Forum shopping when restructuring
The downturn in the shipping and offshore sector has spurred a significant number of financial workout and insolvency proceedings over the last years. Wikborg Rein is involved in a significant number of the on-going restructurings within the OSV segment in Norway and also several international companies in the UK, US, Brazil, China and Mexico. The international nature of the shipping and offshore industry may complicate the financial workout when a company goes into distress, however, the global presence of a company may also present opportunities as the rules of statutory debt reorganisations vary.
The concept of forum shopping
“Forum shopping” is the act of a debtor, creditor or other stakeholder to take advantage of the statutory rules in the jurisdiction that best serves its interests. In a restructuring context the most important rules to seek out would be statutory debt reorganisation procedures which may assist the debtor to continue as a going concern. Examples of such proceedings are administrations and schemes of arrangement in the England and Chapter 11 in the United States.
A stakeholder may access proceedings in jurisdictions other than where the debtor is incorporated, but the access criteria vary depending on the procedure sought. Some proceedings require the debtor to have its “centre of main interest” or an “establishment” within its jurisdiction, whilst the criteria for access in other cases may simply be that the debtor has assets in or contracts governed by the laws of the jurisdiction. Chapter 11 proceedings may for example be initiated by debtors having “assets” within the US – which US courts have considered to be a low threshold that can be satisfied through an unused retainer with an American law firm tasked with drafting the Chapter 11 petition.
If the relevant access criterion is satisfied, the stakeholder can take advantage of this either directly by commencing proceedings within the jurisdiction or indirectly by using the “threat” of commencement as leverage in informal debt reorganisation discussion with other stakeholders.
Reasons to forum shop
There are numerous reasons for a stakeholder to prefer the statutory debt reorganisation procedures of a particular jurisdiction over another – and these can be summarised in four categories:
Firstly, a stakeholder may simply consider the certainty of the process in a particular jurisdiction to be better due to the (perceived) transparency, sophistication, efficiency and flexibility of the relevant proceedings and authorities in handling the restructuring.
Secondly, the ability of the stakeholder to control the process will be of importance when considering the forums available. In this respect the access criteria, the ability of creditors to commence proceedings and the extent of court involvement are important factors. An administrator under the English administration procedure may for example be appointed pursuant to an out-of-court process by a creditor holding a qualifying floating charge. This is an important feature for implementing “pre-packed deals” under the protection of the administration process, where a deal is negotiated by relevant parties first and thereafter executed and implemented by the administrator following his appointment.
Thirdly, it is important to consider the protection of the process during its implementation. In order to efficiently accomplish negotiations and implementation of a restructuring, it will often be imperative to have in place a standstill mechanism preventing single creditor actions and/or termination of contracts due to the commencement of the procedure. Such standstill mechanisms exist under various statutory restructuring mechanisms both in England and the United States, and to an extent lesser in countries such as Norway, but the scope of the standstill varies.
Fourthly, the scope of the process and available tools are possibly the most significant factor to consider. A successful restructuring plan often involves interests of shareholders, secured creditors, unsecured creditors, suppliers, customers and other stakeholders and it should be considered whether all these parties can be included in the process. The voting requirements for implementation of a plan and the option of clampdown whereby a court would impose terms of such plan on non-consenting parties may be vital for a successful restructuring. Significant tools may also be the ability to obtain rescue financing (such as “debtor in possession financing” in US Chapter 11 proceedings) and the ability to plan, execute and implement pre-packed deals.
Recognition of forum shopping
A stakeholder may be able to access a particular jurisdiction to implement and even accomplish a restructuring process, which may be of little value if the implemented restructuring is not recognised in jurisdictions where the debtor has assets or operations. Such recognition will depend partly on the international treaties which the relevant jurisdictions are bound by and partly on the domestic rules applicable within each jurisdiction.
United Nations Commission on International Trade Law has developed a Model Law on Cross-Border Insolvency, but it is only signed by a limited number of nations. The EU has implemented a regulation on insolvency proceedings (Council Regulation (EC) No 1346/2000 of 29 May 2000), which has been important for some forms of forum shopping between e.g. England and other countries within the EU, but this is of limited effect for countries outside of the EU (possibly including England in a Post-Brexit scenario). Amongst the Nordic countries proceedings may be recognised pursuant to the Nordic Bankruptcy Convention of 1933, and the Norwegian Parliament has now approved an amendment to the Norwegian Bankruptcy Act which include the recognition of foreign insolvency proceedings. However, the limited implementation of rules on an international level renders it necessary to consider domestic rules in each relevant jurisdiction when utilising a particular procedure.
From a practical perspective a stakeholder may however be reluctant to contravene rulings of courts in a specific jurisdiction. This is particularly relevant for Chapter 11 proceedings, where creditors with assets or operations within the US may be reluctant to breach the globally imposed stay by US bankruptcy courts.
Risks with forum shopping
In addition to the challenges with international recognition of domestic proceedings, there are other risks which may be encountered when forum shopping in a restructuring. Forum shopping may for example be time and cost consuming in a situation where resources should be utilised elsewhere.
A move from one jurisdiction to another may result in a loss of options that were available in the former jurisdiction. This may be particularly important in respect of the ability of contractual counterparties to rely on termination clauses triggered by initiation of restructuring proceedings – which could be fairly straight forward in England but challenging under US Chapter 11 proceedings or in a Norwegian process.
If the forum shopping involves moving the centre of main interest of the debtor, this may at the same time involve a shift in residency or domicile for tax purposes, which in turn may have adverse consequences for the future of the debtor’s business.
Forum shopping in restructurings is an option and may give stakeholders advantages not otherwise available. The activity may however be costly, time consuming and involve other risks for the restructuring process or the stakeholder. Any international restructuring (and in particular the ones involving forum shopping) will in any event need to take into account complex international and domestic rules regarding access and recognition of the statutory restructuring procedures available in relevant jurisdictions.