DEBT RESTRUCTURING RODRIGO OLIVARES-CAMINAL JOHN DOUGLAS RANDALL GUYNN ALAN KORNBERG SARAH PATERSON DALVINDER SINGH HILARY STONEFROST

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1 DEBT RESTRUCTURING RODRIGO OLIVARES-CAMINAL JOHN DOUGLAS RANDALL GUYNN ALAN KORNBERG SARAH PATERSON DALVINDER SINGH HILARY STONEFROST Consultant Editors: LOOK CHAN HO NICK SEGAL OXPORD UNIVERSITY PRESS

2 CONTENTS Author Biographies Table of Cases Table of Legislation xxi xxiii xxxiii I. CORPORATE DEBT RESTRUCTURING Alan Kornberg andsarah Paterson 1. Insolvency in the UK and the US I. Time to Compare 3 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme and Their Relevance in Considering a Restructuring 4 A. Overview 4 B. The Tests of Inability to Pay Debts 4 C. The Cash Flow Test 6 D. The Balance Sheet Test 11 III. Restructuring and Directors'Duties in England and the US 14 A. Groups 18 B. Directors'Duties in the US 19 IV. The Standstill in England 20 V. Vulnerable Transactions 22 A. Transactions at an Undervalue (Section 238 of the Insolvency Act 1986) 22 B. Transactions Defrauding Creditors (Section 423 of the Insolvency Act 1986) 24 C. Preferences (Section 239 of the Insolvency Act 1986) 24 D. Jurisdiction of the Court 27 E. Avoidance of Floating Charges (Section 245 of the Insolvency Act 1986) 27 VI. Avoidance Actions in the United States 27 A. Fraudulent Conveyances 27 B. Preferences The EC Regulation on Insolvency Proceedings I. Preliminary 35 II. Legal Framework 36 A. Purpose 36 B. Interpretation 36 xiii

3 C. Relationship with the Brussels Regulation 37 D. Scope and Application 38 E. International Jurisdiction 38 F. Choice of Law Rules 45 G. Recognition of Proceedings 51 H. Judicial Cooperation 53 I. Rights of Creditors 53 III. Managing the Insolvency of Group Companies 54 A. Group Companies and Sharing of COMIs 54 IV. Application of the EC Regulation to Rescue Plans 60 A. Impact on Discharge and Variation of Debt 60 B. Use of Company Voluntary Arrangements in Main Proceedings 61 C. Use of Company Voluntary Arrangements and Administrations in Secondary Proceedings 62 D. Schemes of Arrangement 63 V. Forum Shopping as a Restructuring Tool 65 A. Introduction. 65 B. Timing Post-Migration: When to Open Insolvency Proceedings \ 70 C. Freedom of Establishment ' 76 D. The Impact of the European Merger Directive 79 VI. Review and Reform? Out-of-Court vs Court-Supervised Restructurings I. Workouts and Other Restructurings in the United States 82 A. Advantages and Disadvantages of Workouts 82 B. Considerations in Out-of-Court Workouts 84 C. Typical Out-of-Court Approaches 86 D. Potential for Failure and a Subsequent Chapter 11 Filing 87 II. Exchange Offers 87 A. Introduction 87 B. Reasons for Doing a Debt Exchange Offer 89 C. US Securities Law Considerations 90 D. Common Tactics in Debt Exchange Offers 100 E. Certain US Federal Income Tax Considerations and Accounting Considerations 102 III. Chapter 11 Plan Standards 103 A. Introduction 103. B. Best Interests Test 105 xiv

4 C. Absolute Priority Rule 106 D. Feasibility and Other Confirmation Standards 110 IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans ~ 114 A. Pre-Petition Activities 114 B. First-Day Filings 118 C. Confirmation Hearing (Day 30-60) 119 D. Post-Confirmation Activities 120 E. Advantages and Disadvantages of a Pre-Packaged or Pre-Arranged Chapter 11 Plan V. The Section 363 Sale Alternative 122 A. Relevant Standard: Sound Business Reason 122 B. Sub Rosa?hn 124 C. Recent Developments: Chrysler and General Motors 125 D. Conclusion 127 VI. Chapter 11 and Administration Compared 128 A. Administration 128 B. Differences in Theory. 128 C. Differences in Practice 129 D. Perceptions of Administration and Chapter VII. The Role of Receivership in English Restructurings 135 VIII. The Role of the Company Voluntary Arrangement in English Restructurings 136 A. Introduction 136 B. Process 137 C. Challenge 139 D. Moratorium 144 E. Retail Businesses 145 IX. English Pre-Packaged Administrations and Corporate Debt Restructurings 146 A. Introduction 146 B. Criticisms of Pre-Packs 146 C. Pre-Pack Guidelines 147 D. Courts' Approach to Pre-Packs 149 X. English Schemes of Arrangement and Corporate Debt Restructurings 155 A. Introduction 155 B. Meaning of'creditor' 155 C. Stages of a Scheme and Related Issues 158

