I N S O LV E N C Y
DISTRESSED DEBT
Distressed debt in
restructured entities:
a second bite at the cherry
A decision of the English Commercial Court last year emphasises that a
foreign restructuring/composition plan will not automatically discharge a
debtor from liability under a contract governed by English law. In certain
circumstances this may enable a subsequent purchaser of the distressed
debt to enforce against the debtor and obtain a judgment for the full value
of the debt plus interest. Roger Kennell and Patrick Elliot of Brown Rudnick
(London) report on the case.
I
n Global Distressed
Alpha Fund I Limited
Partnership v PT Bakrie
Investindo1 (“Bakrie”)
the facts were as follows:
• The Defendant (“Investindo”)
was and is an Indonesian
entity and part of the Bakrie
Group, which owned and
controlled by the Bakrie family.
• Investindo wished to raise
finance by the issue of $50m
9.625% guaranteed notes (the
“Notes”), which it did via a
Dutch SPV in 1996 pursuant
to a Fiscal Agency Agreement
(the “FAA”). The Notes were
due to mature in 1999 and
repayment was guaranteed by
Investindo under a Deed of
Guarantee. Both the FAA and
the Guarantee were subject to
English law.
• Following the Asian financial
crisis in 1997 there was an
almost immediate default
under the Notes. Then, in
2000-2001 Investindo
underwent a restructuring, in
which its debts were
discharged as a matter of
Indonesia law under a
composition plan which was
approved by the requisite
proportion of creditors and
approved by the Indonesian
court. Creditors were offered
shares in related Bakrie
entities. Investindo
nevertheless continued to exist
as a company, albeit a
dormant one, so it claimed.
• The Claimant (“GDAF”)
purchased $2m of Notes in
late 2009 via
Clearstream/Euroclear and
sough to enforce the
Guarantee. The claim was
issued just before the expiry
of the limitation period.
The key facts cannot
be uncommon:
• A foreign company,
• which owes money under
contracts subject to English
law, and
• which is restructured and
discharged from its debts
under local law.
The question is: does the foreign
restructuring discharge the
company from its liability
under the contract?
The Bakrie decision
In Bakrie it was held that the
answer is no; the restructuring in
Indonesia did not automatically
discharge Investindo from its
obligations under the Guarantee.
Consequently it was held liable to
GDAF for $2m plus 5½ years of
interest at 9.625%.
The Judge held2 that he was
bound by a decision of the
English Court of Appeal from
1890, Antony Gibbs & Sons v La
Société Industrielle et Commerciale
des Métaux3 (“Gibbs”). In that case
a French company had agreed to
purchase copper from the
claimant. After making the
contracts the French company
had gone into liquidation and
consequently did not accept or
pay for the copper. The claimant
claimed damages for the losses
suffered on the resale of the
copper. The defendant argued
that the French insolvency
discharged it from liability under
the contracts and therefore
operated as a total defence.
The Court of Appeal rejected
this argument. The rationale for
this decision was stated clearly,
namely that French law was
irrelevant because it was:
“not a law of the country to
which the contract belongs, or
one by which the contracting
parties can be taken to have
agreed to be bound; it is the law
of another country by which they
have not agreed to be bound.”4
This decision has been approved by
the highest courts5. Therefore, there
currently exists an opportunity for
an investor in distressed debt to
purchase a debt owed by a
restructured entity and to enforce it
for full value. Before that
opportunity, and the factors which
a potential investor should take into
account when considering such a
purchase, are looked at, it is useful
to look at various legal
developments since Gibbs.
Changing legal tide
Despite the antiquity of the rule
in Gibbs, this rule has been
heavily criticised in recent times,
as the Judge in Bakrie noted6. One
commentator has said that “the
Gibbs doctrine belongs to an age of
Anglocentric reasoning which
should be consigned to history.”7
Instead, there is a move towards
universalism, whereby bankruptcy
proceedings (whether corporate or
personal) should be unitary and
should have universal application.
