DEBT RESTRUCTURING

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 DEBT
RESTRUCTURING

Rodrigo Olivares-Caminal
John Douglas
Randall Guynn
Alan Kornberg
Sarah Paterson
Dalvinder Singh
Hilary Stonefrost

Consultant Editors:
Look Chan Ho
Nick Segal

1
 1
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 FOREWORD

Over the past decade or so, virtually all developed countries and the majority of emerging
countries have made major changes to their insolvency laws. One would expect that these
changes would exhibit a common philosophy. This is not so. The attitudes of the mosaic of
jurisdictions point in all directions of the compass as legislators wave the legal wand in the
hope of, by magic, conjuring up assets out of thin air.
These changes greatly complicate the international legal arena. This arena is already intensi-
fied in its intricacy by other potent factors. These include the fact that all jurisdictions, except
a handful, are now part of the world economy or seek to become a meaningful participant.
They include the fact that financial crises exacerbate passions and hence drive the panicky
search for some panacea. The result is that the world is immeasurably more daunting than it
used to be from the legal point of view.
Bankruptcy law is the most powerful impulse behind commercial and financial law. Since
there are not enough biscuits and brandy on the raft, it is the law which must ruthlessly
decide who is to be paid, who is to be ahead of the others on the bankruptcy ladder of priori-
ties to escape the swirling tide of debt, who wins and who is lost, who is the victor and who
is the victim. There is no question that bankruptcy is the most critical indicator of the culture
of a legal system in its business law.
In addition, nowadays it is not possible to sidestep the interconnectedness of the world and
hence the global impact of bankruptcy. No state is an island.
The strict black-letter rules of bankruptcy law are the backdrop against which the resolution
of financial difficulties is negotiated. It is probably true that by far the majority of financial
problems are resolved by a private restructuring, but there is nevertheless a pronounced ten-
dency to introduce judicial reorganization statutes as an alternative. Indeed, one of the most
pressing questions in our times as regards bankruptcy law is whether these statutes should be
substantially debtor-protective or creditor-protective. The jurisdictions of the world have
many answers to this question and there is little harmony on the major indicators.
The events of the first decade of the twenty-first century show conclusively the inter-relation-
ship between bank insolvencies, corporate insolvencies, and sovereign insolvencies. Each can
have a contagion effect on the others. Hence the three areas have to be treated as a whole. It
is a great merit of this book that all three are dealt with in one volume.
This work is a major contribution to the practice and the law on this fundamentally impor-
tant topic. It is a work on the most useful aspect of law, namely applied law, the law in action,
what actually happens in the real world. The book is produced by leading practitioners and

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 Foreword

academics in this field who possess an extraordinary depth of experience and knowledge. It
marks a very large step forward in the state of the art.
Philip R Wood, QC (Hon)
Head, Allen & Overy Global Law Intelligence Unit
Visiting Professor in International Financial Law, University of Oxford
Yorke Distinguished Visiting Fellow, University of Cambridge
Visiting Professor, Queen Mary College, University of London
Visiting Professor London School of Economics & Political Science
7 November 2010

vi
 PREFACE

Upon reviewing trends in domestic insolvency law regimes around the world, one point is
strikingly clear, that is, many insolvency laws have recently been amended or are currently
under review. One reason is a political reaction to addressfor the interests of various par-
tiesthe financial and economic cycles which gave rise to some unforgettable crises (eg the
US sub-prime mortgage crisis and the subsequent credit crunch crisis). This review of insol-
vency laws is also a response to a global impetus focused on avoiding liquidation of troubled
companies as well as to the adoption of UNCITRALs cross-border insolvency Model Law.
In times of financial distress, dealing with debt is a complex matter due to the uncertainties
of the outcome and the scarce flow of funds. Corporations doing business in this context are
not exempt from the turmoil. As stated by Stone, corporate restructuring on a large scale is
usually made necessary by a systemic financial crisis, that is, a severe disruption of financial
markets that by impairing their ability to function, has large and adverse effects on the
economy.1 Financial crises do occur and when they occur they can be of great magnitude.
The corporate episodes of Enron, Parmalat, Yukos, and Worldcom were recently shadowed
by the collapse of Lehman Brothers and the bailout and restructuring of several other large
and complex financial institutions. Not to mention the bailouts of Greece and Ireland in the
sovereign arena.

Time is Money: Expedited Insolvency Laws

A corporation that is experiencing liquidity problems could find itself in a position where it
fails to fulfil its obligations as they fall due (liquidity test). However, an illiquid debtor might
still be solvent despite the fact that it is not able to perform its obligations. However, if the
amount of the obligations of the debtor exceeds the value of its assets (assets test), irrespective
of whether it performs its obligations in a timely fashion, and there is no evidence that this
can be reversed in the course of business, sooner or later it will become insolvent.
The differences between an illiquid and an insolvent company are quite significant. The
former could resort to some type of reorganization procedure to restore its solvency while the
latter will have to face liquidation. Although there are different shades of grey as a result of
the different insolvency laws, the liquidation process is straight forward and some general
guidelines can be drawn. In a liquidation, the courtwith the assistance of a liquidator
will dispose of the assets of the insolvent company and will distribute the proceeds among
creditors according to their ranking of priority to collect their claims.
On the other hand, an illiquid company can resort to a restructuring procedure to reduce its
debt burden and regain a sustainable path. These restructuring procedures could be per-
formed under the direction of a court or out of court.

1 Mark Stone, Corporate Sector Restructuring: The Role of Government in Times of Crisis, International

Monetary Fund, Economic Issues No 31 June 2002.

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 Preface

The court-supervised procedures are usually lengthy and demand detailed financial and
commercial disclosure of information about the company. This is in many cases a recipe for
disaster since often bad publicity resulting from the disclosure requirements and the time
elapsed since the beginning of the restructuring can worsen the state of affairs. If this hap-
pens, the position of the corporation can change almost instantaneously from a position of
illiquidity to insolvency, from being potentially viable to a position of being unviable, from
restructuring to liquidation, from a position of recovery to sudden death.
Importantly, the substance of the new expedited bankruptcy laws is that they provide a
signal to creditors that they may be better off engaging in swift, voluntary, and less cumber-
some restructurings than actual insolvency proceedings.
Corporations, during economic stability periods, invest and try to expand. During recessive
periods, corporations try to maintain their market share and develop new lines of business.
In both cases, corporations resort to different financing techniques to raise the required capi-
tal to achieve their objectives. Subject to their debt-to-equity ratio, corporations have to
decide if they are going to finance themselves with debt or equity.
All time low default rates prior to the US sub-prime mortgage crisis had pushed non-bank
financial institutions into new areas in order to extract value during a period of excess cash
and low returns which in turn enabled arranging banks to structure ever bigger and more
complicated debt packages comprising tranches of senior debt, second lien, mezzanine and
sometimes junior mezzanine.2 This de-equitization trend based upon the lower cost of debt,
excess liquidity in banks due to their tradability in the secondary debt market, and collateral-
ized debt obligations repackaging (CDOs and CDOs-squared3) made debt more attractive
in certain markets vis--vis equity. This resulted in an excessive accumulation of debt which
due to a sudden dry-up of liquidity in the capital markets produced an abrupt halt. Many
enterprises, particularly in the financial sector, had to restructure their debt. That fallout also
saw massive amounts of value wiped off the balance sheets of banks along with asset and
business sales thus reducing them from global proportions to a tiny fraction of their previous
size compared to a few years earlier.

The Special Nature of Banks

Banks are especially prone to crises due to the fact that they operate on a fractional reserve
system. Upon the mere spread of a rumour that a bank is in distress, a bank run can occur.
That is the reason why there is an array of tools and mechanisms to prevent it from happen-
ing. However, sometimes banks fail despite the fact that an official safety net is in place inter
alia formally to supervise its activities through a supervisory authority or central bank. The
supervisory system must foresee the possibility of a crisis unfolding and be prepared to
manage it when it occurs. This is why one key function of bank regulation and supervision is
the prevention and management of banking crises albeit its primary function is to protect
depositors. Crisis management in banking involves an array of instruments that includes

2 See S Patel and M Fennessy, The Changing Nature of Stakeholders in Restructurings, 3(5) International

Corporate Rescue, 2006, p 266.

3 A CDO-squared or a CDO2 is a type of CDO where the underlying portfolio includes
tranches of other CDOs.

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 Preface

emergency liquidity support through the lender-of-last-resort (LOLR) role of the central
bank; deposit insurance schemes; and bank insolvency proceedings (including prompt
corrective actions). According to Lastra, government policies for protection of depositors
(both insured and uninsured) should also be included among this array of instruments.4
In addition, another salient feature in dealing with bank insolvencies is the too-big-to-fail
or too-interconnected-to-fail doctrine (TBTF).
As regards bank insolvency proceedings, there are four basic actions that may be taken in
dealing with a financially distressed bank: (1) rehabilitation; (2) sale or merger of the bank as
a going concern; (3) asset sales and liabilities assumptions on a wholesale basis in the context
of downsizing or liquidating the bank; and (4) liquidation, in which case the assets will be
sold and depositors and other creditors claims will be resolved in winding up the bank.5 It
is important to stress in regard to these insolvency proceedings that a bank that is facing
actual or imminent insolvency should have its assets protected through early intervention by
the supervisory authority because the longer an economically insolvent bank is allowed to
continue operations, the higher the costs to the insurance fund.6
The demand for more (or better) regulation following a crisis is certainly a constant in the
history of banking. By their very nature, mechanisms for resolving banking crises and insol-
vencies are ex post.7 The objective is to provide: (1) certain ex ante policies to be implemented
to prevent banking crises as well as measures to strengthen the financial system; and (2) to
explain the array of instruments available to deal with a banking institution in distress in the
event that banking crises occur.

Opportunities for Arbitrage

The transnational reach of many corporations means they are able to raise finance from a
variety of markets and so take advantage of a foreign currency with better terms and lower
costs. This, however, leads to an additional risk: currency risk. When the economies of the
countries of these indebted corporations are going through a recessive period, they are faced
with low rates of return. In a crisis, it is not strange that currencies can be devalued resulting
in even lower rates of return (in terms of net present value). While their income is reduced,
the burden to pay the principal and/or interests of the corporations indebtedness in a foreign
and (maybe) strong/er currency increases. This mismatch, in many cases, has ended in
restructuring episodes. As Rieffel stated, a sharp depreciation of the domestic currency in the
course of a crisis causes companies to default on their loans from domestic banks as well as
from foreign creditors, rendering a large segment of the corporate sector insolvent.8

4
See R Lastra, Cross-Border Bank Insolvency: Legal Implications in the Case of Banks Operating in
Different Jurisdictions in Latin America, Journal of International Economic Law (2003), p 80. Also see
E Hupkes, The Legal Aspects of Bank Insolvency: A Comparative Analysis of Western Europe, the United
States and Canada (Studies in Comparative Corporate & Financial Law) (Kluwer, 2000).
5
H Schiffman, Legal Measures to Manage Bank Insolvency in Economies in Transition in R Lastra and
H Schiffman (eds), Bank Failures and Bank Insolvency Law in Economies in Transition (Kluwer, 1999), p 81.
6
Ibid, p 100; and G Benston, R Eisenbeis, P Horvitz, E Kane and G Kaufman, Perspectives on Safe and Sound
Banking: Past, Present and Future (MIT Press, 1986), pp 3742 and 913.
7 J J Norton, International Co-operative Efforts and Implications for Law Reform, in R Lastra and

H Schiffman (eds), Bank Failures and Bank Insolvency Law in Economies in Transition (Kluwer 1999), p 293.
8 Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad-hoc Machinery (Brookings Institution Press,

2003) pp 434.

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 Preface

The use of debt restructuring mechanisms allows debtor and creditors to negotiate the terms
of an agreement in a shorter period of time avoiding the problem of hold-out creditors, long
and costly procedures, full disclosure of information, bad press, etc.
As previous crises have proven expedited debt restructuring episodes are essential in facilitat-
ing reorganization procedures. Highly indebted corporations have been able to wash their
balances over a short period of time with the collaboration of their creditors gaining a solid
credit ratio. Although we would expect, as it is common, increased business activity in the
debt market, that may not be the case since trying to block a restructuring to obtain better
terms might become too risky.9 In lieu, buying shares of a distressed company in the event of
default (when non-qualified investors usually try to get rid of their shareholding or qualified
investors sell their shareholdings due to a liquidity problem as a result of the crisis) might
provide the possibility to buy the shares of a highly indebted company at low cost.
Thusover a short period of timeby means of a debt restructuring procedure, the default
would be cured and a large portion of the companys liabilities would have disappeared from
the balance sheet. Consequently, a debt restructuring procedure contributes to the viability
of the company and could increase the value of the shares that were bought at steep discount
after an event of default.

The Context of Sovereign Debt

Sovereign debt restructuring has an important degree of complexity (multi-jurisdictional
legitimacy, problems of collective action, etc). Although each sovereign debt restructuring
episode is unique, there are certain similarities that can be recognized. After the restructuring
experiences of the late 1990s (ie Russia, Ukraine, Pakistan, Ecuador, and Uruguay) and the
criticism the IMF suffered due to its International Lender of Last Resort (ILOLR) role in the
Mexican and Asian crises,10 it can be said that two alternatives were developed to tackle
the key problem of the hold-out creditor in the context of sovereign bond restructuring
(a statutory Sovereign Debt Restructuring Mechanism proposed by the IMF and commonly
known under its acronym SDRM;11 and, a contractual approach by the use of exit consents12
and collective action clauses CACs).13 Both alternatives draw from corporate restructuring
techniques either out of court (ie CACs and exit consents) or under the supervision of a
court (SDRM).

9 Moreover, it should also be borne in mind that most companies undergoing reorganizations are service

providers, which in the case of liquidation do not have many assets to liquidate.
10
See Charles W Calomiris, The IMFs Imprudent Role as Lender of Last Resort, 3(17) The Cato Journal
(1998). See also Rosa M Lastra, Lender of Last Resort, an International Perspective, 48(2) The International
and Comparative Law Quarterly (Apr 1999), pp 34061.
11 See International Monetary Fund, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM),

A FactsheetJanuary 2003, available at <http://www.imf.org/external/np/exr/facts/sdrm.htm>.

12
See Lee Buchheit and G Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, UCLA Law Review
48: 5984, 2001.
13
Both alternatives within the contractual approach either have flaws (eg CACs are not included in all
bonds, only in those issued as of late 2003) or can be improved (eg by using them combined or with special
features. It can be argued that in the restructuring of Uruguay sovereign debt in 2003 various techniques were
used together (ie tick-the-box exit consents, the adoption of CACs with the possibility of aggregation, and
term enhancements). However, it is worth noting that in the case of Uruguay there was no default and the
restructuring was launched to prevent a moratorium on the outstanding debt.

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 Preface

Restructuring sovereign debt is like out-of-court corporate debt restructuring. The only
considerable difference is that bothdebtor and creditorknow that upon failure of the
debt restructuring process in the corporate context there is a last resort that does not exist in
the sovereign context (ie the insolvency process).
Although the SDRM, a regime based on US chapter 11, has been considered for the sover-
eign context, the lack of fear of being wound up as the result of a liquidation process
something which is not and would not be available for sovereign statesalters the whole
rationale in sovereign debt restructuring. Neither the government of a sovereign can be
replaced nor can the sovereign be closed down and sold to the highest bidder.14
Sovereign debt crises have been confined to developing countries. However, we are experi-
encing a new phenomenon with the recent credit crises of Iceland, Greece, and Ireland. The
case of Iceland involves the recent collapse of Kaupthing, Glitnir, and Landsbanki, three
internationally active Icelandic banks.
The Icelandic government did not have the capacity to bail out these institutions. This inabil-
ity of the government to save the troubled banks led to a currency crisis which put Iceland on
the brink of a sovereign debt crisis. These banks were both too big to fail and at the same time
too big to be saved.
The Icelandic case has severe connotations since Iceland can be used to reassess the whole
theoretical notion of countries not being able to become insolvent. Despite the fact that
sometimes it is said in a figurative manner that a country is insolvent or bankrupt, technically
speaking, countries cannot reach this condition. First and foremost, a sovereign state always
has the possibility of taxing its citizens (Iceland is a small country with only 300,000 inhabit-
ants, with a large internationally exposed banking sector and with a limited fiscal capacity),
to dispose of its resources (eg natural resources or even part of its territory as happened in the
past with Alaska or Louisiana in the US), or even in extreme circumstances it can have
recourse to the expropriation of assets.
Iceland was followed by Greece. On 2 May 2010, Greece officially received the support of
the EMU and the IMF by means of a credit line of almost 110 billion that will be available
for the next three years (80 billion provided by the EMU and 30 billion from the IMF).
This eases the current liquidity concerns (since refinancing of short end debt will be achieved
without accessing the markets). However, further austerity measures of equal to 30 billion
(ie almost 13 per cent, of Greek GDP) have to be implemented. At the time of writing,
Ireland has been added to the list and is negotiating a financial assistance package. As result
of the Greek case, the EU has put in place the necessary mechanism to provide liquidity and
support the euro. In May 2010 the European Stabilization Mechanism was set up. The
European Stabilization Mechanism comprises the European Financial Stabilization
Mechanism and the European Financial Stability Facility to provide liquidity support to
sovereign states.
The distress and increase in debt levels is the result of a shift in risk allocation, that is, from
the capital markets to the sovereign arena. In other words, the turmoil of the markets has
been calmed down by pouring in government financial aid which in turn resulted in a con-
siderable increase in the amount of sovereign debt. Although financial markets seem to be at

14 See Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad-hoc Machinery (Brookings, 2003), p 293.

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 Preface

ease, sovereign debt markets are very fragile at the moment with serious contagion risk at the
EU level.

About the Book

This is a collaborative effort by some of the leading experts in the field who have pooled their
resources to produce an ultimate guide to debt restructuring, covering corporate, banking,
and sovereign debt.
The approach is theoretical and eminently practical since it is very closely related to different
types of international financial transactions and their legal documentation. Wherever pos-
sible and appropriate, an actual case study will be provided, the law and jurisprudence will
be discussed, and a draft of a relevant clause or example will be provided. This book relies
strongly upon English and US law. This notwithstanding, references to legal norms of other
jurisdictions, as well as EU norms are provided where necessary.
When a creditor is faced with a distressed debtor there are three possible options: to sue, to
seek the aid of a court through a reorganization procedure (this option is not available in the
case of a sovereign entity), or to enter into a voluntarily restructuring. In addition, the latter
envisages a whole array of alternatives. The core subject matter of the book is transactional
restructuring. However, the requisites and feasibility of suing and the possibility of insol-
vency and liquidation of distressed entities will be part of the study to frame the subject and
provide the full spectrum of possibilities.
The aim of this book is to provide an overview of the different techniques to achieve sustain-
able debt restructuring on an expedited basis. In summary, the book will provide (1) a practi-
cal guide for creditors holding distressed debt; (2) debtor options in a distressed scenario;
and (3) the necessary steps to achieve their goals.
Dr Rodrigo Olivares-Caminal
London, November 2010

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 CONTENTS

Author Biographies xxi

Table of Cases xxiii
Table of Legislation xxxiii

I. CORPORATE DEBT RESTRUCTURING

Alan Kornberg and Sarah 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 32

2. The EC Regulation on Insolvency Proceedings

I. Preliminary 35
II. Legal Framework 36
A. Purpose 36
B. Interpretation 36

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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? 80

3. 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

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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 3060) 119
D. Post-Confirmation Activities 120
E. Advantages and Disadvantages of a Pre-Packaged or
Pre-Arranged Chapter 11 Plan 121
V. The Section 363 Sale Alternative 122
A. Relevant Standard: Sound Business Reason 122
B. Sub Rosa Plan 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 11 134
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

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XI. 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 169

4. The UNICITRAL Model Law on Cross-Border Insolvency

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 VersionChapter 15 174
A. Overview 174
B. History of Chapter 15 174
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
Debtors 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 11 194
VI. Notable Litigation Arising Under Chapter 15 197
A. Litigation Regarding COMI 197
B. Litigation Regarding Available Relief 206
VII. Areas for Potential Improvement 208
VIII. The English Experience of the Model LawThe Cross-Border
Insolvency Regulations 2006 210
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

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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 FSAs 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 257

6. 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

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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 283

7. Banking Act Restructuring and Insolvency Procedures

A. Introduction 285
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 308

8. 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

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 Contents

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 381

10. 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 Elliott Case and Other Relevant Legal Precedents 396
D. The Interaction of the Pari Passu Clause vis--vis Multilateral
Debt Payments 404
E. The NML Capital Ltd v the Republic of Argentina Case 406
II. Conclusion 414

11. 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 IMF 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: Uruguays Debt ReprofilingHow to Perform
a Successful Exchange Offer 453
II. Conclusion 457

Index 461

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 AUTHOR BIOGRAPHIES

Dr Rodrigo Olivares-Caminal LLB (Bue), LLM (Warwick) and PhD (London) is a Senior
Lecturer in Financial Law at the Centre for Financial & Management Studies (SOAS),
University of London and has taught in undergraduate and postgraduate courses in various
Schools of Law and Business Schools in the United Kingdom, Greece, and Argentina as well
as in professional training courses in Europe and Asia. He is a Sovereign Debt Expert for the
United Nations Conference on Trade and Development (UNCTAD) and has acted as a
consultant to several international institutions in Washington DC and Europe as well as in
several international transactions with law firms. He has researched at the Centre for
Commercial Law Studies and specializes in international finance, regulation, and insolvency
law. He is the author/editor of seven books and has extensively published in peer-reviewed
journals. He sits on the editorial/advisory board of several law journals in the UK and US and
is a member of national and international institutions and associations specialized in com-
parative commercial and insolvency law.
John Douglas is a partner in Davis Polk & Wardwell LLPs Financial Institutions Group,
heading the firms bank regulatory practice and focusing on bank restructuring and resolu-
tions and other issues arising from the current banking and financial crisis. He has been
involved in some of the most difficult and sensitive matters during the economic crisis,
including advising the boards of directors of Indymac and Bank United, counselling
Citigroup with respect to FDIC matters, advising various parties on the fallout from the
failure of Washington Mutual, and advising various private equity firms on proposed invest-
ments in troubled or failed banks.
Randall Guynn is head of Davis Polk & Wardwell LLPs Financial Institutions Group in
New York. His practice focuses on providing strategic bank regulatory advice and advising
on mergers and acquisitions and capital markets transactions when the target or issuer is a
banking organization or other financial institution. He also advises on bank failures and
recapitalizations, corporate governance and internal controls, cross-border credit risk man-
agement, collateral and global custody issues. His clients include all six of the largest US and
many of the worlds leading European and Asian banking organizations.
Alan Kornberg is Chair of the Bankruptcy and Corporate Reorganization Department
at Paul, Weiss, Rifkind, Wharton & Garrison LLP and handles chapter 11 cases, cross-
border insolvency matters, out-of-court restructuring, bankruptcy-related acquisitions,
bankruptcy-related litigation, and insolvency-sensitive transactions. His clients include
debtors, official and unofficial creditors committees, lenders and other creditors, equity
holders, court-appointed fiduciaries, and investors that focus on distressed situations. Alan
has been named a Dealmaker of the Year by The American Lawyer, and has been selected as
one of the leading bankruptcy/restructuring lawyers by Chambers USA, Legal 500, and The
Best Lawyers in America.
Sarah Paterson is a partner in Slaughter and May specializing in restructuring, insolvency,
and finance. She has acted domestically and internationally in debt restructurings and has

xxi
 Author Biographies

advised on some of the most high-profile restructurings in the English market in recent
years. She advises the full range of stakeholders including debtors, creditors, and government
and regularly advises insolvency practitioners. Sarah contributes to a number of publications
on all aspects of restructuring and insolvency law and is active on various working groups and
committees.
Dalvinder Singh is an Associate Professor of Law at the University of Warwick; Senior
Associate Research Fellow of the Institute of Advanced Legal Studies at the University of
London; and Managing Editor of the Journal of Banking Regulation and Financial Regulation
International.
Hilary Stonefrost is a barrister at 34 South Square practising in insolvency, company, and
banking law. She particularly specializes in schemes of arrangement, directors liabilities, and
minority shareholders rights, as well as general commercial disputes. She has acted for the
administrators or liquidators in a number of major insolvencies including Barings and
Olympia & York. Some of her recent cases include Hellas Telecommunications (Luxembourg)
II SCA and Portsmouth City Football Club Limited, Cheyne Finance Plc; Hammonds v Pro-Fit
USA Ltd; Leeds United Association Football Club Ltd. She was called to the bar in 1991.

xxii
 TABLE OF CASES

1185 Ave of Americas Assoc v Resolution Trust Corp 22 F 3d 494, 498 (2nd Cir 1994) . . . . . . . . 8.118
Abbotts Dairies of Pennsylvania Inc, re 788 F2d 147 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.139, 3.140
Acequia, re 34 F3d 800, 806 (9th Cir 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.94
Affiliated Foods Inc, re 249 BR 770, 788 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.74
Agnew v Commissioner for Inland Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.185
Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] Ch 213 . . . . . . . . . 3.220, 3.283
Allan Applestein TTEE FBO DCA 2003 WL 22743762 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.71
Allan Applestein TTEE FBO DCA Grantor Trust v Argentine Republic 2003
WL 21058248 SDNY May 12 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.131, 11.132
Allied Bank International v Banco Credito Agricola de Cartago 566 F Supp 1440
(SDNY 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.66
Allied Bank International v Banco Credito Agricola de Cartago No 83-7714, slip op
(2d Cir 23 Apr 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.66
Allied Bank International v Banco Credito Agricola de Cartago 757 F 2d 516 . . . . . . . . . 10.66, 10.90,
10.91, 10.93
Amelung, re 2010 WL 1417742 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.92
Anglo American Insurance, re [2001] 1 BCLC 755 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.278
Anthony John Warner (a trustee in bankruptcy of the estate of the late Rene Rivkin) v
Verfides [2009] Bus LR 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.181
Applestein, Macrotecnic International Corpn and EM Ltd v Argentina . . . . . . . . . . . . . . . . . . . . 10.60
Applied Theory Corp, in re 323 BR 838 (Bankr SDNY 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.98
Arena Corpn Ltd, re [2003] All ER (D) 277 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16
Armstrong World Indus Inc, re 348 BR 111, 122 (D Del 2006) . . . . . . . . .3.76, 3.78, 3.87, 3.88, 3.89
ASIC v Plymin, Eliott & Harrison [2003] VSC 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCC 97 . . . . . . . . . . . . . . . . . . . . . . . . 3.184
Atlas Shipping, re 404 BR 726, 733 (Bankr SDNY 2009) . . . . . . . . . . . . . . . . . . . . . . 4.11, 4.78, 4.79
Axona International Credit & Commerce, re 88 BR 597, 61415
(Bankr SDNY 1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.63
Aztec Company, re 107 BR 585 (Bankr MD Tenn 1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.77, 3.78

Bank of America v World of English 23 BR 1015, 101920 (ND Ga 1982) . . . . . . . . . . . . . . . . . . 4.63

Bank of America Natl Trust and Sav Assn v 203 N LaSalle Street Pship 526
US 434, 465 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.70, 3.73, 3.75, 3.83,
3.84, 3.85, 3.86, 3.88
Bank of Australasia v Hall (1907) 4 CLR 1514 (HCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20
Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112. . . . . . . . . . . . . . . . . . . . . . . . 4.192
Barash v Public Finance Co 658 F2d 504, 510 (7th Cir 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.105
Barnes v Osofsky 373 F 2d 269, 27173 (2d Cir 1967) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.46
Barton Manufacturing Co Ltd, re [1998] BCC 827 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.70
Basic Inc v Levinson 485 US 224, 243 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.37
Basis Yield Alpha Fund (Master) 381 BR 37, 436 (Bankr SDNY 2008) . . . . . 4.17, 4.28, 4.1044.108
Bayonne Medical Center, re 429 BR 152, 192 (Bankr DNJ 2010) . . . . . . . . . . . . . . . . . . . . . . . . 1.111
BCCI (No 10), re [1997] Ch 213 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.178
Bear Sterns High Grade Structured Credit Strategies Master Fund Ltd 374
BR 122 (Bankr SDNY 2007), 389 BR 325, 332 (SDNY 2008) . . . . . . . . 4.17, 4.18, 4.934.103,
4.104, 4.108, 4.132
Bell Group Ltd (in liq) v Westpac Banking Corpn (No 9) [2008]
WASC 239 (SC WA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51
Belvedere case Comm Ct Beaune 16 Jul 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.74
Bergman, re 293 BR 580, 584 (Bankr WDNY 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.101

xxiii
 Table of Cases

Betcorp Ltd, re 400 BR 266, 277 (Bankr D Nev 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.30

Binder v Gillespie 184 F 3d 1059, 1065 (9th Cir 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.37
Bluebrook Ltd (commonly known as IMO Carwash), re [2010] BCC 209 . . . . . . . 1.46, 3.275, 3.304,
3.305, 3.309, 3.310, 3.312, 3.313
BNY Corporate Trustee Services Ltd v Euro-sail UK 2007-3BL plc & ors . . . . . . . . . . 1.27, 1.28, 1.31
Bondi v Bank of America NA (in re Eurofood IFSC Ltd) see Eurofood IFSC Ltd
Bonner Mall Partnership, re 2 F 3d 899, 91016 (9th Cir 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.84
Brac Rent-a-Car Inc [2003] 1 WLR 1421 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.15
Braniff Airways, re 700 F 2d 935, 949 (5th Cir 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.141
Brice Road Developments LLC, re 392 BR 274, 283 (6th Cir 2008) . . . . . . . . . . . . . . . . . . . . . . . 3.90
Bridgeport Jai Alai Inc v Autotote Sys Inc (in re Bridgeport Jai Alai Inc) 215 BR 651, 654
(Bankr D Conn 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.90
Briggs v Spaulding 141 US 132(1891) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.56
British Aviation Insurance Co Ltd [2006] BCC 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.282
Brown v Third Natl Bank (in re Sherman) 67 F3d 1348, 1354 (8th Cir 1995). . . . . . . . . . . . . . . . 1.95
Brumark Investment Ltd, re [2001] 2 AC 710, PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.185
Bryson Properties XVIII, re 961 F 2d 496, 504 (4th Cir 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.84
Buttonwood Partners Ltd, re 111 BR 57, 63 (Bankr SD NY 1990) . . . . . . . . . . . . . . . . . . . . . . . . 3.77
Byblos Bank SAL v Al-Khudhairy (1986) 2 BCC 99549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.28
Byers v Yacht Bull Corpn [2010] BCC 368 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.07

Cajun Electric Power Coop Inc, re 230 BR 715, 728 (Bankr NMD La 1999) . . . . . . . . . . . . . . . . 3.91
Calpine Corp v Nevada Power Co (in re Calpine Corp) 354 BR 45
(Bankr SDNY 2006) affd 365 BR 401 (SDNY 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.39
Cambridge Gas Transportation Corp v Navigator Holdings
plc [2006] UKPC 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.192, 4.201, 4.203
Carl Marks & Co Inc v Union of Soviet Socialist Republics 665 F Supp 323
(SDNY 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.122, 11.123, 11.124
Cartesio Oktato es Szolgaltato Case C-210/06 [2009] Ch 354. . . . . . . . . . . . . . . . 2.148, 2.149, 2.151
Case v Los Angeles Lumber Prods Co 308 US 106, 117 (1939) . . . . . . . . . . . . . . . . . . . . . . . 3.80, 3.83
Castle Holdco 4 Ltd, re Case No 09-11761 (REG) Bankr SDNY Apr 22 2009,
May 7 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.57
Charter Commcns, re 419 BR 221, 2678 (Bankr SDNY 2009) . . . . . . . . . . . . . . . . . . . . . . . . . 3.89
Cheyne Finance plc (in rec), re [2008] BCC 182 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.18, 1.21, 1.28
Christian Faith Assembly, re 4902 BR 794, 799800 (Bankr ND Ohio 2009) . . . . . . . . . . . . . . . . 3.90
Chrysler LLC, re 576 F 3d 108 (2d Cir 2009) vacated as moot
130 S Ct 1015 (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1433.152, 3.153
CI Ltd v The Joint Liquidators of Sonatacus Ltd [2007] BCC 186, CA . . . . . . . . . . . . . . . . . . . . . 1.85
Ci4net.com Inc, re [2005] BCC 277 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.118
Citibank NA v Export-Import Bank of the US No 76 Civ 3514 (CBM) SDNY 9 Aug 1976 . . . . 10.56
Clarence Caf Ltd v Comchester Properties Ltd [1999] L&TR 303 . . . . . . . . . . . . . . . . . . . . . . . 3.178
Clydesdale Financial Services Ltd v Smailes [2009] BCC 810 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.255
Collins & Aikman [2006] BCC 861 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.36, 2.62, 2.63, 2.80
Colonial Ford Inc, re 24 BR 1014, 1015 (Bankr D Utah 1982) . . . . . . . . . . . . . . . . . . . . . . . 3.02, 3.03
Colt Telecom Group plc, re [2002] EWHC 2815(Ch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.07
Coltex Loop Central Three Partners LP, re 138 F 3d 39, 4445 (2d Cir 1998) . . . . . . . . . . . . . . . . 3.84
Commodity Futures Trade Commission v Weintroub 471 US 343, 355 (1985) . . . . . . . . . . . . . . 3.160
Compaia de Alimentos Fargo, re 376 BR 427, 433 (Bankr SDNY 2007) . . . . . . . . . . . . . . . 4.65, 4.66
Company, re [1986] BCLC 261 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.28
Condor Insurance Ltd, re 411 BR 314, 318 (SC Miss 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.78
Condor Insurance Ltd, re see also Fogerty v Petroquest Resouces Inc
(in re Condor Insurance Ltd)
Congoleum Corp, re 414 BR 44, 56 (DNJ 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.72
Coury v Prot 85 F3d 244, 2501 (5th Cir 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.118
Creekstone Apartments Assocs LP, re 168 BR 639, 644 (Bankr MD Tenn 1994) . . . . . . . . . . . . . . 3.77
Crestat Bank v Walker (in re Walker) 165 BR 994, 1004 (ED Va 1994) . . . . . . . . . . . . . . . . . . . . . 3.90

xxiv
 Table of Cases

CrissCross Telecommunications Group, re H Ct 20 May 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.69

Crown Vantage Vantage Inc, re 421 F 3d 963, 872 (9th Cir 2005) . . . . . . . . . . . . . . . . . . . . . . . . . 3.72
Crowthers McCall Pattern Inc, re 120 BR 279, 284 (Bankr SDNY 1990) . . . . . . . . . . . . . . . . . . . 3.70
Culmer, re 25 BR 621, 629 (Bankr SDNY 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.13
Cunard SS Co v Salen Reefer Serv AB 773 F 2d 452, 457 (2nd Cir 1985) . . . . . . . . . . . . . . . . . . . 4.11
Cuthbertson v Thomas (1998) 28 ACSR 310 (SC ACT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20
Cypresswood Land Partners I, re 409 BR 396, 422 (Bankr SD Tex 2009) . . . . . . . . . . 3.70, 3.86, 3.93

DOench Duhme & Co v FDIC 315 US 447 (1942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.109

Daily Mail and General Trust see The Queen v HM Treasury and Commrs of
Inland Revenue, ex p Daily Mail and General Trust plc
Daisytek-ISA Ltd (2004) BPIR 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.51, 2.64, 2.67, 2.68, 4.213
Damovo Group SA, re H Ct Apr 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.141
DAP Holding NV, re [2006] BCC 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.93, 2.94
Davis v Willey 263 F 588, 589 (ND Cal 1920) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.92
Debtor (No 101 of 1999), re A [2001] 1 BCLC 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.217, 3.219
Delaware & Hudson Railway Co, re 124 BR 169, 176 (D Del 1991). . . . . . . . . . . . . . . . . . . . . . 3.134
Deutsche Nickel AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.86, 2.105, 2,125, 2.127,
2.129, 2.130, 2.131, 2.137
Diamant v Sheldon L Pollack Corp 216 BR 589, 591 (Bankr SD Tex 1995) . . . . . . . . . . . . . . . . . 1.95
Diggs v Richardson 555 F 2d 848 (DC Cir 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.61
DKLL Solicitors v Revenue and Customs Commissioners [2008] 1 BCLC 112 . . . . . . . . . . . . . . 3.249
Dow Corning 244 BR 705 (Bankr ED Mich 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.78
Drax Holdings, re [2004] 1 WLR 1049 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.92, 2.93
Drexel Burnham Lambert Group 140 BR 347, 350 (SD NY 1992) . . . . . . . . . . . . . . . . . . . . . . . . 3.79
D/S Norden A/S v Samsun Logix Corpn [2009] BPIR 1367 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.183

Elliott Assocs LP CA Brussels 26 Sep 2000 . . . . . . . . . . . . . . . . . . . . 9.09, 10.23, 10.3010.60, 10.65,

10.66, 11.156
Elliott Associates LP v Banco de la Nacin y Repblica del Per 948
F Supp 1203, SDNY (1996), 961 F Supp 83 SDNY (1997),
12 F Supp 2d 328 SDNY (1998), 194 F 3d 363, 2d Cir (NY) (1999),
194 FDR 116, 54 Fed R Evid Serv 1-23 SDNY (2000) . . . . . . . . . . . 10.15, 10.23, 10.3010.60,
10.65, 10.66, 10.99, 10.101,
10.102, 10.103
EM Ltd 2003 WL 22110745 (Summary order 13 May 2005,
USCA 2d Cir, New York) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.24, 10.71, 10.96, 10.101
EMTEC case see MPOTEC (EMTEC) GmbH
English, Scottish & Australian Chartered Bank [1893] 3 Ch 385. . . . . . . . . . . . . . . . . . . . 3.215, 3.288
Enron Directo case High Ct 4 Jul 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.15
Ephedra Prods Liabil Litig, re 349 BR 333 (SDNY 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.78
Ernst & Ernst v Hochfelder 425 US 185, 193 (1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.37
Eurofood IFSC Ltd, re Case C-341/04 [2006] ECR I-3813,
2006 WL 1142304 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18, 2.21, 2.22, 2.24, 2.33, 2.57, 2.72,
2.122, 4.89, 4.139, 4.161, 4.184
Europische Rckversicherungs-Gesellschaft in Zrich (Bankr SDNY Case No 06-13061) . . . . . . 4.56
European Insurance Agency AS, re High Ct 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.06
European Life Assurance Society, re (186970) LR 9 Eq 122 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.08
Eurotunnel Finance Ltd Paris Comm Ct, 2 Aug 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.73
Exaeris Inc, re 380 BR 741, 744 (Bankr D Del 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.134
Exch Commn v Ralston Purina 346 US 119, 125 (1953) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.48
Exchange Travel Agency Ltd v Triton Property Trust [1991] BCLC 396 . . . . . . . . . . . . . . . . . . . . 3.178
Exide Technologies Inc, in re 299 BR 732 (Bankr D Del 2003) . . . . . . . . . . . . . . . . . . . . . . . 1.57, 3.81

FDIC v Liberty National Bank & Trust Co 906 F 2d 961 (10th Cir 1986) . . . . . . . . . . . . . . . . . 8.104
Federal Mogul case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.213

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Fischman v Raytheon Mfg Co 188 F 2d 183, 186 (2d Cir 1951) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.46
Fogerty v Petroquest Resouces Inc (in re Condor Insurance Ltd) 601 F 3d 319 (5th Cir 2010) . . . . . 4.78
FSA v Anderson [2010] EWHC 599 (Ch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
Futur Energy Corp, re 83 BR 470, 495 (Bankr SD Ohio 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.81

Gandi Innovations Holdings LLC, re 2009 WL 2916908 (Bankr WD Tex Jun 5 2009) . . . . . . . . . 4.78
General Motors (GM), re 407 BR 463 (Bankr SDNY 2009) . . . . . . . . . . . . . . . . . 3.1433.152, 3.153
George L Miller v McCown de Leeuw & Co (in re The Brown Schools)
386 BR 37 (Bankr D Del 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.58
German Graphics v Alice van der Schee Case C-292/08 [2009] ECR 00 . . . . . . . . . . . . . . . . . . . . 2.07
Global Ocean Carriers Ltd, re 251 BR 31, 37 (Bankr D Del 2000) . . . . . . . . . . . . . . . . . . . . . . . . 4.63
Gordian Runoff (UK) Ltd Case 06-11563 (Bankr SDNY 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 4.58
Gourdain v Nadler Case 133/78 [1979] ECR 733 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06
Grand Prix Associates Inc, re Case No 09-16545, 2009 WL 1850966
(Bankr DNJ Jun 26 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.57
Greenhaven Motors Ltd, re [1999] BCC 463, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.218
Gulf Coast Oil Corp, re 2009 WL 361741 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.137
Gulf Federal Saving & Loan Assoc v Federal Home Loan Bank Board 651 F 2d 259, 264
(5th Cir 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.62

Hans Brochier Holdings Ltd v Exner [2007] BCC 127 . . . . . . . . . . . 2.33, 2.105, 2.129, 2.1302.139
Harms Offshore AHT Taurus GmbH & Co KG v Bloom [2010] 2 WLR 349, CA . . . . . . . . . . . 4.168
Hawk Insurance, re [2001] 2 BCLC 480 . . . . . . . . . . . . . . . . . . . . . .3.271, 3.274, 3.279, 3.281, 3.280
Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295. . . . . . . . . . . . 2.14, 2.113, 2.117,
2.142, 3.252, 3.314, 3.315
Heron, re [1994] 1 BCLC 667 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.284
Highberry Ltd v Colt Telecom Group plc [2002] EWHC 2815 . . . . . . . . . . . . . . . . . . . . . . . 1.17, 1.21
HIH Casualty & General Insurance Ltd & Ors (McGrath v Riddell) [2008]
1 WLR 852, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.179, 4.203
Hill v Spread Trustee Co [2007] 1 WLR 2404, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.74, 1.76
Hilton v Guyot 159 US 113, 164 (1895) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11
Hirshon v Republic of Bolivia CA No 1.95 CV 1957 (DDC 1995)
post settlement challenge dismissed 979 F Supp 908 (DDC 1997) . . . . . . . . . . . . 11.122, 11.125
HMRC v Portsmouth City Football Club Ltd & Ors [2010] EWHC 2013 (Ch) . . . . . . . . . . . . . 3.210
Holman, re 93 BR 764 (Bankr SD Ohio 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.168
Hopewell Intl Insurance, re 238 BR 25, 50 (Bankr SDNY 1999),
affd 275 BR 699 (SDNY 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14, 4.56, 4.57
Hughes v Lawson (in re Lawson) 122 F 3d 1237, 1240 (9th Cir 1997) . . . . . . . . . . . . . . . . . . . . 1.109
HW Urban GMBH v Argentine Republic No 02 Civ 5699 (TPG), 2003
US Dist LEXIS 23363 (SDNY Dec 30 2003) . . . . . . . . . . .9.09, 11.130, 11.131, 11.133, 11.134
Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20

Iida, re 377 BR 243, 254 (9th Cir BAP 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11, 4.12, 4.15, 4.17
Indiana State Police Pension Trust v Chrysler LLC 130 S Ct 1015 (2009) . . . . . . . . . . . . . . . . . . 3.149
Integrated Telecom Express Inc, re 384 F 3d 108, 120 (3d Cir 2004) . . . . . . . . . . . . . . . . . . . . . . 3.140
IRC v Wimbledon Football Club Ltd [2005] 1 BCLC 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.219
Iridium Operating LLC, in re 373 BR 283, 344 (Bankr SDNY 2007) . . . . . . . . . . . . . . . . . 1.100, 3.89
Iso Lilodw Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation [2002] NSWSC 644 . . . . . . 1.14

J W Atherton v FDIC 519 US 213 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.58

Jackson, re 318 BR 5, 26 (Bankr DNH 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.92
Johnson Machine and Tool Company Ltd, re [2010] BCC 382 . . . . . . . . . . . . . . . . . . . . . 3.259, 3.260
Journal Register Co, re 407 BR 520, 529 (Bankr SD NY 2009) . . . . . . . . . .3.71, 3.73, 3.89, 3.90, 3.95

Kane v Johns-Manville Corp 843 F 2d 636, 649 (2d Cir 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.90
Kass v Eastern Airlines Inc CA No 8700 (Del Ch Nov 14 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.30

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Katz v Oak Industries Inc 508 A 2d 873 (Del Ch 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.30

Katz Agency Inc v Evening News Assn 514 F Supp 423 (DCNY 1981) . . . . . . . . . . . . . . . . . . . . 10.99
Kaupthing Singer & Friedlander Ltd (in administration) [2009] EWCA 2308 . . . . . . . . . . . . . . . 7.81
Kayley Vending, re [2009] BCC 578 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.250, 3.259
Kelly v Armstrong 141 F3d 799, 802 (8th Cir 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.95
Kensington International Ltd v Republic of Congo [2003] EWCA Civ 709, unreported . . . . . . . 10.55
Kensington International II v BNP Paribas SA No 03602569 (NY Sup Ct 13 Aug 2003) . . . . . . . 10.56
Kinsela v Russell Kinsela Pty Ltd (in liq) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.38
Kittay v Atlantic Bank of New York (in re Global Service Group LLC) 316 BR 451
(Bankr SDNY 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56

La Seda de Barcelona SA [2010] EWHC 1364 (Ch) . . . . . . . . . . . . . . . . . . . . . . . . . 2.94, 2.96, 3.270

Landing Assocs Ltd, re 157 BR 791, 811 (Bankr WD Tex 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.93
Landmark Land Co, re 973 F 2d 283 (4th Cir 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.48
Lason Inc, re 300 BR 227, 233 (Bankr D Del 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.74
Lavie v Ran 384 BR 469, 390 BR 257 (Bankr SD Tex 2008), 406 BR 277
(SD Tex 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1154.120
Lehman Brothers Holdings Inc, re No 08-13555 (Bankr SDNY Sep 19 2008). . . . . . . . . . . . . . . 3.138
Lehman Brothers International (Europe) (in administration), re [2009] All ER (D) 83, CA . . . . . . 2.96
Lehman Brothers International (Europe) (in administration) (No 2), re [2010]
BCC 272, [2009] All ER (D) 36, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.266
Leslie Fay Cos Inc, re 207 BR 764, 791 (Bankr SDNY 1997) . . . . . . . . . . . . . . . . . . . . . . . 3.79, 3.142
Lewis v Doran 219 ALR 555 (SC NSW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20, 1.24
Libra Bank Ltd v Banco Nacional de Costa Rica 570 F Supp 870 (SDNY 1983) . . . . . . . . . . . . . 10.66
Licensing by Paolo Inc v Sinatra (in re Gucci) 126 F 3d 380, 390 (2d Cir 1997). . . . . . . . . 3.139, 3.140
Lightwater Corp Ltd v Rep Argentina 2003 WL 21146665, SDNY (2003) . . . . . . . . . . . . 10.15, 10.71
Lion City Run-Off Private Ltd Case 06-B-10461 (Bankr SDNY 2006) . . . . . . . . . . . . . . . . . . . . . 4.58
Lionel Corp, re 722 F 2d 1063 (2d Cir 1983) . . . . . . . . . . . . . . . . . .3.134, 3.135, 3.136, 3.147, 3.153
LNC v Republic of Nicaragua CA Brussels, 2004 . . . . . . . . . . . . . . . . . . . . . 9.09, 10.5710.59, 10.65
LNC Investments Inc v Republic of Nicaragua No 96 Civ 6360, 2000
US Dist LEXIS 7738, SDNY (Apr 2 1999, Jun 6 2000) . . . . . 10.15, 10.23, 10.5710.59, 10.65
Lohnes v Level 3 Commcn Inc 272 F 3d 49, 56 (1st Cir 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.30
Loral Space and Communications Inc 2008 WL 4293781 (Del Ch 2008) . . . . . . . . . . . . . . . . . . . 3.30
Loy, re 380 BR 154, 1645 (Bankr ED VA 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.17
Lyondell Chemical Co v Centerpoint Energy Gas Services Inc
(in re Lyondell Chemical Co) No 09-01039 (REG) Bankr SDNY Feb 26 2009) . . . . . . . . . . 4.64

M C Bacon Ltd, re [1990] BCC 78 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.71, 1.73, 1.79, 1.80

MAAX Corpn, re Case No 08-11443 (CSS) (Bankr D Del 2008) . . . . . . . . . . . . . . . . . . . . . . . . . 4.76
McCarthy & Stone plc and McCarthy & Stone Developments Ltd [2009]
EWHC 712 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.281, 3.300, 3.304, 3.313
McCullough v Brown 162 BR 506, 516 (ND Ill 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.77
McGonigle v Combs 968 F 2d 810, 820 (9th Cir 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.37
McGrath v Riddell [2008] 1 WLR 852, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.139
MacPlant Services Ltd v Contract Lifting Services (Scotland) Ltd 2009 SC 125 . . . . . . . . . . . . . . . 1.24
Macrotechnic Intl Corp v Republic of Argentina and EM Ltd v Republic of
Argentina SDNY Jan 12 2004, No CV 5932 (TPG), No 03 CV 2507 (TPG) . . . . . . . . . . . 10.60
McTague, re 198 BR 428, 43132 (Bankr WDNY 1996) . . . . . . . . . . . . . . . . . . . . . . 4.63, 4.68, 4.69
Madison Hotel Assocs, re 749 F 2d 410, 425 (7th Cir 1984) . . . . . . . . . . . . . . . . . . . . . . . . 3.94, 3.142
Mark John Wilson, Oxford Pharmaceuticals Ltd v Masters International Ltd
[2009] EWHC 1753 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.81, 1.83
Marketxt Holdings Corp, re 361 BR 369, 398 (Bankr SDNY 2007) . . . . . . . . . . . . . . . . . . . . . . . 1.98
MCorp Fin Inc v Bd of Governors of the Fed Res Sys 900 F 2d 852 (5th Cir 1990) . . . . . . . . . . . . 8.39
Meadows Indemnity Co Ltd, re (Bankr MD Tenn, Case No 09-08706). . . . . . . . . . . . . . . . . . . . . 4.56
Mercantile Investment and General rust Co v International Co of Mexico [1893] 1 Ch 484 . . . . 3.262
Mercury Capital Corp v Milford Connecticut Assocs LP 354 BR 1, 10 (D Conn 2006) . . . . . . . . . 3.77

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Metcalfe & Mansfield Alternative Investments, re 421 BR 685 (Bankr SDNY 2010) . . . . .4.1214.127
MFS/Sun Life Trust-High Yield Series v Van Dusen Airport Serv Co 910
FSupp 913, 943 (SDNY 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.101
MG Rover France SAS, re Comm Ct Nanterre 19 May 2005, CA Versailles
15 Dec 2005 [2006] BCC 599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.51, 2.63
Midland Coal, Coke and Iron Co, re [1985] 1 Ch 267 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.263
Miller v US 363 F 3d 999, 1003 (9th Cir 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.72
Millhouse Capital UK Ltd v Sibir Energy plc [2008] EWHC 2614 . . . . . . . . . . . . 4.154, 4.192, 4.205
Mis-State Raceway Inc, re 343 BR 21, 31 (Bankr NDNY 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.92
Mitchell v Carter [1997] 1 BCLC 673 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.168
Moody v Sec Pac Bus Credit Inc 971 F2d 1056, 1070 (3rd Cir 1992) . . . . . . . . . . . . . . . . . . . . . 1.101
Mourant & Co Trustees Ltd v Sixty UK Ltd [2010] EWHC 1890 (Ch) . . . . . 2.88, 3.210, 3.222, 3.223
MPOTEC (EMTEC) GmbH Case C-341/04 [2006] ECR I-3813 . . . . . . . . . . . . . . . . . . . . 2.60, 2.72
My Travel Group plc [2005] 1 WLR 2365. . . . . . . . . . . . . . . . . . . . . . . . . . 3.298, 3.299, 3.300, 3.304

National Bank Ltd, re [1966] 1 WLR 819 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.287

Natl Bank of Newport v Natl Herkimer County Bank of Little Falls 225
US 178, 184 (1912) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.108
National Union Fire Ins Co of Pittsburgh v Peoples Republic of the
Congo 729 F Supp 936 (SDNY 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.90, 10.93
Nations Bank v Variable Annuity Life Insurance Co 513 US 251 (1995) . . . . . . . . . . . . . . . . . . . . 5.45
New World Alliance Pty Ltd, Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 . . . . . . . . . . . . . . . . . 1.14
NFU Development Trust Ltd, re [1972] 1 WLR 1548. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.262
NML Capital Ltd et al v Republic of Argentina hearing transcript
29 Mar 2005 US DC SDNY, ex p motion 21 Mar 2005 . . . . . . . . . . 10.24, 10.6710.75, 10.76,
10.96, 10.101
Nortel Networks SA, re [2009] BCC 343 . . . . . . . . . . . . . . . . . . . . . . . .2.54, 2.78, 2.80, 2.153, 4.213
North Valley Mall LLC, re 2010 WL 2632017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.90

OMelveny & Myers v FDIC 512 US 79 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.54

Official Committee of Unsecured Creditors v RF Lafferty & Co Inc
267 F3d 340 (3d 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.57
Official Receiver v Eichler [2007] BPIR 1636 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.119, 2.120, 2.122
Olympia & York Canary Wharf Ltd [1993] BCC 154 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.179, 3.180
OODC LLC v Majestic Mgnt Inc (in re OODC LLC) 321 BR 128, 140
(Bankr D Del 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.94
Oriental Island Steam Co, re (1874) LR 9 Ch App 557 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.168
Outlon v Savings Institution 84 US 109, 21 L Ed 618 (1873) LEXIS 1318 . . . . . . . . . . . . . . . . . . 5.44

Palmer Clay Prods Co v Brown 297 US 227, 229 (1936) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.112

Pan Am Corp v Delta Air Lines Inc 175 BR 438, 508 (SDNY 1994) . . . . . . . . . . . . . . . . . . . . . . . 3.90
Paolini v ALbertsons Inc 482 F 3d 1149, 1152 (9th Cir 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.30
Paper I partners LP, re 283 BR 661, 678 (Bankr SDNY 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.65
Paramedics Electromedicina Comercial Ltda v GE Med Sys Info Techs
Inc 369 F 3d 645, 654 (2d Cir 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11
Parkside International Ltd [2008] EWHC 3654 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86, 1.87
Peltz v Hatten 279 BR 710, 744 (D Del 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.103
Perpetual Trustee Co Ltd v BNY Trustee Services Ltd and Lehman Bros
Special Finance Inc [2010] BPIR 228, [2010] BCC 59, CA . . . . . . . . . . . . . . . . . . . . . . . . . 4.194
Petition of Clive Paul Thomas 07-B-1209 (Bankr SDNY 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . 5.48
Petition of Jeffrey John Lloyd, re 2005 Bankr Lexis 2794 (Bankr SD NY 2005) . . . . . . . . . . . 4.56, 4.58
Petition of Philip Heitlinger, as foreign representative of AXA Insurance UK plc,
Ecclesiastical Insurance Office plc, Global General and Reinsurance Co Ltd
and MMA IARD Assurances Mutuelles, re Bankr SDNY Case 07-12112 . . . . . . . . . . . 4.56, 4.58
Petition of PRO Insurance Solutions, re 07-B-12934 (Bankr SDNY 2007) . . . . . . . . . . . . . . . . . . 4.58
Petition of Rose, re 318 BR 771 (Bankr SDNY 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.60

xxviii
 Table of Cases

Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143, HL . . . . . . . . . . . . . . . . . . . . . . . . 1.85
Piece Goods Shops Co LP, re 188 BR 778, 791 (Bankr MDNC 1995) . . . . . . . . . . . . . . . . . . . . . . 3.74
PIN Group AG SA (AG Koln, 19 Feb 2008) 73, IE 1/08 ZIP 2008 423 . . . . 2.71, 2.113, 2.121, 2.148
Pioneer Home Builders Inc v Intl Bank of Commerce (in re Pioneer Home
Builders Inc) 147 BR 889, 894 (Bankr WD Tex 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.103
Pravin Banker Assocs Ltd v Banco Popular del Peru 165 BR 379 SDNY (1994), 1995 WL
102840 SDNY (8 Mar 1995), 895 F Supp 660 SDNY (1995), 912 F Supp 77
(SDNY (19 Jan 1996), 1996 WL 734887, SDNY (24 Dec 1996), 109 F 3d 850, 854
(2d Cir 1997), 9 F Supp 2d 300 SDNY (15 Jun 1998) . . . . . . . . . . . . 4.11, 10.15, 10.3010.33,
10.34, 10.36, 10.37, 10.90, 10.92
Prudential Assurance Co Ltd v PRG Powerhouse Ltd
[2007] BCC 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.87, 2.88, 3.210, 3.211, 3.219, 3.223,
3.225, 3.226, 3.268
Prudential Energy Co, re 58 BR 857, 862 (Bankr SDNY 1986). . . . . . . . . . . . . . . . . . . . . . . . . . . 3.90
Public Prosecutor v Segard (as Administrator for Rover SAS) Versailles CA . . . . . . . . . . . . . . . . . . 2.80
PWS Holding Corp, re 228 F 3d 224, 23840 (3d Cir 2000) . . . . . . . . . . . . . . . . . . . . . . . 3.86, 3.142

Qimonda, re 2009 WL 4060083 (Bankr ED Va Nov 19 2009) affd in part 2010

WL 2680286 (ED Va July 2, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.76

R v Hyde JJ (1912) The Times Law Reps vol 106, 152, 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11
Radco Properties Inc, re 402 BR 666, 675 (Bankr EDNC 2009) . . . . . . . . . . . . . . . . . . . . . . 3.73, 3.90
Rajapakse, re H Ct 23 Nov 2006, (Note) [2007] BPIR 99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.156
Ran, re (see also Lavie v Ran) 607 F 3d 1017 (5th Cir 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.120
Red Mountain Financial Inc v Democratic Republic of Congo and National Bank
of Congo CV 00-0164 (CD Cal 29 May 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.54
Republic of Argentina v Weltover Inc 504 US 607, 112 S Ct 2160, USNY 1992 . . . . . . . 10.12, 11.167
Republic of Nicaragua v LNC Investments LLC et Euroclear Bank SA not reported. . . . . . . . . . . 10.23
Republic of Nicaragua v LNC Investments LLC et Euroclear Bank SA No RK 240/03
(Trib de Comm Brussels) 2003, not reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.23
Republic of Nicaragua v LNC Investments LLC No 2003/KR/334 CA Brussels 2004 . . . . 10.23, 10.57
Resolution Trust Corp v CedarMinn Bldg Ltd Pship 956 F 2d 1446, 1455 (8th Cir 1992) . . . . . 8.118
Resorts Intl Inc, re 145 BR 412, 47778 (Bankr DNJ 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.74
Riverstone, re Case No 05-12678, 2005 Bankr WL 213734 (Bankr SDNY Jul 26 2005) . . . . . . . . 4.60
Robert L Helms Construction & Dev Co Inc 139 F 3d 702, 704 (9th Cir 1998) . . . . . . . . . . . . . . 3.72
Rock Indus Mach Corp, re 572 F 2d 1195, 1198 (7th Cir 1978) . . . . . . . . . . . . . . . . . . . . . . . . . 3.139
ROL Manufacturing (Canada) Ltd, re Case No 08-31022 (Bankr SD Ohio Apr 17 2008) . . . . . . . 4.76
Rubin v Manufacturers Hanover Trust Co 661 F2d 979, 991 (2d Cir 1981) . . . . . . . . . . . . . . . . . 1.98
Rubin and Lan v Eurofinance SA [2009] All ER (D) 102, [2010] 1 All ER (Comm) 81,
[2010] EWCA Civ 895, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.150, 4.198

Saad Investments Finance Co (No 5) Ltd, re Case No 09-13985 (KG)

(Bankr D Del, Nov 5 2009, Nov 11 2009, Dec 4 2009). . . . . . . . . . . . . . . . . 4.1094.114, 4.132
Samsun Logix Corpn v DEF [2009] BPIR 1502 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.174, 4.175
Sandell v Porter (1966) 115 CLR 666 (HCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20, 1.24
Schacht v Brown 711 F2d 1343, 1350 (7th Cir) cert den 464 US 1002,
104 S Ct 508, 78 L Ed 2d 698 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56
Schefenacker plc, re (Bankr SDNY Case 07-11482) . . . . . . . . . . . . . 2.86, 2.105, 2.107, 2.125, 2.127,
2.128, 2.129, 2.130, 2.131, 2.137, 4.56
Scottish Lion Insurance Co Ltd, re [2009] CSOH 127 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.289, 3.290
SCT Industrie AB I likvidation v Alpenblume AB [2009] ECR 00 . . . . . . . . . . . . . . . . . . . . . . . . 2.06
SE Services Ltd H Ct 9 Aug 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.259
SEA Assets Ltd v Perusahaan (Persero) PT Perusahaan Penerbangan Garuda Indonesia
[2001] EWCA Civ 1696 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.219
Sea Voyager Maritime Inc v Bielecki [1999] 1 BCLC 133 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.219
Seagon v Deko Marty Belgium NV Case C-339/07 [2009] ECR I-767 . . . . . . . . . . . . . . . . 2.06, 2.112

xxix
 Table of Cases

Secured Equipment Trust of Eastern Air Lines Inc, re 153 BR 409, 412 (Bankr SDNY 1993) . . . . 4.63
Seijas v Republic of Argentina 04 Civ 0400 (TPG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.138
Sentinel Management Group Inc, re 398 BR 281, 2967 (Bankr ND Ill 2008) . . . . . . 3.92, 3.94, 3.97
Shakespeares Pie Co v Multipye [2006] NSWSC 930 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
Sharp Intern Corp, re 403 F3d 43, 56 (2nd Cir 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.94
Shierson v Vlieland-Boddy [2005] 1 WLR 3966, CA . . . . . . . . . . . . . . . . . . . . . . . . 2.25, 2.26, 2.111
Sidwell & Co Ltd v Kamchatimpex 632 NYS 2d 455 (NY Sup 1995) . . . . . . . . . . . . . . . . . . . . . 10.99
Silvia Seijas and others v Republic of Argentina SD NY 2004 . . . . . . . . . . . . . . . . . . . . . . 9.09, 11.111
Sisu Capital Fund Ltd v Tucker [2006] BPIR 154 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.210, 3.218
Sneath v Valley Gold Ltd [1893] 1 Ch 477 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.262
Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd [2010] L&TR 8 . . . . . . . . . . . . . . . . . . . . 3.184
Source Enters Inc, re 392 BR 541, 5556 (SDNY 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.92
Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation 188 ALR 114,
(2001) 39 ACSR 305 (SC NSW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14, 1.20
Southern Pacific Transp Co v Voluntary Purchasing Groups Inc, re 252 BR 373, 391
(ED Tex 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.74
Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.279
SPhinX Ltd, re 371 BR 10 (SDNY 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.814.92, 4.98, 4.106
SRM Global Master Fund LP & Ors v Commissioner of Her Majestys Treasury
[2009] EWCA Civ 788 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
Stanford International Bank Ltd, re [2009] BPIR 1157, [2010]
All ER (D) 219, CA . . . . . . . . . . . . . . . . . . . . . . . 2.24, 2.122, 4.145, 4.148, 4.158, 4.161, 4.162
Statutory Comm of Unsecured Creditors v Motorola Inc (in re Iridium Operating LLC)
373 BR 283, 345 (Bankr SDNY 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.103
Staubitz-Schreiber Case C-1/04 [2006] BPIR 510. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.26, 2.112
Steadman, re 410 BR 397, 402 (Bankr DNJ 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.16
Stocznia Gdynia SA (Bud-bank Leasing) Sp zo.o [2010] BCC 255 . . . . . . . . . . . . . . . . . . 4.139, 4.153
Stojevic, re Higher Reg Ct Vienna 9 Nov 2004 28 R 225/04w . . . . . . . . . . . . . . . . . . . . . . . 2.54, 2.153
Suburban Motor Freight Inc, re 124 BR 984, 994 (Bankr SD Ohio 1990) . . . . . . . . . . . . . 1.102, 1.104
Summit Global Logistics, re 2008 WL 819934 (Bankr DNJ Mar 26 2008) . . . . . . . . . . . . . . . . . 3.137
Sunberry Properties Ltd v Innovate Logistics Ltd [2009] BCC 164 . . . . . . . . . . . . . . . . . . . . . . . 3.184
Swissair Schweizerische Luftverkehr-Atkiengesellschaft [2009] BPIR 1505, re . . . . . . . . . . . . . . . 4.178

T&D Industries plc (in administration) [2000] 1 WLR 646 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.246

T&N (No 3) Ltd [2007] 1 BCLC 563 . . . . . . . . . . . . . . . . . . 2.96, 3.215, 3.220, 3.268, 3.269, 3.270
T&N and others (No 4) [2007] Bus LR 1411 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.263
Tam, in re 170 BR 838 (Bankr SDNY 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14
Taxman Clothing Co, re 905 F2d 166, 170 (7th Cir 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.100
Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 (SC Vict) . . . . . . . . . . . . . . . . . . . . . . . . . 1.20
Tea Corporation, re [1904] 1 Ch 12, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.299, 3.304
Telia AB v Hillcourt (Docklands) Ltd [2003] BCC 856. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.33
Texas & Pacific Railway Co v Pottorff Receiver No 128 291 US 245, 54 S Ct 416,
78 L Ed 777, 1934 US 959 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.44
Texas Co v Chicago & SR Co 36 F Supp 62, 65 (D Ill 1940), revised on other grounds
126 F 2d 83, 8990 (7th Cir 1942) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.118
Texas Commerce Bank NA v Seymour Licht 962 F 2d 543 (5th Cir 1992) . . . . . . . . . . . . . . 3.02, 3.23
The Queen v HM Treasury and Commrs of Inland Revenue, ex p Daily Mail and
General Trust plc Case 81/87 [1988] ECR 5483 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.149, 2.150
TPC Korea Co Ltd H Ct, No 19984 of 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.175
Trans Max Techs Inc, re 349 BR 80, 89 (Bankr D Nev 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.81
Transbus International Ltd, re [2004] 1 WLR 2654. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.247
Treco, re 240 F 3d 148, 154 (2nd Cir 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11
Trenwick America Litig Trust v Billet 931 A 2d (Del 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.57
Trenwick America Litig Trust v Ernst & Young LLP 906 A 2d 168 (Del Ch 2006) . . . . . . . . . . . . . 1.57
Tri-Continental Exchange Ltd, re 349 BR 627, 63132 (Bankr ED Cal 2006) . . . . . . . . . . . . . . . 4.15
Trigo Hnos Inc v Premium Wholesale Groceries Inc 424 F Supp 1125, 1133 (SDNY 1976) . . . . 10.99

xxx
 Table of Cases

Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532 (FCA). . . . . . . . . . . . . . . . . . . . . 1.14
TS Industries Inc 117 BR 682 (Bankr D Utah 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.02
TSIC Inc, re 393 BR 71, 77 (Bankr D Del 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.89
TXU Europe German Finance BV [2005] BCC 90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17, 2.113

UDL Argos Engineering & Heavy Industries & others v Li Oi Lin & others
[2001] HKEC 1440, [2002] 1 HKC 172 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.279, 3.283
Union Bank v FSLIC 724 F Supp 468, 471 (ED Ky 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.118
Union Meeting Partners, re 165 BR 553, 574 (Bankr ED Pa 1994) . . . . . . . . . . . . . . . . . . . . . . . . 3.70
United Rental Inc v Angell 592 F3d 525, 528 (4th Cir 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.105
United States v JA Jones Construction Group LLC 333 BR 637 (EDNY 2005) . . . . . . . . . . . . . . . 4.17
Universal Casualty & Surety Co v Gee (in re Gee) 53 BR 891, 901 (Bankr SDNY 1985) . . . . . . . . 4.13
Urban v Republic of Argentina see HW Urban v Republic of Argentina . . . . . . . . . . . . . . . . . . . . . . xxx
US v Green 201 F3d 251, 254 (3rd Cir 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.91
US v Philadelphia National Bank et al 374 US 321, 83 S Ct (1963) . . . . . . . . . . . . . . . . . . . . . . . . 5.44
US Intern Trade Comn v Jaffe Case No 10-cv-367, 2010 WL 2636096
(Bankr ED Va June 28 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.38

Vantive Corp Sec Litig 283 F 3d 1079, 1085 (9th Cir 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.37
Verlinden BV v Central Bank of Nigeria 461 US 489, 103 S Ct 1969 . . . . . . . . . . . . . . . . . . . . . 10.12
Vocalion (Foreign), re [1932] 2 Ch 196. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.168

Waccamaws Homeplace, re 325 BR 524, 529 (Bankr D Del 2005) . . . . . . . . . . . . . . . . . . . . . . . 1.100

Ward, in re 201 BR 357, 362 (Bankr SDNY 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14
Washington Bancorporation v Wafic R Said (1993) 812 F Supp 1256 (1993) . . . . . . . . . . . . . . . . 5.56
Washington Mutual Inc, re No 08-12229 (MFW), 2009 WL 4363539
(Bankr D Del Dec 2 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14
Wellman v Dickinson 475 F Supp 783, 82324 (SDNY 1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33
West Mercia Safetywear Ltd (in liq) v Dodd (1988) 4 BCC 30, CA . . . . . . . . . . . . . . . . . . . . . . . . 1.37
White ACT (in liq) v White GB & ors [2004] NSWSC 71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
Wind Hellas case see Hellas Telecommunications (Luxembourg) . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx
Woodbrook Assocs, re 19 F 3d 312, 31920 (7th Cir 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.86
World Health Alternatives Inc, re 344 BR 291, 29798 (Bankr D Del 2006) . . . . . . . . . . . . . . . . . 3.89
WRT Creditors Liquidation Trust v WRT Bankr Litig Master File Defendants
(in re WRT Energy Corp) 282 BR 242, 441 (Bankr WD La 2001) . . . . . . . . . . . . . . . . . . . 1.102

Yukos Oil Co, re 321 BR 396, 41011 (Bankr SD Rex 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.68

Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345 . . . . . . . . . . . . . 3.276

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 TABLE OF LEGISLATION
EUROPEAN UNION
EC Treaty
art 43 . . . . . . . . . . . 2.97, 2.144, 2.147, 2.148
art 48 . . . . . . . . . . 2.144, 2.145, 2.147, 2.148
Regulations
European Cooperative Society, Reg (EC)
1435/2003 [2003] OJ L207/1 . . . . . 2.146
European Economic Interest
Grouping (EEIG), Reg (EEC)
2137/85 [1985] OJ L199/1 . . . . . . . 2.146
Insolvency Proceedings, Reg (EC)
1346/2000 [2000]
OJ L160/1 . . . . . . . . . 2.012.154, 4.32, 4.
139, 4.141, 4,142,
4.153, 4.184, 4.205
rec (4) . . . . . . . . . . . . 2.98, 2.99, 2.114, 2.144
rec (10) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.85
rec (12) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
rec (13) . . . . . . . . . . . . . . . . 2.19, 2.22, 2.116,
4.32, 4.161
rec (14) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.11
rec (22) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.51
rec (24) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.37
rec (26) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.45
rec (33) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16
art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.96
art 1(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.08
art 2(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.29
art 2(d) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.85
art 2(g) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.43
art 2(h) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.32
art 3 . . . . . . . . . . . . . . . . . . . .2.11, 2.20, 2.27
art 3(1) . . . . . . . . 2.11, 2.19, 2.26, 2.85, 4.160
art 3(2) . . . . . . . . . . . . 2.16, 2.32, 2.33, 2.133
art 3(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.28
art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.38
art 4(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35
art 4(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35
art 4(2)(d) . . . . . . . . . . . . . . . . . . . . . . . 2.45
art 4(2)(f ) . . . . . . . . . . . . . . . . . . . . . . . . 2.46
art 4(2)(i) . . . . . . . . . . . . . . . . . . . . 2.36, 2.80
art 4(2)(j) . . . . . . . . . . . . . . . . . . . . 2.82, 2.91
art 4(2)(k) . . . . . . . . . . . . . . . . . . . . . . . 2.82
art 4(2)(m) . . . . . . . . . . . . . . . . . . . . . . . 2.45
arts 515 . . . . . . . . . . . 2.37, 2.48, 2.56, 2.77
art 5 . . . . . . . . . . 2.38, 2.39, 2.41, 2.43, 2.44,
2.45, 2.46, 2.47, 2.55
art 5.1. . . . . . . . . . . . . . . . . . . . . . . . . . . 2.38
xxxiii
art 5(1) . . . . . . . . . . . . . . . . . .2.40, 2.41, 2.45
art 5(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.40
art 5(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.42
art 5(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.45
art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.45
art 7 . . . . . . . . . . . . . . . . . . . . . . . . 2.45, 2.55
art 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.45
art 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.45
art 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.46
arts 1618 . . . . . . . . . . . . . . . . . . . . . . . 2.06
art 16 . . . . . . . . . . . . . . . . . . .2.48, 2.66, 2.67
art 17(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.48
art 17(2) . . . . . . . . . . . . . . . . .2.28, 2.49, 2.82
art 18(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.50
art 18(2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.50
art 18(3) . . . . . . . . . . . . . . . . . . . . . . . . . 2.50
art 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.48
art 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.55
art 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.48
art 26 . . . . . . . . . . . . . . . . . . . . . . 2.50, 4.139
art 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35
art 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.46
art 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.54
art 31(2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.79
art 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.30
art 33(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.79
art 34 . . . . . . . . . . . . . . . . . . . . . . . 2.29, 2.89
art 34(2) . . . . . . . . . . . . . . . . . . . . . 2.82, 2.89
art 37 . . . . . . . . . . . . . . . . . . . . . . . 2.17, 2.31
art 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.55
arts 4042 . . . . . . . . . . . . . . . . . . . . . . . 2.55
art 45 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.153
art 46 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.154
Annex A . . . . . . . . . . . . . . . . . . . 2.153, 4.153
Annex B . . . . . . . . . . . . . . . . . . . . . . . . 2.153
Annex C . . . . . . . . . . . . . . . . . . . 2.153, 4.153
Insolvency Proceedings (Lists),
Reg 603/2005 [2005]
OJ L100/1 . . . . . . . . . . . . . . . . . . . . 2.153
Jurisdiction and recognition and
enforcement of judgments in civil
and commercial matters, Reg (EC)
44/2001 [2001] OJ L12/1 . . . . . . . . . 2.05
art 1(2)(b) . . . . . . . . . . . . . . . . . . . 2.05, 2.06
Statute for a European Company,
Reg (EC) 2157/2001 . . . . . . . . . . . . 2.146
Directives
Deposit-guarantee Scheme,
Dir 94/19/EC. . . . . . . . . . . . . . 7.84, 7.104
 Table of Legislation

