even if it could not obtain new financing outside of bankruptcy. Foreign corporations filing Chapter 11 have received authorisation for substantial DIP financing, including, for example, LATAM Airlines ($2.45bn), Avianca Holdings ($2bn) and Grupo Aeroméxico ($1bn).

There are several additional benefits of Chapter 11 with respect to the restructuring process. First, with respect to approving a plan, a debtor is required to obtain approval from two-thirds of the creditors in a voting class – this threshold is lower than other jurisdictions, including certain common law jurisdictions where debtors are required to meet a 75 percent threshold. Second, debtors have a broad ability to commence ‘avoidance’ actions that allow the debtor to unwind certain transfers made to or for the benefit of non-debtor parties prior to the bankruptcy filing. The debtor may be successful in pursuing such avoidance actions where the transfer at issue had the effect of preferring certain creditors over others, or was made in exchange for less than reasonably equivalent value. Importantly, aside from the scope, the look-back periods for such actions can be significantly longer compared to certain foreign jurisdictions. If a transfer is avoided, the debtor can recover the property transferred or the value of such property to supplement the assets of the debtor’s bankruptcy estate. Avoidance actions can also result in the avoidance of liens or guarantees granted to lenders as part of pre-bankruptcy restructuring transactions or even forbearance arrangements.

If the debtor is not going to continue operating its business, Chapter 11 generally enables a debtor to sell some or all of its assets free and clear of any existing liens on such assets (with any security interest usually shifting to proceeds of the sale). This process allows the debtor to realise value for its assets in an expedited fashion, with the entire process generally taking only two to four months (sometimes less). The ability to sell assets free and clear of existing liens can be a motivating factor for a Chapter 11 filing itself. On 1 August 2021, Alpha Latam Management, LLC and certain of its affiliates in Colombia and Mexico, which operate a specialty finance business that offers consumer and small business lending services in Mexico and Colombia, filed Chapter 11 to commence a sale process for its Colombian assets. The debtors referred to the attractiveness of selling assets though Chapter 11 (under section 363) in their declaration supporting the Chapter 11 petition: “[i]t quickly became evident, however, that potential buyers would be unwilling to pursue a purchase of the Colombian loan portfolio outside a sale under section 363 of the Bankruptcy Code.”

“Large foreign companies are increasingly taking advantage of Chapter 11’s broad eligibility criteria to complete restructurings where management remains in control of the company and can develop and negotiate a restructuring plan under the protection of the automatic stay while tapping into capital markets in the US for DIP financing.”

Under the Bankruptcy Code, Chapter 11 debtors have a broad right to assume (maintain and perform) or reject (terminate) certain pre-petition contracts and unexpired leases until a Chapter 11 plan is confirmed. Such contracts, subject to assumption and rejection, called executory contracts, are contracts where both parties have material performance obligations remaining. A debtor’s ability to retain favourable contracts, subject to curing any defaults, while terminating those that are disadvantageous, is a powerful tool for a debtor seeking to either reorganise its business or market and sell its desirable assets while shedding undesirable assets.

Chapter 11 holds distinct advantages from the perspective of a foreign company seeking to restructure, sell assets or liquidate. Large foreign companies are increasingly taking advantage of Chapter 11’s broad eligibility criteria to complete restructurings where management remains in control of the company and can develop and negotiate a restructuring plan under the protection of the automatic stay while tapping into capital markets in the US for DIP financing. Chapter 11 also provides advantages for companies seeking to sell assets free and clear of existing liens which may not be possible outside the Chapter 11 context.

Richard J. Cooper is a partner at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +1 (212) 225 2276 or by email: rcooper@cgsh.com. Richard J. Cooper is one of the preeminent cross-border bankruptcy and restructuring lawyers in the United States and is the recognized leader in cross-border and sovereign restructurings involving companies and countries in Latin America and other emerging markets. His practice focuses on domestic and international corporate, municipal, and sovereign restructurings, and he is known for his innovative work on behalf of governments, state-owned entities, creditors, institutional investors, creditor committees, and others in connection with in and out-of-court insolvency proceedings and complex financings (including rescue financings). He has advised clients involved in some of the most prominent and noteworthy restructurings in the U.S. and Latin America over the last 20 years.

John Veraja is an associate at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +1 (212) 225 2854 or by email: jveraja@cgsh.com. John Veraja’s practice focuses on bankruptcy and restructuring. He joined the firm in 2018.

© Financier Worldwide

Richard J. Cooper and John H. Veraja

Cleary Gottlieb Steen & Hamilton LLP