>>
24
SUMMER 2012
DISTRESSED DEBT
I N S O LV E N C Y
“
A FOREIGN
RESTRUCTURING
/COMPOSITION
PLAN WILL NOT
AUTOMATICALLY
DISCHARGE A
DEBTOR FROM
LIABILITY UNDER
A CONTRACT
GOVERNED BY
ENGLISH LAW
”
SUMMER 2012
25
I N S O LV E N C Y
DISTRESSED DEBT
“
ENGLISH LAW
HAS RECOGNISED
HEAVILY
QUALIFIED
UNIVERSALISM
AS A PRINCIPLE,
RATHER THAN
A RULE, OF
ENGLISH LAW 8
”
ROGER KENNELL
Brown Rudnick, London
PATRICK ELLIOT
Brown Rudnick, London
26
English law has recognised heavily
qualified universalism as a
principle, rather than a rule,
of English law8.
There have also been various
legal developments which limit
the potential effect and use of
Gibbs and Bakrie.
a) EU Insolvency
Regulation9: if a
restructuring takes place in a
EU member state then it will
automatically be given the
same effect in the UK as it has
in that member state. In
particular, article 4(2)(e)
provides that the law of the
member state in which the
insolvency proceedings are
opened will govern the effects
of insolvency proceedings on
current contracts to which the
debtor is party. It is interesting
to note that Gibbs would
therefore probably not be
decided the same way today
as it was in 1890.
b) Formal recognition and
assistance: even if the foreign
restructuring takes place
outside the EU there are
various ways by which the
insolvency officeholders can
apply for recognition of any
judgment or approved
composition plan in the
foreign insolvency and ask the
English court for assistance,
namely under the (i)
UNCITRAL Model Law as
implemented in the United
Kingdom by the Cross-Border
Insolvency Regulations 2006
(“CBIR”), (ii) under section
426 of the Insolvency Act
1986 for certain designated
countries or territories (all
Commonwealth countries).
Judges are showing themselves
increasingly willing to grant
wide-ranging assistance to
foreign representatives10.
c) Common law: There is also
a more general scope for
recognition at common law
outside the scope of the
relevant legislation. It has been
said, for example, that the
Cross-Border Insolvency
Regulations supplement the
common law but do not
extinguish it11.
Similarly, in Rubin v
Eurofinance12 (“Rubin”) the
Court of Appeal has held that
a composition plan in US
bankruptcy proceedings can
be given effect to at common
law, despite the fact that none
of the usual jurisdictional
safeguards applicable in civil
and commercial proceedings
in respect of the enforcement
of judgments were satisfied:
the defendants were not in the
US when the judgment was
given, nor did they make a
counterclaim or otherwise
submit to the jurisdiction. In
Bakrie Investindo sought to
rely on the decision in Rubin
to give effect to the Indonesian
Restructuring.
The Judge held that he was bound
by Gibbs. However, he granted
permission to appeal on the
ground that it raised a point of
general public importance and
that the Court of Appeal might
not regard itself as bound by
Gibbs. He accepted that there was
much to be said for overruling
Gibbs13 but held that it was not a
course of action open to him14.
There is currently an appeal
pending to the Supreme Court in
Rubin, which is due to be heard
later in 2012. This could provide a
strong indication of whether the
Supreme Court would maintain
the rule in Gibbs were it to have
the opportunity to reconsider it.
But until the Supreme Court (or
possibly the Court of Appeal)
overrules Gibbs it is good law.
The opportunity which
currently exists and the
factors to consider
It may be that not much distressed
debt in restructured entities will
present the opportunity described
above and there are various
factors which a potential investor
should consider when doing its
due diligence. Obviously each
purchase will have to be assessed
on its merits but the following
factors should generally be taken
into account.
a) Choose debt owned by
entities in respect of which
insolvency proceedings
have been closed: if the
insolvency officeholders in the
relevant country are still in
place then they will be able to
apply to the English court for
assistance, be it at common law,
via the CBIR or section 426.
Crucially, there is no
requirement of reciprocity
under the CBIR so it does not
matter that the country in
which the insolvency
proceedings are opened has
not enacted the Model Law
into domestic legislation,
although some states have
enacted this requirement into
their own domestic law15.
Therefore, if the officeholders
are in place there remains the
possibility that they will apply
for recognition.
b) Choose an entity which
was restructured a long
time ago: this factor follows
on from the previous one. The
officeholders are less likely still
to be in place and access to
documentation for the
defendant entity may prove
difficult. This could create
evidential difficulties for the
defendant i.e. they may not be
able to prove what they have
to, such as discharge by
participation in the
restructuring16.