Deposit-guarantee Scheme, Singapore

Dir 09/14/EC. . . . . . . . . . . . . . . . . . 7.104 State Immunity Act 1979 . . . . . . . . . . . . . 10.08
Markets in Financial Instruments
(MiFID) . . . . . . . . . . . . . . . . . . . . . . . 6.88 South Africa
Mergers (Cross Border Mergers
of Limited Liability Companies), Dir Foreign States Immunity Act 1981 . . . . . . 10.08
(EC) 2005/56 [2005] OJ L310/1 . . . 2.152
Reorganisation and Winding-up Spain
of Credit Institutions, Civil Code
Dir 01/24/EC. . . . . . . . . . . . . 7.1017.108 art 1924 . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Settlement Finality, art 1924(3)(a) . . . . . . . . . . . . . . . . . . . . 10.52
Dir 98/26/EC. . . . . . . . . . . . . 10.63, 10.64 Commercial Code
art 913(4) . . . . . . . . . . . . . . . . . . . . . . . 10.52
NATIONAL LEGISLATION Insolvency Act 22/2003 . . . . . . . . . . . . . . 10.52
art 10.1. . . . . . . . . . . . . . . . . . . . . . . . . 2.117
Australia art 91 . . . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Corporations Act 2001
s 95A . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.09 United Kingdom
Immunities Act 1982 . . . . . . . . . . . . . . . . 10.08 Banking Act 2009 . . . . . . . . . . . 6.01, 6.04, 6.07,
6.12, 6.116, 7.09, 8.03
Belgium Pt 1 . . . . . . 6.11, 6.12, 6.436.52, 7.59, 7.72
Law 4765 (C-2004/03482). . . . . . . . . . . . 10.23, Pt 2 . . . . . 6.11, 6.12, 6.106, 7.55, 7.67, 7.68
10.63, 10.65 Pt 3 . . . . . . . . . . 6.11, 6.12, 6.106, 7.10, 7.52
Law of 28 Apr 1999 implementing Pt 3 Table 1. . . . . . . . . . 7.10, 7.33, 7.34, 7.35,
Settlement Finality Directive 7.36, 7.38, 7.39, 7.40,
art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.63 7.41, 7.42, 7.46
Pt 3, Table 2 . . . . . 7.10, 7.35, 7.36, 7.37, 7.45
Canada s 1(1) . . . . . . . . . . . . . . . . . . . . . . . 6.43, 6.45
State Immunity Act 1982 . . . . . . . . . . . . . 10.08 s 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
s 2(2)(a) . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
France s 2(2)(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
s 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13
Decree 27 Dec 1985 (as amended s 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13
by Decree 89339) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.14
art 1(2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.117 s 7 . . . . . . . . . . . 6.21, 6.22, 6.29, 6.117, 7.59
Decree 28 Dec 2005 s 7(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.30
art 1(23) . . . . . . . . . . . . . . . . . . . . . . . 2.117 s 8(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47
s 8(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47
Germany s 8(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47
Statute for the Modernization of Limited s 8(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48
Liability Company Law and the Combat s 8(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48
of Misuse (MOMIG), 2008 . . . . . . . 2.124 s 8(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48
s 9 . . . . . . . . . . . . . . . . . . . .6.25, 6.49, 6.117
Italy s 10 . . . . . . . . . . . . . . . . . . . . . . . . 6.24, 7.77
Legislative Decree 5/9 Jan 2006 . . . . . . . . 2.117 s 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.63
Royal Decree 267/16 Mar 1942 s 11(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47
art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.117 s 11(2)(b) . . . . . . . . . . . . . . . . . . . . . . . . 7.17
s 12(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47
Pakistan s 13 . . . . . . . . . . . . . . . . . . . . . . . . 6.49, 6.63
s 14 . . . . . . . . . . . . . . . . . . . . . . . . 6.67, 6.68
State Immunities Ordinance 1981 . . . . . . 10.08
s 15 . . . . . . . . . . . . . . . . . . . . . . . . 6.66, 6.68
s 16 . . . . . . . . . . . . . . . . . . . . . . . . 6.66, 6.68
Philippines
s 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.66
Civil Code s 17(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.70
art 2244(14) . . . . . . . . . . . . . . . . . . . . . 10.52 s 17(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.69

xxxiv
 Table of Legislation
s 17(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.70
s 17(6) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.70
s 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.78
s 18(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.66
s 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.71
s 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.65
s 33(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.79
s 33(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.79
s 34(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.80
s 34(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.80
s 34(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.80
s 34(6) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.80
s 34(7) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.98
s 35(1)(d) . . . . . . . . . . . . . . . . . . . . . . . . 6.79
s 47 . . . . . . . . . . . . . . . . . . . . . . . 6.84, 6.117
s 47(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.83
s 48 . . . . . . . . . . . . . . . . . . . . . . . 6.84, 6.117
ss 48(1)(a)(d) . . . . . . . . . . . . . . . . . . . . 6.84
ss 4962 . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
s 49 . . . . . . . . . . . . . . . . . . . . . . . . 6.72, 6.99
s 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.74
s 51 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.74
ss 5266 . . . . . . . . . . . . . . . . . . . . . . . . . 6.99
s 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
s 57 . . . . . . . . . . . . . . . . . . . . . . . . 6.74, 6.75
s 57(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
s 58 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.76
s 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.72
s 60 . . . . . . . . . . . . . . . . . . . . . . . . 6.72, 6.96
s 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.77
s 62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.73
ss 6365 . . . . . . . . . . . . . . . . . . . . . . . . . 6.82
ss 6370 . . . . . . . . . . . . . . . . . . . . . . . . 6.100
s 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.78
s 67 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.78
s 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.117
s 69(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.78
s 75(3) . . . . . . . . . . . . . . . . . . . . . . 6.39, 6.40
ss 8283 . . . . . . . . . . . . . . . . . . . . . . . . 6.100
s 82 . . . . . . . . . . . . . . . . . . . . . . 6.100, 6.117
s 83 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.118
s 84 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
s 91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.55
s 93(8) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.57
s 95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.56
s 97(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.58
s 99 . . . . . . . . . . . . . . . . . . . . . . . . 7.60, 7.66
s 99(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 7.60
s 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.63
s 100(6) . . . . . . . . . . . . . . . . . . . . . . . . . 7.63
s 101(2) . . . . . . . . . . . . . . . . . . . . . . . . . 7.63
s 101(3) . . . . . . . . . . . . . . . . . . . . . . . . . 7.68
s 101(5)(a) . . . . . . . . . . . . . . . . . . . . . . . 7.68
s 101(8) . . . . . . . . . . . . . . . . . . . . . . . . . 7.63
s 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.66
xxxv
s 103 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.62
s 104 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.69
s 105 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.60
ss 106116 . . . . . . . . . . . . . . . . . . . . . . . 7.71
ss 115(2)(b) . . . . . . . . . . . . . . . . . . . . . . 7.73
s 117 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.54
s 120 . . . . . . . . . . . . . . . . . . .7.17, 7.54, 7.74
s 120(9) . . . . . . . . . . . . . . . . . . . . . . . . . 7.49
s 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.64
s 124 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.64
s 130 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.106
s 136(2)(a) . . . . . . . . . . . . . . . . . . . . . . . 7.12
s 136(2)(b) . . . . . . . . . . . . . . . . . . . 7.14, 7.15
s 136(2)(c) . . . . . . . . . . . . . . . . . . . 7.12, 7.21
s 137 . . . . . . . . . . . . . . . . . . . . . . . 7.19, 7.28
s 138(1) . . . . . . . . . . . . . . . . . . . . . . . . . 7.20
ss 138(2)(4) . . . . . . . . . . . . . . . . . . . . . 7.22
s 138(3) . . . . . . . . . . . . . . . . . . . . . . . . . 7.21
s 138(3)(a) . . . . . . . . . . . . . . . . . . . . . . . 7.22
s 138(3)(b) . . . . . . . . . . . . . . . . . . . . . . . 7.24
s 138(4) . . . . . . . . . . . . . . . . . . . . . . . . . 7.21
s 138(4)(a) . . . . . . . . . . . . . . . . . . . . . . . 7.24
s 138(4)(b) . . . . . . . . . . . . . . . . . . . . . . . 7.23
s 138(4)(c) . . . . . . . . . . . . . . . . . . . . . . . 7.23
s 138(5) . . . . . . . . . . . . . . . . . . . . . . . . . 7.25
s 139 . . . . . . . . . . . . . . . . . . . . . . . 7.26, 7.32
s 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.27
s 142 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.14
s 143 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.15
s 143(2) . . . . . . . . . . . . . . . . . . . . . . . . . 7.14
s 143(3) . . . . . . . . . . . . . . . . . . . . . . . . . 7.14
s 145 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.28
s 145(1) . . . . . . . . . . . . . . . . . . . . . . . . . 7.28
s 145(6) . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
s 146 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.28
s 147 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.29
s 148 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.31
s 153 . . . . . . . . . . . . . . . . . . .7.32, 7.50, 7.51
s 154(3) . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
s 154(6) . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
s 158 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.106
s 233 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.109
s 234 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.109
s 238 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.72
s 239 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.72
s 252 . . . . . . . . . . . . . . . . . . . . . . 6.109, 7.83
s 257 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.48
s 259(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.106
s 262 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.10
s 423 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.72
s 893(4) . . . . . . . . . . . . . . . . . . . . . . . . . 7.57
Banking (Special Provisions)
Act 2008 (BSPA) . . . . . . . . . . . .6.03, 6.05,
6.06, 6.07, 6.08
s 5(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
 Table of Legislation
Building Societies Act 1986 . . . . . . . . 7.76, 7.78
ss 8692 . . . . . . . . . . . . . . . . . . . . . . . . . 7.76
s 119 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
Sch 2, para 9 . . . . . . . . . . . . . . . . . . . . . . 7.75
Sch 15 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.76
Sch 15A . . . . . . . . . . . . . . . . . . . . . . . . . 7.76
Building Societies Act 1997 . . . . . . . . . . . . 7.76
Companies Acts . . . . . . . . . . . . . . . . . . . . . 2.14
Companies Act 1862
s 80 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.08
s 80(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 1.07
Companies Act 1929 . . . . . . . . . . . . . . . . . 1.08
Companies Act 1948 . . . . . . . . . . . . . . . . . 1.08
Companies Act 1985 . . . . . . . . . . . . . 1.08, 4.56
s 425 . . . . . . . . . . . . . . . . . .2.91, 2.92, 3.220
s 427 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.298
Pt XIII, ss 425430. . . . . . . . . . . . . . . . 3.261
Companies Act 2006 . . . . . 3.263, 3.265, 3.266,
3.278, 3.287, 3.290, 4.56, 7.83
Pt 26 (ss 895899) . . . . . . . . . . . . 3.261, 4.58
s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.91
s 172 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36
s 172(1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.18
s 382 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.227
s 895 . . . . . . . . . . . . . . . . . .2.91, 2.93, 3.273
s 896 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.273
s 899 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.289
Companies (Consolidation) Act 1908
s 130 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.08
Company Directors Disqualification Act 1986 . .
1.43, 7.53
Credit Unions Act 1979
s 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
Cross Border Insolvency Act 2008. . . . . . . 4.174
Energy Act 2004 . . . . . . . . . . . . . . . . . . . . . 7.01
Enterprise Act 2002 . . . . . . . 2.90, 3.175, 3.176,
3.178, 3.179, 3.180, 3.195, 3.247
Pt 10 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.154
Financial Services Act 2010. . . . . . . . . . . . . 7.99
s 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.99
Financial Services and Markets Act
2000 (FSMA 2000) . . . . . 5.05, 5.09, 5.15,
6.06, 6.33, 7.84, 7.100
Preamble . . . . . . . . . . . . . . . . . . . . . . . . 5.09
Pt 4 . . . . . . . . . . . . . . . . . . . . . . . 6.12, 7.109
s 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.14
s 6(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.15
s 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
s 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
s 22(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
s 41(1) . . . . . . . . . . . . . . . . . . . . . . 6.29, 7.59
s 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11
s 105 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.59
s 138 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12
Sch 1, s 6(1) . . . . . . . . . . . . . . . . . . . . . . 5.13
xxxvi
Sch 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
Sch 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12
Human Rights Act 1998 . . . . . . . . . . . 6.13, 6.16
s 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
Insolvency Act 1986 . . . . . 2.14, 2.91, 2.92, 3.25,
3.234, 4.153, 4.168, 4.207, 7.01,
7.09, 7.54, 7.74, 7.78
Pt I, ss 17B . . . . . . . . . . . . . . . . . 3.198, 7.51
s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.73
s 1(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.198
s 1(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.202
s 2(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.203
s 2(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.202
s 3(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
s 3(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
s 3(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.204
s 4(3) . . . . . . . . . . . . . . . . . . . . . . 2.87, 3.207
s 4(4) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.207
s 4A(2) . . . . . . . . . . . . . . . . . . . . . . . . . 3.206
s 6 . . . . . . . . . . . . . . . . . . . . . . . 3.208, 3.210
s 6(1)(a) . . . . . . . . . . . . . . . . . . . . . . . . 3.222
s 11(3) . . . . . . . . . . . . . . . . . . . . . . . . . 3.175
s 11(3)(c) . . . . . . . . . . . . . . . . . . . . . . . 3.177
s 11(3)(d) . . . . . . . . . . . . . . . . . . . . . . . 3.179
s 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.134
s 122(1) . . . . . . . . . . . . . . . . . . . . . . . . . 7.07
s 122(1)(f ) . . . . . . . . . . . . . . . . . . . . . . . 7.07
s 123 . . . . . . . . . . . . . . 1.04, 1.20, 7.07, 7.57
s 123(1) . . . . . . . . . . . . . . . . .1.04, 1.18, 1.20
s 123(1)(a) . . . . . . . . . . . . . . . . . . . . . . . 1.04
s 123(1)(b)(d) . . . . . . . . . . . . . . . . . . . . 1.04
s 123(1)(e) . . . . . . . . . . 1.04, 1.08, 1.10, 1.12,
1.16, 1.19, 1.20
s 123(2) . . . . . . . 1.04, 1.08, 1.16, 1.19, 1.20,
1.25, 1.27, 1.28, 1.29, 1.30, 1.31
s 135 . . . . . . . . . . . . . . . . . . . . . . . 7.10, 7.45
s 143 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.67
s 167 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.68
s 168(4) . . . . . . . . . . . . . . . . . . . . . . . . . 7.36
s 172(1) . . . . . . . . . . . . . . . . . . . . . . . . . 7.45
s 172(2) . . . . . . . . . . . . . . . . . . . . . . . . . 7.45
s 172(5) . . . . . . . . . . . . . . . . . . . . . . . . . 7.45
s 176A . . . . . . . . . . . . . . . . . . . . . 3.195, 7.35
s 176A(3) . . . . . . . . . . . . . . . . . . . . . . . 3.195
ss 178188 . . . . . . . . . . . . . . . . . . . . . . . 7.37
s 212 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.42
s 213 . . . . . . . . . . . . . . . . . . . . . . . 1.43, 7.49
s 214 . . . . . . . . . . . . . . . . . . . . . . . 1.41, 7.49
s 215(4) . . . . . . . . . . . . . . . . . . . . . . . . 4.188
s 221 . . . . . . . . . . . . . . . . . . . . . . . 2.16, 4.05
s 221(4) . . . . . . . . . . . . . . . . . . . . . 2.17, 2.91
s 221(5) . . . . . . . . . . . . . . . . . . . . . . . . . 1.16
ss 234237 . . . . . . . . . . . . . . . . . . . . . . . 7.49
s 238 . . . . . . . . . 1.701.75, 1.74, 1.85, 3.25,
4.184, 7.49, 7.72
 Table of Legislation
s 239 . . . . . . . . . . . . . .1.71, 1.781.88, 3.25,
4.184, 7.49, 7.72
ss 240246 . . . . . . . . . . . . . . . . . . . . . . . 7.49
s 242 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 234 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 244 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 245 . . . . . . . . . . . . . 1.891.90, 3.25, 4.184
s 339 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 340 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 342A . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 343 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.184
s 423 . . . . 1.74, 1.761.77, 3.25, 4.184, 7.72
s 426 . . . . . . 2.85, 4.141, 4.144, 4.155, 4.179
s 426(5) . . . . . . . . . . . . . . . . . . . . . . . . 4.144
s 436 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17
Sch A1 . . . . . . . . . . . . . . . . . . . . . . . . . 3.227
para 24 . . . . . . . . . . . . . . . . . . . . . . . . 3.227
para 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.228
Sch B1 . . . 2.14, 3.174, 6.08, 7.11, 7.42, 7.46
para 3 . . . . . . . . . . . . . . . . .3.247, 3.316, 7.27
para 3(1). . . . . . . . . . . . . . . .3.157, 6.08, 6.18
para 3(1)(a) . . . . . . . . . . . . . . . . . . . . . 3.154
para 3(1)(b) . . . . . . . . . . . . . . . . . . . . . 3.154
para 3(1)(c) . . . . . . . . . . . . . . . . . 3.154, 7.27
para 3(2). . . . . . . . . . . . . . . . . . . . . . . . 3.239
para 3(3). . . . . . . . . . . . . . . . . . . . . . . . . 7.27
para 3(4). . . . . . . . . . . . . . . . . . . . . . . . 3.239
para 13(1)(f ) . . . . . . . . . . . . . . . . . . . . 3.259
para 14 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.07
para 14(2). . . . . . . . . . . . . . . . . . . . . . . . 7.17
para 27(2)(a) . . . . . . . . . . . . . . . . . . . . . 7.07
para 30(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.07
para 35(2). . . . . . . . . . . . . . . . . . . . . . . . 7.07
para 38 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.73
para 42 . . . . . . . . . . . . . . . . . . . . 3.174, 3.175
para 43 . . . . . . . . . . . . . . . . . . . . 3.174, 4.173
para 43(2). . . . . . . . . . . . . . . . . . . . . . . 3.176
para 43(3). . . . . . . . . . . . . . . . . . . . . . . 3.177
para 43(4). . . . . . . . . . . . . . . . . . . . . . . 3.178
para 43(5). . . . . . . . . . . . . . . . . . . . . . . 3.178
para 44(5). . . . . . . . . . . . . . . . . . . . . . . 3.174
para 49 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.29
para 5058 . . . . . . . . . . . . . . . . . . . . . . . 7.33
para 52 . . . . . . . . . . . . . . . . . . . . . . . . . 3.248
para 5969 . . . . . . . . . . . . . . . . . . . . . . 3.161
para 61 . . . . . . . . . . . . . . . . . . . . . . . . . 3.161
para 63 . . . . . . . . . . . . . 7.22, 7.26, 7.29, 7.34
para 65 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.35
para 66 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.36
para 68 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.36
para 70 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.38
para 71 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.38
para 73 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.38
para 74 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.39
para 75 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.39
xxxvii
para 68(2). . . . . . . . . . . . . . . . . . . . . . . 3.247
para 80 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50
para 87 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
para 88 . . . . . . . . . . . . . . . . . . . . . 3.257, 7.40
para 90 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
para 91 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
para 98 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.41
para 99 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.41
para 99(4). . . . . . . . . . . . . . . . . . . . . . . 3.184
para 107 . . . . . . . . . . . . . . . . . . . . . . . . . 7.42
para 108 . . . . . . . . . . . . . . . . . . . . . . . . . 7.42
para 111(1). . . . . . . . . . . . . . . . . . . . . . . 7.07
Sch 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.69
Sch 4, para 5 . . . . . . . . . . . . . . . . . . . . . . 7.69
Sch 4, para 13 . . . . . . . . . . . . . . . . . 7.36, 7.69
Insolvency Act 2000 . . . . . . . . . . . . . . . . . 3.227
Law of Property Act . . . . . . . . . . . . . . . . . 3.196
Railway Act 1993 . . . . . . . . . . . . . . . . . . . . 7.01
Railway Act 2005 . . . . . . . . . . . . . . . . . . . . 7.01
State Immunity Act 1978 (SIA) . . 10.16, 11.156
Trust Indenture Act 1939 (TIA)
s 316(b) . . . . . . . . . . . . . . . . . . . . . . . . 11.70
Statutory Instruments
Bank Administration (England and Wales)
Rules 2009 (Administration Rules) . . . 7.10,
7.16, 7.43, 7.45, 7.46, 7.48, 7.50
r 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.16
r 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.16
r 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.16
r 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17
r 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17
r 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17
r 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17
r 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17
r 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.18
r 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.29
r 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.29
r 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
r 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51
rr 5057 . . . . . . . . . . . . . . . . . . . . . . . . . 7.15
Bank Administration (Sharing
Information) Regulations 2009. . . . . . 7.19
Bank Insolvency (England and Wales)
Rules 2009 . . . . . . . . . . . . . . . . . . . . . 7.55
r 72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.82
Banking Act 2009 (Bank Administration)
(Modification for Application to
Banks in Temporary Public
Ownership) Regulations 2009,
SI 2009/312 . . . . . . . . . . . . . . . . 6.11, 7.10
Banking Act 2009 (Bank Administration)
(Modification for Application to
Multiple Transfers) Regulations 2009,
SI 2009/313 . . . . . . . . . . . .6.11, 7.10, 7.52
 Table of Legislation
Banking Act 2009 (Bank Administration)
(Sharing Information) Regulations
2009, SI 2009/314 . . . . . . . . . . . 6.11, 7.10
Banking Act 2009 (Commencement No 1)
Order 2009, SI 2009/296 . . . . . . . . . . 6.11
Banking Act 2009 (Pts 2 and
3 Consequential Arrangements)
Regulations 2009, SI 2009/317 . . . . . 6.11
Banking Act 2009 (Restrictions of Partial
Property Transfers) Order 2009
(Safeguards Order), SI 2009/322 . . . . 6.11,
6.88, 6.90, 6.98
cl 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.86
art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.90
art 1(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.90
art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.85
art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.93
Banking Act 2009 (Restrictions of Partial
Property Transfers) (Amendment)
Order 2009 . . . . . . . . . . . . . . . . . . . . 6.91
Banking Act 2009 (Third Party
Compensation Arrangements for
Partial Property Transfers) Regulations
2009, SI 2009/319 . . . . . . .6.11, 6.85, 6.96
Bradford & Bingley plc Compensation
Scheme Order 2008, SI 2008/3249 . . 6.06
Bradford & Bingley plc Compensation
Scheme (Amendment) Order 2009 . . . 6.06
Building Societies (Insolvency and Special
Administration) Order 2009,
SI 2009/805 . . . . . . . . . . .6.12, 6.106, 7.55
Companies (Cross-Border Merger)
Regulations, SI 2007/2974 . . . . . . . . 2.152
Credit Institutions (Reorganisation and
Winding Up) Regulations 2004 . . . . 7.101
Cross Border Insolvency
Regulations 2006 . . . . . . . 2.24, 2.80, 4.01,
4.1344.216
arts 18 . . . . . . . . . . . . . . . . . . . . . . . . 4.137
art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.164
art 1(2) . . . . . . . . . . . . . . . . . . . . 4.135, 4.138
art 1(4) . . . . . . . . . . . . . . . . . . . . . . . . . 4.168
art 2(e) . . . . . . . . . . . . . . . . . . . . . . . . . 4.149
art 2(g) . . . . . . . . . . . . . . . . . . . . . . . . . 4.149
art 2(h) . . . . . . . . . . . . . . . . . . . . . . . . . 4.149
art 2(i) . . . . . . . . . . . . . . . . . . . . 4.148, 4.164
art 2(j) . . . . . . . . . . . . . . . . . . . . 4.147, 4.164
art 2(k) . . . . . . . . . . . . . . . . . . . . . . . . . 4.168
art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.142
art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . . 4.142
art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.152
art 4(3) . . . . . . . . . . . . . . . . . . . . . . . . . 4.152
art 8 . . . . . . . . . . . . . . . . . .4.08, 4.150, 4.162
art 11 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.153
art 12 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.166
xxxviii
art 13 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.188
art 13(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.188
art 13(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.188
art 15 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.154
art 15(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.164
art 15(3) . . . . . . . . . . . . . . . . . . . 4.155, 4.164
art 15(18) . . . . . . . . . . . . . . . . . . . . . . . 4.155
art 16 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.157
art 16(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.158
art 17(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.164
art 17(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.165
art 17(4) . . . . . . . . . . . . . . . . . . . . . . . . 4.143
art 19 . . . . . . . . . . . . . . . .4.167, 4.172, 4.207
art 19(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.167
art 20 . . . . 4.150, 4.164, 4.169, 4.171, 4.207,
4.208
art 20(2) . . . . . . . . . . . . . .4.168, 4.173, 4.174
art 20(3) . . . . . . . . . . . . . . . . . . . 4.168, 4.173
art 20(4) . . . . . . . . . . . . . . . . . . . . . . . . 4.164
art 20(5) . . . . . . . . . . . . . . . . . . . 4.164, 4.170
art 20(6) . . . . . . . . . . . . . . . . . . . . . . . . 4.143
art 21 . . . . 4.167, 4.168, 4.171, 4.172, 4.197,
4.207
art 21(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.176
art 21(1)(a)(e). . . . . . . . . . . . . . . . . . . 4.171
art 21(1)(d) . . . . . . . . . . . . . . . . . . . . . 4.181
art 21(1)(g). . . . . . . . . . . 4.169, 4.173, 4.174,
4.175, 4.176, 4.183
art 21(2) . . . . . . . . . . . . . .4.140, 4.176, 4.179
art 21(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.179
art 22 . . . . . . . . . . . . . . . . . . . . . 4.172, 4.182
art 22(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.182
art 22(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.183
art 22(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.143
art 23 . . . . . . . . . . 4.135, 4.184, 4.185, 4.186
art 23(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.184
art 23(4) . . . . . . . . . . . . . . . . . . . . . . . . 4.184
arts 2527 . . . . . . . . . . . . . . . . . 4.135, 4.190
arts 2528 . . . . . . . . . . . . . . . . . . . . . . 4.205
art 25 . . . . 4.192, 4.196, 4.198, 4.202, 4.206,
4.213
art 26 . . . . . . . . . . . . . . . . . . . . . 4.193, 4.213
art 27 . . . . . 4.190, 4.192, 4.198, 4.199, 4.204
art 27(d) . . . . . . . . . . . . . . . . . . . 4.204, 4.213
art 28 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.205
art 29 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.206
art 29(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.207
art 29(a)(i) . . . . . . . . . . . . . . . . . . . . . . 4.180
art 29(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.207
art 29(b)(iii) . . . . . . . . . . . . . . . . . . . . . 4.186
art 30 . . . . . . . . . . . . . . . . . . . . . 4.206, 4.209
art 31 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.163
Sch 1 . . . . . . . . . . . . . . . . . . . . . 4.136, 4.137
Sch 2 . . . . . . . . . . . . . . . . . . . . . 4.137, 4.155
Sch 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.137
 Table of Legislation
Sch 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.137
Sch 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.137
Cross-Border Insolvency Regulations
(Northern Ireland) 2007,
SR 2007/115 . . . . . . . . . . . . . . . . . . 4.134
Dunfermline Building Society
Compensation Scheme, Resolution
Fund and Third Party Compensation
Order 2009, SI 2009/1800 . . . . . . . . 6.107
Financial Collateral Arrangements
(No 2) Regulations 2003,
SI 2003/3226 . . . . . . . . . . . . . . . . . . 4.168
Financial Services and Markets Act
(Contribution to Costs of Special
Resolution Regime)
Regulations 2009 . . . . . . . . . . . . . . . 7.100
Financial Services and Markets Act
(Regulated Activities) Order 2001
(RAO)
art 5(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
art 5(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
Financial Services and Markets Act
(Carrying on Regulated Activities
by Way of Business) Order 2001
(Business Order) . . . . . . . . . . . . . . . . . 5.10
art 2(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
Heritable Bank plc Transfer of Certain
Rights and Liabilities Order 2008,
SI 2008/2644 . . . . . . . . . . . . . . . . . . . 6.09
Heritable Bank plc Transfer of Certain
Rights and Liabilities (Amendment)
Order 2008, SI 2009/310 . . . . . . . . . . 6.09
Insolvency Act 1986 (Amendment)
(No 2) Regulations 2002,
SI 2002/1240 . . . . . . . . . . . . . . . 2.14, 2.17
reg 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17
Insolvency Act 1986 (Amendments)
Rules, SI 2002/1307 . . . . . . . . . . . . . . 2.38
reg 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17
reg 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17
Insolvency Rules 1986, SI 1986/1925 . . . . . 2.14,
2.38, 3.234, 7.01, 7.09, 7.10,
7.16, 7.76, 7.77, 7.78
r 1.3(1) . . . . . . . . . . . . . . . . . . . . . . . . . 3.202
r 1.9(1) . . . . . . . . . . . . . . . . . . . . . . . . . 3.204
r 1.17 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.205
r 1.17A . . . . . . . . . . . . . . . . . . . . . . . . . 3.205
r 1.17A(3) . . . . . . . . . . . . . . . . . . . . . . 3.205
r 1.19 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.206
r 1.19(3) . . . . . . . . . . . . . . . . . . . . . . . . 3.206
r 1.20 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.206
r 2.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.46
r 2.67 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.48
r 2.67(h) . . . . . . . . . . . . . . . . . . . . . . . . 3.261
r 2.78 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
xxxix
r 2.80 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
r 2.95 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
r 2.98 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
r 2.100 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
r 2.103 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.47
rr 2.1062.109 . . . . . . . . . . . . . . . . . . . . 7.43
r 2.106 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.48
rr 4.254.31 . . . . . . . . . . . . . . . . . . . . . . 7.45
r 4.131 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.95
r 4.156 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.95
r 4.167 . . . . . . . . . . . . . . . . . . . . . . . . . . 7.95
rr 7.17.10 . . . . . . . . . . . . . . . . . . . . . . . 7.15
Insolvency (Amendment) Rules 2010,
SI 2010/686 . . . . . . . . 3.202, 3.204, 3.259,
3.260, 3.261
Financial Services Authority (FSA)
Principles for Business
PRIN 1.1.3G . . . . . . . . . . . . . . . . . . . . . 5.09
PRIN 1.1.5G . . . . . . . . . . . . . . . . . . . . . 5.09
PRIN 1.1.6G . . . . . . . . . . . . . . . . . . . . . 5.09
PRIN 1.1.7G . . . . . . . . . . . . . . . . . . . . . 5.09
PRIN 1.1.8G . . . . . . . . . . . . . . . . . . . . . 5.09
PRIN 1.1.9G . . . . . . . . . . . . . . . . . . . . . 5.09
Fit and Proper Tests for Approved Persons
FIT 1.1.2G. . . . . . . . . . . . . . . . . . . . . . . 5.11
FIT 1.1.3G. . . . . . . . . . . . . . . . . . . . . . . 5.11
FIT 1.2.3G. . . . . . . . . . . . . . . . . . . . . . . 5.11
FIT 1.3.1G. . . . . . . . . . . . . . . . . . . . . . . 5.11
General Prudential Sourcebook
(GENPRU) . . . . . . . . . . . . . . . . . . . . 5.22
GENPRU 1.2.11G. . . . . . . . . . . . . . . . . 5.22
GENPRU 1.2.15G. . . . . . . . . . . . . . . . . 5.22
GENPRU 1.2.19G(1) . . . . . . . . . . . . . . 5.22
GENPRU 1.2.11G(2) . . . . . . . . . . . . . . 5.22
GENPRU 1.2.29G. . . . . . . . . . . . . . . . . 5.22
GENPRU 1.2.57R . . . . . . . . . . . . . . . . . 5.22
GENPRU 1.2.30R(2) . . . . . . . . . . . . . . 5.23
GENPRU 1.2.42R(1) . . . . . . . . . . . . . . 5.23
GENPRU 1.2.42R(2) . . . . . . . . . . . . . . 5.23
GENPRU 1.2.73BG . . . . . . . . . . . . . . . 5.23
GENPRU 1.2.90G. . . . . . . . . . . . . . . . . 5.23
Prudential sourcebook for banks,
building societies and investment
firms (BIPRU) . . . . . . . . . . . . . . . . . . 5.12
BIPRU 8 . . . . . . . . . . . . . . . . . . . . . . . . 5.16
BIPRU 8.5.2G . . . . . . . . . . . . . . . . . . . . 5.18
BIPRU 8.5.4R . . . . . . . . . . . . . . . . . . . . 5.18
BIPRU 8.5.5R . . . . . . . . . . . . . . . . . . . . 5.18
BIPRU 8.7.1G . . . . . . . . . . . . . . . . . . . . 5.18
BIPRU 10 . . . . . . . . . . . . . . . . . . . . . . . 5.19
BIPRU 10.5.310.5.5 . . . . . . . . . . . . . . 5.20
BIPRU 12 . . . . . . . . . . . . . . . . . . . . . . . 5.24
BIPRU 12.2.1R(1) . . . . . . . . . . . . . 5.24, 5.25
BIPRU 12.2.1R(2) . . . . . . . . . . . . . . . . . 5.24
 Table of Legislation
Prudential sourcebook for banks, building
societies and investment firms (cont.)
BIPRU 12.2.5G . . . . . . . . . . . . . . . . . . . 5.24
BIPRU 12.3.39R . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.1R . . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.2R . . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.4E . . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.5E . . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.10R . . . . . . . . . . . . . . . . . . 5.25
BIPRU 12.4.13R . . . . . . . . . . . . . . . . . . 5.25
Statements of principles for
approved persons . . . . . . . . . . . . . . . . 5.12
Supervision handbook . . . . . . . . . . . . . . . . 5.13
SUP 1.1.2G . . . . . . . . . . . . . . . . . . . . . . 5.13
SUP 1.1.3G . . . . . . . . . . . . . .5.13, 5.14, 5.15
SUP 1.1.3(1A) . . . . . . . . . . . . . . . . . . . . 5.14
SUP 10. . . . . . . . . . . . . . . . . . . . . . . . . . 5.11
SUP 10.2.1G . . . . . . . . . . . . . . . . . . . . . 5.11
SUP 10.4.5R . . . . . . . . . . . . . . . . . . . . . 5.11
APER 4.4.1G4.4.9E . . . . . . . . . . . . . . . 5.11
AUTH 6 . . . . . . . . . . . . . . . . . . . . . . . . 5.11
AUTH 6.5.1G . . . . . . . . . . . . . . . . . . . . 5.11
COND 1 . . . . . . . . . . . . . . . . . . . . . . . . 5.12
COND 2.1. . . . . . . . . . . . . . . . . . . . . . . 5.16
COND 2.2. . . . . . . . . . . . . . . . . . . . . . . 5.16
COND 2.3. . . . . . . . . . . . . . . . . . . . . . . 5.16
COND 2.4. . . . . . . . . . . . . . . . . . . . . . . 5.16
COND 2.4.2G. . . . . . . . . . . . . . . . . . . . 5.22
TC 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11
United States of America
Bank Conservation Act 1933 . . . . . . . . . . . 8.01
Bank Holding Company Act 1956
as amended 12 USC 1841
et seq . . . . . . . . . . . . . . . . . . . . . 5.34, 8.41
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.40
s 4(k) . . . . . . . . . . . . . . . . . . . . . . . . . . 8.159
Banking Act 1933, Public
Law 7366 . . . . . . . . . . . . .5.35, 8.01, 8.25
30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.49
31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.55
Banking Act 1935 . . . . . . . . . . . . . . . . . . . . 8.01
Bankruptcy Abuse Prevention and
Consumer Protection Act 2005. . . . . 3.105,
3.189, 4.10
Bankruptcy Code 11 USC 101 et seq . . . . 1.01,
1.56, 1.66, 1.69, 3.01, 3.53, 3.54,
3.119, 8.20, 8.27, 8.30, 8.32, 8.159,
8.1698.171, 8.174, 8.177, 8.179,
8.181, 8.182, 8.183, 8.195, 8.196,
8.201, 8.2048.211, 8.222, Annex A
s 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.28
s 101(5) . . . . . . . . . . . . . . . . . . . . . . . . 8.105
s 101(23) . . . . . . . . . . . . . . . .4.14, 4.30, 4.58
s 101(4) . . . . . . . . . . . . . . . . . . . . . . . . . 4.25
xl
s 101(54) . . . . . . . . . . . . . . . . . . . . . . . 1.108
s 102(1) . . . . . . . . . . . . . . . . . . . . . . . . 3.138
s 109(a) . . . . . . . . . . . . . . . . . . . . . 4.62, 4.63
s 109(c) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
s 109(e) . . . . . . . . . . . . . . . . . . . . . . . . . 4.22
s 212(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.119
s 301 . . . . . . . . . . . . . . . . . . . . . . . 3.01, 4.51
s 302 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.51
s 303 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.51
s 304 . . . . . . . . . 4.10, 4.114.14, 4.174.20,
4.43, 4.57, 4.60, 4.78, 4.130
s 304(b) . . . . . . . . . . . . . . . . . . . . . 4.12, 4.13
s 304(b)(1)(3) . . . . . . . . . . . . . . . . . . . . 4.12
s 304(c) . . . . . . . . . . . . . . . . .4.13, 4.17, 4.42
s 305 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.54
s 305(a) . . . . . . . . . . . . . . . . . . . . . . . . . 4.65
s 306 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.54
s 361 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.35
s 362 . . . . . . . . . 3.165, 4.34, 4.35, 4.69, 4.86
s 362(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.195
s 362(a)(1) . . . . . . . . . . . . . . . . . . . . . . 3.166
s 362(a)(2) . . . . . . . . . . . . . . . . . . . . . . 3.167
s 362(a)(6) . . . . . . . . . . . . . . . . . . . . . . 3.170
s 362(a)(7) . . . . . . . . . . . . . . . . . . . . . . 3.171
s 362(a)(8) . . . . . . . . . . . . . . . . . . . . . . 3.172
s 362(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.173
s 362(b)(6) . . . . . . . . . . . . . . . . . . . . . . 8.122
s 362(d) . . . . . . . . . . . . . . . . . . . . 3.173, 4.70
s 363 . . . . . . . . . .3.1353.140, 3.141, 3.142,
3.143, 3.144, 3.150, 3.151, 3.152,
3.153, 3.2933.316, 4.35, 4.47
s 363(a)(3) . . . . . . . . . . . . . . . . . . . . . . 3.167
s 363(a)(4) . . . . . . . . . . . . . . . . . . . . . . 3.169
s 363(a)(5) . . . . . . . . . . . . . . . . . . . . . . 3.169
s 363(b) . . . 3.134, 3.144, 3.147, 3.148, 3.152
s 363(b)(1) . . . . . . . . . . . . . . . . . . . . . . 3.138
s 364 . . . . . . . . . . . . 3.01, 4.72, 8.207, 11.14
s 364(a)(d) . . . . . . . . . . . . . . . . . . . . . . 4.72
s 364(b)(4) . . . . . . . . . . . . . . . . . . . . . . . 4.38
s 365 . . . . . . . . . . . . . 3.01, 3.25, 4.76, 4.195
s 365(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.117
s 365(e) . . . . . . . . . . . . . . . . . . . . . . . . 8.112
s 365(e)(1) . . . . . . . . . . . . . . . . . . . . . . . 4.76
s 365(n) . . . . . . . . . . . . . . . . . . . . . . . . . 4.76
s 502(c) . . . . . . . . . . . . . . . . . . . . . . . . 8.105
s 507(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 3.99
s 522 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.73
s 542 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.195
s 544 . . . . 1.921.93, 1.107, 3.01, 4.73, 4.77
s 544(a) . . . . . . . . . . . . . . . . . . . . . . . . . 1.93
s 544(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 1.93
s 544(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 1.93
s 544(a)(3) . . . . . . . . . . . . . . . . . . . . . . . 1.93
s 544(b) . . . . . . . . . . . . . . . .1.92, 1.93, 1.107
s 546 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.159
 Table of Legislation
s 547 . . . . . . . . . . . . . 1.111, 3.01, 3.25, 4.73,
4.77, 8.129, 8.159
s 547(b) . . . . . . . . . . . . . .1.105, 1.109, 1.112
s 547(b)(2) . . . . . . . . . . . . . . . . . . . . . . 1.110
s 547(c) . . . . . . . . . . . . . . . . . . . 1.106, 1.113
s 547(c)(1) . . . . . . . . . . . . . . . . . . . . . . 1.106
s 547(c)(2) . . . . . . . . . . . . . . . . . . . . . . 1.106
s 547(c)(3)(6) . . . . . . . . . . . . . . . . . . . 1.106
s 547(c)(7) . . . . . . . . . . . . . . . . . . . . . . 1.106
s 547(e)(2) . . . . . . . . . . . . . . . . . . . . . . 1.111
s 547(f ) . . . . . . . . . . . . . . . . . . . . . . . . 1.111
s 547(g) . . . . . . . . . . . . . . . . . . . . . . . . 1.113
s 548 . . . . . . . . 1.911.93, 1.104, 3.01, 3.25,
4.73, 4.77, 8.159
s 548(a)(1) . . . . . . . . . . . . . . . . . . . 1.95, 1.98
s 548(a)(1)(B)(ii)(I) . . . . . . . . . . . . . . . . 1.99
s 548(a)(1)(B)(ii)(II) . . . . . . . . . . . 1.99, 1.101
s 548(a)(1)(B)(ii)(III) . . . . . . . . . . 1.99, 1.104
s 549 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.35
s 550 . . . . . . . . . . . . . . . . . . . . . . 1.106, 4.73
s 552 . . . . . . . . . . . . . . . . . . . . . . . 4.35, 4.47
s 553 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.171
Ch 7 . . . . . . . . 3.73, 3.74, 3.107, 3.122, 4.77,
4.78, 4.99, 4.132, 8.161, 8.162, 8.165,
8.186, 8.189, 8.197, 8.198, 8.206
s 724(a) . . . . . . . . . . . . . . . . . . . . . . . . . 4.73
Ch 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.17
Ch 11 . . . . . . . . . . .3.703.111, 3.1273.133,
3.1543.191, 3.2933.316,
4.614.79, 4.99, 4.121, 4.125, 4.126,
4.127, 4.132, 8.205, 10.103, 11.13,
11.17, 11.30, 11.45
s 1102(b) . . . . . . . . . . . . . . . . . . . . 3.15, 4.68
s 1102(b)(1) . . . . . . . . . . . .3.02, 3.100, 3.103
s 1107 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.72
s 1109(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.72
ss 11211141 . . . . . . . . . . . . . . . . . . . . 11.13
s 1121(a) . . . . . . . . . . . . . . . . . . . 3.02, 3.100
s 1122 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.92
s 1123 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.92
s 1123(a) . . . . . . . . . . . . . . . . . . . . . . . . 3.92
s 1124 . . . . . . . . . . . . . . . . . . . . . 3.97, 3.108
s 1125 . . . . . . . . . . . . . . . . . . . . . 3.93, 3.101
s 1125(a) . . . . . . . . . . . . . . . . . . . . . . . 3.104
s 1125(a)(1) . . . . . . . . . . . . . . . . . . . . . 3.106
s 1125(b) . . . . . . . . . . . . . . . . . . . . . . . 3.142
s 1125(g) . . . . . . . . . . . . . . . . . . . . . . . 3.105
s 1126 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.93
s 1126(b) . . . . . . . . 3.02, 3.100, 3.102, 3.104
s 1126(c) . . . . . . . . . . . . . . . . . . . 3.97, 3.121
s 1126(f ) . . . . . . . . . . . . . . . . . . . . . . . 3.108
s 1126(g) . . . . . . . . . . . . . . . . . . . . . . . 3.108
s 1128(a) . . . . . . . . . . . . . . . . . . . . . . . . 3.70
s 1128(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.72
s 1129 . . . . . . . . 3.70, 3.72, 3.91, 3.92, 3.142
xli
s 1129(a) . . . . . . 3.01, 3.70, 3.71, 3.75, 3.91,
3.953.99, 3.122
s 1129(a)(1) . . . . . . . . . . . . . . . . . . 3.92, 3.93
s 1129(a)(2) . . . . . . . . . . . . . . . . . . . . . . 3.93
s 1129(a)(3) . . . . . . . . . . . . . . . . . 3.94, 3.142
s 1129(a)(4) . . . . . . . . . . . . . . . . . 3.95, 3.142
s 1129(a)(5)(A)(i) . . . . . . . . . . . . . . . . . . 3.96
s 1129(a)(6) . . . . . . . . . . . . . . . . . . . . . . 3.96
s 1129(a)(7) . . . . . . . . . . . . . . . . . 3.73, 3.107
s 1129(a)(7)(ii) . . . . . . . . . . . . . . . . . . . . 3.74
s 1129(a)(7)(A) . . . . . . . . . . . . . . . . . . . . 3.73
s 1129(a)(7)(A)(ii) . . . . . . . . . . . . . . . . 3.142
s 1129(a)(8) . . . . . . . . . . . . .3.71, 3.97, 3.142
s 1129(a)(9) . . . . . . . . . . . . . . . . . . . . . . 3.99
s 1129(a)(9)(A) . . . . . . . . . . . . . . . . . . . . 3.98
s 1129(a)(9)(B)(D) . . . . . . . . . . . . . . . . 3.98
s 1129(a)(10) . . . . . . . . . . . . . . . . 3.97, 3.142
s 1129(a)(11) . . . . . . . . . . . . . . . . 3.90, 3.142
s 1129(a)(12) . . . . . . . . . . . . . . . . . . . . . 3.99
s 1129(a)(13) . . . . . . . . . . . . . . . . . . . . . 3.99
s 1129(b) . . . . . . . . . . . . . . . 3.01, 3.71, 3.75,
3.85, 3.97, 3.123, 3.142, 3.148
s 1129(b)(1) . . . . 3.71, 3.75, 3.76, 3.80, 3.123
s 1129(b)(2)(A) . . . . . . . . . . . . . . . . . . . 3.81
s 1129(b)(2)(B) . . . . . . . . . . . . . . . . . . . 3.81
s 1129(b)(2)(B)(ii) . . . . . . . .3.81, 3.87, 3.142
s 1129(b)(2)(C) . . . . . . . . . . . . . . . . . . . 3.81
s 1129(c) . . . . . . . . . . . . . . . . . . . . . . . . 3.99
s 1129(d) . . . . . . . . . . . . . . . . . . . . 3.97, 3.99
s 1141 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.72
s 1144 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.99
Ch 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.77
s 1322(b)(1) . . . . . . . . . . . . . . . . . . . . . . 3.77
Ch 14 . . . . . . . . . . . . . . . .8.204, 8.205, 8.206
Ch 15 . . . . . . . . . . . .4.01, 4.104.127, 4.128,
4.129, 4.130, 4.132, 4.133
s 1501(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.04
s 1501(b) . . . . . . . . . . . . . . . . . . . 4.21, 4.129
s 1501(c)(d) . . . . . . . . . . . . . . . . . . . . . 4.22
s 1502(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.31
s 1502(4) . . . . . . . . . . . . . . . . . . . . 4.31, 4.88
s 1502(5) . . . . . . . . . . . . . . . . . . . . 4.31, 4.98
s 1503 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.24
s 1504 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.25
s 1506 . . . . . . . . . . . . . . . . .4.24, 4.76, 4.126
s 1507 . . . . . . . . . . 4.43, 4.126, 4.129, 4.130
s 1507(a) . . . . . . . . . . . . . . . . . . . . 4.42, 4.43
s 1507(b) . . . . . . . . . . . . . . . . . . . . 4.18, 4.42
s 1508 . . . . . . . . . . . . . . . . . . . . . . 4.08, 4.55
s 1509 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.77
s 1509(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.25
s 1509(b)(1) . . . . . . . . . . . . . . . . . . . . . . 4.46
s 1509(b)(3) . . . . . . . . . . . . . . . . . . . . . . 4.46
s 1509(c) . . . . . . . . . . . . . . . . . . . . . . . . 4.19
s 1509(d) . . . . . . . . . . . . . . . . . . . 4.19, 4.129
 Table of Legislation
Bankruptcy Code 11 USC 101 et seq (cont.)
s 1511(a) . . . . . . . . . . . . . . . . . . . . 4.51, 4.61
s 1515 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.65
s 1515(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.26
s 1515(c) . . . . . . . . . . . . . . . . . . . . . . . . 4.28
s 1516 . . . . . . . . . . . . . . .4.105, 4.107, 4.108
s 1516(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.27
s 1516(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.27
s 1516(c) . . . . . . . . . . . . . . .4.32, 4.88, 4.107
s 1517 . . . . . . . . . . . . . . . . . . . . . . . . . 4.105
s 1517(c) . . . . . . . . . . . . . . . . . . . 4.33, 4.107
ss 15191521 . . . . . . . . . . . . . . . . . . . . . 4.43
s 1519 . . . . . . . . . . . . . . . . . .4.28, 4.39, 4.45
s 1519(a) . . . . . . . . . . . . . . . . . . . . 4.37, 4.39
s 1519(a)(1) . . . . . . . . . . . . . . . . . . . . . . 4.40
s 1519(a)(2) . . . . . . . . . . . . . . . . . . . . . . 4.40
s 1519(a)(3) . . . . . . . . . . . . . . . . . . . . . . 4.40
s 1519(c) . . . . . . . . . . . . . . . . . . . . . . . . 4.41
s 1519(d) . . . . . . . . . . . . . . . . . . . . . . . . 4.41
s 1519(e) . . . . . . . . . . . . . . . . . . . . . . . . 4.39
s 1519(f ) . . . . . . . . . . . . . . . . . . . . . . . . 4.41
s 1520 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.35
s 1520(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.71
s 1520(a)(3) . . . . . . . . . . . . . . . . . . 4.45, 4.47
s 1521 . . . . . . . . . . . . . 4.36, 4.45, 4.63, 4.73,
4.75, 4.78
s 1521(a)(1)(7) . . . . . . . . . . . . . . . . . . . 4.37
s 1521(a)(3) . . . . . . . . . . . . . . . . . . . . . . 4.40
s 1521(a)(4) . . . . . . . . . . . . . . . . . . . . . . 4.40
s 1521(a)(5) . . . . . . . . . . . . . . . . . . . . . . 4,79
s 1521(a)(7) . . . . . . . . . 4.38, 4.40, 4.77, 4.78
s 1521(b) . . . . . . . . . . . . . . . . . . . . 4.37, 4.79
s 1521(c) . . . . . . . . . . . . . . . . . . . . . . . . 4.38
s 1521(d) . . . . . . . . . . . . . . . . . . . . . . . . 4.38
s 1521(e) . . . . . . . . . . . . . . . . . . . . . . . . 4.38
s 1522 . . . . . . . . . . . . . . . . . . . . . . 4.43, 4.76
s 1522(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.45
s 1523 . . . . . . . . . . . . . . . . . . . . . . 4.77, 4.78
s 1523(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.77
s 1524 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.46
s 1525 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50
s 1525(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.50
s 1526 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50
s 1526(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.50
s 1527 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50
s 1528 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.51
Bankruptcy Reform Act 1978 . . . . . . . . . . . 4.11
Banks and Banking of the
United States, Title 12 USC . . . . . . . . 5.31
Ch 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.31
1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.28
24 . . . . . . . . . . . . . . . . . . . . . . . . 5.44, 5.45
27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32
161 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32
214(a) . . . . . . . . . . . . . . . . . . . . . . . . . 5.28
xlii
2(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
2(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32
282 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.28
Ch 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.31
312 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.30
312(b)(1)(A) . . . . . . . . . . . . . . . . . . . . 5.34
312(b)(2)(B)(i)(I) . . . . . . . . . . . . . . . . 5.32
312(b)(2)(C) . . . . . . . . . . . . . . . . . . . . 5.35
313 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.30
321 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.29
325326 . . . . . . . . . . . . . . . . . . . . . . 5.29
331(b) . . . . . . . . . . . . . . . . . . . . . . . . . 5.35
334(d) . . . . . . . . . . . . . . . . . . . . . . . . . 5.35
335(a) . . . . . . . . . . . . . . . . . . . . . . . . . 5.35
481 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32
Ch 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.31
1011(a) . . . . . . . . . . . . . . . . . . . . . . . . 5.38
1022(c)(6)(B)(i) . . . . . . . . . . . . . . . . . 5.38
1811 et seq . . . . . . . . . . . . . . . . . . . . . 5.35
1811(a) . . . . . . . . . . . . . . . . . . . . . . . . 5.35
1813(d)(e) . . . . . . . . . . . . . . . . . . . . . 5.29
1813(q)(1)(4) . . . . . . . . . . . . . . . . . . 5.31
1815 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.35
1818(b) . . . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(b)(1). . . . . . . . . . . . . . . . . . . . . . 5.63
1818(b)(6). . . . . . . . . . . . . . . . . . . . . . 5.63
1818(i) . . . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(i)(2) . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(e)(1) . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(e)(3) . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(e)(7) . . . . . . . . . . . . . . . . . . . . . . 5.63
1818(u) . . . . . . . . . . . . . . . . . . . . . . . . 5.60
1831 . . . . . . . . . . . . . . . . . . . . . . 5.60, 5.62
1841 et seq Bank Holding
Company Act . . . . . . . . . . . . . . . . . . . . . 5.34
3101 et seq International
Banking Act 1978 . . . . . . . . . . . . . . . . . . 5.34
33013308 . . . . . . . . . . . . . . . . . . . . . 5.36
3305 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.36
Consumer Protection and Regulatory
Enhancement Act . . . . . . . . . . . . . . . 8.204
Dodd-Frank Wall Street Reform and
Consumer Act 2010 . . . . . . . . . .5.04, 5.31,
5.33, 5.35, 5.37, 5.47,
5.48, 5.52, 8.166, 8.171,
8.185, 8.198
Title II . . . . . . . . . . . . . . . . . . . . . 8.03, 8.158
Title III . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
2(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
165(d) . . . . . . . . . . . . . . . . . . . . . . . . 8.216
201(a)(9) . . . . . . . . . . . . . . . . . . . . . . 8.159
201(a)(11) . . . . . . . . . . . . . . . . . . . . . 8.159
202 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.159
203(4) . . . . . . . . . . . . . . . . . . . . . . . . 8.159
 Table of Legislation
203(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.159
203(b) . . . . . . . . . . . . . . . . . . . . . . . . 8.159
203(e) . . . . . . . . . . . . . . . . . . . . . . . . 8.159
204(c) . . . . . . . . . . . . . . . . . . . 8.191, 8.213
204(d) . . . . . . . . . . . . . . . . . . . . . . . . 8.161
205 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.163
206 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.161
209 . . . . . . . . . . . . . . . . . . . . . 8.159, 8.196
210 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.59
210(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.162
210(a)(1)(I) . . . . . . . . . . . . . . . . . . . . 8.159
210(a)(1)(N) . . . . . . . . . . . . . . . . . . . 8.213
210(a)(6) . . . . . . . . . . . . . . . . . . . . . . 8.159
210(a)(8)(10) . . . . . . . . . . . . . . . . . 8.163
210(a)(11) . . . . . . . . . . . . . . . . . . . . . 8.159
210(a)(12) . . . . . . . . . . . . . . . . . . . . . 8.159
210(b)(4). . . . . . . . . . . . . . . . . 8.159, 8.162
210(c)(1)(3) . . . . . . . . . . . . . . . . . . 8.162
210(c)(3)(D) . . . . . . . . . . . . . . . . . . . 8.159
210(c)(3)(E) . . . . . . . . . . . . . . . . . . . 8.159
210(c)(8)(12) . . . . . . . . . . . . . . . . . 8.162
210(c)(10) . . . . . . . . . . . . . . . . 8.167, 8.201
210(c)(12) . . . . . . . . . . . . . . . . . . . . . 8.159
210(c)(13) . . . . . . . . . . . . . . . . . . . . . 8.162
210(d)(4). . . . . . . . . . . . . . . . . 8.159, 8.162
210(f )(1)(A)(C). . . . . . . . . . . . . . . . . 5.59
210(h)(5)(E) . . . . . . . . . . . . . . 8.159, 8.162
210(n) . . . . . . . . . . . . . . . . . . . . . . . . 8.186
210(n)(9). . . . . . . . . . . . . . . . . . . . . . 8.191
210(o) . . . . . . . . . . . . . .8.175, 8.186, 8.189
210(o)(1). . . . . . . . . . . . . . . . . . . . . . 8.164
213(b)(1). . . . . . . . . . . . . . . . . . . . . . . 5.64
213(c) . . . . . . . . . . . . . . . . . . . . . . . . . 5.64
216 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.200
301(2) . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
313(a)(c) . . . . . . . . . . . . . . . . . . . . . . 5.27
335 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.24
502 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.27
11011106 . . . . . . . . . . . . . . . . . . . . 8.175
11051106 . . . . . . . . . . . . . . . . . . . . . 8.47
1106 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.47
Emergency Banking Relief
Act 1933 . . . . . . . . . . . . . . . . . . . . . . 8.01
Emergency Economic Stabilization
Act 2008 . . . . . . . . . . . . . . . . . . . . . . 8.44
Exchange Act (Securities Exchange
Act 1934) . . . . . . . . . . . . . .3.32, 3.333.43
s 10(b) . . . . . . . . . . . . . . . . . . . . . . 3.36, 3.37
r 10b-5 . . . . . . . . . . . . . 3.36, 3.37, 3.43, 3.46
r 13e-3 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33
r 13e-4 . . . . . . . . . . . . . . . . . . . . . . 3.33, 3.45
r 14e-1to 14e-8 . . . . . . . . . . . . . . . . . . . . 3.33
r 14e-1 . . . . . . . . . . . . . . . . . . . . . . 3.34, 3.38
r 14e-1(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.34
r 14e-1(d) . . . . . . . . . . . . . . . . . . . . . . . . 3.34
xliii
r 13E . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33
r 14D . . . . . . . . . . . . . . . . . . .3.33, 3.43, 3.45
r 14E . . . . . . . . . . . . . . . . . . .3.33, 3.36, 3.43
Federal Deposit Insurance Act (FDIA) . . . . 8.01,
8.151, 8.152, 8.154, 8.159, 8.161,
8.170, 8.177, 8.178, 8.180, 8.181,
8.182, 8.194, 8.201
s 1812(a)(1) (s 2(a)(1)) . . . . . . . . . . . . . . 8.25
s 1812(b) (s 2(b)) . . . . . . . . . . . . . . . . . . 8.25
s 1812(k) . . . . . . . . . . . . . . . . . . . . 5.57, 5.58
s 1815 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
s 1815(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.24
s 1815(e)(1) . . . . . . . . . . . . . . . . . . . . . 8.134
s 1815(e)(2)(A)(C) . . . . . . . . . . . . . . . 8.134
s 1816 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
s 1817 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
s 1818 (s 8) . . . . . . . . . . . . . . . . . . . . . . . 8.34
s 1818(b)(1) . . . . . . . . . . . . . . . . . . . . . . 8.34
s 1818(e) . . . . . . . . . . . . . . . . . . . . . . . . 8.34
s 1818(i) . . . . . . . . . . . . . . . . . . . . . . . . . 8.34
s 1821 (s 11) . . . . . . . . 8.01, 8.20, 8.24, 8.100,
8.159, Annex A
s 1821(a) . . . . . . . . . . . . . . . . . . . . . . . . 8.28
s 1821(a)(4)(C) . . . . . . . . . . . . . . . . . . . 8.56
s 1821(c) . . . . . . . . . . . . . . . . . . . . . . . . 8.49
s 1821(c)(1) . . . . . . . . . . . . . . . . . . . . . . 8.50
s 1821(c)(2) . . . . . . . . . . . . . . . . . . . . . . 8.48
s 1821(c)(4) . . . . . . . . . . . . . . . . . . . . . . 8.48
s 1821(c)(5) . . . . . . . . . . . . . . . . . . 8.49, 8.49
s 1821(d)(2)(A)(D) (s 11(d)
(2)(A)(D)) . . . . . . . . . . . . . . . . . . 8.27
s 1821(d)(2)(A) . . . . . . . . . . . . . . . . . . . 8.54
s 1821(d)(2)(G)(i)(II) . . . . . . . . . . . . . . . 8.58
s 1821(d)(3)(B) . . . . . . . . . . . . . . . . . . 8.101
s 1821(d)(3)(B)(i) . . . . . . . . . . . . . . . . . 8.101
s 1821(d)(4)(B) . . . . . . . . . . . . . . . . . . 8.100
s 1821(d)(5)(A)(i). . . . . . . . . . . . . . . . . 8.101
s 1821(d)(5)(E) . . . . . . . . . . . . . . . . . . 8.100
s 1821(d)(5)(F)(i) . . . . . . . . . . . . . . . . . 8.137
s 1821(d)(6)(A)(D) (s 11(d)
(6)(A)(D)) . . . . . . . . . . . . . . . . . . 8.27
s 1821(d)(6)(A) . . . . . . . .8.100, 8.101, 8.136
s 1821(d)(6)(B) . . . . . . . . . . . . . . . . . . 8.101
s 1821(d)(10) . . . . . . . . . . . . . . . . . . . . 8.100
s 1821(d)(11) . . . . . . . . . . . . . . . . 8.29, 8.103
s 1821(d)(12) . . . . . . . . . . . . . . . . . . . . 8.137
s 1821(d)(12)(A) . . . . . . . . . . . . . . . . . 8.136
s 1821(d)(12)(B) . . . . . . . . . . . . . . . . . 8.136
s 1821(d)(13)(B) . . . . . . . . . . . . . . . . . 8.138
s 1821(d)(13)(D) . . . . . . . . . . . . . . . . . 8.100
s 1821(d)(14)(A) . . . . . . . . . . . . . . . . . 8.139
s 1821(d)(14)(B) . . . . . . . . . . . . . . . . . 8.139
s 1821(d)(17)(A) . . . . . . . . . . . . 8.132, 8.133
s 1821(d)(17)(B)(C) . . . . . . . . . . . . . . 8.133
s 1821(d)(17)(D) . . . . . . . . . . . . . . . . . 8.133
 Table of Legislation
Federal Deposit Insurance Act (cont.)
s 1821(e) . . . . . . . . . . . . . . . . . . . . . . . 8.105
s 1821(e)(1)(C) . . . . . . . . . . . . . . . . . . 8.114
s 1821(e)(3) . . . . . . . . . . . . . . . . . . . . . 8.119
s 1821(e)(3)(A) . . . . . . . . . . . . . . . . . . . 8.119
s 1821(e)(3)(A)(ii)(I) . . . . . . . . . . . . . . 8.120
s 1821(e)(3)(C) . . . . . . . . . . . . . 8.119, 8.125
s 1821(e)(4)(5) . . . . . . . . . . . . . . . . . . 8.121
s 1821(e)(4)(B) . . . . . . . . . . . . . . . . . . . 8.121
s 1821(e)(8)(C)(ii) . . . . . . . . . . . . . . . . 8.130
s 1821(e)(8)(D)(i) . . . . . . . . . . . . . . . . 8.122
s 1821(e)(8)(G)(i). . . . . . . . . . . . 8.114, 8.126
s 1821(e)(8)(G)(ii) . . . . . . . . . . . . . . . . 8.114
s 1821(e)(9)(A)(i) . . . . . . . . . . . . . . . . . 8.123
s 1821(e)(10)(B)(i) . . . . . . . . . . . . . . . . 8.123
s 1821(e)(10)(B)(ii) . . . . . . . . . . . . . . . 8.124
s 1821(e)(11) . . . . . . . . . . . . . . . 8.117, 8.125
s 1821(e)(12) . . . . . . . . . . . . . . . . . . . . 8.127
s 1821(e)(13)(A) . . . . . . . . . . . . . . . . . . 8.114
s 1821(e)(14) . . . . . . . . . . . . . . . . . . . . 8.128
s 1821(g) . . . . . . . . . . . . . . . . . . . . . . . . 8.27
s 1821(n)(1)(A) . . . . . . . . . . . . . . . . . . . 8.61
s 1821(n)(1)(B) . . . . . . . . . . . . . . . . . . . 8.62
s 1821(n)(7) . . . . . . . . . . . . . . . . . . . . . . 8.62
s 1821(n)(9) . . . . . . . . . . . . . . . . . . . . . . 8.62
s 1823 (s 13) . . . . . 8.01, 8.20, 8.159, Annex A
s 1823(c) . . . . . . . . . . . . . . . . . . . . . . . . 8.45
s 1823(c)(2)(A) . . . . . . . . . . . . . . . . . . . . 8.58
s 1823(c)(4) . . . . . . . . . . . . . . . . . . 8.56, 8.96
s 1823(e) . . . . . . . . . . . . 8.107, 8.109, 8.110,
8.111, 8.127
s 1824(a) (s 14(a)). . . . . . . . . . . . . . . . . . 8.24
s 1831i(e) . . . . . . . . . . . . . . . . . . . . . . . . 5.57
s 1831o(a)(2) (s 38(a)(2)) . . . . . . . . . . . . 8.35
s 1831o(e)(i) (s 38(e)(i)) . . . . . . . 8.36, 8.49
s 1831o(h)(2) (s 38(h)(3)) . . . . . . . . . . . . 8.37
Federal Home Loan Bank
Act 1932 . . . . . . . . . . . . . . . . 8.145, 8.146
Federal Home Loan Mortgage
Corpn Act . . . . . . . . . . . . . . . . . . . . 8.142
Federal Housing Enterprises Financial
Safety and Soundness Act 1992
(Safety and Soundness Act) . . . 8.143, 8.150
1367 . . . . . . . . . . . . . . . . . . . . . . . . . 8.150
1369 . . . . . . . . . . . . . . . . . . . . . . . . . 8.150
1369A . . . . . . . . . . . . . . . . . . . . . . . . 8.150
Federal National Mortgage Association
Charter Act. . . . . . . . . . . . . . . . . . . . 8.143
Federal Reserve Act 1913 . . . . . . . . . . . . . . 5.33
1101 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.33
1101(a)(6) . . . . . . . . . . . . . . . . . . . . . . 5.33
1101(a)(1) . . . . . . . . . . . . . . . . . . . . . . 5.33
1101(a)(2)(A)(B) . . . . . . . . . . . . . . . . . 5.33
s 10B . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.42
s 13(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 8.43
xliv
Financial Institutions Reform,
Recovery and Enforcement Act
1989 (FIRREA), Public Law
10173. . . . . . . . . . 5.57, 8.01, 8.30, 8.104,
8.147
s 212(a) . . . . . . . . . . . . . . . . . . . . 5.57, 8.131
s 212(e) . . . . . . . . . . . . . . . . . . . . . . . . 8.116
s 914 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.57
s 1812(k) . . . . . . . . . . . . . . . . . . . . 5.57, 5.58
Foreign State Immunity Act 1976
Title 28 USC (FSIA). . . . . . . .10.12, 10.16,
11.156, 11.167
Freedom of Information Act . . . . . . . . . . . . 8.68
Gramm-Leach-Biley Act 1999,
Public Law 106-102 . . . . . .5.27, 5.395.41
2(12) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.42
101 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.39
103 . . . . . . . . . . . . . . . . . . . . . . . 5.39, 5.40
104 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.39
108 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.40
111 . . . . . . . . . . . . . . . . . . . . . . . 5.41, 5.42
111(1)(A)(J) . . . . . . . . . . . . . . . . . . . 5.42
112(1)(A) . . . . . . . . . . . . . . . . . . . . . . 5.42
112(1)(B) . . . . . . . . . . . . . . . . . . . . . . 5.42
112(1)(C) . . . . . . . . . . . . . . . . . . . . . . 5.42
113(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 5.42
113(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 5.42
113(b) . . . . . . . . . . . . . . . . . . . . . . . . . 5.42
113(e)(5)(h) . . . . . . . . . . . . . . . . . . . . 5.42
115(d)(1). . . . . . . . . . . . . . . . . . . . . . . 5.42
165 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.41
307 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.39
Home Owners Loan Act . . . . . . . . . 8.145, 8.146
Housing and Economic Recovery
Act 2008 . . . . . . . . . . . . . . . . 8.1498.154
1002(a)(3) . . . . . . . . . . . . . . . . . . . . . 8.151
1101 . . . . . . . . . . . . . . . . . . . . . . . . . 8.149
1102(a) . . . . . . . . . . . . . . . . . . . . . . . 8.149
1117(a) . . . . . . . . . . . . . . . . . . . . . . . 8.151
1145 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.52
1145(a) . . . . . . . . . . . . . . . . . . . . . . . 8.151
1361 . . . . . . . . . . . . . . . . . . . . . . . . . 8.151
4617(a)(3) . . . . . . . . . . . . . . . . . . . . . 8.152
4617(b)(1). . . . . . . . . . . . . . . . . . . . . 8.152
4617(b)(2). . . . . . . . . . . . . . . . . . . . . 8.152
4617(b)(2)(E) . . . . . . . . . . . . . . . . . . 8.153
4617(b)(11)(E) . . . . . . . . . . . . . . . . . 8.153
4617(b)(3). . . . . . . . . . . . . . . . . . . . . 8.154
4617(b)(5)(E) . . . . . . . . . . . . . . . . . . 8.154
4617(c)(2) . . . . . . . . . . . . . . . . . . . . . 8.154
4617(d) . . . . . . . . . . . . . . . . . . . . . . . 8.154
4617(d)(3). . . . . . . . . . . . . . . . . . . . . 8.154
4617(d)(8). . . . . . . . . . . . . . . . . . . . . 8.154
4617(d)(13). . . . . . . . . . . . . . . . . . . . 8.154
4617(i) . . . . . . . . . . . . . . . . . . . . . . . 8.152
 Table of Legislation
Housing and Urban Development
Act 1968 . . . . . . . . . . . . . . . . . . . . . 8.141
International Banking Act 1978
12 USC 1301 et seq . . . . . . . . . . . . . 5.34
International Debt Management
Act 1988 . . . . . . . . . . . . . . . . . . . . . 10.33
National Bank Act 1864 . . . . . . . . . . . . . . . 5.28
National Bank Acts 18631865 . . . . . . . . . 5.44
619 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.47
National Currency Act 1863 . . . . . . . . . . . . 5.28
National Emergencies Act
s 202(d) . . . . . . . . . . . . . . . . . . . . . . . . 11.61
Omnibus Budget Reconciliation
Act 1993 . . . . . . . . . . . . . . . . . . . . . 8.102
Restoring American Financial
Stability Act 2010 . . . . . . . . . . . 8.03, 8.158
Securities Act 1933 . . . . . . . . . . .3.32, 3.443.55
s 3(a)(9) . . . . . . . . . . . . 3.44, 3.47, 3.533.55
s 4(2) . . . . . . . . . . 3.44, 3.47, 3.483.52, 3.54
s 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.44
s 11 . . . . . . . . . . . . . . . . . . . . . . . . 3.37, 3.46
s 11(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . 3.46
s 11(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.46
s 12(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 3.46
s 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.56
r 144A . . . . . . . . . . . . . . . . . . . . . . . . . . 3.49
r 162 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.45
Securities Investor Protection
Act 1970 (SIPA) . . . . . . .4.22, 8.163, 8.169
Uniform Foreign Money-Judgments
Recognition Act 1962 . . . . . . . . . . . . 10.19
Wall Street Reform and Consumer
Protection Act 2009 . . . .8.03, 8.158, 8.166
Wall Street Reform and Consumer
Protection Act 2010 . . . . . . . . . . . . . . 8.03
Bankruptcy Rules: Federal Rules of
Bankruptcy Procedure . . . . . . 3.109, 3.119
1007(a)(4) . . . . . . . . . . . . . . . . . . . . . . 4.28
1015(b) . . . . . . . . . . . . . . . . . . . . . . . . 4.28
2002(a)(2) . . . . . . . . . . . . . . . . . . . . . 3.138
2002(q)(1). . . . . . . . . . . . . . . . . . 4.28, 4.33
2002(b) . . . . . . . . . . . . . . . . . . . . . . . 3.109
3018(b) . . . . . . . . . . . . . . . . . . . . . . . 3.109
7007.1(A) . . . . . . . . . . . . . . . . . . . . . . 4.28
9006(c) . . . . . . . . . . . . . . . . . . . . . . . 3.117
Federal Rules of Civil Procedure
r 7(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . 10.95
r 23 . . . . . . . . . . . . . 11.117, 11.119, 11.124,
11.134, 11.135
r 23(a) . . . . . . . . . . . . . . . . . . 11.125, 11.134
r 23(b) . . . . . . . . . . . . . . . . . . . . . . . . 11.134
r 23(b)(1) . . . . . . . . . . . . . . . . . . . . . . 11.140
r 23(b)(2) . . . . . . . . . . . . . . . . . . . . . . 11.140
r 23(b)(3) . . . 11.125, 11.131, 11.135, 11.140
r 23(b)(3)(D) . . . . . . . . . . . . . 11.132, 11.133
xlv
r 23(e) . . . . . . . . . . . . . . . . . . . . . . . . 11.126
r 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.73
r 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.76
Federal Rules of Evidence
r 614 . . . . . . . . . . . . . . . . . . . . . 4.106, 4.107
Code of Federal Regulations (CFR). . . . . . . 5.31
12 CFR s 4.2 . . . . . . . . . . . . . . . . . . . . . 5.32
12 CFR Pt 201 . . . . . . . . . . . . . . . . . . . . 8.42
12 CFR Pt 360 . . . . . . . . . . . . . . . . . . . . 8.31
12 CFR 225.4(a) . . . . . . . . . . . . . . . . . . 8.39
17 CFR 230.144A . . . . . . . . . . . . . . . . 3.49
17 CFR 230.144(d)(3)(ii) . . . . . . . . . . 3.52
17 CFR 230.149 . . . . . . . . . . . . . . . . . 3.53
17 CFR 230.150 . . . . . . . . . . . . . . . . . 3.53
17 CFR 230.501 . . . . . . . . . . . . . . . . . 3.48
17 CFR 230.902(k) . . . . . . . . . . . . . . . 3.44
17 CFR 239.25 . . . . . . . . . . . . . . . . . . 3.45
17 CFR 239.34 . . . . . . . . . . . . . . . . . . 3.45
17 CFR 240.10b-5 . . . . . . . . . . . . . . . 3.33
17 CFR 240.13e-3 . . . . . . . . . . . . . . . . 3.33
17 CFR 240.14d-1 et seq . . . . . . . 3.33, 3.43
17 CFR 240.14e-1 . . . . . . . . . . . . . . . 3.34
IRC
61(a)(12) . . . . . . . . . . . . . . . . . . . . . . . 3.68
108(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . 3.68
108(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 3.68
108(e)(10) . . . . . . . . . . . . . . . . . . . . . . 3.68
108(i) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.68
1273(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.68
Treasury Regulations
1.1273-2(c) . . . . . . . . . . . . . . . . . . . . . 3.68
1.1273-2(f ) . . . . . . . . . . . . . . . . . . . . . 3.68
1.1273-1(1) . . . . . . . . . . . . . . . . . . . . . 3.68
1.1273-2 . . . . . . . . . . . . . . . . . . . . . . . 3.68
1.1273-2 . . . . . . . . . . . . . . . . . . . . . . . 3.68
1.1634(a)(1) . . . . . . . . . . . . . . . . . . . 3.68
New York Civil Practice Law and Rules
6201. . . . . . . . . . . . . . . . . . . . . . . . . . . 10.19
6210. . . . . . . . . . . . . . . . . . . . . . . . . . . 10.19
6211(b) . . . . . . . . . . . . . . . . . . . . . . . . 10.19
TREATIES, CONVENTIONS AND
OTHER INTERNATIONAL
INSTRUMENTS
Brussels Convention 1968 . . . . . . . . . . . . . 2.05
European Convention on
Human Rights . . . . . . . . . . . . . . . . . . 6.13
art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75
art 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.181
European Convention on Insolvency
Proceedings . . . . . . . . . . . . . . . . . . . 4.161
INSOL Principles (International
Federation of Insolvency Professionals)
Pr 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.62
 Table of Legislation
International Monetary Fund, Articles
of Agreement
art VIII, s 2(b) . . . . . . . . . . . . . . . . . . . 11.50
art XXIX . . . . . . . . . . . . . . . . . . . . . . . 11.50
art XXVIII(a) . . . . . . . . . . . . . . . . . . . . 11.40
Statute of the International Court of Justice
art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.56
UN Charter
Ch VI . . . . . . . . . . . . . . . . . . . . . . . . . . 11.57
Ch VII . . . . . . . . . . . . . . . . . . . . 11.56, 11.57
art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.54
art 10 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.56
art 14 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.56
art 18 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.54
art 23 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.55
art 24 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.58
art 25 . . . . . . . . . . . . . . . . . . . . . 11.56, 11.58
art 41 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.58
art 42 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.58
art 48 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.58
art 49 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.58
xlvi
art 92 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.56
UN Security Council
Resolution No 1483/03 . . . . . . .11.59, 11.60,
11.61, 11.62
Resolution No 1546/04 . . . . . . . . . . . . 11.60
UNCITRAL Model Law 1997 . . . . . . . . . . 2.54,
4.014.216
Preamble . . . . . . . . . . . . . . . . . . . . . . . 4.176
art 7 . . . . . . . . . . . . . . . . . . . . . . . 4.44, 4.129
UNCITRAL Legislative Guide
on Insolvency Law, 2010. . . . . 4.2114.216
UNCITRAL Practice Guide on
Cross-Border Insolvency, 2009 . . . . . 4.190,
4.204, 4.2114.216
Vienna Convention on Succession of
States in Respect of State Property,
Archives and Debts 1983
(not yet ratified) . . . . . . . . . . . . . . . . 11.41
Vienna Convention on the Law
of Treaties, 1969
art 28 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.42
 Part I

CORPORATE DEBT
RESTRUCTURING
This page intentionally left blank
 1
INSOLVENCY IN THE UK AND
THE US 1

I. Time to Compare 1.01 A. Transactions at an Undervalue

(Section 238 of the Insolvency
II. Principal Tests of Inability to Act 1986) 1.701.75
Pay Debts in the English Statutory B. Transactions Defrauding Creditors
Scheme and Their Relevance in (Section 423 of the Insolvency
Considering a Restructuring 1.021.35 Act 1986) 1.761.77
A. Overview 1.021.03 C. Preferences (Section 239 of the
B. The Tests of Inability to Pay Debts 1.041.09 Insolvency Act 1986) 1.781.87
C. The Cash Flow Test 1.101.24 D. Jurisdiction of the Court 1.88
D. The Balance Sheet Test 1.251.35 E. Avoidance of Floating Charges
(Section 245 of the Insolvency
III. Restructuring and Directors Duties Act 1986) 1.891.90
in England and the US 1.361.58
VI. Avoidance Actions in the
A. Groups 1.501.54 United States 1.911.113
B. Directors Duties in the US 1.551.58
A. Fraudulent Conveyances 1.911.104
IV. The Standstill in England 1.591.67 B. Preferences 1.1051.113

V. Vulnerable Transactions 1.681.90

I. Time to Compare
The1US and English models for financial restructurings of companies in financial difficulties 1.01
are fundamentally different. The US has its chapter 11 regime, a statutory process under the
Bankruptcy Code, which allows a company to restructure under court protection and does
not require proof of insolvency.2 The English system has, by contrast, a mixed approach of
contract, common law, and statute and no formal regime specifically designed to achieve a
financial restructuring. However, the latest wave of restructurings precipitated by the credit

1
Alan Kornberg would like to acknowledge the invaluable assistance of his colleagues, Lawrence G Wee,
Sarah Harnett, Kellie Cairns, and Evan R Zisholtz. Sarah Paterson would like to acknowledge the similarly
invaluable help of Lynda Elms, Sophy Lewin, Lois Deasey, Sarah Ellicott, and Frances Churchard.
2 Section 109(c) of title 11 of the United States Code, 11 USC 101, et seq (the Bankruptcy Code) pro-

vides that a municipality must be insolvent to be eligible to file for relief under chapter 9 (11 USC 109(c)).
Although proof of insolvency is not required for relief under other chapters of the Bankruptcy Code, the issue
of insolvency often arises in connection with whether creditors will receive post-petition interest and whether
certain pre-petition transactions may be set aside.

3
 Insolvency in the UK and the US

crisis has brought into the spotlight arguments that the time has arrived for such a restructur-
ing regime to be adopted in England. Commentators have engaged in vigorous debate as to
the extent to which the principles behind chapter 11 ought to be imported into a UK statu-
tory scheme. In the meantime, junior creditors in complex capital structures have increas-
ingly sought to borrow ideas from chapter 11 in raising challenges to financial restructurings
in the UK. A comparative review of the two systems could not, therefore, be more timely.

II. Principal Tests of Inability to Pay Debts in

the English Statutory Scheme and Their Relevance
in Considering a Restructuring

A. Overview
OWE, v. To have (and to hold) a debt. The word formerly signified not indebtedness, but pos-
session; it meant own and in the minds of debtors there is still a good deal of confusion
between assets and liabilities.
Ambrose Bierce (18421914), The Devils Dictionary (1911)
Creditors have better memories than debtors.
Benjamin Franklin (17061790), Poor Richards Almanac (1758)
1.02 The concept of insolvency is of central importance in the context of corporate restructuring
law and practice. The focus of modern insolvency regimes has moved steadily from the liq-
uidation of the company to its rescue and, increasingly, toward a financial restructuring
rather than a realization of the assets of the business. However, the critical question for the
board of directors is when such a financial restructuring is necessary. The answer to this turns
on when the solvency of the company is in sufficient doubt to mean that a financial restruc-
turing is needed. Thus different approaches from jurisdiction to jurisdiction to both the
solvency question and the duties of the directors of a company in financial difficulties result
in materially different approaches to when a financial restructuring is necessary and the form
it must take.
1.03 The Oxford English Dictionary defines solvent as able to pay all ones debts or liabilities, and
conversely insolvent as unable to pay ones debts or discharge ones liabilities. In theory, the
meaning of insolvency is simple. In practice, it can be extremely difficult to apply.

B. The Tests of Inability to Pay Debts

1.04 English law has no definition of insolvency; the relevant standard is one of an inability to
pay debts. The various tests of inability to pay debts are set out in section 123(1) and (2) of
the Insolvency Act 1986:
123. Definition of inability to pay debts.
(1) A company is deemed unable to pay its debts
(a) if a creditor (by assignment or otherwise) to whom the company is indebted
in a sum exceeding 750 then due has served on the company, by leaving it at

4
 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme

the companys registered office, a written demand (in the prescribed form)
requiring the company to pay the sum so due and the company has for 3 weeks
thereafter neglected to pay the sum or to secure or compound for it to the
reasonable satisfaction of the creditor, or
(b) if, in England and Wales, execution or other process issued on a judgment,
decree or order of any court in favour of a creditor of the company is returned
unsatisfied in whole or in part, or
(c) if, in Scotland, the induciae of a charge for payment on an extract decree, or
an extract registered bond, or an extract registered protest, have expired with-
out payment being made, or
(d) if, in Northern Ireland, a certificate of unenforceability has been granted in
respect of a judgment against the company, or
(e) if it is proved to the satisfaction of the court that the company is unable to pay
its debts as they fall due.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction
of the court that the value of the companys assets is less than the amount of its
liabilities, taking into account its contingent and prospective liabilities.
Section 123 evidently lays down a number of tests for determining whether a company is to
be deemed unable to pay its debts.3 These tests can be summarized into two groups:
Specific tests: these comprise the statutory demand limb (section 123(1)(a)) and the juris-
diction specific tests in relation to enforcement of a court order (section 123(1)(b)(d)).
General (principal) tests: a company may also be regarded as unable to pay its debts if it is
unable to pay its debts as they fall due (section 123(1)(e)) or if its liabilities exceed its assets
(section 123(2)). The first meaning is sometimes referred to as cash flow insolvency; the
second meaning is commonly referred to as insolvency on a balance sheet basis, or balance
sheet insolvency.
The specific tests of inability to pay debts are satisfied by reference to irrefutable and easily 1.05
established external facts or events. Under these tests, the court will decide the issue of solvency
on the basis of a presumption; that is, the company will be presumed to be unable to pay its
debts without it actually being proved, and the company has the burden of rebutting that pre-
sumption. By contrast, application of the principal tests requires detailed analysis of the debtor
companys financial position. Evidence of solvency must be adduced and if the court is satisfied
regarding the proof, the company is found unable to pay its debts as a matter of fact.
In considering whether a financial restructuring is necessary, the board of directors will ordi- 1.06
narily be focused on the general tests although a company in financial distress may also be
experiencing creditor action based on the specific tests.

1. Introduction to the general tests

The distinction between cash flow insolvency on the one hand and balance sheet insolvency 1.07
on the other is of quite recent origin. Section 80(4) of the Companies Act 1862 provided as
follows:
A company under this Act shall be deemed to be unable to pay its debts . . . Whenever it is
proved to the satisfaction of the court that the company is unable to pay its debts.

3
Goode notes that [t]he reasons for selecting different tests for different provisions have never been clearly
articulated: RM Goode, Principles of Corporate Insolvency Law (3rd edn, 2005) 85.

5
 Insolvency in the UK and the US

1.08 In Re European Life Assurance Society,4 James VC held that the test in section 80 of the Companies
Act 1862 referred to debts absolutely due (thus excluding contingent and prospective liabilities),
and that prospective creditors had no standing to petition for the winding up of a company.5 This
shortcoming was addressed by section 28 of the Companies Act 1907, which permitted prospective
creditors to petition, and required the court to have regard to contingent and prospective liabilities
when applying the Companies Act 1862.6 The basic statutory formulation remained unchanged
despite various re-enactments of the Companies Acts in 1929, 1948, and 1985, and the current
division embodied in section 123(1)(e) and (2) only appeared in the short-lived Insolvency Act
1985, ultimately replaced by the Insolvency Act 1986.
1.09 Given the relatively recent origin of the current primary tests of inability to pay debts, there
is minimal English authority on the meaning and content of the tests. For this reason, judges
and academic writers frequently cite Australian authority, in particular because there has
been a quite developed jurisprudence on the subject in that jurisdiction.7 However, the
Australian cases must be considered with some caution in the English context given the
formulation of section 95A of the Australian Corporations Act 2001, which sets out a cash
flow (rather than balance sheet) insolvency test.8

C. The Cash Flow Test

1.10 The English law cash flow test is embodied in section 123(1)(e) of the Insolvency Act 1986:
123. Definition of inability to pay debts.
(1) A company is deemed unable to pay its debts

(e) if it is proved to the satisfaction of the court that the company is unable to pay
its debts as they fall due.
1.11 Cash flow insolvency is sometimes referred to as commercial insolvency. Goode explains
the rationale behind the cash flow insolvency test as follows:
. . . the fact that its assets exceed its liabilities is irrelevant; if it cannot pay its way in the conduct
of its business it is insolvent, for there is no reason why creditors should be expected to wait
while the company realises assets some of which may not be held in readily liquidated form.9
1.12 In many cases, cash flow insolvency can readily be established by evidence showing persistent
failure by a company to pay its debts as they fall due for payment. In this sense, application

4 (186970) LR 9 Eq 122.
5 Ibid at 127. At 128, his Honour observed: I take it that the Court has nothing whatever to do with
any question of future liabilities, that it has nothing whatever to do with the question of the probability whether
any business which the company may carry on tomorrow or hereafter will be profitable or unprofitable. That is
a matter for those who may choose to be the customers of the company and for the shareholders to consider.
I have to look at the case simply with reference to the solvency or insolvency of the company, and in doing that
I have to deal with the company exactly as it stood on the day to which the evidence relates
6
The new provision was consolidated in the Companies (Consolidation) Act 1908 in s 130 in the following
form: A company shall be deemed to be unable to pay its debts (iv) if it is proved to the satisfaction of the
court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its
debts, the court shall take into account the contingent and prospective liabilities of the company.
7
A Keay and P Walton, Insolvency Law: Corporate and Personal (2nd edn, 2008) 17.
8 Section 95A (Solvency and insolvency) provides: (1) A person is solvent if, and only if, the person is able

to pay all the persons debts, as and when they become due and payable; (2) A person who is not solvent is
insolvent.
9 RM Goode, Principles of Corporate Insolvency Law (3rd edn, 2005) 87.

6
 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme

of the test is relatively straightforward insofar as the court will be looking at what the com-
pany is actually doing. However, in marginal cases, the vague and imprecise nature of the test
makes the determination of a companys solvency on any particular day difficult. This is all
the more so as English courts have not tackled some of the issues which the cash flow formu-
lation in section 123(1)(e) raises.10
However, the question of whether the company is facing cash flow insolvency is likely to be 1.13
the real driver behind a decision that a financial restructuring is necessary. As we will discuss
below, creditors who are out of the money today are likely to argue for a wait and see
approach rather than radical surgery in a poor market. However, the companys ability to
wait, or undertake only limited amendments, will be driven by whether or not it has a cash
need. Even in the absence of an event of default, a company cannot continue to trade if it
runs out of cash. Therefore, the question of whether and when the company faces a cash crisis
can become the principal battle ground, with junior creditors arguing that the directors are
not taking many of the actions available to them and that the cash need is not as real or
immediate as the company is claiming.
1. General approach of the court
In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation,11 Palmer J in the New 1.14
South Wales Supreme Court usefully set out the general principles guiding a court in apply-
ing the applicable Australian insolvency test (emphasis added, citations omitted):12
(i) [w]hether or not a company is insolvent for the purposes of [relevant Australian statutory
provisions] is a question of fact to be ascertained from a consideration of the companys finan-
cial position taken as a whole ;
(ii) in considering the companys financial position as a whole, the Court must have regard to com-
mercial realities. Commercial realities will be relevant in considering what resources are
available to the company to meet its liabilities as they fall due, whether resources other
than cash are realisable by sale or borrowing upon security, and when such realisations are
achievable . . .;
(iii) in assessing whether a companys position as a whole reveals surmountable temporary
illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to
have regard to the commercial reality that, in normal circumstances, creditors will not always
insist on payment strictly in accordance with their terms of trade but that does not result in
the company thereby having a cash or credit resource which can be taken into account in
determining solvency ;
(iv) the commercial reality that creditors will normally allow some latitude in time for payment
of their debts does not, in itself, warrant a conclusion that the debts are not payable at the
times contractually stipulated and have become debts payable only upon demand ;
(v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the
time stipulated for payment in the contract unless there is evidence, proving to the Courts
satisfaction, that:
there has been an express or implied agreement between the company and the
creditor for an extension of the time stipulated for payment; or
there is a course of conduct between the company and the creditor sufficient to
give rise to an estoppel preventing the creditor from relying upon the stipulated
time for payment; or

10 A Keay and P Walton, Insolvency Law: Corporate and Personal (2nd edn, 2008) 17.
11 188 ALR 114 (Supreme Court of New South Wales).
12 Ibid at 54.
7
 Insolvency in the UK and the US

there has been a well established and recognised course of conduct in the indus-
try in which the company operates, or as between the company and its creditors
as a body, whereby debts are payable at a time other than that stipulated in the
creditors terms of trade or are payable only on demand ;13
1.15 These principles are a helpful guide in the English context for a board of directors grappling
with the cash needs of the company and, in particular, its ability to take significant actions
such as stretching creditors to buy more time.
2. Future debts
1.16 The introduction of a distinction between cash flow insolvency and balance sheet insol-
vency in the Insolvency Act 1985 created uncertainty as to the degree to which future
debts could be taken into account when determining cash flow insolvency under section
123(1)(e). In particular, while at the worst as they fall due would appear to extend the test
to obligations falling due in the near future, it was not clear whether the omission of the
words contingent and prospective liabilities (appearing in section 123(2)) from section
123(1)(e) was of any significance.14 This is of particular importance to the question of when
the board concludes that it has a cash flow issue and when creditors may be able to take action
on that basis.
1.17 The case of Highberry Limited v Colt Telecom Group Plc15 involved the application for admin-
istration by certain of Colt Telecom Group Plcs noteholders (collectively called Highberry).
The petition was unusual in that Colt was both cash flow solvent and, according to a report
prepared for Colt by one of the big four accounting firms which the noteholders contested,
balance sheet solvent at the time. The company was a member of the FTSE mid-250 index,
had a market capitalization in excess of 550 million and net assets of 977 million. There
was no default under the notes. The noteholders, keen to force Colt into administration in
order to effect a debt for equity exchange and thereby gain full value from the notes they had
recently purchased, argued that Colt would be unable to repay a substantial amount of the
capital due on the notes when it became payable four years later. Highberry, largely relying
on the dramatic fall in Colts share price over the two preceding years, contended that it was
unclear that Colt would be generating enough cash flow from its assets and that anyone
would refinance. Jacob J gave short shrift to speculation over the future health of the com-
pany, criticizing any shaky, tentative, and speculative peering into the middle-distance16
when seeking to establish cash flow insolvency. The judge considered any allegation of
insolvency to be a serious matter and one that requires a solid foundation.17 He noted factors

13
See, however, subsequent Australian case law, eg White ACT (In Liquidation) v White GB & ors [2004]
NSWSC 71 at 291293 (Supreme Court of New South Wales); Iso Lilodw Aliphumeleli Pty Ltd (In Liquidation)
v Commissioner of Taxation [2002] NSWSC 644 at 14 (Supreme Court of New South Wales); Re New World
Alliance Pty Ltd (receiver and manager appointed), Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 434 (Federal
Court of Australia); Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532 at 4548 (Federal Court of
Australia); ASIC v Plymin, Elliott & Harrison [2003] VSC 123 at 380 (Supreme Court of Victoria); and
Shakespeares Pie Co v Multipye [2006] NSWSC 930 at 89 (Supreme Court of New South Wales).
14 A Keay and P Walton, Insolvency Law: Corporate and Personal (2nd edn, 2008) 19 and A Keay, McPhersons

Law of Company Liquidation (2nd edn, 2009) 106107.