5 XL Comparison Between 'Cramdown' in England Achieved Through a Scheme and a Pre-Packaged Administration and (A) a Chapter 11 Plan of Reorganization and (B) a Section 363 Credit Bid with Stalking Horse 163 A. Introduction 163 B. Case Studies 164 C. Valuation 166 D. Directors'Duties 168 E. Pre-Packaged Administration and Section 363 Sales The UNICITRAL Model Law on Cross-Border Insolvency v I. The Impact of the UNCITRAL Model Law on Cross-Border Insolvency 172 A. Introduction 172 B. Objectives " 172 C. Scope of Application 173 D. Interpretation 173 II. The US Version Chapter A. Overview 174 B. History of Chapter C. Mechanics of Chapter 15 \ 178 III. Chapter 15 Recognition of English Schemes of Arrangement 187 IV. Does the Availability of Chapter 15 Relief Affect the Willingness of US Courts to Accept Jurisdiction in a Chapter 11 Case Where the Debtor's COMI is Outside the US? 190 V. Choosing Between Chapter 15 and Chapter 11 for Foreign Debtors 192 A. The Automatic Stay 192 B. Debtor in Possession Financing 193 C. Automatic Relief 194 D. Additional Protections Under Chapter VI. Notable Litigation Arising Under Chapter A. Litigation Regarding COMI 197 B. Litigation Regarding Available Relief 206 VII. Areas for Potential Improvement 208 VIII. The English Experience of the Model Law The Cross-Border Insolvency Regulations A. Implementation ' 210 B. Framework of the Regulations and Limitations on Application 210 C. Relationship Between the Regulations and Other Bases of Recognition and Assistance Under English Law 211 D. Key Definitions 212 xvi

6 E. Recognition of a Foreign Proceeding and Relief 214 F. Effects of Recognition 217 G. Foreign Creditors' Rights of Access to Proceedings Under British Insolvency Law 222 H. Cross-Border Cooperation 223 I. Commencement of Concurrent Proceedings and Coordination of Relief 227 J. UNCITRAL Guidance 228 II. BANK RESOLUTION John Douglas, Randall Guynn, Dalvinder Singh, and Hilary Stonefrost 5. Legal Aspects of Banking Regulation in the UK and USA I. Introduction " 233 II. The UK Model of Regulation and Supervision 234 A. The Scope of the FSA's Responsibilities 235 B. Bank Supervision 237 III. The US Approach to Bank Supervision 242- A. The Dual Banking System 243 B. The Individual Regulators 245 C. Financial Stability Oversight Council 249 IV. The US Regulation of the Business of Banks and Safe and Sound Requirements 250 A. Safety and Soundness 252 B. Capital and Liquidity Requirements 253 C. The Directors' Duties 254 D. The Common Law Standard 255 E. The Statutory Position 256 F. Other Enforcement Actions Banks in Distress A. Sermons and Burials 259 B. Northern Rock: the Catalyst for the Banking Legislation 260 C. The Institutions to which the Banking Act Applies 262 D. The Role of the Tripartite Authorities 262 E. Early Intervention by the Tripartite Authorities: the Conditions 265 F. The Special Resolution Regime: Part 1 of the Banking Act 268 G. The Banking Institutions' Management and Bank Resolution 270 XVI1

7 H. The Impact of Share Transfers and Property Transfers 271 I. Holding Companies 279 J. The Resolution of Dunfermline Building Society 280 K. Investment Banks 281 L. Cross-Border Cooperation and Resolution Regimes 282 M. Parent Undertakings of Banks Banking Act Restructuring and Insolvency Procedures A. Introduction B. The Administration and Liquidation Regime for Banking Institutions 287 C. The Bank Administration Procedure (BAP) 288 D. Bank Insolvency Procedures 297 E. Building Societies 301 F. The Treatment of Creditors in Bank Insolvencies 302 G. Deposit Insurance 303 H. Cross-Border Bank Insolvency 306 I. Potential Reforms: Investment Bank Failure 308 J. Commissions on Banking Resolution of US Banks and other Financial Institutions I. Introduction 311 II. Fundamentals of Resolution Authority 313 III. Resolution of US Banks 317 A. Background 318 B. Supervisory and Other Tools to Prevent Failure 321 C. Resolution Process 326 D. FDIC-assisted Transactions 331 E. Claims Process 339 F. FDIC Super Powers 339 IV. Resolution Authority over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, 348 A. Background 348 B. Resolution Authority 351 C. Exercise of New Resolution Authority, 352 V. Resolution Authority over Systemically Important Financial Institutions 353 A. Orderly Liquidation Authority Framework 354 B. Key Policy Issues 359 C. Alternatives Based on Bankruptcy Model 367 xvin

8 VI. International Coordination of Cross-Border Resolutions 369 A. Living Wills 369 B. Cross-Border Bank Resolution and National Bank Insolvency Regimes 370 C. Contingent Capital, Recapitalization Programmes, and Bail-Ins 371 VII. Conclusion 372 Annex A 373 III. SOVERIGN DEBT RESTRUCTURING Rodrigo Olivares-Caminal 9. An Introduction to Sovereign Debt Restructuring I. Introduction Litigation Aspects of Sovereign Debt I. Litigation 389 A. An Introduction to Sovereign Debt Litigation 389 B. Some Preliminary Distinctions: In Using a Fiscal Agent and a Trust Structure 395\ C. The H/zott Case and Other Relevant Legal Precedents 396 D. The Interaction of the Pari Passu Clause vis-a-vis Multilateral Debt Payments 404 E. The NML Capital Ltd v the Republic of Argentina Case 406 II. Conclusion Transactional Aspects of Sovereign Debt Restructuring I. Transactional Aspects of Sovereign Debt Restructuring 415 A. An Introduction to the Transactional Aspects of Sovereign Debt Restructuring 415 B. Current Debate on Sovereign Debt Restructuring: Procedures and Methods 417 C. The Sovereign Debt Restructuring Mechanism (SDRM) Proposed by the IM F 420 D. The Use of CACs, Exit Consent, and Term Enhancements 434 E. Some Notes on Class Actions in the Sovereign Debt Context 448 F. Case Study: Uruguay's Debt Reprofiling How to Perform a Successful Exchange Offer 453 II. Conclusion 457 Index 461