There is also the fact that the
longer the debt has been
outstanding, the greater the
amount of interest which
could be payable. In Bakrie
GDAF obtained judgment for
the $2m plus 5½ years of
interest at 9.625%, a rate of
return which may be harder to
get in the current economic
climate.
c) Choose the country wisely:
an investor should not
purchase debt in restructured
entities in EU member states,
otherwise the composition
plan will be given automatic
effect. If there are no
insolvency officeholders in
place who can apply for
recognition, then there is a
wider choice.
d) Non-participation by the
previous holder: it may not
be possible for an investor to
enforce the debt if a previous
SUMMER 2012
DISTRESSED DEBT
holder participated in, and is
bound by, the restructuring
and composition plan. In
Bakrie the judge seemed to
leave open the question of
whether GDAF could sue
under the guarantee even if a
previous holder did participate
(para 31).
In any event, in Bakrie neither
GDAF nor Investindo was in a
position to prove such
participation or nonparticipation but the judge
held that Investindo bore the
burden of proof on this
issue17. It was not for the
claimant to prove that there
were no defences to the claim.
If the distressed debt is freely
traded and relatively liquid, it
may be hard to trace the debt
back to the holder at the time
of the restructuring.
e) Check for unhelpful
terms in the contractual
documentation: insofar as
it is possible to check the
wording of the contractual
documentation before
purchase, this should be done
carefully. There may be terms
in the documents themselves,
which limit the right of the
non-participating creditors,
or subsequent purchasers, to
enforce the contract and which
mean that such persons are
bound by the foreign
restructuring, such as a
Collective Action Clause.
f) Enforcement/execution of
judgment: it is pointless
having a judgment or award if
there is no realistic prospect of
enforcing it or even of
recovering the legal costs of
obtaining it. By definition the
restructured entity will at one
stage have been a company
with insufficient assets to pay
all its creditors and those assets
will have been subsumed in
the restructuring and used to
pay creditors. A purchaser
should therefore always have
an eye on enforcement and
identify assets for the potential
execution of any judgment or
arbitration award. But if the
entity was not wound up but
carried on trading after the
restructuring then it may have
subsequently acquired assets
against which the judgment or
award can be enforced.
6.
7.
8.
9.
10.
Summary
The opportunity described above
may not be around forever, given
the legal changes underway and
recent court decisions.
Nevertheless, for a canny investor,
which has done its due diligence,
the opportunity remains.
11.
12.
13.
14.
15.
16.
FOOTNOTES
1.
2.
3.
4.
5.
[2011] EWHC 256 (Comm):
http://www.bailii.org/ew/cases/EWHC
/Comm/2011/256.html.
Paragraphs 26 to 27.
(1890) 25 QBD 399.
Per Lord Esher MR at p. 406.
By the House of Lords in Adams v
17.
I N S O LV E N C Y
National Bank of Greece [1961] AC 255
and by the Privy Council in New
Zealand Loan and Mercantile Agency
Company v Morrison [1898] AC 349
and Wight v Eckhardt Marine GmbH
[2004] 1 AC 147.
Paragraph 14.
Fletcher, Insolvency in Private International
Law 2nd ed. at paragraph 2.127.
Re HIH Casualty & General Insurance
Ltd [2008] 1 WLR 852 at paragraph 7.
(EC) Regulation No. 1346/2000 of 29
May 2000 on insolvency proceedings.
See, for example, the wide disclosure
order granted in Akers v Deutsche Bank
AG (Re Chesterfield United Inc & Re
Partridge Management Group SA)
[2012] EWHC 244 (Ch).
Re Stanford International Bank Ltd &
Ors [2009] EWHC 1441 (Ch) at
paragraph 100.
[2010] EWCA Civ 895.
Paragraph 25.
Paragraph 26.
e.g. Mexico, Romania, South Africa.
This was also an issue in Bakrie.
Investindo was unable to identify any
previous holders of GDAF’s Notes and
was not even in a position to run the
argument that a previous, participating
holder of the notes could not pass on
better title to the Notes than it had: see
paragraph s 29 to 32.
Paragraph 32.
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