15 [2002] EWHC 2815.
16
Ibid at 87.
17
Ibid.

8
 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme

such as the companys ability to refinance and the volatility of the telecoms market being
such that anything could happen prior to the time at which the noteholders claimed the
companys cash would run out.18
However, the decision of Jacob J in the Colt case stands in contrast to the decision of Briggs J 1.18
in Re Cheyne Finance Plc (In Receivership).19 In the Re Cheyne case, receivers were appointed
in respect of a structured investment vehicle by the security trustee pursuant to a security
trust deed. Under the deed, Insolvency Event was defined as follows:
Insolvency Event means a determination by the manager or any receiver that the issuer [the
Company] is, or is about to become, unable to pay its debts as they fall due to senior creditors
and any other persons whose claims against the issuer are required to be paid in priority
thereto, as contemplated by section 123(1) of the Insolvency Act 1986 . . .
The receivers sought guidance from the court as to whether, on the facts, Cheyne was or was 1.19
about to become unable to pay its debts; in particular, whether, and to what extent, could
regard be had to senior debts falling due in the future. The senior creditors argued that the
parties had agreed to a deliberate omission of section 123(2) of the Insolvency Act 1986 and
that the receivers had to apply the commercial or cash flow insolvency test found in section
123(1)(e) which omits, and therefore requires to be ignored, all contingent and prospective
liabilities.
Briggs J rejected this argument, pointing out that, until recently, the question of inability 1.20
to pay debts had been framed without any rigid distinction between commercial and
cash flow insolvency on the one hand and balance sheet insolvency on the other.20 He found
that there was no English authority on the question of whether the introduction of a manda-
tory requirement to consider contingent and prospective liabilities in section 123(2) pre-
vented reference to future debts under section 123(1)(e).21 However, in the Australian
context, Briggs J recognized that there was a wealth of authority indicating that a cash flow
or commercial insolvency test permitted references to debts which would fall due in the
future.22 Furthermore, it was critical to note that when separating out balance sheet insol-
vency from commercial insolvency in 1985, the legislature added what in Australia had
always been regarded as the key words of futurity, the phrase as they fall due.23 Briggs J
concluded:24
In my judgment, the effect of the alterations to the insolvency test made in 1985 and
now found in s.123 of the 1986 Act was to replace in the commercial solvency test now
in s.123(1)(e), one futurity requirement, namely to include contingent and prospective

18
Ibid at 27.
19 [2008] BCC 182.
20
Ibid at 34.
21
Ibid at 36.
22
Ibid at 41. In particular, Briggs J cites Bank of Australasia v Hall (1907) 4 CLR 1514 (High Court of
Australia); Cuthbertson v Thomas (1998) 28 ACSR 310 (Supreme Court of the Australian Capital Territory);
Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 (High Court of Australia); Lewis v Doran 219 ALR 555
(Supreme Court of New South Wales); Sandell v Porter (1966) 115 CLR 666 (High Court of Australia);
Southern Cross Interiors Pty Ltd v Deputy Commissioner for Taxation (2001) 39 ACSR 305 (Supreme Court of
New South Wales); and Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 (Supreme Court of Victoria).
23
Re Cheyne Finance Plc (In Receivership) [2008] BCC 182 at 53.
24
Ibid at 56.

9
 Insolvency in the UK and the US

liabilities, with another more flexible and fact-sensitive requirement encapsulated in the new
phrase as they fall due.
1.21 To what extent, then, is a company to be regarded as currently insolvent on a cash flow basis
when its forecasts show that, having regard to its contingent and future debts, it will run out
of cash at some point in the future? The answer probably lies somewhere between the deci-
sion in the Colt case and the decision in the Cheyne case. While it is difficult to imagine an
English court supporting the view that a company was currently insolvent on a cash flow
basis, and therefore required to take immediate action to adopt a restructuring, when fore-
casts looked as far forward as the Colt decision, equally matters are unlikely to be as clear-cut
as in the Cheyne case for a trading company suffering the ebbs and flows of day-to-day
trading compared with a closed structured investment vehicle. However, the managing
board of a company which has sufficient cash to meet its current liabilities and is forecasting
a cash shortfall some way in the future for which it can see no other remedial action may be
perfectly justified in moving for a restructuring sooner rather than later. A board is not
expected to trade the business without taking any action until the eve of a cash flow crisis nor
is it expected to trade the business for junior creditors whom it considers to be out of the
money at the expense of senior creditors who have clear value to preserve. This difficult area
is discussed in greater detail in Chapter 3.
3. What other actions might be available to the directors?
1.22 In considering whether a financial restructuring is needed, the directors will have regard to
other sources of funds such as asset disposals and borrowings.
1.23 (i) Disposal of assets Asset sales may not be viewed as a source of liquidity where the debtor
company is forced to accept large discounts in order to effect the sale in time to meet its debts.
Keay points out that expert evidence could be heard as to the likelihood of any of the assets
yielding ready cash in sufficient time to satisfy the debts as they fall due.25 In the context of
a complex capital structure, the Board will not be expected to take action that may damage
long-term value for short-term expediency unless that is part of a wider plan.
1.24 (ii) Borrowings It is legitimate to take into account any loan that the company might be
able to obtain, either on the strength of its assets26 or on an unsecured basis.27 However,
in order for borrowed funds to be a factor in the assessment of cash flow insolvency, either
the funds must be available or there must be a significant probability that they would be
available in time to enable the companys debts to be paid.28 In todays market, the issue has
more usually been over-leverage and few companies have had any additional debt-bearing
capacity to meet cash flow concerns.

25
A Keay, The Insolvency Factor in the Avoidance of Antecedent Transactions in Corporate Liquidations
(1995) 21(2) Monash University Law Review 322323.
26 Sandell v Porter (1966) 115 CLR 666 (High Court of Australia); (or those of a third party) Lewis v Doran

219 ALR 555 (Supreme Court of New South Wales).

27 Lewis v Doran 219 ALR 555; Re a Company (No 006794 of 1983) [1986] BCLC 261.
28 MacPlant Services Ltd v Contract Lifting Services (Scotland) Ltd 2009 SC 125, per Lord Hodge at 76.

10
 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme

D. The Balance Sheet Test

The balance sheet test is embodied in section 123(2) of the Insolvency Act 1986: 1.25
123. Definition of inability to pay debts.

(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction
of the court that the value of the companys assets is less than the amount of its
liabilities, taking into account its contingent and prospective liabilities.
The essential difference between the balance sheet test and the cash flow test is that the focus 1.26
of the former is on liabilities (including contingent and prospective liabilities), which is a
much broader concept than debts.29 As Goode explains, the rationale behind the test is that
[i]t is not sufficient for the company to be able to meet its current obligations if its total
liabilities can ultimately be met only by the realisation of its assets and these are insufficient
for the purpose.30
The requirement in section 123(2) to take into account a companys contingent and prospec- 1.27
tive liabilities was considered for the first time in BNY Corporate Trustee Services Ltd v
Eurosail-UK 2007-3BL Plc & ors.31 In that case the debtor, Eurosail, issued notes as part of a
securitization transaction in relation to a portfolio of UK residential non-conforming mort-
gage loans. Security for the notes was provided by a fixed charge over Eurosails interests in
the underlying mortgages entered into with the Trustee. Its risk in relation to changes in
interest and exchange rates was hedged by means of interest and currency swaps with Lehman
Brothers Special Financing Inc (LBSF), whose obligations were guaranteed by Lehman
Brothers Holdings Inc (LBHI). The collapse of the Lehman Brothers Group in 2008 caused
LBSF to default under the swap agreements and LBHI to default under the guarantee.
Eurosail terminated the swap agreements which resulted in it having substantial claims
against LBSF and LBHI but no protection against currency and interest rate changes. This
led to concerns among certain of the noteholders that their notes would not be redeemed as
early as initially projected, as the transaction structure did not allow for the absorption of
such losses, and that there would be a significant shortfall if the principal amount of the
foreign currency notes had to be paid back immediately.32 They argued that the security
trustee should therefore call an event of default under the notes and enforce the security on
the basis that Eurosail should be deemed unable to pay its debts within the meaning of sec-
tion 123(2). The security trustee sought a determination from the court on whether Eurosail
should be deemed unable to pay its debts.33

29
There is of course a direct relationship between cash flow and balance sheet solvency, as the assets of a
company that can be sold as a going concern will have a higher value than assets sold on a break-up basis.
30
RM Goode, Principles of Corporate Insolvency Law (3rd edn, 2005) 88.
31 [2010] All ER (D) 351 (Jul); [2010] EWHC 2005 (Ch).
32
In effect, the noteholders were arguing that the balance sheet test had to take into account Eurosails
prospective and contingent liabilities and that Eurosail should therefore be treated as liable for the full amount
of those liabilities if converted into sterling at the exchange rates at that time.
33
A second issue for consideration was whether, in the event that Eurosail was deemed unable to pay its
debts, a post enforcement call option (PECO) which was exercisable by an associate of Eurosail to take the
benefit of the notes at a nominal price if the security on enforcement was insufficient to pay all amounts due,
had the effect that Eurosail was not unable to pay its debts. In the event, this issue did not require consideration
as Eurosail had been deemed able to pay its debts. However, Morritt C, aware that the case might go further,
expressed the view that, had it been found that the value of Eurosails assets was less than the amount of its

11
 Insolvency in the UK and the US

1.28 Morritt C considered the meaning of section 123(2) and set out a number of propositions
that could be derived from the wording of the provision and from such guidance as was
afforded by the authorities:34
(1) the assets to be valued are the present assets of the company and should be valued at their
present value: there was no question of taking into account any contingent or prospec-
tive assets;35
(2) the requirement to take account of contingent and prospective liabilities could not
require such liabilities to be aggregated at their face value with debts presently due (such
inclusion would be commercially illogical). Had the simple aggregation of present and
prospective liabilities been intended the subsection would have provided that the
amount of its liabilities include its contingent and prospective liabilities. Given that
simple aggregation of present and prospective liabilities was not required then the con-
version of prospective liabilities denominated in some currency other than sterling into
sterling at the present spot rate was not required either;
(3) subject to the foregoing, the subsection was silent as to what taking account of a pro-
spective liability involved. In Morritt Cs view, the content of taking account of must
be recognized in the context of the overall question posed by the subsection, namely
whether the company was deemed to be insolvent because the amount of its liabilities
exceeded the value of the assets. That would involve consideration of the relevant facts
of the case, including when the prospective liability fell due, whether it was payable in
sterling or some other currency, what assets would be available to meet it and what, if
any, provision was made for the allocation of losses in relation to those assets.
1.29 The court concluded that the factual evidence in Eurosail indicated that the debtor was well
able to pay its debts as they fell due. The decision provides some clarification as to the inter-
pretation of section 123(2) although it lacks clear guidance on the meaning of taking into
account contingent and prospective liabilities.
(a) Relevance of accounting concepts
1.30 The term balance sheet test and the references to assets and liabilities in section 123(2)
beg the obvious question: to what extent are accounting concepts relevant? Clearly there are
differences between the legal and accounting definitions of assets and liabilities, with the
general law focusing more on legal form, and the accounting treatment on economic sub-
stance. Accounting concepts will therefore often be wider than legal concepts. Goode points
out that:
differences between the legal and accounting concepts of what constitutes an asset and
what constitutes a liability do not normally matter for the purpose of the balance sheet test of
insolvency so long as the company is able to maintain the payments needed to preserve its right
to retain assets which in law do not belong to it In most cases, therefore, the court is likely

liabilities, taking into account its contingent and prospective liabilities, the PECO would have had no effect on
those liabilities. Eurosails liabilities remained the same, whether or not there was a PECO or, if there was,
whether or not it had been exercised. It was to be assumed that the option company would release Eurosail from
all further liability but it was under no obligation to do so and, until it did, Eurosails liability was unaffected.
34 See Cheyne Finance (n 23 above); Re a Company [1986] BCLC 261; and Byblos Bank SAL v Al-Khudhairy

(1986) 2 BCC 99549.

35 Note that in Eurosail, the claims against the swap counterparties, although not admitted by the US trus-

tees of those companies, were valued as present assets on the basis that such claims could be sold on a liquid
secondary market.

12
 II. Principal Tests of Inability to Pay Debts in the English Statutory Scheme

to follow generally accepted accounting principles in deciding what constitutes a balance sheet
asset or liability, but may decline to do so where for any reason it considers this would be
inappropriate.36
In Eurosail Morritt C said of the exercise required by section 123(2) that it was not the 1.31
production of an annual balance sheet but a comparison of the value of assets with the
amount of liabilities in order to ascertain solvency.37 In considering the liabilities shown on
the financial statements in relation to currency conversion, Morritt C held that this part
of the liabilities shown on the financial statements is entirely speculative I do not consider
this element of the liabilities shown in the financial statements is a liability at all I do not
think that at this stage, account should be taken of it for the purposes of s 123(2) at any mat-
erial value.38
Commentators are often dismissive of the importance of the balance sheet test in the English 1.32
insolvency regime. It is possible that de-leveraging an over-indebted balance sheet will
ease the cash flow difficulties that the company is facing without the need for further action.
In this case, the balance sheet difficulties also give rise to a cash problem. Where this is not
the case, many in the English market dismiss out of hand balance sheet issues. In many
highly leveraged structures the leverage does not create a cash difficulty as much of the debt
service may be in the form of so-called payment in kind or other non-cash pay interest. In
this case, the company may not need an immediate financial restructuring and the Board will
need to take a view, based on its business plan and trading forecasts, of the ability of the
company to grow back into its existing capital structure. In recent times this has been a par-
ticularly challenging assessment given the very uncertain global economic outlook and, in
many cases, has resulted in companies and their creditors not taking immediate action to
restructure the balance sheet.
However, while it is certainly true that many companies incorporated in England continue 1.33
to trade with net liabilities, the balance sheet test cannot be entirely disregarded, not least for
its ability to act as a red flag to directors, warning of troubled times ahead. If directors are
facing maturity deadlines, and are not confident of their ability to refinance, the balance
sheet could certainly steer the directors towards a proactive restructuring. Furthermore, bal-
ance sheet insolvency may trigger events of default in the companys financing arrangements
which, unless waived, entitle lenders to accelerate their debt.
The health of the balance sheet can also be significant if it prevents a company obtaining a 1.34
clean going concern statement from its auditors in its accounts. In preparing the companys
accounts, management will make an assessment of the companys ability to continue as a
going concern. Accounting standards require management to take into account all available
information in the future which is at least, but not limited to, 12 months from the balance
sheet date. The auditors responsibility is to consider the appropriateness of managements
use of the going concern assumption and to consider whether there are any material uncer-
tainties about the companys ability to continue as a going concern that need to be disclosed.
If there are, the auditors consider whether the financial statements adequately describe the
principal events or conditions and, assuming that they do, the auditors will express an

36 RM Goode, Principles of Corporate Insolvency Law (3rd edn, 2005) 104.

37 Eurosail (n 31 above), at para 34.
38 Ibid at para 35.

13
 Insolvency in the UK and the US

unqualified opinion but add to their report an emphasis of matter statement which draws
attention to the particular event or circumstance giving rise to the concern about continued
going concern status.
1.35 There has been a proliferation of emphasis of matter statements in 2008/9 company accounts
(both UK GAAP and IFRS), and this is expected to continue as auditors become increasingly
conservative in their going concern sign-offs in an extremely uncertain global economic cli-
mate. This has, to some extent, meant that in many sectors companies have been less con-
cerned about carrying an emphasis of matter statement, as they do not perceive it to create
such a competitive disadvantage as it might if others in the sector were not carrying the same
sorts of statements in their accounts. However, in some businesses such as those heavily reli-
ant on tendering, it can be a very real issue. It is worth noting that, in considering the need
for an emphasis of matter statement, the auditors are looking at least 12 months ahead and
so this issue may cause discussions with lenders to start before there has been a financial
covenant breach but where one is forecast such that reference can be made to ongoing discus-
sions in the accounts. It is also worth noting that an emphasis of matter statement does not
result in qualified accounts; so it will not cause an event of default relating to qualified
accounts to be triggered.

III. Restructuring and Directors Duties in England and the US

1.36 The question of solvency is also central to determining how the directors ought to exercise
their duties to the company. When a company is trading solvently, the Companies Act
200639 provides that the primary duty of directors is to act in a way that they consider, in
good faith, would be most likely to promote the success of the company for the benefit of its
members as a whole, as between whom they are required to act fairly, and in doing so to have
regard to various specific factors (such as, for example, the interests of the companys employ-
ees). However, this duty is subject to any enactment or rule of law requiring directors, in
certain circumstances, to consider or act in the interests of creditors of the company.
1.37 While a company is clearly solvent there is no duty to consider creditors interests. In this
circumstance, it is assumed that trading will generate sufficient funds for the company to
meet all liabilities to creditors as they fall due. By contrast, when a company is clearly insol-
vent, directors must consider creditors interests before those of shareholders. This common
law principle is illustrated in West Mercia Safetywear Ltd (In Liquidation) v Dodd.40
1.38 The case concerned two companies, AJ Dodd & Co Ltd and its wholly-owned subsidiary, West
Mercia Safetywear Ltd. Both companies had a common director, Mr Albert Dodd. By May
1984 both companies were insolvent. Dodd & Cos account was considerably overdrawn. By
way of security on the account, the bank had a charge over Dodd & Cos book debts (which
included a 30,000 intercompany debt from West Mercia), as well as a personal guarantee from
Mr Dodd. West Mercias account was in credit. The directors called in an accountant to advise
them and take any steps necessary to liquidate the companies. He called the requisite meetings

39 Section 172.
40 (1988) 4 BCC 30, CA.

14
 III. Restructuring and Directors Duties in England and the US

and informed the directors that the companies bank accounts were not thereafter to be oper-
ated. Some days before the meetings were held, Mr Dodd instructed the bank to transfer
4,000 from West Mercias account (which had just been paid in by a debtor) into the account
of Dodd & Co, which the bank accordingly did. The liquidator brought proceedings against
Mr Dodd for breach of, among other things, his duty to consider the interests of the creditors
of West Mercia. The Court of Appeal, overruling the first instance decision, held that there had
indeed been such a breach of duty. West Mercia was at the relevant time insolvent to the knowl-
edge of the directors. They had been expressly told not to deal with the companys bank account.
Mr Dodd was guilty of breach of duty when for his own purposes (to relieve his liability under
his guarantee) he transferred the 4,000 in disregard of the interests of the general creditors in
the insolvent company. Dillon LJ approved the following statement of Street CJ in the New
South Wales Court of Appeal case of Kinsela v Russell Kinsela Pty Ltd (In Liquidation):41
In a solvent company the proprietary interests of the shareholders entitle them as a general
body to be regarded as the company when questions of the duty of directors arise. If, as a gen-
eral body, they authorise or ratify a particular action of the directors, there can be no challenge
to the validity of what the directors have done. But where a company is insolvent the interests
of the creditors intrude. They become prospectively entitled, through the mechanism of liqui-
dation, to displace the power of the shareholders and directors to deal with the companys
assets. It is in a practical sense their assets and not the shareholders assets that, through the
medium of the company, are under the management of the directors pending either liquida-
tion, return to solvency, or the imposition of some alternative administration.42
However, between the two points of clear solvency and clear insolvency there remains a grey 1.39
area, and it is unclear at precisely which point, and to what extent, the directors duties to
promote the success of the company for the benefit of its members is displaced by a duty to
act in the interests of creditors.
The directors must act in the best interests of the creditors as a whole in proposing or supporting 1.40
any restructuring proposal. This is particularly difficult where the proposed restructuring involves
some classes of creditors suffering a greater write-down of their debt than other classes.
Circumstances in which the board may feel justified in supporting such a restructuring may
include: (i) where there is significant concern around liquidity so that restructuring is necessary to
ease cash flow demands and ensure continued solvency, and (ii) where estimates of future going
concern value indicate that the companys existing capital structure is no longer sustainable. The
budget and business plan would need to support the view that a restructuring is necessary.
As discussed, where the directors identify a balance sheet issue (for example, debt maturing 1.41
in two or three years which, unless there is a change in market conditions, they are concerned
they may not be able to refinance) they are less likely to press for an immediate restructuring
than where the issue identified is one of cash flow. However, when the companys budget and
business plan numbers support the view that the company has a liquidity issue, there would
be very real concerns for the directors if they did not propose/support a restructuring (assum-
ing, that is, that the company could not otherwise head-off a restructuring by securing a
further equity injection from the incumbent sponsor, or secure third party investment).
A court, on an application by a liquidator in a winding up, can order that a director of a
company which has gone into insolvent liquidation is liable to make such contribution to

41 4 NSWLR 722.
42 Ibid at 730.

15
 Insolvency in the UK and the US

the companys assets as the court thinks proper if: (i) before the commencement of a wind-
ing up, a director knew or ought to have concluded that there was no real prospect that
the company would avoid going into insolvent liquidation, and (ii) thereafter the director
failed to take every step to minimize the potential loss to the companys creditors which he
ought to have taken (section 214 of the Insolvency Act 1986, known as the wrongful trad-
ing test). The standard required as to what a director ought to know, the conclusions he
ought to reach, and steps he ought to take are those which would be known, reached, or
taken by a reasonably diligent person with both the general knowledge, skill, and experience
that may reasonably be expected of a person carrying out the same functions as those of the
director in relation to the company, and the general knowledge, skill, and experience that
the relevant director actually has. The test to be applied is therefore both objective and
subjective.
1.42 There are also a number of other relevant standards. For example, under section 212 of the
Insolvency Act 1986, if in the course of a winding up anyone who has been involved with the
promotion, formation, or management of the company is found to have misapplied, retained,
or become accountable for any money or other property of the company, or been guilty of
misfeasance or breach of a fiduciary or other duty in relation to the company, a court may on
application by the official receiver, liquidator, or a creditor compel him to:
(1) repay, restore or account for the money or property of the company with interest; or
(2) contribute such sum to the companys assets by way of compensation in respect of the
misfeasance or breach of fiduciary duty or other duty as the court thinks just.
1.43 The Insolvency Act 1986 also contains a test for fraudulent trading in section 213 and a
director may incur liability in common law. Apart from these risks of incurring personal
liability, where a director engages in fraudulent or wrongful trading or has been found guilty
of other misconduct in connection with a company and is held to be unfit by the court, he
may also be disqualified by court order or have a disqualification undertaking accepted by
the Secretary of State under the Company Directors Disqualification Act 1986.
1.44 Faced with this litany of risks, the question of whether a director who considers that a com-
pany ought to pursue a restructuring should take action to implement it may seem straight-
forward. However, as described above, those who are out of the money on a current
assessment of the enterprise value of the company may argue vigorously that no restructur-
ing is necessary, that the cash position is not as dire as the directors are suggesting, and that
the directors ought to bide their time rather than take action which may be detrimental to
the junior creditors.
1.45 A complicating factor in this equation is the extent to which the directors are entitled to have
regard to the fact that the companys financial difficulties have triggered an event of default
entitling lenders to accelerate their debt and enforce any security that they might have.
Chapter 3 examines some of the difficulties with administration (the UKs principal insol-
vency regime) but in any event an unplanned administration, with no support from the
company or its directors, is very often destructive of value. Junior creditors may argue, there-
fore, that the counter factual that if the directors simply refuse to take action the company
will go into administration is incorrect. They may maintain that the senior lenders will never,
in reality, take any action if the company does not, as to do so would be value-destructive for
them.

16
 III. Restructuring and Directors Duties in England and the US

In Re Bluebrook Ltd (commonly known as IMO Carwash),43 the mezzanine creditors con- 1.46
tended (albeit rather late in proceedings) that the directors had failed to act in the interests
of all creditors, but rather had favoured the senior creditors at the expense of the mezzanine
creditors. They maintained that the situation was one in which enforcement was not in the
interests of the senior lenders because it would have been destructive of value and that the
group had sufficient cash and cash flow to keep trading. Mann J disagreed:
This seems to me to be somewhat unreal. The group was, on any footing, technically insolvent.
That does not of itself inevitably require any course of action, but it is a starting point for
considering the impropriety of continued trading The directors realised that there were
problems, and set about addressing them by engaging in discussions with the lenders. There
were, as the directors recognised, events of default under the major credit agreements. They
had valuations, none of which suggested that the Mezzanine Lenders had an economic interest
in the group for them to threaten to carry on trading in those circumstances, when they had
quite properly recognised a problem about that, would arguably have been to threaten to
engage in wrongful trading.44
The decision, then, will turn on the facts. If, having reviewed the budget, business plan, and 1.47
valuations provided to them, the directors conclude that a restructuring is necessary they would
not be fulfilling their duties to the company in taking no action purely on the basis that the
senior lenders are unlikely to take matters into their own hands. If, on the other hand, the
budget, business plan, and valuations available to the board indicate that there is no immediate
cash need and that there may be value for other creditors, then they may be equally justified in
resisting attempts by senior creditors to drive a restructuring opportunistically.
There may be a perceived tendency for the interests of directors to be implicitly aligned with 1.48
junior creditors early on in the process, favouring a wait and see approach and demonstrat-
ing a reluctance to restructure. As seen, the directors decision as to whether to support a
restructuring will ultimately be driven by the financial evidencethey are unlikely to sup-
port a restructuring in the absence of a looming liquidity crisis and if valuations indicate that
the companys existing capital structure is sustainable. In the absence of an event of default,
the company may be concerned that the very act of engaging with creditors would trigger an
event of default.
Once the financial evidence is such that the directors decide to support a restructuring, their 1.49
allegiances are often perceived to be more aligned with the interests of the senior creditors.
Management are typically able to secure an allocation of equity in the post-restructured
company. Given the subordinated nature of equity, the directors have an incentive to rank
behind as little debt as possible. To counter such allegations of bias, it may sometimes be
sensible to have an independent person sitting on the board (in the IMO Carwash restruc-
turing the judge gave weight to the independence of two of the directors, ie directors who
were not to be directors in the post-restructured group). This will be of particular importance
in the private equity sector where sponsors often have one of their own sitting on the board
of the company.

43 [2010] BCC 209.

44
Ibid at 60.

17
 Insolvency in the UK and the US

A. Groups
1.50 As each member of the group is a distinct legal entity, directors of a company have duties to
the separate creditors of that company alone, irrespective of the interests of the group.
1.51 In the words of Owen J in the New South Wales Court of Appeal case of The Bell Group Ltd
(In Liquidation) v Westpac Banking Corporation (No 9):45
When looking at a group of companies there is a tendency to slip into language that suggests the
focus of attention is the solvency of the group. But solvency is a concept that applies to indi-
vidual entities, not to the group Material disclosing the financial position of the group is rel-
evant. It is a necessary starting point but the ultimate enquiry must focus on the state of individual
companies. If from time to time I use language that smacks of the group insolvency heresy, it will
be inadvertent or made necessary by the context. The reader should be in no doubt that I am
aware of the need to look at the financial position of individual companies.46
1.52 In brief, financing had been provided by two different groups of lenders to certain companies
in the Bell Group. At the time the financings were initially put in place, they were unsecured.
Following the stock market crash of October 1987 and the Bell Groups financial difficulties,
the financings were restructured and, among other matters, certain Bell Group companies
who were not party to the original financing arrangements provided security over all of their
assets in favour of the lenders. Approximately one year after the restructuring occurred, most
companies in the Bell Group were placed into insolvency administration of some form or
another. The case was commenced by the liquidator of the Bell Group companies, to recover
for the benefit of unsecured creditors some $283 million received by the lenders from
enforcement of the security. The judgment ran to over 2,500 pages, but of particular note for
present purposes is that the judge found that the directors of the Australian companies were
in breach of their duties by looking at the problem solely from a group perspective approach-
ing the issue effectively as: We all survive or we all go down.47 He noted that:
They did not look at the circumstances of each individual company that was to enter into a
Transaction. They did not identify what, if any, creditors (external and internal) the individual
companies had or might have and what, if any, effect a Transaction would have on the creditors
or shareholders of an individual company.48
1.53 The directors of the UK companies, however, did everything rightup until the last hurdle,
when they improperly relied on assurances from the Australian directors, some of whom
were conflicted, without seeking independent verification of financial matters consistent
with advice received.
1.54 There are complicating factors where the group is international, as insolvency triggers and
directors duties can vary between jurisdictions. Such issues can hamper restructurings, for
example by requiring directors to file voluntarily for insolvency at a stage earlier than their
director colleagues in England are so required. By way of illustration, until recently in
Germany the requirement was for directors to file for bankruptcy without undue delay but

45 [2008] WASC 239 (Supreme Court of Western Australia).

46 Ibid at 809.
47 Ibid at 6040.
48 Ibid.

18
 III. Restructuring and Directors Duties in England and the US

in any event no later than three weeks of becoming aware of the over-indebtedness/illiquid-
ity of the company.49

B. Directors Duties in the US

Directors in the US generally owe fiduciary duties only to the company and its stockholders, 1.55
and not creditors of the company who are protected through contractual agreements and pro-
visions of debtor/creditor law.50 However, when the company enters the zone of insolvency,
creditors become part of the community of interests that have a stake in the company and the
board should take into account their interests. If the directors of an insolvent or near insolvent
company breach their fiduciary duties, a companys stockholders can sue the directors on behalf
of the company for breach of fiduciary duties, or sue in their own right, if the stockholders
injury are distinct from any general injury to the company. Creditors of such a company gener-
ally cannot sue directors directly, in their own right, for breach of fiduciary duties.51
Deepening insolvency is the fraudulent prolongation of a corporations life beyond insol- 1.56
vency, resulting in damage to the corporation caused by increased debt.52 Under the theory
of deepening insolvency, creditors could impose liability on directors and officers, among
others, for the fraudulent, that is bad faith, prolonging of the life of a company causing
increased debt or waste of assets. However, deepening insolvency remains a theory and not a
well-established cause of action. The Bankruptcy Code does not reference deepening insol-
vency, and courts have disagreed whether it is a separate cause of action, a method of measur-
ing damages, and whether it is a cognizable theory at all.
The theory of deepening insolvency was thought to be all but dead after the Delaware 1.57
Supreme Courts decision in Trenwick America Litig Trust v Billet.53 Federal courts had rec-
ognized deepening insolvency claims even though there is no such federal cause of action by
predicting how a particular states highest court would rule if it were presented with the
question.54 However, no state court had squarely considered the issue of deepening insol-
vency before Trenwick. In the first state-level decision of its kind, the Delaware Court of
Chancery rejected deepening insolvency as a cause of action,55 and its decision was later
affirmed by the Delaware Supreme Court in Trenwick. The Court of Chancery explained
that Delaware law imposes no absolute obligation on the board of a company that is unable

49 The German legislators sought to address the over-indebtedness test with temporary legislation which

came into effect on 18 October 2008. The amendment, however, currently only applies until the end of 2013.
50
North American Catholic Educational Programming Foundation, Inc v Gheewalla, 930 A 2d 92, 99
(Del 2007).
51
Ibid at 103. The Delaware Supreme Court also suggested that creditors lack standing to bring a derivative
claim against directors for breach of fiduciary duty when the company is operating in the zone of insolvency.
Ibid at 101.
52
Kittay v Atlantic Bank of New York (In re Global Service Group, LLC) 316 BR 451, 456 (Bankr SDNY 2004
(quoting Schacht v Brown 711 F 2d 1343, 1350 (7th Cir), cert denied, 464 US 1002, 104 S Ct 508, 78 L Ed 2d
698 (1983)).
53
931 A 2d (Del 2007).
54 Official Committee of Unsecured Creditors v RF Lafferty & Co, Inc 267 F 3d 340 (3d Cir 2001) (recognizing

deepening insolvency as a separate cause of action); see also In re Exide Technologies, Inc 299 BR 732 (Bankr D
Del 2003) (recognizing a deepening insolvency claim brought by the unsecured creditors committee against
the debtors secured lenders).
55 Trenwick America Litig Trust v Ernst & Young, LLP 906 A 2d 168 (Del Ch 2006).

19
 Insolvency in the UK and the US

to pay its bills to cease operations and to liquidate, but rather, the insolvent companys board
may pursue, in good faith, strategies to maximize the value of the firm. The Chancery Court
further explained that [i]f the board of an insolvent corporation, acting with due diligence
and good faith, pursues a business strategy that it believes will increase the corporations
value, but that also involves the incurrence of additional debt, it does not become a guarantor
of that strategys success nor does it give rise to a cause of action.56 Although the Chancery
Court rejected an independent cause of action for deepening insolvency, there are other
actions plaintiffs can take against directors of insolvent corporations that fail to fulfil their
fiduciary obligations including [e]xisting equitable causes of action for breach of fiduciary
duty, and existing legal causes of action for fraud, fraudulent conveyance, and breach of
contract.57
1.58 A more recent decision, George L Miller v McCown De Leeuw & Co (In re The Brown Schools),58
from the United States Bankruptcy Court for the District of Delaware, indicates that deep-
ening insolvency endures, albeit in reduced form. The case involved a bankruptcy trustees
suit against an equity sponsor, McCown De Leeuw & Co, and the directors of, and counsel
for, the equity sponsors portfolio company, the debtor in this case. The trustee alleged that
the equity sponsor caused the debtor to make transfers and restructure debt that improperly
favoured the equity sponsor and its affiliates over other creditors. According to the trustee,
such conduct occurred while the debtor was insolvent and thus, the equity sponsor had
engaged in self-interested transactions in breach of the equity sponsors fiduciary duties to
the debtors creditors. The trustee brought various claims, including breach of fiduciary duty,
civil conspiracy, and deepening insolvency. The Bankruptcy Court dismissed the deepening
insolvency claim based on the Delaware Supreme Courts holding in Trenwick, but held that
deepening insolvency remained a viable damages theory for the trustees independent claims,
including breach of fiduciary duties claims. The Brown Schools is noteworthy because it illus-
trates the risks that equity sponsors and directors of portfolio companies (as well as advisers)
may face when restructuring an insolvent company. The Bankruptcy Courts ruling makes
clear that equity sponsors must be mindful of participating in transactions that could benefit
them at the expense of creditors. The Brown Schools is also significant in holding, post-Tren-
wick, that deepening insolvency may provide a viable damages theory, even though Trenwick
rejected deepening insolvency as an independent cause of action.

IV. The Standstill in England

1.59 Once the directors have decided a restructuring is needed, minds will turn to approaching
negotiations with the companys lenders.
1.60 In the 1990s, the Bank of England formulated an unwritten, flexible framework for the
conduct of corporate workouts known as the London Approach which it promulgated
through speeches rather than formal policy documents. It sought to represent the essential
elements of any restructuring and, in the years when it commanded general support, was

56 Ibid at 205.
57
Ibid at 174.
58 386 BR 37 (Bankr D Del 2008).

20
 IV. The Standstill in England

powerful in persuading those with different personal interests in a particular case to follow
its spirit, enabling the majority view to prevail and the restructuring to be successful.
However, although the London Approach achieved this very successfully in the recession of 1.61
the early 1990s, it subsequently became more and more difficult to apply in the UK market
until it became something of historical interest only. This was due largely to the fact that it
had its origins with the Bank of England and, although UK clearing banks may have found
the influence of the central bank persuasive, it had no force with other institutions which
subsequently entered the rapidly expanding debt markets.
The International Federation of Insolvency Professionals (INSOL) has taken up the baton 1.62
and published a Statement of Principles for a Global Approach to Multi-Creditor Workouts
(the INSOL Principles) in 2000. Although these principles are not often explicitly referred
to, they reflect many elements of the London Approach and provide a useful agenda of prin-
ciples to be adopted in a financial restructuring. The first of the INSOL Principles is:
Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared
to co-operate with each other to give sufficient (though limited) time (a Standstill Period) to
the debtor for information about the debtor to be obtained and evaluated and for proposals
for resolving the debtors financial difficulties to be formulated and assessed, unless such a
course of action is inappropriate in a particular case.
Thus the intention is to allow for a period of time in which to gather information, assess 1.63
viability, and evaluate options, with a view to implementing an agreed strategy and, if appro-
priate, restructuring.
There may be circumstances where negotiations become protracted over many months or 1.64
where a formal standstill agreement cannot be agreed at all, or can only be agreed in relation
to the senior debt. This is becoming more common in todays multi-layered debt structures,
as junior creditors are becoming increasingly reluctant to sign up and difficult to identify and
organize. The Majority Bank mechanism in facility agreements and inter-creditor agree-
ments legislating for a junior standstill arguably reduces the need for a lengthy formal stand-
still agreement, although standstill provisions within inter-creditor agreements may be
subject to insolvency carve-outs and/or be time limited, which may give rise to concerns.
The lack of a standstill in the junior debt may, at one time, have been disregarded on the 1.65
assumption that the junior creditors had no incentive to take enforcement action. However,
it is increasingly dangerous to make this assumption. Junior creditors may be concerned
about the precedent implications of a particular transaction. Moreover, the increasing preva-
lence of credit default swaps in the market has had a significant impact on dynamics.
Although Restructuring Event may be specified in a credit default swap as an event entitling
the protected party to call under his swap, counterparties are unenthusiastic about relying on
it and prefer cleaner triggers such as a failure to pay interest or principal or an insolvency
filing. Even if protected parties are comfortable that they can rely on a Restructuring Event
they are unlikely to wish to vote in favour of a restructuring if that is the very event which
they will subsequently use to make a claim.
A recent example of this occurred in the restructuring of LyondellBasell. The LyondellBasell 1.66
group is one of the worlds largest oil refiners and producers of petrochemicals and plastics.
Faced with falling worldwide demand, Lyondell Chemical Company and 78 of its subsidiar-
ies and affiliates filed for protection under chapter 11 of the US Bankruptcy Code. At this

21
 Insolvency in the UK and the US

stage, the Luxembourg incorporated parent of Lyondell Chemical Company, LBIAF, did not
file for chapter 11 protection or enter any other insolvency process. However, the chapter 11
filings made in respect of the US entities triggered an event of default under certain notes
issued by LBIAF and, under their terms, holders of 25 per cent of the principal amount of
the notes could accelerate amounts due under them. During January 2009, news services
began to report that some of the holders of the notes held credit default swaps. These news
services reported that noteholders who were also holders of credit default swaps were attempt-
ing to rally the requisite 25 per cent support needed to accelerate the notes and trigger a
payout of the credit default swaps. This forced Lyondell to take some innovative steps to try
to preserve the plan for its global restructuring.
1.67 In todays complicated financing structures steady nerves will be essential on the part of the
companys directors and advisers in circumstances where a formal standstill cannot be agreed,
and avoiding events of default assumes ever-increasing importance.

V. Vulnerable Transactions
1.68 In addition to the above issues, directors should be aware that if the company enters into
certain types of transaction within specified periods before its insolvency, an administrator
or liquidator may be able to apply to the court for an order that the parties be put back into
the position they would have been in if the transaction had not been entered into, or require
some other appropriate remedy. With regard to certain of these matters, the entering into of
such a transaction could be treated as a breach of duty by the directors, in particular if a
transaction is at an undervalue or is a preference.
1.69 During the period in which the company is attempting to put together a financial restructur-
ing, both directors and third parties dealing with the company will wish to be alive to the risk
of a transaction being subsequently set aside if an insolvency proceeding follows (and if
a chapter 11 proceeding or an administration is used to implement the restructuring).
For example:
(1) the company may be working hard to preserve cash during the restructuring period,
paying some critical creditors early and others as late as possible;
(2) lenders to the company, or pension fund trustees, may press for further guarantees or
security for existing liabilities;
(3) the company may seek to realize assets for cash; and
(4) assignments of intra-group liabilities may need to be made to restructure the group
going forward.

A. Transactions at an Undervalue (Section 238 of the Insolvency Act 1986)

1.70 A transaction is at an undervalue if a company makes a gift to a person or enters into a trans-
action on terms where the company receives no consideration or one which has a value which
is significantly less than the value of the consideration provided by the company. One defence
is that the transaction is entered into in good faith for the purpose of carrying on the
companys business and that there are reasonable grounds for believing that it will benefit

22
 V. Vulnerable Transactions

the company. The burden of proof in establishing this defence is with the party seeking to
avoid the application of section 238.59 To be vulnerable, a transaction at an undervalue must
have been entered into during the period of two years before the onset of insolvency (broadly,
the commencement of the winding up or administration procedure) and the company must
have been insolvent at the time it entered into the transaction or become insolvent by enter-
ing into it. There is a presumption of insolvency if the parties to the transaction are con-
nected, for instance if it is an intra-group transaction or a transaction with a director.
In Re MC Bacon Ltd 60 Millett J held that the creation of security will not typically amount to a 1.71
transaction at an undervalue as the security itself does not deplete the assets of the company or
diminish their value. In that case, a company granted security for an existing overdraft at the
time when it was insolvent. The company subsequently went into liquidation and the liquida-
tor commenced proceedings under sections 238 and 239 of the Insolvency Act 1986 to have
the security set aside. The court held that a transaction of this type could not be a transaction at
an undervalue, as the mere creation of a security over a companys assets does not deplete them
and the company retains the right to redeem, sell, or remortgage the charged assets.
However, as mentioned above, a transaction can be a transaction at an undervalue if: 1.72

(1) it is a gift or otherwise on terms that provide for the company to receive no considera-
tion; or
(2) the value of the transaction, in money or moneys worth, is significantly less than the
value, in money or moneys worth, of the consideration provided by the company.
In the MC Bacon case Millett J found that there was consideration consisting of the banks 1.73
forbearance from calling in the overdraft and its honouring of the cheques and making of fresh
advances to the company during the continuance of the facility.61 He was therefore concerned
with limb (2), and it was in this context that he considered the grant of security could not come
within the paragraph as the mere creation of security over the assets does not deplete them.
In Hill v Spread Trustee Company,62 the Court of Appeal held that the grant of security can 1.74
constitute a transaction at an undervalue where one is considering limb (1) and the situation
in which there is no consideration for the transaction. In that case, Arden LJ found that
charges which had been granted in favour of certain trustees had been granted notwithstand-
ing that the trustees were not pressing for repayment of the sums due to them and did not
give any consideration in the form of forbearance for the grant of the later charges and the
assignment. It is worth nothing that Hill v Spread Trustees was a case concerning claims by a
trustee in bankruptcy to obtain relief under section 423 of the Insolvency Act 1986. Although
it is applicable to corporate debtors, as will be seen from the discussion of section 423 that
follows, the good faith defence available in section 238 would not have been applicable.
Lenders who receive new security as part of a restructuring should therefore always ensure 1.75
that there are board minutes or other board papers, reflecting the necessary consideration,
which may for example be the grant of new facilities or forbearance, and that the transaction
is of benefit to the company. If the company is disposing of assets as part of its restructuring

59 See, eg, Re Barton Manufacturing Co Ltd [1998] BCC 827.

60 [1990] BCC 78.
61 Ibid at 92.
62 [2007] 1 WLR 2404, CA.

23
 Insolvency in the UK and the US

plan, a detailed minute or board paper addressing the decision-making process ought to be
prepared. This should address the financial condition of the company and the reasons why
the board considers that the value of the consideration received for the transaction is not
significantly less than the consideration that the company has given. This may be evidenced
by professional advice and, in some circumstances, by efforts to auction the asset more
widely. The minute or paper ought also to address the reasons for entering into the transac-
tion and the reasons why the directors consider that it is likely to benefit the company. The
counterparty to the transaction who is aware of a possible solvency question would also be
well advised to obtain a copy of these supporting papers.

B. Transactions Defrauding Creditors

(Section 423 of the Insolvency Act 1986)
1.76 The same undervalue definition applies in respect of transactions defrauding creditors,
although there is no time limit between the transaction being effected and the onset of insol-
vency for the transaction to be attacked. However, the transaction must have been entered
into for the purpose of putting the assets beyond the reach of a creditor (current or prospec-
tive) or of otherwise prejudicing the interests of the claimant. The difficulties in establishing
such intent have made this a difficult section to apply. In the Hill v Spread Trustee 63 case,
Arden LJ commented:
The test whether Mr. Nurkowski had the necessary intention is a subjective test: the judge had
to be satisfied that he actually had the purpose, not that a reasonable person in his position
would have it. On the other hand, the judge could infer that such a purpose existed even if Mr
Nurkowski himself denied it.64
1.77 Where a company enters into a transaction at an undervalue for the purpose of putting its
assets beyond the reach of current or future creditors, the transaction is vulnerable to being
unwound at any time, whether or not the company is insolvent. A challenge under section
423 can be brought by any person who is, or is capable of being, prejudiced.

C. Preferences (Section 239 of the Insolvency Act 1986)

1.78 A preference is given to a creditor or a guarantor or a surety of its debts if the company does
anything or allows anything to be done which has the effect of putting that person in a posi-
tion which, if the company were to go into insolvent liquidation, would be better than the
position he would have been in if the thing had not been done. The repayment of an unse-
cured debt by a customer to its bank on the due date could be within this wide definition.
The company must have been influenced in deciding to give the preference by a desire to
produce the preferential effect, in order for the preferential transaction to be vulnerable.
There is a presumption of such influence if the parties are connected.
1.79 Millett J first considered the requirement in the 1986 Act for the company to be influenced
by a desire to produce the preferential effect in the MC Bacon case.65 He noted that it was not

63 Ibid.
64 Ibid at 86.
65 Re MC Bacon Ltd [1990] BCC 78.

24
 V. Vulnerable Transactions

sufficient to establish a desire to make the payment or grant the security which it is sought to
avoid. Rather, there must have been a desire to produce the preferential effect that is to say, to
improve the creditors position in the event of an insolvent liquidation. He went on to say:
A man is not to be taken as desiring all the necessary consequences of his actions. Some con-
sequences may be of advantage to him and be desired by him; others may not affect him and
be matters of indifference to him; while still others may be positively disadvantageous to him
and not be desired by him, but be regarded by him as the unavoidable price of obtaining the
desired advantages. It will still be possible to provide assistance to a company in financial
difficulties provided that the company is actuated by proper commercial considerations . . .
a transaction will not be set aside as a voidable preference unless the company positively
wished to improve the creditors position in the event of its own insolvent liquidation.66
Millett J then considered the requirement of influence. It was not sufficient to show only 1.80
that the desire to prefer was present. It was also necessary to show that it influenced the
decision to enter the transaction. It is not necessary, under the 1986 regime, to show that the
desire to produce the preferential effect was the dominant factor but it must have been one
of the factors that operated on the minds of those who made the decision. In MC Bacon,
Millett J found that the directors knew that the company was probably insolvent and might
not be able to avoid an insolvent liquidation, that its continuing to trade was entirely depend-
ent on the support of the bank, that if the debenture that the bank had asked for was not
forthcoming the bank would withdraw its support and that if the bank were to withdraw its
support the company would be forced into immediate liquidation. The decision to give the
debenture was therefore a simple one: either it was given or the bank would call in its over-
draft. Millett J found that there was no evidence that the directors had wanted to improve
the position of the bank and there was no reason why they should have wanted to do so.
In Mark John Wilson, Oxford Pharmaceuticals Limited v Masters International Limited,67 Mark 1.81
Cawson QC, sitting as deputy judge, considered whether the parties had satisfied him that:
on the balance of probabilities [they] were acting solely by reference to proper commercial
considerations in making the payments and that a desire (i.e. a subjective wish) to better the
position of [X] in the event of an insolvent liquidation did not operate on the directing mind
or minds of the company.68
In that case, Mark Cawson QC did find the necessary elements of influence and desire but it 1.82
is worth noting that this was a case concerning connected parties.
The Oxford Pharmaceuticals case is also interesting in touching upon the capacity in which a 1.83
person or company must be preferred. Cawson QC held that section 239 is concerned with
creditors and guarantors, and about setting aside preferences where a company has done
something or caused something to be done which puts one of the companys creditors or a
surety or guarantor for any of the companys debts or liabilities in a better position as creditor
or surety/guarantor. It does not, however, operate to require a person to disgorge a benefit
obtained in some other capacity from the mere accident of them being a surety or guarantor,
and even though the benefit obtained has nothing to do with their status as surety or guaran-
tor and they have not been benefitted in that latter capacity.

66 Ibid at 8788.
67 [2009] EWHC 1753.
68 Ibid at 76.

25
 Insolvency in the UK and the US

1.84 A transaction amounting to a preference will be set aside if, in the case of a non-connected
person, it was entered into in the six-month period before the commencement of the wind-
ing up of the company or its entry into administration. This period extends to two years in
the case of a connected person. Further, for the transaction to be set aside, the company must
be insolvent at the time of the transaction or as a result of entering into the transaction.
1.85 We discussed above, in the context of the grant of security for an existing debt, the relation-
ship between transactions at an undervalue and the preference regime. The courts have con-
tinued to struggle with the inter-relationship between the two. In CI Ltd v The Joint
Liquidators of Sonatacus Ltd 69 the Court of Appeal considered the earlier case of Phillips v
Brewin Dolphin Bell Lawrie Ltd 70 in which the court held that, as a matter of law, a preferen-
tial payment which was susceptible to challenge could not amount to consideration for the
making of that payment and, therefore, that the transaction was liable to be set aside as a
transaction at an undervalue if the consideration for the transaction was precarious because
it was liable to be set aside as a preferential payment. The Court of Appeal referred to a case
report71 that was highly critical of this decision and its failure to recognize the distinct func-
tions performed by sections 238 and 239. The report also expressed some doubt as to whether
the approach in the Brewin Dolphin case was the right one. In practice, directors considering
whether a particular transaction could be vulnerable (and counterparties to the transaction)
would be well advised to analyse the transaction under all relevant heads of liability.
1.86 Section 239 provides that a company gives a preference to a person if it does anything or
suffers anything to be done which (in either case) has the effect of putting that person into
a better position in an insolvent liquidation. The question of when the company suffers
something to be done has been considered in Parkside International Limited.72 Anthony
Elleray QC, sitting as a deputy judge, considered the situation in which B and C assign a debt
owed by A and the question of whether A suffers the making of the assignment. The conten-
tion in the case was that A had deliberately delayed asking its bank to appoint an administra-
tor in order for the assignment to complete. Elleray QC carried out a thorough review of the
texts which had considered this question (in the absence of any direct authority) and con-
cluded that in order for the company to suffer something to be done it must allow something
to happen over which it exercises some element of control. He did not therefore consider that
A had suffered the assignment of the debt to be done (for which its consent was not needed)
so as to amount to a preference given by it susceptible to challenge under section 239.
1.87 The Parkside International case concerned the assignment of debts between group companies
in order to ensure the survival of other group companies should one of them enter insolvency
proceedings. Elleray QC considered whether this desire to improve the position of the resid-
ual group was the same thing as a desire to prefer one set of creditors over the other. He noted
that it might be impossible to ensure group survival, if dealings by other group companies to
help ensure their survival might be impugned as preferences on behalf of the insolvent com-
panies. However, ultimately Elleray QC did not need to take his analysis any further given
his conclusion that the insolvent company had not suffered anything to be done to produce

69 [2007] BCC 186, CA.

70 [2001] 1 WLR 143, HL.
71
[2007] BCC 186 at 19. The case report is L Chan Ho Barber v CIJudgment of the High Court of
Justice (2006) 22 Insolvency L & Practice 183.
72 [2008] EWHC 3654.

26
 VI. Avoidance Actions in the United States

the preferential effect and his findings on advice which had been given that the assignment
was not susceptible to challenge.

D. Jurisdiction of the Court

If a transaction is established as being at an undervalue or a preference, the court has very 1.88
wide powers to put the parties back into the position they were in before the transaction was
entered into. Counterparties may therefore seek to derive some comfort from the fact that
the overall scheme of the sections is restitutionary and that they might therefore expect that
any property or benefits that they have provided ought properly to be restored to them if the
transaction were to be subsequently unwound. While it is the case that the sections do not
seek to enrich the insolvent company at the expense of the counterparty by putting the insol-
vent company in a better position than it would have been in if the transaction had never
occurred, it should be noted that the court will only restore the position between the parties
so far as it is possible to do so. Furthermore it would be open to the court, for example, to
charge interest on the companys assets which had been in the hands of the counterparty
before the transaction is unwound.

E. Avoidance of Floating Charges (Section 245 of the Insolvency Act 1986)

A floating charge may be invalid if it is created within two years of the onset of insolvency if 1.89
the parties are connected or one year if they are not. There is a defence that the company was
solvent when the charge was created (on a balance sheet and cash flow test) and did not
become insolvent as a consequence of the transaction, but this solvency test will not apply if
the parties are connected. The charge will, however, be valid to the extent of the value of so
much of the consideration for the charge as consists of money paid or goods or services sup-
plied to the company at the same time as or after and in consideration of the creation of the
charge, together with interest, if any, payable under the relevant agreement.
A floating charge given as security for an existing debt will, therefore, be vulnerable to attack 1.90
under this section. A lender seeking a floating charge for purposes other than credit support
(for example, in order to be in a position to exercise the right of a qualifying floating charge
holder to appoint an administrator or to select the identity of the administrator) may wish
to provide a limited amount of new borrowing in order to ensure that at least some propor-
tion of the floating charge cannot be vulnerable to attack.

VI. Avoidance Actions in the United States

A. Fraudulent Conveyances
1. Overview
In the United States, there are two basic types of fraudulent conveyances: intentional and 1.91
constructive, which, when taken together, provide that the debtor may not dispose of its
property with the intent (actual fraud) or the effect (constructive fraud) of placing it beyond

27
 Insolvency in the UK and the US

the reach of creditors.73 Under section 548 of the Bankruptcy Code, the trustee (or debtor in
possession) may avoid: (1) any transfer of the debtors property, or any obligation incurred
by the debtor, that was made with actual intent to hinder, delay, or defraud present and
future creditors (intentional fraudulent conveyance); or (2) any transfer made for less than
reasonably equivalent value and made while the transferor was insolvent, thereby rendered
insolvent, had unreasonably small capital to operate the business, or intended or believed
that it would incur debts beyond its ability to pay as they matured (constructive fraudulent
conveyance).74 To recover property (or its value) or avoid an obligation as a fraudulent con-
veyance, the transfer must have been made or obligation incurred on or within two years
before the date of the filing of the bankruptcy petition.75
1.92 Section 544(b) of the Bankruptcy Code is commonly referred to as the strong arm provision
because it permits a bankruptcy trustee (or debtor in possession) to exercise the same rights
an unsecured creditor would have under applicable state law.76 Specifically, section 544(b) of
the Bankruptcy Code permits a trustee to avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable under applicable law.77
The strong arm provision, however, does not permit the trustee to exercise greater rights
than a creditor would have under state law.78 As a 1920 district court decision explained:
It is well established that the effect of this section is to clothe the trustee with no new or addi-
tional right in the premises over that possessed by a creditor, but simply puts him in the shoes
of the latter, and subject to the same limitations and disabilities that would have beset the credi-
tor in the prosecution of the action on his own behalf; and the rights of the parties are to be
determined, not by any provision of the [former] Bankruptcy Act, but by the applicable prin-
ciples of the common law, or the laws of the state in which the right of action may arise.79
1.93 Thus, section 544(b) of the Bankruptcy Code permits a trustee to step into the shoes of an
unsatisfied creditor to bring an avoidance action under state fraudulent transfer law.80

2. Elements of an intentional fraudulent conveyance

1.94 Avoiding a transfer as an actual fraudulent conveyance is rarely successful in corporate trans-
actions because it requires proof of actual intent on the part of the transferor to hinder, delay,
or defraud creditors.81 However, because there is rarely direct evidence of such intent courts

73
United States v Green, 201 F 3d 251, 254 (3rd Cir 2000) (internal citations omitted).
74
11 USC 548(a)(1)(A) and (B).
75 11 USC 548(a)(1), 550(a).
76 See In re Amelung, 2010 WL 1417742, at *3 (Bankr SD Fla, 7 April 2010) (Section 544(b) of the

Bankruptcy Code . . . gives the Trustee the power to avoid transfers of property of the debtor that are voidable
under state law.)
77
11 USC 544(b).
78
See In re Jackson, 318 BR 5, 26 (Bankr DNH 2004).
79 Davis v Willey, 263 F 588, 589 (ND Cal 1920).
80
It is important to note that s 544(a) of the Bankruptcy Code grants trustees additional avoidance powers
under the strong arm provision. Specifically, under s 544(a)(1) of the Bankruptcy Code, a trustee can avoid
transfers or obligations of a debtor that are avoidable by a hypothetical creditor on a simple contract with a
judicial lien on the property as of the petition date. Section 544(a)(2) permits trustees to avoid transfers or
obligations of a debtor that are avoidable by a hypothetical creditor with an unsatisfied writ of execution as of
the commencement of the case. Finally, under s 544(a)(3) trustees can avoid unperfected liens that a bona fide
hypothetical purchaser of real property could also avoid as of the commencement of the case.
81 See In re Sharp Intern Corp, 403 F 3d 43, 56 (2nd Cir 2005) (To prove actual fraud under [New York law],

a creditor must show intent to defraud on the part of the transferor.) (internal citations omitted).

28
 VI. Avoidance Actions in the United States

look to circumstantial evidence, referred to as the badges of fraud, in determining whether

a transfer was intended to hinder, delay, or defraud creditors. Badges of fraud include the
following:
(1) a close relationship among the parties to the transaction;
(2) a secret and hasty transfer not in the usual course of business;
(3) inadequacy of consideration;
(4) the transferors knowledge of the creditors claim and the transferors inability to pay it;
(5) the use of dummies or fictitious parties; and
(6) retention of control of property by the transferor after the conveyance.82
While the existence of a single badge of fraud is not enough to demonstrate fraudulent 1.95
intent, where there is a confluence of several badges of fraud, the trustee or debtor in pos-
session is entitled to a presumption of fraudulent intent.83 The burden then shifts to the
transferee to prove some legitimate supervening purpose for the transfers at issue.84

3. Elements of a constructive fraudulent conveyance

Constructive fraudulent conveyance actions are typically more successful than actual fraud- 1.96
ulent transfer claims because the debtors intent is not an element. Rather, there are two
prongs to a constructive fraudulent conveyance analysis: the threshold question is whether
the debtor received reasonably equivalent value. Once it is established that the debtor did
not receive reasonably equivalent value, the party challenging the transfer/incurrence of an
obligation must also show that the debtor was insolvent at the time of the transfer or incur-
rence, rendered insolvent by such transfer, or had unreasonably small capital.
In determining whether fair value was exchanged, courts focus on the value exchanged at the 1.97
time of the transfer, taking a totality-of-the-circumstances approach. Such approach consid-
ers, among other facts, the fair market value of the assets or benefits received by the debtor
and the arms length nature of the transaction, giving significant weight to the sophistication
of the parties. It is important to note that it is the value received by the debtor, not the value
given by the creditor, that is determinative.
Moreover, in the fraudulent conveyance context, a transfer of security on account of anteced- 1.98
ent debt is always reasonably equivalent value.85 For example, in In re Applied Theory Corp,86

82
OODC, LLC v Majestic Mgmt, Inc, (In re OODC, LLC), 321 BR 128, 140 (Bankr D Del 2005).
83
See Kelly v Armstrong, 141 F 3d 799, 802 (8th Cir 1998) (stating that [o]nce a trustee establishes a conflu-
ence of several badges of fraud, the trustee is entitled to a presumption of fraudulent intent). It is important to
note, however, that as a matter of law, a finding of fraudulent intent cannot properly be inferred from the exist-
ence of just one badge of fraud. See, eg, Brown v Third Natl Bank (In re Sherman), 67 F 3d 1348, 1354 (8th
Cir 1995) (holding that the presence of a single badge of fraud is not sufficient to constitute conclusive evidence
of actual intent); Diamant v Sheldon L Pollack Corp, 216 BR 589, 591 (Bankr SD Tex 1995) (stating that
[w]hile one badge of fraud standing alone may amount to little more than a suspicious circumstance, insuffi-
cient in itself to constitute a fraud per se, several of them when considered together may afford a basis from
which its existence is properly inferable).
84
See In re Acequia, 34 F 3d 800, 806 (9th Cir 1994) (stating that [o]nce a trustee establishes indicia of
fraud in an action under section 548(a)(1), the burden shifts to the transferee to prove some legitimate super-
vening purpose for the transferee at issue).
85 See Rubin v Manufacturers Hanover Trust Co, 661 F2d 979, 991 (2d Cir 1981) (stating that if the debtor

receives property or discharges or secures an antecedent debt that is substantially equivalent in value to the
property given or obligation incurred by him in exchange, then the transaction has not significantly affected his
estate and his creditors have no cause to complain).
86 323 BR 838 (Bankr SDNY 2005).

29
 Insolvency in the UK and the US

the debtor granted its lenders a security interest to secure antecedent debt, which included
$30 million in unsecured debentures.87 The trustee argued that the grant of such security
interest constituted a fraudulent conveyance under section 548(a)(1) of the Bankruptcy
Code.88 The Bankruptcy Court, however, found that [t]he security interest did not provide
the [l]enders with a right to receive anything more than the amount of money they had pro-
vided, and the debtors liability did not increase due to the security interest.89 Following the
uniform90 view of federal case law on this issue, the Bankruptcy Court thus held that the
grant of the security interest did not constitute a fraudulent transfer.91

4. Solvency and related tests

1.99 In the context of a constructive fraudulent conveyance analysis, there are three statutory
tests: the balance sheet solvency test (section 548(a)(1)(B)(ii)(I)); the unreasonably small
capital test (section 548(a)(1)(B)(ii)(II)); and the inability to pay debts as they come due
test (section 548(a)(1)(B)(ii)(III)). The party challenging the transfer must prove one of
these circumstances.
1.100 (i) Balance sheet solvency test A company is insolvent if the sum of [its] debts is greater
than all of [its] property, at a fair valuation.92 Under the balance sheet test, the court
compares the fair value of the debtors liabilities to the fair value of the debtors assets. The
analysis is not, however, literally limited to or constrained by the debtors balance sheet.93
Instead, it is appropriate to adjust items on the balance sheet that are shown at a higher or
lower value than their going concern value and to examine whether assets of a company
that are not found on its balance sheet should be included.94 The debtors assets should
therefore be valued on a going concern basis, unless the business is on its deathbed.95
1.101 (ii) Unreasonably small capital test An allegedly fraudulent transfer may also be avoided
if, among other things, at the time of the transfer the debtor was engaged in business or
a transaction, or was about to engage in business or a transaction, for which any property
remaining with the debtor was an unreasonably small capital.96 Unreasonably small capital
generally refer[s] to the inability to generate sufficient profits to sustain operations.97 Courts
have held that the unreasonably small capital test is a test of reasonable foreseeability,
which is an objective standard anchored in projections of cash flow, sales, profit margins,
and net profits and losses, including difficulties that are likely to arise.98 The question is
not whether the projection was correct . . . but whether it was reasonable and prudent

87 Ibid at 841.
88 Ibid at 840.
89
Ibid at 841.
90 See In re Marketxt Holdings Corp, 361 BR 369, 398 (Bankr SDNY 2007) (stating that [t]he cases are

uniform that the grant of collateral for a legitimate antecedent debt is not, without more, a constructive fraudu-
lent conveyance).
91 Applied Theory, 323 BR at 841.
92 11 USC 101(32)(A).
93 See In re Iridium Operating LLC, 373 BR 283, 344 (Bankr SDNY 2007) (stating that courts should adopt

a flexible approach to the insolvency analysis).

94 In re Waccamaws Homeplace, 325 BR 524, 529 (Bankr D Del 2005).
95 Matter of Taxman Clothing Co, 905 F 2d 166, 170 (7th Cir 1990).
96
11 USC 548(a)(1)(B)(ii)(II).
97 Moody v Sec Pac Bus Credit, Inc, 971 F 2d 1056, 1070 (3rd Cir 1992).
98 In re Bergman, 293 BR 580, 584 (Bankr WDNY 2003) (citations omitted).

30
 VI. Avoidance Actions in the United States

when made.99 Accordingly, [t]he test is aimed at [transfers] that leave the transferor
technically solvent, but doomed to fail.100
Adequacy of capital is a question of fact in each case.101 The test for unreasonably small capi- 1.102
tal is flexible and may depend on the industry or business at issue:
Adequate capitalization is . . . a variable concept according to which specific industry or busi-
ness is involved. The nature of the enterprise, normal turnover of inventory rate, method of
payment by customers, etc., from the standpoint of what is normal and customary for other
similar businesses in the industry, are all relevant factors in determining whether the amount
of capital was unreasonably small at the time of, or immediately after, the transfer.102
The unreasonably small capital test is prospectivethe inquiry is whether it was reasonably 1.103
foreseeable on the transfer date that the debtor would have unreasonably small capital to
carry on its business.103 This analysis, however, is not necessarily static. For instance, a debt-
ors projections may not reflect sufficient cash to pay off principal balances on loans or notes
when due. Loans and notes, however, often can be refinanced before they become due, even
by companies that are experiencing financial or operating difficulties.104 Accordingly, courts
examining the question of adequate capital place great weight on the ability of the debtor to
obtain financing105 and take into account all reasonably anticipated sources of operating
funds, which may include new equity infusions, cash from operations, or cash from secured
or unsecured loans over the relevant time period.106 Also, at least one court has found that
the transfer at issue must cause the condition of unreasonably small capitalif the debtor
had unreasonably small capital before the alleged fraudulent transfer, the transfer will not be
avoided.107
(iii) Inability to pay debts as they come due test Section 548 of the Bankruptcy Code also 1.104
provides that an allegedly fraudulent transfer may be avoided if, among other things, the
debtor was unable to pay its debts as they came due. This test is highly subjective, requiring
the debtor or trustee to demonstrate that, at the time of the transfer, the debtor intended
to incur, or believed it would incur, debts that would be beyond its ability to pay as such

99 MFS/Sun Life Trust-High Yield Series v Van Dusen Airport Serv Co, 910 F Supp 913, 943 (SDNY 1995)

(internal quotations omitted).

100
Ibid at 944.
101 See WRT Creditors Liquidation Trust v WRT Bankr Litig Master File Defendants (In re WRT Energy Corp),

282 BR 343, 441 (Bankr WD La 2001) (Whether the amount of capital remaining in the hands of the debtor
is unreasonably small for running the business is a factual question to be determined on a case-by-case basis);
see also In re Suburban Motor Freight, Inc, 124 BR 984, 994 (Bankr SD Ohio 1990) (Whether the amount of
capital remaining in the hands of the debtor is unreasonably small is a question of fact).
102
5 Collier on Bankruptcy, para 548.04[1] (15th edn rev 2005).
103
Peltz v Hatten, 279 BR 710, 744 (D Del 2002).
104
Ibid at 747 (stating that the fact that a company may have operating difficulties at a point in time does
not mean that it cannot reasonably expect to have access to traditional banking sources at the time of difficulty
or at a later point in time).
105
Statutory Comm of Unsecured Creditors v Motorola Inc (In re Iridium Operating LLC), 373 BR 283, 345
(Bankr SDNY 2007) (to determine the adequacy of capital, courts compare a companys projected cash inflows
(also referred to as working capital or operating funds) with the companys capital needs throughout a rea-
sonable period of time after the questioned transfer).
106 Peltz, 279 BRat 744745.
107 In re Pioneer Home Builders, Inc, v Intl Bank of Commerce (In re Pioneer Home Builders, Inc), 147 BR 889,

894 (Bankr WD Tex 1992) (Where a debtor has unreasonably small capital, that the debtor subsequently
engaged in transfers which worsened, but did not cause, its financial infirmities, will not subject those transfers
to avoidance as fraudulent conveyances).

31
 Insolvency in the UK and the US

debts matured.108 Since this test requires a subjective inquiry into the debtors intent,
section 548 (a)(1)(b)(ii)(III) is rarely litigated to conclusion.109

B. Preferences
1. Generally
1.105 Section 547(b) of the Bankruptcy Code grants a trustee (or a debtor in possession) the power
to recover certain payments or transfers made to creditors within 90 days before the bank-
ruptcy filing.110 Such payments/transfers qualify as voidable preferences. There is no intent
aspect to a preference; a transfer is avoidable as a preferential transfer to the extent that it fits
within the statutory requirements.111
1.106 The debtor must prove five elements to establish a preference: (1) a transfer of an interest of
the debtor in property to or for the benefit of a creditor; (2) for or on account of an anteced-
ent debt owed by the debtor before such transfer was made; (3) made while the debtor was
insolvent; (4) made within a specified period before the filing of the bankruptcy petition (90
days unless the transferee is an insider, in which case, one year); and (5) that permits the
creditor to receive a greater amount than it would get in a chapter 7 liquidation of the debtor
if the transfer had not been made. Unless shielded by section 547(c)112 or a judge-made
exception, a transfer meeting these requirements can be avoided and, under section 550 of
the Bankruptcy Code, the trustee can recover the property transferred (or its value) from
parties liable.
2. Trustees rights to bring preference actions under section 544 of the Bankruptcy Code
1.107 The strong arm provision of the Bankruptcy Code, as described above in relation to fraudu-
lent transfers, also applies to preferential transfers. Specifically, section 544(b) of the
Bankruptcy Code gives the trustee the ability to bring actions under state preferential trans-
fer laws. Currently, however, only four of the 50 states in the US have preferential transfer
statutes available to trustees under this strong arm power.113

108 11 USC 548(a)(1)(B)(ii)(III).

109
See, eg, In re Suburban Motor Freight, Inc, 124 BR at 1000, n 14 (There are few rulings on this particular
prong . . . and it is rarely used by parties seeking to avoid a transfer as it appears to require the courts to undergo
a subjective, rather than objective, inquiry into a partys intent).
110 The Fourth Circuit has held that the Bankruptcy Codes preference section serves two main goals: (1)

preventing companies from racing to the courthouse to dismember the debtor during its slide into bankruptcy;
and (2) protecting equality of distribution among creditors of the debtor. United Rental, Inc v Angell, 592 F 3d
525, 528 (4th Cir 2010).
111
Barash v Public Finance Cor, 658 F 2d 504, 510 (7th Cir 1981) (stating that [t]he creditors knowledge
or state of mind is no longer relevant [as] Congress eliminated this requirement in favor of the objective criteria
under the new Code).
112
Section 547(c)(1) excepts a transfer intended as a contemporaneous exchange for new value (rather than
in satisfaction of an antecedent debt) if the exchange was in fact substantially contemporaneous. Section
547(c)(2) excepts payments made in the ordinary course of a debtors business or financial affairs and according
to ordinary business terms, if the obligation paid was incurred in the ordinary course of the debtors business or
financial affairs. The statutory exceptions in s 547(c)(3)(6) concern transfers of consensual security interests
and statutory liens. Section 547(c)(7) excepts de minimis transfers by individual debtors.
113 5 Collier, para 544.07[2], at 54420. These states include Ohio, Kentucky, Mexico, and Maryland.

See ibid.

32
 VI. Avoidance Actions in the United States

3. A transfer is broadly defined

A transfer includes every mode, direct or indirect, absolute or conditional, voluntary or 1.108
involuntary, of disposing of or parting with property or an interest in property. As stated in
the House Report with respect to section 101(54), Congress intended [t]he definition of
transfer [to be] as broad as possible.114 The Supreme Court in Natl Bank of Newport v Natl
Herkimer County Bank of Little Falls115 observed:
To constitute a preference, it is not necessary that the transfer be made directly to the creditor.
It may be made to another for his benefit. If the bankrupt has made a transfer of his property,
the effect of which is to enable one of his creditors to obtain a greater percentage of his debt
than another creditor of the same class, circuitry of arrangement will not avail to save it.116
Because the definition of transfer is comprehensive, every conceivable type of transfer may 1.109
be avoided if the other requirements of section 547(b) are met. This includes granting a
security interest in the property of the debtor to secure a pre-existing obligation.117

4. Antecedent debt
Although antecedent debt is not defined by the Bankruptcy Code, a debt is antecedent if 1.110
it is incurred before the transfer. Thus, if the transaction at issue constitutes a debt incurred
prior to the transfer, it is antecedent; if it becomes a debt contemporaneously with, or after
the transfer, then it is not antecedent and does not give rise to a preference claim. Moreover,
any transfer to a creditor within the preference period by way of payment on or security for
an antecedent debt causes a depletion of the debtors estate and, other elements being present,
will constitute an avoidable preference.118 Any pre-existing debt which is reduced or dis-
charged as a result of payment within 90 days of bankruptcy is, therefore, an antecedent debt
within the meaning of section 547(b)(2).
5. Insolvency presumed for 90-day preference period
For a transfer to be avoidable under section 547, it must be made while the debtor was insol- 1.111
vent.119 Under section 547(f) of the Bankruptcy Code, there is a rebuttable presumption that
the debtor was insolvent within the 90-day preference period. To overcome the presumption,
the transferee must introduce some evidence showing that the debtor was solvent at the time
of the transfer. The effect of this presumption is to shift the burden of going forward with the
evidence, not the burden of proof, which remains on the party seeking to avoid the transfer.
This presumption, however, does not exist for transfers made between 90 days and one year
prior to the bankruptcy. Unlike a constructive fraudulent transfer claim, insolvency here is
measured only by a balance sheet test, and not a capital adequacy or liquidity test.
6. Creditor must benefit from transfer
The trustee or debtor must also establish that the creditor received a quantifiable benefit 1.112
from the challenged transfer for purposes of section 547(b) and that any benefit received

114
HR Rep No 95-595, 95th Cong, 1st Sess 314 (1977), reprinted in 1978 USCCAN 5963, 6271.
115 225 US 178, 184 (1912).
116
Ibid at 184.
117 See Hughes v Lawson (In re Lawson), 122 F 3d 1237, 1240 (9th Cir 1997) (Granting of security for a debt

is a transfer under the Bankruptcy Code).

118 5 Collier, para 547.03[4], at 54736.
119 11 USC 547(e)(2); see also In re Bayonne Medical Center, 429 BR 152, 192 (Bankr DNJ 2010)

(Insolvency is a necessary element . . . to establish a voidable preference).

33
 Insolvency in the UK and the US

exceeded the amount the creditor would have received in a hypothetical chapter 7 liquida-
tion. The bankruptcy court is required to compare the monetary benefit the creditor in fact
received from the alleged preferential transfer with the projected amount of any distribution
to the same creditor in the event there was an order for relief under chapter 7 and the prefer-
ential transfer had never occurred. In other words, whether a specific transfer is a preference
is determined not by what the situation would have been if the debtors assets had been liq-
uidated and distributed among his creditors at the time the alleged preferential payment was
made, but by the actual effect of the payment as determined when bankruptcy results.120

7. Defences to a preference action

1.113 Once the elements of a preference are established, the defendant transferee may attempt to
prove that the transfer fits within one of the exceptions set forth under section 547(c) of the
Bankruptcy Code.121 Examples of such exceptions include, among others, transfers in which
the parties intend for the transfer to be a contemporaneous exchange for new value and pay-
ments made in the ordinary course of business, according to ordinary business terms.
Additionally, common law exceptions to preferences have developed, such as the earmark-
ing defence, in which funds that that are specifically earmarked by a creditor for payment to
a designated creditor do not constitute a transfer of propertyeven if the funds pass through
the debtors hands in reaching the specified creditor.

120Palmer Clay Prods Co v Brown, 297 US 227, 229 (1936).

121Pursuant to s 547(g) of the Bankruptcy Code, the creditor or party in interest against whom recovery or
avoidance is sought has the burden of providing the nonavoidability of a transfer under [section 544(c)].

34
 2
THE EC REGULATION ON INSOLVENCY
PROCEEDINGS

I. Preliminary 2.012.02 A. Impact on Discharge and Variation

of Debt 2.812.84
II. Legal Framework 2.032.56 B. Use of Company Voluntary
A. Purpose 2.03 Arrangements in Main Proceedings 2.852.88
B. Interpretation 2.04 C. Use of Company Voluntary
C. Relationship with the Brussels Arrangements and Administrations
Regulation 2.052.07 in Secondary Proceedings 2.892.90
D. Scope and Application 2.082.10 D. Schemes of Arrangement 2.912.96
E. International Jurisdiction 2.112.33 V. Forum Shopping as a
F. Choice of Law Rules 2.342.47 Restructuring Tool 2.972.152
G. Recognition of Proceedings 2.482.53 A. Introduction 2.972.114
H. Judicial Cooperation 2.54 B. Timing Post-Migration: When to
I. Rights of creditors 2.552.56 Open Insolvency Proceedings 2.1152.142
III. Managing the Insolvency of C. Freedom of Establishment 2.1432.151
Group Companies 2.572.80 D. The Impact of the European
Merger Directive 2.152
A. Group Companies and Sharing
of COMIs 2.572.80 VI. Review and Reform? 2.1532.154

IV. Application of the EC Regulation

to Rescue Plans 2.812.96

I. Preliminary
In cases where the restructuring plan requires the debtor to be made subject to a formal 2.01
insolvency process, the laws applicable to that process will be determined in accordance with
the EC Regulation on Insolvency Proceedings1 (the EC Regulation) if the debtor has its
centre of main interests (COMI) in an EU member state and assets in one or more of the

1 Council Regulation (EC) 1346/2000 on Insolvency Proceedings [2000] OJ L160/1. The EC Regulation

came into force in all member states except Denmark in May 2002 without the need for implementing legisla-
tion. It is directly applicable and an integral part of the national law of each member state and will override
where necessary any conflicting provisions in national laws. The number of participating member states has
risen from 14 to 26 since the Regulation was implemented. General references to member states in this chapter
should be taken to mean EU member states excluding Denmark.

35
 The EC Regulation on Insolvency Proceedings

other member states.2 Where the COMIs of individual group companies are located in the
same member state it may be possible to use the EC Regulation to consolidate the adminis-
tration of group insolvencies, thereby ensuring a coordinated approach to the restructuring
of the groups business. Any restructuring plan might also involve moving a debtors COMI
to another member state in order to make use of a more flexible insolvency regime.
2.02 The opening sections of this chapter will describe the framework and key features of the
EC Regulation3 including the concept of COMI, its application to group insolvencies,
and the use of COMI shifting in cross-border restructurings. Unless otherwise indicated,
references to Recitals, Articles, and Annexes are to recitals, articles, and annexes of the EC
Regulation.

II. Legal Framework

A. Purpose
2.03 The principal purpose of the EC Regulation is to improve the efficiency and effectiveness of
insolvency proceedings with a cross-border dimension. It aims to do this by establishing a
framework, based on the principles of mutual recognition and enforcement, within which
the different insolvency regimes of individual member states can interact more effectively. It
does not attempt to harmonize the insolvency laws of those member states but allows the law
of the state in which insolvency proceedings are opened (the lex concursus) to dominate.

B. Interpretation
2.04 The interpretation of the EC Regulation is assisted by the Recitals that precede it. The Recitals
are more extensive than those typically found in EU legislation. They draw heavily from the
Virgos-Schmit Report4 and provide an indication of the aims and policy considerations
underlying the individual provisions. The Virgos-Schmit Report was originally intended to
be the authorized guide to the interpretation of the EC Convention on Insolvency
Proceedings5 (the draft Insolvency Convention) and, while it has no formal status, it is
widely used by practitioners and the judiciary as an unofficial aid to interpretation. The
European Court of Justice (ECJ) also has a role in interpreting the text of the EC Regulation
by delivering preliminary rulings on questions raised by the appellate courts of member
states. This process should ensure that the law is applied in a uniform and consistent manner.
Finally, a wealth of case law from the national courts has built up since the EC Regulation
came into force, which also assists the interpretation of the Regulations.

2
The debtor must also fall within the jurisdiction of the EC Regulationsee section II.F for details of
excluded entities.
3
For a detailed analysis of the EC Regulation see G Moss, I Fletcher, S Isaacs, The EC Regulation on Insolvency
Proceedings, a Commentary and Annotated Guide (2nd edn, 2009).
4 M Virgos, E Schmit, Report on The Convention on Insolvency Proceedings (1996).
5
The Convention itself lapsed in 1995 for political reasons but was enacted in the form of the EC Regulation
with very few changes: see IF Fletcher, Insolvency in Private International Law (2nd edn, 2005), pp 339358.

36
 II. Legal Framework

C. Relationship with the Brussels Regulation

The EC Regulation is complementary to the Brussels Regulation, which deals with the rec- 2.05
ognition and enforcement of judgments in civil and commercial matters.6 Thus, while
Recital (6) provides that the EC Regulation should be confined to provisions governing
jurisdiction for opening proceedings and judgments which are delivered directly on the basis
of the insolvency proceedings and are closely connected with such proceedings, the Brussels
Regulation places insolvency and related judgments beyond its scope.7 As a general rule,
where the claim is one that only an insolvency office holder could bring (and is therefore
dependent on insolvency proceedings having been opened), it is likely that jurisdiction to
hear the claim will be governed by the EC Regulation. On the other hand, if the claim is one
arising under general law rather than under insolvency law, it is likely that jurisdiction to
hear the claim will be governed by the Brussels Regulation.
The Article 1(2)(b) exclusion has nonetheless given rise to uncertainty as to the extent to 2.06
which the courts jurisdiction in insolvency matters extends to ancillary actions commenced
within the context of an insolvency. A ruling from the ECJ, in line with guidance found in
the Virgos-Schmit Report,8 has confirmed that avoidance actions brought against debtors
whose registered offices are in another member state are closely linked to the insolvency
proceedings.9 More recently, in relation to a case which was opened before the implementa-
tion of the EC Regulation and which analysed the equivalent provision in the 1968 Brussels
Convention, the ECJ ruled that a transfer of shares effected in the context of insolvency
proceedings also fell within the exception.10 This decision is helpful in the context of cross-
border restructurings involving, for example, a pre-packaged administration or liquidation
of a holding company with the consequent sale of the shares in the holding company beneath
it that controls the rest of the group. If the latter company is registered in another member
state, it is likely that any such transfer of title would now require automatic recognition in
accordance with Articles 1618.
Examples of cases where the insolvency exception has been found not to apply include an 2.07
action concerning a reservation of title clause which was not based on the law of the insol-
vency proceedings and required neither the opening of such proceedings nor the involve-
ment of a liquidator11 and a claim for ownership of a debtors asset arising under general law
and accruing before the debtor was wound up.12

6
Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in
civil and commercial matters [2001] OJ L12/1. This Regulation replaced the 1968 Brussels Convention.
7
Article 1(2)(b) of the Brussels Regulation (ibid) excludes bankruptcy, proceedings relating to the winding
up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous
proceedings.
8
Virgos-Schmit Report (n 4 above) para 196.
9
Case C-339/07 Seagon v Deko Marty Belgium NV [2009] ECR I-767.
10 Case C-111/08 SCT Industrie AB I likvidation v Alpenblume AB [2009] ECR 00. The ECJ cited an earlier

case, decided under the Brussels Convention (Case 133/78 Gourdain v Nadler [1979] ECR 733), in which it
held that an action is related to insolvency if it derives directly from the insolvency and is closely linked to pro-
ceedings for realizing the assets.
11
Case C-292/08 German Graphics v Alice van der Schee [2009] ECR 00.
12 Byers v Yacht Bull Corporation [2010] BCC 368.

37
 The EC Regulation on Insolvency Proceedings

D. Scope and Application

2.08 The EC Regulation applies to collective insolvency proceedings which entail the partial or
total divestment of a debtor and the appointment of a liquidator.13
2.09 The relevant insolvency proceedings for corporate entities are the collective insolvency pro-
ceedings listed in Annex A. The proceedings normally include both winding up and reor-
ganization proceedings. In the UK these comprise: winding up by or subject to the supervision
of the court; creditors voluntary winding up (with confirmation by the court); administra-
tion (including out of court appointments); and voluntary arrangements proposed under
insolvency legislation. The term insolvency is not defined so each member state is free to
administer its own procedures according to the test of insolvency laid down by its own
national laws and practice. The EC Regulation does not apply to receiverships of any form as
these are creditors self-help remedies rather than collective proceedings, or to members
voluntary winding up, which is a solvent process. Nor does it apply to insolvency proceed-
ings relating to insurance undertakings, credit institutions, investment undertakings hold-
ing funds or securities for third parties, or collective investment undertakings. Instead, these
entities are generally regulated by special insolvency regimes under national laws, which in
some cases are subject to harmonized provisions introduced through EU directives.
2.10 The term liquidator is defined widely to mean any person or body whose function is to
administer or liquidate assets of which the debtor has been divested or to supervise the
administration of the debtors affairs. Annex C lists the types of office holder that fall within
this definition and includes, in relation to UK proceedings, liquidators, provisional liquida-
tors, supervisors of voluntary arrangements, and administrators.

E. International Jurisdiction
2.11 The EC Regulation imposes a framework of jurisdictional rules governing the opening of all
proceedings that fall within its scope. This uniform set of rules provides a basis on which the
unified choice of law rules, and the provisions for extra-territorial recognition and enforce-
ment, operate throughout the EU. The EC Regulation will only apply if the debtors COMI
is situated in a member state,14 in which case the court of that member state will have juris-
diction to open insolvency proceedings.15 In the case of a company or other legal person
there is a presumption, in the absence of proof to the contrary, that the COMI is where the
debtors registered office16 is located.
2.12 Main proceedings can only be opened in one member state, because a debtor can only have
one COMI. Main proceedings have universal effect throughout the EU and the liquidator
will be entitled to deal with all of the assets of the debtor, regardless of where they are situated,

13
Article 1(1).
14 Recital (14).
15
Article 3(1). The relevance of COMI in cross-border restructurings of corporate groups is discussed in
detail in section III.A.
16 This term corresponds to statutory seat in the foreign language versions of the Regulation. Although

registered office has a narrower meaning, the two terms are construed interchangeably to identify the law
under which the entity has been constituted for the purposes of the Art 3 presumption.

38
 II. Legal Framework

unless secondary proceedings are opened in another member state.17 Secondary proceedings
can be opened in any other member state where the debtor has an establishment.
If the debtors COMI is outside the EU, the EC Regulation will not apply and member states 2.13
will be free to act in accordance with their existing laws and practice when exercising jurisdic-
tion, opening proceedings and recognizing and enforcing proceedings opened in other
member states. They will not, however, be able to take advantage of the associated provisions
under the EC Regulation, such as automatic recognition in all member states, which are
available where main proceedings are opened. This may prove to be a hurdle in group restruc-
turings where some of the debtor companies have substantial connections with one or more
member states but fall outside the scope of the EC Regulation because their COMIs are not
situated in a member state.
The EC Regulation has broadened the jurisdiction of the courts of member states in certain 2.14
respects, thereby facilitating the restructuring process in circumstances where formal pro-
ceedings are contemplated. In some cases, it has been necessary to adopt specific rules to
ensure that the EC Regulation is given full effect in domestic legal systems. In England, a
number of key changes were made to the Insolvency Act 1986 and the Insolvency Rules
1986 to ensure compatibility between the EC Regulation and UK insolvency law in a manner
that would not discriminate against companies incorporated in other member states.18 One
of the effects of these changes has been that the jurisdiction of the English courts to make an
administration order has been extended to overseas registered and unregistered companies.
As a result, the jurisdiction of the English courts to grant administration orders is no longer
confined to companies formed under the UKs Companies Acts.19
The use of this extended jurisdiction was first seen in the Enron Directo case,20 in which a 2.15
Spanish subsidiary of the Enron Group was placed into administration. In the following year
a Delaware-incorporated company was placed into administration in Re Brac Rent-A-Car
Inc,21 again confirming that jurisdiction under the EC Regulation extended to legal entities
incorporated in non-EU member states. In that case, the court held that the only test for the
application of the EC Regulation was whether the debtors COMI was in a member state and
not where a debtor which is a legal person is incorporated. To have decided otherwise would
have enabled debtors incorporated outside the EU, but with businesses and assets in a mem-
bers, to place themselves beyond the reach of the courts of the member states.
Note, however, that the jurisdiction of the English courts has been limited in respect of 2.16
companies whose COMIs are situated in another member state but which do not have an
establishment in the UK. Prior to the coming into force of the EC Regulation, if a foreign
company was found to have sufficient connection with England, for example the presence of
assets, the court could exercise its discretion to wind up that company as an unregistered

17
Recital (12). Because the main proceedings have universal scope, the Regulation builds in protections in
relation to certain transactions, including the enforcement of security, in other member states (discussed in
section II.F).
18 See the Insolvency Act 1986 (Amendment) (No 2) Regulations 2002, SI 2002/1240.
19
In the Wind Hellas case (n 152 below) Lewison J concluded that a Luxembourg-incorporated socit en
commandite par actions (effectively a combination of a joint stock company and a limited partnership) had a
separate legal personality and was a company for the purposes of Sch B1 to the Insolvency Act 1986.
20
High Court, 4 July 2002.
21 [2003] 1 WLR 1421.

39
 The EC Regulation on Insolvency Proceedings

company under section 221(5) of the Insolvency Act 1985. That jurisdiction is now pre-
cluded by virtue of Article 3(2) although the test remains in place for companies that fall
outside the scope of the EC Regulation. In Re Arena Corporation Ltd,22 for example, the
English court found that a company incorporated in the Isle of Man but with its COMI
in Denmark23 had sufficient connection with England (in the form of assets located in
England) to enable it to exercise its jurisdiction under section 221 of the Insolvency Act 1986
to wind up the company. Cases such as these, which do not meet the jurisdictional require-
ments of main or territorial proceedings, will be subject to national law and will be recog-
nized by EU member states and non-member states alike in accordance with the rules of
private international law.
2.17 Other amendments made to UK legislation to ensure the EC Regulation is given effect
under English law include the modification of the definition of property (as defined in sec-
tion 436 of the Insolvency Act 1986) to include, where relevant, property to be dealt with in
secondary proceedings;24 changes to enable foreign liquidators to apply to convert adminis-
tration and voluntary arrangements in English proceedings into winding up proceedings
when exercising their rights under Article 37;25 and for foreign companies to be placed into
voluntary liquidation as unregistered companies if their COMI is located in the UK.26

1. Asserting jurisdiction: the meaning of COMI

2.18 The concept of COMI is central to the EC Regulation, primarily because it is used to deter-
mine whether the EC Regulation applies and because it determines the type of proceedings
that can be opened and where a claim is situated. The concept has an autonomous meaning
and must therefore be interpreted in a uniform way, independently of national legislation.27
The importance for creditors of being able to identify the debtors COMI usually derives
from the need for them to ascertain the commercial risks involved in entering into transac-
tions with the debtor. It is also relevant in any proposed restructuring plan where it may be
desirable, if circumstances permit, to move the debtors COMI to a member state that offers
a restructuring regime better suited to the particular circumstances of the debtor.28
2.19 Despite its significance, there is no definition of COMI in the main text of the EC Regulation
although the registered office presumption in Article 3(1) is helpful in the case of a company or
legal person. The Virgos-Schmit Report suggests that the COMI will normally correspond to
the debtors head office.29 Further guidance on determining COMI is provided by Recital (13)
which states that it should correspond to the place where the debtor conducts the administra-
tion of his interests on a regular basis and is therefore ascertainable by third parties.

22
[2003] All ER (D) 277.
23
Recital (33) confirms that Denmark, which exercised its opt-out in relation to the Regulation, is not to be
regarded as a member state for the purposes of the Regulation.
24
See reg 18 of the Insolvency Act 1986 (Amendments) (No 2) Regulations, SI 2002/1240.
25
Insolvency Act 1986 (Amendments) Rules, SI 2002/1307: see reg 4 for CVAs; reg 5 for administrations.
26 Section 221(4) of the Insolvency Act 1986 was amended by the Insolvency Act 1986 (Amendments)

(No 2) Regulations, SI 2002/1240, to allow for this. The use of this extended jurisdiction can be seen, for exam-
ple, in Re TXU Europe German Finance BV [2005] BCC 90 where the debtor entered a CVL.
27 Case C-341/04 Re Eurofood IFSC Ltd [2006] ECR 1-3813 at 31.
28
Discussed below in section V.A.
29 Virgos-Schmit Report (n 4 above), para 75.

40
 II. Legal Framework

The determination of a debtors COMI is a factual matter to be decided on a case-by-case 2.20

basis and it is possible that a companys COMI may move gradually over time in response to
business needs.30 The rules relating to jurisdiction in Article 3 rely on the state of affairs that
exist at the time of the opening of insolvency proceedings and it will be for the party wishing
to rebut the presumption to provide proof that the debtors COMI is located elsewhere.31
A debtor which has moved its COMI and wishes to rebut the registered office presumption
needs only to provide evidence at the time of opening of proceedings that it is administering
its interests on a regular basis in the new member state.
The test for COMI was established by the ECJ in the Eurofood case,32 in which both the Irish 2.21
and the Italian courts asserted jurisdiction to open insolvency proceedings over Parmalats
Irish subsidiary, Eurofood, on the basis that its COMI was located in their respective juris-
dictions. The Italian administrator filed a notice of appeal against the Irish High Courts
decision to grant a winding up petition in respect of Eurofood, which prompted the Irish
Supreme Court to seek a preliminary ruling from the ECJ on several issues. The question
relating to COMI was phrased as follows:
Where,
(a) the registered offices of a parent company and its subsidiary are in two different
Member States,
(b) the subsidiary conducts the administration of its interests on a regular basis in a
manner ascertainable by third parties and in complete and regular respect for its own
corporate identity in the Member State where its registered office is situated and
(c) the parent company is in a position, by virtue of its shareholding and power to
appoint directors, to control and does in fact control the policy of the subsidiary, in
determining the centre of main interests,
are the governing factors those referred to at (b) above or on the other hand those referred to
at (c) above?
The ECJ, guided by Recital (13), ruled that the governing factors were as described in para- 2.22
graph (b) and that, in those circumstances, the registered office presumption can be rebutted
only if factors which are both objective and ascertainable by third parties enable it to be
established that an actual situation exists which is different from that which location at that
registered office is deemed to reflect. A key factor could be that the company is carrying out
business in the territory of a member state other than where its registered office is situated.
The ECJ further ruled that, where a company carries on its business in the territory of the
member state in which its registered office is situated, the mere fact that its economic choices
are or can be controlled by a parent company in another member state is not enough to rebut
the presumption laid down by the EC Regulation.33

30
In practice, facility agreements will often contain repeating representations as to the location of the
debtors COMI (as seen in the Loan Market Associations loan documentation for leveraged transactions).
31
For a non-exhaustive list of the factors which may be taken into account when determining a companys
COMI see Marshall (ed), European Cross-Border Insolvency, 1-13 at para 65.
32
Case C-341/04 Re Eurofood IFSC Ltd [2006] ECR 1-3813.
33 Following the preliminary ruling by the ECJ, the Italian administrators appeal against the Irish High

Courts decision to grant a winding up petition in respect of Eurofood, which had included a request to recog-
nize the decision of the Italian court that Eurofoods COMI was in Italy, was dismissed: see Re Eurofood IFSC
Ltd [2006] IESC 41 (3 July 2006).

41
 The EC Regulation on Insolvency Proceedings

2.23 The question put to the ECJ was narrowly framed. This inevitably fettered the ability of the ECJ
to lay down clear guidelines on the factors to consider when determining a debtors COMI. The
decision does, however, clarify the test to be applied and confirms that this is the hurdle to be
overcome if group companies incorporated in different member states are to be dealt with in a
single procedure. By considering the location of Eurofoods COMI on the basis that it was a
separate legal entity the ECJ made it clear that Eurofoods status as a group company was not
recognized under the EC Regulation and confirmed the relevance of the ruling to all compa-
nies, irrespective of their place within a corporate structure. At the time, this prompted con-
cerns that the emphasis on the separate legal personality of each company would deal a blow to
the practice of the courts asserting jurisdiction in respect of group companies whose registered
offices are situated in a number of different member states. However, as will be seen in the dis-
cussion on COMI cases below, this has not always been borne out in practice.34
2.24 The test used in the Eurofood case to determine a debtors COMI has since been approved by
the Court of Appeal in recognition proceedings in Re Stanford International Bank Limited 35
under the Cross-Border Insolvency Regulations 2006, even though its purpose in those
Regulations is to determine COMI at the time the debtor enters insolvency proceedings for
the purpose of seeking recognition and assistance in foreign courts rather than to determine
jurisdiction to open proceedings.
2. When is COMI assessed?
2.25 The English Court of Appeal considered this question in Shierson v Vlieland-Boddy36 and
found that a debtors COMI is to be determined at the time that the court is required to
decide whether to open insolvency proceedings.37 In cases where proceedings are com-
menced by the presentation of a bankruptcy petition, that time will normally be at the date
of the hearing of the petition. Occasionally it may be at an earlier point, such as when an
application has been made for permission to serve the petition out of the jurisdiction, in
which case it will be at the hearing of that application. Similar considerations would apply if
the court were faced with an application for interim relief in advance of the hearing of the
petition.38
2.26 However, the decision in the Shierson case must now be read subject to a subsequent ruling
by the ECJ in the Staubitz-Schreiber case,39 in which the determination of a debtors COMI
was held to be at an earlier time. Staubitz-Schreiber concerned an individual debtor who
initiated her own bankruptcy proceedings in Germany but moved to Spain before they were
opened. In consequence, when the German court eventually came to hear the application, it
found that it did not have jurisdiction to open proceedings. The debtor appealed, arguing
that her COMI should be determined as at the date she had requested bankruptcy proceed-
ings to be opened and not at the date of the hearing of her application. The German Federal

34
The insolvency of group companies is discussed further in section III.A.
35
[2009] BPIR 1157 and [2010] All ER (D) 219, CA. For a discussion on this case in the context of deter-
mining COMI under the Cross-Border Insolvency Regulations 2006, which implement the UNCITRAL
Model Law on Cross-Border Insolvency, see Chapter 4.
36 [2005] 1 WLR 3966, CA.
37
In the first instance decision, which was overturned, the court had decided that the question of the loca-
tion of the debtors COMI should be decided as at the date of judgment, and not at any earlier time.
38 See D Petkovich, The correct time to determine the debtors COMI: case note and commentary on

Staubitz-Schreiber and Vlieland-Boddy [2006] 22(2) Insolvency Law and Practice.

39 Case C-1/04 Staubitz-Schreiber [2006] BPIR 510.

42
 II. Legal Framework

Court referred the case to the ECJ. The ECJ, following the opinion of AG Colomer, ruled
that Article 3(1) must be interpreted as meaning that the court of the member state within
the territory in which the debtors COMI is situated at the time when the debtor lodges the
request to open insolvency proceedings retains jurisdiction to open those proceedings if the
debtor moves its COMI to the territory of another member state after lodging the request
but before the proceedings are opened. Therefore, any attempt to shift a debtors COMI after
the date of the application to open proceedings will be ineffective. The ruling respects the
policy considerations underlying the EC Regulation, namely that in order to preserve credi-
tor certainty, a debtors COMI must be ascertainable by third parties. It would therefore be
unjust if a creditor, believing the debtors COMI to be in one jurisdiction, were to file an
application to initiate proceedings only to find that between the application date and the
hearing (which may take place some weeks or months later), the debtor has moved its COMI
to another jurisdiction.

3. Main and territorial proceedings

Article 3 imposes a hierarchical structure of primary and subsidiary jurisdiction on insol- 2.27
vency proceedings. Primary jurisdiction is accorded to the main proceedings that are opened
in the member state where the debtor has its COMI and are governed by the laws of that
state. Main proceedings are intended to encompass the debtors assets on a global basis and
to affect all creditors, wherever located.40 However, where territorial or secondary proceed-
ings (described below) are opened in other member states, they run in parallel to the main
proceedings and largely oust the jurisdiction of the main proceedings in the relevant member
state. This is to avoid imposing the substantially different rules and procedures of the law of
the state of opening on member states where territorial or secondary proceedings have been
opened. The intention here is to provide comfort to creditors who have analysed the risks
both of advancing credit to the debtor and of the debtors insolvency, by reference to the
member state where the debtor is carrying on its business.
Territorial proceedings can be opened in any member state where the debtor has an establish- 2.28
ment. These proceedings will be restricted to the assets of the debtor situated in that member
state and jurisdiction over the debtors assets will be restricted to the territory of the state in
which those proceedings are commenced unless creditors have agreed otherwise.41 The pro-
ceedings will be either independent, territorial proceedings that are opened before the main
proceedings are opened in another member state (if at all) or secondary proceedings, opened
after the start of main proceedings. Territorial proceedings may only be opened in two sets of
circumstances: either where main proceedings cannot be opened because of the conditions
laid down by the law of the member state within the territory in which the debtors COMI
is situated; or where the opening of territorial proceedings is requested by a creditor who has
his domicile, habitual residence, or registered office in the member state within the territory
where the establishment is situated or whose claim arises from the operation of that estab-
lishment.42 This has the advantage of preventing the opening of territorial proceedings
merely to recover local assets without adequate supervision and control. If main proceedings
are not subsequently opened in the member state where the debtors COMI is situated, the

40 Virgos-Schmit Report (n 4 above) para 73.

41
Article 17(2).
42 Article 3(4).

43
 The EC Regulation on Insolvency Proceedings

territorial proceedings will retain their independent status. If main proceedings are subse-
quently opened, the territorial proceedings will become secondary proceedings.
2.29 Territorial proceedings can be in the form of any of the proceedings listed in the EC Regulation
but, in order to maintain the primacy of the main proceedings, secondary proceedings must
be in the form of winding up proceedings, as distinct from rescue or rehabilitation proceed-
ings. Winding up proceedings for these purposes are listed in Annex B. They are defined in
Article 2(c) as insolvency proceedings listed in Annex A involving the realization of the
debtors assets, including where the proceedings have been closed by a composition or other
measure terminating the insolvency, or closed by reason of the insufficiency of the assets.
Any surplus arising after the claims of local creditors have been met must be remitted to the
liquidator in the main proceedings. Although secondary proceedings must be opened as
winding up proceedings, the liquidator of those proceedings may propose a rescue plan or
composition, such as a voluntary arrangement or a scheme of arrangement, where permitted
by the law of that member state. Where such a plan is proposed by the liquidator in the sec-
ondary proceedings, the consent of the liquidator in the main proceedings must be obtained
if the financial interests of the creditors in the main proceedings are affected.43 The liquidator
in the main proceedings can similarly propose that the secondary proceedings be closed by
way of a rescue plan, composition, or comparable measure.
2.30 Notwithstanding their independent standing, the court that opens the secondary proceed-
ings must stay them in whole or in part if requested to do so by the liquidator in the main
proceedings. It may request the liquidator in the main proceedings to take any suitable
measure to guarantee the interests of the creditors in the secondary proceedings and of indi-
vidual classes of creditors. Such a request may only be rejected if it is manifestly of no interest
to the creditors in the main proceedings. The court that opened the secondary proceedings
must terminate the stay of proceedings if requested to do so by the liquidator in the main
proceedings. It also has the power to terminate the stay of its own motion, at the request of a
creditor. The court can also terminate the stay at the request of the liquidator in the second-
ary proceedings if that measure no longer appears justified, in particular, by the interests of
creditors in the main proceedings or in the secondary proceedings. The stay may only be
made for a period of three months but may be renewed for a further three months.44
2.31 The liquidator in the main proceedings may also intervene in the territorial proceedings and
request that they be converted into winding up proceedings (if they were not commenced as
such), if this proves to be in the interests of creditors in the main proceedings. In that event
the court with jurisdiction over the territorial proceedings must order the proceedings to be
converted into winding up proceedings.45

4. The meaning of establishment

2.32 In order to found jurisdiction to open territorial or secondary proceedings it must be demon-
strated that the debtor possesses an establishment.46 The term establishment is narrowly
defined in Article 2(h) as any place of operations where the debtor carries out a non-transitory
economic activity with human means and goods. A place of operations means a place from

43 Article 34.
44 Article 33.
45
Article 37.
46 Article 3(2).

44
 II. Legal Framework

which the debtor conducts commercial, industrial, or professional activities in the market. The
definition is likely to include a branch office of the debtor, or an established place of business
and the same debtor may have several establishments located in different member states. The
reference to non-transitory economic activity expresses the requirement of a certain degree of
stability within the forum while human means and goods implies an organizational presence
in the forum. It is generally accepted that the term goods includes office equipment, such as
desks, chairs, computers, printers, and telephones and that it should also be interpreted to
include both tangible and intangible assets. The reference in Article 3(2) to possessing an estab-
lishment implies that the debtors establishment must be located in the jurisdiction at the time
at which the application for insolvency proceedings is filed. It will be for the court to determine
the existence of an establishment in each case, based on the facts presented to it. There is no
guidance provided as to the test to be applied to determine whether an establishment is no
longer being used by the debtor in order to demonstrate that the debtor no longer possesses it
in order to meet the Article 3(2) requirement.
The existence of a registered office in a relevant jurisdiction is not part of the test to determine 2.33
whether a company has an establishment there.47 The petitioner in Telia AB v Hillcourt,48
having failed to demonstrate to the English court that the COMI of the subsidiary of a
Swedish-registered company was situated in England, advanced a secondary argument that
the subsidiary, which occupied business premises in the UK, ranked as an establishment of
its parent for the purposes of Article 3(2). The argument was rejected. Although the court did
not provide its reasoning, the decision appears to be in keeping with the basic rule that a
subsidiary has a separate legal entity to that of its parent and that carrying on business in one
member state does not amount to the simultaneous carrying on of that business in another
member state by the debtors holding company. The decision is, therefore, consistent with
the ECJs ruling in the Eurofood case, which acknowledged the separate legal personality of a
subsidiary company. If the parent company had conducted its operations in England through
a branch office rather than through a UK subsidiary then the argument that it was an estab-
lishment is likely to have had a greater chance of success. Notwithstanding the clarifications
contained in the Virgos-Schmit Report and in case law, in practice it is not always clear
whether a companys presence in a jurisdiction amounts to an establishment and further
guidance from the ECJ is needed on this point.

F. Choice of Law Rules

1. The general rule
In cases where a member state is able to assert jurisdiction to open main or secondary pro- 2.34
ceedings, the EC Regulations choice of law rules for determining the law applicable to cer-
tain matters will come into play. The potential impact of these rules will require careful
consideration if the restructuring plan proposes subjecting the debtor to a formal insolvency
process recognized by the EC Regulation. In this regard, it should be noted that the effects
of the provisions are not always clear and that rulings from the ECJ may ultimately be
required in respect of some of the issues to assist in their interpretation.

47
This point is illustrated in Hans Brochier Holdings Ltd v Exner [2007] BCC 127.
48 Telia AB v Hillcourt (Docklands) Ltd [2003] BCC 856.

45
 The EC Regulation on Insolvency Proceedings

2.35 The general rule, set out in Article 4(1), provides that the national law of the member state
in which the insolvency proceedings are opened (the lex concursus) is the law applicable to
those insolvency proceedings and their effects.49 Article 4(2) lists 13 specific matters where
the lex concursus can expect to be used to determine the conditions for the opening of pro-
ceedings, their conduct, and their closure. In particular, it will determine:
(a) against which debtors insolvency proceedings may be brought on account of their
capacity;
(b) the assets which form part of the estate and the treatment of assets acquired by or devolv-
ing on the debtor after the opening of the insolvency proceedings;
(c) the respective powers of the debtor and the liquidator;
(d) the conditions under which set-offs may be invoked;
(e) the effects of insolvency proceedings on current contracts to which the debtor is party;
(f ) the effects of the insolvency proceedings brought by individual creditors, with the excep-
tion of lawsuits pending;
(g) the claims which are to be lodged against the debtors estate and the treatment of claims
arising after the opening of insolvency proceedings;
(h) the rules governing the lodging, verification, and admission of claims;
(i) the rules governing the distribution of proceeds from the realization of assets, the rank-
ing of claims, and the rights of creditors who have obtained partial satisfaction after the
opening of insolvency proceedings by virtue of a right in rem or through a set-off;
(j) the conditions for and the effects of closure of insolvency proceedings, in particular by
composition;50
(k) creditors rights after the closure of insolvency proceedings;
(l) who is to bear the costs and expenses incurred in the insolvency proceedings;
(m) the rules relating to the voidness, voidability, or unenforceability of legal acts detrimen-
tal to all the creditors.
2. Lex concursus and the ranking of claims
2.36 Article 4(2)(i) provides that the lex concursus will determine the rules governing the distribu-
tion of proceeds from the realization of assets, the ranking of claims, and the rights of credi-
tors who have obtained partial satisfaction after the opening of insolvency proceedings by
virtue of a right in rem or through a set-off. This may give rise to concerns among local credi-
tors that they will be disadvantaged by the order of priority in main proceedings and lead
them to seek to open secondary proceedings where possible so that claims are ranked and
distributions made in accordance with local rules. Where main proceedings have been
opened in England by way of an administration these concerns can be dealt with by the
application of paragraph 66 of Schedule B1 to the Insolvency Act 1986. Paragraph 66 pro-
vides that an administrator may make a payment otherwise than in accordance with the
prescribed rules if it is likely to assist the achievement of the purpose of the administration.
This provision was used to good effect in Collins v Aikman,51 where group companies were
placed in administration in England and the administrators made payments to local credi-
tors in accordance with local law, thereby removing the need for them to commence
proceedings.

49 This rule also applies to secondary proceedings (Art 28).

50
See section IV.A for a discussion on the discharge or variation of debts by way of a composition.
51 Collins & Aikman [2006] BCC 861. Discussed further in section III.A.5.

46
 II. Legal Framework

3. Exceptions to the general rulegeneral observations

There are a number of exceptions and limitations to the general rule, which are set out in 2.37
Articles 515 inclusive. Their purpose is to ensure the preservation of rights or interests that
are specially protected by the laws of a member state from the uncertainties or inconsisten-
cies in policy that might result from the application of a foreign lex concursus.52 In so doing,
they enable transactions to be entered into with a specific legal environment in mind, on the
basis that the application of the law under which the right was created is usually preferable to
the application of the law of the debtors COMI.
The key exception to the general rule is set out in Article 5 and deals with third parties rights 2.38
in rem. Article 5 only applies to rights in rem created before the opening of proceedings53
and present within a member state other than the state of opening at the time of opening
(Article 4 applies to those created after that time). Thus the exception will benefit a secured
creditor or third party only to the extent that it has rights in rem, recognized by local law, over
assets situated in a member state where neither main nor secondary proceedings have been
opened. Article 5.1 provides that:
The opening of insolvency proceedings shall not affect the rights in rem of creditors or third
parties in respect of tangible or intangible, moveable or immoveable assetsboth specific
assets and collections of indefinite assets as a whole which change from time to timebelong-
ing to the debtor which are situated within the territory of another Member State at the time
of the opening of proceedings.
Recital (25) offers some guidance as to the underlying rationale and effect of this provision.54 2.39
It explains the need to diverge from the law of the state of opening in the case of rights in rem
since they are of considerable importance for the granting of credit. It also states that the
secured creditor should be able to continue to assert his right to segregation or separate set-
tlement of the collateral security and that the basis, validity, and extent of such rights should
normally be determined in accordance with the lex situs and not be affected by the opening
of proceedings.55 This means that, although the lex concursus applied in the main proceedings
may lay claim to assets of the debtor situated in other member states, the rights in rem attach-
ing to those assets are excluded from the universal scope of those main proceedings. Thus, if
the right in rem is valid under the lex situs of the secured assets, the secured party can enforce
their rights in respect of the debtors local assets, in accordance with the lex situs, irrespective
of whether or not this would be contrary to the lex concursus.
The terms of Article 5(1) are sufficiently widely drafted to include rights in rem relating to 2.40
book debts and other receivables that were not in existence at the time the insolvency pro-
ceedings were opened. The wording departs from that of the draft Insolvency Convention,
which served as a blueprint to the EC Regulation, by including extra text to ensure that a

52
Recital (24).
53
The term opening of insolvency proceedings has been interpreted by the UK legislature to include acts
done after the opening of those proceedings. See, for example, the consequential changes made to the rules
affecting secured creditors (rr 4.964.98 inclusive of the Insolvency Rules 1986, SI 1986/1925) to take account
of the Regulation. These amendments were introduced by the Insolvency (Amendment) Rules 2002, SI
2002/1307.
54 See also the Virgos-Schmit Report (n 4 above) paras 1024.
55
Note that Art 5 offers no guidance as to which law should determine the lex situs (and therefore the appli-
cable law) of the right in rem.

47
 The EC Regulation on Insolvency Proceedings

floating charge will be characterized as a right in rem.56 There is some uncertainty, in the
absence of a precise definition,57 as to whether rights in rem for the purposes of Article 5(1)
include not only the recognized rights58 but extend, for example, to quasi-security such as
flawed asset arrangements or to rights by way of a beneficial interest under a trust. The rights
of trust beneficiaries are likely to be recognized as a matter of English law but may not be
recognized under the law of the member state in which main proceedings have been opened.
Article 5(2) lists rights that will normally be considered by national laws to be rights in rem
although it will be for the member state where the assets are situated to determine whether
they can be characterized as such.
2.41 There is also some uncertainty as to the meaning of the statement in Article 5(1) that the law
of the insolvency proceedings shall not affect the rights in rem of creditors and third parties
at the opening of such proceedings. This raises the question of whether Article 5(1) merely
protects the right in rem itself (that is to say, the security interest over the relevant assets) or
whether its protection extends to the underlying, secured debt. If it merely protects the right
in rem then any composition plan or proceeding would erode the effectiveness of that right
by varying or discharging the debt it secures over assets that may be located in other member
states. If, on the other hand, the protection extends to the underlying debt there would be no
variation or discharge of the debtors secured indebtedness over any assets located in other
member states. Accordingly, the right of a secured creditor to enforce its security for that
indebtedness would be preserved. Several commentators have suggested that secured credi-
tors should not be bound by a discharge or variation of debt under a plan approved in the
main proceedings unless they give their consent.59 Indeed, if they were to be bound there
would be no value in the Article 5 protection.60 They should instead be able to realize the
relevant collateral in accordance with the non-insolvency law and procedure of the member
state where the proceedings were opened. The opposing view is that if the underlying debt is
compromised, the value of any right in rem is accordingly reduced. The underlying reasoning
is that a distinction must be drawn between the rights in rem (the security rights) and the
rights that the secured creditor may have against the debtor. Therefore, the argument runs,
rights not enforced before the implementation of the compromise plan may be diminished
by any compromise of the associated rights the secured creditor may have against the debtor
in respect of the underlying debt itself. In effect, what is being argued is that security rights
exist only to the extent of the debt due.

56
If the charged assets are situated in England or Ireland (the two jurisdictions that recognize this form of
security) the right in rem created by the floating charge should be recognized by a foreign court. If they are not
situated in England or Ireland the court of the member state which opens main proceedings will need to exam-
ine the relevant lex situs to determine whether, under that law, the floating charge creates a valid right in rem over
local assets.
57
The Virgos-Schmit Report (n 4 above) states that the absence of a definition of rights in rem was inten-
tional, thereby allowing the law of the state where the assets are located to determine the question of whether a
right is a right in rem according to pre-insolvency conflict of laws rules.
58 Such as charges, mortgages, assignment, guarantees, liens, and pledges.
59
M Balz, The European Union Convention on Insolvency Proceedings (1996) 70 ABLJ 485, 95;
M Virgos and F Garcimartin, The European Insolvency Regulation: Law and Practice (2004), p 80; A McKnight,
The Law of International Finance (2008), p 281; P Smart, Rights in Rem, Article 5 and the EC Insolvency
Regulation (2006) 15 Intl Insolvency Rev 33.
60 Moss et al (n 3 above) para 6.138.

48
 II. Legal Framework

Article 5(3) provides certainty as to the determination of registrable rights in rem by defining 2.42
them as any right entered into a public register and enforceable against third parties, allowing
a right in rem to be obtained.61
In order to apply Article 5 it must be possible to identify the location of the assets. Article 2.43
2(g) seeks to provide certainty by setting out special rules for determining where an asset is
located to interpret the principles set out in the EC Regulation. It does this by defining the
expression the Member State in which assets are situated in relation to three specific types
of assets. In the case of tangible property, the situs will be the member state within the terri-
tory in which the property is situated. In the case of property and rights, which must be
entered in a public register, it will be the member state under the authority of which the
register is kept. In the case of claims (in this context, liabilities that are enforceable by
the debtor against third parties), it will be in the member state in which the relevant obligor
has its COMI.62 It follows that the situs of claims for the purpose of Article 5 is not therefore
the place at which the debt is expressed to be payable or where the debtor has agreed to be
sued in the event of non-payment. This can have surprising consequences where the claim
concerns debts owed to the debtor company. So, for example, if a French company has a
bank account with the Paris branch of a German bank, its rights in respect of that account
comprise a claim situated in Germany. If the French company has an establishment in
Germany and territorial or secondary proceedings are commenced in Germany, the account
will fall within the jurisdiction of the German insolvency proceedings, not the French
proceedings.63
If the assets are situated in a member state where the debtor has an establishment and 2.44
secondary proceedings are opened, Article 5 will not apply to those proceedings. Nor will it
apply if the assets are situated in a non-member state at the time of opening of proceedings.
Instead, the conflict of law rules of the law of the state of opening will be applied to deter-
mine the situs of the assets and the law applicable to issues concerning the validity of the
rights in rem.
Another key exception relates to set-off rights. Article 6 provides that set-off will be unaf- 2.45
fected by the opening of proceedings where it would be recognized under the law applicable
to the debtors claim against the creditor. As a result, a creditor who would normally be enti-
tled to exercise a set-off claim will be permitted to do so, even if it is not available under the
lex concursus.64 This is a significant departure from the general rule set out in Article 4(2)(d)
which states that the conditions under which set-off may be invoked are determined by the
law governing the proceedings. In common with Article 5(1), rights of set-off are not pro-
tected from voidable transactions under Article 4(2)(m).65 While Articles 5, 6, and 7 (which
excludes rights relating to reservation of title) merely disapply the lex concursus, a further six
exceptions designate a different applicable law. These exceptions deal with contracts relating
to immovable property; payment systems, and financial markets; employment contracts;

61
Virgos-Schmit Report (n 4 above) para 101.
62 This is in contrast to the position under English common law where the situs of a debt or other chose in
action is where the debtor or obligor resides.
63 These issues are discussed in detail in Moss et al (n 3 above) Ch 6. See also P Smart, Rights in Rem,

Article 5 and the EC Insolvency Regulation (2006) 15 Intl Insolvency Rev.

64
Recital (26).
65 Article 5(4).

49
 The EC Regulation on Insolvency Proceedings

rights subject to registration; the avoidance of antecedent transactions; the protection of

third party purchasers; and the effects of insolvency on lawsuits pending. Article 12 provides
that certain rights relating to Community patents and trade marks may only be included in
the main proceedings. Finally, Article 13 acknowledges the legitimate expectations of credi-
tors or third parties by stating that the lex concursus will not apply where the person who
benefited from an act detrimental to all the creditors provides proof that: (a) the said act is
subject to the law of a member state other than that of the state where proceedings are
opened, and (b) that law does not allow any means of challenging that act in the relevant case.
As such, Article 13 effectively represents a defence, to be pursued by the interested party
claiming it, against the application of the foreign lex concursus.

4. Effects of a statutory moratorium on rights in rem

2.46 The ability of secured creditors to enforce their security or otherwise commence legal pro-
ceedings may be compromised by a moratorium or stay in force in the member state in which
the secured assets are located.66 Article 4(2)(f ) provides that the effects of the insolvency
proceedings on proceedings brought by individual creditors will (with the exception of
lawsuits pending67) be determined by the lex concursus. If, therefore, an enforcement action
falls within the meaning of proceedings for the purposes of Article 4(2)(f ) the secured
creditor will have no automatic right to enforce its security. Instead, it will be for the courts
of the member state where the insolvency proceedings have been opened to decide whether
to exercise their discretion to lift the stay. If the debtor has assets and an establishment in
a member state other than the one where main proceedings are opened, but secondary
proceedings in that member state have not been opened, Article 5 will operate as a rule
of absolute immunity in that other member state. As a result, the secured creditor will be
able to enforce its security notwithstanding any moratorium or stay in place in the main
proceedings. If, however, the liquidator in the main proceedings requests the opening of
secondary proceedings in that other member state under Article 29, the Article 5 protection
will fall away, in which case the rights in rem will be treated in accordance with local law in
the local proceedings. If the local law provides for a moratorium or stay, the secured creditor
will not have an automatic right to enforce its security.

5. Paying off the secured creditor

2.47 Opinion is divided as to whether a liquidator can remove a secured creditor from the insol-
vency process by paying him off in order to gain control of the secured assets. The liquidator
may then be able to preserve value by avoiding the disposal of assets in a piecemeal fashion.
He would also be able to use or dispose of assets in furtherance of the rescue plan. Any
such disposal is likely to require the consent of the secured creditor, particularly if he is
under-secured. The Virgos-Schmit Report is helpful on this point and states that the liquida-
tor has the power to decide on the immediate payment of the claim guaranteed and thus
avoid the loss in value that certain assets could suffer were they to be realized separately.68 It
is possible, however, that a breach of Article 5 would arise if the net proceeds of sale are less

66
Under English law, an automatic moratorium will arise in an administration and a compulsory liquida-
tion. An optional moratorium is available in a small company CVA (discussed further in Chapter 3).
67 Article 15 provides that the effects of a lawsuit pending concerning an asset or a right of which the debtor

has been divested shall be governed solely by the law of the member state in which that lawsuit is pending.
68 Virgos-Schmit Report (n 4 above) para 99.

50
 II. Legal Framework

than the debt owed to the holder of the right in rem. This might be the case, for example,
where the asset is land, the value of which is likely to rise in the future. If a secured creditor
agrees to give up his rights as part of a rescue plan, he would not be able to claim protection
under Article 5.69 Where the secured creditor is paid off in full, there will be no breach of
Article 5.

G. Recognition of Proceedings
Proceedings opened under the EC Regulation must be recognized in all member states from 2.48
the time the opening judgment becomes effective in the relevant member state.70 In addi-
tion, but subject to two exceptions, the judgment must without further formality71 produce
the same effects in any other member state as under the law of the state of opening.72 The first
exception to this rule is that the law of the state of opening will be displaced where special
provisions apply, such as those set out in Articles 515 inclusive73 and Article 24.74 The
second exception is that, if territorial proceedings have already been opened, or secondary
proceedings are subsequently opened, the insolvency law of the state in which those territo-
rial or secondary proceedings were opened will apply.
Territorial and secondary proceedings also enjoy automatic recognition but where secondary 2.49
proceedings have produced a stay on creditors remedies, that stay cannot extend to other
member states unless creditor consent has been obtained. Where the proceedings are con-
cluded by agreeing to discharge the debtor, as in a compromise of claims against the debtor,
the effect of that discharge is restricted to the assets situated in the member state where ter-
ritorial or secondary proceedings were opened unless the consent of affected creditors has
been obtained.75
Recognition can only be refused where the proceedings infringe that member states public 2.50
policy.76 In most cases, the liquidator appointed in main proceedings will immediately be
able to exercise all the powers conferred on him by the lex concursus in other member states,
providing that no secondary proceedings have been opened in any of those other member
states or no contrary preservation measures have been taken pursuant to a request to open
secondary proceedings. The liquidator in the main proceedings is otherwise able to remove
the debtors assets from the territory of the member state in which they are situated, provided
they are not subject to a third partys rights in rem or reservation of title.77 The liquidator

69
The Virgos-Schmit Report (n 4 above) states that the consent of the secured creditor will be required (see
para 95). For a discussion on this point see P Smart, Rights in Rem, Article 5 and the EC Insolvency Regulation
(2006) 15 Intl Insolvency Rev.
70
Article 16.
71
The liquidator merely needs to provide proof of his appointment by way of a certified copy of the original
decision appointing him or by any other certificate of the court that has jurisdiction. A translation may be
required (Art 19).
72
Article 17(1).
73
Discussed in section II.F.3 above.
74 Article 24 provides that any person honouring an obligation for the benefit of a debtor in a member state

while unaware that proceedings have been opened in another member state will be deemed to have discharged
that obligation.
75 Article 17(2). For the position on discharge of debts in relation to main proceedings see section IV.A.
76
Article 26.
77 Article 18(1).

51
 The EC Regulation on Insolvency Proceedings

in territorial or secondary proceedings has the power to act to recover assets removed to
another member state after the proceedings for which he was appointed were opened.78
Any liquidator must comply with the law of the member state within the territory in which
he intends to take action, especially when seeking to realize assets.79
2.51 The requirement for automatic recognition is based on the principle of mutual trust,
which requires the courts of member states to recognize a decision to open main insolvency
proceedings without being able to review the assessment made by the first court as to its
jurisdiction. The principle is reinforced by Recital (22) which suggests that the decision of
the first court to open main proceedings should be recognized in other member states
without those member states having the power to scrutinize the courts decision.
Nonetheless, in Re Daisytek-ISA Ltd,80 which was decided soon after the coming into
force of the EC Regulation, the German courts (and the French court at first instance)
failed to apply Article 16. Both refused to accept that the English court was correct in
asserting jurisdiction on the basis that the COMIs of the German and French subsidiaries
were situated in England. A different approach was adopted by the French court two years
later in Re MG Rover France SAS 81 where it accepted that it was obliged to recognize the deci-
sion of the English court and that it could not refuse recognition on grounds of public
policy.
2.52 It is also possible that the court of the member state in which the debtors registered office is
located can conclude that the debtors COMI is situated in another member state. If the
courts of that other member state refuse to accept jurisdiction a negative conflict situation
will arise.82 An example of this can be found in Sprl Gabriel Tricot 83 where the Belgian court
held that the COMI of a Belgian-registered import/export company, which marketed goods
in Belgium and France from its Belgian office, was in Italy. This determination by the Belgian
court was not binding on the Italian court, which initially declined to open main proceed-
ings on the basis that it did not have jurisdiction. In practice, this situation should rarely arise
if the courts ensure that a thorough inquiry of the relevant facts is carried out. Such inquiry
is assisted in the UK by the requirement on the part of the appointor when seeking to initiate
insolvency proceedings to make a declaration as to whether the EC Regulation applies to the
proceedings in question. In the case of court-based applications, the declaration is then rein-
forced by the court order, which states that the court is satisfied on the evidence presented to
it that the EC Regulation applies.
2.53 Any interested party wishing to challenge the jurisdiction assumed by the court that opens
main proceedings must pursue the matter in accordance with the procedure for appeal and
review under the law of the state of opening, with the possibility of a reference to the ECJ
where an issue of interpretation arises.

78 Article 18(2).
79
Article 18(3).
80 (2004) BPIR 30.
81 Commercial Court of Nanterre, 19 May 2005; Court of Appeal of Versailles, 15 December 2005.
82
See M Virgos and F Garcimartin, The European Insolvency Regulation: Law and Practice (2004) para 70.
83 Tournai Commercial Court, 24 May 2005.

52
 II. Legal Framework

H. Judicial Cooperation
In recognition of the need to coordinate insolvency proceedings in different jurisdictions, 2.54
Article 31 imposes a duty on liquidators in main and secondary proceedings to cooperate
with one another and to communicate information that may be relevant to the other pro-
ceedings.84 Unlike the UNCITRAL Model Law, it places no express duty on the courts to
cooperate with one another. However, the duty imposed on liquidators has been interpreted
as incorporating or reflecting a wider obligation which extends to the courts themselves.
Accordingly, in a decision handed down by the Vienna Higher Regional Court in Re Stojevic,85
the court looked to the Model Law for guidance: although the wording of Article 31 of the
EU Insolvency Regulation only obliges the trustees in bankruptcy to cooperate, this also
applies to the court according to the prevailing opinion and under the UNCITRAL Model
Law. The duty to cooperate has since been reiterated by Patten J in Re Nortel Networks SA,86
where the assistance of foreign courts was required to prevent the opening of secondary
proceedings.

I. Rights of Creditors
The EC Regulation ensures that creditors are kept well informed of proceedings and provides 2.55
a number of built-in protections which may prove helpful where some form of rescue is
contemplated. Where main proceedings are opened in another member state, Articles 4042
ensure that known creditors are immediately notified of the opening of proceedings. A credi-
tor for these purposes includes tax and social security authorities of member states.87 All
creditors, wherever domiciled in the EU, have the right to lodge claims in the main proceed-
ings and in any secondary proceedings. The office holder must provide information on time
limits and related penalties, who is entitled to accept claims, and whether preferential or
secured creditors need to lodge their claims. The hotchpot rule in Article 20 requires credi-
tors who have recovered debt by proceeding against the assets of the debtor in another
member state to return what they have received to the liquidator in the main proceedings
and, if they have proved in secondary proceedings, to bring that sum into account and par-
ticipate on a pari passu basis.88
Creditors participating in main insolvency proceedings opened in another member state are 2.56
at risk of being disadvantaged by the application of foreign laws to assets of the debtor
located in the creditors own jurisdiction unless their rights fall within the exceptions set out
in Articles 515. If the debtor has assets and an establishment in the creditors jurisdiction
then the creditor has the option of opening secondary proceedings in that jurisdiction where
they will then benefit from the application of local insolvency laws.

84
The ability of office holders to carry out this duty might, however, be compromised by the lack of a central
register or database to record judgments.
85
Re Stojevic (Higher Regional Court, Vienna, 9 November 2004) 28 R 225/04w.
86 [2009] BCC 343. See section III.A.5.
87 Article 39. This effectively reverses the position previously held under English law whereby an English court

would not enforce the revenue or tax claims of another state: Government of India v Taylor [1955] AC 491, HL.
88 Note that the hotchpot rule is subject to Art 5 (Rights in rem) and Art 7 (Reservation of title).

53
 The EC Regulation on Insolvency Proceedings

III. Managing the Insolvency of Group Companies

A. Group Companies and Sharing of COMIs

2.57 The EC Regulation does not expressly provide a framework to deal with the insolvency of
corporate groups. Virgos and Garcimartin suggest that this is intentional and as such avoids
two risks:
One is the risk of fragmentation, i.e. dealing in a segmented way with the reorganisation of a
corporate combine made up of several companies which are legally independent but which are
subject to some form of unified economic control, can prove inefficient. The other is the risk
of over-centralisation, i.e. consolidating different companies because they have corporate
structures linked by relationships of property or shareholder control contradicts the principles
of risk diversification and asset partitioning which, for good reasons, form the basis of com-
pany law.89
2.58 They argue that if group companies were to be dealt with in a linked way, it would be difficult
for third parties to ascertain a debtors COMI without investigating the group structure.
As a result, potential creditors would struggle to determine beforehand which insolvency
regime would apply to the insolvent company. Furthermore, a simple change in control
would automatically modify that regime and the rights of all creditors. This in turn would
create strong incentives for forum shopping by making it easier for a debtor to shift its
COMI from one member state to another.
2.59 Another concern was that member states would not be able to control the insolvency of
subsidiaries of non-member state companies, even if the activities of the subsidiaries take
place only within the EU, and that this would run counter to the goal of promoting the
proper functioning of the internal market.90
2.60 Even so, while justifying the absence of provisions to deal with group companies, Virgos and
Garcimartin acknowledge that cross-border group insolvencies can be managed within the
framework provided by the general rules in the EC Regulation. They recognize that this can
be achieved where individual companies within a group share a common COMI, in which
case the court of the member state in which the COMIs are located can assert jurisdiction to
open proceedings in respect of those companies. This will require a degree of flexibility and
pragmatism on the part of the courts. It will result in a procedural consolidation enabling the
proceedings to be administered by a single liquidator.91 The proceedings will then be recog-
nized as one main insolvency process by other member states.
2.61 Procedural consolidation has the advantage of avoiding the expense of multiple proceed-
ings and the uncoordinated disposal of the debtors assets. In so doing, it maximizes the
return for stakeholders while minimizing the potential conflict between liquidators in

89
In the Eurofood case (n 32 above), the argument by the Italian administrator that an Irish subsidiarys
COMI was located in Italy, because it was controlled by its Italian parent, failed. See section III.E.1 for a discus-
sion of this case.
90
M Virgos and F Garcimartin, The European Insolvency Regulation: Law and Practice (2004) para 60.
91 Substantive consolidation, which entails pooling the assets and liabilities of individual group companies,

is also possible in some member states where permitted by the lex concursus but is rarely seen in practice. An
example of the use of substantive consolidation can be found in the EMTEC case (n 103 below) in relation to
two Belgian subsidiaries, one of which held mainly assets and the other mainly liabilities.

54
 III. Managing the Insolvency of Group Companies

different jurisdictions. This approach is also consistent with the historical tendency of the
English courts towards the common law principle of universalism whereby, in the interests
of fairness to all creditors, insolvency proceedings of the debtor are administered on a global
basis from a single jurisdiction and under one law as far as possible.92
The opponents of procedural consolidation argue that there is a risk that local interests, such 2.62
as employee and revenue claims, will not be adequately safeguarded where protection is not
otherwise afforded by cross-border agreements. However, this is not an inevitable conse-
quence of consolidation: case law demonstrates that, in addition to making use of the protec-
tions afforded by the EC Regulation itself 93 the appointed office holders have been able to
ensure that the rights of local creditors are treated in the same way as if secondary proceed-
ings had been opened.94

1. Rustling
Critics of procedural consolidation have accused the courts of rustling large cross-border 2.63
insolvencies for the purposes of opening main proceedings. This has been achieved either by
asserting jurisdiction over a debtor which has moved its COMI opportunistically to another
jurisdiction or by herding subsidiaries with registered offices in different member states into
one member state, by ruling that the registered office presumption has been rebutted in
favour of finding that all of the subsidiaries COMIs are located in the same member state.
The English courts in particular have asserted jurisdiction over several pan-European groups95
and England, in consequence, has been referred to as the Delaware of Europe. This label
derives from a recognized trend in the United States in the 1990s in which a significant
number of insolvency filings of debtors from all over the US were made in Delaware, which
has been viewed by many as the preferred choice for shareholders and/or management.
Commentators have analysed the reasons behind this trend and argued that the sympathetic
approach taken by Delaware judges to these stakeholders is a major factor. However, a com-
prehensive review of the Delaware courts caseload and the outcome of cases it presided over
during the 1990s, found that Delawares prominence was due to a combination of court
experience and efficiency, both of which are more likely to benefit the creditors due to an
inverse correlation between the speed with which an insolvency is handled and value erosion
of the underlying business.96

2. Consolidation of proceedingsthe approach of the English courts

The willingness of the English courts to assist a corporate groups restructuring by finding 2.64
that group companies share a common COMI can be seen in the Daisytek97 case. In Daisytek,
an English-incorporated holding company was placed into administration along with a
number of other European group subsidiaries, including three German companies and one

92
See M Stokes and B Griffiths, Trends in co-operation in cross-border insolvencies, PLC article, p 1; and
G McCormack, Jurisdictional competition and forum shopping in insolvency proceedings, (2009) 68(1) C L
Journal 170.
93
See section II.H.
94
The Collins & Aikman case (n 51 above) provides an example of thissee section III.A.5.
95 In addition to the cases discussed below, other examples can be found in Re MG Rover Espana SA [2006]

BCC 599 and Collins & Aikman (n 51 above).

96 K Mayotte and D Steel Jnr, Why Do Distressed Companies Choose Delaware? An Empirical Analysis of

Venue Choice in Bankruptcy, University of Pennsylvania, Institute for Law & Economics Research Paper No
03-29, October 2004.
97 Re Daisytek-ISA Ltd [2003] BCC 562.

55
 The EC Regulation on Insolvency Proceedings

French company. The Daisytek group structure was complex but, in essence, one English-
incorporated subsidiary of the holding company undertook head office functions for the
entire European branch of the group. The prospective administrators were aware that in
order to achieve a distressed sale of the business and a better return than on a liquidation, the
European subsidiaries would need to be placed into administration together with the English
holding company. They were also mindful of the fact that the key creditors were common to
all the companies and that common control of all the proceedings could allow the advisers
to build on their earlier distressed merger and acquisition work and rapidly achieve a sale of
all the businesses as going concerns, to the benefit of the creditors.
2.65 The English court placed significant emphasis on the fact that the majority of creditors by
value contracted with all the European companies via the English holding company and
therefore regarded England as their COMI. Furthermore, the head office functions, includ-
ing where the companies chief executive officers were domiciled, where transaction approval
was granted, and where financial information was compiled, all pointed to England as the
location of the companies COMIs. Mindful of these factors, the court concluded that the
presumption that the subsidiaries COMIs were in the jurisdictions of their registered offices
had been rebutted and that it therefore had jurisdiction to open proceedings. It duly granted
administration orders over the German and French companies as well as over the English
company.98
2.66 The English courts decision was challenged by the directors of the French and German sub-
sidiaries, who argued that it had not applied the EC Regulation correctly, and that the
COMIs of the French and German companies were not located in England but in the juris-
dictions of their registered offices, from where those companies traded. Disregarding the
principle of automatic recognition enshrined in Article 16, the German court initially
appointed an administrator to the German company but on appeal accepted that the English
administration order should be recognized in Germany.
2.67 Similarly, the French court at first instance disagreed with the English courts approach on
the grounds that it had attempted to adopt a group company approach to determining
COMI. Accordingly, and again in contravention of Article 16, it opened main proceedings
in France by appointing an administrateur judiciaire over the French company. The decision
was subsequently overturned by the French Court of Appeal, which found that the lower
court did not have jurisdiction to open main proceedings and that it was bound by Article
16. Only then were the English administrators finally able to complete the business sale of
the European arm of the Daisytek group.
2.68 Despite the objections raised in Germany and France, and the accusations that the English
court had poached insolvency proceedings from these states, Daisytek is often cited with
approval as an example of the English courts willingness to facilitate an administration of a
pan-European group of companies under the EC Regulation.99 On the particular facts of the
case, while it was necessary to carry out an analysis of each of the companies to determine its

98 E Klempka, The Centre of Main Interest and the Administration of Daisytek (2004) 1(1) International

Corporate Rescue 2729.

99
See J Alderton, The Regulation on Insolvency Proceedings: Streamlining Cross-border Insolvency? The
Contrasting Approaches of the Courts in England and France (2006) 3(5) Intl Corporate Rescue 258.

56
 III. Managing the Insolvency of Group Companies

COMI, the finding that they shared a common COMI in England enabled the administration
sale to go ahead, thereby avoiding a liquidation of the entire European arm of the group.
A similar approach was subsequently adopted in Re CrissCross Telecommunications Group,100 2.69
which again involved the insolvencies of group companies incorporated in both EU and
non-EU member states. The evidence submitted to the English court demonstrated that the
companies shared a number of operational features, indicating that each of their COMIs was
located in England. Rimer J accordingly granted administration orders in respect of each
company.
3. Consolidation of proceedingsthe approach of the German and French courts
Despite criticism of the English courts approach in Daisytek, subsequent case law from 2.70
Germany and France has shown that the courts of these member states, having traditionally
adopting a territorial stance,101 are now more inclined to consolidate proceedings in group
company insolvencies.
This approach holds additional advantages for German domestic insolvencies since, under 2.71
German law, insolvent companies are subject to the jurisdiction of the courts in the regions
in which their registered office or statutory seat is located. Thus, a restructuring involving
only German companies frequently requires the involvement of several courts and insol-
vency office holders. However, in the PIN restructuring in 2008, the Cologne Insolvency
Court was seen to adopt a pragmatic approach by opening insolvency proceedings in respect
of 100 subsidiaries whose statutory seats were located in various parts of Germany. The
group was a postal sorting and delivery business and the court placed significant emphasis on
the fact that each of the subsidiaries needed the assistance of their sister companies in order
to carry out the mail deliveries. As a result of the consolidated proceedings, the business was
successfully restructured.102
One example of how the French courts have modified their approach to consolidated pro- 2.72
ceedings can be seen in MPOTEC (EMTEC) GmbH.103 Here an application was made to the
French court to open main proceedings in respect of a German-registered company, which
was part of the French EMTEC Group. The French court applied the head office functions
test referred to in AG Jacobs opinion104 in the Eurofood case and adopted by the English
court in the Daisytek case. It examined factors such as where board meetings were held; the
governing law of the contracts; where the groups commercial policy was formed; where
creditors were located; and where centralized management and administration were located
and concluded that the companys COMI was in France. The court stated that the case law
of member states under the EC Regulation showed that Courts adopt a pragmatic approach

100
High Court, 20 May 2003.
101
The territorialist principle (which is diametrically opposed to universalism) proposes that the effects of
insolvency proceedings should be confined to property located within the state in which proceedings are opened
and should have no effect on the foreign assets of the debtor. Instead, it allows for the possibility of any number
of local proceedings to be opened, their number and location depending on the circumstances of the case. Local
laws will be applied by the courts in each of the relevant jurisdictions and the debtors assets distributed in
accordance with that local law.
102 T Schorling, PIN Group: German Courts Take a Practical Approach to the Insolvency of a Group of

German Companies with a Luxembourg Parent (2008) 5(6) Intl Corporate Rescue 330332.
103
[2006] BCC 681.
104 Case C-341/04 Opinion of Mr Advocate General Jacobs [2006] ECR I-3813.

57
 The EC Regulation on Insolvency Proceedings

tending to allow streamlining of strongly integrated groups of companies and endorsed the
consolidation of proceedings where possible in order to effect a global insolvency plan.105
2.73 A similar approach was taken in the same year in Eurotunnel Finance Limited,106 in which the
Paris Commercial Court placed 17 companies in the Eurotunnel group into sauvegarde pro-
ceedings, including companies located in England, Germany, the Netherlands, and Spain as
well as France. The Paris court applied the head office functions test and found that the
COMIs of these companies were in France because decisions relating to the groups strategic,
operational, and financial matters were made there. The court justified its decision on the
grounds that the aim of the EC Regulation was the efficient and homogenous administration
of justice.
2.74 Finally, in the Belvedere case in 2008,107 the Commercial Court of Beaune placed the Polish
beverage manufacturer, Belvedere SA, and a number of its European subsidiaries, into sauve-
garde proceedings. This decision also proved to be controversial and some of Belvederes credi-
tors challenged the French courts determination of the COMIs of some of the subsidiary
companies by bringing tierce opposition proceedings (whereby third parties seek to set aside a
judgment adversely affecting their interests). The challenge was rejected by the Commercial
Court and a subsequent appeal to the Court of Appeal of Dijon was unsuccessful.
4. The consolidation of group companiessome conclusions
2.75 Several conclusions can be drawn from cases where group companies have been dealt with
on a consolidated basis. First, despite the fact that the EC Regulation does not recognize the
insolvency of group companies, it nonetheless enables the courts, where circumstances
permit, to adopt a consolidated approach to insolvency proceedings involving corporate
groups. This approach is likely to continue in cases where groups with complicated corporate
structures straddle multiple jurisdictions. Underlying this approach is a clear recognition by
the courts of the advantages of being able to deal with group companies on a collective basis
in insolvency proceedings.108 These decisions will nonetheless continue to be challenged by
creditors in cases where they consider themselves to be prejudiced by the consolidation.
However, as discussed elsewhere in this chapter, any such challenge will be limited by the fact
that it must be made in the court that handed down the decision.
2.76 Secondly, while some courts have demonstrated a willingness to find that group companies
registered in different member states share the same COMI, companies seeking to enter an
insolvency process in a member state cannot assume that the courts of that member state will
adopt a similar approach to that seen in other cases and apply it in a consistent manner, or
indeed at all.
2.77 Finally, although consolidated proceedings are run in accordance with the law of the state in
which proceedings are opened, local laws will still govern such matters as employee rights,

105
Cited by M Heron and G Moss QC, Building Europe: The French case law on COMI (2007) 20(2)
Insolvency Intelligence 21.
106
Eurotunnel Finance Limited (Paris Commercial Court, 2 August 2006).
107 Commercial Court of Beaune, 16 July 2008.
108 As discussed below, this has led, in some cases, to the courts authorizing requests to courts of other

member states for office holders in the main proceedings to oppose the opening of secondary proceedings where
steps are being taken by those office holders to ensure that the interests of local creditors are protected.

58
 III. Managing the Insolvency of Group Companies

retention of title, and the exercise of security rights, in accordance with the exceptions set out
in Articles 515 inclusive, which may be in conflict with the law of the state of opening.

5. Management of local creditors interests in group restructurings

In the restructuring of a multi-national group, particularly where proceedings have been 2.78
consolidated in one member state, there is a risk that the rescue process would be impaired if
local creditors were to open secondary proceedings. To prevent this from happening, consid-
eration may need to be given to requesting the court of the member state in which main
proceedings have been opened to seek the assistance of the courts of member states in which
subsidiaries have establishments. This approach was adopted by the administrators in Nortel
Networks,109 a case involving a number of European companies within the Nortel group. In
the initial hearing before the English court, Blackburne J made orders authorizing the
administrators to make discretionary payments out of the relevant companies assets to
employees and preferential creditors corresponding to the amounts they would receive in the
event that secondary insolvency proceedings were commenced in other member states. In so
doing, he ensured that local creditors would receive fair treatment in the absence of second-
ary proceedings. The administrators subsequently made a further application to the court to
request that the courts of those other member states be asked to notify them of any requests
or applications for the opening of secondary proceedings and to enable them to make sub-
missions opposing the proposed opening of secondary proceedings, should any such appli-
cations be made. This would provide them with an opportunity to explain to the relevant
court why such proceedings would not be in the interests of the creditors. Patten J granted
the request, finding it highly desirable in the circumstances, and duly authorized the send-
ing of appropriate letters to the judicial authorities in those member states.
It is noteworthy that, in the course of his deliberations, Patten J found the obligation under 2.79
Article 31(2) on liquidators in main and secondary proceedings to cooperate with one
another extended to the courts. He also considered the application of Article 33(1), which
provides for the court that has opened the secondary proceedings to stay the process of liqui-
dation at the request of the liquidator in the main proceedings, subject to suitable measures
being taken to guarantee the interests of creditors in the secondary proceedings. However,
while acknowledging that this would halt the realization of assets located in the state of the
secondary proceedings, he recognized that it would not be appropriate to seek a stay in
the circumstances as it would not prevent the continuation of winding up proceedings in the
member states in which each of the Nortel companies was incorporated. Furthermore, the
effect of the commencement and continuation of secondary proceedings was likely to cause
the relevant company to cease to trade save for the purposes of winding up which would
hinder the planned reorganization of the Nortel group.
In reaching his conclusions, Patten J had regard to the decision in the Collins & Aikman 2.80
case,110 where the administrators had similar concerns about the damage that could result
from the opening of secondary proceedings. In that case, administrators were appointed over
24 of the European subsidiaries incorporated in ten different member states. Their preferred
strategy was to continue trading, obtain funding, and enter into a sale process on a group-
wide basis. The success of this plan would have been placed in jeopardy had secondary

109
Re Nortel Networks SA [2009] BCC 343.
110 Collins & Aikman [2006] BCC 861.

59
 The EC Regulation on Insolvency Proceedings

proceedings been opened in those member states where any of the group companies had
establishments. To prevent this from happening, the administrators gave oral assurances to
creditors that, if they refrained from issuing proceedings in other jurisdictions, their respec-
tive financial positions as creditors under the relevant local law would as far as possible be
respected in the English administration even though this would be contrary to the English
scheme of distribution. The court subsequently directed distributions and payments to be
made in line with local entitlements thereby enabling the administrators to honour the
assurances they had given to creditors.111 Finally, Patten J noted that, for the obligation to
cooperate to be effective, the court dealing with the application to open secondary proceed-
ings should be provided with the reasons why such proceedings might have an adverse effect
on the main proceedings. In both the Nortel Networks and the Collins & Aikman cases, local
priorities were respected so the need for local creditors to open secondary proceedings was
largely removed.112

IV. Application of the EC Regulation to Rescue Plans

A. Impact on Discharge and Variation of Debt

2.81 In any cross-border restructuring where the rescue of the debtor is contemplated, the risk
that debts and liabilities compromised in insolvency proceedings in one jurisdiction might
not be regarded in other jurisdictions as having been varied or discharged will require careful
analysis.
2.82 In cases where the EC Regulation applies, Article 4(2)(j) and (k) provide that the lex concur-
sus shall determine both the conditions for and the effects of closure of insolvency proceed-
ings in particular by composition and creditors rights after the closure of insolvency
proceedings.113 This suggests that any composition that is effective under the law of a com-
petent member state where main proceedings are opened (and listed in the annexes to the EC
Regulation) will be recognized in other member states as extinguishing all the debts covered
by the composition, irrespective of where they were incurred.114 Thus, in the case of an
English law company voluntary arrangement (CVA) entered into as a main proceeding, for
example, it will be recognized by, and have the same effect in, any other member state as it
does under English law, although any secured debts cannot be compromised without the
consent of the secured creditor. In territorial or secondary proceedings, the effectiveness of

111
This was achieved by using the power conferred by para 66 of Sch B1 to the Insolvency Act 1986. Had
secondary proceedings been opened, the ranking of claims would have been determined in accordance with
local law, as provided for under Art 4(2)(i).
112
In Public Prosecutor v Segard (as Administrator for Rover SAS) the Versailles Court of Appeal stated that
the applicant must show a valid purpose, such as the protection of local interests or the realization of assets, to
justify opening secondary proceedingssee Moss et al (n 3 above) para 8.153.
113
In contrast, the discharge and variation of debts is not expressly recognized in the Cross-Border Insolvency
Regulations 2006see Chapter 4, section VIII.F.1.
114
In the Eurotunnel restructuring, the terms of the sauvegarde plan included compromising debt incurred
under financing agreements that were governed by the laws of another jurisdiction (England) although the issue
was never tested in the English courts.

60
 IV. Application of the EC Regulation to Rescue Plans

the discharge is subject to the qualification that creditors who have not consented to it can
pursue the assets of the debtor situated in another member state.115
Where main proceedings are opened in another member state, if the laws of that member 2.83
state permit the discharge or variation of debt, it must be recognized in England even if it is
not an effective discharge or variation under the law applicable to the contract.116
If the compromise includes the discharge of debts under loan agreements entered into with 2.84
the debtor which are governed by the law of another member state and the secured assets are
situated in that other member state, consideration will need to be given to how to protect
creditors in cases where the absence of an establishment precludes the opening of secondary
proceedings.117 This may simply be a matter, in the case of secured lenders, of ensuring that
the plan provides for them to be paid in priority to unsecured creditors in accordance with
their rights under the security documentation.

B. Use of Company Voluntary Arrangements in Main Proceedings

Before the implementation of the EC Regulation, CVAs were only available to UK- 2.85
incorporated entities and, in limited circumstances, to foreign companies when proposed by
a foreign liquidator seeking assistance under section 426 of the Insolvency Act 1986.118 They
are now listed as a main proceeding in Annex A, which means that any company, wherever
incorporated, can propose a CVA provided its COMI is situated in the UK.119 If the CVA is
approved then it will be binding throughout the EU.
A CVA has the advantage of being a flexible restructuring tool, which can often be swiftly 2.86
implemented with minimal court involvement. The process was used to good effect in the
restructuring of the UK businesses of Dana Corporation, the US automobile parts manufac-
turer, which filed for chapter 11 protection in the US in March 2006. The UK companies
had obligations under four defined benefit pension plans that they sponsored. The liabilities
attaching to these obligations represented the overwhelming majority of the UK creditors by
value and would have rendered the disposal of the UK businesses as part of any global restruc-
turing prohibitively expensive. The solution found was to transfer them to a special purpose
vehicle and subsequently compromise them by way of a CVA. This required the consent of
both the Pensions Regulator and the Pension Protection Fund. The fact that their approval
was forthcoming may encourage the use of CVAs in special purpose vehicles in future restruc-
turings where there are pension fund liabilities. CVAs have also been used to restructure

115 Articles 17(2) and 34(2).

116 It is also possible that main proceedings opened in another member state could provide for a discharge
or variation of secured debt governed by English law without the express consent of the secured creditor: see
Moss et al (n 3 above) para 6.56.
117 Moss et al (n 3 above) raise the question as to whether a secured creditor could enforce its security in

another member state where the borrowers assets are situated if it consents to a CVA in England and the CVA
has the effect of discharging the borrowers debt to the creditor. The Regulation is silent on this point.
118 An example of this can be found in the case of a BVI company, Michael David Rothschild Limited: see

M Rutstein, The proposal by a foreign liquidator for a CVA (1999) 12(8) Insolvency Intelligence 5759.
119 Even so, as acknowledged by Recital (10), a broad interpretation of the word court is required to bring

CVAs within the jurisdiction conferred by Art 3(1). Court is defined in Art 2(d) to mean a judicial body or
any other competent body of a Member State empowered to open insolvency proceedings or to take decisions
in the course of such proceedings. See the Virgos-Schmit Report (n 4 above), paras 52 and 66.

61
 The EC Regulation on Insolvency Proceedings

companies from other member states following the migration of their COMIs120 to England.
In this situation, they may hold additional appeal because their approval requires lower
creditor thresholds under English law. Examples of two high-profile restructurings using
CVAs post-migration can be seen in the Deutsche Nickel AG and Schefenacker cases.121
2.87 One potential disadvantage of a CVA is that it cannot be used to compromise secured debt
without the consent of the secured creditors.122 It can, however, provide for guarantees to be
treated as having been released, as evidenced in Prudential Assurance Co Ltd v PRG Powerhouse
Limited.123 In that case, Etherton J was prepared to recognize that a CVA was not designed
to regulate the affairs of any associated claims that a creditor might have against third parties
but that the principal debtor could include a term in the CVA that a creditor cannot enforce
obligations against a third party which would give rise to a right of recourse by the third party
against the debtor. This would have the effect of depriving the beneficiaries of a guarantee
granted by a third party in favour of the principal debtor. It was Etherton Js view that:
In terms of what legitimately may be encompassed within a CVA, there is no difference in
substance between an obligation of a creditor not to enforce a contract with a third party, on
the one hand, and an obligation of the creditor to deal with the third party as if the creditors
contract with the third party did not exist, on the other hand. If the former is enforceable by
the debtor company against the creditor, there is no legitimate policy reason, nor anything in
the relevant legislation, for holding the latter to be unenforceable by the debtor company.
2.88 In the event, the Powerhouse CVA could not be given effect because it was held to be unfairly
prejudicial to the beneficiaries of the guarantees.124 The case nonetheless confirms that a
claim against a third party, at least to the extent that its enforcement would give rise to a right
of recourse by the third party against the debtor, can be compromised. This may prove to be
valuable in a restructuring.

C. Use of Company Voluntary Arrangements and

Administrations in Secondary Proceedings
2.89 Arguably, CVAs can be proposed as a means of terminating secondary proceedings in accord-
ance with Article 34, on the basis that they amount to a composition. Article 34(2) provides
that closure in this way requires the consent of the liquidator in the main proceedings but, in
the absence of such consent, it may become final if the financial interests of the creditors in
the main proceedings are not affected by the measure proposed. Note, however, the concern
that because an English law CVA is not specifically listed as a winding up proceeding in the
UK section of Annex B it may not be viewed by the courts as a way to close secondary pro-
ceedings. This issue may ultimately need to be referred to the ECJ.125

120
COMI migration in the context of forum shopping is discussed in detail in section V.A of this chapter.
121
Discussed below in section V.B.1.
122
Section 4(3) of the Insolvency Act 1986. Note that an English CVA can provide for the variation or
discharge of all unsecured debt whatever the governing law. See Chapter 3 for a discussion on CVAs and their
role in restructurings.
123
Prudential Assurance Co Ltd v PRG Powerhouse Limited [2007] BCC 500 (for further consideration of
this point, see Chapter 3).
124 The same conclusion was subsequently drawn in Mourant & Co Trustees Ltd v Sixty UK Ltd [2010]

EWHC 1890 (Ch), which shared a number of factual similarities with the Powerhouse case (ibid).
125 See Moss et al (n 3 above) para 8.387.

62
 IV. Application of the EC Regulation to Rescue Plans

The administration process, in contrast, is listed in Annex B as a winding up proceeding, 2.90

whether by way of a court-based or an out of court appointment. Its inclusion followed the
introduction of the new administration regime under the Enterprise Act 2002, which allows
a company to exit from administration by way of a creditors voluntary liquidation. It seems
likely that administration should only be used in secondary proceedings where the adminis-
trator is of the opinion that the rescue of the company is not reasonably practicable. Its use,
therefore, would be confined to cases where its objective would be to achieve a better result
for the companys creditors as a whole than would be likely if the company were to be wound
up without first being placed in administration or to realize property in order to make a
distribution to secured or preferential creditors.

D. Schemes of Arrangement
A scheme of arrangement is not listed as a collective insolvency proceeding in the UK section 2.91
of Annex A and will not therefore enjoy the benefits of automatic recognition in other member
states.126 Instead, recognition will depend on the domestic law of the member state where it is
being sought. The EC Regulation may, however, have an indirect impact because the English
courts jurisdiction to sanction a scheme, which is conferred by section 895 of the Companies
Act 2006 (formerly section 425 of the Companies Act 1985), hinges on its jurisdiction to wind
up the scheme company in question. A company for these purposes means any company
liable to be wound up under the Insolvency Act 1986. This includes a company formed and
registered under the Companies Act 2006 or under the Companies Act 1985, or an existing
company for the purposes of that Act.127 It can also include a foreign company which, as an
unregistered company, may be voluntarily wound up in accordance with the EC Regulation if
it has its COMI in England.128 There is no indication in the Insolvency Act 1986 as to when
the English court will exercise its discretion to use its jurisdiction to wind up such a company
but three core requirements have been established by case law.129
The possible effect of the EC Regulation on the jurisdiction of the English courts to sanction 2.92
a scheme was first considered in Re Drax Holdings.130 In that case, the debtors were compa-
nies incorporated in the Cayman Islands and Jersey whose COMIs were located outside the
EU. The court found that the companies were unregistered companies and that it therefore
had jurisdiction to wind them up under the Insolvency Act 1986 or to sanction schemes of
arrangement and that the EC Regulation was not applicable.131 In the course of his delibera-
tions, Lawrence Collins J examined the principles that would lead the court to decide whether

126
However, it is possible that if it is entered into within the framework of an administration, which is listed
in Annex A, then it may be recognized in other member states pursuant to Art 4(2)(j). Article 4(2)(j) provides
that the law of the state in which proceedings are opened determines the conditions for and effects of closure of
insolvency proceedings, in particular by composition. Arguably, it may also be used as an exit procedure in
secondary proceedings.
127
Section 1 of the Companies Act 2006.
128
Section 221(4) of the Insolvency Act 1986.
129 These are that: (1) there must be sufficient connection with England; (2) there must be a reasonable pos-

sibility, if a winding up order is made, of benefit to those applying for the winding up order; and (3) one or more
persons interested in the distribution of assets of the company must be persons over whom the court has
jurisdiction.
130
Re Drax Holdings [2004] 1 WLR 1049.
131 Ibid at para 28.

63
 The EC Regulation on Insolvency Proceedings

to exercise its discretion to assume jurisdiction under section 425 of the Companies Act
1985. He concluded that the preconditions established by case law were to assist the court in
determining whether it should exercise that discretion and not in determining whether such
jurisdiction existed. He conceded that the distinction did not matter in most cases. However,
where the question is one of the courts jurisdiction to approve a scheme he concluded that
it was not necessary to meet the core requirements to wind up a foreign company, other than
to show that the company had a sufficient connection with England. He did not give any
consideration to the possibility that the court might not have jurisdiction to sanction a
scheme because the company in question had to be liable to be wound up under the
Companies Acts and that to be liable to be wound up under the EC Regulation it would have
to have its COMI or an establishment in England.
2.93 In the DAP Holding case,132 Lewison J agreed with the approach to jurisdiction adopted in
Re Drax Holdings. He went on to sanction the proposed scheme even though the EC
Regulation had no direct application to the case as the debtor, a Dutch company, had neither
its COMI nor an establishment in the UK. He reasoned that, when deciding whether a
company was liable to be wound up by the English court within the meaning of section 895
of the Companies Act 2006, requirements that are transient, such as the companys financial
position, did not need to be satisfied at the time that the court sanctioned the scheme. Also,
that as the company was free to change the location of its COMI or an establishment, it did
not matter that these tests were not satisfied at the time the scheme was sanctioned just as if,
had a winding up been sought at that time, there would have been no jurisdiction to wind
up the company. He concluded that there was nothing in the EC Regulation that precluded
the court from concluding that a foreign corporation like DAP Holding was liable to be
wound up. It should be noted that doubts have been expressed as to the reasoning underlying
this decision and it has been suggested that the question might simply be one of whether
there is domestic law jurisdiction rather than international jurisdiction where the sanction-
ing of a scheme is sought in these circumstances.133
2.94 The approach taken in DAP Holding was later followed in the La Seda case,134 in which a
Spanish-incorporated parent company obtained an order from the English court to sanction
a scheme of arrangement. Newey J, in the application for an order for permission to convene
the scheme meetings, found that it was the pre-Insolvency Regulation English test for wind-
ing up that applied, not the new test under the EC Regulation.135
2.95 In cases where the debtor has neither its COMI nor an establishment in England, considera-
tion could also be given to migrating the debtors COMI to the UK so that it would then fall
within the courts discretion to sanction a scheme. This was the approach taken in the restruc-
turing of British Vita, where a scheme of arrangement was used to bind the junior creditors
of a Luxembourg-incorporated holding company.

132
Re DAP Holding NV [2006] BCC 48.
133
L Chan Ho Schemes for foreign insurershow the court got it so wrong: Re DAP Holding NV (2005)
21(5) Insolvency L and Practice 171174.
134
La Seda de Barcelona SA [2010] EWHC 1364 (Ch).
135
Sufficient connection was evidenced by the fact that the proposed scheme related primarily to the rights
of lenders under a senior facilities agreement which was governed by English law and subject to the jurisdiction
of the English courts. In addition, many of the lenders were based in the UK and would therefore benefit from
the proceedings and La Seda had subsidiaries, a branch office, and an employee based in the UK.

64
 V. Forum Shopping as a Restructuring Tool

The EC Regulation is, however, relevant in cases where the principal debtor, which may be 2.96
the subject of a scheme of arrangement, has subsidiaries located in other European jurisdic-
tions that are guarantors of the debt. A scheme does not, in itself, affect the liability of the
guarantors. However, in one of the cases in the Lehman administration,136 the Court of
Appeal considered whether a scheme could extend to rights held by creditors that are con-
nected to the subject matter of their claims against the company such as claims against third
party sureties under a guarantee. The court, referring to an earlier judgment of David
Richards J in T&N (No 3) Ltd,137 expressly considered the courts jurisdiction to approve a
scheme which varies or releases creditors claims against the company on terms which require
them to bring into account and release rights of action against third parties designed to
recover the same loss. Although obiter dicta, Patten LJ commented: the release of such third
party claims is merely ancillary to the arrangement between the company and its own credi-
tors.138 However, where the guarantor is an overseas company, or where the guarantee is not
governed by English law, a further question may arise as to whether this release of the guar-
antee through the terms of the scheme will be recognized in other jurisdictions. If there is a
concern about recognition then another solution may need to be found. These cases demon-
strate that, although the EC Regulation does not include schemes of arrangement as collec-
tive insolvency proceedings under Article 1, it is nonetheless relevant in considering their
implementation in a restructuring context, particularly of pan-European groups.

V. Forum Shopping as a Restructuring Tool

A. Introduction
The practice of migrating a debtors COMI to another member state in order to avail the 2.97
debtor of a more advantageous insolvency regime has proved in some cases to be a valuable
restructuring tool. However, it is also one that has generated a lot of debate, raising questions
as to the legitimacy of its use in cases where the migration results in the disenfranchisement
of some of the stakeholder groups. This section will examine the controversy surrounding its
use and the different forms of migration used to achieve a shift in COMI. It goes on to exam-
ine the extent to which forum shopping has received judicial support and considers whether
the issues relating to whether member states whose national laws restrict migration are in
breach of the fundamental principle of freedom of establishment, now enshrined in Article 49
of the Treaty on the Functioning of the European Union (TFEU), have been resolved.
1. Background
Recital (4) suggests that forum shopping is to be discouraged: It is necessary for the proper 2.98
functioning of the internal market to avoid incentives for the parties to transfer assets or
judicial proceedings from one Member State to another, seeking to obtain a more favourable
position (forum shopping). One of the stated aims of the EC Regulation is, therefore, to

136 In the matter of Lehman Brothers International (Europe) (in administration) [2009] All ER (D) 83, CA.
137 T&N (No 3) Ltd [2007] 1 BCLC 563.
138 This statement was also cited with approval in the La Seda case (n 134 above) in which the court sanc-

tioned a scheme that included among its terms the release of an English-incorporated guarantor.

65
 The EC Regulation on Insolvency Proceedings

prevent debtors from seeking out the most suitable jurisdiction in the EU in which to file for
insolvency or to effect a restructuring.
2.99 However, as has been widely noted and is evident from the case law, the EC Regulation has
in fact facilitated forum shopping because, rather than attempting the Gargantuan task of
harmonizing the existing insolvency regimes of individual member states,139 it has left the
existing regimes in place, some of which offer more attractive restructuring opportunities
than others. For as long as this disparity exists, there will be an incentive for debtors to move
their COMIs in search of a more favourable regime. This, coupled with the absence of a clear
definition of COMI, means that the EC Regulation has arguably had the opposite effect to
its stated aim. As one commentator puts it: Ironically, the European Regulation, which was
introduced partly to prevent forum shopping, has itself become a major tool for just that,
and migration is the most recent method of forum shopping.140 It should also be noted that,
despite the bold statement in Recital (4), the EC Regulation does not contain any clear pro-
visions on how to prevent or police forum shopping.141
2.100 So exactly what is wrong with forum shopping, and should EU legislators be trying to pre-
vent it or to promote it? The debate is essentially one of certainty versus flexibility and, as
will be seen, is not merely one of pure theoretical interest; rather, it directly informs how the
courts of member states approach the question of COMI, and therefore the extent to which
corporate insolvencies and restructurings can be effected by a migration of COMI.

2. The underlying rationale: the need for certainty

2.101 At the heart of insolvency law is the balancing act between the need for certainty for creditors
on the one hand, and for flexibility in the event of a debtors insolvency on the other. Creditors
want certainty and predictability as to the location of the debtors COMI throughout their
relationship with the debtor since that is what will determine the law to be applied if the
debtor becomes insolvent. If the creditor knows which law will be applied in the event of the
debtors insolvency at the time of contracting with the debtor it will be in a better position to
assess the likelihood of recovery, its ability to determine the direction of the insolvency proc-
ess, and the practicality of enforcing any security it has taken. For these reasons, the creditor
will want to establish where the debtors COMI is situated before entering into a contractual
relationship with it, so that it may accordingly provide for and price the risk of advancing
credit. A debtor with its COMI in a jurisdiction that is deemed less creditor-friendly than
others can expect to pay an additional cost to compensate the creditor for the risk it takes in
lending. The debtor may also be subjected to more stringent obligations under the terms of
the finance documents.
2.102 A creditor may nonetheless find itself subject to an insolvency regime that it had not antici-
pated, and with which it may not be familiar, if the location of a debtors COMI is uncertain
or has shifted after credit has been advanced. This may again place the creditor in a less
advantageous position as regards restructuring talks or recovering what it is owed. There is

139 But note the European Parliament Report, Harmonisation of Insolvency Law at EU Level (2010),

which identifies a number of areas of insolvency law where harmonization at EU level is achievable and evalu-
ates to what extent harmonization of insolvency law could facilitate further harmonization of company law in
the EU.
140
S Moore, COMI Migration: the future (2009) 22(2) Insolvency Intelligence 26.
141 G Mitchell and R Brent, Establishing jurisdiction in insolvency cases (2005) 155(7202) NLJ 1819.

66
 V. Forum Shopping as a Restructuring Tool

also concern that a debtor may be able to forum shop within the EU to evade creditors,
which would result in reduced recoveries by the creditors.
However, the need for certainty must be balanced with the competing need for flexibility 2.103
when dealing with a debtor in order to achieve the best possible outcome on insolvency.
Under English law, there has been a shift away from insolvent liquidations, which tend to
return limited value to a small class of creditors, in favour of corporate rescue and recovery.
This trend acknowledges that the best possible solution for a financially distressed debtor is
likely to be one that seeks to provide a better return for a wider range of stakeholders, includ-
ing the debtors shareholders and employees, and will preserve the debtor company or its
business wherever possible.
The cases discussed below demonstrate the importance of flexibility when trying to rescue a 2.104
company while maximizing creditor returns. The ability to migrate a debtors COMI in
order to use the most appropriate restructuring tools available under the laws of another
member state has allowed many companies to continue to trade and restructure their debts
in ways which would not have been possible, or would at least have been much more diffi-
cult, under their original local laws.

3. Why forum shop?

Companies often seek to migrate their COMIs in order to take advantage of what are per- 2.105
ceived to be more flexible restructuring processes than those available under the law of the
member state in which they were incorporated.142 This can be seen in a line of cases involving
German companies migrating their COMIs to England. In so doing, these companies were
able to escape the filing deadlines and stricter obligations imposed upon their directors when
the company was either approaching insolvency or insolvent. They were also able to escape
the uncertainties associated with the implementation of a German insolvency plan whereby,
if a creditor who is likely to be better off without the plan raises an objection to it, the court
may refuse its consent even though the requisite consents from all the creditor classes have
been obtained. In addition, the insolvency processes available under English law, in particu-
lar CVAs and administrations (including those involving pre-pack business sales) are capable
of maximizing value for creditors. This has resulted in England, which is generally consid-
ered to be a creditor-friendly jurisdiction, becoming one of the preferred jurisdictions for
European restructurings.
Another significant motivation for forum shopping is to subject the debtor to insolvency and 2.106
restructuring proceedings that are familiar to the stakeholders involved. The Schefenacker
restructuring (discussed below), where approximately 90 per cent of the creditors were based
in the UK or the US, is a prime example of this. It has been argued that the psychological
importance of using a familiar restructuring regime should not be underestimated.143 This is
particularly so where a debtor has a significant number of US lenders, who tend to be more
familiar with the English insolvency and restructuring regimes than other European restructur-
ing processes. There is also an obvious practical advantage to sharing a common language.

142
See the discussion on Deutsche Nickel, Schefenacker and Hans Brochier in Sections V.B.1 and V.B.2. For
other advantages of English insolvency and restructuring law over German law, see Dr A Tashiro, German
Companies heading towards England for their Rescue (2007) 4(4) Intl Corporate Rescue 171177.
143
W Ringe, Forum Shopping under the EU Insolvency Regulation (2008) 9 European Business
Organisation L Rev 600.

67
 The EC Regulation on Insolvency Proceedings

2.107 Allied to this, it is important to recognize that, in large-scale corporate insolvencies, forum
shopping is frequently instigated or supported by some or all of the creditors. The Schefenacker
case is a good example of a COMI migration undertaken to facilitate an English restructur-
ing which was approved by the companys creditors. Indeed, it has been argued that the fact
that creditors often suggest moving the debtors COMI can and must be taken to be a
remarkable indication of a more efficient insolvency procedure.144
2.108 Another important incentive for forum shopping in England is that English insolvency law
is considered to be more established, and therefore more predictable, than the insolvency
laws in some other European jurisdictions. This was the case in the Damovo restructuring,
one of the first instances of COMI migration under the EC Regulation. Damovo, an IT
consultancy, was acquired by a private equity firm following a leveraged buy-out in 2001.
This acquisition had resulted in Damovo shouldering the burden of a high-yield bond on
which it defaulted in October 2007. The company migrated its COMI to London from
Luxembourg in order to carry out a pre-packaged administration sale of the business under
English law. This strategy was adopted because the interested parties and their advisers pre-
ferred to carry out the restructuring in a jurisdiction where the relevant insolvency process
was more developed and predictable.
2.109 There are a number of other reasons why, depending on the nature of a debtors distress and
the factual circumstances, a migration of COMI may be desirable. These include:
(a) the ability of a stakeholder to choose who is appointed as insolvency office holder;
(b) the ability of an insolvency office holder to review antecedent transactions;
(c) the efficiency with which the courts in the target jurisdiction hear proceedings;
(d) the ability to make use of restructuring processes that require less court involvement;
(e) the ease of enforcement of security;
(f )the location of other debtor group companies and the ability to place as many group
companies as possible into the same process or legal framework; and
(g) the ease of selling all or parts of the debtors business to realize maximum value.
2.110 The critics of forum shopping have nonetheless raised concerns about creditors being disen-
franchised from and prejudiced in proceedings in the target jurisdiction. This is particularly
so because, once a court has opened proceedings, any challenge to that courts jurisdiction
must be made in the target jurisdiction. This will entail a review by the court that has asserted
jurisdiction of its own decision and may require referral to the ECJ. The cost, complications,
and delays associated with such a challenge may act as a deterrent for smaller creditors and
third parties.

4. Forum shopping: judicial support

2.111 The Court of Appeal considered a debtors entitlement to forum shop, and the need for vigi-
lance on the part of the courts, in the Shierson case,145 where Chadwick LJ commented:
It is a necessary incident of the debtors freedom to choose where he carries on those activities
which fall within the concept of administration of his interests, that he may choose to do so
for a self-serving purpose. In particular, he may choose to do so at a time when insolvency
threatens. In circumstances where there are grounds for suspicion that a debtor has sought,

144
Ibid at 604.
145 Shierson v Vlieland-Boddy [2005] 1 WLR 3966, CA at 55.

68
 V. Forum Shopping as a Restructuring Tool

deliberately, to change his centre of main interests at a time when he is insolvent, or is threat-
ened with insolvency, in order to alter the insolvency rules which will apply to him in respect
of existing debts, the court will need to scrutinise the facts which are said to give rise to a
change in the centre of main interests with that in mind. The court will need to be satisfied that
the change in the place where the activities which fall within the concept of administration of
his interests are carried on which is said to have occurred is a change based on substance and
not an illusion; and that that change has the necessary element of permanence.
Similarly, AG Colomer distinguished between good and bad forum shopping in the opinion 2.112
he delivered to the ECJ in the Staubitz-Schreiber case.146 It was his view that good forum
shopping consists of ensuring that the COMI is located in the best place to reorganize
the company and its group for the benefit of creditors and, possibly, other stakeholders.
Bad forum shopping occurs where the debtor acts for selfish motives to benefit itself or its
shareholders or directors at the expense of creditors. He noted that forum shopping, in the
absence of uniformity of private law systems, was merely the optimisation of procedural
possibilities . . . which is in no way unlawful147 but went on to say that where forum shop-
ping leads to unjustified inequality between parties . . . the practice must be considered and
its eradication is a legitimate legislative objective.148 AG Colomer subsequently repeated
these views in the opinion he issued in Seagon:149
As the regulation intimates, forum shopping is not a completely unlawful practice.
The Community legislation counters the opportunistic and fraudulent use of the right to
choose a forum, which is very different to the demonisation for the sake of it of a practice
which on occasions it is appropriate to encourage.
In Re TXU Europe German Finance BV,150 the registrar presiding over a creditors voluntary 2.113
winding up of debtor companies incorporated in the Netherlands and the Republic of
Ireland which had moved their COMIs to England, stated that he may not have granted
an order for a winding up if there had been evidence that the COMI migration had preju-
diced creditors. In another case, the Cologne Insolvency Court in the PIN Group restructur-
ing151 reiterated that it was not illegal to move a debtors COMI to take advantage of legal
restructuring tools in other member states. The practice received further judicial endorse-
ment in Wind Hellas,152 where Lewison J stated
It is also the case as one might expect in a system of law which encourages a single market
across the whole of the European Union that it is possible for an entity, whether a corporate
entity or an individual, to change its COMI from its original or presumed location.
These cases demonstrate that, despite the apparent censure of forum shopping in Recital (4), 2.114
there are likely to be circumstances in which forum shopping will be acceptable and even

146
For a more detailed discussion of this case, see section II.E.2.
147
Opinion of AG Colomer in Case C-1/04 Staubitz-Schreiber [2006] ECR I-701 paras 7177 (delivered
6 September 2005).
148
See also G Moss et al (n 3 above) para 8.101. For an analysis of COMI migration by individual debtors
see B Wessels, Moving House: Which Court Can Open Insolvency Proceedings?, International Insolvency
Institute (paper based on a public lecture given at the Johann Wolfgang Goethe University, Frankfurt, Germany,
25 November 2003).
149
Case C-339/07 Seagon v Deko Marty Belgium NV [2009] ECR I-767.
150 [2005] BCC 90 at 19.
151 PIN Group AG SA (AG Koln, 19 February 2008 73, IE 1/08, ZIP 2008 423) cited in R Janjuah, Court

allows change of COMI to bolster cross-border group restructuring, 3 October 2008, Intl L Office.
152 Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295.

69
 The EC Regulation on Insolvency Proceedings

prudent under the EC Regulation in order to maximize recovery proceeds and preserve
company value or viability or both. Clearly, the individual circumstances in each case will
govern whether moving the debtors COMI is appropriate and whether such a move can be
made without a challenge. However, forum shopping is likely to be considered by interested
parties in cases where the insolvency regimes of other member states will facilitate the
restructuring objectives of the debtor without unduly prejudicing the rights of stakeholders.
In some cases it may even be insisted upon by the major creditors.

B. Timing Post-Migration: When to Open Insolvency Proceedings

2.115 While a significant amount of academic and judicial time has been taken up with the consid-
eration of how to migrate a debtors COMI, questions relating to how soon after migration
the debtor can initiate insolvency proceedings appear to have caused less concern and confu-
sion. In some cases, the timing of the migration may be determined by reference to an
impact date in the restructuring plan by which time the debtor expects to have entered an
insolvency process. Getting the timing right when moving a debtors COMI for this pur-
pose is essential and will avoid challenges from interested parties on the grounds that the
attempted migration is a fraud or a sham.
2.116 The EC Regulation itself offers no guidance as to how long a debtor must conduct its inter-
ests in the new jurisdiction before it may safely initiate insolvency proceedings. As discussed
above, Recital (13) offers a starting point by stipulating that the COMI corresponds to the
place where the debtor conducts the administration of his interests on a regular basis (empha-
sis added). The use of the present tense (conducts) and the requirement for regularity sug-
gest that a debtor must be based and active in the target jurisdiction for a certain period of
time before its COMI will be viewed as being established following migration. Accordingly,
a debtor wishing to relocate its COMI in order to enter an insolvency restructuring process
in the target jurisdiction will need to be sure that when it initiates insolvency proceedings its
COMI will be deemed to have become established in the new jurisdiction.
2.117 Some member states, such as Spain and Italy,153 have introduced legislation stipulating a
minimum time period which a debtor, after migrating its COMI, must spend in the target
jurisdiction before commencing insolvency proceedings. France, on the other hand, has
legislated only for debtors moving their COMIs from one region within the territory of
mainland France to another. This requires a minimum period of six months following a
change of COMI before proceedings can be opened.154 There is no specified minimum
requirement under French law for an inbound migration from another member state.
English law contains no minimum time requirement. It focuses instead on the specific facts
and circumstances in the relevant case. In the Wind Hellas case the court was satisfied that the

153
In Spain, the migration must take place at least six months before commencing insolvency proceedings:
Art 10.1 of the Spanish Insolvency Act (Act 22/2003, dated 9 July, on Insolvency, Official State Gazette no 164,
dated 10 July 2003); in Italy, it must take place at least one year and one day before commencing insolvency
proceedings: Art 9 of the Royal Decree No 267 of 16 March 1942, as amended by the Legislative Decree No 5
of 9 January 2006.
154
Decree of 27 December 1985, Art. 1, para 2, as amended by Decree No 89-339, 29 May 1989 and
restated in Art 1, paras 23 of the Decree of 28 December 2005.

70
 V. Forum Shopping as a Restructuring Tool

company had migrated its COMI three months after registering as a foreign company at the
companies registry.155
In Re Ci4net.com Inc,156 the English court was asked to grant administration orders in respect 2.118
of two companies with registered offices in Delaware and Jersey but whose COMIs, accord-
ing to the creditor applicant, were in England. Langan J stated: A business must under the
Regulation have a COMI, and in my judgment, a COMI must have an element of perma-
nence. The debtors COMIs could not therefore be said to move around constantly as their
directors travelled internationally on business.
In Official Receiver v Eichler,157 a German locum doctor with creditors in Germany filed for 2.119
bankruptcy in England. In his outline of the facts, Chief Registrar Baister, while not required
to determine the point, referred to the fact the debtor had been working in England for the
greater part of six months prior to presentation of the petition (although it was not clear
exactly when the debtor moved to England):
As far as I am aware, there is no authority which establishes any minimum period of time
which a person must spend in a Member State before it can be said to have become his centre
of main interests. Common sense would seem to indicate that a few days (or even a few weeks)
would be unlikely to suffice because that would be at odds with conducting the administration
of ones interests in a place on a regular basis (as well as being at odds with the idea of habitual
residence).
Arguably, a different time period may be applicable to individuals, who are generally more 2.120
mobile than companies so can their migrate their COMI with relative ease. However, the
view of the judge in the Eichler case has been cited with approval in other courts.
The PIN restructuring in Germany demonstrates that in certain circumstances it is possible 2.121
to move a companys COMI and file for insolvency within as short a period of time as one
month. In PIN, the parent company, which was registered in Luxembourg but which had a
large number of subsidiaries in Germany, took steps to move its COMI to Germany on or
around 20 December 2007 and successfully opened main proceedings by filing for insol-
vency in Germany on 25 January 2008. The steps taken by the company during this period
were sufficient for the Cologne Insolvency Court to hold that its COMI had moved. These
steps included moving its statutory books, records, and offices to Cologne and taking all
decisions relating to management, company direction, and the restructuring there. The
company also notified creditors, employees, and business partners by press releases and
advertisements that it had moved its payments, accounting, sales, purchasing, planning, and
press relations to Cologne in that time. Only marginal functions were left behind at the
companys Luxembourg site and, on the basis of the evidence addressed, the court was satis-
fied that one months notice was sufficient to move the companys COMI.158

155
Note that doubts have been expressed as to whether a time limit can be imposed under national law when
the Regulation itself has not stipulated onesee M Virgos and F Garcimartin, The European Insolvency
Regulation: Law and Practice (2004) para 69.
156 [2005] BCC 277 at 26.
157 [2007] BPIR 1636 at 19.
158
T Schorling, PIN Group: German Courts Take a Practical Approach to the Insolvency of a Group of
German Companies with a Luxembourg Parent (2008) 5(6) Intl Corporate Rescue 330332.

71
 The EC Regulation on Insolvency Proceedings

2.122 Thus, a common sense approach to analysing the specific facts of each case, like that taken
by the court in the Eichler case,159 appears to underlie the decisions as to whether a sufficient
amount of time has elapsed in order to conclude that a companys COMI has been moved to
a different jurisdiction, thereby enabling it to enter an insolvency process. The courts will
assess a variety of facts but, in light of the ECJs decision in the Eurofood case,160 and the
recent reaffirmation of this approach by the Court of Appeal in the Stanford case,161 emphasis
is likely to be placed on the perspective of third parties and whether, if they have had prior
dealings with the debtor, they have had time to adjust to the debtors move of COMI. The
debtor may therefore be able to file for insolvency within a short period of time after moving
its COMI, provided there is clear evidence that third parties have adjusted to the debtors
new location and consider it to be the debtors COMI.

1. Migrations involving transfer of registered office

2.123 As evidenced by the case law, a distinction can be drawn between, on the one hand, COMI
migrations which involve winding up the companys operations and transferring its regis-
tered office to its target jurisdiction and, on the other hand, a gradual migration involving a
series of separate changes to the debtors business arrangements resulting in the eventual
relocation of the debtors COMI, without necessarily moving the registered office. In the
former case, the transfer is achieved either by dissolving the company in its home member
state and establishing a new legal entity in the target jurisdiction or by establishing a new
legal entity in the target jurisdiction and then merging both undertakings.
2.124 The need for this form of migration arose in Germany largely because, as a matter of German
corporate law, companies were required to have both their operational headquarters and
their registered offices in Germany. They could not therefore migrate their COMIs to another
member state without also migrating their registered office or statutory seat. This issue has
now been addressed as part of the programme to modernize German corporate law162 and
German companies can now move their COMIs to another member state without the need
to incorporate a new company in the target jurisdiction.
2.125 The early case law is nonetheless instructive and remains relevant for companies incorpo-
rated in member states that do not permit a company registered in its territory to transfer its
COMI to another jurisdiction without also deregistering from its home member state. Two
German cases in particular, Deutsche Nickel and Schefenacker, provide examples of migration
requiring registration as a new company in the host member state. Deutsche Nickel AG, the
operating subsidiary of Deutsche Nickel Group, was the first German company to migrate
to England. It had been incorporated as a private limited company under German law and
had encountered financial difficulties in 2004 due to a fall in demand for euro coins, which
it manufactured. At that time, the company had approximately 120 million of bank debt
and a similar amount of bondholder debt. It had attempted a restructuring by way of a debt
for equity (schulderverschreibungsgesetz) swap under German law but this had failed, as the
required consent threshold had not been reached. Many of Deutsche Nickels lenders and

159
Ibid at 50.
160
Case C-341/04 Re Eurofood IFSC Ltd [2006] ECR I-3813.
161
In the Matter of Re Stanford International Bank Limited [2009] BPIR 1157.
162
The Statute for the Modernisation of Limited Liability Company Law and the Combat of Misuse
(MOMIG) came into force on 1 November 2008.

72
 V. Forum Shopping as a Restructuring Tool

bondholders were familiar with English law and decided that a CVA would be an easier and
more effective process than those available under German law at that time, and that the
company should therefore migrate its COMI in order to benefit from the English regime.
The migration took place in several phases. First, the shares in Deutsche Nickel were sold to 2.126
an English registered vehicle, DNick Ltd. Deutsche Nickel was then converted into a German
limited partnership, to which DNick Ltd became a general partner, and another English
special purpose vehicle, EU Coin Ltd, became limited partner. EU Coin Ltd then withdrew
from the partnership and, under the German law of universal succession, all assets and liabil-
ities of the limited partnership passed to DNick Ltd and the partnership, with only one
remaining partner, ceased to exist. DNick Ltd then transferred all the operating entities into
newly incorporated English companies, and incorporated another company, DNICK
Holdings plc, as the new group parent. Finally, DNick Ltd filed for insolvency in the High
Court in London and an administrator was appointed by the court in April 2005. Two
months later, the creditors of DNick Ltd approved a proposal for a CVA and the metamor-
phosis into a viable, English registered company was complete.
The case of Schefenacker, two years later, followed a very similar metamorphosis and migra- 2.127
tion process to that of Deutsche Nickel, with equal success. Schefenacker AG was a German-
incorporated, medium-sized, car parts manufacturer, which supplied automotive parts to
BMW and Mercedes. Around the middle of 2006, the company began to encounter increas-
ing problems maintaining its capital structure and commenced contingency planning for a
restructuring. It seems likely that the success of Deutsche Nickel, and the same desire to find
a more flexible restructuring regime, were major factors behind the company and its credi-
tors deciding that it should migrate its COMI to England and use a CVA to compromise
debts of approximately 500 million through a debt for equity swap.
Schefenacker is frequently cited as the model COMI migration in which a company is res- 2.128
cued from the verge of collapse. However, there are several important reasons why, even
though the migration was successful, it was not, in the view of the insolvency office holders
who put the voluntary arrangement in place, a mandate for every non-UK company to
switch to England to achieve a restructuring that might not be easy in their homeland.163
Instead, it was a combination of specific circumstances and the terms of the restructuring
that ensured a successful migration. First, although the company was German, it was a pure
holding company; its significant global operating companies were spread across 12 jurisdic-
tions, including Asia and North America. Secondly, the company had no direct trade
creditors, and no employees in Germany. Its only creditors were financial and institutional
lenders, approximately 90 per cent of whom were based in the UK. Thirdly, it was a privately
owned family company, whose only major shareholder agreed as part of the restructuring to
inject about 20 million and relinquish about 100 million in claims in return for a 25 per
cent stake in the restructured company. Fourthly, the vehicle set up to act as general partner
in the interim stage of the restructuring was a newly incorporated English company with no
connection to Germany and which had never carried out any operations in Germany. Finally,
and perhaps most significantly, the company, like Deutsche Nickel, had the consent of its
secured lenders and the majority of its bondholders to the reorganization plan.

163 S Bewick, Schefenacker plc: A Successful Debt-for-Equity Swap (2008) 5(2) Intl Corporate Rescue.

73
 The EC Regulation on Insolvency Proceedings

2.129 However, while Schefenacker and Deutsche Nickel have been hailed as model migrations,
other companies have not achieved the same degree of success. Hans Brochier (discussed
below) can be viewed as the case which serves as a chastening warning to parties contemplat-
ing migration to exercise the utmost care when planning the migration process.

2. Failed migration: practical lessons from Hans Brochier

2.130 Not all migrations achieve the desired result, as can be seen in Hans Brochier Ltd v Exner,164
the first reported case of a company that failed to migrate its COMI from Germany to
England. An analysis of the key facts distinguishes it from Deutsche Nickel and Schefenacker.
2.131 Hans Brochier GmbH & Co KG was a German construction business based in Nuremburg
that sought to replicate the restructuring method used in Deutsche Nickel. It incorporated an
English company, Hans Brochier Holdings Ltd (HBH), to which the assets and liabilities of
the German company were to be transferred. However, whereas in Deutsche Nickel and
Schefenacker, a further English company was installed between the company receiving the
assets and liabilities, and the operating subsidiaries, in Hans Brochier a second English com-
pany was not incorporated. Therefore, although HBH was registered in England, its business
operations and COMI remained in Germany. This proved to be the first mistake made in the
restructuring process.
2.132 The ensuing events are complicated but in summary, the directors, concluding that HBHs
COMI was in England, appointed an English administrator to the company, using the out
of court procedure. This was done in hurried circumstances, due to the growing unrest of the
companys plant workers in Germany. However, it emerged that within an hour of the
English administrators appointment, German employees of HBH had applied to the local
court in Nuremburg to appoint a German administrator on the basis that the companys
COMI was in Germany. The Nuremburg court, unaware of the administration proceedings
in England, agreed that the companys COMI was in Germany and appointed a German
insolvency office holder. After further analysis in the days following their appointment, the
English administrators agreed with the German court that the companys COMI was indeed
still in Germany and accordingly obtained an order from the English court declaring their
appointment to be void.
2.133 HBHs directors then attempted to open secondary proceedings in England by a second
appointment of administrators, on the grounds that even if main insolvency proceedings
could not be opened there, HBH did at least have an establishment in England for the pur-
poses of Article 3(2). However, the German insolvency office holder successfully challenged
this appointment. On the evidence provided, it was clear that, although the registered office
of the company was in England, the company itself was little more than a letterbox company;
there was a very weak connection with England and no economic activity was carried out
there. The High Court ruled that it did not have jurisdiction to open secondary proceedings
as the company, while incorporated in England and Wales, did not have an establishment in
the jurisdiction.
2.134 In the High Court application to declare the administrators appointment void, Warren J
reviewed the evidence provided to the administrators by the company that had led them to

164 Hans Brochier Ltd v Exner [2007] BCC 127.

74
 V. Forum Shopping as a Restructuring Tool

conclude that HBHs COMI was in England. This included that the companys registered
office was in England; employment contracts were made with the English company; credi-
tors knew that they were owed debts by an English company; the companys bank account
was in England; its financial statements were prepared in the UK by consolidating trading
figures from German branches, and one creditor had threatened to issue a statutory demand
in London for unpaid debts.165 However, these factors gave a semblance of migration with-
out having a sound basis and when the administrators visited the companys site in
Nuremberg they were provided with overwhelming evidence that HBHs COMI was
located in Germany.
The first lesson to be drawn from the case is that simply moving the registered office or incor- 2.135
porating a company with a registered office in the target jurisdiction as a holding company
will not be sufficient to move that companys COMI, or indeed to create an establishment,
for the purposes of the EC Regulation.
The second lesson is that the directors of a debtor company must carefully consider whether 2.136
its COMI, and not merely its registered office, has moved, before opening proceedings in the
target jurisdiction. The insolvency office holder should also conduct their own independent
evaluation of whether the companys COMI has moved, preferably well in advance of their
formal appointment. Clearly, the office holder will be assisted by the directors in this exercise
but the case does illustrate the danger of over-reliance on the directors understanding or
representation of the facts. It should be noted that, in the Hans Brochier case, the out of court
appointment of the administrator appears to have been carried out in urgent and expedited
circumstances where it may not have been possible to conduct a full investigation.
The third lesson is the need to be wary of such out of court appointments that, if made in the 2.137
erroneous belief that the companys COMI is in England, may result in significant cost and
damage to the business at a time when it is fighting for survival. In a court-based appoint-
ment, on the other hand, the court will review the evidence as to the location of the debtors
COMI before deciding whether to grant the application to make such an appointment.
Finally, the case demonstrates the desirability of obtaining the consent of key interested par-
ties where possible before opening main proceedings following a change in COMI. In the
Deutsche Nickel and Schefenacker cases, the companies had obtained the overwhelming sup-
port of their creditors prior to migration, and in Schefenacker there were no employees in
Germany who would be prejudiced by moving the companys COMI and carrying out the
restructuring in England rather than Germany.
In contrast, the Hans Brochier case revealed that even before HBH appointed English admin- 2.138
istrators, unrest was mounting among its 700 Germany-based employees due to unpaid
wages. Under German employment and social security law, these employees would have
been entitled to three months wages while the company was in a German insolvency
process. There was, therefore, a clear reason for the hostility towards a restructuring under
English law, which lacks such employee protection. In his judgment, declaring the admin-
istrators appointments void, Warren J attached some significance to these rights and the
fact that only a German insolvency office holder would be capable of addressing them
adequately.166

165 Ibid at 9.
166 Ibid at 29.

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 The EC Regulation on Insolvency Proceedings

2.139 The practical effect of this last point is that where a debtor seeks to move its COMI, it will
often be desirable to obtain the consent of as many stakeholders as possible, which may
include shareholders, employees, tax and regulatory authorities, as well as lenders and trade
creditors, and to assess the risk of challenge from such parties. This may involve seeking legal
advice on the law of the jurisdiction from which the debtors COMI is to be migrated.
3. Migration without a change in registered office
2.140 Companies in some member states have been able to migrate their COMIs to facilitate a
restructuring in another member state without having to undergo any form of corporate
transformation. Two cases involving Luxembourg-registered companies provide helpful
examples of this.
2.141 In Re Damovo Group SA,167 the company sought to restructure its bondholder debt by way
of a pre-pack administration sale. The steps it took to migrate its COMI included moving its
head office functions, notifying suppliers, creditors, and counterparties of its address in
England, establishing bank accounts and holding board meetings in England. These actions
were disclosed to the English court in the application to appoint administrators.
2.142 Similarly, in the Wind Hellas case,168 a series of steps were taken by a Luxembourg-registered
finance company, Hellas Telecommunications (Luxembourg) II SCA to move its COMI to
England as part of a plan to avail itself of a jurisdiction which the group considered would
afford greater flexibility for restructuring. These steps included appointing an English-
registered group company as corporate general partner and appointing individuals resident
in the UK as its directors and as members of its supervisory board. The objective and ascer-
tainable facts on which it relied to support its claim that it had shifted its COMI from
Luxembourg to England were that its head office and principal operating address were then
in London, that the companys creditors were notified of its change of address around the
time of its relocation and that an announcement was made by way of a press release that its
activities were shifting to England. It had opened a bank account in London and all pay-
ments were made into and from that bank account (although an account remained open in
Luxembourg to deal with minor miscellaneous payments). It registered under the Companies
Act 2006 as a foreign company. Finally, in what Lewison J considered to be one of the most
important features of the evidence, all negotiations between the company and its creditors
took place in London. This provided clear evidence that the creditors considered the com-
panys COMI to be located in England. The court was therefore able to open main proceed-
ings and grant an administration order in respect of the company.

C. Freedom of Establishment
2.143 Another aspect of the forum shopping debate concerns whether a debtors ability to move its
COMI as part of a coherent restructuring plan has the support of EU law under the principle of
freedom of establishment or whether it may be limited by the national laws of a member state.
2.144 Recital (4) states that it is necessary for the proper functioning of the internal market to
avoid forum shopping. However, as discussed elsewhere in this chapter, the success of the

167
High Court, April 2007.
168 Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295.

76
 V. Forum Shopping as a Restructuring Tool

EC Regulation in achieving this aim, and indeed the legitimacy of such an aim, has been
widely questioned. The proponents of forum shopping have, however, drawn attention to
the apparent contradiction between the anti-forum shopping stance of the EC Regulation
and the principle of freedom of establishment enshrined in Articles 49 and 54 TFEU (previ-
ously Articles 43 and 48 of the Treaty of the European Community). Article 49 of the EC
Treaty provides:
Within the framework of the provisions set out below, restrictions on the freedom of establish-
ment of nationals of a Member State in the territory of another Member State shall be prohib-
ited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or
subsidiaries by nationals of any Member State established in the territory of any Member State.
It goes on to state: 2.145
Freedom of establishment shall include the right to take up and pursue activities as self-em-
ployed persons and to set up and manage undertakings, in particular companies or firms
within the meaning of the second paragraph of Article 48, under the conditions laid down for
its own nationals by the law of the country where such establishment is effected, subject to the
provisions of the Chapter relating to capital.
Natural and legal persons within the EU are, therefore, free to pursue, take up and establish 2.146
economic activity in any member state in a stable and continuous way, without being sub-
jected to any discrimination on the basis of that persons nationality or, in the case of compa-
nies, its mode of incorporation. Insofar as companies are concerned, freedom of establishment
is most relevant to the legal framework governing incorporation and taxation; that is, for
companies deciding where to incorporate and operate when they are solvent, and the taxa-
tion issues arising from their choice of jurisdiction. Historically there has been significantly
less discussion on the principle of freedom of establishment in the context of insolvency. This
seems to be linked to the concern about insolvency forum shopping in particular, and the
fundamental philosophical differences between corporate law and insolvency law. Thus,
while it appears that there are minimal objections to a company having the right to move
into and retreat from different jurisdictions within the EU, or to organize itself in a tax-
efficient manner (where permitted under national laws)169 while it is financially sound it has
been agreed that that freedom should not apply when the company is distressed or insolvent.
Commentators have questioned the merits of making such a distinction.170
The freedom of establishment principle received judicial support in Germany in the PIN case.171 2.147
In its judgment, the Cologne Insolvency Court accepted that forum shopping could be legitimate
and rejected arguments that it was illegal under the EC Regulation. The court emphasized that
the freedom of establishment principle gave companies the right to transfer their seat to benefit
from a better legal environment, and that forum shopping under the EC Regulation was therefore
permitted. However, it should be noted that this conclusion was reached in the knowledge that

169 Note that national laws are displaced by the European Company Statute Regulation in the case of a

European company (Societas Europea) (Council Regulation (EC) 2157/2001 on the Statute for a European
company [2001] OJ L294/1); by the European Cooperative Society Regulation in the case of a European
Cooperative Society (SCE) (Council Regulation (EC)1435/2003 on the Statute for a European Cooperative
Society [2003] OJ L207/1), and, in the case of a European Economic Interest Grouping (EEIG) by Council
Regulation (EEC) No 2137/85 on the European Economic Interest Grouping [1985] OJ L199/1.
170 W Ringe (n 143 above) at 608.
171 See section V.B.

77
 The EC Regulation on Insolvency Proceedings

the companies were migrating from one region of Germany to another and that there would be
no conflict with Germanys domestic laws.
2.148 A very different outcome may result where domestic law restricts the freedom of establish-
ment principle. An example of this can be found in Cartesio Oktato es Szolgaltato172 which
was handed down shortly after PIN. The case concerned a Hungarian limited partnership
that had applied to the Hungarian court to transfer its operational headquarters to Italy
without deregistering as a Hungarian limited partnership. The Hungarian court rejected the
application at first instance on the grounds that corporate entities are not permitted under
Hungarian law to transfer their headquarters to another member state while retaining the
legal status of a Hungarian registered entity: instead Hungarian law required both the opera-
tional headquarters and the registered office to be situated in Hungary. The partnership
would therefore have to dissolve itself in Hungary, and incorporate a new company under
Italian law. The partnership appealed the decision, citing the right to freedom of establish-
ment under Articles 43 and 48 of the then Treaty of the European Community in its submis-
sions. The Szeged Court of Appeal referred the question of whether Hungarian corporate law
was in breach of the right to freedom of establishment under that Treaty to the ECJ.
2.149 AG Maduro was of the view that the company should be able to migrate its operational head-
quarters without having to deregister as a Hungarian company.173 He argued that ECJ jurispru-
dence had shown something of a volte face since the ruling in Daily Mail and General Trust174
had been delivered some 20 years earlier and that a line of decisions now existed to show that
restrictions under national law on a company entering or leaving a member state are prohibited
under the Treaty. He pointed to clear practical and policy reasons for allowing a company to
move its headquarters without the expense and administrative burden, particularly for a small
undertaking, of having to dissolve itself in one member state and to re-establish itself in another.
He concluded that member states were afforded the freedom to impose conditions on under-
takings seeking to transfer in and out of a jurisdiction but that, on the facts of the case, Hungarian
law amounted to a total ban on such movement and was consequently in breach of EU law as
its effects would be discriminatory and a restriction of the freedom of movement.
2.150 In the event, the ECJ did not follow the AGs opinion.175 Instead, it held that EU law did not
prohibit a member state from legislating that an undertaking incorporated in its jurisdiction
may not transfer its statutory seat to another member state while retaining its status as a
company governed by the law of the original member state. The ECJ further held that there
was no definition of the type of entities which may benefit from freedom of establishment
under the EC Treaty, nor was there a central, Community-defined connecting factor which
an undertaking must have in order to be considered incorporated in a member state. Thus,
whether a company may rely on the principle is a question of national law and a preliminary
matter; each member state has the power to define the connecting factors required of a com-
pany in order to be duly incorporated under that states laws. This power reserved by member
states includes the power to decide that a company incorporated under its laws cannot retain

172 Case C-210/06 Cartesio Oktato es Szolgaltato [2009] Ch 354.

173 Opinion of Advocate General Polares Maduro in Case C-210/06 Cartesio Oktato es Szolgaltato [2008]
ECR. I-9641 at 25.
174 Case 81/87 The Queen v HM Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and

General Trust plc [1988] ECR 5483.

175
This is a relatively rare example of an Advocate Generals decision not being followed by the ECJ.

78
 V. Forum Shopping as a Restructuring Tool

that status if it decides to reorganize itself and move its operational headquarters to another
member state. In view of this ruling, which further reinforces the principles laid down by the
ECJ in the Daily Mail case, it seems unlikely that a future challenge based on the principle of
freedom of establishment will automatically succeed in cases where a company is prevented
by national law from moving its COMI while retaining its registration in its state of
incorporation.
Soon after the ruling was handed down, the European Parliament asked the European 2.151
Commission to prepare a legislative proposal for a directive providing for the coordination
of the national laws of member states in order to facilitate cross-border transfers within the
EU of companies registered offices.176 This would enable companies to migrate their COMIs
to another member state without having to deregister in their original jurisdiction of incor-
poration although there would be restrictions on transfers by companies subject to insol-
vency proceedings.177 However, there is no indication at the present time that the European
Commission has acted on this request so the uncertainty and inconsistency in this area is
likely to remain for the time being.178 This may prompt those member states with restrictive
national laws to amend their legislation to facilitate forum shopping. Otherwise, they will
have to look to the creativity and ability of national courts to find arguments permitting
migration in the case in question. Looking ahead, it may be some time before the true impact
of the Cartesio decision is known. For now, the case provides a warning that careful consid-
eration will need to be given as to whether the national laws of the jurisdiction in which the
debtor was incorporated will permit the desired form of migration. In some cases, the restruc-
turing possibilities may be limited and local advice will be required to assess the extent of the
restrictions on transfer imposed by the state of registration.

D. The Impact of the European Merger Directive

A discussion on moving COMI for the purposes of forum shopping would not be complete 2.152
without briefly mentioning the European Merger Directive.179 The Directive may have an
application in the context of restructuring transactions as it enables two limited liability
companies incorporated in different member states of the EU to merge and for the merged
entity to have its COMI in either member state. This may make a shift of COMI easier and
eliminate some of the uncertainty as to the effectiveness of migrations achieved in stages.180
However, it is possible that the merger process may itself prove to be time-consuming and
complex which would be disadvantageous in the context of a restructuring. At the time of
writing, there is no evidence that the Directive has been used in a restructuring context.

176
European Parliament resolution of 10 March 2009 with recommendations to the Commission on the
cross-border transfer of the registered office of a company (2008/2196 (INI)). This follows on from earlier ini-
tiatives to modernize company law, including the Fourteenth Company Law Directive on the transfer of the
company seat.
177 Ibid at recommendation 6.
178
G Peters, Case Review: Cartesio es Szolgaltato bt (Case C-210/06) ECJ (Grand Chamber) (16 December
2008) Intl Corporate Rescue.
179 Council Directive (EC) 2005/56 on cross-border mergers of limited liability companies [2005] OJ

L310/1 (commonly referred to as the Merger Directive). The directive was implemented in the UK by the
Companies (Cross-Border Merger) Regulations, SI 2007/2974, which came into force on 15 December
2007.
180
W Ringe (n 143 above) at 592.

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 The EC Regulation on Insolvency Proceedings

VI. Review and Reform?

2.153 Minor amendments have already been made to the annexes to the EC Regulation to take
account of developments in insolvency procedures available in the member states and to
provide for the accession of new members.181 There have also been calls for the Articles of the
EC Regulation to be amended, with criticism focusing on several areas, including the lack of
clear judicial guidance or examples of objective factors which should be used determine
COMI; the need for a specific regime or default presumption for group companies; whether
curbs should be placed on the practice of forum shopping; the difficulties associated with the
absence of a central register of insolvency judgments; the need for express provisions dealing
with communication and cooperation between courts (although the Stojevic and Nortel deci-
sions may have allayed some of the concerns in this area); and whether limiting secondary
proceedings to winding up proceedings has the effect of impairing rescue attempts.
2.154 Article 46 of the EC Regulation provides that the first European Commission report on the
EC Regulation is due on 1 June 2012 and, in light of the concerns that have been expressed
it is perhaps unsurprising that work on the first review has already started in the UK. This is
in the form of an evaluation questionnaire launched by the Insolvency Service in July 2009.
The response of the Insolvency Law Committee, a sub-committee of the City of London
Law Society, articulated some of the concerns referred to above.182 It concluded that the EC
Regulation has, for the most part, been an improvement on what went before, and has
resolved the problem of having to apply conflict of laws rules to insolvencies in the EU.
Reassuringly, the Committee reported that its members had not had any direct experience of
corporate debtors relocating their COMIs from one member state to another in order to
frustrate creditors claims; rather, that there was increasing evidence of debtors either moving
their COMI or moving their assets to another member state in order to take advantage of
another insolvency regime within the EU. There have apparently been few, if any, objections
where this had been done for the mutual benefit of creditors. Notwithstanding the apparent
shortcomings of the EC Regulation, insolvency practitioners, and the judiciary alike have for
the most part taken a pragmatic and flexible approach to resolving many of the issues as they
work to achieve the best solution for the various stakeholders.

181
Article 45 provides for the Annexes to be amended at any time. These will be effected by the Council
acting on the initiative of one of its members or on a proposal from the Commission. In the case of the UK
revisions have been made to Annex A to ensure recognition of the out of court administration process and of
Annex C to include a provisional liquidator in the list of liquidators (see Council Regulation 603/2005 amend-
ing the lists of insolvency proceedings, winding up proceedings and liquidators in Annexes A, B and C to
Regulation (EC) No 1346/2000 on insolvency proceedings [2005] OJ L100/1).
182
The Insolvency Law Committee also highlighted the fact that court orders commencing insolvency
proceedings in England and Wales do not usually contain details as to why the court has concluded that a
debtors COMI is located in its jurisdiction, making it difficult for third parties to obtain information about
where a debtors COMI is located and why.

80
 3
OUT-OF-COURT VS COURT-SUPERVISED
RESTRUCTURINGS

I. Workouts and Other Restructurings V. The Section 363 Sale Alternative 3.1343.153
in the United States 3.013.25 A. Relevant Standard: Sound Business
A. Advantages and Disadvantages Reason 3.1343.140
of Workouts 3.013.08 B. Sub Rosa Plan 3.1413.142
B. Considerations in Out-of-Court C. Recent Developments: Chrysler
Workouts 3.093.18 and General Motors 3.1433.152
C. Typical Out-of-Court Approaches 3.193.24 D. Conclusion 3.153
D. Potential for Failure and a Subsequent
VI. Chapter 11 and Admistration
Chapter 11 Filing 3.25
Compared 3.1543.191
II. Exchange Offers 3.263.69 A. Administration 3.1543.156
A. Introduction 3.263.29 B. Differences in Theory 3.157
B. Reasons for Doing a Debt C. Differences in Practice 3.1583.187
Exchange Offer 3.303.31
D. Perceptions of Administration
C. US Securities Law Considerations 3.323.56 and Chapter 11 3.1883.191
D. Common Tactics in Debt Exchange
Offers 3.573.67 VII. The Role of Receivership in
English Restructurings 3.1923.197
E. Certain US Federal Income Tax
Considerations and Accounting VIII. The Role of the Company
Considerations 3.683.69 Voluntary Arrangement in
III. Chapter 11 Plan Standards 3.703.99 English Restructurings 3.1983.233
A. Introduction 3.703.72 A. Introduction 3.1983.200
B. Best Interests Test 3.733.74 B. Process 3.2013.207
C. Absolute Priority Rule 3.753.89 C. Challenge 3.2083.226
D. Feasibility and Other Confirmation D. Moratorium 3.2273.229
Standards 3.903.99 E. Retail Businesses 3.2303.233
IV. Pre-Arranged vs Pre-Packaged IX. English Pre-Packaged
Chapter 11 Plans 3.1003.133 Administrations and Corporate
A. Pre-Petition Activities 3.1003.111 Debt Restructurings 3.2343.259
B. First-Day Filings 3.1123.119 A. Introduction 3.2343.235
C. Confirmation Hearing B. Criticisms of Pre-Packs 3.2363.237
(Day 3060) 3.1203.123 C. Pre-Pack Guidelines 3.2383.244
D. Post-Confirmation Activities 3.1243.126 D. Courts Approach to Pre-Packs 3.2453.259
E. Advantages and Disadvantages
of a Pre-Packaged or Pre-Arranged X. English Schemes of Arrangement and
Chapter 11 Plan 3.1273.133 Corporate Debt Restructurings 3.2603.291

81
 Out-of-Court vs Court-Supervised Restructurings

A. Introduction 3.2603.261 (B) a Section 363 Credit Bid

B. Meaning of Creditor 3.2623.269 With Stalking Horse 3.2923.315
C. Stages of a Scheme and A. Introduction 3.2923.295
Related Issues 3.2703.291 B. Case Studies 3.2963.299
XI. Comparison Between Cramdown C. Valuation 3.3003.308
in England Achieved Through D. Directors Duties 3.3093.311
a Scheme and a Pre-Packaged E. Pre-Packaged Administration
Administration and (A) a Chapter 11 and Section 363 Sales 3.3123.315
Plan of Reorganization and

I. Workouts and Other Restructurings

in the United States

A. Advantages and Disadvantages of Workouts

3.01 In the United States, a voluntary court-supervised reorganization is commenced by filing a peti-
tion for relief under section 301 of title 11 of the United States Code, 11 USC 101
et seq (the Bankruptcy Code). Companies seek reorganization relief for many reasons: to stave
off foreclosure or obtain a breathing spell from debt-related lawsuits, to halt and manage other
vexatious litigation, to reject burdensome contracts and leases,1 to avoid and recover certain
transfers,2 to facilitate the sale of assets (if a prospective buyer is unwilling to proceed out-of-
court), to obtain financing that would have been contractually prohibited or otherwise
unavailable,3 and generally to develop a rational basis for restructuring their liabilities in a forum
which centralizes all of their assets and all of their creditors claims.4 Many of the same objectives
apply to the commencement of a creditor-initiated involuntary reorganization case.
3.02 Although there are advantages to obtaining relief under the Bankruptcy Code, [a] company
confronted . . . can choose to rearrange its finances out of court as an alternative to obtaining
relief under the bankruptcy laws.5 In fact, the underlying policy of the Bankruptcy Code
favours workouts or private, negotiated adjustments of creditor-company relations.6
Indeed, the legislative history of the Bankruptcy Code contemplates that the bankruptcy
laws would serve as an alternative if a debtor and its creditors were unable to arrive at mutu-
ally acceptable agreements necessary to effectuate a workout.7 This policy is embodied in the

1 11 USC 365.
2
11 USC 547 (avoiding preferences); 11 USC 548 (avoiding fraudulent transfers); 11 USC 544
(trustee as lien creditor).
3
11 USC 364.
4
See 11 USC 1129(a) (if a chapter 11 plan complies with the Bankruptcy Code, the court may confirm a
plan if it has been accepted by at least two-thirds in dollar amount and one-half in number of claims actually
voting in each class); 11 USC 1129(b) (under certain circumstances, the court may cramdown a plan even if
a particular class has rejected it).
5 Texas Commerce Bank, NA v Seymour Licht, 962 F 2d 543 (5th Cir 1992).
6
In re Colonial Ford, Inc, 24 BR 1014, 1015 (Bankr D Utah 1982); see Texas Commerce Bank, 962 F 2d at
549 (stating that bankruptcy policy strongly favours the speedy, inexpensive, negotiated adjustment of credi-
tor-company relations afforded by out-of-court procedures).
7 HR Rep No 95-595, at 220 (1977), reprinted in 1978 USCCAN 5963, 6368 (citing Hearings on HR 31

and HR 32 Before the Subcomm on Civil and Constitutional Rights of the House Comm on the Judiciary, 94th
Cong, 1st Sess, Ser 27, pt 1, at 43637 (197576)).

82
 I. Workouts and Other Restructurings in the United States

Bankruptcy Code in at least two ways: (i) the Bankruptcy Code itself [l]ike a fleet-in-
being . . . may be a force towards mutual accommodation, and as such, sets parameters for
negotiations preceding a workout,8 and (ii) the Code, in several specific respects, contem-
plates that workouts will be a prelude to, yet [be] consummated in, bankruptcy specifically
through a pre-packaged9 plan of reorganization provided for in sections 1102(b)(1),
1121(a), and 1126(b) of the Bankruptcy Code.10 Several bankruptcy court decisions have
reinforced the general policy favoring out-of-court workouts.11
In many instances an out-of-court workout may be a more efficient method of debt restruc- 3.03
turing than a court-supervised bankruptcy proceeding. Pre-petition-negotiated agreements
between a debtor and its creditors generally reflect a well thought out reorganization attempt.
In addition, a chapter 11 filing does not come without its disadvantages. A debtor may
encounter significant expenses associated with a chapter 11 filing in terms of administrative
and professional costs. Management may be distracted by the additional responsibilities
imposed on a debtor in possession, professional restructuring officers may be hired, or in rare
cases management may be displaced by a court-appointed trustee. Management and share-
holders may have to deal with the prospect of creditors filing their own reorganization plans
that eliminate shareholder recoveries.12 It is possible that a chapter 11 filing could be con-
verted to a chapter 7 liquidation proceeding.13 Finally, it is common for the debtors business
to experience some degree of backlash from a bankruptcy filing in the form of reputational
harm and loss of business.
Determining whether a debtor should file for chapter 11 relief involves a delicate balancing 3.04
of the advantages and disadvantages discussed above. Implemented correctly, a successful
out-of-court workout should convert a distressed company into one that is economically
viable and comfortably sustainable. A summary of the principal advantages and disadvan-
tages of out-of-court workouts are set forth below.

1. Advantages of a workout
The advantages of a workout are as follows: 3.05

lower administrative costs;

lower professional fees;
increased control and flexibility;
less management distraction;
generally, no loss of management control;
better preservation of going concern value;

8
Colonial Ford, 24 BR at 1017; see Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors
Bargain (1982) 91 Yale LJ 857, 867 (formal bankruptcy process would presumably be used only when individual-
istic advantage-taking in the setting of multi-party negotiations makes a consensual deal too costly to strike . . .).
9 For a detailed discussion of pre-packaged plans of reorganization, see Section IV infra.
10
Colonial Ford, 24 BR at 1017.
11
Ibid (dismissing bankruptcy petition filed when debtor failed to get financing required by a workout
agreement reached with its creditors because the court refused to abandon an out-of-court workout where it was
clear that the debtor had agreed to compose its debts outside of the court system and then attempted to ambush
its creditors by filing a chapter 11 petition); In re TS Industries, Inc, 117 BR 682 (Bankr D Utah 1990) (holding
that pre-petition workout agreements are assumable contracts under s 365(c)(2)).
12 Colonial Ford, 24 BR at 1022.
13 Debtors and creditors are familiar with the old saw that a good liquidation out of court is better than a

bad reorganization in Chapter 11, ibid.

83
 Out-of-Court vs Court-Supervised Restructurings

less negative publicity;

creditors not subject to potential subordination of or avoidance of pre-petition transfers.

2. Disadvantages of a workout
3.06 The disadvantages of a workout are as follows:

no ability to bind dissenting creditors or classes of creditors;

no automatic stay protection;
no ability to unilaterally reject executory contracts;
no ability to recover preferences;
no ability to recover fraudulent conveyances.
3.07 As described in Chapter 1, traditionally financial restructurings in the English market have
been concluded out of court. However, in this cycle, multi-tiered debt structures have made
such restructurings significantly more difficult to conclude and there has been increasing
reliance on formal procedures.
3.08 We set out later in this chapter the distinctions between chapter 11 and administration
(the principal insolvency procedure in England) and the reasons why schemes of arrange-
ment and pre-packaged administrations have generally been used to implement restruc-
turings rather than a trading administration. Some of the disadvantages of a workout
identified in the chapter 11 context, notably the inability to reject executory contracts and
automatic stay protection, do not apply in the English context as schemes and pre-packaged
administrations do not effectively deliver these benefits. Equally, however, in certain
circumstances the advantages of a workout when compared to a scheme of arrangement
may not be as stark compared with the advantages of a workout compared with a chapter 11
proceeding.

B. Considerations in Out-of-Court Workouts

3.09 Regardless of the restructuring process a debtor chooses, there are certain considerations that
are fundamental to the workout process.
1. Moratorium
3.10 At the outset of out-of-court negotiations, a company will call a meeting of key creditors
with impaired claims and disclose its financial status and explain the difficulties it faces.
Having explained the situation, the company should seek a moratorium, a temporary
period during which the company can delay payment on obligations as they become due.
This moratorium allows the company, in essence, a time-out to negotiate restructuring
agreements. If agreed upon, any payment defaults would be waived, which should prevent
cross-acceleration of other debts as well as negative publicity and reactions based on news of
a default.
3.11 It is important for the company to provide periodic progress reports on its financial dealings
during a moratorium. Disclosure helps foster a relationship of trust with creditors and
encourages continued cooperation. Such cooperation will be needed in the potential nego-
tiations that lie ahead.

84
 I. Workouts and Other Restructurings in the United States

We set out in Chapter 1 some of the challenges with obtaining such a voluntary moratorium. 3.12
As described above, in the English context these considerations apply equally where a scheme
of arrangement is used as the scheme does not provide a moratorium.

2. Negotiations
A successful out-of-court workout requires negotiations and, ultimately, agreements 3.13
between the company and its substantial creditors. Inevitably, the terms of each negotiation
will be company and creditor-specific. Each agreement will be unique and will memorialize
the specific contractual terms negotiated. As long as the company can reach agreement with
each of its main creditors, it has a chance of consummating a successful out-of-court
restructuring.

3. Ad hoc creditors committee

Often, creditors of a company that expects to negotiate an out-of-court restructuring will 3.14
facilitate formation of informal committees of creditors holding similar claims, such as bank,
bond, or trade debt. The committee functions as the de facto representative of the larger
creditor body and should further common interests and concerns. No rules exist as to who
can be on the committee and committee members have no fiduciary duties to each other or
to non-committee members.14 Moreover, while the actions of the committee are not binding
on any individual creditors, the committee process streamlines negotiations.
It should be noted that section 1102(b) of the Bankruptcy Code permits the United States 3.15
Trustee to appoint a committee of unsecured creditors during a bankruptcy case that was
formed before commencement of the case.

4. Debt repayment
It is fundamental to a proper out-of-court workout to negotiate a debt repayment schedule 3.16
that is consistent with the debtors current and predicted cash flows and anticipated financial
condition. Typical arrangements include an extended repayment period, a debt-for-equity
swap, or relief from interest or amortization payments.
5. Collateralization
The company may consider offering collateral to secure repayment of a currently unsecured 3.17
obligation. Collateralization affords the newly secured creditor substantial additional rights
and leverage against the company both in and out of court.
6. Management changes
Inadequate management or leadership may be a contributing cause to the financial hard- 3.18
ships a company is experiencing. If significant creditors do not have confidence in manage-
ment, management should be changed or supplemented, often with the addition of a chief
restructuring officer.

14 But see In re Washington Mutual, Inc, No 08-12229 (MFW), 2009 WL 4363539 (Bankr D Del, 2 Dec

2009).

85
 Out-of-Court vs Court-Supervised Restructurings

C. Typical Out-of-Court Approaches

3.19 When an out-of-court restructuring can effectively resolve the debtors financial distress, it
generally is the preferred method of proceeding. Successful execution of an out-of-court
restructuring begins with an analysis of the debtors business. As discussed above, such analy-
sis should identify the specific problems that led to the necessity of a restructuring and
should address the companys financial prospects on a realistic basis.
3.20 However, an out-of-court restructuring only binds those creditors that agree to be so bound.
This is a principal disadvantage when compared to a confirmed chapter 11 plan of reorgani-
zation that binds dissenting creditors and, in certain instances, classes of creditors or a scheme
of arrangement and pre-packaged plan in the English context. In any event, there are several
common types of out-of-court restructurings, which are discussed below.
1. Down-round financing
3.21 A down-round financing is an offering of securities at a price per share that is lower than the
price per share of one or more prior financing rounds. This allows for an immediate profit
and an incentive for existing investors, while simultaneously raising needed capital. Down-
round financings also may recruit new investors seeking to ensure an appropriate return on
their investment. However, down-round financings often have a negative impact on existing
investors trying to preserve their investment and on management with pre-existing equity-
based compensation arrangements. These directly opposing interests must cooperate to
ensure that the company is adequately capitalized and that management has the proper
incentives to aggressively develop the business for the new funding to succeed.
2. Washout or Cramdown Venture Financing
3.22 A washout or cramdown round of financing occurs when existing equity is either com-
pletely eliminated or severely impaired, and the new investors receive all or nearly all the
equity in the restructured company enabling them to take control. Such investment gener-
ates new working capital which allows the company to remain functional and avoid a bank-
ruptcy proceeding.
3. Debt conversion deals
3.23 Debt conversion deals involve the voluntary conversion or cancellation of existing debt in
exchange for new obligations or different repayment terms. There are a range of common
debt conversion mechanisms, including debt-for-debt swaps, debt-for-equity swaps, and
debt buybacks. Such debt exchanges allow a potential debtor to alter the terms of its debt,
while providing its creditors with a greater likelihood of some payment. In such a restructur-
ing, the interests of a company and its creditors are aligned in achieving a successful restruc-
turing of the [companys] financial obligations in order to avoid the uncertainties and
daunting transaction costs of bankruptcy.15

15 Texas Commerce Bank, 962 F 2d at 547.

86
 II. Exchange Offers

4. Assignment for the benefit of creditors (Informal Wind Downs)

An assignment for the benefit of creditors occurs when the company conveys its assets to a 3.24
creditor representative who is to use such assets to satisfy existing debt. Such an assignment
allows the representative to hold the property in trust and to sell or liquidate the assets and
then distribute the proceeds to creditors, returning any surplus to the debtor.

D. Potential for Failure and a Subsequent Chapter 11 Filing

It should be noted that an out-of-court workout or restructuring may fail to resuscitate the 3.25
business and revitalize the company. It is therefore vital to consider bankruptcy alternatives
within the workout context. Most notably, the creditors who agree to a workout agreement
should be wary of provisions in the Bankruptcy Code which allow the debtor to assume or
reject executory contracts16 and the provisions in the Bankruptcy Code (in the US context) and
in the Insolvency Act 1986 (in the English context) that empower the debtor with a number of
avoidance powers which may void prior transfers or obligations.17 In the event of a bankruptcy
proceeding, these statutory provisions could be used to undermine agreed-upon terms of a
workout or restructuring agreement and possibly require the creditor to forfeit payments or
liens previously received. Therefore, each creditor in workout negotiations should carefully
analyse the potential bankruptcy ramifications of an out-of-court transaction.

II. Exchange Offers

A. Introduction
Due to a number of companies experiencing financial distress following the onset of the 3.26
global economic recession in 2008, out-of-court debt exchange offers have become a com-
monly used tool by US companies experiencing financial distress.
1. Typical structure
Debt exchange offers are usually initiated by issuers of debt securities18 in an attempt 3.27
to reduce leverage and debt service costs without going through an insolvency proceeding.

16 11 USC 365.
17
See 11 USC 547 (the preference period extends to 90 days before the chapter 11 filing, unless the credi-
tor is an insider, in which case the preference period is one year. There are a number of defences that can be
raised, including the exchange for new value defence, and the ordinary course of business exception); 11 USC
548 (a creditor in an out-of-court workout or restructuring also should be mindful of constructive fraudulent
transfer risk. This would arise if the transfer occurred while the debtor was insolvent or the transfer rendered the
debtor insolvent and the debtor did not receive reasonably equivalent value in return); s 238 of the Insolvency
Act 1986 (transaction at an undervalue which occurs where the company is insolvent or becomes insolvent as a
result of the transaction, the sale is at an undervalue and the company cannot benefit from the defence of acting
in good faith, for the purpose of carrying on its business and with reasonable grounds that it would benefit the
company. The challenge period is two years); s 239 of the Insolvency Act 1986 (grant of preference within six
months or two years for connected persons where influenced by the desire to prefer); s 245 (vulnerable floating
charges); s 423 (putting assets beyond the reach of creditors).
18 While it is possible to attempt an exchange offer for credit agreement debt, unless there are express provi-

sions permitting such exchange offers in the governing documents, debt exchange offers for credit agreement

87
 Out-of-Court vs Court-Supervised Restructurings

The typical debt exchange offer will therefore involve an offer by the issuer to holders of exist-
ing debt securities to issue new debt (in the form of debt securities or credit facility debt) in
exchange for their existing debt securities. The debt exchange offer will be made pursuant to
an exchange offer document (which will contain information regarding the issuer, the
exchange offer, the new securities, and other material information) that is prepared by the
issuer and disseminated to holders of the debt securities sought. Response deadlines are
specified, and there may be a number of other conditions, such as minimum participation,
maximum participation, the availability of associated financing, the completion of other
transactions (such as acquisitions), or other customary conditions. A solicitation of consents
from holders of the existing debt securities to modify or strip away entirely the restrictive
covenants (and sometimes the collateral, if the debt is secured) applicable to the existing debt
securities is frequently coupled with the debt exchange offer. The economics and form of an
offer will generally depend on the goals of the issuer, the ability of the issuer to access the capi-
tal markets at the time, the nature and characteristics of the debt holder base (including the
prevalence of credit default swaps and other derivatives), and time constraints (which are
often imposed by impending maturities).
2. Recent trends
3.28 In the United States, a wave of very large leveraged buyouts (LBOs) at very high valuations
occurred from 2005 to early 2008, fuelled in large part by optimistic business projections,
favourable economic conditions, very low interest rates, and a market that was awash in
available capital.19 A typical large LBO from this period would be financed by a new secured
credit facility (usually with a revolving portion and one or more tranches of term loans), new
high-yield bonds of various levels of contractual or lien seniority, and often existing debt that
the equity sponsor was able to retain. Because capital was so plentiful during the 20058
period, although the LBO securities were high-yield debt securities (which typically have
strong restrictive covenants),20 the restrictive covenants in the high-yield debt securities
issued in these LBOs were often very loose, as prominent equity sponsors were largely able
to dictate terms to the market. These same equity sponsors were also able to negotiate for
covenant light credit agreements, which contain mostly incurrence-based covenants (ie
covenants that only restrict the company when it wishes to undertake some action) that are
similar to those in the LBO high-yield debt securities and very few or even none of the tra-
ditional maintenance-based financial covenants that are typical for senior credit facilities.
Finally, because of the sheer size of some of the LBOs, the targets were often formerly invest-
ment-grade companies whose existing debt securities contained very few restrictive cove-
nants. The relative lack of covenants in the existing debt securities often permitted the equity

debt are likely to run afoul of prohibitions against non-pro rata repayments contained in the governing
documents.
19 See Robert J Samuelson, The Private Equity Boom, The Washington Post, 15 March 2007, available at

<http://www.washingtonpost.com/wp-dyn/content/article/2007/03/14/AR2007031402177.html> ([B]uyouts
are booming again . . . Nine of the 10 largest buyouts have occurred in the past year); Private Equity Fund
Raising Up In 2007: Report, Reuters, 8 January 2008, available at <http://www.reuters.com/article/
idUSBNG14655120080108> (detailing ongoing increases in US private equity fundraising for buyouts).
20 Examples of such covenants include: limitations on the incurrence of indebtedness, limitations on divi-

dend payments and investments, limitations on liens and sale/leaseback transactions, limitations on affiliate
transactions, requirements for subsidiary guarantees, limitations on dividend-blocking provisions applicable to
subsidiaries, limitations on asset sales, change of control provisions, financial reporting requirements, and
merger/consolidation/asset sale covenants.

88
 II. Exchange Offers

sponsors to retain the existing debt securities (which had the very attractive interest rates and
long maturities that are common for investment-grade securities) rather than refinancing
them, structuring the new LBO debt around the very limited covenants.
The US debt capital markets were very tight during the second half of 2008 through much 3.29
of the first quarter of 2009, so many of these 20058 LBO companies found it difficult to
refinance their existing debt, some of which was approaching scheduled maturities in 2010
or 2011. Simultaneously, as a result of the economic downturn that began in late 2007, a
number of these companies became unable to service their LBO debt as their businesses suf-
fered economically. Exacerbating this trend was the natural tendency of vendors and suppli-
ers to tighten credit terms during periods of financial uncertainty, further reducing available
liquidity. These factors, taken together with the relative laxity of the restrictive covenants and
the nature of the capital structure of a number of the LBO companies (which made debt
exchange offers easier to structure), contributed to a wave of very large debt exchange offers
that were launched and closed during 2008 and 2009.21 There was a significant resurgence
in the US debt capital markets during the second half of 2009, which has continued into
2010. Nonetheless, should the debt capital markets tighten again, there could be a second
major wave of debt exchange offers as the LBO-related debt incurred during 20058 contin-
ues to creep closer to maturity.

B. Reasons for Doing a Debt Exchange Offer

The motivations of an issuer to do a debt exchange offer can vary. First, the issuer may wish 3.30
to address an upcoming maturity in its capital structure by offering to issue new debt that
matures later in exchange for the earlier-maturing existing debt. Secondly, the issuer may
wish to de-leverage itself by offering to issue the new debt in exchange for the existing debt
at a discount to its face amount. Thirdly, an issuer may wish to modify or eliminate restrictive
covenants in the existing debt (or collateral securing such debt) through the solicitation of
consents to such modifications (often called exit consents) from debt holders who tender
their debt in the debt exchange offer.22
A debt exchange offer is often an attractive possibility for an issuer that is unable to access the 3.31
capital markets to refinance upcoming maturities. As noted above, a number of companies

21
See, eg, Realogy Announces Commencement of Exchange Offer, Business Wire, 9 January 2008, avail-
able at <http://findarticles.com/p/articles/mi_m0EIN/is_2008_Jan_9/ai_n24227230/>; Aleksandrs Rozens,
GMAC Plans Exchange Offer, Prompting Downgrade, Investment Dealers Digest, 31 October 2008, available
at <http://www.iddmagazine.com/news/187007-1.html> (GMAC . . . said it plans to commence a private
offer to exchange a significant amount of its outstanding indebtedness for a reduced principal amount of new
indebtedness); Harrahs Finishes Debt Exchange OfferDealBook BlogNYTimes.com, available at <http://
dealbook.blogs.nytimes.com/2008/12/22/harrahs-finishes-debt-exchange-offer/> (22 December 2008, 16:22
EST).
22
The availability of the exit consent mechanism is well-settled with respect to debt securities. See, eg, In re
Loral Space and Communications Inc, 2008 WL 4293781 (Del Ch 2008) (declining to prohibit what might have
been deemed a non-pro rata consent payment to a holder of bonds that was a controlling stockholder, where
the indenture was silent on the topic); Katz v Oak Industries Inc, 508 A 2d 873 (Del Ch 1986) (upholding the
legality of the consent payment against plaintiff bondholders challenge that the offer of consideration for
bondholder consents violated the implied covenant of good faith and fair dealing); Kass v Eastern Airlines, Inc,
CA No 8700 (Del Ch 14 Nov 1986) ([t]he fact that the offer in this case is one made publicly to all voters on
the same terms . . . precludes . . . a conclusion that it disenfranchises any voter or group of voters . . .).
Nevertheless, such a mechanism may be quite novel in the credit agreement context.

89
 Out-of-Court vs Court-Supervised Restructurings

used debt exchange offers during 2008 and 2009 to address upcoming maturities without
raising new funds and to take advantage of the fact that their debt was trading below its face
amount, often at distressed levels.23

C. US Securities Law Considerations

3.32 A number of US securities laws are applicable to debt exchange offers made into the United
States or to US investors. The two principal regulations are the US Securities Exchange Act
of 1934 (the Exchange Act) (which generally governs the conduct of existing security hold-
ers and transactions in the US securities markets with respect to existing securities) and the
US Securities Act of 1933 (the Securities Act) (which generally governs the offer and sale of
new securities by issuers and their affiliates into the US securities markets).
1. Considerations under the Securities Exchange Act of 1934tender offer rules
and anti-fraud provisions
(a) Regulation 14E
3.33 Because a debt exchange offer is typically made to most holders of the subject security for
pre-set consideration and is usually made publicly for a substantial portion of the outstand-
ing securities and is subject to time limits for response, a debt exchange offer is generally
viewed as a tender offer for purposes of the Exchange Act.24 All tender offers are subject to
Regulation 14E under the Exchange Act.25 In addition, if the debt security that is subject to
the tender offer is a convertible security, the debt exchange offer will also be subject to the equity
tender offer rules (such as Rule 13e-4 or Regulation 14D) under the Exchange Act, which

23 See, eg, Ford Distressed Debt Exchange Likely, Analyst Says, Reuters, 2 February 2009, available at

<http://uk.reuters.com/article/idUK171977+02-Feb-2009+RTRS20090202> (We believe there is little

chance that Fords unsecured notes will be paid back at par and expect the company to announce a distressed
debt exchange in the coming months, along with GM, in an effort to reduce its level of unsecured debt as it piles
on secured debt, according to a report issued on Friday); S&P Cuts Harrahs Rating on Debt Exchange Offer,
Reuters, 18 November 2008, available at <http://www.reuters.com/article/idUSN1828269220081118> (In
some cases, the new notes being offered would represent a substantial discount to the par amount of bond-
holders existing debt, S&P said in a statement. The rating agency said it has concerns about Harrahs ability to
service its debt without the exchange offer); Rozens, supra n 21 (Moodys warned that there is a possibility that
GMACs offering will be a distressed exchange. Distressed exchanges have default-like implications for affected
creditors because the changes to principal amount, tenor, coupon, and/or priority can cause debt holders to
recognize economic loss).
24
See Wellman v Dickinson, 475 F Supp 783, 82324 (SDNY 1979). In Wellman, the court set forth an
eight-factor test to determine what constitutes a tender offer: (1) active and widespread solicitation of public
shareholders for the shares of an issuer; (2) solicitation made for a substantial percentage of the issuers stock; (3)
offer to purchase made at a premium over the prevailing market price; (4) terms of the offer are firm rather than
negotiable; (5) offer contingent on the tender of a fixed number of shares, often subject to a fixed maximum
number to be purchased; (6) offer open only a limited period of time; (7) offeree subjected to pressure to sell his
stock; and (8) whether the public announcements of a purchasing program concerning the target company
precede or accompany rapid accumulation of large amounts of the target companys securities. Ibid.
25 Section 14E of the Exchange Act prohibits untrue statements of material fact or material omissions in

connection with any tender offer. Securities Exchange Act of 1934 14E, 15 USC 78a, 78n(e) (2009). SEC
Rules 14e-114e-8 implement Regulation 14E, heavily regulating tender offers as a means reasonably designed
to prevent fraudulent, deceptive or manipulative acts or practices. Regulation 14E, 17 CFRCFR 240.14e-1
et seq (Sec Exch Commn 2009).

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 II. Exchange Offers

govern tender offers for equity securities by issuers and third parties.26 In addition, if the debt
exchange offer will result in the delisting or deregistration of a class of equity securities regis-
tered under the Exchange Act, Rule 13e-3 under the Exchange Act will also apply.27
Generally, Regulation 14E governs the conduct of all equity and debt tender offers. The most 3.34
significant portion of Regulation 14E is Rule 14e-1,28 which, among other things:
requires any tender offer to remain open at least 20 business days after the date the offer is
first published or sent to security holders;
requires that an offer remain open at least ten business days after any increase or decrease
in price or percentage of securities sought;29
requires prompt payment for tendered securities after an offer expires; and
requires that if an open tender offer is to be extended, it must be extended by press release
or other public announcement prior to certain specified deadlines.30
As a result of the requirements of the Exchange Act, most debt exchange offers will remain 3.35
open for at least 20 business days after commencement, although issuers may use various
techniques to try to effectively shorten the amount of time bond holders have to react or
organize.
(b) The offer document and anti-fraud rules
In addition to Regulation 14E, because debt exchange offers involve the issuance and sale of 3.36
a security in exchange for another security, they are subject to the anti-fraud provisions of the
Exchange Act, including Rule 10b-5. Section 10(b) and Rule 10b-5 of the Exchange Act are
the primary provisions under which injured parties seek in private actions to recover dam-
ages for fraud. Section 10(b) of the Exchange Act makes it unlawful to use or employ any
manipulative or deceptive device or contrivance in connection with the purchase or sale of
any security. Under Rule 10b-5, any documentation used in connection with an exchange
offer must not contain any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading.31 Therefore, issuers will typically prepare some form
of exchange offer document, which will contain all information deemed by the issuer to be
material to a prospective participant in the exchange offer, including issuer business and

26
Rule 13e-4 will govern a tender offer conducted by the issuer. Tender offers by issuers, 17 CFR 240.13e-4
(Sec Exch Commn 2009). Regulation 14D will govern a tender offer being conducted by a party other than the
issuer. Regulation 14D, 17 CFR 240.14d-1 et seq (Sec Exch Commn Sec Exch Commn 2009).
27 See Going private transactions by certain issuers or their affiliates, 17 CFR 240.13e-3 (Sec Exch Commn

2009) (bringing under the rubric of Rule 13E, inter alia, any solicitation of any proxy, consent or authorization
of, or a distribution . . . of information statements to [any equity holder] by the issuer . . . in connection with: a
merger, consolidation, reclassification, recapitalization, reorganization or similar corporate transaction . . .
[causing] any class of securities of the issuer which is . . . listed on a national security exchange . . . to be [delisted
from] any national security exchange . . .).
28
Unlawful tender offer practices, 17 CFR 240.14e-1 (Sec Exch Commn 2009).
29
Rule 14e-1(b) does, however, provide that the acceptance for payment of an additional amount of securi-
ties not to exceed 2 per cent of the class of securities that is the subject of the tender offer is not an increase in
the amount sought for purposes of this requirement. Ibid.
30 Rule 14e-1(d) requires that the press release or public announcement be issued not later than (i) 9.00 am

Eastern time, on the next business day after the scheduled expiration date of the offer or (ii), if the class of securities
which is the subject of the tender offer is registered on one or more national securities exchanges, the first opening
of any one of such exchanges on the next business day after the scheduled expiration date of the offer. Ibid.
31 Employment of manipulative and deceptive devices, 17 CFR 240.10b-5 (Sec Exch Commn 2009).

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 Out-of-Court vs Court-Supervised Restructurings

financial disclosure, risk factors, the terms of the offer, the description of the securities being
offered, and other material information. For issuers that file public reports with the US
Securities and Exchange Commission (SEC), much of the issuer-related information will be
incorporated by reference to those reports. If an exchange offer is subject only to Regulation
14E and not the equity tender offer rules (because it is a tender offer for a non-convertible
debt security), beyond the general anti-fraud requirements, Regulation 14E will not specify
that the exchange offer document contain any particular items of disclosure, and the offer
materials need not be filed with the SEC for review and comment.32
3.37 It is important to note that the standard for liability under Section 10(b) and Rule 10b-5 is
substantially higher than that under Section 11 of the Securities Act (described below).
A Rule 10b-5 plaintiff must prove existence of the material fraudulent or misleading state-
ment or omission as well as reliance on the fraudulent or misleading statement or omission33
and resulting injury.34 In addition to proving the substantive elements of fraud, reliance, and
injury, a plaintiff claiming liability under Rule 10b-5 must state with particularity facts
giving rise to a strong inference that the defendant acted with the required state of mind.35
Courts have defined scienter as the intent to defraud, deceive or manipulate.36 While scienter
includes recklessness (ie conduct that involves an extreme departure from standards of ordi-
nary care that presents a danger of misleading a buyer of securities), mere negligence is not
sufficient in a cause of action under Rule 10b-5.37
(c) Early consent/early tender deadlines
3.38 As noted above, all tender offers, including debt exchange offers, are required by Rule 14e-1
to remain open for at least 20 business days. Nevertheless, it is widely accepted market prac-
tice for issuers to set an early consent deadline or an early tender deadline of ten business
days after commencement.38 In the case of an exchange offer with a consent solicitation, the
holder of a bond that is tendered is required to also consent to the removal of all or most of
the restrictive covenants applicable to the bond. In the case of an exchange offer without a
consent solicitation, the holder of the bond is asked to tender prior to the early tender
deadline.
3.39 Holders who fail to tender into the exchange offer prior to the early deadline will receive an
amount of total consideration that is somewhat less than the amount of total consideration

32
Issuers that are public companies should evaluate whether the offer document contains material non-
public information regarding the issuer. If so, the dissemination of the offer document may trigger simultane-
ous public disclosure requirements under Regulation FD.
33 See Basic Inc v Levinson, 485 US 224, 243 (1988) (holding that reliance is an element of a Rule 10b-5

cause of action).
34
See Binder v Gillespie, 184 F 3d 1059, 1065 (9th Cir 1999) (The causation requirement in Rule 10b-5
securities fraud cases includes both transaction causation, that the violations in question caused the plaintiff to
engage in the transaction, and loss causation, that the misrepresentations or omissions caused the harm (citing
McGonigle v Combs, 968 F 2d 810, 820 (9th Cir 1992)).
35
Private Securities Litigation Reform Act of 1995 21D(b)(2), 15 USC 78u-4(b)(2) (2009).
36
See, eg, Ernst & Ernst v Hochfelder, 425 US 185, 193 (1976) (holding that a private cause of action for
damages will not lie under 10(b) and Rule 10b-5 in the absence of any allegation of scienter, ie intent to
deceive, manipulate, or defraud on the defendants part).
37 See In re Vantive Corp Sec Litig, 283 F 3d 1079, 1085 (9th Cir 2002) ([T]he complaint must allege that

the defendant made false or misleading statements either intentionally or with deliberate recklessness or, if the
challenged representation is a forward looking statement, with actual knowledge . . . that the statement was false
or misleading (internal citation omitted)).
38 The same structure may be adopted in a cash tender offer for debt securities as well.

92
 II. Exchange Offers

that will be paid to holders who do tender into the offer prior to the early deadline. Usually,
the difference in consideration, which the issuer will call a consent fee (if there is a consent
solicitation involved) or an early tender fee (if not) will not be more than $30 per $1,000
principal amount of securities tendered.39 Holders will not be permitted to withdraw ten-
dered securities after the early deadline has passed. If a consent solicitation is involved, once
the requisite level of consents has been received, the issuer and the indenture trustee will
promptly enter into a supplemental indenture (which will contain the proposed modifica-
tions) that will become effective immediately upon execution, although the actual modifi-
cations will not become operative until the tendered bonds are accepted and paid for by the
offeror.40
While there are no specific SEC rules permitting the early consent/early tender structure, 3.40
issuers have consummated numerous debt exchange offers using this structure without
objection from the SEC. Issuers adopt the early consent/tender structure for a number of
reasons, including:
increasing the speed of the exchange offer, since most bondholders will tender prior to the
early deadline in order to receive the maximum amount of consideration;
giving the issuer an earlier view of the certainty of the outcome, which may aid the com-
pletion of other transactions conditioned on completion of the exchange offer;
if there is an associated consent solicitation, adding a coercive element to the exchange
offer, since any securities that are not tendered will no longer have the benefit of restrictive
covenants (or perhaps collateral) as a result of the successful consent solicitation; and
significantly decreasing the amount of time bondholders have to organize themselves.
The significance of the last of the above-described motivations for the early deadline cannot 3.41
be underestimated. As a practical matter, for US bondholders, the very act of tendering
bonds can be a significant administrative exercise. For many bondholders, the process can
take several business days, effectively making the early deadline only seven to eight business
days after commencement. Furthermore, the tender offer documents are often not available
in readable form immediately at commencement, and effectively organizing bondholders
can take several days. An issuer may have a large incentive to prevent organization of bond-
holder groups, particularly where speed is required and the issuer wishes to avoid negotiation
of the terms of the new securities with bondholders.41 In response, it has become common

39 For example, the total exchange consideration per $1,000 of existing debt securities tendered may

be $770 of new securities if the existing debt securities are tendered after the early consent period and $800 of
new securities if they are tendered before the early consent period ($770 of tender consideration and a $30
consent fee).
40
The reason for this mechanic is that most US indentures contain the following provision: Until an
amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing
consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the
same debt as the consenting Holders Note, even if notation of the consent is not made on any Note. However,
any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee
receives written notice of revocation before the date the waiver, supplement or amendment becomes effective.
An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every
Holder (emphasis added). The mechanism is designed to prevent revocation of the consent of the bondholder
after the supplemental indenture is executed and effective (even though its provisions are not operative until
the tendered bonds are accepted and paid for).
41 It should be noted, however, that notwithstanding the early deadlines, to the extent a sufficiently large

group of bondholders manages to organize prior to the deadline, the group can often force the issuer to extend

93
 Out-of-Court vs Court-Supervised Restructurings

practice in the United States for bondholders to take the precautionary step of having regular
outside counsel review the debt documents of companies they believe may be ripe for a debt
restructuring and also preemptively contact other significant bondholders to organize an ad
hoc bondholder committee in anticipation of a debt restructuring.
3.42 Certain exchange offers will be structured to permit early settlement of the exchange offer
soon after expiration of the early deadline. Under such a structure, bondholders who meet
the early deadline for tenders will receive their new securities shortly after the early deadline,
and the supplemental indenture to modify the existing debt covenants will go into effect at
the time of such payment. This structure may be used by issuers to further increase the coer-
cive power of the exchange offer or to facilitate other financing transactions that would
otherwise be prohibited by the covenants being modified.
(d) Equity tender offer rules
3.43 If a debt exchange offer is subject to the equity tender offer rules, a number of additional
requirements will apply in addition to Regulation 14E and Rule 10b-5, including the
requirement for the issuer to file with the SEC a Statement on Schedule TO, which requires
the issuer to provide certain rule-specified disclosures, exhibits, and other content relating to
the proposed exchange offer and which will be subject to review and comment by the SEC
after it is filed.42 While the SEC has committed to provide comments as promptly as possible
to avoid delaying the consummation of the tender offer,43 the offer may not be consummated
until the SEC review process is complete. Furthermore, if comments received from the SEC
are deemed to be material, the issuer may be required to recirculate amendment materials or
amended and restated offer materials once the comments have been cleared. In addition, the
equity tender offer rules contain various limitations as to purchases outside the tender offer,
requirements as to the price that may be offered to holders, requirements to make the offer
to all holders and procedural rules as to proper commencement, withdrawal rights, reporting
of results, amendments, and consummation of the offer.44 The key disadvantages to being
subject to the equity tender offer rules are:
it is impossible to predict with certainty the duration or substance of an SEC review proc-
ess, so the expected timing or structure of the offer may be disrupted;
the equity tender offer rule requiring offers to be made to all holders of a security will
preclude the offeror from limiting its offer only to certain classes of investors (such as
accredited investors or qualified institutional buyers), and as a result, the exchange offer
may be ineligible for exemptions from registration under the Securities Act;
it is not possible to use the early consent/early tender structure in connection with an
equity tender offer (or the associated early settlement mechanic);
purchases of securities outside the offer by the offeror will generally be prohibited; and

the deadline and negotiate, as was the case in the proposed exchange offer by GMAC LLC in November and
December of 2008. See Caroline Salas, GMACs Bondholders Want Debt Exchange Terms Amended,
Bloomberg, 11 December 2008, available at <http://www.bloomberg.com/apps/news?pid=20601009&sid=aH
St6El3hZj4>.
42 See Schedule TO, 17 CFR 240.14d-100 (Sec Exch Commn 2009).
43 See Regulation of Takeovers and Security Holder Communications, Release No 33-7760, 70 SEC Docket
2229 (22 October 1999) (We are . . . committed to expediting staff review of exchange offers so that they may
compete more effectively with cash tender offers).
44 See generally Regulation 14D, 17 CFR 240.14d-1 et seq (Sec Exch Commn 2009).

94
 II. Exchange Offers

if the tender offer is subject to a financing condition, the financing condition must be
removed at least five business days prior to consummation.45

2. Considerations under the US Securities Act of 1933issuance of new securities

Section 5 of the Securities Act prohibits an issuer from selling or offering to sell a security 3.44
unless the offer and sale have been registered under the Securities Act or are otherwise
exempt from registration under the Securities Act.46 These prohibitions generally apply
only to sales into the United States or to US Persons (as defined in the relevant regulations).47
Because a debt exchange offer involves the offer and sale by the issuer of a new security in
exchange for an existing one, a debt exchange offer that is made into the United States or
to US investors must either be registered under the Securities Act or exempt from such
registration. Because the Securities Act registration process can be a time-consuming one,
issuers often opt to make debt exchange offers that are exempt from registration under
Securities Act Section 4(2) or Section 3(a)(9).48 It should be noted, however, regardless of
the issuers chosen method of compliance with the Securities Act, it must also comply with
the Exchange Act.
(a) Registration under the Securities Act
A debt exchange offer that is registered under the Securities Act will require the filing with 3.45
the SEC of a registration statement on Form S-4 (or F-4, in the case of a foreign private
issuer).49 The registration statement is a lengthy document that is required to contain finan-
cial and other disclosures regarding the issuer, disclosures regarding the exchange offer, a
description of the debt securities being offered, and any other information that may be mat-
erial to an investor considering the exchange offer. Information relating to the issuer is ordi-
narily required to be set forth in full in the registration statement, but certain issuers that file
periodic reports with the SEC may instead incorporate that information by reference to their

45 This comment is often made by the SEC in equity tender offers. See, eg, Genentech, Inc, SEC Staff

Comments, at 7 (2 March 2009) (We note that this tender offer is conditioned on Roche obtaining financing
to pay for the purchase of tendered shares, and that you had not obtained financing as of the date of the filing
of this Schedule TO-T/13E-3. Please be aware that when financing is obtained, the offer must remain open for
a sufficient time period (with withdrawal rights) from the date that information about the financing is dissemi-
nated to shareholders to allow them to react to this new information. We believe a minimum of five business
days would be required under these circumstances). See also Harrahs Operating Company, Inc., Issuer
Response, at para 2 (22 July 2005) (In response to the Staffs comment, the Company has revised the [offer] . . .
to specify that the only conditions to the offer are (1) the timely and proper delivery and tender of notes in
accordance with the terms of the offer and (2) that the offer must comply with applicable law. The Company
has also revised the [offer] to clarify that there is no financing condition to the offer). Such a condition need not
be removed at all in an offer that is subject only to Regulation 14E.
46
Securities Act of 1933 5, 15 USC 77a, 77e(c) (2009) (It shall be unlawful . . . to sell or offer to
buy. . .any security, unless a registration statement has been filed . . .).
47
US person, 17 CFR 230.902(k) (Sec Exch Commn 2009). The provisions of Regulation S broadly
define US person to include, inter alia: natural persons resident in the United States, any partnership or corpo-
ration organized or incorporated in the United States, any trust whose trustee is a US person, and any agency or
branch of a foreign entity located in the United States.
48
See Securities Act of 1933 4(2), 15 USC 77a, 77d(2) (2009) (The provisions of section 77e of this
title shall not apply to . . . transactions by an issuer not involving any public offering); Securities Act of 1933
3(a)(9), 15 USC 77a, 77c(a)(9) (2009) (The provisions of this subchapter shall not apply to . . . any security
exchanged by the issuer with its existing security holders exclusively where no commission or other remunera-
tion is paid or given directly or indirectly for soliciting such exchange . . .).
49 See Form S-4, for the registration of securities issued in business combination transactions, 17 CFR

239.25 (Sec Exch Commn 2009); Form F-4, for registration of securities of foreign private issuers issued in
certain business combination transactions, 17 CFR 239.34 (Sec Exch Commn 2009).

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 Out-of-Court vs Court-Supervised Restructurings

existing public filings. Once filed, the registration statement is subject to review by the SEC.
Although it is possible to commence the exchange offer prior to the time the relevant regis-
tration statement is declared effective, the exchange offer cannot be consummated before the
review process is complete and the registration statement is declared effective by the SEC.50
Furthermore, if the SEC review process results in material changes to the offer materials, a
recirculation may be required, which could impose even further delay. Therefore, one pri-
mary disadvantage of a registered exchange offer is the potential delay and uncertainty assoc-
iated with an SEC review, which can be a significant disadvantage for a company facing
financial distress.
3.46 Another disadvantage of a registered exchange offer is the applicability of additional anti-
fraud provisions in the Securities Act that would not otherwise be applicable to an exempt
offering.51 The most important of these provisions is Section 11 of the Securities Act, which
provides that a person acquiring a security covered by a registration statement may recover
damages if any part of the registration statement, when such part became effective, con-
tained an untrue statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.52 An unregistered
offering would not be subject to Section 11 but would only be subject to Rule 10b-5. Unlike
a Rule 10b-5 action, in a Section 11 action, subject to certain exceptions, plaintiffs do not
have to prove that the material misstatement or omission caused the decline in value of the
securities,53 and they generally do not have to prove any scienter (ie fraudulent intent or
recklessness) on the part of the defendant.54 It is this feature of a Section 11 claim that is often
referred to as strict liability for misstatements or omissions. The issuer, each signatory to the
registration statement (which will include at least the principal executive officer and the
principal financial and accounting officers of the issuer), each director of the issuer, and each
underwriter can be subject to Section 11 liability. While there are affirmative defences (such
as the due diligence defence)55 to Section 11 claims for all of the possible defendants aside

50 Prior to December 2008, a registered exchange offer for equity securities or convertible debt securities

(which would be subject to the equity tender offer rules contained in Exchange Act Rule 13e-4 or Regulation
14D) could be early commenced upon filing of the registration statement using a preliminary prospectus
under Securities Act Rule 162 (17 CFR 230.162), but a registered exchange offer for non-convertible debt
securities could not be early commenced until the applicable registration statement had been declared effective
(since such an exchange offer would not be covered by Rule 13e-4 or Regulation 14D). Because of amendments
to Rule 162 that were enacted in December 2008, under certain circumstances, the SEC will permit an issuer
to early commence a registered exchange offer for non-convertible debt rather than being required to wait until
the registration statement is declared effective. In order to do so, the issuer must: (i) provide the same with-
drawal rights as it would be required to provide under the equity tender offer rules (Exchange Act Rule 13e-4 or
Regulation 14D), (ii) if a material change in the offer materials occurs, disseminate the amended materials
under the same conditions and in the same time periods as it would in an offer subject to Rule 13e-4 or
Regulation 14D, and (iii) leave the offer open for the periods required for an offer that is subject to Rule 13e-4
and Regulation 14D. See Rule 162, 17 CFR 230.162 (Sec Exch Commn 2009).
51 For example, s 12(a)(2) of the Securities Act also imposes liability on sellers of securities for misstatements

or omissions in prospectuses or oral communications made in the offer or sale of securities. Securities Act of
1933 12(a)(2), 15 USC 77a, 77k(a)(2) (2009).
52 Securities Act of 1933 11, 15 USC 77a, 77k (2009).
53
Barnes v Osofsky, 373 F 2d 269, 27173 (2d Cir 1967).
54 See Fischman v Raytheon Mfg Co, 188 F 2d 183, 186 (2d Cir 1951) (A suit under Sec 11 of the 1933 Act

requires no proof of fraud or deceit . . .).

55 See Securities Act of 1933 11(b)(3), 15 USC 77a, 77k(b)(3) (2009) (creating a safe harbour under

certain conditions for anyone but the issuer who had reasonable grounds to believe the allegedly misleading
statement was true, or who relied on an expert or official source in believing the statement to be true). See also

96
 II. Exchange Offers

from the issuer itself, a Section 11 claim can be much easier to establish than a Rule 10b-5
claim.
The primary advantage of a registered debt exchange offer is the ability to make the offer to 3.47
any investor, including retail investors. As discussed below, offers that are made pursuant to
exemptions from registration under Section 4(2) of the Securities Act may only be made to
suitable investors (generally large institutions or sophisticated individual investors). Offers
that are made under the Section 3(a)(9) exemption are subject to a number of other limita-
tions. The ability to broadly disseminate the offer and include retail investors is often neces-
sary for the success of a debt exchange offer, particularly for an issuer that is well known to
the general public, since a significant portion of such an issuers debt securities are often held
by retail investors. For this reason, when General Motors Corp was considering an out-of-
court debt exchange offer during the first and second quarters of 2009 (before it ultimately
filed for chapter 11 relief in June 2009), it filed a registration statement on Form S-456 to
register its proposed debt exchange offer, recognizing that a significant portion of its debt
securities were held by retail investors. GM also simultaneously filed a Schedule TO57 under
Rule 13e-4 because a number of the securities subject to the proposed exchange offer were
convertible into GM common stock. In contrast, one reason cited for the relatively low level
of participation in the late 2008 debt exchange offer by GMAC LLC was that the exchange
offer was structured as a private placement under Section 4(2) of the Securities Act, which
severely limited the ability of GMAC to appeal to retail bondholders.

(b) Exempt offeringsprivate placements under section 4(2) of the Securities Act
Section 4(2) of the Securities Act provides an exemption from registration for transactions 3.48
by an issuer not involving any public offering.58 Section 4(2) permits private placements of
securities by issuers that are limited so as to only be available to investors who can fend for
themselves (and therefore do not need the protections of the registration process under the
Securities Act) because they are sophisticated59 and have access to the type of information
that would be contained in a registration statement.60 A retail investor would not likely be
eligible to participate in a Section 4(2) private placement, where an institutional investor
(such as a hedge fund or mutual fund) would almost certainly be so.
The primary advantage of a Section 4(2) private placement is speed. For this reason, a great 3.49
majority of debt exchange offers are structured as such. The bondholders of most issuers tend
to be large institutional investors who would be qualified institutional buyers (QIBs) under

Securities Act of 1933 11(c), 15 USC 77a, 77k(c) (2009) (stating that the standard of reasonableness for
the 10(b)(3) safe harbour is that required of a prudent man in the management of his own property).
56
See Gen Motors Corp, Registration Statement (Form S-4) (Apr 27, 2009), available at <http://www.sec.
gov/Archives/edgar/data/40730/000119312509087739/ds4.htm>.
57
See Gen Motors Corp, Tender Offer Statement (Schedule TO) (Apr 27, 2009), available at <http://www.
sec.gov/Archives/edgar/data/40730/000119312509087775/dsctoi.htm>.
58
Securities Act of 1933 4(2), 15 USC 77a, 77d(2) (2009) (exempting transactions by an issuer not
involving any public offering ). Regulation D under the Securities Act was promulgated under s 4(2) and pro-
vides specific requirements for private placements. See Regulation DRules Governing the Limited Offer and
Sale of Securities Without Registration Under the Securities Act of 1933, 17 CFR 230.501 et seq (2009).
Issuers frequently structure their debt exchange offers to comply with Regulation D.
59 Sec Exch Commn v Ralston Purina, 346 US 119, 125 (1953) (An offering to those who are shown to be

able to fend for themselves is a transaction not involving any public offering).
60 Ibid at 12526 (stating that an offering may not be public if the offerors as a class have access to the same

kind of information that the act would make available in the form of a registration statement).

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 Out-of-Court vs Court-Supervised Restructurings

Rule 144A under the Securities Act, so they would clearly be sufficiently sophisticated not to
require a Securities Act registration to protect them.61 Furthermore, the offering document
that would typically be used in a Section 4(2) debt exchange offer would contain or incorpo-
rate by reference substantially all of the information that would be contained in a registration
statement under the Securities Act, so the offerees would have the necessary access to
information.
3.50 As discussed above with respect to registered offerings, one primary disadvantage of a Section
4(2) private placement is that an issuer with a significant retail bondholder base will not be
able to make the offer to those bondholders, and the private placement may not be made
through the use of a general solicitation or other publicity. By effectively excluding the retail
bondholder base from the offer:
it may be more difficult for the issuer to obtain sufficient participation to achieve the
issuers economic goals (such as debt reduction or the fulfilment of regulatory
requirements);
it may be more difficult to complete an associated consent solicitation, which can be a
serious problem if the consent solicitation is necessary either to complete the exchange
offer itself or to permit some other required transaction;
it may be easier for an individual significant bondholder or an ad hoc committee to form
a blocking position against the exchange offer and negotiate with the issuer for better
terms; and
it may expose the issuer to lawsuits by retail bondholders who may feel that they are being
treated unfairly at the expense of the bondholders who are eligible to participate.62
3.51 Therefore, it is essential that an issuer contemplating a private placement debt exchange offer
receive reliable information regarding the composition of its debtholder base prior to struc-
turing the debt exchange offer. A dealer-manager that has been engaged to assist with the
transaction may be able to provide this type of information.
3.52 It should be noted that certain investors who are receiving the new securities may not be
able to hold the securities being issued in exchange for the existing securities unless they are
subject to registration rights.63 Registration rights for debt securities usually allow the
holder of the debt securities to compel the issuer either to: (i) issue a new series of debt securi-
ties (which have the same terms as the original privately placed securities) in exchange for the
privately placed securities in an exchange offer that is registered under the Securities Act,64 or
(ii) register under the Securities Act for a specified period of time the resale of the privately

61
Qualified Institutional Buyer is defined in Rule 144A under the Securities Act. It includes, inter alia, any
insurance company, investment company, state-owned employee plan, private employee plan, trust whose
trustee is a bank or trust company, non-profit organization or corporation that in the aggregate owns and
invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity,
or dealer acting on behalf of a QIB. See Private resales of securities to institutions, 17 CFR 230.144A (Sec
Exch Commn 2009).
62
Examples of such lawsuits include the suits filed against Harrahs Entertainment and Station Casinos, Inc.
See Steve Green, Harrahs Hit With Class-Action Lawsuit Over Debt Plan, Las Vegas Sun, 16 February 2009,
available at <http://www.lasvegassun.com/news/2009/feb/16/harrahs-hit-class-action-lawsuit-over-debt-plan/>.
63 The constituent documents of certain funds prohibit them from receiving securities in a private place-

ment that do not have registration rights.

64 Such an offer is often referred-to as an A/B exchange offer.

98
 II. Exchange Offers

placed securities by the holders of those securities.65 Failure to comply with those require-
ments by certain specified deadlines will result in additional interest being paid on the debt
securities. While the ostensible goal of registration rights is to maximize free transferability
of the debt securities issued, in a number of cases, the registration rights are of little value,
either because the securities issued in the debt exchange offer are already freely transferable
under the US securities laws66 or because the required holding period under the securities
laws is fairly short.67 Furthermore, for less well-known issuers whose retail bondholder base
is small, the primary investors trading their bonds will be QIBs or other sophisticated inves-
tors, so no registration would be required to allow such investors to trade the bonds to other
similarly sophisticated investors. Nevertheless, to maximize participation in an exchange
offer, an issuer will often offer registration rights.68
(c) Exchange offers under section 3(a)(9) of the Securities Act
Section 3(a)(9) of the Securities Act exempts from registration except [for a security issued 3.53
under chapter 11 of the Bankruptcy Code], any security exchanged by the issuer with its
existing security holders exclusively where no commission or other remuneration is paid or
given directly or indirectly for soliciting such exchange.69 The required elements of a Section
3(a)(9) exchange are:
the issuer of the new securities is the same as the issuer of the securities being sought;70
subject to limited exceptions, the offer is exclusively an exchange (although an issuer may
pay cash in addition to issuing the new securities); 71 and

65 This type of registration is often referred to as a resale shelf registration.

66 So long as the issuers and guarantors of both the new security and the old security are the same, and no
additional consideration is being paid by the offerees, the new security will be just as transferable as the old
security. Conversions and exchanges, 17 CFR 230.144(d)(3)(ii) (Sec Exch Commn 2009). See also Tech
Squared Inc, SEC No-Action Letter, 1999 WL 288750 (4 May 1999) (SEC agreeing that a securityholder may
tack the holding period of an option onto the holding period for shares received in exercise of that option).
67 The holding period can be as short as six months for most public companies that are required to file peri-

odic reports under the Exchange Act, and the typical deadlines in registration rights agreements can be in excess
of six months.
68
For example, the exchange offers by GMAC in December 2008 and Tyco International Ltd in April 2008.
See GMAC LLC, Current Report (Form 8-k) (2 Jan 2009); Tyco Intl Ltd., Current Report (Form 8-k) (5 June,
2008).
69
Securities Act of 1933 3(a)(9), 17 USC 77a, 77c(a)(9) (2009).
70 A guarantee by another entity (such as a parent or subsidiary) is generally viewed by the SEC as a security

that is separate from the security being guaranteed, so, in most instances, the guarantors of the old securities and
the new securities being issued under s 3(a)(9) must be the same. There are a number of exceptions to this gen-
eral policy. The SEC has previously taken a no-action position with respect to the issuance of a new parent
security in a s 3(a)(9) exchange for a subsidiarys security that is guaranteed by the parent. See, eg, Kerr McGee
Corporation, SEC No-Action Letter (31 July 2001), Nabors Industries, Inc, SEC No-Action Letter (29 April
2002), Weatherford International, Inc, SEC No-Action Letter (25 June 2002) and Duke Energy Corporation,
SEC No-Action Letter (30 March 2006). In addition, in January 2010, the SEC took a no-action position with
respect to the issuance of a new parent security (such as an equity security) that is not guaranteed by any subsid-
iaries in a s 3(a)(9) exchange for a security of the same parent entity that is guaranteed by one or more subsidiar-
ies of the parent (including in the case of the issuance of non-guaranteed securities of the parent upon the
conversion of a subsidiary-guaranteed convertible note). See Section 3(a)(9) Upstream Guarantees, SEC
No-Action Letter (13 January 2010).
71 With limited exceptions, any cash consideration paid by the recipients of the new securities would make

the s 3(a)(9) exemption unavailable. See Definition of exchanged in s 3(a)(9), for certain transactions, 17 CFR
230.149 (Sec Exch Commn 2009).

99
 Out-of-Court vs Court-Supervised Restructurings

no commission or other remuneration is paid or given directly or indirectly for soliciting

such exchange.72
3.54 An issuer availing itself of the Section 3(a)(9) exemption would not be required to register its
debt exchange offer yet would be able to make the debt exchange offer to all holders of the
relevant existing debt security without regard to investor suitability. Therefore, the issuer
using Section 3(a)(9) would avoid the delay and Section 11 liability of a Securities Act regis-
tration while avoiding the offeree and private placement limitations of Section 4(2).73
3.55 Nevertheless, while the Section 3(a)(9) exemption seems on its face to provide a convenient
means of accomplishing a debt exchange offer without registration, Section 3(a)(9) is often
not used where widespread participation is sought, because in many such cases, an issuer will
find it necessary or advisable to engage a dealer-manager to ensure maximum participation.
Because dealer-managers are usually paid to solicit debt exchange offers, most debt exchange
offers involving dealer-managers are not able to be exempt under Section 3(a)(9). As a result,
the Section 3(a)(9) exemption is often used by issuers in exchange offers that are not actively
solicited, such as one-off exchanges with individual holders of debt securities.
3. State securities law concerns
3.56 A debt exchange offer may be subject to the securities laws of the various states in which the
offerees reside (commonly referred to as Blue Sky laws). State securities laws are preempted
by US federal laws in the case of the issuance of a security that is equal in right of payment or
senior in right of payment to a security that is listed on a national stock exchange under
Section 18 of the Securities Act.74 Furthermore, most private placements made to QIBs will
require little or no state law compliance activity. Nevertheless, an issuer must consult with
Blue Sky counsel prior to commencement of a debt exchange offer to ensure compliance
with applicable state laws, particularly those relating to pre-commencement filing or regis-
tration requirements.

D. Common Tactics in Debt Exchange Offers

3.57 Because a debt exchange offer is a voluntary transaction on the part of the holder of the exist-
ing debt securities, an issuer may employ various tactics to encourage or coerce participation.
The holder of the existing debt securities either has to love the offer enough to accept it or
fear the consequences of not accepting the offer (or some combination of both).
1. Exit consents
3.58 As discussed above, exit consents may be used to discourage bondholders from retaining
their existing bonds because the existing bonds will be stripped of covenants or even collat-
eral as a result of a consent solicitation associated with the debt exchange offer. Often, issuers
may privately seek consents and agreements to participate from known significant holders of

72 See definition of commission or other remuneration in s 3(a)(9), for certain transactions, 17 CFR

230.150 (Sec Exch Commn 2009). This prohibition applies both to employees of the issuer itself as well as to
third parties.
73 A s 3(a)(9) exchange offer would still be subject to Rule 10b-5 under the Exchange Act as well as the tender

offer regulations of the Exchange Act.

74 Securities Act of 1933 18, 15 USC 77a, 77r (2009) (exempting covered securities from state

regulation).

100
 II. Exchange Offers

the existing bonds in order either to ensure a successful exit consent solicitation or to increase
the likelihood of success, thereby making the offer more coercive and likely to be accepted
overall.
Indentures under which multiple series of debt securities are issued can present a number of 3.59
issues with respect to consents and voting. If multiple series of debt securities with varying
maturity dates and other varying terms and provisions vote together as a single class under
an indenture, it may be possible for an issuer to make an exchange offer that is more attractive
to certain holders than others yet will receive sufficient participation so an exit consent solici-
tation will be successful, thereby making the debt exchange offer more coercive. In particu-
lar, an indenture that governs both debt securities with a pay-in-kind interest payment
feature and other debt securities whose interest is payable in cash may be particularly suscep-
tible to such an approach if all of the debt securities vote together as a single class for waiver
and amendment purposes. Such indentures were quite common during the wave of large
LBOs during 2005 to early 2008.
2. Increased coupon or covenant enhancements
Because de-leveraging is often a goal of a debt exchange offer, issuers may offer higher interest 3.60
rates or more restrictive covenants in exchange for a reduction in principal amount to induce
bondholders to participate.
3. Threat of bankruptcy
Issuers that are experiencing financial distress may use the threat of bankruptcy to induce bond- 3.61
holders to tender into a de-leveraging bond exchange offer, particularly when a bankruptcy could
be disruptive to the business of the issuer and destroy enterprise value.
4. Leapfrog
A number of issuers have offered existing bondholders new securities that are in some way 3.62
higher in priority than the existing securities, thus leapfrogging over them. The purpose of
this tactic is to make the new security more attractive to the bondholders while reducing the
value of the existing security to any holder that does not accept the exchange offer. The
increase in priority may be accomplished in a number of different ways.
(a) Increased contractual priority
The new securities may be contractually senior to the existing securities if the existing securi- 3.63
ties are subordinated in right of payment to senior debt by issuing the new securities as
senior debt. Issuers using this method may need to comply with Restricted Payments and
similar covenants in existing debt instruments, which may prohibit the retirement of subor-
dinated debt through the issuance of senior debt.
(b) Increased structural priority
The issuer may make the new securities structurally senior by having subsidiaries that have 3.64
significant assets or operations guarantee the new securities (and not guarantee the existing
securities). This method is often used in exchange offers for securities that are rated invest-
ment grade (or were rated investment grade when they were issued), since those securities
usually do not have stringent restrictive covenants and usually are not guaranteed by subsidi-
aries of the issuer. The issuer may also accomplish structural priority by interposing an inter-
mediate holding company between the issuer of the existing security and one or more

101
 Out-of-Court vs Court-Supervised Restructurings

subsidiaries holding valuable assets (but that do not guarantee the existing securities), and
issuing the new securities from such intermediate holding company.
3.65 Issuers that are subject to high-yield covenants may use capacity under such covenants to
transfer valuable assets or operations to subsidiaries that are not subject to the covenants.
Such unrestricted subsidiaries may then guarantee the new securities but not the existing
securities, thereby structurally subordinating the existing securities to the new securities.
A number of 20058 vintage indentures permit unlimited receivables financings in subsidi-
aries that are not subject to the indenture covenants, so issuers may use those provisions to
make investments in receivables subsidiaries that guarantee the new securities being offered
but not the existing securities.
(c) Increased priority as to security
3.66 The issuer may offer to secure the new securities with its assets, thereby effectively subordi-
nating the existing securities to the extent of the value of the collateral. A number of inden-
tures of 20058 vintage are relatively permissive with respect to liens that may be incurred
by the issuer. Often, those indentures have large baskets permitting a significant amount of
secured debt or other similar indebtedness and may also permit additional secured debt
based on compliance with a ratio of secured debt to EBITDA.75 Such indentures may also
have definitions of EBITDA with various exceptions and adjustments that can be used to
give the issuer significant additional secured debt incurrence capacity.76 This method is often
used by issuers that have existing senior debt that is already guaranteed by the issuers subsidi-
aries. Issuers of existing debt that is already secured by liens may use this method by offering
new debt that is secured by liens of higher priority.
5. Partial repayment and extension of maturity
3.67 A number of issuers have offered to repay a portion of their existing indebtedness in exchange
for covenant relief and an extension of the maturity of the remaining portions. This method
may be used to address an impending maturity by an issuer in a cyclical business experienc-
ing a downturn the issuer believes to be temporary.

E. Certain US Federal Income Tax Considerations and

Accounting Considerations
3.68 In a de-leveraging debt exchange offer, the issuer will generally realize income as a result of
the cancellation of debt (commonly referred to as COD income).77 If debt is trading at a
discount to its face amount, considerable COD income could result from any restructur-
ing.78 If either the existing bonds or the new bonds (or both) are publicly traded for pur-
poses of the relevant tax regulations, the amount of COD income from a debt exchange offer
will be measured by the difference between (x) the adjusted issue price of the existing debt

75 Generally, EBITDA is defined as earnings, excluding interest, tax, depreciation, and amortization expense.

Indentures will also contain numerous adjustments to EBITDA that are negotiated by the issuer.
76 For example, an indenture might permit the issuer to adjust EBITDA to take account of projected cost

savings that are expected in good faith by management to result from operational improvements or other
changes made to the business.
77 IRC 61(a)(12).
78 See IRC 108(e)(10); IRC 1273(b).

102
 III. Chapter 11 Plan Standards

(which will in most cases be close to its face value if it was issued in a typical underwritten
offering or private placement) minus (y) the fair market value of the new debt on the date of
its issuance (which may or may not be its face value, depending on market conditions exist-
ing on the date the exchange offer is consummated).79 The COD income may be offset
somewhat by increased interest expense if a significant portion of the new debt immediately
trades at a discount, and is therefore deemed to have been issued with original issue discount,
which will be amortized over the remaining term of the debt.80 With respect to transactions
giving rise to COD income occurring in 2009 and 2010, an issuer may elect to defer the
recognition of the COD income until 2014, with the COD income included in the issuers
gross income ratably over the five taxable year period beginning in 2014.81 In an out-of-court
restructuring, an insolvent issuer may exclude the COD income from gross income to the
extent of its insolvency, but the issuer is required to reduce its tax attributes by the amount
of the excluded COD income.82 In addition to the insolvency exception, other exceptions
may be available to an issuer, which will permit the issuer to exclude the COD income from
its gross income.83 In sum, such tax matters require careful consideration.
Similarly, the extinguishment of the existing debt at a discount may result in income under 3.69
the accounting standards used by the issuer. Nevertheless, most modern debt covenant pack-
ages will exclude this sort of income from financial calculations. Still, the issuance of the new
debt, if it is issued with original issue discount, may result in additional non-cash interest
expense due to the amortization of the original issue discount over the life of the new debt.
Therefore, if there are debt covenants based on consolidated net income or earnings (or simi-
lar measures),84 an issuer should try to exclude such amortization from the calculation of
consolidated net income or earnings for purposes of those debt covenants, since the income
from the extinguishment of the existing debt is likely to be eliminated by the covenant cal-
culations. The accounting effects of a debt exchange offer therefore need to be carefully
considered.

III. Chapter 11 Plan Standards

A. Introduction
Confirmation and consummation are the ultimate objectives of every plan of reorganiza- 3.70
tion.85 Congress promulgated section 1129 of the Bankruptcy Code to establish the mini-
mum requirements for plan confirmation, thus enabling an entity to discharge its debts
and continue its operations.86 Such a determination is made by the bankruptcy court at a

79
See IRC 108(e)(10); IRC 1273(b); Treas Reg 1.1273-2(c); Treas Reg 1.1273-2(f ).
80 See Treas Reg 1.1273-1(1); Treas Reg 1.1273-2; Treas Reg 1.163-4(a)(1).
81
IRC 108(i).
82
IRC 108(a)(1)(B).
83 IRC 108(a)(1).
84
Examples would include a Restricted Payments limitation in a high-yield debt indenture, which would
allow dividends and investments to be paid out of a growing basket that increases by 50 per cent of cumulative
consolidated net income.
85 See Bank of America Natl Trust and Sav Assn v 203 N LaSalle Street Pship, 526 US 434, 465 n 4 (1999)

(quoting 7 Collier on Bankruptcy, para 1129.01, p 1129-10 (15th rev 1998)).

86 See ibid.

103
 Out-of-Court vs Court-Supervised Restructurings

statutorily required hearing.87 The plan proponent has the burden,88 by a preponderance of
the evidence, to show that confirmation requirements have been satisfied.89 This is true even
in the face of overwhelming creditor support.90
3.71 The specific requirements that an entity must satisfy to confirm a plan of reorganization depend
to some extent on whether this objective is sought consensually or not.91 Confirmation is con-
sensual if the plan is accepted by each class of impaired creditors and interest holders. For a
consensual confirmation to be approved, the 13 enumerated paragraphs of section 1129(a) of
the Bankruptcy Code also must be satisfied. If confirmation is non-consensual, however, sec-
tion 1129(b) governs. While section 1129(b) removes the requirement that each class consent
to the plan or be unimpaired, all other requirements of section 1129(a) must be satisfied as well
as two additional requirements, commonly referred to as the cramdown provisions.92
Specifically, a non-consensual plan may be confirmed only if the plan does not discriminate
unfairly and is fair and equitable with respect to each dissenting, impaired class.93
3.72 Once a plan is confirmed, the debtor is discharged from all pre-existing debts and all estate
property is vested in the reorganized debtor, unless the plan provides otherwise.94 A con-
firmed plan therefore essentially operates as a final judgment with res judicata effect95 on all
issues not otherwise dealt with in the plan or confirmation order. Creditors who fail to timely
object96 to the plan or appeal a confirmation order are nevertheless bound by its terms and
can sue only on the obligations created under the planeven those that are inconsistent with
the Bankruptcy Code.97 It is therefore critical for a plan proponent to satisfy the applicable
provisions of section 1129 and the court has an independent duty to determine that such
proponent has done so. Below is a discussion of the most significant chapter 11 confirmation
standards, including the best interests test, the absolute priority rule, and feasibility.

87 See 11 USC 1128(a).

88 See In re Crowthers McCall Pattern, Inc, 120 BR 279, 284 (Bankr SDNY 1990) (stating that to confirm a
plan the court must find that the plan proponent has complied with all applicable provisions of s 1129).
89 See In re Cypresswood Land Partners, I, 409 BR 396, 422 (Bankr SD Tex 2009) (the debtor has the burden

of proving if a plan conforms with s 1129(b) of the Bankruptcy Code by a preponderance of the evidence).
90
See In re Union Meeting Partners, 165 BR 553, 574 (Bankr ED Pa 1994) (providing that a plan proponent
has the affirmative burden of proving that its plan satisfies the provisions of [section] 1129(a) by the preponder-
ance of the evidence, even in the absence of an objection).
91
See 11 USC 1126(c).
92 See In re Journal Register Co, 407 BR 520, 529 (Bankr SDNY 2009) ([w]here [section] 1129(a)(8) cannot

be satisfied because impaired classes fail to accept the plan or receive nothing and are deemed to reject the plan,
confirmation of a chapter 11 plan requires compliance with all other requirements of [section] 1129(a) and also
the cramdown provisions of [section] 1129(b)).
93
See 11 USC 1129(b)(1).
94
See generally 11 USC 1141.
95 In re Crown Vantage, Inc, 421 F 3d 963, 972 (9th Cir 2005) (quoting In re Robert L Helms Construction &

Dev Co, Inc, 139 F 3d 702, 704 (9th Cir 1998)).

96
Under 11 USC 1128(b) any party in interest may object to plan confirmation. Specifically, a party in
interest includes the debtor, the trustee, a creditors committee, an equity security holders committee, a credi-
tor, an equity security holder, or any indenture trustee . . . 11 USC 1109(b). A party in interest, however, has
standing only to assert an objection based on its own interestsnot those of other parties. See Miller v US, 363
F 3d 999, 1003 (9th Cir 2004).
97 See In re Congoleum Corp, 414 BR 44, 56 (DNJ 2009) ([t]he Bankruptcy Code affords standing to object

to the confirmation of a reorganization plan to any party in interest, which has been construed broadly to
encompass anyone with a practical stake in the outcome of the proceedings) (internal citations omitted).

104
 III. Chapter 11 Plan Standards

B. Best Interests Test

The best interests test of section 1129(a)(7) of the Bankruptcy Code protects creditors and 3.73
equity holders who are impaired by the plan and who have not voted to accept it. Focus here
is placed on individual dissenting parties rather than classes.98 Specifically, the best interests
test requires that holders of impaired claims or interests who do not vote to accept the plan
receive or retain under the plan on account of such claim or interest property of a value, as
of the effective date of the plan, that is not less than the amount that such holder would so
receive or retain if the debtor were liquidated under chapter 7 of . . . title [11] on such date.99
If the court finds that each dissenting member of an impaired class will receive at least as
much under the plan as it would receive in a chapter 7 liquidation, the plan satisfies the best
interests test.100
To prove that the plan satisfies the best interests test, the plan proponent must submit 3.74
sufficient evidence that the debtors creditors will not receive less under the plan as compared
to a chapter 7 liquidation.101 Failure to provide such supportupon which the court
may undertake its own independent factual determinationwill bar confirmation.102
Most often, the plan proponent will provide expert testimony concerning a hypothetical
chapter 7 liquidation as of the effective date of the plan, the time at which the plan will be
implemented.103 Consequently, a considerable degree of speculation arises from an analysis
based on hypothetical fire-sale conditions.104 Such conjecture, however, is tempered by the
bankruptcy courts use of discretion in evaluating and weighing the relevant evidence pre-
sented during the confirmation hearing.105

98 See Bank of Am Natl Trust & Sav Assn v 203 N LaSalle St Pship, 526 US 434, 441 n 13 (1999).
99 See 11 USC 1129(a)(7)(A); see also In re Journal Register Co, 407 BR 520, 539 (Bankr SDNY 2009)
(the best interests test requires that each holder of an impaired claim or interest receive at least as much in the
chapter 11 reorganization as it would in a chapter 7 liquidation).
100 See In re Radco Properties, Inc, 402 BR 666, 675 (Bankr EDNC 2009) (for a plan to be confirmable, the

plan must provide creditors with at least as much as the creditors would have received in a Chapter 7
liquidation).
101
See In re Piece Goods Shops Co, LP, 188 BR 778, 791 (Bankr MDNC 1995) (finding the evidentiary
burden on the plan proponents was satisfied by extensive evidence presented at the confirmation hearing
concerning debtors current financial information including its assets and liabilities).
102
In re Southern Pacific Transp Co v Voluntary Purchasing Groups, Inc, 252 BR 373, 391 (ED Tex 2000) (A
plan obviously cannot be confirmed if there is an insufficient evidentiary basis to determine that it is in the best
interests of the creditors).
103
But see In re Lason, Inc, 300 BR 227, 233 (Bankr D Del 2003) (stating that a chapter 7 liquidation analy-
sis can be conducted either under forced sale conditions or as a going concern). Ibid.
104
See ibid. See also Southern Pacific Transp Co, 252 BR at 392 (Because such matters as asset valuation and
the estimation of liquidation recoveries can be drastically affected by the timing of ones calculations a court
must ensure that all financial projections incorporated into its analysis reflect the resources that are likely to be
available to a debtor on a plans effective date); In re Affiliated Foods, Inc, 249 BR 770, 788 ([t]he valuation of
a hypothetical Chapter 7 for purposes of [section] 1129(a)(7)(ii) is not an exact science [and] [t]he hypothetical
liquidation entails a considerable degree of speculation about a situation that will not occur unless the case is
actually converted to chapter 7).
105 See In re Resorts Intl. Inc, 145 BR 412, 47778 (Bankr DNJ 1990) (finding sufficient evidence to hold

that creditors would receive at least the same value they would receive under the proposed plan as they would
under a liquidation analysis). But see Southern Pacific Transp Co, 252 BR at 39091 (remanding the bankruptcy
courts decision to confirm a plan on the grounds that the court engaged in a questionable liquidation analysis
using an apparently arbitrary discount rate).

105
 Out-of-Court vs Court-Supervised Restructurings

C. Absolute Priority Rule

3.75 Section 1129(b) of the Bankruptcy Code contains a cramdown provision, which applies
when confirmation is non-consensual. It provides that if all of the applicable confirmation
requirements of section 1129(a)other than subsection (8), which requires that all impaired
classes accept the planare met, the court, on request of the plan proponent, shall confirm
the plan if it does not discriminate unfairly and is fair and equitable with respect to each
class of claims or interests that is impaired under, and has not accepted, the plan.106 In the
cramdown context, failure to comply with the absolute priority rule will preclude confirma-
tion of a plan of reorganization.
1. The plan must not unfairly discriminate
3.76 Under section 1129(b)(1), a non-consensual plan of reorganization can be confirmed only if
it does not unfairly discriminate against impaired dissenting classes. While unfair discrimi-
nation is precluded, fair discrimination is indeed permissible. The Bankruptcy Code offers
no description of unfair discrimination, however, it has been generally interpreted to mean
that dissenting classes receive relatively equal value under the plan as compared with other
similarly situated classes.107 While, bankruptcy courts have attempted to fashion a bright-
light objective standard to evaluate unfair discrimination, such efforts have met with little
success.
3.77 For example, competing tests have arisen in In re Aztec Company108 and In re Dow Corning
Corp.109 In Aztec, the court imported the underlying principles from section 1322(b)(1) of
chapter 13 of the Bankruptcy Code, which concerns unfair discrimination in the context of
individual repayment plans, to develop a four-part test to evaluate unfair discrimination.110
These factors include: (1) whether the discrimination is supported by a reasonable basis; (2)
whether the debtor can confirm and consummate a plan without the discrimination; (3)
whether the discrimination is proposed in good faith; and (4) the treatment of classes dis-
criminated against.111 While some courts have adopted the test in Aztec,112 others have criti-
cized it.113
3.78 Still, other courts such as Dow Corning114 have developed different criteria. There, the court
held that a plan of reorganization will be rejected on the grounds of unfair discrimination
where there is: (1) a dissenting class; (2) another class of the same priority; (3) a difference in

106 11 USC 1129(b)(1); see also Bank of Am Natl Trust & Sav Assn v 203 N LaSalle St Pship, 526 US 434,

441 (1999).
107
In re Armstrong World Indus, Inc, 348 BR 111, 122 (D Del 2006) (noting that [a] finding that all classes
of the same priority will receive the identical amount under the proposed [p]lan is not necessary to find that the
[p]lan does not discriminate).
108 107 BR 585 (Bankr MD Tenn 1989).
109 244 BR 705 (Bankr ED Mich 1999).
110 Aztech, 107 BR at 589.
111 Ibid at 590.
112
See Mercury Capital Corp v Milford Connecticut Assocs, LP, 354 BR 1, 10 (D Conn 2006); In re Buttonwood
Partners, Ltd, 111 BR 57, 63 (Bankr SDNY 1990); In re Creekstone Apartments Assocs, LP, 168 BR 639, 644
(Bankr MD Tenn 1994).
113
See McCullough v Brown, 162 BR 506, 516 (ND Ill 1993) (This court . . . cheerfully rejects any tempta-
tion to formulate a universal standard by which to measure all future class-discriminatory plans).
114 244 BR 705 (Bankr ED Mich 1999).

106
 III. Chapter 11 Plan Standards

the plans treatment of the two classes that results in either: (a) a materially lower percentage
recovery for the dissenting classmeasured by the net present value of all payments; or (b)
regardless of percentage recovery, an allocation under the plan of materially greater risk to the
dissenting class in connection with its proposed distribution.115 Unlike the Aztec factors,
which focus on reasonableness, a presumption of unfair discrimination arises under Dow
Corning only where the dissenting class [receives] a materially lower percentage recovery
or will have a materially greater risk in connection with plan distributions.116
Accordingly, under either of the aforementioned approaches, as between two classes of claims 3.79
or two classes of equity interests, there is no unfair discrimination if the classes are comprised
of dissimilar claims or interests, or taking into account the particular facts and circumstances
of the case, there is a reasonable basis for such disparate treatment.117 Thus, whether a plan
of reorganization unfairly discriminates against an impaired class boils down to whether the
proposed discrimination between classes has a reasonable basis and is necessary for successful
reorganization of the debtor.118

2. The plan must be fair and equitable

To confirm a plan under section 1129(b)(1) over the objection of dissenting classes of 3.80
impaired creditors or equity holders the plan must not only avoid unfair discrimination but
must also be fair and equitable.119 Justice Douglas labelled the words fair and equitable as a
rule of full or absolute priority120 based on previous judicial interpretations in the field of
equity receivership reorganizations. Such construction of the fair and equitable requirement
continues to be correct.
To comply with the absolute priority rule a plan must ensure that the holder of any claim 3.81
or interest that is junior to the claims of such [impaired]121 classes will not receive or retain
under the plan on account of such junior claim or interest any property.122 An essential
corollary of the absolute priority rule holds that a senior class cannot receive more than full
compensation for its claims or interests.123 Thus, where the interests of former shareholders
are eliminated in a cramdown plan, the court must ensure that the senior classes of claims do
not receive more than they are owed.124

115 Ibid at 710 (citing Bruce A Markell, A New Perspective on Unfair Discrimination in Chapter 11 (A New

Perspective) (1998) 72 Am Bankr LJ 227).

116 Armstrong, 348 BR at 12122 (applying the Dow Corning test).
117
See, eg, In re Drexel Burnham Lambert Group, 140 BR 347, 350 (SDNY 1992) (where legal claims are
sufficiently different as to justify a difference in treatment under a reorganization plan, reasonable differences in
treatment are permissible) (internal citations omitted).
118
In re Leslie Fay Cos Inc, 207 BR 764, 791 n 37 (Bankr SDNY 1997).
119
11 USC 1129(b)(1).
120
Case v Los Angeles Lumber Prods Co, 308 US 106, 117 (1939).
121 The fair and equitable requirement essentially codifies the absolute priority rule but requires different treat-

ment for different types of classesdepending whether the class is secured, unsecured, or a class of interests. See 11
USC 1129(b)(2)(A) (stating the requirements for secured claims); 11 USC 1129(b)(2)(B) (stating the require-
ments for unsecured claims); and 11 USC 1129(b)(2)(C) (stating the requirements for a class of interests).
122
11 USC 1129(b)(2)(B)(ii).
123 In re Exide Techs., 303 BR 48, 61 (Bankr D Del 2003) (internal citations omitted).
124 In re Trans Max Tech, Inc, 349 BR 80, 89 (Bankr D Nev 2006) ([o]ne component of fair and equitable

treatment [required by section 1129(b) of the Bankruptcy Code] is that a plan may not pay a premium to a
senior class); see also In re Future Energy Corp, 83 BR 470, 495 n 39 (Bankr SD Ohio 1988) (Clearly, overpay-
ment of senior creditors is violative of the fair and equitable standard).

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 Out-of-Court vs Court-Supervised Restructurings

3.82 A key facet of the absolute priority rule is the meaning of property. Specifically, the legisla-
tive history refers to an expansive interpretation of propertyincluding both tangible and
intangible interests.125 This broad definition includes both property interests that may be
received or retained by shareholders and creditors. As such, the method under which the
property to be distributed or retained under the plan is valued plays a vital role in determin-
ing whether the absolute priority rule is satisfied.
3.83 A significant exception to the absolute priority rule concerns contribution of new value under
a plan. The new value exception has its origins in dicta from a 1939 Supreme Court decision,
Case v Los Angeles Lumber Products Co.126 There, the Court stated that there are indeed circum-
stances when stockholders may participate in a plan of reorganization where the old stockhold-
ers make a fresh contribution and receive in return a participation reasonably equivalent to
their contribution.127 Where such value is contributed by the stockholders, no objection can
be made.128 The Supreme Court offered no guidance on whether or how the new value excep-
tion applied under the current version of the Bankruptcy Code until its 1999 opinion in Bank
of America Natl Trust and Savings Ass v 203 North LaSalle Street Pship.129
3.84 Prior to 203 North LaSalle, a split of authority existed as to whether the doctrine remained
valid under the Bankruptcy Code.130 Under the new value exception, if old equity provides
an infusion of new value, old equity holders are deemed not to have received property on
account of their old equity interests, thereby avoiding any violation of the absolute priority
rule.131
3.85 In 203 North LaSalle, the Supreme Court held that even if the new value exception to the
absolute priority rule existed under the Bankruptcy Code it still would not have permitted
the junior interest holders in that case to obtain an interest in the reorganized company.132
Key to the Courts finding was the junior interest holders exclusive opportunity to obtain
such interest free of market competition.133 Rather, the Court found that such exclusivity
was in fact a property interest that the junior holders received on account of their old
equity position.134 As a result of such exclusivity, replete with its protection against the mar-
kets scrutiny of the purchase price by means of competing bids or even competing plan
proposals, the Court concluded that any value received by the junior interests was solely on

125 See HR Rep No 95-595, at 413 (1977), reprinted in 1978 USCCAN 5963, 6368.
126
308 US 106 (1939).
127
Ibid at 121.
128 Ibid.
129 526 US 434 (1999).
130
Compare In re Bonner Mall Pship, 2 F 3d 899, 91016 (9th Cir 1993) (accepting the new value excep-
tion to the absolute priority rule), with In re Coltex Loop Central Three Partners, LP, 138 F 3d 39, 4445 (2d
Cir 1998) (disfavouring the new value exception without expressly rejecting it), and In re Bryson Properties,
XVIII, 961 F 2d 496, 504 (4th Cir 1992) (same).
131 See Bonner, 2 F 3d at 91516. Here, the Ninth Circuit objected to the notion that the new value excep-

tion allows old equity to repurchase the business at a bargain price, while superior creditors go unpaid. Ibid at
916. Rather, the court stated that, assuming proper application of the new value rule, its application will in fact
enhance the absolute priority rule rather than contravene its principles. Ibid.
132
203 North LaSalle, 526 US at 458.
133 See ibid at 45558. Moreover, the Court stated that there is no apparent reason for giving old equity

a bargain . . . unless the very purpose of the whole transaction is, at least in part, to do old equity a favor.
Ibid at 456.
134 Ibid at 456. In evaluating the presence of the term on account of in s 1129(b) the Court held that there

could be a new value corollary under the Code based on its inclusion in the statute. Ibid at 449.

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 III. Chapter 11 Plan Standards

the basis of its old equity position rather than the new value provided.135 As such, the Court
emphasized market exposure in determining the top dollar for a particular interestrather
than determination by a bankruptcy court.136
Following the Supreme Courts holding in 203 North LaSalle and uncertainty as to its con- 3.86
tinuing viability, lower courts continue to walk a fine line in applying the contours of the
new value exception.137 In doing so, courts have given special attention to the Courts crea-
tion of the so-called market test138 and its directive that any efforts by junior interests to
infuse new value into a debtor entity under a plan of reorganization first be exposed to
market competition, thus ensuring top dollar is received.139 The extent to which such expo-
sure is necessary, however, is an open question that bankruptcy courts will continue to grap-
ple with in the wake of 203 North LaSalle.
In Re Armstrong World Indus Inc,140 the Third Circuit had the opportunity to address the 3.87
absolute priority rule. Specifically, it held that equity holders cannot retain any interest if an
impaired dissenting class of senior creditors does not receive full payment, including
post-petition interest. In Armstrong, the company filed a chapter 11 case principally to deal
with its significant contingent asbestos-related liabilities. Three classes were at the core
of the Armstrong plan: Class 6 claimantsconsisting of unsecured creditors, including
bank lenders, that would receive a 59 per cent recovery; Class 7 claimantsconsisting of
present and future asbestos-related claimants, who agreed to receive a 20 per cent recovery,
and Class 12consisting of shareholders, whose equity interests would be wiped out.141 If
Class 6 voted against the plan, then Class 7 asbestos claimants would receive warrants, which
they would automatically waive in favour of Class 12, the equity class.142 The Third Circuit
reversed the lower courts confirmation of the Armstrong plan on the basis that this scheme
violated the absolute priority rule:
The absolute priority rule, as codified, ensures that the holder of any claim or interest that is
junior to the claims of [an impaired dissenting] class will not receive or retain under the plan
on account of such junior claim or interest any property. The plain language of the statute
makes it clear that a plan cannot give property to junior claimants over the objection of a more
senior class if that class is impaired.143

135
Ibid. The Court further supported its conclusion that the new value exception did not apply because the
debtors plan included a provision for vesting equity in the reorganized business in the Debtors partners with-
out extending an opportunity to anyone else either to compete for that equity or to propose a competing reor-
ganization plan. Ibid at 545.
136 See ibid at 456-7.
137 See Matter of Woodbrook Assocs, 19 F 3d 312, 319-20 (7th Cir 1994). In Woodbrook, the Seventh Circuit

fashioned a three-pronged test to determine whether the new value exception applies to a particular case.
Specifically, the following inquiries are relevant: (1) whether the old equity owners made a new contribution in
money or moneys worth; (2) that is reasonably equivalent to the value of the new equity interests in the reorga-
nized debtor, and (3) that is necessary for implementation of a feasible reorganization plan. Ibid at 320.
138 See 7 Collier on Bankruptcy at para 1129.04[4][c], p. 1129-137.
139
See, eg, Cypresswood Land Partners, I, 409 BR 396, 43839 (Bankr SD Tex 2009) (applying the new value
exception to permit approval of a plan of reorganization where there was sufficient notice to the interested
parties of the opportunity to offer competing plans); In re PWS Holding Corp., 228 F 3d 224, 23840 (3d Cir
2000) (finding equity holders did not enjoy an exclusive opportunity under the plan to invest in the reorganized
entity thus avoiding violation of the absolute priority rule).
140 432 F 3d 507 (3d Cir 2005).
141 Ibid at 509.
142 Ibid.
143 Ibid at 513 (alteration in original) (quoting 11 USC 1129(b)(2)(B)(ii)).

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 Out-of-Court vs Court-Supervised Restructurings

3.88 The Court of Appeals rejected the argument that the asbestos claimants could do whatever
they wanted with their plan distributions, observing that the absolute priority rule arose
from the concern that because a debtor proposed its own reorganization plan, the plan could
be too good a deal for the debtors owners.144 Such value retention by the equity holders
could otherwise result only from gifting from the asbestos claims holdersan impermis-
sible value transfer that was forbidden by Armstrong.
3.89 While Armstrong advocates a strict interpretation of the absolute priority rule, recent cases
have taken a more flexible approach to the concept of gifting within proposed reorganiza-
tions plans.145 For example, where there are sound business reasons for permitting the gift146
or the gift does not reduce a more senior creditors recovery147 courts have demonstrated a
willingness to permit deviations from the absolute priority rule. Thus, while Armstrong may
have signalled the demise of the gifting doctrine, this doctrine remains a viable option for
debtors seeking to build consensus in connection with proposed reorganization plans among
possible dissenting creditors.

D. Feasibility and Other Confirmation Standards

1. Feasibility
3.90 A plan of reorganization must be feasible to be confirmed. Specifically, section 1129(a)(11)
of the Bankruptcy Code provides that a plan of reorganization may be confirmed only if
[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for
further financial reorganization, of the debtor or any successor to the debtor under the plan,
unless such liquidation or reorganization is proposed in the plan.148 To prove that a plan is
feasible, the proponent must present proof through reasonable projections that there will
be sufficient cash flow to fund the plan and maintain operations according to the plan.149

144 Ibid at 512 (citing 203 North LaSalle, 526 US at 444).

145
See In re Iridium LLC, 478 F 3d 452, 463 (2d Cir 2007) ([i]n the Chapter 11 context, whether a settle-
ments distribution plan complies with the Bankruptcy Codes priority scheme will often be the dispositive
factor. However, where the remaining factors weigh heavily in favor of approving a settlement, the bankruptcy
court, in its discretion, could endorse a settlement that does not comply with some minor respect with the prior-
ity rule if the parties to the settlement justify, and the reviewing court clearly articulates the reasons for approv-
ing, a settlement that deviates from the priority rule).
146
See, eg, In re Charter Commcns, 419 BR 221, 26768 (Bankr SDNY 2009) (holding that a pre-plan
settlement did not violate the absolute priority rule where an equity holder received a recovery, before more
senior classes were paid in full, due to his cooperation throughout the reorganization process rather than on
account of his equity interests); In re Journal Register Co, 407 BR 520, 534 (Bankr SDNY 2009) (permitting
a gift by secured lenders to trade creditorsover the objection of unsecured creditorswhere credible
testimony supported the view that such a gift was necessary to ensure the goodwill of trade creditors, which
were essential to the debtors post-confirmation survival and was not being used for an ulterior purpose).
147 See, eg, In re TSIC, Inc, 393 BR 71, 77 (Bankr D Del 2009) (holding that a settlement did not violate the

absolute priority rule where the distributions to be paid to unsecured creditorsbefore more senior classes are
paid in fullwere derived from property that was not a part of the estate); In re World Health Alternatives, Inc.,
344 BR 291, 29798 (Bankr D Del 2006) (finding that a settlement does not violate the absolute priority rule
where it allows general unsecured creditors to receive a recovery before priority creditors and the recovery is a
carve out of the secured creditors lien and does not belong to the estate).
148 11 USC 1129(a)(11).
149 Pan Am Corp v Delta Air Lines, Inc, 175 BR 438, 508 (SDNY 1994) (internal quotations omitted).

See also In re Christian Faith Assembly, 402 BR 794, 799800 (Bankr ND Ohio 2009) (denying confirmation
of the debtors plan on the grounds of feasibility because of the debtors failure to obtain a firm financial
commitment).

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 III. Chapter 11 Plan Standards

Thus, an inquiry into a plans feasibility is essentially a question of fact, in which the debtor
has the burden, by a preponderance of the evidence, to provide sufficient evidence.150 The
feasibility test of section 1129(a)(11) is intended to protect creditors against visionary or
speculative plans.151 The prospect of financial uncertainty, however, cannot defeat confirm-
ation of a plan on feasibility grounds as only a reasonable assurance of success rather than
guaranteed success is the standard.152 Courts may consider several factors to determine
whether a plan is feasible including: (1) adequacy of the capital structure; (2) the earning
power of the business; (3) economic conditions; (4) the ability of management; (5) the
probability of the continuation of the same management; and (6) any other related matter
which affects the prospects of a sufficiently successful operation to enable performance
of the plans provisions.153 Thus, to be confirmed, a plan proponent must meet a relatively
low threshold of proof by demonstrating a realistic and workable framework for
reorganization.154

2. Other plan confirmation standards

In addition to the best interests test and feasibility, section 1129 of the Bankruptcy Code 3.91
incorporates several additional standards that the plan proponent must satisfy.155
(a) The plan must comply with the applicable provisions of title 11 (section 1129(a)(1))
Under section 1129(a)(1) a plan must comply with the applicable provisions of the Bankruptcy 3.92
Code.156 Despite its broad drafting, it is well established that section 1129(a)(1) is aimed at
compliance with sections 1122 and 1123157 of the Bankruptcy Code, which govern the classi-
fication of claims and the contents of a plan of reorganization, respectively, as well as section

150 In re Radco Properties, Inc., 402 BR at 678 (Bankr EDNC 2009). See Journal Register, 407 BR at 539

(finding the plan was feasible based on testimony by an experienced restructuring professional, financial projec-
tions and an exit financing commitment letter).
151 See Bridgeport Jai Alai, Inc. v Autotote Sys, Inc, (In re Bridgeport Jai Alai, Inc), 215 BR 651, 654 (Bankr D

Conn 1997). See also Christian Faith Assembly, 402 BR at 799 (Section 1129(a)(11) prevents confirmation of
visionary schemes that promise creditors more than what the debtor can provide post-confirmation.).
152 Kane v Johns-Manville Corp., 843 F 2d 636, 649 (2d Cir 1988). See also Crestar Bank v Walker (In re

Walker), 165 BR 994, 1004 (ED Va 1994) (A plan must provide a realistic and workable framework for
reorganization.).
153 In re Brice Road Developments, LLC, 392 BR 274, 283 (6th Cir 2008).
154
Ibid; see also In re The Prudential Energy Co., 58 BR 857, 862 (Bankr SDNY 1986) (Guaranteed success
in the stiff winds of commerce without the protection of the Code is not the standard under [section] 1129(a)
(11). . . . All that is required is that there be reasonable assurance of commercial viability); see also In re North
Valley Mall, LLC, 2010 WL 2632017, at *9 (The Code does not require debtor to prove that success is inevi-
table or assured, and a relatively low threshold of proof with satisfy [section] 1129 so long as adequate evidence
supports a finding of feasibility).
155
11 USC 1129; see also In re Cajun Elec Power Coop, Inc, 230 BR 715, 728 (Bankr MD La 1999) (for
a plan to be confirmed, the plan proponent bears the burden of proof with respect to each and every
element of section 1129(a)).
156
11 USC 1129.
157
The plan must comply with each of the seven mandatory requirements of section 1123(a) of the
Bankruptcy Code which include: (1) designating classes of claims and equity interests; (2) specifying any classes
of claims or interests that are not impaired under the plan; (3) specifying the treatment of any class of claims or
interests that is impaired under the plan; (4) providing the same treatment for claims or equity interests within
each class; (5) providing adequate means for implementation of the plan; (6) containing certain provisions
regarding the selection of post-confirmation managers and officers; and (7) containing only provisions that are
consistent with the interests of creditors and equity security holders and with public policy. See 11 USC
1123(a).

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 Out-of-Court vs Court-Supervised Restructurings

510, which governs the subordination of claims.158 To satisfy these provisions, classification
must be based on the nature of the claim or interest. Specifically, a claim or interest should be
included in a specific class only if it is substantially similar to other claims and interests in such
class.159 Classification, however, does not require that all substantially similar claims or interests
be placed in the same class.160 Thus, a proponent has significant flexibility in determining a
classification structure so long as dissimilar claims are not classified together and similar claims
are classified separately only for a legitimate reason.161

(b) The plan must comply with the applicable provisions of title 11 (section 1129(a)(2))
3.93 While section 1129(a)(1) concerns the form and content of the plan itself, section 1129(a)(2)
is concerned primarily with the applicable activities of a plan proponent under the Bankruptcy
Code.162 Thus, the principal purpose of section 1129(a)(2) is to ensure that a plan proponent
has complied with the disclosure and solicitation requirements set forth in sections 1125 and
1126 of the Bankruptcy Code.163

(c) The plan must be proposed in good faith (section 1129(a)(3))

3.94 Section 1129(a)(3) requires that a plan be proposed in good faith and not by any means
forbidden by law. Although not defined in the Bankruptcy Code, good faith has been
described to include a reasonable likelihood that the plan will achieve a result consistent
with the objectives and purposes of the Bankruptcy Code.164 In evaluating good faith courts
will consider the the totality of circumstances.165

(d) Additional requirements under section 1129(a)

3.95 Several additional requirements must be satisfied for a plan of reorganization to be con-
firmed. For example, section 1129(a)(4) requires that certain professional fees and expenses
paid by a plan proponent, debtor, or by a person receiving distributions of property under a
plan, be subject to court approval. This subsection requires that any and all post-petition
professional fees promised or received in the bankruptcy case be disclosed and subject to the
courts review and approval as to their reasonableness.166

158
See HR Rep No 95-595, 95th Cong, at 412 (1977), reprinted in 1978 USCCAN 5963, 6368; S Rep No
95-998, at 126 (1978), reprinted in 1978 USCCAN 5787, 5912.
159 11 USC 1122(a).
160
See In re Sentinel Management Group, Inc, 398 BR 281, 29697 (Bankr ND Ill 2008).
161
See In re Source Enters, Inc, 392 BR 541, 55556 (SDNY 2008). But see In re Mid-State Raceway, Inc,
343 BR 21, 31 (Bankr NDNY 2006) ([T]he one clear rule [that has] emerge[d] concerning [section] 1122 is
that thou shalt not classify similar claims differently in order to gerrymander an affirmative vote on a reorganiza-
tion plan) (internal citations omitted).
162
See 7 Collier on Bankruptcy at para 1129.03[2], at 1129-26 (15th edn rev 1999).
163
See In re Cypresswood Land Partners, I, 409 BR 396, 424 (Bankr SD Tex 2009) citing In re Landing Assocs,
Ltd., 157 BR 791, 811 (Bankr WD Tex 1993). Moreover, the Court noted that [s]ection 1129(a)(2) does not
provide creditors with a silver bullet to defeat confirmation based on each and every minor infraction of Title
11 that a debtor may commit. Ibid.
164 See Sentinel, 398 BR 281, 315 (Bankr ND Ill 2008) (internal citations omitted).
165 In re Madison Hotel Assocs, 749 F 2d 410, 425 (7th Cir 1984).
166 Journal Register, 407 BR at 537 (stating that the issue of reasonableness under s 1129(a)(4) will vary on a

case-by-case basis and depend on the particular facts surrounding the payments).

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 III. Chapter 11 Plan Standards

Further, the plan proponent must disclose the identity and affiliations of any individual 3.96
proposed to serve, after confirmation, as a director, officer, or voting trustee of the debtor or
the debtors successor.167 Additionally, any regulatory commission having jurisdiction over
the rates charged by the reorganized debtor in the operation of its business must approve any
rate change provided for in the plan.168
At the heart of consensual confirmation is section 1129(a)(8).169 Specifically, it mandates 3.97
that, subject to the exceptions contained in section 1129(b) of the Bankruptcy Code
described above, each class of claims or interests must either have accepted the plan or be
rendered unimpaired170 under the plan.171 Under section 1129(a)(10), however, if a plan
impairs one or more classes of claims at least one such class must vote to accept the plannot
including acceptance of the plan by an insider.
Additionally, section 1129(a)(9) sets forth a number of requirements relating to the payment 3.98
of priority claims. Among other things, this section provides that all administrative claims
must be paid in full in cash upon the plans effectiveness.172 Other priority and non-tax
claims must be paid as of the effective date in a manner that depends on whether the class
has accepted or rejected the plan.173
Furthermore, under section 1129(a)(12), certain fees listed in 28 USC 1930, which 3.99
relate primarily to quarterly amounts owed to the United States Trustee, must be paid or
arranged to be paid under the plan as of its effective date.174 Lastly, under section 1129(a)(13)
of the Bankruptcy Code the plan must also provide for the continuation of retiree benefits
for the duration of the period that the debtor has obligated itself to provide such
benefits.175

167 11 USC 1129(a)(5)(A)(i).

168
11 USC 1129(a)(6).
169 7 Collier on Bankruptcy at para 1129.03, p 1129-58.
170
See 11 USC 1124; see also Sentinel, 398 BR at 317 (A class is impaired if there is any alteration of a
creditors rights, no matter how minor) (internal citations omitted).
171 11 USC 1129(a)(8). A class of claims accepts a plan if the holders of at least two-thirds in dollar amount

and more than one-half in the number of claims vote to accept the plancounting only those claims whose
holders actually vote. 11 USC 1126(c). A class of interests accepts a plan if holders of at least two-thirds of the
amount of interests vote to accept the plan, counting only those interests whose holders actually vote. 11 USC
1129(d).
172
11 USC 1129(a)(9)(A).
173 11 USC 1129(a)(9)(B)(D).
174
While such fees must be paid to confirm a plan of reorganization, there is in fact no true need for this
provision as the fees explicitly referred to are already classified as administrative (first priority claims) under
s 507(a)(1) of the Bankruptcy Code and thus must be paid in full pursuant to the aforementioned s 1129(a)(9).
See 7 Collier on Bankruptcy at para 1129.03[13], p 1129-74.5.
175 In addition to the requirements set forth under s 1129(a) of the Bankruptcy Code, two additional limita-

tions on plan confirmation are set forth. Specifically, under s 1129(c) only one plan may be confirmed unless
the confirmation order has been revoked under s 1144 of the Bankruptcy Code. Further, under s 1129(d) of the
Bankruptcy Code, if the main objective of the plan is to avoid taxes or the application of federal securities laws,
the plan cannot be confirmed.

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 Out-of-Court vs Court-Supervised Restructurings

IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans

A. Pre-Petition Activities
1. General
(a) Pre-Packaged chapter 11 plan
3.100 A pre-packaged chapter 11 case is one in which the debtor, before filing its chapter 11 peti-
tion, prepares, distributes, and solicits acceptances for a plan of reorganization from its credi-
tors and shareholders.176 Because the debtor already will have solicited acceptances of its
plan, it will be able to file the plan on the petition date and immediately ask the bankruptcy
court to schedule a hearing to confirm it.177
(b) Pre-Arranged chapter 11 plan
3.101 A pre-arranged bankruptcy case178 is one in which the debtor negotiates with its creditors
and shareholders179 the terms of a plan of reorganization before filing its chapter 11 bank-
ruptcy petition, but waits to formally solicit acceptances until after the filing.180 As with a
pre-packaged plan, because the terms of the plan of reorganization have been negotiated pre-
petition, the debtor will be able to file the plan on or close to the petition date and
immediately ask the bankruptcy court to schedule hearings to approve the related disclo-
sure statement, solicitation procedures, and confirmation of the plan.181

2. Pre-petition disclosure and solicitation of a pre-packaged plan of reorganization

(a) Is court approval of the disclosure statement required?
3.102 A debtor is not required to seek court approval of its disclosure statement before soliciting
acceptances for a pre-packaged plan of reorganization.182 As a result, the period of time
between commencement of the chapter 11 case and the reorganization plans effective
date is normally one to two months shorter then in a pre-arranged case.183 A two-month
difference can be significant when considering the public relations stigma associated with

176
Usually a debtors chapter 11 reorganization plan must deal with two broad categories of individuals and
entities that assert rights against the debtors estate: (1) creditors who have claims against the debtor, and (2)
equity security holders who have interests in the debtor. Equity security holders include not only shareholders,
but others with similar equity or ownership interests in a debtor, such as a limited partners interest in a limited
partnership.
177 Bankruptcy Code provisions specifically allow for pre-packaged bankruptcy cases. See 11 USC

1102(b)(1) (allowing a committee of creditors chosen prepetition to serve as the official committee of creditors
in a chapter 11 case); 11 USC 1121(a) (permitting a debtor to file a plan of reorganization with its petition);
and 11 USC 1126(b) (allowing prepetition solicitation of plan acceptances).
178
A pre-arranged bankruptcy case is also commonly referred to as a pre-negotiated case or a partial pre-
packaged case.
179
The debtor need only negotiate with the most significant creditors who are expected to be impaired and
whose acceptances will be needed to confirm a plan.
180 To provide the debtor with assurance that these creditors and shareholders will vote in favour of the

prenegotiated plan, lockup or plan support agreements are typically used. Lockup agreements obligate the
creditors and shareholders (assuming certain conditions are met) to vote in favour of the pre-arranged plan.
181 The process of post-petition disclosure and solicitation for a pre-arranged bankruptcy case is the same as

in any other chapter 11 case and is governed by s 1125 of the Bankruptcy Code.
182 11 USC 1126(b).
183 Norton Bankruptcy Law and Practice 3d 97:36.

114
 IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans

bankruptcy, the distractions of dealing with committees and other interested parties, and the
additional costs associated with a bankruptcy proceeding.
Although the bankruptcy court need not approve a disclosure statement for a debtor in a 3.103
pre-packaged chapter 11, the debtor is still obligated to distribute one, and it must comply
with applicable non-bankruptcy law standards or, if there are none, the Bankruptcy Codes
concept of adequate information. Often, the debtor in a pre-packaged chapter 11 plan will
distribute a disclosure statement that is consistent with US securities laws requirements.184
Such requirements are more stringent and may be more costly than those required under the
Bankruptcy Code. For example, approval by the SEC may take two or three months, which
is time the debtor may not have to wait before filing its chapter 11 case.
(b) Sufficient disclosure
Irrespective of when a debtor solicits votes for a plan of reorganization, the Bankruptcy Code 3.104
requires that creditors and shareholders receive sufficient disclosure prior to voting. When
soliciting acceptances pre-petition, section 1126(b) of the Bankruptcy Code requires that
the debtor either: (a) comply with any applicable non-bankruptcy law, rule, or regulation
(for example, federal securities laws and regulations) governing the adequacy of disclosure in
connection with such solicitation; or (b) if no such law, rule, or regulation applies, the
debtor must provide, to each person it solicits, adequate information as defined in the
Bankruptcy Code.185 As a practical matter, the debtor should ensure that its pre-petition
disclosure and solicitation comply both with any applicable non-bankruptcy law, rule, or
regulation and with the Bankruptcy Code.
Prior to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 3.105
2005, a debtor was prohibited from continuing solicitation of votes for a pre-packaged plan
if the pre-petition solicitation was interrupted by a bankruptcy filing by or against the debtor.
The pre-petition solicitation was supposed to cease and post-petition solicitation was sup-
posed to be accompanied by a court-approved disclosure statement. Section 1125(g) of the
Bankruptcy Code now provides that notwithstanding the prohibition on post-petition solic-
itation of plan votes in the absence of a court-approved disclosure statement, acceptances of
the plan may be solicited from a claim or interest holder if such solicitation complies with
applicable non-bankruptcy law and if such holder was solicited prior to the commencement
of the case in a manner that complied with applicable non-bankruptcy law.186
(c) The adequate information standard
The debtor may not solicit post-petition acceptances of its reorganization plan before it 3.106
transmits to those voting on the plan (a) a copy (or summary) of the plan and (b) a disclosure
statement. The disclosure statement is designed to provide stakeholders with a detailed
background and commentary on the debtors reorganization and the plans technical
mechanics. The disclosure statement must contain adequate information, meaning infor-
mation of a kind, and in sufficient detail, as far as is reasonably practicable in light of the
nature and history of the debtor and the condition of the debtors books and records, that

184 See 11 USC 1126(b)(1); In re Zenith Electronics Corp, 241 BR 92, 99 (Bankr D Del 1999).
185 Adequate information is the relevant standard for all postpetition disclosure statements. See 11 USC
1125(a).
186 11 USC 1125(g).

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 Out-of-Court vs Court-Supervised Restructurings

would enable a hypothetical reasonable investor typical of holders of claims or interests of

the relevant class to make an informed judgment about the plan.187

(d) Disclosure statement contents

3.107 The disclosure statement should include, or at least describe, the documents that the debtor
expects to be executed in connection with the plan and other appropriate exhibits. The dis-
closure statement must clearly and succinctly inform the average creditor and shareholder
what distribution it will receive under the plan, when it will receive it, and what contingen-
cies there are to receipt. To that end, a disclosure statement usually includes descriptions of
the following:
(i) the circumstances that gave rise to the filing of the debtors bankruptcy petition;
(ii) the available assets and their value;
(iii) the anticipated future operations of the debtor;
(iv) the source(s) of the information provided in the disclosure statement;
(v) the condition and performance of the debtor while in chapter 11;
(vi) information regarding claims against the estate, including those allowed, disputed, or
estimated;
(vii) a liquidation analysis describing the estimated return that creditors and shareholders
would receive under a chapter 7 liquidation;188
(viii) the accounting and valuation methods used to produce the financial information in
the disclosure statement;
(ix) information on the debtors future management, including the amount of compen-
sation to be paid to the debtors directors, officers, and other insiders;
(x) a summary of the reorganization plan;
(xi) an estimate of all administrative expenses, including attorneys and accountants fees;
(xii) the collectibility of any accounts receivable;
(xiii) any financial information, valuations, or pro forma projections that would be relevant
to creditors and shareholders decisions to accept or reject the plan;
(ivx) the risks being taken by the creditors and shareholders;
(xv) the actual or projected value that can be obtained from avoidable transfers;
(xvi) the existence, likelihood, and possible success of non-bankruptcy litigation; and
(xvii) the plans tax consequences.
(e) Dissemination of the plan, disclosure statement, plan ballots, and voting
notice to creditors and shareholders
3.108 The debtor must send to all impaired creditors and shareholders copies of the plan, disclo-
sure statement, plan ballot, and notice setting the time within which acceptances or rejec-
tions of the plan must be received. In general, a claim or interest is impaired if the proposed
plan alters the legal, equitable, or contractual rights of such claim or interest in any respect.189
Significantly, the Bankruptcy Code provides that members of an unimpaired class are
conclusively presumed to have accepted the plan; the debtor need not solicit their accept-
ances.190 On the other hand, a class that neither receives nor retains any property under the

187 11 USC 1125(a)(l).

188 11 USC 1129(a)(7).
189 11 USC 1124.
190 11 USC 1126(f ).

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 IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans

plan is deemed to have rejected the plan.191 These presumptions, however, do not prevent
creditors and shareholders from challenging their treatment under the plan.
(f ) Deadline to vote on the plan
Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure (the 3.109
Bankruptcy Rules) prescribe a minimum period for soliciting votes in a pre-packaged bank-
ruptcy case. However, the Bankruptcy Rules do provide that a bankruptcy court may disre-
gard pre-petition votes if the court finds that creditors and shareholders were given an
unreasonably short period of time to vote on the plan.192 What constitutes an unreasonably
short period depends on the circumstances of each particular case; nonetheless, guidance
can be taken from the rules governing ordinary, non-pre-packaged bankruptcy cases. In such
instances, the Bankruptcy Rules require that creditors and shareholders have at least 28 days
to consider, and object to the adequacy of, a proposed disclosure statement.193 Thus, unless
specific circumstances warrant otherwise, creditors and shareholders should be given at least
28 days to consider the debtors plan and disclosure statement before casting their ballots.
3. The reorganization plan
The reorganization plan embodies the solution to the debtors financial problems and pro- 3.110
vides for the transactions, distributions, and protections contemplated by such solution. It
also defines and provides for (1) the classification and treatment of classes of creditor claims
and shareholder interests and (2) the means of implementing the plan.
In a pre-packaged or pre-arranged case, this business solution usually results from extensive 3.111
pre-petition negotiations between the debtor and its key creditors and shareholders along
with their respective representatives and advisers. Such negotiations resemble typical non-
bankruptcy workout negotiations, except that the goal of pre-packaged or pre-arranged plan
negotiations is not the standard post-workout closing, but a bankruptcy closing, that is,
confirmation and implementation of a court-approved reorganization plan, thereby allow-
ing the debtor to take advantage of the benefits provided under the Bankruptcy Code.194

191 11 USC 1126(g).

192 Fed R Bankr P 3018(b).
193
Fed R Bankr P 2002(b).
194
A pre-packaged plan allows the debtor to utilize many of the benefits available under chapter 11 includ-
ing: (1) the ability to modify payment terms of debt owed to all members of a class of creditors thus eliminating
the free rider problem inherent in out-of-court restructurings; (2) the ability to define, liquidate, and, in some
cases, disallow liabilities; (3) the ability to reject, assume, or assign contracts; (4) the ability to avoid certain pre-
petition transactions; (5) the potential to receive more favourable tax treatment; (6) the ability to bind all credi-
tor and equity holder classes, even those that do not consent to the plan; (7) the ability to resolve nearly all
disputes with creditors in a single forum; (8) the ability to resolve contingent, unliquidated, and unmatured
claims through estimation procedures; (9) the ability to complete expedited sales of encumbered assets free and
clear of liens and other interests; (10) the ability to reject executory real estate leases while limiting lease termina-
tion damages; (11) the ability to reject collective bargaining agreements; (12) the ability to halt litigation and
other creditor actions because of the automatic stay; and (13) the ability to eliminate balance sheet debt through
less than full payment of claims while retaining control for existing management or owners. See Norton
Bankruptcy Law and Practice 3d 97:25.

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 Out-of-Court vs Court-Supervised Restructurings

B. First-Day Filings
3.112 Once a debtor has obtained sufficient support for either its pre-packaged or pre-arranged
plan of reorganization, it is ready to file its voluntary chapter 11 petition. Along with the
petition, the debtor will need to file a number of first day pleadings on or shortly after the
petition date. First-day motions and applications can generally be grouped into two catego-
ries: (1) administrativepleadings dealing with procedural and administrative matters; and
(2) operationalthose asking the court to ensure that the debtors business and operations
remain stabilized and allowing the debtor to continue to operate its business consistent with
past practices.

1. Debtors standard filings

(a) Administrative filings
3.113 As in any chapter 11 case, the debtor will, along with its bankruptcy petition, need to file a
number of other Bankruptcy Code-prescribed documents including: schedules of assets and
liabilities, schedules of income and current expenditures, a statement of financial affairs, a
schedule of executory contracts and unexpired leases, lists of creditors and shareholders, and
a list of the creditors holding the at least the 20 largest unsecured claims. These administra-
tive documents are typically prepared by the debtors officers and professionals prior to filing
for bankruptcy. In addition, the debtor will likely file applications to retain counsel and other
professional advisers.
(b) Operational filings
3.114 Along with administrative pleadings, a debtor will usually file a number of motions asking
the court to approve procedures for allowing the debtors operations to continue unimpeded.
While the exact nature of the requests will depend on the specific circumstances, typical first
day operational pleadings include motions authorizing the debtor to: (i) continue to use its
existing bank accounts, cash management system, and business forms, (ii) use cash collateral
on an emergency basis, (iii) obtain post-petition financing, (iv) pay pre-petition wages and
benefits, (v) pay its critical vendors, and (vi) honour customers pre-petition claims (ie
returns, warranties, and deposits).

2. Additional filings for pre-packaged or pre-arranged plans

3.115 Since the debtor in a pre-arranged or pre-packaged chapter 11 case will have negotiated the
terms of the plan of reorganization or received sufficient votes in favour of its proposed plan
prior to filing for bankruptcy, the debtor should be able to file the following additional docu-
ments on or close to the petition datespeeding up the normal plan confirmation process.

(a) Plan and disclosure statement

3.116 As noted, the goal of a pre-packaged or pre-arranged case is to minimize the debtors stay in
bankruptcy by having the bankruptcy court promptly confirm its plan. The confirmation
process begins with the filing of the plan of reorganization and the related disclosure state-
ment. The Bankruptcy Rules also require the debtor to file, along with the plan and the dis-
closure statement, any other evidence of compliance with the pre-petition disclosure and
solicitation requirements.

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 IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans

(b) Pleadings to establish date for plan confirmation hearing and date by which plan
confirmation objections must be filed
Once the plan and disclosure statement are on file, the debtor will need to file requests for 3.117
the bankruptcy court to fix: (a) a date usually on at least 28 days notice to creditors, share-
holders, and other parties in interest195for the confirmation hearing, and (b) a date
usually a week or so before the confirmation hearingby which interested parties must file
objections to plan confirmation. The pleadings will also need to describe the proposed form,
manner, and extent of notice the debtor plans on providing to creditors, shareholders,
and other interested parties. Once the court enters the order, the debtor will have to mail
the notice of the confirmation hearing and confirmation objection deadline to all credi-
tors and shareholders.
(c) Pleadings to set bar date for filing proofs of claim or interest
A debtor cannot reasonably confirm and implement a plan without knowing the nature and 3.118
amount of the claims and interests that creditors and shareholders assert against it. In most
pre-packaged or pre-arranged plan cases, therefore, on the petition date the debtor should
file a motion asking the bankruptcy court to set a date, usually on at least 20 days notice
(commonly referred to as the bar date), by which all creditors and shareholders must file
proof of the claims and interests they assert against the debtor or be forever barred from
asserting those claims and interests in the debtors bankruptcy case or otherwise. Once the
bankruptcy court enters the bar date order the debtor will need to send creditors and share-
holders notice of the bar date; the bankruptcy court may also order notice by publication.
(d) Pleadings to obtain court approval of pre-petition and post-petition documents
and actions
As noted above, the bankruptcy court can, under certain circumstances, disregard votes 3.119
obtained pre-petition. Therefore, it is imperative that the debtor request that the bankruptcy
court approve the form, content, timing, and dissemination of the disclosure statement and
all notices, ballots, and other documents transmitted pre-petition. Any order should expressly
find that the documents are adequate and satisfy all legal requirements, including the notice
requirements of the Bankruptcy Code, the Bankruptcy Rules, and any applicable non-
bankruptcy law, rule, or regulation. In particular, the debtor should request an order expressly
approving the debtors pre-petition disclosure and solicitation; the order could be entered at
the same time as, or as part of, the order confirming the debtors plan.

C. Confirmation Hearing (Day 3060)

At the confirmation hearing the debtor will present evidence that its proposed plan complies 3.120
with all the requirements of the Bankruptcy Code and Bankruptcy Rules and that it has
followed the bankruptcy courts procedures for confirming the plan. The debtor will
also present evidence that it has received the requisite votes to confirm the plan. Finally, the
bankruptcy court will address any unresolved objections raised by parties-in-interest to the
debtors plan.

195 Under appropriate circumstances and for cause shown, the bankruptcy court may reduce the normal

28- day notice period. Fed R Bankr P 9006(c).

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 Out-of-Court vs Court-Supervised Restructurings

1. Determining plan acceptances and rejections

3.121 To confirm a plan, the debtor must receive the requisite approvals from its creditors and
shareholders. Acceptance by a class of creditors requires the affirmative vote of creditors
holding at least two-thirds in amount, and more than one-half in number, of the allowed
claims of such class voting on the plan.196 The plan acceptance standard for shareholders
interests has no numerosity requirement and only requires the affirmative vote of share-
holders holding at least two-thirds in amount of the allowed interests of such class voting
on the plan. The bankruptcy court will calculate these numbers by (1) including only the
creditors or shareholders that actually vote on the plan, and ignoring non-voting creditors
and shareholders, and (2) in unusual circumstances, excluding votes that the court deter-
mines, after notice and a hearing, were not cast or solicited in good faith or in accordance
with the provisions of the Bankruptcy Code.

2. Confirmation when no impaired class rejects the plan

3.122 As discussed above, if the plan impairs no classes of claims or interests, or if all impaired
classes vote to accept the plan, the bankruptcy court will confirm the plan if it satisfies the
requirements of section 1129(a) of the Bankruptcy Code. At the confirmation hearing the
debtor may have to present expert testimony or other evidence establishing, among other
things, that (1) under the plan (and even if the class as a whole accepts the plan) any dissent-
ing, impaired creditors or shareholders will receive or retain property of a value at least equal
to what they would receive or retain if the debtor were liquidated under chapter 7 of the
Bankruptcy Code and (2) the plan is feasible, that is, confirmation of the plan is not likely to
be followed by the liquidation or other financial reorganization of the debtor, except as
proposed in the plan.
3. Confirmation when an impaired class rejects the plan
3.123 If an impaired class rejects the plan, the debtor may nevertheless seek to confirm the plan
under section 1129(b) of the Bankruptcy Code, the so-called cramdown provision, as
described above. To cramdown a plan the debtor will need to show that: (1) the plan oth-
erwise complies with the requirements of the Bankruptcy Code, and (2) the plan: (a) does
not discriminate unfairly, and (b) is fair and equitable, with respect to each non-accepting
class of impaired creditors and shareholders.197 Practically speaking, this second require-
ment requires a showing that classes ranked below the objecting class(es) are not receiving
any distribution under the plan. In general, the debtor should have little difficulty cram-
ming-down a plan over the opposition of shareholders, although particular plan provisions
could make such a cramdown less likely.

D. Post-Confirmation Activities
1. Effectiveness of confirmation order
3.124 Confirmation of the debtors plan is evidenced by the courts entry of a confirmation order.
Although generally a confirmation order is effective ten days after entry, the Bankruptcy

196 11 USC 1126(c).

197 11 USC 1129(b)(1).

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 IV. Pre-Arranged vs Pre-Packaged Chapter 11 Plans

Court may direct that it be effective sooner, or even immediately upon entry. The debtor and
all other parties may rely on the confirmation order and, unless stayed, take all acts directed
or contemplated by it, such as preparing and executing documents, transferring property,
issuing securities, and the like.

2. Effect of confirmation
Generally, confirmation of the debtors reorganization plan (subject to certain limitations 3.125
and exceptions): (1) discharges the debtor from its pre-confirmation debts and other obli-
gations, and (2) binds the debtor, creditors, shareholders, and other parties within the
bankruptcy courts jurisdiction to the terms of the plan.

3. Post-confirmation jurisdiction
The Bankruptcy Code and the Bankruptcy Rules give the bankruptcy court considerable 3.126
authority to retain post-confirmation jurisdiction over the plan and its implementation, and to
enter all orders necessary to: (1) administer the debtors estate, and (2) ensure the performance
of any act that is necessary for consummation of the plan. The plan itself also may provide that
the bankruptcy court retain jurisdiction over particular matters. The bankruptcy court will
close the case when the debtors estate is fully administered. Afterwards, the bankruptcy court
may reopen the case to administer assets, to accord relief to the debtor, or for other cause.

E. Advantages and Disadvantages of a Pre-Packaged or

Pre-Arranged Chapter 11 Plan
Along with the benefits198 and costs of a traditional bankruptcy case, a debtor in a pre- 3.127
packaged or pre-arranged case should remain mindful of some additional considerations,
including the following.
1. Certainty
The debtor has a high degree of assurance that the plan of reorganization it negotiated will be 3.128
implemented with minimal revisions and disruptions by third parties. Indeed, even before
the debtor files its bankruptcy petition, it will know that its plan already has received the
acceptances (or will receive the acceptances) required to confirm the plan.
2. Speed and control
Because most of the work is done pre-petition, a pre-packaged or pre-arranged bankruptcy 3.129
case moves at a faster pace than a traditional chapter 11 case and can often go from filing the
petition through plan confirmation in a few months. The speed of a pre-packaged or pre-
arranged case greatly reduces the costs associated with the bankruptcy case and allows the
debtor greater control over the bankruptcy process.199

198
These benefits include, among other things: (1) the ability to implement a plan without receiving unani-
mous consent of creditors and shareholders; (2) the ability to alter and/or modify the debtors contractual
obligations with third parties; (3) the ability to assume, reject, or assign executory contracts and unexpired leases
and to issue securities; (4) the automatic stay; and (5) favourable tax treatment.
199 Note, however, that it is common for creditors to require a debtor to pay for their fees and expenses

expended during the pre-petition negotiation period.

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 Out-of-Court vs Court-Supervised Restructurings

3.130 A drawback to the fast-pace of the pre-packaged bankruptcy case is that it does not allow
for the debtor to take full advantage of the breathing spell that normally accompanies
a bankruptcy filing by application of the automatic stay. This breathing spell can provide
the debtor with ample time in which to thoroughly review its business operations, executory
contracts, and manage any pending litigation. Thus, for a debtor that is facing significant
operational difficulties, a pre-packaged bankruptcy, with its shortened life-span, may not
be appropriate. Rather, such a debtor may be best served by filing a more traditional bank-
ruptcy case.

3. Business deterioration
3.131 A pre-packaged bankruptcy case allows a debtor to avoid the stigma normally associated with
bankruptcy and may provide comfort to both customers and suppliers that the debtor is
working expeditiously and successfully to fix its problems. This can help prevent deteriora-
tion of the debtors business while in bankruptcy.

4. Pre-petition negotiation, solicitation, and voting

3.132 For the debtor, navigating the pre-petition negotiation and solicitation period raises a
number of additional considerations. The key to a successful pre-packaged or pre-arranged
bankruptcy case is the debtors ability to negotiate a comprehensive plan of reorganization
with its creditors. This requires the debtor to first identify the universe of creditors before it
can begin negotiating. While a debtor may know the identity of some of its larger creditors
(including debtholders) it may not know the identity of others. This is especially true if the
debtor has a large amount of trade creditors, a group constantly in flux, or if its debt is largely
held in street name. The worst-case scenario for a debtor would be to find out that it spent
significant time and resources negotiating with a group of creditors that couldnt deliver a
confirmable plan.
3.133 In addition, during this pre-petition period, there is a heightened risk that a group of credi-
tors may file an involuntary bankruptcy petition against the debtor pursuant to section
303(b) of the Bankruptcy Code. This risk is further heightened if the debtor is contemplat-
ing a cramdown plan leaving shareholders and subordinated creditors with little or no
recovery and nothing to lose by filing the involuntary petition.

V. The Section 363 Sale Alternative

A. Relevant Standard: Sound Business Reason

3.134 Section 363 provides, in relevant part, that [t]he trustee, after notice and hearing, may use,
sell, or lease, other than in the ordinary course of business, property of the estate.200 In
approving the sale of assets outside of the ordinary course of business and outside of a chapter
11 plan under section 363(b), courts generally have adopted the sound business reason test
established by the Second Circuit Court of Appeals in Re Lionel Corp.201 Such ruling imposes

200 11 USC 363(b)(1).

201 In re Lionel Corp, 722 F 2d 1063 (2d Cir 1983).

122
 V. The Section 363 Sale Alternative

a four-part test, requiring a debtor to demonstrate that: (1) there is a sound business purpose
for the sale; (2) the proposed sale price is fair and reasonable; (3) the debtor has provided
adequate and reasonable notice; and (4) the buyer has acted in good faith.202 After the debtor
has satisfied such standards, the court may then consider whether the proposed sale amounts
to a sub rosa chapter 11 plan.
1. Sound business purpose
Under Lionel Corp203 a bankruptcy court will approve a sale of all or substantially all of the 3.135
debtors assets under section 363 if there is some business justification, other than mere
appeasement of major creditors, for the asset sale.204 The Lionel court provided some guid-
ance to bankruptcy courts in making such determination:
[The] Bankruptcy judge must not blindly follow the hue and cry of the most vocal special
interest groups; rather he should consider all salient factors pertaining to the proceeding and,
accordingly, act to further the diverse interests of the debtor, creditors and equity holders,
alike.205
The Lionel court also provided a non-exhaustive list of factors courts should consider: 3.136

(i) the proportionate value of the asset to the estate as a whole;

(ii) the amount of time elapsed since filing;
(iii) the likelihood that a plan of reorganization will be proposed and confirmed in the near
future;
(iv) the impact of the proposed disposition of assets on future plans of reorganization;
(v) the value of consideration versus value of assets; and
(vi) whether the value of the assets to be sold is decreasing or increasing.

2. The sale must contemplate a fair and reasonable price

A fair and open sale process is crucial to a bankruptcy courts good faith finding.206 In deter- 3.137
mining whether the sale price is fair and reasonable, courts should consider whether
the assets have been marketed aggressively, what efforts were taken to maximize value to
creditors, and whether the purchase agreement and auction process were designed to encour-
age and maximize competitive bidding to ensure the highest value.207

3. Notice must be given to creditors and interested parties

Section 363(b)(1) of the Bankruptcy Code provides that the trustee may use, sell, or 3.138
lease estate property only after notice and a hearing.208 Section 102(1) provides that notice
and a hearing means after such notice as is appropriate in the particular circumstances
and such opportunity for a hearing as is appropriate in the particular circumstances.209
However, an actual hearing is not required if one is not timely requested or there is insufficient

202
See In re Delaware & Hudson Railway Co, 124 BR 169, 176 (D Del 1991); In re Exaeris, Inc, 380 BR 741,
744 (Bankr D Del 2008).
203 In re Lionel Corp, 722 F 2d at 1070.
204
Ibid.
205 Ibid at 1071.
206 See In re Summit Global Logistics, 2008 WL 819934 at 12 (Bankr DNJ, 26 Mar 2008).
207 In re Gulf Coast Oil Corp, 2009 WL 361741 at 12.
208 11 USC 363(b)(1).
209 11 USC 102(1).

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 Out-of-Court vs Court-Supervised Restructurings

time for a hearing. Generally, Bankruptcy Rule 2002(a)(2) requires 21 days notice by mail of
a proposed use, sale or lease of property of the estate other than in the ordinary course of busi-
ness, unless the court for cause shown shortens the time or directs another method of giving
notice.210 Most often, courts have shortened the notice period and permitted an expedited sale
when a delay would cause substantial deterioration of a debtors assets.211

4. The purchaser is proceeding in good faith

3.139 The Bankruptcy Code does not define good faith. Court-developed definitions include one
who buys . . . for value, without knowledge of adverse claims.212 The Third Circuit Court of
Appeals has stated that the requirement that a purchaser act in good faith . . . speaks to the
integrity of his conduct in the course of sale proceedings. Typically, the conduct that would
destroy good faith status at a judicial sale involves fraud, collusion between the purchaser and
other bidders or the trustee, or an attempt to take grossly unfair advantage of other bid-
ders.213 The good faith requirement prohibits fraudulent, collusive actions specifically
intended to affect the sale price or control the outcome of the sale.214
3.140 The good faith analysis is focused on the purchasers conduct in the course of the bankruptcy
proceedings, including the purchasers actions in preparation for and during the sale itself.215
Two inquiries relevant to the question of good faith are: (1) whether the petition serves a
valid bankruptcy purpose, ie by preserving the going concern value of a debtor or maximiz-
ing the value of the debtors estate, and (2) whether the petition is filed merely to obtain a liti-
gation advantage.216

B. Sub Rosa Plan

3.141 Courts first addressed the issue of a sub rosa plan in Re Braniff Airways.217 The Braniff court
held that the proposed 363 sale, which would have distributed travel coupons, promissory
notes, and a share of profits to different groups of creditors, was a de facto plan of
reorganization:
The debtor and the Bankruptcy Court should not be able to short circuit the requirements of
Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub
rosa in connection with a sale of assets . . . Were this transaction approved, and considering the
properties proposed to be transferred, little would remain save fixed based equipment and
little prospect or occasion for further reorganization. These considerations reinforce our view
that this is in fact a reorganization.218

210 Fed R Bankr P 2002(a)(2).

211
See In re Lehman Brothers Holdings Inc, No 08-13555 [Docket No 258] (Bankr SDNY, 19 Sept 2008)
(the court approved a major sale transaction, free and clear of all liens, claims, encumbrances, obligations, lia-
bilities and contractual commitments and rights after only five days in bankruptcy.).
212 See In re Abbotts Dairies of Pennsylvania, Inc, 788 F 2d 143, 147 (3d Cir 1986).
213 Ibid quoting In re Rock Indus Mach Corp, 572 F 2d 1195, 1198 (7th Cir 1978); see Licensing By Paolo,

Inc v Sinatra (In re Gucci), 126 F 3d 380, 390 (2d Cir 1997) (adopting the same definition of good faith).
214 Ibid.
215
Licensing By Paolo, Inc v Sinatra (In re Gucci), 126 F 3d at 390.
216 In re Abbotts, 788 F 2d at 165; In re Integrated Telcom Express, Inc, 384 F 3d 108, 120 (3d Cir 2004).
217 In re Braniff Airways, 700 F 2d 935, 949 (5th Cir 1983).
218
Ibid at 940.

124
 V. The Section 363 Sale Alternative

A court should, therefore, find that a 363 sale is an impermissible sub rosa plan of reorganiza- 3.142
tion when it short circuits the protections set forth in section 1129 of the Bankruptcy Code.
These protections include the:
Good Faith Requirementsection 1129(a)(3) of the Bankruptcy Code requires that a
plan be proposed in good faith and not by any means forbidden by law. This generally
means that there is a reasonable likelihood that the plan will fairly achieve a result consist-
ent with the Bankruptcy Code, in light of the particular facts and circumstances;219
Equal Treatment of Similarly Situated Creditorssection 1123(a)(4) requires the same
treatment for each claim or interest in a particular class, unless the holder of a particular
claim or interest agrees to a less favourable treatment of such claim or interest;
Acceptance of Creditorssection 1129(a)(8) requires that each class of claims or interests
accept the plan or such class is not impaired under the plan;220 section 1129(a)(10) requires
that if a class of claims is impaired under the plan, at least one class of claims that is
impaired under the plan has accepted the plan, determined without including any accept-
ance of the plan by an insider;
Cramdown Protectionunder section 1129(b)(2)(B)(ii), the plan must satisfy the fair
and equitable requirement of section 1129(b), or the absolute priority rule, which
ensures that a plan cannot give property to junior claimants over the objection of a more
senior class of creditors if such dissenting class does not receive full value for its claims;
Best Interests of Creditors Testsection 1129(a)(7)(A)(ii) requires that an impaired claim holder
who does not accept the proposed plan must receive property of a value that is not less than the
amount that such holder would receive if the debtor were liquidated under chapter 7;
Feasibility Requirementsection 1129(a)(11) of the Bankruptcy Code requires that a
plan be feasible in that confirmation of such plan is not likely to be followed by the liquida-
tion, or the need for further financial reorganization, of the debtor or any successor to the
debtor under the plan, unless such liquidation is proposed in the plan.

C. Recent Developments: Chrysler and General Motors

Section 363 sales customarily have been used to sell subsidiaries or unprofitable divisions or 3.143
obsolete assets of a debtor. However, the 363 sales completed by Chrysler LLC (Chrysler)
and General Motors Corporation (GM) during 2009 involved the transfer under section
363 of massive, entire enterprises and therefore drew significant attention. The question
before the bankruptcy court in those cases was whether 363 sales of all or substantially all of
a debtors assets should be permitted.

219
See In re Madison Hotel Associates, 749 F 2d 410 (7th Cir 1984), In re PW Holdings Corp, 228 F 3d 224,
242 (3d Cir 2000), In re Leslie Fay Cos, 207 BR 764, 781 (Bankr SDNY 1997).
220 Acceptances of a plan may not be solicited unless a court-approved disclosure statement has been trans-

mitted to the affected creditor or interest holder. 11 USC 1125(b).

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 Out-of-Court vs Court-Supervised Restructurings

1. Chrysler221
3.144 The chapter 11 case of In re Chrysler LLC, although complex, proceeded swiftly. A reorganiza-
tion that could have taken years to negotiate, was completed in a relatively short period of time.
Chrysler filed for and emerged from bankruptcy in 42 days. The rapid pace of this filing can
be credited to the Second Circuits interpretation and application of section 363 of the
Bankruptcy Code, which affirmed the Bankruptcy Courts decision to approve a sale under
section 363 of substantially all of Chryslers assets without confirmation of a chapter 11 plan.
3.145 Chrysler and related companies filed chapter 11 petitions on 30 April 2009. Chrysler immedi-
ately sought the Bankruptcy Courts approval of an asset sale transaction under section 363(b).
The proposed sale would transfer substantially all of Chryslers operating assets to New CarCo
(New Chrysler), a newly created entity owned by Fiat SpA, the United States and Canadian gov-
ernments, and a voluntary employees benefit association controlled by the United Auto Workers,
in exchange for New Chryslers assumption of certain liabilities and $2 billion in cash.
3.146 Following Bankruptcy Court approval of the sale, the Indiana State Police Pension Trust, the
Indiana State Teachers Retirement Fund, and the Indiana Major Moves Construction Fund,
along with certain tort claimants and others, sought both a stay of the sale and an expedited
appeal directly to the Second Circuit, both of which were granted. The Second Circuit
affirmed the Bankruptcy Courts order approving the sale, but entered a short stay pending
Supreme Court review. Following a brief additional extension of the stay, the Supreme Court
declined to grant any further extensions and the sale closed on 10 June 2009.
3.147 The Second Circuit held that the asset sale transaction did not constitute a prohibited sub rosa
plan, but served to maximize the value of the bankrupt estate. Asset sale transactions normally
are approved to preserve wasting assets at a time when there is a good business opportunity
that will benefit the debtor. While there are valid concerns that a section 363(b) sale of all or
substantially all of the debtors assets may strong-arm the debtor-in-possession and bypass the
requirements of chapter 11, there also is a need for debtors to maintain flexibility to preserve
their going concern value. Under the multi-factor test set forth in Lionel, the Second Circuit:
look[ed] to such relevant factors as the proportionate value of the asset to the estate as a whole,
the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be
proposed and confirmed in the near future, the effects of the proposed disposition on future
plans of reorganization, the proceeds to be obtained from the disposition vis--vis any apprais-
als of the property . . . and most importantly perhaps, whether the asset is increasing or
decreasing in value.222
3.148 After applying these factors, the Second Circuit found that the sale to New Chrysler maxi-
mized the ultimate value recoverable by creditors and thus was valid under section 363(b) of
the Bankruptcy Code. Moreover, the asset sale did not violate the absolute priority rule of
section 1129(b) of the Bankruptcy Code because the proceeds went solely to secured credi-
tors, who may be repaid outside of a plan.223

221
In re Chrysler LLC, 576 F 3d 108 (2d Cir 2009) vacated as moot, 130 S Ct 1015 (2009).
222
In re Lionel Corp, 722 F 2d at 1071.
223
In re Chrysler LLC, 576 F 3d at 118.

126
 V. The Section 363 Sale Alternative

On appeal, the US Supreme Court vacated the Second Circuits decision and remanded the 3.149
case with instructions to dismiss the appeal as moot.224 Although, the Second Circuit vacated
its decision,225 the Bankruptcy Courts judgment remains good law and the sale was left
intact.
2. General Motors226
Following in Chryslers footsteps, the disposition of GMs operating assets, which was 3.150
expected to be extremely cumbersome and time consuming, lasted only 40 days. Based on
the Chrysler precedent, after filing a chapter 11 petition on 1 June 2009, GM immediately
sought the Bankruptcy Courts approval of an asset sale under section 363 of the Bankruptcy
Code. The sale proposed to transfer substantially all of GMs assets to Vehicle Acquisitions
Holdings LLC, a purchaser sponsored by the US Department of the Treasury, free and clear
of liens, claims, encumbrances, and other interests, which would create a new GM to operate
free of any entanglement with old GMs chapter 11 case.
Various objectors contended that allowing GM to dispose of so many of its assets in a single 3.151
section 363 sale as a going concern was improper. Central to the objectors case was the argu-
ment that a sale of all or substantially GMs assets could only be completed through a reorg-
anization plan.
Following the Second Circuits decision in Chrysler, the Bankruptcy Court rejected the 3.152
objectors contentions and found that a chapter 11 debtor may sell all or substantially all of
its assets pursuant to section 363(b) prior to confirmation of a chapter 11 plan when the
court finds a good business reason for doing so. Here, after analysing the multi-factor test set
forth in Lionel, the Bankruptcy Court held that there was a good business reason to sell sub-
stantially all of GMs assets under section 363 because GM was not capable of locating ade-
quate funding for a reorganization and was bleeding cash; the going concern value of the
business was dropping dramatically. In fact, the Court noted that it would be hard to imag-
ine circumstances that more strongly justified an immediate 363 sale.

D. Conclusion
It remains to be seen how the use of section 363, after both Chrysler and General Motors, to 3.153
sell substantially all of a debtors assets will affect future reorganizations. In current market
conditions, such sales are becoming more common. If this becomes the norm, companies
would enter and exit bankruptcy much more quickly and important chapter 11 protections
for creditors will be become less relevant as the plan confirmation process is eclipsed by an
expedited sale transaction. Hopefully, trial courts will be vigilant in their review of the rele-
vant circumstances and application of the factors articulated in Lionel, Chrysler, GM, and
other relevant authorities to ensure that improper end-runs around the chapter 11 plan proc-
ess are not tolerated.

224 Indiana State Police Pension Trust v Chrysler LLC, 130 S Ct 1015 (2009).
225 In re Chrysler, LLC, 592 F 3d 370 (2d Cir 2010).
226 In re General Motors Corp, 407 BR 463 (Bankr SDNY 2009).

127
 Out-of-Court vs Court-Supervised Restructurings

VI. Chapter 11 and Administration Compared

A. Administration
3.154 Administration was an insolvency procedure at inception, although Part 10 of the Enterprise
Act 2002 attempted to reform it with a view to turning it into the go to rescue procedure for
companies in financial difficulties. The 2002 Act looked to streamline the administration
procedure by permitting the appointment of an administrator out of court by secured credi-
tors and companies or their directors, permitting secured creditors to choose the identity of
the administrator, permitting an administrator to make distributions to secured and prefer-
ential creditors (and, with the leave of the court, unsecured creditors), and amending the
purposes of an administration so that it may be used as a recovery mechanism by secured
creditors. The primary objective of administration is now to rescue the company as a going
concern.227 Only if this objective is not reasonably practicable to achieve, may the adminis-
trator proceed to the second objective of achieving a better result for the companys creditors
as a whole than would be likely if the company were wound up 228 (and only if it is not reason-
ably practicable to achieve either the first or second objective, will the third objective apply,
ie realizing the companys property to make a distribution to the companys secured or pref-
erential creditors).229
3.155 In practice, the success of the 2002 reforms to turn administration into the company rescue
procedure of choice has been limited. Few companies have been successfully rehabilitated by
administration, the most notable examples being Olympia & York, the owners of Canary
Wharf, and Railtrack. More commonly administration leads to the sale of the companys
assets, and subsequent liquidation. The rescue element has therefore transpired to be little
more than a bolt-on to what is fundamentally still regarded by the market as an insolvency
procedure with the accompanying stigma which that entails. Pre-packs, discussed later, are
able to mitigate the stigma to some extent but have not been without criticism themselves.
3.156 Such a conclusion may seem surprising, given that administration has frequently been
described as the UKs answer to chapter 11 of the US Bankruptcy Code. In practice, how-
ever, and as explored further in this section, the two differ considerably as restructuring
processes.

B. Differences in Theory
3.157 It is worth touching on what one might call the theoretical differences between administra-
tion and chapter 11; that is, their different purposes. Commentators have argued that
whereas administration previously focused on achieving the best possible realization for
creditors, chapter 11 has focused on preserving the corporate entity.230 However, it is debat-
able whether either of these premises is still correct. As seen earlier, following the introduc-
tion of the Enterprise Act 2002 rescuing the company as a going concern is no longer one of

227 Insolvency Act 1986, Sch B1, para 3(1)(a).

228
Ibid, para 3(1)(b).
229 Ibid, para 3(1)(c).
230
See, eg, G Moss, Comparative Bankruptcy Cultures: rescue or liquidation? (1997) 23 Brooklyn J of Intl
L 115, 121.
128
 VI. Chapter 11 and Administration Compared

four purposes of administration, any of which could be selected, but the first item in a man-
datory hierarchy of objectives.231 Additionally, some commentators have argued that chapter
11 is shifting its focus to place a greater emphasis on realizing assets.232

C. Differences in Practice
There are four key areas in which the operation of administration and chapter 11 as restruc- 3.158
turing processes differs:
the management of the debtor;
the ability of third parties to terminate contracts with the debtor;
the ability of the debtor to raise new financing once it has entered the process; and
the ability to bind non-consenting creditors to a restructuring plan.

1. Management of the debtor

The merits of debtor-in-possession processes versus practitioner-in-possession processes 3.159
have been debated at length.233 In summary, it is argued that where the shareholder base is
narrow and consolidated, management are likely to be too sympathetic to fairly represent the
creditors interests during reorganization and should therefore be replaced. Absent a consoli-
dated shareholder base, however, directors can be trusted to look after the creditors interests
and should be left in place as those best placed, by virtue of both qualification and informa-
tion, to manage the debtors day-to-day affairs.
The chapter 11 approach in theory conforms to this model. Shareholdings in large US cor- 3.160
porates tend to be widely dispersed and the directors and officers of debtor companies are
typically234 expected as part of the chapter 11 proceedings to, in the words of the US Supreme
Court, carry out the fiduciary responsibilities of a trustee.235 The management also enjoys
an exclusive period to formulate and present to the court a plan of reorganization. In prac-
tice, the management of the debtor may change or become subject to additional constraints
during the course of chapter 11 proceedings, sometimes at the instigation of the creditors
(and in particular those, if any, providing debtor-in-possession financing).236
By contrast, the administration regime in the UK does not conform to this model. Although 3.161
the shareholder base of publicly listed companies is also widely dispersed (although arguably
not to the same extent as in the US due to the larger stakes held by institutional investors),
the management of the debtor company is invariably replaced with one or more qualified

231
Insolvency Act 1986, Sch B1, para 3(1).
232G McCormack, Control and Corporate Rescue: an Anglo-American Evaluation (2007) IQLQ 515,
530532.
233
See, eg, N Martin, Common Law Bankruptcy Systems: Similarities and Differences, 11 American
Bankruptcy Institute L Rev 367, 390391; D Hahn, Concentrated Ownership and Control of Corporate
Reorganisations (2004) J of Corporate L Studies 117; G McCormack (n 232 above); Lijie Qi, Managerial
models during the corporate reorganisation period and their governance effects: the UK and US Perspective
(2008) 29(5) Company Lawyer 131140. See generally V Finch, Corporate Insolvency Law: Principles and
Perspectives (2nd edn, 2009) Ch 9.
234 In rare situations, an independent trustee may be appointed.
235 Commodity Futures Trade Commission v Weintroub, 471 US 343, 355 (1985).
236
See N Martin (n 233 above) p 390 and G McCormack (n 232 above) p 546.

129
 Out-of-Court vs Court-Supervised Restructurings

insolvency practitioners as administrators. From the day of his or her appointment, the
administrator has wide powers to run the debtors affairs.237 Although still in office, the direc-
tors and secretary of the debtor cannot exercise their powers where to do so would interfere
with the exercise by the administrator of his, unless he consents. An administrator is also able
to appoint additional directors,238 although implementing such an appointment might
prove complex in practice. Crucially, it is the administrators and not management who for-
mulate proposals for the conduct and conclusion of the administration (including whether
or not to sell assets and whether or not to enter liquidation).
3.162 Some commentators have attempted to attribute this differing approach to the differing
historical origins of administration and chapter 11239 whilst others point to an alleged harsher
attitude in the UK to failed businesses.240 But whatever the philosophical reasoning, the
transfer of management responsibilities in an administration remains a key point of distinc-
tion from chapter 11 proceedings.
3.163 In 2001, Railtrack plc, the company which owned the track in the UKs railway network,
entered administration. Railtrack was subject to a special administration regime which
recognized its critical importance. One element of this regime was that the objectives were
varied from those in a normal administration, crucially so that the administrator had to keep
the railway running. For this and other reasons a Day One Order was sought and obtained
at the application hearing for the administration order pursuant to which day-to-day man-
agement powers were left with the directors. This approach was also adopted in the admini-
stration of Metronet, which operates part of Londons underground rail network. It may be
possible to use the Day One Order in an administration which is being sought to enable a
financial restructuring to occur. The argument would be that it was important that a busi-
ness as usual message could be deliveredand as such that the directors continue to operate
the business with the administrator in an oversight role.
2. Ability of third parties to terminate contracts with the debtor
3.164 Both chapter 11 and the administration regime provide a breathing space for companies
who enter the process by protecting them, subject to certain exceptions, against claims and
actions from third parties. The details of the application of the automatic stay provided for
in chapter 11 and the moratorium provided for in the administration regime are set
out below.
(a) Chapter 11 automatic stay
3.165 Section 362 of the Bankruptcy Code provides that a stay takes effect automatically upon the
filing of a petition for relief under the Bankruptcy Code without the need for a court order.
The stay enjoins nearly all judicial and administrative proceedings, as well as most informal
actions a creditor could take in an effort to collect a debt. As such, the automatic stay is one
of the most significant features of the Bankruptcy Code as it preserves the debtors going
concern value and prevents creditors from a race to collect debts. The scope of the stay
includes the following:

237
Insolvency Act 1986, Sch B1, paras 5969.
238 Insolvency Act 1986, Sch B1, para 61.
239 See, eg, N Martin (n 233 above).
240
See, eg, D Hahn (n 233 above).

130
 VI. Chapter 11 and Administration Compared

(i) Judicial and administrative proceedings The automatic stay blocks the commencement 3.166
or continuation of any judicial, administrative proceeding or other action against the
debtor that was or could have been filed pre-petition.241
(ii) Enforcement of judgments Section 362(a)(2) stays the enforcement of a judgment 3.167
obtained before the commencement of the bankruptcy case either against the debtor or
against the estate.
(iii) Acts to obtain possession or control of estate property Section 362(a)(3) stays any 3.168
act to obtain possession of property of the estate or of property from the estate or to
exercise control over property of the estate. This section inhibits a creditors right to self-
help repossession of the debtors property.242
(iv) Acts to create, perfect, or enforce liens The automatic stay prohibits any act to create, 3.169
perfect, or enforce any lien against property of the debtor. Therefore, once a debtor files
a bankruptcy petition, a creditor who has not yet perfected a security interest generally is
restrained from doing so.243
(v) Acts to collect Section 362(a)(6) stays any act to collect, assess, or recover a claim 3.170
against the debtor that arose before the commencement of the case.
(vi) Exercise of right to set-off Section 362(a)(7) stays the set-off of any debt owed to 3.171
the debtor that arose before commencement of the case. Though a set-off right generally
is preserved under section 553 of the Bankruptcy Code, section 362(a)(7) restricts the
exercise of such right.
(vii) Tax court proceedings Section 362(a)(8) stays the commencement or continuation 3.172
of a proceeding before the United States Tax Court concerning a corporate debtors tax
liability for a taxable period the bankruptcy court may determine or concerning the tax
liability of a debtor who is an individual for a taxable period ending before the date of the
order for relief.
A bankruptcy court may, upon a creditors request and after notice and a hearing, grant relief 3.173
from the automatic stay.244 The Bankruptcy Code provides two primary grounds for allow-
ing relief from the automatic stay: (1) for cause, including the lack of adequate protection of
an interest in property held by such party in such interest, or (2) with respect to an action
against property of the estate, if the debtor does not have any equity in such property (ie the
claims against such property exceed its value) and such property is not necessary for an effect-
ive reorganization of the debtor.245
(b) Moratoria in administration
Schedule B1 to the Insolvency Act 1986 provides for both an interim moratorium in the 3.174
period between either the filing of an application to appoint an administrator or the giving

241 11 USC 362(a)(1).

242 In re Holman, 92 BR 764 (Bankr SD Ohio 1988).
243 11 USC 362(a)(4),(5).
244 See 11 USC 362(d). In addition, there are numerous exceptions to the automatic stay contained in

s 362(b), including those relating to the exercise of certain police and regulatory authority and enforcement of
rights under various designated securities contracts, repurchase agreements, commodity contracts, and the
like.
245
Ibid.

131
 Out-of-Court vs Court-Supervised Restructurings

of notice of intention to appoint an administrator and the actual appointment, and a mora-
torium for the duration of the administration. Both moratoria have the same substantive
scope,246 set out in paragraphs 42 and 43 of Schedule B1, discussed below.
3.175 (i) Moratorium on other insolvency processes This element of the moratorias substantive
scope is, and always has been, uncontroversial. Paragraph 42 provides for a moratorium on
passing resolutions or granting orders for the winding up of a company; similarly paragraph
43(6A) provides for a moratorium on the appointment of an administrative receiver. Both
these elements were present in much the same form prior to the coming into force of the
Enterprise Act 2002 (in what was then section 11(3) of the Insolvency Act 1986).
3.176 (ii) Moratorium on the enforcement of security Paragraph 43(2) provides for a moratorium
on the enforcement of security over the companys property without the permission of
either the administrator or the court. Again, this was present in substantially this form
prior to the coming into force of the Enterprise Act 2002.
3.177 (iii) Moratorium on the repossession of goods Paragraph 43(3) provides for a moratorium on
the repossession of goods in the companys possession under a hire-purchase agreement without
the consent of either the administrator or the court. This was previously combined with the
moratorium on the enforcement of security (as section 11(3)(c)) but it is not thought that the
separation of these two elements is intended to make any substantive change to their scope.
3.178 (iv) Moratorium on the exercise of a right of forfeiture by peaceable re-entry (or right of
irritancy in Scotland) Prior to the introduction of this specific element (paragraphs 43(4)
and (5) of Schedule B1) as part of the Enterprise Act 2002 reforms, there had been some
debate as to whether a landlord was able to exercise a right of peaceable re-entry against
a company in administration without the leave of the administrator or the court.247 This
point has, however, now been clarified.
3.179 (v) Moratorium on the institution of a legal process against the company or its
property This is the most critical aspect of the moratorium as a result of the ruling in Re
Olympia & York Canary Wharf Limited 248 that the taking of non-judicial steps such as the
service of a contractual notice in order to crystallise the liability of the party on whom the
notice is served did not amount to instituting other proceedings . . . execution . . . or other
legal process within section 11(3)(d) of the Insolvency Act 1986 prior to its amendment
by the Enterprise Act 2002. In other words, other parties are entitled to terminate contracts
with the debtor during its administration. Other cases have considered the application of
the moratorium to specific self-help remedies, for example the forfeiture of a lease.
3.180 The Enterprise Act has since changed the wording of the moratorium on legal processes but
it is not believed249 that this change in wording was intended to in any way alter the position

246 Paragraph 44(5) provides that in the circumstances identified elsewhere in para 44 (ie where an interim

moratorium arises) paras 42 and 43 apply.

247 Clarence Caf Limited v Comchester Properties Limited [1999] L&TR 303 held that the right of peaceable

re-entry did not constitute security based on a previous decision in the personal bankruptcy area (Razzaq v Pala
[1997] 1 WLR 1336), in the process disapproving of the decision in Exchange Travel Agency Limited v Triton
Property Trust [1991] BCLC 396.
248 [1993] BCC 154.
249
See, eg, G Lightman and G Moss, The Law of Administrators and Receivers of Companies (4th edn, 2007),
at 22-004 (although note that the theoretical possibility of a challenge to Olympia based on the changed word-
ing is acknowledged at 22-030).

132
 VI. Chapter 11 and Administration Compared

established in the Re Olympia case. The European High Yield Association has previously
been vocal in its assertion that this constituted a missed opportunity to correct what it sees as
a major flaw in the administration regime.250 Others, however, have pointed out the poten-
tial unfairness to trade creditors in preventing them from terminating their contracts during
the debtors administration.251
The moratoria on claims set out above can be lifted with the approval of the administrator or 3.181
the consent of the court, with the exception of the moratorium on other insolvency processes
which is absolute.
The key point of distinction from the stay on proceedings under chapter 11 is the ability of 3.182
other parties to terminate contracts with the debtor. This is often a key deterrent from enter-
ing administration, particularly in contract businesses.

3. The ability of the debtor to raise new financing

Much has been made of the lack of a formal debtor-in-possession financing regime in the 3.183
English context. However, there are real questions as to how significant this has been in the
failure of administration to develop as a restructuring regime.
Any debt or liability on any contract entered into by the administrator in his role as the 3.184
companys agent will be payable in priority to the administrators fees and expenses and also
in priority to floating charges, although after fixed charges: paragraph 99(4) of Schedule B1
to the Insolvency Act 1986. There is a potential risk that the right of the administrator to
repay rescue finance as an administration expense under paragraph 99 would breach negative
pledge provisions given by the company to existing creditors. In practice, however, charges
arising by operation of law are commonly carved out from standard negative pledge provi-
sions. Even without an express carve-out, a court is arguably likely to construe the provision
so as to exclude charges arising by operation of law through no act on the part of the com-
pany. Also, case law suggests that whilst an administrator is not able to repudiate or disclaim
contracts, he may nonetheless decide on a balance of fairness test (ie the counterpartys inter-
ests versus those of the estate) not to perform a contract.252 Any counterparty will be left with
a claim in damages against the company, although the statutory moratorium that protects
companies in administration against creditor action will prevent the counterparty from
commencing proceedings, unless permitted by the court.
As a result of developments in English case law,253 the bar for the successful creation of a fixed 3.185
charge has been significantly raised. As a result, in many companies a significant proportion
of the assets will be subject to floating, rather than fixed, security and for the reasons outlined
above finance raised to fund the administration ought to rank above those claims.
Furthermore, the English investment grade market has typically been unsecured and so-
called fallen angels often have significant unencumbered assets. It may be that other aspects
of the administration regime have made it cumulatively unattractive as a restructuring

250 The European High Yield Associations 2007 submission on insolvency law reform pp 34.
251
V Finch, Corporate Rescue in a World of Debt (2008) J of Business L 756.
252 See, eg, Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCC 97, and Somerfield Stores Limited v

Spring (Sutton Coldfield) Limited [2010] L&TR 8; Sunberry Properties Ltd v Innovate Logistics Ltd [2009] BCC
164.
253 Re Brumark Investment Ltd [2001] 2 AC 710, PC (sometimes reported as Agnew v Commissioner for

Inland Revenue).

133
 Out-of-Court vs Court-Supervised Restructurings

procedure and, as a result, there has been no need to test the boundaries on administration
financing.

4. The ability to bind non-consenting creditors

3.186 In addition to offering the protection of an automatic stay (as discussed above), chapter 11
includes a mechanic for implementing, with the courts blessing, a plan of reorganization
(typically formulated by the debtors management) in the face of opposition from a dissent-
ing minority of creditors (commonly referred to as a cramdown). This mechanic is discussed
in detail elsewhere but for present purposes it suffices to note that the statutory provisions
also incorporate certain principles, such as the absolute priority rule, with which the plan
must comply before creditors can be crammed down. Of crucial importance to the applica-
tion of these principles is the valuation of the debtor, to which end the chapter 11 process
provides for valuation hearings where the court will approve a valuation in light of compet-
ing valuations from the debtor and dissenting creditors.
3.187 An administration offers no such opportunity of binding dissenting creditors. The adminis-
trator must formulate proposals to be put254 to a meeting of creditors for approval but such
approval does not bind any of the creditors to a compromise of their rights. Where this is
required as part of the restructuring of the debtor a combination of processes may be used,
with the administrator including a company voluntary arrangement or scheme of arrange-
ment as part of his proposals. The question in these circumstances is whether it is necessary
or desirable for the company to enter administration at all before the scheme or company
voluntary arrangement is proposed; the usual reason for doing so will be to take advantage of
the moratorium but as discussed above this is not always as useful as it may at first appear.

D. Perceptions of Administration and Chapter 11

3.188 Although the legal differences between administration and chapter 11 are discussed above,
perhaps the most commercially significant distinction is the manner in which they are per-
ceived. For an English company, administration is perceived as being a probable death-blow,
whereas in the US filing for chapter 11 relief generally is perceived as taking advantage of a
valid recovery technique.
3.189 Directly comparable figures are hard to come by, but two separate empirical studies into the
outcomes for companies which enter into chapter 11 and administration suggest an interest-
ing distinction. An analyst and assistant director of the Executive Office for Trustees pub-
lished a study in May 2009 looking at the outcomes of all chapter 11 proceedings commenced
after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005255 came into
force. Of those proceedings, 33.2 per cent. were confirmed, which implies they had out-
comes which might be classed as successful, ie where the same corporate entity continued
to trade. A study looking at administrations in the period between September 2004 and

254
Unless they state that (i) all creditors will be paid in full, (ii) that the debtor has insufficient property to
make any distribution to unsecured creditors other than the prescribed part, or (iii) that the first and second
purposes of administration cannot be achieved.
255
E Flynn and P Crewson, Chapter 11 Filings Trends in History and Today (2009) 28(4) American
Bankruptcy Institute J 14. The Bankruptcy Abuse Prevention and Consumer Protection Act was passed on 17
October 2005.

134
 VII. The Role of Receivership in English Restructurings

May 2005,256 however, concluded that less than 1 per cent [of the administrations in the
study] result in a rescue of the company. Although too much weight should not be given to
the disparity (given, inter alia, the disparity in the length of periods looked at), the suggestion
that as many as one third of chapter 11 cases may result in the original company continuing
to trade against no more than 1 per cent of administrations is noteworthy.
More anecdotally, one would be hard placed to name a UK listed company which had entered 3.190
administration and successfully emerged to continue trading. In the US, however, there are a
number of household names which have emerged from chapter 11 to continue trading in a rec-
ognizable form, such as United Airlines,257 Continental Airlines (which has been through not one
but two sets of chapter 11 proceedings),258 Texaco,259 Worldcom,260 Marvel,261 Greyhound,262
CIT Group Inc,263 and Macys264 (although Macys emerged under new ownership).
The focus on the continuation of the original company does not take into account the impact 3.191
of pre-packs, where a company is liquidated and its business sold to a new vehicle, leaving
liabilities owed to junior creditors behind in the original company. However, in terms of
public perception, such pre-packs may not be viewed as a success. On the contrary, the press
in the UK has typically had a very negative reaction to pre-pack administrations. Pre-packs
are discussed in further detail later.

VII. The Role of Receivership in English Restructurings

A receiver (or manager) is a person appointed pursuant to the terms of the relevant security 3.192
document by a secured creditor as a means of enforcing his security. An administrative
receiver is a receiver (or manager) of the whole or substantially the whole of a companys
property who is appointed by or on behalf of holders of debentures secured by a floating
charge or by such a charge and other forms of security.
An administrative receiver has similar management powers to those of an administrator and 3.193
also any additional powers conferred by the security document under which he is appointed.
There is, however, no moratorium, although the appointment of an administrative receiver
usually prevents the making of an administration order, unless the person appointing the
administrative receiver consents.

256
S Frisby, The pre-pack progression: latest empirical findings (2008) 21(10) Insolvency Intelligence
154158.
257
United Airlines filed for chapter 11 relief in December 2002 and exited chapter 11 in February 2006. Its
stock resumed trading on 2 February 2006.
258
Continental Airlines first filed for chapter 11 relief on 23 September 1983 and exited those proceedings
on 30 June 1988. Subsequently, it filed for chapter 11 relief again on 3 December 1990 and exited those pro-
ceedings in May 1993.
259
Texaco filed for chapter 11 Bankruptcy in April 1987 and emerged in May 1988.
260 Worldcom filed for chapter 11 relief in July 2002 and emerged in April 2004.
261 Marvel filed for chapter 11 relief in December 1996 and emerged in October 1998.
262 Greyhound filed for chapter 11 relief in June 1990 and emerged in October 1991.
263 CIT Group Inc filed for chapter 11 relief on 1 November 2009 and emerged on 10 December 2009.
264 Macys filed for bankruptcy in January 1992 and emerged approximately three years later.

135
 Out-of-Court vs Court-Supervised Restructurings

3.194 The administrative receiver takes possession of the secured assets with a view to realizing their
value and applying the proceeds to pay the amounts due to the secured creditor who
appointed the receiver. Creditors with fixed charges and preferential debts must be paid
before creditors with floating charges.
3.195 The Enterprise Act 2002 prohibits the appointment of an administrative receiver to most
companies. Administrative receivers appointed in respect of floating charges entered into
before the prohibition came into force on 15 September 2003 are not subject to the prohibi-
tion. Where a charge is entered into on or after 15 September 2003 it will only be possible to
appoint an administrative receiver where the company granting the charge falls into an
exception to the prohibition. The exceptions cover capital markets transactions, companies
which trade on the financial markets, companies involved in public-private partnership and
utilities projects, high value financed projects, companies subject to special administration
regimes, companies involved in urban regeneration projects, and registered social landlord
companies. The exceptions are complex and can be amended by statutory instrument.
Whether a company has the benefit of an exception will fall to be determined on the date of
appointment of an administrative receiver. In addition, for charges entered into on or after
15 September 2003, the receiver is required to set aside a proportion of the floating charge
realizations for the benefit of unsecured creditors.265
3.196 It may still be possible for a secured creditor to appoint a receiver under a fixed charge.
A receiver appointed under a fixed charge (usually called a fixed charge, or Law of Property
Act, receiver) has limited powers in respect of the property over which he is appointed. He
pays the proceeds of the property to the holder of the fixed charge. If the company subse-
quently goes into administration, the fixed charge receiver must vacate office if required to
do so by the administrator.
3.197 Whilst in certain circumstances, receivership (administrative receivership or fixed charge
receivership) may still form part of a restructuring armoury, it is not in itself a rescue proce-
dure. Indeed receivership is likely to signal an acknowledgement that the company has no
future and all that can be sought is the maximization of the proceeds of the sale of its assets
or business.

VIII. The Role of the Company Voluntary Arrangement

in English Restructurings

A. Introduction
3.198 Part I of the Insolvency Act 1986 (sections 17B) looks to remedy a deficiency highlighted
by the 1982 Cork Committee Report,266 by introducing into English law a voluntary
arrangement for companies which would be at the instigation of the debtor and be binding

265
Insolvency Act 1986, s 176A. This provision will not apply if the companys net property is less than the
prescribed minimum or the receiver thinks that the cost of making a distribution to unsecured creditors would
be disproportionate to the benefits (s 176A(3)).
266
Report of the Review Committee into Insolvency Law and Practice (Cmnd 8558, 1982).

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 VIII. The Role of the Company Voluntary Arrangement in English Restructurings

on creditors. A company voluntary arrangement (CVA) does not result from a court order
and/or the actions of a secured creditor as in the case of administration or administrative
receivership, but is rather a compromise as between a company and its unsecured creditors
enabling a composition in satisfaction of [the companys] debts or a scheme of arrangement
of its affairs.267 It is not a prerequisite that the company should be technically insolvent or
unable to pay its debts.
However, since the introduction of the procedure in 1986, CVAs have on the whole had very 3.199
little take up, remaining something of a backwater known only to a few very perceptive navi-
gators.268 Even the introduction of the small companies moratorium by the Insolvency Act
2000 (in force since 1 January 2003) did not cause any upsurge in its usage.269 A number of
explanations have been advanced for this.270 The most plausible, considered in further detail
later, are that CVAs cannot bind secured or preferential creditors without their consent, and
the available moratorium is limited in scope.
CVAs may serve as a powerful restructuring tool, as seen in the complex restructuring of the 3.200
TXU group. They have recently come into the spotlight due to the success of a number of
high profile CVAs in the retail sector, such as those for JJB Sports plc, Focus DIY, Discover
Leisure, and Blacks Leisure Group plc, together with the focus CVAs received in the govern-
ments 2009 consultation on insolvency law reform271 which flagged CVAs as the rescue
procedure of choice for tomorrows restructurings (given that they are apparently cheaper
and can result in higher returns to creditors than administration).272

B. Process
The whole process is relatively quick and, subject to the risk of challenge (discussed later), can 3.201
be implemented in around 45 days.
The initiative in proposing a CVA is taken by the directors of the company (or, if the com- 3.202
pany is in administration or liquidation, the administrator or liquidator as the case may be).
Indeed, the existing management are able to stay in place (although in certain circumstances
will be replaced, as was the case in the JJB Sports CVA). The proposal must provide for a
nominee (a qualified insolvency practitioner) to act in relation to the CVA either as a trustee
or otherwise to supervise its implementation.273 The nominee will require from the person
intending to make the proposal, the terms of the proposed CVA, and a statement of the
companys affairs setting out, among other things, details of creditors, the companys debts
and other liabilities, and its assets.274 The directors proposal of a CVA should provide a short
explanation of why, in their opinion, a CVA is desirable and give reasons why the creditors

267 Insolvency Act 1986, s 1(1).

268 Milman and Chittenden, Corporate rescue: CVAs and the challenge of small companies (1995) ACCA
Research paper, p i.
269 John Tribe, Company Voluntary Arrangements and rescue: a new hope and a Tudor orthodoxy (2009)

JBL 5 454487.
270 Ibid.
271
Insolvency Service, Encouraging Company Rescuea consultation (June 2009).
272 Background data: Impact Assessment of Encouraging Company Rescuea consultation (June 2009).
273 Insolvency Act 1986, s 1(2).
274
Ibid, s 2(3).

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 Out-of-Court vs Court-Supervised Restructurings

may be expected to concur with such an arrangement.275 The proposal must include all
information necessary for ensuring that creditors and members are able to reach an informed
decision on the proposal.276
3.203 The nominee, within 28 days (or such longer period as the court may allow) of being given
notice of the proposal for a CVA, is required to submit a report to court as to whether, in his
opinion, the proposed arrangement has a reasonable prospect of being approved and imple-
mented; whether meetings of the company and its creditors should be summoned to con-
sider the proposal; and if such meetings should be summoned, their date, time, and place.277
Court involvement is limitedthe court has no role (at least at this stage) in approving the
CVA or scrutinizing its terms. CVAs are consequently considered to be relatively quick and
user-friendly when compared with more court-intensive restructuring tools such as schemes
of arrangement. If the nominee considers that the proposed CVA should not be pursued,
and submits a negative report, the company can seek another opinion from another
nominee.
3.204 If the nominee believes the proposal should be put, meetings of shareholders and creditors
are called to approve the proposal. Every creditor of the company of whose claim and address
the person summoning the meeting is aware is summoned to the creditors meeting.278
Meetings of the creditors and members should be summoned to consider the CVA proposal
within 28 days from the filing at court of the nominees report.279
3.205 Creditors vote as a single class (in contrast to the position under schemes of arrangement
where creditors are divided into distinct classes, as discussed later). However, although
there is no formal need for class meetings, the fact that creditors are in different classes
cannot be disregarded entirely (as discussed below in the context of the Powerhouse judg-
ment). Votes are calculated according to the amount of the creditors debt as at the date of
the meeting (or the date of the companys liquidation or administration). A creditor may
vote in respect of a debt for an unliquidated amount or any debt whose value is not ascer-
tained and for the purpose of voting (but not otherwise) such debt shall be valued at 1
unless the chairman of the meeting agrees to put a higher value on it.280 By way of example,
claims for future rent are unliquidated and unascertained; in the JJB Sports and Focus DIY
CVAs, a discounted rent formula (ie a formula to work out a discounted rent for the
remaining life of a lease) was used to create a mechanism for determining the level of
voting rights for unliquidated claims. The chairman is to ascertain the entitlement of per-
sons wishing to vote and can admit or reject their claims accordingly, in whole or in part281
(although the chairmans decision is subject to appeal to the court by any creditor or
member of the company).282

275Insolvency Rules 1986, SI 1986/1925, r 1.3(1).

276Ibid, r 1.3(2), as amended by the Insolvency (Amendment) Rules 2010, SI 2010/686.
277 Insolvency Act 1986, s 2(2).
278 Ibid, s 3(3).
279 Insolvency Rules 1986, SI 1986/1925, r 1.9(1), as amended by the Insolvency (Amendment) Rules

2010, SI 2010/686.
280 Ibid, r 1.17.
281 Ibid, r 1.17A.
282
Ibid, r 1.17A(3).

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 VIII. The Role of the Company Voluntary Arrangement in English Restructurings

Approval of the CVA requires a simple majority in value at the shareholders meeting,283 and a 3.206
majority in excess of 75 per cent by value at the creditors meeting284 (subject to the exclusion
of secured creditors285 and certain other limitations, for example, the overall 75 per cent required
to vote in favour must include more than 50 per cent of unconnected creditors). There is no
requirement to have a majority in number of those creditors who vote. Whilst the purpose of
requiring a separate meeting of members is arguably questionable (since the members may no
longer have a continuing economic interest in the company), the members vote cannot over-
ride the wishes of the creditors.286 Where a decision approving a CVA is made, under section 5
of the Insolvency Act 1986 it takes effect as if made by the company at the creditors meeting
and binds every person who in accordance with the rules: (a) was entitled to vote at that meet-
ing (whether or not he was present or represented at it), or (b) would have been so entitled if he
had notice of it, as if he were a party to the voluntary arrangement.
However, a CVA cannot affect the rights of secured or preferential creditors without their 3.207
consent,287 thus giving secured creditors a veto on an arrangement if it affects their rights.
Such consent is likely to be prohibitively difficult to obtain in todays multi-layered debt
structures, especially when junior secured creditors are out of the money and have no incen-
tive to cooperate. It is primarily for this reason that schemes of arrangement, rather than
CVAs, have remained the restructuring tool of choice in the English market in the larger,
highly leveraged debt structures.

C. Challenge
Section 6 of the Insolvency Act 1986 provides a right to challenge either the CVA itself or the 3.208
manner by which its approval was obtained:
6. Challenge of decisions
(1) Subject to this section, an application to the court may be made. . .on one or both
of the following grounds, namely
(a) that a voluntary arrangement . . . unfairly prejudices the interests of a
creditor, member or contributory of the company;
(b) that there has been some material irregularity at or in relation to either of the
meetings.
...
(4) Where on such an application the court is satisfied as to either of the grounds
mentioned in subsection (1) . . . it may do one or both of the following, namely
(a) revoke or suspend any decision approving the voluntary arrangement . . . or,
in a case falling within subsection (1)(b), any decision taken by the meeting
in question . . .;
(b) give a direction to any person for the summoning of further meetings to
consider any revised proposal the person who made the original proposal may
make or, in a case falling within subsection 1(b), a further company or (as the
case may be) creditors meeting to reconsider the original proposal.

283 Ibid, r 1.20.

284
Ibid, r 1.19.
285 Ibid, r 1.19(3).
286 Insolvency Act 1986, s 4A(2).
287
Ibid, ss 4(3) and 4(4).

139
 Out-of-Court vs Court-Supervised Restructurings

3.209 Any challenge must be brought within 28 days from the date of report to the court of the
meetings, or if by someone without notice of the meetings, 28 days from the first day he
became aware.288 There is thus an ongoing risk that an untraced creditor, who can demon-
strate unfair prejudice or some material irregularity, may challenge the CVA many years after
approval of the CVA at the creditors meeting. This is a distinct disadvantage in todays multi-
stakeholder debt structures where it can often be difficult to identify precisely who all the
creditors are, for example where there are contingent creditors, and stands in stark contrast
to the position in respect of schemes of arrangement where once the court gives its final sanc-
tion there is no risk of subsequent challenge.
3.210 The extent of the power to intervene under section 6 was considered by Warren J in the Sisu
Capital case,289 in which applicant creditors sought to revoke or suspend the approval given by
creditors meetings to CVAs relating to two companies in the TXU group. They were challeng-
ing the CVAs on the basis that they contained releases for office holders in respect of claims that
might have been brought against them. Warren J found that the speculative nature of the claims
was not enough, by itself, to establish unfair prejudice for the purposes of revoking or suspend-
ing a CVA. More recently, the question of what constitutes unfair prejudice for the purpose of
a section 6 challenge has been considered by Etherton J in Prudential Assurance Co Ltd v PRG
Powerhouse Limited290 and Henderson J in Mourant & Co Trustees Ltd and anor v Sixty UK Ltd
& ors.291 In both those cases the challenges were successful.292
3.211 In the Powerhouse case, which concerned the UKs third largest electrical retailer before it ran
into financial difficulties, the directors proposed to close 35 underperforming stores and
continue trading out of 53 more profitable sites. The claimants were landlords of closed
stores who had the benefit of guarantees given by Powerhouses parent company, PRG Group
Limited, in respect of Powerhouses obligations under the leases. When Powerhouse acquired
the business as a going concern in 2003, the claimant landlords had required parent guaran-
tees as a condition of their giving consent to the assignment of the leases. The guarantees were
drafted in such a way that they were not affected by any subsequent insolvency of Powerhouse.
The directors of Powerhouse proposed a CVA in 2007 under which the claims against it aris-
ing from the store closures would be compromised but all other claims would be settled in
full. The creditors whose rights were to be affected by the CVA would receive a dividend of
28 pence in the pound. They included the claimant landlords, even though the proposed
CVA also sought to release the parent companys guarantees in respect of the closed stores.
The claimant landlords were to receive nothing extra for the loss of the benefit of the guaran-
tees which (as acknowledged by the judge) had both real value in themselves and as a poten-
tial lever in negotiations. The majority of creditors were not affected at all as they stood to
have their claims settled in full or obtain a dividend of 28 pence in the pound when they
would have received nothing on liquidation. The landlord creditors with the benefit of the
parent company guarantee were in the minority. The CVA was consequently approved by
the requisite majority at a meeting of Powerhouses creditors. The guaranteed landlords

288
Ibid, s 6(3).
289Sisu Capital Fund Ltd v Tucker [2006] BPIR 154.
290 [2007] BCC 500.
291
[2010] EWHC 1890 (Ch).
292 For more recent judicial consideration of what constitutes unfair prejudice and material irregularity see

HMRC v Portsmouth City Football Club Ltd & Ors [2010] EWHC 2013 (Ch).

140
 VIII. The Role of the Company Voluntary Arrangement in English Restructurings

challenged the validity of the CVA, claiming that it was unfairly prejudicial to them as credi-
tors of Powerhouse.
Etherton J acknowledged that it is common ground that the issue of unfair prejudice should 3.212
be judged on the information available at the time the CVA is approved.293 He found that
any CVA which leaves the creditor in a less advantageous position than before the CVA
looking at both the present and futurewill be prejudicial.294 It is the additional need to
show that the prejudice is unfair which gives rise to difficulties.
It is common ground that there is no single and universal test for judging unfairness in this 3.213
context. The cases show that it is necessary to consider all the circumstances, including in
particular, the alternatives available and the practical consequences of a decision to confirm
or reject the arrangement.295
The judge continued that unfairness may be assessed by a comparative analysis from a 3.214
number of different angles, including both a vertical and horizontal comparison.

1. Vertical comparison
Etherton J considered that [i]t will often be a useful starting point, and will always be highly 3.215
material, to compare the creditors position under the CVA with what the creditors position
would have been on a winding up. He referred296 to the judgment of David Richards J in Re
T & N Ltd:297
I find it very difficult to envisage a case where the court would sanction a scheme of arrange-
ment, or not interfere with a CVA, which was an alternative to a winding up but which was
likely to result in creditors, or some of them, receiving less than they would in a winding up of
the company, assuming that the return in a winding up would in reality be achieved and
within an acceptable time scale: see Re English, Scottish and Australian Chartered Bank [1893]
3 Ch 385.
Also, the Cork Committee Report had provided: 3.216
Unless it can be shown that the treatment of the general body of creditors under the voluntary
arrangement is likely to be at least as advantageous as that obtainable by Court proceedings,
then a dissatisfied creditor will have reasonable grounds for complaint and will be normally
entitled to have the debtors affairs administered by the Court; otherwise he would be bound
by the wishes of the majority voting in favour of the voluntary arrangement.298
Etherton J warned, however, that comparison with the position on a winding up is not 3.217
always conclusive as to unfair prejudice.299
A related principle, is that it is not for the court to speculate whether the terms of the pro- 3.218
posed CVA are the best that could have been obtained, or whether it would have been better
if it had not contained all the terms it did contain.300

293
Ibid at 71.
294
Ibid at 72.
295 Ibid at 74.
296
Ibid at 81.
297 [2005] 2 BCLC 488.
298 Report of the Review Committee into Insolvency Law and Practice (Cmnd 8558, 1982) para 364(4).
299 Ferris J in Re a Debtor (No 101 of 1999) [2001] 1 BCLC 54.
300 Warren J in SISU Capital Fund Ltd [2006] BCC 463 at 73; Chadwick LJ in Re Greenhaven Motors Ltd

[1999] BCC 463, CA at 469.

141
 Out-of-Court vs Court-Supervised Restructurings

2. Horizontal comparison
3.219 This is a comparison with other creditors or classes of creditors. The fact that a CVA involves
differential treatment of creditors will not necessarily be sufficient to establish unfair preju-
dice.301 Indeed differential treatment may be required to ensure fairness,302 or secure the
continuation of the companys business for example where it is necessary to pay trade
creditors.303
3.220 Depending on the circumstances, Etherton J found that a helpful guide is comparison with
the position if, instead of a CVA, there had been a formal scheme of arrangement under the
Companies Act. Again the judge quoted from the judgment of David Richards J in Re T &
N Ltd:304
There is no statutory guidance on the criteria for judging fairness either for a scheme of
arrangement under section 425 of the Companies Act 1985 or for the CVA under section 6 of
the 1986 Act. There is a difference in the onus. Under section 425, it is for the proponents to
satisfy the court that it should be sanctioned, whereas under section 6 it is the objector who
must establish unfair prejudice. I do not, however, consider that there is any difference in the
substance of the underlying test of fairness which must be applied. It is deliberately a broad test
to be applied on a case by case basis, and courts have struggled to do better than the approach
adopted by the Court of Appeal in Re Alabama, New Orleans, Texas and Pacific Junction Railway
Co [1891] Ch 213 and summarised in the often cited passage from a leading textbook, Buckley
on the Companies Acts (14th edn) vol 1, pp 473474:
In exercising its power of sanction the court will see, first, that the provisions of the
statute have been complied with, second, that the class was fairly represented by those
who attended the meeting and that the statutory majority are acting bona fide and are not
coercing the minority in order to promote interests adverse to those of the class whom
they purport to represent, and thirdly, that the arrangement is such as an intelligent and
honest man, a member of the class concerned and acting in respect of his interest, might
reasonably approve. The court does not sit merely to see that the majority are acting bona
fide and thereupon to register the decision of the meeting, but, at the same time, the
court will be slow to differ from the meeting, unless either the class has not been properly
consulted or the meeting has not considered the matter with a view to the interests of the
class which it is empowered to bind or some blot is found in the scheme.
That paragraph is directed to schemes of arrangement. The crucial difference with a CVA is
that there is just one meeting of creditors, so that necessarily means that there may be sub-
groups who would constitute separate classes for a scheme. In considering unfair prejudice,
the court will have regard to the different position of different groups of creditor.
3.221 Etherton J accepted that, if a reasonable and honest man in the same position as the claim-
ants might reasonably have approved the CVA, that would be a powerful, and probably
conclusive, factor against the claimants on the issue of unfair prejudice. However it was also
the case that the fact that no reasonable and honest man in the same position as the claimants
would have approved the CVA was not necessarily conclusive in favour of the claimants.

301 Prudential Assurance Co Ltd v PRG Powerhouse Limited [2007] BCC 500 at 88. He referred to the judg-

ment of Ferris J in Re a Debtor (No 101 of 1999) [2001] 1 BCLC 54.

302 Sea Voyager Maritime Inc v Bielecki [1999] 1 BCLC 133 at 149; IRC v Wimbledon Football Club Ltd

[2005] 1 BCLC 66 at 18.

303
SEA Assets Limited v Perusahaan Perseroan (Persero) PT Perusahaan Penerbangan Garuda Indonesia [2001]
EWCA Civ 1696 at 4546; IRC v Wimbledon Football Club Ltd [2004] BCC 638 at 18.
304 [2005] 2 BCLC 488 at 81.

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 VIII. The Role of the Company Voluntary Arrangement in English Restructurings

Applying the vertical and horizontal tests, Etherton J held that the Powerhouse CVA unfairly 3.222
prejudiced the interests of the guaranteed landlords as creditors of Powerhouse, within the
meaning of section 6(1)(a) of the Insolvency Act 1986. The CVA left them in a worse position
than without the CVA, having regard both to the present and also future possibilities. The
guaranteed landlords would still have had the benefit of valuable guarantees on an insolvent
liquidation of Powerhouse, whereas all the other unsecured creditors would have received
nothing. The guaranteed landlords were thus the group of unsecured creditors that would
suffer least, if at all, on an insolvent liquidation, but they were the group that was most preju-
diced by the CVA.305 Etherton J found that such an illogical and unfair result would not have
occurred under a scheme of arrangement, as under a scheme the guaranteed landlords would
have been in a class of their own and would have vetoed any scheme, and the scheme would not
have needed to include creditors who were to be paid in full. The result was only different under
the CVA because all the creditors formed a single class, including those creditors who were to
be paid in full, the votes of the latter thus swamping the votes of the guaranteed landlords.
The facts of the Miss Sixty case are very similar to those of Powerhouse. Sixty UK Ltd was a 3.223
retailer operating from a number of leasehold properties which ran into financial difficulties
and decided to close its loss-making stores as part of its restructuring plan. Its attempts to
negotiate the surrender of leases of those stores failed so it sought instead to compromise its
liabilities in a CVA. Its liabilities to the landlord applicants related to two retail units which
were guaranteed by its ultimate Italian parent company. The effect of the CVA was to release
the parent from all guarantees upon payment to the landlords of a sum of 300,000 (said in
the proposal to represent 100 per cent of the tenants estimated liability to the landlords on
a surrender of the leases). A lower level of compensation was offered to landlords in respect
of leases which did not have the benefit of any guarantees.
The landlords challenge to the CVA was advanced on a number of grounds but centred on the 3.224
alleged inadequacy of the compensation payment and the compulsory deprivation of the benefit
of the parent company guarantees (which would have been enforceable regardless of whether the
tenant went into liquidation or the leases were disclaimed). They argued that they had been
unfairly treated, both in comparison with external unsecured creditors who had been paid in full
and with at least one creditor whose claims related to one of the other closed stores.
On reviewing the evidence and the principles established in the Powerhouse case, Henderson 3.225
J concluded that the landlords had been unfairly prejudiced as the CVA did not adequately
compensate them for the loss of their rights under the guarantee, even though it purported
to pay the full surrender value of the leases to the landlords. Accordingly, the CVA was
revoked. Moreover, the CVA created no enforceable obligation upon the parent to make any
of the compensation payments in return for which the applicants are obliged to give up their
guarantees, nor did it make the release of the guarantees conditional upon the receipt of such
payments.
Finally, Henderson J also expressed doubts as to the potential for a CVA to deprive a landlord 3.226
of a third party guarantee, saying although the possibility of guarantee-stripping in a
CVA was established in Powerhouse, and it has given rise to a good deal of debate among
practitioners and academics, there is no subsequent reported case in which the court has had

305 A similar conclusion was reached in the Miss Sixty case (n 291 above) discussed below at paras

3.2233.226.

143
 Out-of-Court vs Court-Supervised Restructurings

to consider whether and how a CVA might fairly effect a compromise of a landlords claim
against a guarantor of the tenant debtor.

D. Moratorium
3.227 Schedule A1 to the Insolvency Act 1986 introduced an optional moratorium of up to 28
days306 for certain small companies.307 The effect of the moratorium is similar to the statu-
tory moratorium which arises in administration, ie among other things, security cannot be
enforced and proceedings cannot be commenced or continued against the company or
its property except with the consent of the court. Insolvency Service data shows that
the small company moratorium has been little usedit was used in only 18 cases during
20078.308 This is likely to be because so few companies are eligible for it. Eligibility is
principally determined by reference to the definition of a small company under the
Companies Act 2006.309 A company will fall within the definition of being a small com-
pany if it satisfies two or more of the following requirements (in the year ending with the
date the company files for the CVA moratorium or in the last financial year of the company
ending before that date310):
turnover of not more than 6.5 million;
balance sheet total of no more than 3.26 million;
no more than 50 employees.
3.228 The Insolvency Act 1986 contains further exclusions from eligibility for certain companies
(for example, banks, building societies, insurance companies) as well as those involved in
certain financial transactions.311 Under the current legislation, there is no such moratorium
for medium or large companies. In practice, therefore, the number of companies which are
eligible for moratorium is extremely limited. This has further reduced the practical effective-
ness of CVAs as a restructuring tool.
3.229 The governments proposals in its 2009 consultation Encouraging Company Rescue con-
sidered extending the existing small company moratorium to medium and large-sized com-
panies, and the introduction of a new court-sanctioned moratorium of 42 days (extendable
up to three months) available to all companies. Such proposals appear to have been broadly
welcomed312 and the Insolvency Service confirmed that it will continue to develop more
detailed proposals in this regard.

306
Extendable up to a maximum of two months.
307 Section 1A of the Insolvency Act 1986 was enacted by the Insolvency Act 2000. Prior to then, there was
no mechanism for a company to obtain a moratorium whilst a CVA was being put in place, unless an adminis-
trator was simultaneously appointed.
308 Background data: Table 4, Impact Assessment of Encouraging Company Rescuea consultation (June

2009).
309 Companies Act 2006, s 382.
310
Insolvency Act 1986, Sch A1, para 3.
311 See Sch A1, paras 24 for exclusions.
312 Governments response to the Insolvency Service Consultation on Encouraging Company Rescue (11

November 2009).

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 VIII. The Role of the Company Voluntary Arrangement in English Restructurings

E. Retail Businesses
Retail is one sector which perhaps lends itself more readily to CVAs and indeed the recent success- 3.230
ful CVAs have predominantly been in this arena. Retail businesses are generally heavily reliant on
leased properties, their key creditors typically being landlords and unsecured trade creditors.
Continuing costs associated with closed retail stores (stores that are no longer trading, but where
the company remains party to a lease) are a particular issue as they can be a significant drain on
profitability. JJB Sports, for example, had costs of approximately 17.3 million per year associated
with the groups closed retail stores. A CVA may allow a distressed company to leave unwanted
stores behind, and pay just part of what it owes landlords of closed stores. Whilst landlords of
closed stores may lose out, their loss is likely to be less than it would have been if the company were
liquidated. The lack of a moratorium may not be of paramount concern to those suppliers who
have the benefit of retention of title arrangements, as was the case in JJB Sports.
UK sports retailer JJB Sports plc implemented a high-profile CVA in March 2009, in what 3.231
was the first case of a UK listed company successfully utilizing a CVA. In the face of falling
sales, the group encountered unprofitable lifestyle divisions, had a large portfolio of closed
stores and was finding quarterly rents a burden on cash flow. The CVA proposed a compro-
mise of closed store landlord claims of approximately 140 closed retail stores and certain
related contingent claims (such as claims of former tenants and guarantors) in return for a
ratable share in a pot of 10 million (which, on average, provided them with a return equiva-
lent to six months rent). The group was to remain liable for rates and insurance costs; land-
lords of the 250 open stores were to be paid monthly (instead of quarterly) for a period of 12
months pursuant to a rent concession agreement; the rights of all other unsecured, secured,
and preferential creditors were unchanged and they were paid in full. Creditors (including
landlords) and members voted overwhelmingly in favour of the proposals.
The story is not always one of success however, as illustrated by the failed Stylo CVA. Stylo plc, 3.232
a predominantly family-owned, AIM listed company, owned the Barratt and PriceLess shoe
chains. In response to financial difficulties, the operating companies proposed a restructuring
plan involving CVAs in February 2009. The CVAs failed to obtain the requisite 75 per cent by
value of creditor votes. Under the terms of the proposed CVA, the landlords were required to
move from passing rent (ie rent then payable) to 3 per cent of turnover for three months from
approval of the CVA and 7 per cent of turnover for the 21 months thereafter. Whilst the operat-
ing companies would continue to trade from all stores for a period of six months to enable the
landlords to seek new tenants, after the end of that period the operating companies would be
able to terminate their leases. The landlords would be required to find another tenant before
terminating the lease, rather than simply giving notice to the existing tenant. The proposals
consequently met a hostile response from landlords. They viewed the CVA proposals as confus-
ing as it was not clear which stores were wanted and which were not, and the interference with
contractual terms of the leases was unwelcome. The larger shopping centre landlords were pen-
sion funds, which owed duties to their pension holders to maintain value. Whilst 95 per cent
of trade creditors approved the CVA, only 20 per cent of landlords supported it. The necessary
voting threshold was therefore not met and Stylo had to be placed into administration.
As the failed Stylo, Powerhouse, and Miss Sixty CVAs demonstrate, securing the support of 3.233
landlords will be critical to the success of any retail CVA. The terms of any proposed CVA
will be paramountforced surrenders will not be well received by landlords and temporary

145
 Out-of-Court vs Court-Supervised Restructurings

concessions (for example in respect of rental payments) will always be preferred over perma-
nent amendments to lease provisions. The importance of managing dialogue with the land-
lords should not be underestimated. Landlord engagement should be early and extensive. In
the case of JJB Sports, call centres were set up and meetings held which resulted in an even-
tual meeting with every one of the 200 or so landlords, in order to ensure that they all under-
stood why the CVA was being proposed, its terms, and the advantages and disadvantages.

IX. English Pre-Packaged Administrations and

Corporate Debt Restructurings

A. Introduction
3.234 A pre-packaged administration, commonly referred to as a pre-pack, is not a creation of law
(it is not expressly contemplated by either the Insolvency Act 1986 or the Insolvency Rules
1986),313 but is rather a practice which has evolved. It is an arrangement under which a sale
of all or part of a companys business and/or assets is arranged before the formal appointment
of an insolvency practitioner as administrator. The sale is then rapidly executed on the same
day as, or shortly after, the appointment. The business may be sold to a third party, but more
usually is sold back to the existing management or existing senior lenders.314
3.235 Pre-packs are not new. They were originally developed for use in the context of receiverships
and were utilized in the administration regime which existed before the Enterprise Act amend-
ments were introduced. They are however becoming increasingly prevalent. Insolvency Service
data315 suggests that there were at least 1,190 pre-packs in 2009, which accounts for at least 29
per cent of the total number of administrations over the period. The key attraction is that the
swift sale is more likely to preserve value, goodwill, and confidence than a protracted adminis-
tration process, and therefore pre-packs with their business as usual veneer are particularly
attractive in people businesses, those reliant on goodwill (such as retail, advertising, and finan-
cial services), or regulated businesses which generally cannot be traded in insolvency. Examples
of pre-packs in the UK in recent years include Escada UK, the Officers Club, Whittard of
Chelsea, USC, Laurel Pubs, Allied Carpets, MFI, Mark One, Polestar, and Torex Retail.

B. Criticisms of Pre-Packs
The procedure has been branded legalised robbery, shabby and quickie bankruptcy
(Retail Week, 16 January 2009)
3.236 Despite their advantages in certain circumstances, pre-packs have been the subject of much
media criticism and public concern in the UK largely due to their perceived opaqueness

313 SI 1986/1925.
314 Insolvency Service data suggests that in the first half of 2009, 81 per cent of pre-pack sales reviewed were
made to parties connected with the insolvent company: Report on the First Six Months Operation of Statement of
Insolvency Practice 16 (20 July 2009), p 22. In the second half of 2009, 76 per cent of pre-packs reviewed were to
connected parties: Report on the Operation of Statement of Insolvency Practice 16 (JulyDecember 2009), p 14.
315 Insolvency Service, Report on the Operation of Statement of Insolvency Practice 16 (JulyDecember 2009), p 5.

146
 IX. English Pre-Packaged Administrations and Corporate Debt Restructurings

unsecured creditors (such as HMRC, trade creditors, and landlords) are presented with a
done deal, only being informed of the pre-pack after the sale is completed. (Secured credi-
tors will usually be aware of the transaction as they will generally be required to release their
security.) Concerns are magnified when the business is sold to an entity owned by secured
creditors or existing management who may have been responsible for the companys demise
in the first place. The introduction of out-of-court administrations following the enactment
of the Enterprise Act 2002 made these kinds of phoenix-style pre-packs possible as it ena-
bled management to appoint a management-friendly administrator.
The following passage, taken from a report on pre-packs by Dr Sandra Frisby for the 3.237
Association of Business Recovery Professionals,316 succinctly summarizes a number of spe-
cific objections which are often raised in relation to pre-packs:
A pre-packaged business has not, by definition, been exposed to the competitive forces of the
market, which may lead to the business being disposed of for a consideration less than would
have been obtained had it been marketed for an appropriate period.
Where a pre-pack is effected through administration, the rights of stakeholders to participate
in the decision-making process, as envisaged by the Insolvency Act 1986, are frustrated.
The pre-pack process is insufficiently transparent: creditors, or at least certain classes of credi-
tors, are not provided with information adequate to allow them to measure whether the prac-
titioner has carried out his functions in a manner that has not improperly or unlawfully
prejudiced their interests.
. . . a lack of transparency inevitably results in a want of accountability: creditors are entitled
to challenge the practitioners conduct but are disabled from doing so without the information
necessary to mount a challenge.
Pre-packs may be unacceptably biased towards the interests of secured creditors, most notably
floating charge holders. There may be no incentive to negotiate a consideration for the busi-
ness much over the amount necessary to discharge the secured indebtedness . . .
Pre-packs may also be geared rather more towards achieving enough to satisfy the claims of the
floating charge holder and practitioners fees and expenses, with no effort at capturing any
premium over and above these amounts
Where a pre-pack involves the sale of the business to a party previously connected with the
company, usually as director, the process resembles the practice of phoenixing . . .
. . . the opportunities for and appearances of collusion with the purchaser of the business are
heavily amplified where a sale of the business is effected through a pre-pack.

C. Pre-Pack Guidelines
In an attempt to alleviate such concerns and create greater confidence in the market, the 3.238
Joint Insolvency Committee (a body made up of each of the recognized professional bodies
and the Insolvency Service) issued Statement of Insolvency Practice 16: Pre-packaged Sales
in Administrations (SIP 16), which took effect from 1 January 2009. It sets out the stand-
ards required of practitioners who are involved in a pre-pack (as advisers or in the role of

316 S Frisby, A Preliminary Analysis of Pre-packaged Administrations (Report to The Association of Business

Recovery Professionals, August 2007), p 8.

147
 Out-of-Court vs Court-Supervised Restructurings

administrator), particularly concerning the disclosure of information to creditors. SIP 16 is

not legally binding, although the Insolvency Service has indicated that it expects practition-
ers to comply with both the spirit and letter of the SIP and failure to comply could result in
regulatory or disciplinary action.
3.239 SIP 16 reiterates317 the duties of administrators to act in the interests of creditors as a whole,318
and where the objective is to realize property in order to make a distribution to secured or
preferential creditors, to avoid unnecessarily harming the interests of creditors as a whole.319
Insolvency practitioners are required to make it clear that their role is to advise the company
as an entity and not individuals within it, encouraging directors to take independent advice;
this will be particularly important where the directors have a stake in the acquisition vehi-
cle.320 It sets out a detailed list of information which administrators must disclose to creditors
regarding the sale in order to ensure that creditors are provided with a detailed explanation
and justification of why a pre-pack was undertaken, and so that they can be satisfied that the
administrator has acted with due regard for their interests. Among other things, the admin-
istrators are required321 to provide details of the identity of the purchaser (including any
connection with the directors, shareholders, or secured creditor); the price paid; any market-
ing activities conducted by the company and/or the administrators; and any valuations
obtained of the business or the underlying assets. Other information required to be disclosed
includes the alternative course of actions that were considered by the administrators, and
why it was not appropriate to trade the business, and offer it for sale as a going concern,
during the administration. If there are exceptional circumstances (which are not further
defined) which prevent the disclosure of any of the information, the administrator must state
these. If the sale is to a connected party it is unlikely that considerations of commercial con-
fidentiality would outweigh the need for creditors to be provided with the relevant
information.322
3.240 The information should be provided to creditors as soon as possible, usually with the admin-
istrators first notification to creditors.323 Of course the provision of such information will be
to justify a sale that has already taken placeit will not give a right of veto to creditors of an
impending sale. It may however give creditors the information they need to subsequently
challenge the conduct of administrators, for example under paragraphs 74 and 75 of Schedule
B1 to the Insolvency Act 1986 where the interests of creditors are unfairly harmed or where
there is a claim for misfeasance.
3.241 Whilst the House of Commons Select Committee report published on 6 May 2009324 wel-
comed the introduction of SIP 16, it recognized that it was merely a step in the right direc-
tion and ongoing monitoring would be required:
There must be a systematic monitoring of the situation by the Insolvency Service and the
Department. If the new practice statement does not prove effective then it will be necessary
to take more radical action, possibly by giving stronger powers to the creditors or the court.

317 Statement of Insolvency Practice (SIP) 16, para 7.

318 Insolvency Act 1986, Sch B1, para 3(2).
319
Ibid, para 3(4).
320 SIP 16, para 5.
321 SIP 16, para 9.
322
SIP 16, para 10.
323 SIP 16, para 11.
324 HC Business and Enterprise Committee Sixth Report of Session 200809 (HC 198).

148
 IX. English Pre-Packaged Administrations and Corporate Debt Restructurings

In the meantime, we urge anyone who suspects the abuse of pre-packs to contact either the
Insolvency Service or the body that licences the insolvency practitioner concerned. We also
encourage large creditors, in particular Her Majestys Revenue and Customs, to take an active
role in rooting out abuse.325
The Insolvency Service has been monitoring insolvency practitioners compliance with SIP 16 3.242
since its introduction. Its report on the first six months operation of SIP 16,326 revealed that
only 65 per cent of the 572 SIP 16 reports it reviewed, were fully compliant with the disclosure
requirements of SIP 16. The main areas where reports fell down were statements being issued
to creditors late; failure to provide full details of a valuation or marketing exercise; and failure
to fully disclose a connection between the insolvent company and purchaser of its business.
Whilst the Insolvency Services figures for the period July to December 2009327 noted that 3.243
in the majority of cases, the quality and timeliness of information being provided is signifi-
cantly improved in comparison to the first six months of 2009, over one-third of the 497
pre-packs reviewed over the period were found to be non-compliant.328 Whilst it is encour-
aging to note the improved level of information being provided in the majority of cases,
which we believe has led to a greater understanding of pre-packs on the part of creditors and
others affected by the process, it is of serious concern that compliance overall did not improve
in the latter half of 2009, despite the issuance of further guidance.329
At the time of writing, the Insolvency Service has launched a consultation on a range of 3.244
proposed new measures to improve the transparency of, and boost confidence in, the pre-
pack process.330 Various options on which views are sought include giving statutory force to
the disclosure requirements in SIP 16; restricting the exit from administration, for all com-
panies subject to a pre-pack, so that the only available exit route would be through compul-
sory liquidation, so as to achieve automatic scrutiny of the directors and administrators
actions by the Official Receiver; requiring different insolvency practitioners to undertake
pre- and post-administration appointment work, thus addressing any concern that a single
insolvency practitioner is implicitly conflicted; and requiring the approval of the court or
creditors, or both, for the approval of all pre-pack business sales to connected parties. The
Office of Fair Tradings market study into corporate insolvency (announced on 12 November
2009) is also expected to have a particular focus on pre-packs.

D. Courts Approach to Pre-Packs

The English courts have confirmed that, where the circumstances require, an administrator 3.245
is entitled to dispose of the business and assets of a company in advance of a creditors meet-
ing and without the need for direction from the court. Both pre- and post-Enterprise

325
Ibid, para 26.
326
Insolvency Service, Report on the Fist Six Months Operation of Statement of Insolvency Practice 16 (20 July
2009).
327
Report on the Operation of Statement of Insolvency Practice 16 (JulyDecember 2009).
328 The insolvency trade body R3 considers such figures to be misleading given that just 7 per cent were

actually referred to regulatory bodies for possible disciplinary action (R3 press release, 19 March 2010).
329 Report on the Operation of Statement of Insolvency Practice 16 (JulyDecember 2009), p 3.
330 Insolvency Service, Improving the transparency of, and confidence in, pre-packaged sales in administra-

tionsa consultation (April 2010).

149
 Out-of-Court vs Court-Supervised Restructurings

Act 2002, the courts have demonstrated themselves to be reluctant to become involved in the
commercial decisions of administrators, in the absence of clear improprietary. Of course it is
only that relatively small proportion of pre-packs that are to be implemented by a court-
appointed administrator which currently find themselves before the court (in the context of
the courts approval of an administration order).
3.246 In T&D Industries plc,331 a pre-Enterprise Act 2002 case involving the interpretation of sec-
tion 17 of the Insolvency Act 1986, Neuberger J held that an administrator could dispose of
the assets of a company prior to the approval of his proposals by the companys creditors,
without specific direction of the court. The administrators in that case decided some two
weeks after the administration order that they wished to dispose of some of the assets of the
relevant companies as a matter of some urgency. Neuberger J noted332 that administration
was meant to be a more flexible, cheaper, and comparatively informal alternative to liquida-
tion. From the point of view of the court, it is undesirable to have a potential plethora of
applications by administrators; save where the issue is whether he has power to take the
intended action as a matter of law, it will normally be an administrative or commercial deci-
sion for the administrator on which the court has nothing useful to say. A conclusion to the
contrary, requiring the administrators to apply for directions whenever they wished to do
something, would involve administrators in potential delay and expense. Neuberger J did
however emphasize that the proposals should be put to the creditors as soon as reasonably
possible.333
3.247 The position does not appear to have changed radically post-Enterprise Act 2002 (a prime
purpose of which was, after all, to reduce court involvement in administrations) and the
introduction by it of Schedule B1 to the Insolvency Act 1986, although of course an admin-
istrator must now always consider the hierarchy of objectives set out in paragraph 3 of
Schedule B1 to the Insolvency Act 1986. In Re Transbus International Ltd,334 Collins J deter-
mined that administrators are permitted to sell the assets of the company in advance of their
proposals being approved by creditors.335 He reasoned that paragraph 68(2) of Schedule B1
to the Insolvency Act 1986 requires administrators to act in accordance with the directions
of the court: if the court gives [them], considering this to be a deliberate choice by legisla-
tors to adopt wording which mirrors the interpretation which Neuberger J had put upon the
earlier provisions.
3.248 There will be many cases where the administrators are justified in not laying any proposals
before a meeting of creditors. This is so where they conclude that the unsecured creditors are
either likely to be paid in full, or to receive no payment, or where neither of the first two
objectives for the administration can be achieved: see paragraph 52 of the Schedule. If, in
such administrations, administrators were prevented from acting without the direction of
the court it would mean that they would have to seek the directions of the court before car-
rying out any function throughout the whole of the administration. The Enterprise Act 2002

331 Re T&D Industries plc (in administration) [2000] 1 WLR 646.

332
Ibid at 652.
333 Ibid at 657.
334 [2004] 1 WLR 2654.
335
Ibid at 12.

150
 IX. English Pre-Packaged Administrations and Corporate Debt Restructurings

reflects a conscious policy to reduce the involvement of the court in administrations, where
possible.336
The first explicit judicial endorsement of the administration pre-pack as a legitimate tech- 3.249
nique is often considered to be DKLL Solicitors v Revenue and Customs Commissioners.337
DKLL Solicitors applied for an administration order, following which it was intended that
the proposed administrators would dispose immediately, and therefore prior to the holding
of a creditors meeting, of the business of the partnership to a newly formed LLP. Despite
opposition from HMRC, the partnerships largest creditor, which argued that it would be
wrong to make an administration order in circumstances where, had a meeting of creditors
been held, HMRC as largest creditor would have voted against the proposed sale, the court
made an administration order which allowed the pre-pack sale to go ahead. Andrew
Simmonds QC, sitting as a judge of the High Court, held that even had there been a credi-
tors meeting at which HMRC voted down the proposal, even the majority creditor would
not have had a right of veto of the administrators proposals as there would still have been a
real prospect of the court authorizing the proposed sale under paragraph 55 of Schedule B1
to the Insolvency Act 1986. Paragraph 55 provides that in circumstances where a creditors
meeting has failed to approve an administrators proposals, the court may do a number of
things, including making any order that the court thinks appropriate. There was no reason
why DKKL should be in a worse position or HMRC in a better position simply because the
matter involved a pre-pack.338 The judge admitted that he was particularly influenced by the
fact that the proposed sale seemed to be the only way of saving the jobs of DKKLs employees
and was also likely to result in the affairs of DKKLs clients being dealt with, with the mini-
mum of disruption.339
The High Court judgment in Re Kayley Vending340a post-SIP 16 caseappears to demon- 3.250
strate a greater proactiveness by the courts to look beyond the proposed administrators
statement at the effect of the administration and proposed pre-pack. Provided the court is
able to conclude, on the information submitted to it, that a pre-pack is in the best interests
of the creditors as a whole, the courts can confer their implicit blessing on the pre-pack by
making the administration order. Whilst it is primarily a matter for the applicant to identify
what information is likely to be provided in an administration application to assist the court,
and that information may not be limited to matters identified in SIP 16, the judge consid-
ered it likely that in most cases the information required by SIP 16, insofar as known or
ascertainable at the date of the application, will fall within the requirement and be appropri-
ate to enable the court to make its determination.341
Kayley Vending Limited supplied cigarette vending machines to public houses. Factors such 3.251
as the ban on smoking in public houses had contributed to cash flow problems. HMRC
applied for a winding up petition, as a result of which the directors were unable to make an
out-of-court appointment of an administrator. The directors applied for an administration
order and filed evidence that showed that the directors and proposed administrator intended

336 Ibid at 14.

337 [2008] 1 BCLC 112.
338
Ibid at 19.
339 Ibid at 20.
340 [2009] BCC 578.
341
Ibid at 24.

151
 Out-of-Court vs Court-Supervised Restructurings

to conclude a pre-pack sale immediately upon their appointment. The evidence showed that
directors and proposed administrators were negotiating with two potential purchasers, nei-
ther of which were connected to the directors. In fact the potential purchasers were the two
principal competitors of the company, supporting the opinion of the proposed administra-
tor that they would be the most likely purchasers and would be prepared to pay the most for
the assets. The administrators opinion, supported by an asset valuer, was that if the company
were to go into liquidation and the machines could not be serviced they could not be sold in
their present locations and would have to be removed and sold separately, at a much lower
value. The court was satisfied on the evidence before it that there was a reasonable prospect
of achieving a better return to creditors as a whole through the administration and proposed
pre-pack. There was nothing to suggest that the administration order should not be made as
a matter of discretion.
3.252 In Re Hellas Telecommunications,342 the court went one step further by expressly referring to
the proposed sale on the face of the order. The judgment concerned an administration appli-
cation in relation to Hellas Telecommunications (Luxembourg) II SCA, made on behalf of
the company and its directors on the grounds that it was unable to pay its debts and that
administration would produce a better result for creditors than a winding up. The proposal
by the potential administrators was to sell the companys key asset, namely its shareholding
in Greek telecoms company WIND Hellas, by way of a pre-pack. The proposed buyer was
Finance III S..r.l., a vehicle established by the incumbent sponsor, Weather S.p.a. As
Lewison J highlighted in his judgment, there had been a lengthy bid process and an attempt
by the company to attract bidders for its assets. Whilst complaints had been made about the
method by which that bidding process had taken place and in particular that Weather had
been given an advantage in terms of information provided to it, [n]evertheless, the fact
remains that the Weather bid is now the only bid on the table. Furthermore, the senior credi-
tors had made it clear that the only bid they were prepared to support was that of Weather;
and in all cases it was envisaged that their debt would stay in place post-restructuring making
their consent critical. Therefore on the evidence before the court there is no real alternative
for the administrators other than to proceed with the pre-pack sale to Weather. Lewison J
was satisfied that SIP 16 had been fully complied with. He further commented:
It is not entirely easy to see precisely where in the statutory structure the court is concerned
with the merits of a pre-pack sale. It seems to me that in general the merits of a pre-pack sale
are for the administrator to deal with; and the creditors, if sufficiently aggrieved, have a remedy
in the course of the administration to challenge an administrators decision. It may on the
evidence be obvious that a pre-pack sale is an abuse of the administrators powers, in which
event the court could refuse to make the administration order or could direct the administra-
tors not to complete a pre-pack sale. At the other end of the spectrum it may be that it is obvi-
ous that a particular pre-pack is on the evidence the only real way forward, in which case the
court could give the administrators liberty to enter into the pre-pack, leaving open the possi-
bility that a sufficiently aggrieved creditor could nevertheless challenge the administrators
decision ex post facto. But in the majority of cases the position may not be clear; in which event
the making of an administration order, even in the context of a pre-pack should not be taken
as the courts blessing on the pre-pack sale.343

342 Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295.

343
Ibid at 8.

152
 IX. English Pre-Packaged Administrations and Corporate Debt Restructurings

Lewison J referred to three courses of action the court can take when faced with a proposed 3.253
pre-pack. First, if the evidence before it suggests that the pre-pack would involve an abuse of
process, the court can either refuse to grant the administration order or grant the administra-
tion order but order that the sale should not go ahead. Secondly, where the evidence before
the court does not clearly point to the benefit of the pre-pack, the court can make the admin-
istration order but leave the pre-pack to the commercial judgment of the administrator.
Thirdly, if the evidence before the court is compelling, the order can expressly permit the
administrators to enter into the pre-pack. On the facts available to him, the judge felt confi-
dent that the pre-pack was the only legitimate option available to the company, and therefore
felt able to endorse expressly the pre-pack on the face of the order. An express endorsement
would not prevent a disgruntled creditor from challenging the pre-pack, but it is likely that
such a creditor would be required to offer up some evidence which had not been originally
put before the court at the time of the original application.
Finally, the case of Clydesdale Financial Services Ltd v Smailes344 warrants a mention as it 3.254
highlights the importance of an administrator obtaining robust valuation evidence in sup-
port of any pre-pack sale, as well as emphasizing that SIP 16 is something which administra-
tors need to consider from the outset.
The case involved an insolvent firm of solicitors that specialized in personal injury claims. It 3.255
sold its work in progress and retainers, together with its rights in respect of disbursements
and other assets to another practitioner for a total price of 1.9 million. The sale agreement
was executed immediately before the practice went into administration (therefore differing
from the typical pre-pack administration which entails the sale being executed on or shortly
after the appointment of the administrator), although the administrator in waiting in this
case had been actively involved in the terms of the sale. The companys major creditors (the
firms two funders and its ATE insurers) applied for an order removing the administrator
from office with a view to an investigation of the sale by an independent replacement office
holder. In particular, the claimants alleged that the sale had occurred at a gross undervalue
(they were particularly critical of the information provided to and methodology of the
valuer), that they had not been adequately consulted prior to the sale, and that the letter sent
to creditors informing them of the sale after the event did not contain the information
required by SIP 16.
Richard J removed the administrator from office (under paragraph 88 of Schedule B1 to the 3.256
Insolvency Act 1986). He found that the valuation evidence in support of the sale price was
not thorough enough to prove that the sale was for the best price available and so a review of
the sale was appropriate. The accountant who had conducted the valuation had merely car-
ried out a desk-top review of the practices assetshe had not inspected the files or reviewed
the assets of the firm, but rather based his valuation on the opinions of the practice partners
on the value of the firms work-in-progress. Whilst there was no clear evidence that a better
deal would have been possible, in the absence of clear evidence that this deal was the best
available, it was right for the transaction to be subject to review. The administrators involve-
ment in negotiating the deal meant they lacked the necessary independence to conduct such
a review.

344
[2009] BCC 810.

153
 Out-of-Court vs Court-Supervised Restructurings

3.257 Whilst the judge agreed that the administrator had not complied with SIP 16, the failure of
the administrator in that respect was not in itself a ground to remove him from office.
Keeping the creditors in the dark about the sale in order to prevent disruption to the sale was
a legitimate tactic, provided it was done honestly and for the purpose of securing a better deal
for creditors. Whilst the administrator had failed to appreciate that creditors had been enti-
tled to receive, on request, a copy of the sale agreement and valuation (having forgotten that
their sole task had been to act in the interests of creditors who were surely entitled, although
perhaps not as a matter of enforceable right, to see the agreement made for their benefit and
the valuation which was said to support it), the delay in production to the creditors had not
been sinister and did not provide a ground for removal.
3.258 Finally, it is worth mentioning the costs incurred by an administrator in waiting in negotiat-
ing the terms of a pre-pack sale, in particular whether such costs are recoverable as an admin-
istration expense. Prior to the coming into force of the Insolvency (Amendment) Rules
2010, an administrator could usually only recover costs incurred whilst in office as adminis-
trator, which precluded the recovery of costs incurred in negotiating a pre-pack sale before
his appointment.345 The only way of recovering such costs as an expense of the administra-
tion was if the appointment was made by court order and the court made a pre-appointment
costs order under its discretion under paragraph 13(1)(f ) of Schedule B1 to the Insolvency
Act 1986 to make any other order which the court thinks appropriate. This was the case in
Re Kayley Vending Limited,346 where the judge347 considered that the incurring of such costs
benefited the creditors as a whole more than it did any other stakeholders (such as manage-
ment). By contrast, in Re Johnson Machine and Tool Company Limited,348 again decided
before the implementation of the Insolvency (Amendment) Rules 2010, the judge refused
an administrators application for permission to pay his pre-appointment costs in negotiat-
ing a pre-pack as an expense of the administration, because the pre-pack sale was to a com-
pany connected to the insolvent companys existing management. The judge could find no
evidence that incurring the pre-appointment costs was plainly for the benefit of creditors as
opposed to the benefit of management. In fact he said it would rarely be possible to clearly
establish the balance of advantage in the creditors favour where the pre-pack is to a company
connected with the existing management (even if the sale achieved a better return for credi-
tors than would be the case in a winding-up). Furthermore, the judge took the narrow view
that the only costs and expenses recoverable are those relating directly to the appointment of
administrators[i]f the costs occasioned by insolvency advice would have been incurred
in any event, even if no decision to go down the administration route had been made,
it will rarely (if ever) be appropriate to order those costs to be paid as an administration
expense.349
3.259 The Insolvency (Amendment) Rules 2010, in force since 6 April 2010, allow insolvency
practitioners to recover certain pre-appointment costs and expenses from the insolvent
estate, subject to the approval of creditors, including 50 per cent of preferential creditors if

345 Insolvency (Amendment) Rules 2010, SI 2010/686.

346 [2009] BCC 578.
347
Following the earlier case of Re SE Services Ltd (High Court, 9 August 2006).
348 [2010] BCC 382.
349 Ibid at 11.

154
 X. English Schemes of Arrangement and Corporate Debt Restructurings

preferential debts are not paid in full.350 In order to obtain that approval, administrators will
need to justify why the pre-appointment work in question has assisted in achieving the
objective of the administration. At the time of writing it is as yet unclear as to whether the
courts will continue to adopt the narrow view of the scope of pre-appointment costs as taken
by the judge in the Johnson Machine and Tool Company case.

X. English Schemes of Arrangement and Corporate

Debt Restructurings

A. Introduction
A scheme of arrangement is a statutory procedure for effecting a compromise or arrangement 3.260
between a company and its members and/or creditors (or, importantly, any class of them),
with the sanction of the court. A scheme of arrangement is not an insolvency procedure, but
rather a creature of corporate statute to be found in Part 26 (sections 895899) of the
Companies Act 2006.351
Compromise and arrangement have no fixed meaning; the scope for using a scheme of 3.261
arrangement is therefore wide. Case law suggests that whilst the essence of a compromise is
that there must be some difficulty or dispute which the scheme seeks to resolve,352 arrange-
ment is broad enough to encompass any transaction involving an element of give and take
between a company and its members or creditors.353

B. Meaning of Creditor
The term creditor for this purpose is not defined in the Companies Act 2006, but the courts 3.262
have given the expression its ordinary meaning so as to include all persons having pecuniary
claims against the company notwithstanding that they are often difficult to quantify and
irrespective of whether such claims are actual, contingent, unliquidated, or prospective.354
Creditors are not limited to those who have a provable claim against a company, but will
include those that do.355
In the case of bond issues, who is regarded as the creditor is very much dependent on the 3.263
structure of the bond issue. Where the bonds are held in global form through the clearing
systems, one typically has to address the question of whether it is possible to allow the
ultimate beneficial holders of the bonds to vote on the scheme. Questions can arise as to
whether it is the common depositary or trustee who is the creditor, and whether the ultimate

350
Insolvency Rules 1986, SI 1986/1925, r 2.67(h) as amended by the Insolvency (Amendment) Rules
2010, SI 2010/686.
351 Prior to 2008, the procedure was governed by Pt XIII (ss 425-430) of the Companies Act 1985, and

before 1985 by various statutes.

352 Sneath v Valley Gold Ltd [1893] 1 Ch 477; Mercantile Investment and General Trust Co v International Co

of Mexico [1893] 1 Ch 484.

353 Re NFU Development Trust Ltd [1972] 1 WLR 1548.
354 Re Midland Coal, Coke and Iron Co [1985] 1 Ch 267.
355 Re T&N and others (No 4) [2007] Bus LR 1411.

155
 Out-of-Court vs Court-Supervised Restructurings

beneficial holders may be able to vote as contingent creditors without actually having defini-
tive notes issued to them (as such issuance can be expensive and administratively burden-
some). In the past, for example in the Marconi scheme (2003), a process of attornment was
employed, whereby global bonds were exchanged for definitive bonds on the day before the
creditors scheme meetings. Each definitive bondholder identified in a duly completed
account holder letter was then entitled to vote at the creditors scheme meetings. More
recently however, for example in the Countrywide scheme (2009), the noteholders were able
to vote directly without holding definitive notes. Under the terms of the New York law
indenture in that case, on an event of default under the notes, the ultimate noteholders had
the right to call for the issue of definitive bonds and were therefore contingent creditors with
an entitlement to vote on the scheme. The relevant contingency was the possible issue of
definitive notesit did not require an actual request to issue definitive notesthe fact that
there was power to do so was sufficient. The contingent creditor approach was similarly
adopted in, amongst others, the Energis plc and Ionica plc schemes.
3.264 As the Lehman Brothers administration shows, the concept of creditor for this purpose does
not encompass proprietary claims. The administrators of the European arm of Lehman
Brothers had been hoping to return client assets which were held on trust pursuant to a
scheme of arrangement. Lehman did not hold enough assets to satisfy the claims of all trust
clients, and it was not clear which assets were held on trust for beneficiaries. The administra-
tors, therefore, proposed a scheme of arrangement to compromise the claims of the trust
clients and apportion the shortfall in the assets between them. Counsel for the administra-
tors argued for the breadth afforded by case law to the definitions of the terms creditor and
arrangement. To be a Lehman scheme creditor one was required to have both a proprietary
claim to a security which was held on a segregated basis at the time of administration and an
associated pecuniary claim (however contingent) against Lehman. The pecuniary claim
could be a claim for damages or equitable compensation for breach of trust or contract (for
late delivery of the security for example). Counsel argued that the pecuniary claim arising
out of the trust relationship is enough to take a party through the creditor gateway and,
once through, an arrangement under Part 26 can deal with the whole relationship of a cli-
entie once through the creditor gateway, the scheme jurisdiction is engaged and extends
to all of a creditors rights against the company and not merely those that give rise to a claim
in debt. The significant practical difficulties in pursuing any alternative solution were
emphasized.
3.265 The Court of Appeal unanimously affirmed356 the earlier High Court decision357 that the
court does not have jurisdiction to sanction a scheme under Part 26 of the Companies Act
2006 which varies or extinguishes rights of clients whose property is held on trust. The court
ultimately considered the question to be one of statutory construction. The courts jurisdic-
tion under Part 26 is circumscribed by the requirement that a scheme must be an arrange-
ment between a company and its creditors (or members). A creditor consists of anyone
who has a monetary claim (including contingent claims) against the company which, when
payable, will constitute a debt. A proprietary claim to trust property is not a claim in respect

356 In the matter of Lehman Brothers International (Europe) (In Administration) (No 2) [2010] BCC 272,
CA.
357 In the matter of Lehman Brothers International (Europe) (In Administration) (No 2) [2009] All ER (D)
36.

156
 X. English Schemes of Arrangement and Corporate Debt Restructurings

of a debt or liability of the company. Whilst a trustee-beneficiary relationship may give rise
to unsecured claims against the trustee for breach of trust or even negligence (and to that
extent the beneficiary will be a creditor of the trustee), that is a consequence of the trust
relationship and not a definition of itit remains at core a different relationship. Neuberger
MR considered that it would be surprising if a scheme could have been proposed and sanc-
tioned in relation to trust property for over 100 years without anyone (including all the
leading writers of company law and trust law textbooks) apparently being aware of such a
feature. Furthermore, the judges considered it unlikely that the legislature would have
intended beneficiaries rights to be capable of being altered by a scheme if the trustee was a
company, when there is no such right if the trustee is an individual. The judges were sympa-
thetic to the significant practical difficulties faced by the administrators but thought the
wider impact at law of allowing the appeal would be positively undesirable. The trust mecha-
nism has long been regarded as an important safeguard against insolvency and has been
imported into commercial contracts for that very reason.
The Court of Appeal did, however, consider the ability of a scheme to release creditors claims 3.266
not only against the company but also against third parties designed to recover the same loss.
This is particularly important in the context of many complex debt structures where lenders
have the benefit of a comprehensive guarantee package from group companies. A scheme of
arrangement does not per se deal with these guaranteesand obviously there is little to be
gained if the creditors claim has been released against the principal debtor but he is then able
immediately to enforce a guarantee.
Some authority already existed for the release of guarantees through the terms of an arrange- 3.267
ment in the context of CVAs in the Powerhouse case358 and in the case of schemes in the T&N
(No 3) judgment.359 In Lehman, albeit that the comments are obiter, the Court of Appeal con-
sidered both the T&N (No 3) case and a number of Australian authorities on the issue. Whilst
noting that the point has not been without controversy in the Australian context, Patten LJ
commented:360
It seems to me entirely logical to regard the courts jurisdiction as extending to approving a
scheme which varies or releases creditors claims against the company on terms which require
them to bring into account and release rights of action against third parties designed to recover
the same loss. The release of such third party claims is merely ancillary to the arrangement
between the company and its own creditors. Mr Snowden has not invited us to overrule T&N
Ltd (No 3) and it would not be appropriate for us to do so without hearing full argument on
the point.
Thus releases of third party claims through the terms of the scheme are permitted, at least insofar 3.268
as guarantees of the debt compromised by the scheme of arrangement are concerned. However, it
is clear that the relevant third party claims must be closely connected with the claims against the
company compromised as part of the scheme. Longmore LJ commented:361
. . . the creditors rights against the insurers in T&N (No 3) Ltd . . . (a) were closely connected
with their rights against the company as creditors, (b) were personal, not proprietary,
rights and (c) if exercised and leading to a payment by the insurers, would have resulted in a

358
Prudential Assurance Co Ltd v PRG Powerhouse Limited [2007] BCC 500.
359 T&N (No 3) Ltd [2007] 1 BCLC 563.
360 [2010] BCC 272 at 63.
361
Ibid at 83.

157
 Out-of-Court vs Court-Supervised Restructurings

reduction of the creditors claims against the company. Bearing in mind these three factors, it
seems to me, as it does to Patten LJ, that the decision of David Richards J was correct.
3.269 La Seda de Barcelona SA362 provides a more recent example of a case in which the court sanc-
tioned a scheme of arrangement which included amongst its terms the release of a guarantor
who was not a party to the scheme. In reaching his decision, Proudman J followed T&N (No
3) and the obiter dicta comments in Lehman. It is clear, therefore, that in order for the third
party claim to be released as part of the scheme it will need to be closely connected. This will
need to be borne in mind in extending the principle of release of third party claims beyond
the guarantee context. It is also worth noting that the use of a scheme to release third party
claims may give rise to particular issues in multi-jurisdictional groups. This is touched on
in Chapter 2.

C. Stages of a Scheme and Related Issues

3.270 There are three distinct stages in the procedure for implementing a scheme: (i) the leave to
convene hearing; (ii) the scheme meetings; and (iii) the sanction hearing, each discussed
more fully below. As Chadwick LJ explained in Re Hawk Insurance:363
It can be seen that each of those stages serves a distinct purpose. At the first stage the court
directs how the meeting or meetings are to be summoned. It is concerned, at that stage, to
ensure that those who are to be affected by the compromise or arrangement proposed have a
proper opportunity of being present (in person or by proxy) at the meeting or meetings at
which they are to be considered and voted upon. The second stage ensures that the proposals
are acceptable to at least a majority in number, representing three-fourths in value, of those
who take the opportunity of being present (in person or by proxy) at the meeting or meetings.
At the third stage the court is concerned (i) to ensure that the meeting or meetings have been
summoned and held in accordance with its previous order, (ii) to ensure that the proposals
have been approved by the requisite majority of those present at the meeting or meetings and
(iii) to ensure that the views and interests of those who have not approved the proposals at the
meeting or meetings (either because they were not present or, being present, did not vote in
favour of the proposals) receive impartial consideration.
3.271 The process is court intensive (entailing not one but two court hearings) and from start to
finish is likely to take at least six weeks. A scheme of arrangement can consequently be slower
and more costly to implement than, for example, a company voluntary arrangement.

1. Leave to convene hearing

3.272 A company, any of its creditors or members, or a liquidator or administrator of the company,
may apply to the court to sanction a compromise or arrangement, as well as providing for the
convening of the relevant meetings by the court.364 Whilst a creditor (or class of them) may
make an application, the company must still be a party to the applicationie a scheme of
arrangement cannot be used as a mechanism to implement an arrangement between the
creditors merely as between themselves.

362 [2010] EWHC 1364 (Ch).

363 Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 at 12.
364
Companies Act 2006, ss 895 and 896.

158
 X. English Schemes of Arrangement and Corporate Debt Restructurings

(a) Class issues

Are the rights of those who are to be affected by the scheme proposed such that the scheme 3.273
can be seen as a single arrangement; or ought the scheme to be regarded, on a true analysis,
as a number of linked arrangements? The question may be easy to state; but, as the cases
show, it is not always easy to answer.365
The applicant must decide whether creditors can be treated as a single class or multiple classes 3.274
for the purposes of voting. There is no requirement that all creditors and/or shareholders of
the company be included in a scheme:
In promoting and entering a scheme, it is not necessary for the company to consult any class
of creditors (or contributories) who are not affected, either because their rights are untouched
or because they have no economic interest in the company.366
A court practice direction from 2002 provides that any issues which may arise as to the con- 3.275
stitution of class meetings/class issues must be drawn to the courts attention at this first court
hearing rather than leaving it to the final court hearing (ie the sanction hearing):
It is the responsibility of the applicant by evidence in support of the application or otherwise
to draw to the attention of the court as soon as possible any issues which may arise as to the
constitution of meetings of creditors or which otherwise affect the conduct of those meetings
(creditor issues). For this purpose unless there are good reasons for not doing so the applicant
should take all steps reasonably open to it to notify any person affected by the scheme that it
is being promoted, the purpose which the scheme is designed to achieved, the meetings of
creditors which the applicant considers will be required and their composition.
In considering whether or not to order meetings of creditors (a meetings order) the court will
consider whether more than one meeting of creditors is required and if so what is the appropri-
ate composition of those meetings.367
The purpose of the practice direction is to enable issues relating to the composition of the 3.276
classes of creditors and the summoning of the relevant class meetings to be identified and
resolved early in the proceedings so as to avoid the waste of time and costs associated with the
court determining that the classes have not been properly identified at the hearing to sanc-
tion the scheme at the end of the process. Creditors who feel that they have been unfairly
treated will still be able to raise objections at the hearing of the petition to sanction the
scheme, but the court will expect them to show good reason why they did not raise their
objections at an earlier stage.
The Companies Act 2006 does not provide any guidance on the formulation of classes, how- 3.277
ever there is an extensive body of case law for guidance. The courts prefer to take a common-
sense practical approach to the classification of creditors; as Neuberger J remarked in
Re Anglo American Insurance:368 Practical considerations are not irrelevant . . . if one gets too
picky about potential different classes, one could end up with virtually as many classes as
there are members of a particular group.

365
Chadwick LJ in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 at 23.
366 In the matter of Bluebrook Ltd and Others [2010] BCC 209.
367 Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345.
368
[2001] 1 BCLC 755 at 764.

159
 Out-of-Court vs Court-Supervised Restructurings

3.278 The accepted starting point is that set out by Chadwick LJ in Re Hawk Insurance,369 namely
a class must be confined to those persons whose rights are not so dissimilar as to make it
impossible for them to consult together with a view to their common interest.370 When
applying this test, the court held that it is necessary to consider both the rights which are to
be released or varied under the proposed scheme, and the new rights (if any) the scheme gives
to replace those rights to be released or varied. It is clear from case law that the governing
factor in class composition is rights and not interests.371
3.279 When considering the composition of classes, it is necessary to ensure not only that those
whose rights really are so dissimilar that they cannot consult together with a view to a
common interest should be treated as parties to distinct arrangements, but also that those
whose rights are sufficiently similar to the rights of others that they can properly consult
together should be required to do so; lest by ordering separate meetings the court gives a veto
to a minority group.372
3.280 When dealing with a scheme in complex capital structures, the operation of the Re Hawk
Insurance test usually results in creditors with differing levels of seniority constituting differ-
ent classes of creditors. Senior secured creditors might form one class, senior unsecured
lenders another class, and mezzanine or subordinated creditors will form a third class.
Consider, by way of illustration, the classification of creditors in the recent McCarthy &
Stone scheme.373 The senior term loan holders formed one class of creditors. The senior term
loan holders were all secured lenders under term loans. They each held guaranteed liabilities.
They shared pari passu (by virtue of an inter-creditor agreement) in all realizations and recov-
eries. Under the proposed schemes they were each to acquire the same rights proportionate
to their lendings to the companies. Although there were minor differences in the rates of
interest payable under the facilities, the schemes were to proceed by reference to the principal
sums outstanding and not by reference to accrued interest. In any event, the judge in that
case374 viewed the interest differences to be so small in the context of the outstanding indebt-
edness that he took the view that the senior term loan holders could consult together with a
view to a consideration of their common interests. The second class was made up of the
senior revolving credit facility holders. They all had the same rights in respect of their respec-
tive lendings to the company in each case and they were all to be treated identically under the
scheme. They formed a class separate to the senior term loan holders because under the terms
of the security documentation there was a pool of assets over which they had priority as
against the senior term loan holders. The third class was that of the hedge counterparties,
who had claims of a different nature against the companies. The scheme was not put to the
second lien and mezzanine debt holders as they were considered to have no economic inter-
est in the group on the basis of a number of valuations all of which showed them to be out of
the money.
3.281 Irrevocable undertakings to vote in favour are often sought from creditors in advance of the
scheme meetings to give the applicant comfort as to the level of support for the proposed scheme.

369 [2001] 2 BCLC 480.

370 By reference to Sovereign Life Assurance Company v Dodd [1892] 2 QB 573.
371
UDL Argos Engineering & Heavy Industries & others v Li Oi Lin & others [2001] HKEC 1440.
372 Re Hawk Insurance [2001] 2 BCLC 480 at 33.
373 Discussed in further detail at para 3.300.
374
McCarthy & Stone Plc & McCarthy & Stone (Developments) Ltd [2009] EWHC 712.

160
 X. English Schemes of Arrangement and Corporate Debt Restructurings

This was done, for example, in each of the Telewest, Countrywide, McCarthy & Stone, and Crest
Nicholson schemes. Those who have given an irrevocable undertaking will be motivated to
comply with their undertaking and in that sense it could be argued that there is a difference of
interests between them and the other creditors. In the past this has led to concern that those who
provide such undertakings might thereby be prevented from falling within the same class as other
creditors. But this now appears to no longer be a risk. There are clear statements in the recent
authorities that the existence of different motives or interests does not give rise to separate classes.
As per Lewison J in Re British Aviation Insurance Company Limited:375 There is nothing inherently
objectionable about a company promoting a scheme from reaching agreement with some of its
creditors under which they undertake to vote in favour of the scheme. However, although irrevo-
cable undertakings may not result in the creation of different classes for the purpose of determin-
ing the composition of the classes required at the first stage, they may still be taken into account
by the court when exercising its discretion as to whether or not to sanction the scheme.
Increasingly, there are likely to be within one class of creditors some creditors who also 3.282
belong to another class of creditors or to the body of shareholders of the company. For exam-
ple, a lender may hold both a senior and mezzanine piece. Creditors with different and
potentially conflicting interests arising from circumstances unconnected with their interests
as members of the class are not precluded from attending and voting at a meeting of the class.
However, whilst their presence does not invalidate the result of the meeting, it may lead the
court to decline to sanction the scheme.376 It was held in Re Alabama, New Orleans, Texas and
Pacific Junction Railway Co377 that:
[i]t is perfectly fair for every man to do that which is best for himself, yet the Court, which has
to see what is reasonable and just as regards the interest of the whole class, would certainly be
very much influenced in its decision, if it turned out that the majority was composed of per-
sons who had not really the interests of that class at stake.
In that case it had been objected that many of those who held first ranking debentures also 3.283
held second ranking debentures or shares in the company, and that they ought not to have
been allowed to vote at the meeting of first ranking debenture holders. The Court of Appeal
held that this did not disqualify them from attending and voting at the meeting, but rather
went to the discretion of the court to sanction the scheme. In Re Heron,378 certain notehold-
ers were also bank lenders to the Heron group, and in their capacity as bank lenders, entered
into an agreement approving an overall restructuring of the group. Certain noteholders
complained that the lenders should not vote at the meeting as they were in receipt of benefits
under the restructuring proposals which were not available to all. It was held on the facts of
the case that although the bank lenders did enjoy an element of benefit not available to the
noteholders, this benefit was not sufficient to destroy the necessary degree of community of
interest between the bank lenders and the other noteholders.
2. Convening and holding of scheme meetings
Once the court has concluded that the scheme classes are properly constituted, the scheme 3.284
proposal must be put to a meeting, or meetings, of creditors and voted on. At the meeting(s),

375
[2006] BCC 14 at 103.
376 Re UDL Holdings [2002] 1 HKC 172 at 1620.
377 [1891] 1 Ch 215.
378
[1994] 1 BCLC 667.

161
 Out-of-Court vs Court-Supervised Restructurings

the scheme would need to be approved by the relevant majority of each relevant class being
a (i) majority in number; (ii) representing 75 per cent in value of those persons present and
voting (in person or by proxy) in each relevant class of creditors.
3. Sanction hearing
3.285 If approved at the meeting(s) there must be a further application to court to obtain the
courts sanction to the arrangement. If the scheme is sanctioned by the court, a copy of the
court order is delivered to the Registrar of Companies for registration, at which point the
scheme of arrangement becomes effective.
3.286 The sanctioning of the scheme by the court is no mere rubber stamping exerciseit is a
genuine exercise of discretion. The court must be satisfied that:379 (i) the provisions of the
Companies Act 2006 and all other procedural requirements have been complied with; (ii)
the class was fairly represented by those who attended the meeting and the majority are
acting bona fide in supporting the scheme and not coercing the minority in order to promote
interests adverse to those of the class whom they purport to represent; and (iii) the scheme is
such as an intelligent and honest man, who is a member of the class concerned and acting
alone in respect of his interest as such member, might reasonably approve it.
3.287 However, the court will recognize that creditors will normally be the best judges of what is in
their commercial interest:
if the creditors are acting on sufficient information and with time to consider what they are
about, and are acting honestly, they are, I apprehend, much better judges of what is to their
commercial advantage than the court can be.380
3.288 In the recent case of Re Scottish Lion Insurance Company Limited, Lord Glennie at first
instance381 attempted to add a gloss to the three limb test. The case concerned a scheme
proposed by a solvent insurance company with contingent long-tail liabilities to its policy-
holders. The scheme for which sanction was sought under section 899 of the Companies Act
2006 included, broadly, a proposal that the companys creditors, including its contingent
creditors in respect of so-called IBNR (incurred but unreported) claims, would be entitled
to receive immediately certain sums based on a scheme of valuation, the payment of which
would discharge their contingent claims. Lord Glennie concluded that creditor democracy
should carry the day only if there is:
. . . a problem requiring a solution; that it is in the interests of the creditors (or classes of credi-
tors) as a body that a solution should be found and implemented; and that, to this end, the
creditors must act as one and, in identifying the appropriate solution, must agree to be bound
by the wishes of the majority, because if they did not then their failure to agree would ruin it
for all.382
3.289 In his view, a solvent scheme was an example of where, subject to other considerations, credi-
tor democracy should not carry the day. On appeal,383 the Inner House of the Court of Session
overruled Lord Glennie, holding that although a problem could be a factor to be considered
by the court it was not a precondition to the sanctioning of a scheme. Further, there is nothing

379 Re National Bank Ltd [1966] 1 WLR 819.

380
Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385.
381 Scottish Lion Insurance Company Limited [2009] CSOH 127.
382 Ibid at 56.
383
Scottish Lion Insurance Company Limited, 2010 SLT 459.

162
XI. Cramdown in England Achieved Through a Scheme and a Pre-Packaged Administration

in the Companies Act 2006 or its predecessors, suggesting that applications for sanction of
solvent schemes should in principle be dealt with any differently from those where the com-
pany is insolvent or on the verge of insolvency. Solvency is simply one factor for the court to
take into account when exercising its discretion to sanction.384 However, in sweeping away
the gloss, the Inner House of the Court of Session did arguably appear to refer to a possible
new test, namely a need to demonstrate the positive benefits of the scheme, as well as the
soundness and robustness of the procedures . . . in place for valuing the claims.
At the sanction hearing it is open to disenfranchised creditors who were not consulted on the 3.290
scheme, to contest the scheme on grounds of fairness if they are able to demonstrate that the
scheme unfairly affects them in ways other than altering their strict legal rights, or that value
breaks within/beneath the junior debt and thus they do have an economic interest in the com-
pany. For a discussion of the ability of disenfranchised junior creditors to challenge the fairness
of a scheme of arrangement on the grounds of valuation see paragraphs 3.3013.309 below.
Once the scheme has been sanctioned by the court and registered, the arrangements are 3.291
binding on all of the persons affected by it, whether they voted in favour or not (even if they
did not have notice of the meeting).

XI. 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

A. Introduction
In contrast to the position under chapter 11, there is no formal statutory cramdown mecha- 3.292
nism under English law for dissenting creditor classes. Cramdown within schemes of arrange-
ment is limited to the statutory majorities in each separate class cramming down the
minorities within their own classit is not possible for senior classes to cramdown classes of
junior creditors who have voted against the scheme. CVAs do not provide a mechanism to
cramdown the claims of secured creditors. It would be wrong, however, to conclude that it is
not possible under English law to impose a restructuring on junior secured creditors.
A scheme of arrangement may be twinned with a pre-packaged administration. The scheme 3.293
is employed to novate all or a substantial amount of the debt owed to senior secured creditors
to a newly incorporated company (newco). In this structure, the scheme is used to deal with
the fact that the senior lenders may not, themselves, agree on how the restructuring ought
to be implemented, particularly where there is a level of equitization or other reduction
in senior debt which some lenders may find unacceptable or where some senior lenders
are also holders of significant amounts of junior debt and are unhappy with the fate of the
junior tranche. Once the scheme has been sanctioned, all or part of the companys assets and

384
Ibid at 43.

163
 Out-of-Court vs Court-Supervised Restructurings

business are sold to newco via the pre-packaged administration sale, leaving the debt owed
to junior creditors stranded in the original company.
3.294 As discussed earlier, it is technically not necessary to call a meeting of junior creditors if their
rights are unaffected by the scheme of arrangement and if assets are able to be transferred
outside the scheme. Advantages of such a structure include the transfer of the business and
assets to a new company (which is clean of any prior trading and liabilities); avoiding the
need to buy off crammed down parties unjustifiably in cases where they are out of the
money but might have nuisance value; and circumventing the requirement for unanimous
senior lender consent where it would otherwise be required, for example to effect a debt write
down of senior debt. With value breaking in the senior debt in so many of todays LBO deals,
it is this ability to legitimately exclude junior creditors from a restructuring in circumstances
where they have lost all economic interest, that has proved such an appealing solution for
senior lenders.
3.295 The terms of any existing inter-creditor agreement (ranking the senior and junior debt, guar-
antees, and security inter se) will be critical to the ability to effect such a structure. Senior
creditors need the ability to bypass the junior creditors and dispose of the main operating
companies free from junior borrowing and guarantee liabilities. If, under the terms of the
inter-creditor agreement, the senior creditors have the ability to direct the security trustee on
the enforcement of security and the release of existing guarantees and security in an enforce-
ment or default context to allow assets to be sold free of existing security to newco then it is
likely that, through a pre-pack, an administrator can effect the sale of the assets underpin-
ning the scheme and release the existing guarantees and security (which would also extend to
supporting the junior debt). The credit crisis is likely to refocus the minds of parties, in par-
ticular junior creditors, on the provisions of any inter-creditor agreements they enter into.

B. Case Studies
3.296 The structure of a scheme of arrangement followed by sale was first threatened in the MyTravel
restructuring. MyTravel was a charter holiday business, heavily dependent on the operating
licence granted to it by the Civil Aviation Authority. The business was adversely affected by
a number of factors, not least 9/11, the SARS epidemic, the Iraq situation, and even the
weather. The group had an unsupportable amount of debt: by March 2004 it had consoli-
dated net liabilities of some 877.6 million. Efforts at a consensual deal failed, with the
bondholders objecting to the equity allocation offered to them. Ultimately, the company
proposed a scheme to its senior creditors but not its subordinated bondholders, pursuant to
which, after restructuring the senior debt, the business and assets of MyTravel would be sold
to a newco owned by its senior lenders leaving its junior creditors behind with effectively
worthless claims against the legacy company. The alternative was liquidation under which
bondholders would receive nothing. The subordinated bondholders challenged this struc-
ture at first instance and in the Court of Appeal.
3.297 A significant proportion of the High Court judgment385 related to whether the scheme was
a reconstruction scheme under section 427 of the Companies Act 1985. The judge held that

385
MyTravel Group plc [2005] 1 WLR 2365.

164
XI. Cramdown in England Achieved Through a Scheme and a Pre-Packaged Administration

it was not but, mindful of the accelerated timetable (the company was at risk of having its
CAA licence revoked) and the risk of appeal, commented on the position of the bondhold-
ers. Given the judges decision on section 427, the issue of whether the bondholders had an
economic interest was strictly obiter. The company argued that as the alternative was liquida-
tion, where the assets would be insufficient to discharge even the unsubordinated creditors,
the bondholders had no economic interest. The judge concluded that insolvent liquidation
was the appropriate comparison and concluded that the economic interest of the bondhold-
ers in the company was nil as there was no serious prospect that they would receive anything
on a liquidation. The question was ultimately settled by the Court of Appeal386 which held
that it was not necessary to put a scheme of arrangement to every class of a companys credi-
tors if their rights were not affected by the scheme, and that the judge did not need to deter-
mine the question of whether or not the bondholders had an economic interest at the
permission to convene hearing. As such, at the initial court hearing the subordinated bond-
holders could not object to the convening of the class meetings. It may have been that they
would subsequently have been able to raise challenges to the fairness of the scheme at the
sanction hearing or have been able to challenge (as a transaction at an undervalue) the price
at which the sale of the business and assets was concluded, but none of this was a relevant
issue at the initial stages. In the event, the threat of the implementation of this structure
caused the subordinated bondholders to agree to a consensual restructuring (and a much
lower equity allocation than they had initially sought) outside a scheme of arrangement
meaning that the scheme did not need to proceed.
The structure adopted in MyTravel was a variation on that used in Re Tea Corporation.387 In 3.298
that case, a scheme was proposed in a liquidation whereby the ordinary shareholders were to
be given shares in a new company in place of their existing shares. The shareholders as a class
voted against the scheme; the other stakeholders voted for it. As seen, under English law
there is no inherent jurisdiction for the court to sanction a scheme which has been voted
down by a class of creditors. In Re Tea Corporation, however, the court held that the share-
holders dissent could be disregarded when sanctioning the scheme as the financial state of
the company was such that the ordinary shareholders had no economic interest in the com-
panys assets. Two of the judges based their reasoning on treating the scheme as only an
arrangement as between the company, the creditors, and the preference shareholders such
that the new shares offered to the ordinary shareholders were in the nature of a gift of which
the ordinary shareholders could not complain. According to the third judge, if you have the
assent to the scheme of all those classes who have an interest in the matter, you ought not
consider the votes of those classes who have really no interest at all. Re Tea Corporation was
of course an entirely different set of circumstances to that found in complicated multi-tiered
debt structures and it remains to be seen whether a present day court would be prepared to
sanction a scheme which has been voted down by a class of creditors on the grounds that such
class has no economic interest.
More recently, Re McCarthy and Stone plc388 (a distressed company the business of which is 3.299
the development of retirement homes), adopted a very similar cramdown structure to that
proposed in MyTravel, which completed in April 2009. McCarthy & Stone proposed a

386 MyTravel Group plc [2005] 2 BCLC.

387 Re Tea Corporation [1904] 1 Ch 12, CA.
388
[2009] EWHC 1116.

165
 Out-of-Court vs Court-Supervised Restructurings

scheme of arrangement only to its senior debt, leaving its junior creditors to receive nothing,
the justification being that on a number of valuations the second lien and mezzanine lenders
were considered to be out of the money. Once the scheme of arrangement had been approved,
the company was placed into administration purely for the purposes of selling its business
and assets to a newly incorporated company owned by the senior lenders. This left the mez-
zanine lenders and second lien lenders (valued at around 110 million and 40 million
respectively) behind in the old rump, their debt claims being worthless. Objections to this
structure were raised at the first court hearing (in relation to the constitution of classes) but,
following the Court of Appeal in MyTravel, Norris J held that the purpose of that hearing
was only to approve the convening of the class meetings; it was not a forum to address legal
challenges or lender discontent.389 Ultimately, the lenders did not choose to mount a chal-
lenge at the final sanction hearing.

C. Valuation
3.300 The fundamental issue in these cases is what method of valuation is appropriate to determine
whether or not a class of creditors has a continuing economic interestdoes one consider
the present market value of the business and assets (when the price is likely to be depressed
and less than the senior debt), or does one look at the future (post-restructuring) going con-
cern value of the business.
3.301 There are essentially two schools of thought as to how to approach the valuation question.
The first, which we shall call the counterfactual analysis, suggests that it is necessary to focus
on what will happen if the scheme is not sanctioned. If the company is running out of cash,
such that the directors can show that without the scheme they will have no choice but to
place the company in administration, or there has been an event of default entitling the
requisite majority of senior lenders to accelerate and take enforcement action, this approach
focuses on the position of the various creditors at that point. In this sense, it is similar to the
best interests test in chapter 11, although focused on a going concern value in current
market conditions. However, whereas in the chapter 11 context this test is combined with
other standards, in the English context many would argue that only the counterfactual analy-
sis ought to be relevant. Proponents of this view argue that once there has been a crystallizing
event only current value should be taken into account. To do otherwise is to enfranchise
those who ought properly not to be enfranchised.
3.302 In the equity receivership sales of the 1930s and 1940s in the US, concerns were raised that this
approach was open to abuse. As a result, the US Bankruptcy Code focuses not only on the best
interests test but also on the principle of absolute priority. This has the result that a junior class
cannot recover until more senior classes have recovered in full but also, as a corollary, that a
senior class cannot receive more than full compensation for its claims. In this approach the
focus is on future going concern valueis it reasonably possible that the company will grow
back into its capital structure such that there will be value for the junior creditors?
3.303 Questions of valuation are far less developed in English jurisprudence as compared to under
chapter 11. Prior to the judgment in Bluebrook Ltd (commonly known as IMO Carwash),390

389 [2009] EWHC 712.

390 [2010] BCC 209.

166
XI. Cramdown in England Achieved Through a Scheme and a Pre-Packaged Administration

there had been little direction from the English courts on the valuation standard to be used
in valuation disputes and there is no guidance on how to approach the question in statute.
Both the Tea Corporation and MyTravel cases involved unique sets of circumstances. Tea
Corporation was already in liquidation, and in MyTravel the withdrawal of the Civil Aviation
Authority licence would inevitably have resulted in liquidation. Consequently, a liquidation
valuation was appropriate in both cases. The McCarthy & Stone case offered a more typical
set of circumstances but the mezzanine creditors in that case ultimately chose not to mount
a challenge at the sanction hearing.
Valuation was central to the submissions of the junior creditors in the IMO Carwash case. 3.304
The business and assets of the existing group were to be transferred to a new group via a pre-
packaged administration sale. A large portion of senior debt (approximately 185 million)
was to be novated to the new group, with the remainder being exchanged by the senior lend-
ers for the bulk of the equity in the new holdco (subject to a small interest in favour of man-
agement). The old group was to be released from the debt (other than 12 million which was
to remain in the existing group in case some asset unforeseeably came in). It was necessary to
implement the proposal via schemes of arrangement not to transfer the assets (which,
although conditional on the schemes being sanctioned, was taking effect outside of the
schemes), but rather to effect the release of the senior debt in the absence of all senior lender
consent (a small percentage of the senior lenders were not in favour). The mezzanine lenders
were to be left behind in the old rump group with worthless claims, the justification for this
being that a number of valuation exercises indicated that the value broke well into the senior
debt. As the mezzanine lenders were not party to the schemes, they were not summoned to
vote at any class meeting. The mezzanine lenders challenged the schemes on the grounds of
fairness. Their two main arguments (although not their only ones) centred on valuation and
directors duties.
The senior lenders had commissioned three valuation exercises. Each valuation sought to 3.305
answer the question of what a purchaser would pay now for the business, although adopted
different techniques for doing so. A valuation by the administrators in waiting valued the
group using an income approach (based on discounted cash flow adjusted, by an alpha
factor, for current market conditions), a market approach based on comparables, and a lever-
aged buy-out analysis (assessing the level of equity investment a private equity investor would
be prepared to make in the current market given a typical required equity rate of return). The
maximum valuation was 265 million. Concurrently, a leading investment bank conducted
a third party sales process with a view to establishing whether a buyer for the existing group
could be found. The sales process produced only one indicative offer which placed a value on
the group of 150 million to 188 million on a cash and debt free basis. (This was not con-
sidered by the board to be an appropriate level of interest to pursue.) A further exercise by
property valuers valued a number of the groups sites, from which an overall value was extrap-
olated. This produced a valuation of 164 million on a swift sales basis and 208 million on
a full market value basis. Each of the three valuations indicated that the value of the group
fell significantly short of the 313 million of senior debt outstanding. Furthermore, the
senior debt was trading in the secondary market significantly below par, at about 60 pence in
the pound.
The mezzanine lenders, in contrast, relied on a report from a leading consulting firm to argue 3.306
that the value of the group broke in the mezzanine debt. The report used a Monte Carlo

167
 Out-of-Court vs Court-Supervised Restructurings

simulation to assess on a statistical basis the most likely valuation outcomes given a variety
of inputs. It involved repeated calculation of a discounted cashflow valuation, using random
sampling of input and assumptions, and then aggregated the result into a distribution of the
probabilities of different valuation outcomes. The result indicated a range of 210 million to
700 million (as opposed to a single point valuation), with a significant majority of out-
comes exceeding 320 million.
3.307 Mann J found the mezzanines valuation unconvincing and insufficiently robust. By giving
more weight to the valuation reports prepared by the scheme companies, which were done
on a present market value basis, and less weight to the mezzanine lenders report which
sought to demonstrate the intrinsic value of the business, the court appeared to accept on
the facts of the case that the appropriate benchmark for valuation is the present market value
basis. Critically, however, the judge did not wholly dismiss the concept of intrinsic value,
rather it was the manner in which the junior creditors in that case had sought to demonstrate
intrinsic value which he found to be unconvincing. He was simply not persuaded on the
evidence available that market conditions were giving the senior lenders an unfairly good
deal. He emphasized that even when the alpha factor was extracted from the senior lenders
DCF valuation (ie the adjustment for market conditions was removed) the mezzanine lend-
ers were still shown to be out of the money. Mann J found the Monte Carlo simulation too
mechanistic and devoid of any judgment, and was critical of the late stage at which the
mezzanine lenders had presented their valuation evidence. Thus there appears to be some
room for further development in the valuation arena in the context of schemes of arrange-
ment, for junior creditors who are able to demonstrate convincingly a chapter 11 style post-
restructuring enterprise valuation in less distressed businesses and as markets improve.
3.308 If such valuation disputes do become a feature of schemes of arrangement it will be interest-
ing to see how, on a practical level, the English courts will approach them. At its heart the
English insolvency regime draws a distinction between commercial issues (which are prop-
erly a matter for the creditors and for the administrator as the courts officer) and legal issues
which are properly a matter for the court. The valuation evidence in the IMO Carwash case
did not require Mann J to weigh equal valuation evidence examining, for example, the
terminal values or weighted average cost of capital used in rival DCF valuations. Although
the English courts do preside over such disputes in other contexts, it is not the sort of evalu-
ation which they have traditionally been keen to undertake.

D. Directors Duties
3.309 The mezzanine lenders in IMO Carwash further contended that in implementing such a
restructuring the directors of the scheme companies, whilst not acting in bad faith, had failed
to comply with what was said to be their obligation to extract a proper benefit for all creditors
(including the mezzanine lenders), and not just the senior lenders. They argued that the
board should have considered or at least threatened other options, and used their negotiating
position to bargain for something to be provided to the mezzanine lenders.
3.310 Mann J held that there was no evidence to suggest any shortcomings or breach of duty by
management. He criticized the late stage at which this allegation aroseit had not even been
made in any detail in the skeleton argument served by the mezzanine lenders counsel prior
to the hearing. It was a serious allegation to make (not one that should be made on the hoof

168
XI. Cramdown in England Achieved Through a Scheme and a Pre-Packaged Administration

and as a matter of analytical convenience), and the directors had not been given sufficient
time to formulate a clear evidential rebuttal.
It was not disputed that the directors of an insolvent company have to pay proper regard to the 3.311
interests of all its creditors. However, what that duty means in practice and how it should be
discharged will be very fact sensitive. The mezzanine lenders had their own coordinating com-
mittee to fight their corner in negotiations, and there was no evidence to suggest that the mez-
zanine coordinating committee had requested help from the board to negotiate. The directors
had properly engaged the major creditors in discussions (at one stage of negotiations there was
a proposal to allow the mezzanine lenders to participate in the form of share warrants although
that came to naught). The directors were faced with actual events of default under the credit
agreements and valuations which all suggested that the mezzanine lenders were out of the
money (the board had not received the mezzanine valuation until much later). To have threat-
ened to carry on trading, as mezzanine lenders counsel suggested they ought, may have been
to threaten to engage in wrongful trading. The board of the company included two independ-
ent directors (in the sense that they were not to be directors in the new group) who voted in
favour of the restructuring and so, together with the fact that they had sought independent
professional advice throughout, the judge was satisfied that the board could be seen to be acting
independently. Thus whilst any assessment of directors duties in agreeing to such a restructur-
ing model will always be fact specific, the IMO Carwash judgment indicates that it will be dif-
ficult for disenfranchised junior creditors to argue a breach of directors duties vis--vis the
juniors in circumstances where a mezzanine coordinating committee has been appointed and
valuations point to value breaking within the senior debt.

E. Pre-Packaged Administration and Section 363 Sales

It will be seen, from the descriptions of the McCarthy & Stone and IMO Carwash cases, that 3.312
the scheme of arrangement has been used to implement the new capital structure in the
senior debt rather than to compromise the junior debt. It is the pre-packaged transfer of the
assets to the newly capitalized group which effectively removes the junior debt.
The pre-packaged sale may not, however, always be coupled with a scheme of arrangement. 3.313
WIND Hellas391 is the second largest mobile and fixed line telephony operator in Greece.
Pre-restructuring it was owned indirectly by Weather Investments Limited and it had a com-
prehensive financing package, including bank loans and senior notes in the operating group
below WIND Hellas, and subordinated notes at the parent finance company level (Hellas
Telecommunications (Luxembourg) II SCA).
Hellas II launched a competitive sale process for its assets, principally the shares in the main 3.314
operating company and its subsidiaries. Two final bids were received: one from Weather
Investments and one from a group of holders of subordinated notes. However, both bids
assumed that a significant amount of senior debt would remain in place and both required vari-
ous consents from the senior lenders. Ultimately, the senior creditors supported the Weather
bid over the subordinated noteholder bid. An administration order was made on 26 November
2009 and the sale of the assets of Hellas II was concluded on 27 November 2009.

391
Hellas Telecommunications (Luxembourg) II SCA [2010] BCC 295.

169
 Out-of-Court vs Court-Supervised Restructurings

3.315 The administrator needs to be satisfied that it is not practicable to achieve the rescue of the
company as a going concern before effecting a pre-packaged sale.392 His or her obligation is
then to obtain the best price reasonably obtainable for the business and assets which are to be
sold. In this context the focus is therefore very much on current value and, if there are simi-
larities between the use of a scheme coupled with a pre-pack and a chapter 11 plan, there are
also similarities between implementation solely through a pre-packaged administration and
implementation via a section 363 sale. In this case, as in a section 363 sale, in order to pre-
serve value the junior creditors (and, indeed, equity) may have to join in the bidding. Where
the senior creditors are not prepared to support the bid, either because they prefer another
bid or because they wish to take control themselves, the junior creditors may need to refi-
nance the senior debt in order to maintain their interest.

392
Insolvency Act 1986, Sch B1, para 3.

170
 4
THE UNCITRAL MODEL LAW ON
CROSS-BORDER INSOLVENCY

I. The Impact of the UNCITRAL VI. Notable Litigation Arising Under

Model Law on Cross-Border Chapter 15 4.804.127
Insolvency 4.014.09 A. Litigation Regarding COMI 4.804.120
A. Introduction 4.014.02 B. Litigation Regarding Available
B. Objectives 4.034.04 Relief 4.1214.127
C. Scope of Application 4.054.06 VII. Areas for Potential
D. Interpretation 4.074.09 Improvement 4.1284.133
II. The US VersionChapter 15 4.104.55 VIII. The English Experience
A. Overview 4.10 of the Model LawThe Cross-Border
B. History of Chapter 15 4.114.20 Insolvency Regulations 2006 4.1344.216
C. Mechanics of Chapter 15 4.214.55 A. Implementation 4.1344.136
III. Chapter 15 Recognition of English B. Framework of the Regulations
Schemes of Arrangement 4.564.60 and Limitations on Application 4.1374.140
C. Relationship Between the Regulations
IV. Does the Availability of Chapter 15 and Other Bases of Recognition and
Relief Affect the Willingness of US Assistance Under English Law 4.1414.145
Courts to Accept Jurisdiction in a D. Key Definitions 4.1464.151
Chapter 11 Case Where the E. Recognition of a Foreign
Debtors COMI is Outside Proceeding and Relief 4.1524.167
the US? 4.614.68 F. Effects of Recognition 4.1684.186
V. Choosing Between Chapter 15 and G. Foreign Creditors Rights of Access
to Proceedings Under British
Chapter 11 for Foreign Debtors 4.694.79
Insolvency Law 4.1874.189
A. The Automatic Stay 4.694.71 H. Cross-Border Cooperation 4.1904.204
B. Debtor in Possession Financing 4.724.73 I. Commencement of Concurrent
C. Automatic Relief 4.74 Proceedings and Coordination
D. Additional Protections Under of Relief 4.2054.210
Chapter 11 4.754.79 J. UNCITRAL Guidance 4.2114.216

171
 The UNCITRAL Model Law on Cross-Border Insolvency

I. The Impact of the UNCITRAL Model Law on

Cross-Border Insolvency

A. Introduction
4.01 The Model Law on Cross-Border Insolvency (the Model Law) was adopted by the UN
Commission on International Trade Law (UNCITRAL) in May 1997 and formally approved
by the UN General Assembly in December 1997. It was drafted with the intention of provid-
ing a template for use by countries seeking to put into place a cross-border insolvency regime,
or to strengthen one already in existence. The countries that enact the Model Law will then
share a common set of cross-border insolvency laws providing an international network of
cooperation and assistance. The Model Law has so far been adopted by 19 countries includ-
ing the United States, under chapter 15 of the Bankruptcy Code and Great Britain, under
the Cross-Border Insolvency Regulations 2006 (the Regulations).1 Its usefulness as a tool in
facilitating cross-border restructurings has already been demonstrated and a body of helpful
jurisprudence is beginning to form as its boundaries are tested in the courts.
4.02 This chapter will start with a brief examination of the objectives and scope of the Model Law,
which are common to both the US and English versions, before analysing in more detail key
aspects of those two versions as enacted.

B. Objectives
4.03 The Model Law seeks to provide effective mechanisms for dealing with cross-border insol-
vencies, including those where the debtor has assets in more than one jurisdiction or where
creditors are located in a jurisdiction other than the jurisdiction where the insolvency pro-
ceeding is initiated. It does not attempt to unify substantive insolvency laws. Its stated objec-
tives are to achieve:
cooperation between the courts and other competent authorities of the enacting state and
foreign states involved in cases of cross-border insolvency;
greater legal certainty for trade and investment;
fair and efficient administration of cross-border insolvencies that protects the interests of
all creditors and other interested persons, including the debtor;
protection and maximization of the value of the debtors assets; and
facilitation of the rescue of financially troubled businesses, thereby protecting investment
and preserving employment.

1 As at August 2010, the 19 countries which have adopted legislation based on the Model Law are: Australia

(2008), British Virgin Islands (2003), Canada (2009), Colombia (2006), Eritrea (1998), Great Britain (2006),
Greece (2010), Japan (2000), Mauritius (2009), Mexico (2000), Montenegro (2002), New Zealand (2006),
Poland (2003), Republic of Korea (2006), Romania (2003), Serbia (2004), Slovenia (2007), South Africa
(2000), and the United States (2005).

172
 I. The Impact of the UNCITRAL Model Law on Cross-Border Insolvency

These objectives are replicated in both chapter 152 and the Regulations. Their value is appar- 4.04
ent in the context of cross-border restructurings where, in the absence of a consensual agree-
ment between the debtor and its creditors, the involvement of local courts is required in
order to prevent creditors from taking action to enforce their rights in jurisdictions where the
debtors assets are located.

C. Scope of Application
The Model Law is intended to operate as an integral part of the existing insolvency law in the 4.05
states in which it is enacted. Its scope is limited to procedural aspects of cross-border insol-
vency cases and, in both the US and the UK, may be applied where:
assistance is sought in an enacting state by a foreign court, or a foreign representative, in
connection with a foreign proceeding; or
assistance is sought in a foreign state in connection with a proceeding under the insolvency
laws of the enacting state; or
a foreign proceeding and a proceeding under the insolvency laws of the enacting state in
respect of the same debtor are taking place concurrently; or
creditors or other interested persons in a foreign state have an interest in requesting the
commencement of, or participating in, a proceeding under the insolvency laws of the
enacting state.
There is no requirement of reciprocity under the Model Law and in most instances it will be 4.06
possible to apply for recognition of a foreign proceeding commenced in any foreign country,
whether or not that foreign country is an enacting state.3 An example of this can be found in
Re European Insurance Agency AS.4 In that case the Bristol District Registry recognized the
Norwegian insolvency of the European Insurance Agency as a foreign main proceeding and
the Norwegian trustee (who was seeking information from parties in the UK concerning the
debtors assets in England and Wales) as a foreign representative. The fact that Norway had
not enacted the Model Law was not a bar to recognition by the English courts.5

D. Interpretation
UNCITRAL has produced background and explanatory information to assist in the inter- 4.07
pretation of the Model Law, in the expectation of making it a more effective tool for legisla-
tors. The key work is the Guide to Enactment6 which is based on the deliberations and
decisions of the Commission and considerations of the Working Group on Insolvency Law,
which carried out the preparatory work.

2
Chapter 15 is the only chapter of the Bankruptcy Code that includes an express description of its purposes,
goals, and scope. See 11 USC 1501(a).
3
A small number of countries, including Mexico and South Africa, have included reciprocity requirements
in their implementing legislation.
4 High Court, 2006. This was the first recognition application to be heard in the English courts.
5 I Fletcher, The UNCITRAL Model Law in the United Kingdom (2007) 20(9) Insolvency Intelligence

13841.
6 UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment, 15 December 1997.

173
 The UNCITRAL Model Law on Cross-Border Insolvency

4.08 The information is primarily directed at the relevant government departments and legisla-
tors preparing the necessary legislative revisions but is also expected to provide useful insight to
other users of the text such as judges, practitioners, and academics. In particular, it was hoped
that the information could be used by the courts to ascertain the meaning or effect of any of the
provisions of the Model Law and to assist in achieving uniformity of interpretation.7
4.09 The Guide to Enactment recommends that, in order to achieve a satisfactory degree of har-
monization and certainty, enacting states should make as few changes as possible in incorpo-
rating the Model Law into their legal systems. Both US and British legislators have attempted
to respect this recommendation although they necessarily depart from it in certain key
provisions.

II. The US VersionChapter 15

A. Overview
4.10 On 20 April 2005, the Bankruptcy Code was amended substantially by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 which, among other things, added chapter
15 to the Bankruptcy Code. Chapter 15 replaces section 304 as the primary mechanism for a
representative in a foreign bankruptcy proceeding to obtain relief in a US bankruptcy court to
facilitate a foreign insolvency proceeding. Under chapter 15, a foreign representative that
obtains recognition of a foreign proceeding gains access to a wide variety of relief with respect
to the foreign debtors assets and operations in the US, including relief under the automatic stay
and statutory provisions relating to the foreign debtors US affairs.

B. History of Chapter 15
1. Section 304
4.11 Prior to the enactment of chapter 15, section 304 of the Bankruptcy Code permitted a for-
eign representative in a foreign proceeding to initiate an ancillary case in the US to obtain
judicial assistance in administering US assets.8 The filing of a petition by the foreign repre-
sentative under section 304 commenced a limited proceeding, rather than a full-blown
bankruptcy case, to administer the foreign debtors US assets. Enacted as part of the
Bankruptcy Reform Act of 1978, section 304 was Congresss first effort to provide specific
procedures for dealing with issues related to foreign insolvency proceedings.9 Section 304
was a step towards achieving universalism in cross-border foreign proceedings10 and it spe-
cifically codified principles of comity11 and cooperation with foreign courts in bankruptcy

7
Both the US and British versions state that, when interpreting the Model Law, regard will be had to its
international origin and to the need to promote uniformity in its application (s 1508 of ch 15; art 8 of the
Regulations).
8 Jay Lawrence Westbrook, Chapter 15 At Last (2005) 79 American Bankruptcy Law Journal 713, 71819.
9 In re Iida, 377 BR 243, 254 (9th Cir BAP 2007).
10 In re Treco, 240 F 3d 148, 154 (2nd Cir 2001).
11 The US Supreme Court has described comity as the recognition which one nation allows within its terri-

tory to the legislative, executive or judicial acts of another nation, having due regard both to international duty

174
 II. The US VersionChapter 15

matters.12 The goal of section 304 was to afford deference to the country where the primary
foreign insolvency case was pending, provide flexible cooperation in the administration of
the debtors US interests involved in that proceeding, and prevent the piecemeal distribution
of assets in the US by local creditors.13
(a) Framework of section 304
Under section 304(b), a bankruptcy court had broad discretion to grant appropriate relief to 4.12
a foreign representative seeking judicial assistance in the administration of a foreign proceed-
ing. The bankruptcy court could: (i) enjoin the commencement or continuation of any
action against the debtor with respect to property involved in a foreign proceeding or any
action against such property, including the enforcement of a judgment or the creation or
enforcement of a lien, (ii) order turnover of such property to the foreign representative, or
(iii) order other appropriate relief.14
In determining whether to grant relief under section 304(b), a bankruptcy court was required 4.13
to consider six enumerated factors: (i) just treatment of all claim holders; (ii) protection of
US claim holders against prejudice and inconvenience because of the foreign proceeding;
(iii) prevention of preferential and fraudulent transfers; (iv) distribution of assets substan-
tially in accordance with the Bankruptcy Code; (v) comity; and (vi) if applicable, the oppor-
tunity for a fresh start for the debtor.15 Section 304 did not provide guidance as to the weight
to be given to each factor, although several courts found that comity should be the primary
consideration.16 In addition, the statute itself did not provide any guidance as to how the
factors should be applied.17 This led to different courts, even within the same judicial district,
reaching strikingly different results.18

and convenience, and to the rights of its own citizens or of other persons who are under the protection of its
laws. See Hilton v Guyot, 159 US 113, 164 (1895). Under principles of international comity, state and federal
courts in the US typically will refuse to review acts of foreign governments and defer to proceedings in foreign
countries, allowing those acts and proceedings to have extraterritorial effect in the United States. But, while
state and federal courts may choose to give res judicata effect to foreign judgments on the basis of comity, they
are not obliged to do so. Paramedics Electromedicina Comercial, Ltda v GE Med Sys Info Techs, Inc, 369 F 3d 645,
654 (2nd Cir 2004) (internal quotation marks and citations omitted). As a general matter, courts will extend
comity only if the following three conditions are met: (i) the foreign court had proper jurisdiction, (ii) the for-
eign proceeding adhered to fundamental standards of procedural fairness, and (iii) the judgment does not
offend the public policy of the forum state. See Cunard SS Co v Salen Reefer Serv AB, 773 F 2d 452, 457 (2nd
Cir 1985); see also Pravin Banker Assocs, Ltd v Banco Popular Del Peru, 109 F 3d 850, 854 (2nd Cir 1997)
([F]rom the earliest times, authorities have recognized that the obligation of comity expires when the strong
public policies of the forum are vitiated by the foreign act).
12
Westbrook, supra n 8, at 718.
13
See In re Iida, 377 BR at 254255; In re Atlas Shipping, 404 BR 726, 733 (Bankr SDNY 2009).
14
11 USC 304(b)(1)(3) (repealed 2005). See also In re Iida, 377 BR at 255.
15
11 USC 304(c) (repealed 2005).
16 See Universal Casualty & Surety Co v Gee (In re Gee), 53 BR 891, 901 (Bankr SDNY 1985); In re Culmer,

25 BR 621, 629 (Bankr SDNY 1982).

17
Several commentators have noted that the factors were in direct tension with each other. For example,
[p]rotecting the claims and convenience for US creditors would conflict with a just outcome of all interested
parties if at least some of those parties came from foreign jurisdictions or would benefit from the bankruptcy
laws of a foreign jurisdiction rather than the U.S. Bankruptcy Code. See Lesley Salafia, Note, Cross Border
Insolvency Law in the United States and its Application to Multinational Corporate Groups (2006) 21
Connecticut Journal of International Law 297, 309; see also Todd Kraft and Allison Aranson, Transnational
Bankruptcies: Section 304 and Beyond (1993) Columbia Business Law Review 329, 339341.
18 Ibid.

175
 The UNCITRAL Model Law on Cross-Border Insolvency

4.14 Another challenge posed by section 304 was determining whether a particular foreign proc-
ess constituted a foreign proceeding under section 304. A foreign proceeding was defined
as a proceeding, whether judicial or administrative and whether or not under bankruptcy
law, in a foreign country . . . for the purpose of liquidating an estate, adjusting debts by com-
position, extension, or discharge, or effecting a reorganization.19 One of the first cases on
this issue held that a voluntary winding up was not a foreign proceeding because creditors
had no voice in the proceeding and little right to notice, the debtor acted free from control
or supervision of the local court, and the local court merely played a ministerial role.20
Subsequent decisions appeared to limit the holding of In re Tam to whether the foreign
proceeding involved sufficient judicial oversight and creditor notice.21 As the case law
evolved, it became clear that a foreign proceeding would be recognized if there was a suffi-
cient amount of judicial involvement and supervision or creditors were given access to the
proceeding to voice their objections.22

2. Legislative history
4.15 As described above, chapter 15 generally implements the Model Law.23 The US was an active
participant in the drafting of the Model Law, and the Model Law was wholeheartedly
accepted by the United States National Bankruptcy Review Commission.24 The language of
chapter 15 generally follows the form and substance of the Model Law with certain modifi-
cations designed to conform the Model Law to US law and terminology.25
4.16 Chapter 15 was added to the Bankruptcy Code with the goal of promoting international
comity and to provide for the fair and efficient administration of cross-border insolvencies,
which protects the interests of creditors and other interested parties, including the debtor.26
Chapter 15 was not intended to change the basic approach of US law to multinational insol-
vencies, but is rather procedural in nature and designed to provide a common platform for
cooperation with other countries around the world.27

3. Chapter 15 vs section 304

4.17 Chapter 15 was intended to streamline and simplify the ability of a foreign representative to
obtain recognition of a foreign proceeding in the US compared to former section 304.28
Section 304 did not specifically provide for recognition of a foreign bankruptcy proceeding,
but rather gave courts the authority to open an ancillary proceeding and grant relief if the six
statutorily enumerated factors were present. The enactment of chapter 15 shifted from the

19 11 USC 101(23) (repealed 2005).

20 In re Tam, 170 BR 838 (Bankr SDNY 1994).
21
See In re Ward, 201 BR 357, 362 (Bankr SDNY 1996). In Ward, the court held that a Zambian voluntary
winding up was a foreign proceeding (though very similar to the Cayman winding up in In re Tam) because
there was active court involvement and creditors had the right to be heard. Ibid.
22
See In re Hopewell Intl Insurance, 238 BR 25, 50 (Bankr SDNY 1999), affd, 275 BR 699 (SDNY 2002).
Interestingly, Hopewell was solvent, yet its scheme was nonetheless recognized as a foreign proceeding. Ibid
at 48.
23
HR Rep No 109-31, at 105107 (2005); In re Tri-Continental Exchange Ltd, 349 BR 627, 631632
(Bankr ED Cal 2006).
24
Westbrook, supra n 8, at 719.
25 Ibid at 719720; In re Iida, 377 BR at 256.
26 In re Steadman, 410 BR 397, 402 (Bankr DNJ 2009) (quoting HR Rep No 109-31, at 106 (2005)).
27 Westbrook, supra n 8, at 725726.
28 See Allan L Gropper, Current Developments in International Insolvency Law: A United States Perspective

(2006) 15 Journal of Bankruptcy Law & Practice 2 Art 3.

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subjective, comity-based process of section 304(c) to chapter 15s more rigid recognition
standard.29 In its place, chapter 15 sets forth a procedure for recognition of a foreign
proceeding. A foreign representative files a petition for recognition of the foreign proceeding
and once recognition is granted, the foreign representative is entitled to relief.30 As one court
noted, [r]equiring recognition to nearly all court access and consequently as a condition
to granting comity distinguishes Chapter 15 from its predecessor section 304.31 Courts
have adopted the approach that chapter 15 requires a factual determination with respect
to recognition before principles of comity come into play, promoting predictability and
reliability.32
While recognition turns on the strict application of objective criteria, relief is largely discre- 4.18
tionary and turns on subjective factors that embody principles of comity.33 However, the six
section 304 criteria have limited application under chapter 15; they are used only when a
bankruptcy court considers whether additional assistance beyond that specifically provided
for in chapter 15 is required after the court has recognized the foreign proceeding.34 Moreover,
comity has been elevated to an overarching principle.35 Therefore, case law decided under
section 304 is of limited use in chapter 15 cases and will generally only be applicable when
courts consider whether to grant additional assistance.36
Chapter 15 is also designed to concentrate all issues dealing with foreign proceedings in the 4.19
bankruptcy court. Under section 304, state or other federal courts could have granted comity
to a foreign proceeding and deferred to the decisions of the foreign court. This left room for
abuse as [p]arties would be free to avoid the requirements of [chapter 15] and the expert
scrutiny of the bankruptcy court by applying directly to a state or federal court unfamiliar
with the statutory requirements.37 As a result, under section 1509(d), if a foreign representa-
tive is denied recognition under chapter 15, the court may prohibit the representative from
seeking relief in another court. In addition, a foreign representative must include a copy of
the recognition order when requesting comity or cooperation in any US court besides the
court that granted recognition.38
Unlike section 304, chapter 15 also provides for provisional relief, contains specific provi- 4.20
sions for cooperation with a foreign representative and provides for judicial cooperation
between the courts and other authorities involved in a cross-border case.

29
In re Bear Sterns High Grade Structured Credit Strategies Master Fund, Ltd, 389 BR 325, 332 (SDNY 2008).
30
Westbrook, supra n 8, at 721722.
31 Bear Sterns, 389 BR at 333.
32 Ibid. See also In re Iida, 377 BR at 257; In re Basis Yield Alpha Fund (Master), 381 BR 37, 4346 (Bankr

SDNY 2008); In re Loy, 380 BR 154, 164165 (Bankr ED Va 2007); United States v JA Jones Construction
Group, LLC, 333 BR 637 (EDNY 2005) (holding that the court did not have authority to consider a foreign
receivers request for a stay of action in accordance with Canadian bankruptcy law because the foreign receiver
had not sought recognition under chapter 15).
33 Bear Stearns, 389 BR at 333334.
34
See 11 USC 1507(b).
35
Ibid.
36 Westbrook, supra n 8, at 720 (Because 304 has been repealed, the case law developed under that section

is not directly controlling in Chapter 15 cases, but it remains relevant to a limited extent). See also, In re Bear
Stearns High Grade Structured Credit Strategies Master Fund, 374 BR 122, 132 (Bankr SDNY 2007) (the juris-
prudence developed under section 304 is of no assistance in determining the issues relating to the presumption
for recognition under chapter 15).
37 HR Rep No 109-31, at 110 (2005).
38 11 USC 1509(c).

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C. Mechanics of Chapter 15

1. When does chapter 15 apply?

4.21 Chapter 15 only applies when (i) US assistance is sought by a foreign court or a foreign repre-
sentative in connection with a foreign proceeding, (ii) assistance is sought in a foreign country
in connection with a case under the Bankruptcy Code, (iii) a foreign proceeding and a plenary
case under the Bankruptcy Code are pending with respect to the same debtor, and (iv) creditors
or other interested persons in a foreign country have an interest in requesting the commence-
ment of, or participating in, a case or proceeding under the Bankruptcy Code.39
4.22 Chapter 15 does not apply to (i) a proceeding concerning an entity, other than a foreign
insurance company, that is ineligible to be a debtor under the Bankruptcy Code (eg a rail-
road, a domestic insurance company, or a domestic or foreign bank), (ii) an individual, or to
an individual and such individuals spouse, who have debts within certain limits specified
under section 109(e) and who are US citizens or permanent residents, (iii) an entity subject
to a proceeding under the Securities Investor Protection Act of 1970, or a stock or commod-
ity broker subject to the liquidation provisions of chapter 7, and (iv) any deposit, escrow,
trust fund, or other security required or permitted under any applicable states insurance law
or regulation for the benefit of claim holders in the US.40
4.23 Although chapter 15 appears to apply to all requests for assistance in the US by a foreign
court or foreign representative in connection with a foreign proceeding, a foreign representa-
tive will be unable to obtain most types of relief from US courts if the underlying foreign
proceeding does not qualify as either a main or non main proceeding.41
4.24 There are certain circumstances in which a court cannot apply chapter 15. For example, if
chapter 15 conflicts with a US obligation under a treaty or other agreement to which the US
is a party with one or more countries, chapter 15 will not be available.42 Courts, however, are
instructed to read the Model Law and the US obligation so as not to conflict, especially if the
subject matter of the international obligation is less directly related than the Model Law to
a case before the court.43 In addition, a court has discretion to abstain from acting under
chapter 15 if such action would be manifestly contrary to US policy.44

2. Commencement of a chapter 15 case

4.25 A chapter 15 case begins when a foreign representative files a petition for recognition of a
foreign proceeding.45 A foreign representative is defined as a person or body, including an
interim representative, authorized in a foreign proceeding to administer the reorganization
or the liquidation of the debtors assets or affairs or to act as a representative of such foreign
proceeding.46

3911 USC 1501(b).

4011 USC 1501(c)(d).
41 Alesia Ranney-Marinelli, Overview of Chapter 15 Ancillary and Other Cross-Border Cases (2008) 82

Am Bankr L J 269, 272.

42
11 USC 1503.
43 HR Rep No 109-31, at 107 (2005).
44 11 USC 1506.
45
11 USC 1504, 1509(a).
46 11 USC 101(24).

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 II. The US VersionChapter 15

A petition for recognition must be accompanied by a statement identifying all foreign pro- 4.26
ceedings involving the debtor that are known to the foreign representative, as well as one of
the following three items: (i) a certified copy of the decision commencing the foreign pro-
ceeding and appointing the foreign representative, (ii) a certificate from the foreign court
affirming the existence of the foreign proceeding and the appointment of the foreign repre-
sentative, or (iii) in the absence of the evidence referred to above, any other evidence accept-
able to the court of the existence of the foreign proceeding and of the appointment of the
foreign representative.47
Because chapter 15 was designed to make recognition as simple and expedient as possible,48 4.27
Congress adopted statutory presumptions regarding the petition and supporting docu-
ments. Specifically, a court is entitled to presume that documents submitted in support of a
petition for recognition are authentic, regardless of whether they have been legalized.49 There
also is a presumption that a proceeding is a foreign proceeding and the representative is a
foreign representative if the foreign decision or certificate indicates as much.50 Such statu-
tory presumptions are rebuttable and the court may hear proof on any element stated.51
In practice, a foreign representative seeking recognition of a foreign proceeding under chap- 4.28
ter 15 typically should file the following documents with the bankruptcy court:
Voluntary Petition: The voluntary petition is a standard document filed by all foreign rep-
resentatives. A separate voluntary petition seeking chapter 15 recognition must be filed for
each debtor.
Board Resolutions: The board resolutions should, among other things, authorize the filing
of the chapter 15 petition, designate an officer of the debtor to execute the chapter 15 peti-
tion and related documents, approve the retention of bankruptcy counsel and other pro-
fessionals, and authorize further acts in support of the chapter 15 cases.
Verified Petition: The verified petition is executed by the foreign representative. Among
other things, it provides a factual background describing the debtors business, the reasons
for the chapter 15 filing, and the relief requested (eg providing that a scheme of arrange-
ment be given full force and effect in the US). A variety of exhibits are attached to the veri-
fied petition, including but not limited to: (i) a certified copy of the decision (translated
into English, if necessary) commencing the foreign proceeding and appointing the foreign
representative; (ii) the proposed order granting recognition under chapter 15; (iii) the
foreign order authorizing the foreign representative to convene a meeting to permit credi-
tors to vote on a proposed scheme of arrangement; and (iv) the scheme of arrangement.
List Required Pursuant to Fed R Bankr P 1007(a)(4): Unless the bankruptcy court orders
otherwise, rule 1007(a)(4) of the Bankruptcy Rules requires the foreign representative to
file a list containing the name(s) and address(es) of all administrators in foreign proceed-
ings of the debtor, all parties to any pending US litigation in which the debtor is a party
and all entities against whom provisional relief is sought under section 1519 of the
Bankruptcy Code.

47
11 USC 1515(b).
48 HR Rep No 109-31, at 112 (2005).
49 11 USC 1516(b).
50 11 USC 1516(a).
51 HR Rep No 109-31, at 112 (2005); In re Basis Yield Alpha Fund (Master), 381 BR 37, 53 (Bankr SDNY

2008).

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 The UNCITRAL Model Law on Cross-Border Insolvency

Statement Required Pursuant to Fed R Bankr P 7007.1(A): Rule 7007.1 of the Bankruptcy
Rules requires a nongovernmental corporate party to list the corporations (as defined by
section 101 of the Bankruptcy Code) owning more than a 10 per cent interest in such
party or state that there are no such corporations.
Statement of Foreign Representative Pursuant to Section 1515(c): The statement pursuant to
section 1515(c) of the Bankruptcy Code identifies all foreign proceedings with respect to
the debtor that are known to the foreign representative.
Motion to Specify Form and Manner of Service of Notice of Filing of Chapter 15 Petition and
to Schedule a Hearing on the Chapter 15 Petition: By this motion, the foreign representative
seeks the bankruptcy courts approval of the proposed notice to be sent to the debtors
creditors and other parties-in-interest notifying them of the filing of the debtors chapter
15 petition. In an abundance of caution, the foreign representative also should seek the
bankruptcy courts authorization to publish the notice in a national newspaper (eg Wall
Street Journal). In addition, the motion requests that the bankruptcy court schedule a
hearing on the chapter 15 petition. Bankruptcy Rule 2002(q)(1) provides that parties are
to be given 21 days notice of a hearing on a chapter 15 petition.
Memorandum of Law in Support of the Chapter 15 Petition and any Ex Parte Relief Requested:
The memorandum of law provides a factual background regarding the debtors business,
the reason(s) for seeking chapter 15 protection and arguments in support of the conten-
tion that the applicant is entitled to recognition under chapter 15. If the foreign repre-
sentative requests ex parte provisional relief (see description below), the memorandum of
law also explains why the bankruptcy court should grant such relief.
Declaration in Support of the Chapter 15 Petition and Related Motions: A representative of
the debtor will execute a declaration in support of the chapter 15 petition and any ex parte
provisional relief requested by the debtor.
Motion Directing Joint Administration of Chapter 15 Cases (Optional): If two or more peti-
tions are pending in the same court by related debtors, Bankruptcy Rule 1015(b) author-
izes the bankruptcy court to order the joint administration of the cases for administrative
purposes. Joint administration permits, among other things, the use of a single docket for
all of the debtors cases, and the ability to combine notices to creditors and other parties-
in-interest. This is a typical motion that is routinely granted by the bankruptcy court.
Ex Parte Application for Order to Show Cause with Temporary Restraining Order and, After
Notice and a Hearing, A Preliminary Injunction (Optional): Section 1519 of the Bankruptcy
Code provides for the entry of relief that may be necessary during the gap period between
the filing of the chapter 15 petition and a bankruptcy courts decision on recognition. A
foreign representative sometimes requests that the bankruptcy court approve provisional
injunctive relief, such as staying and restraining all persons and entities from: (a)(i) con-
tinuing any action or commencing any additional action involving the debtor or its assets;
(ii) enforcing any judicial, quasi-judicial, administrative, or regulatory judgment, assess-
ment, or order or arbitration award against the debtor; (iii) commencing or continuing
any action to create, perfect, or enforce any lien, setoff, or other claim against the debtor
or its property; or (iv) managing or exercising control over the debtors assets located
within the US except as expressly authorized by the foreign representative in writing; and/
or (b) entrusting the administration or realization of all or part of the debtors assets located
in the US to the foreign representative; and/or (c) authorizing the foreign representative

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to operate the debtors business and to exercise certain rights under the Bankruptcy Code;
and/or (d) scheduling a hearing to consider the foreign representatives request for a pre-
liminary injunction granting the same relief as set forth in items (a) to (c).

3. Recognition
Recognition is a central concept under chapter 15. A foreign representative initiates a chap- 4.29
ter 15 case by filing a petition for recognition of a foreign proceeding in the bankruptcy
court, but the foreign representative cannot obtain permanent (as opposed to provisional)
relief under chapter 15 until the bankruptcy court recognizes the foreign proceeding. As
described above, the petition must include certain evidentiary documents, such as a certified
copy of the court order commencing the foreign proceeding and appointing the foreign
representative. Absent contrary evidence, the bankruptcy court presumes the authenticity of
these documents.
A foreign proceeding is defined as a collective judicial or administrative proceeding in a for- 4.30
eign country . . . under a law relating to insolvency or adjustment of debt in which proceeding
the assets and affairs of the debtor are subject to control or supervision by a foreign court, for
the purpose of reorganization, or liquidation.52 This definition clarifies that a foreign proceed-
ing need not be a bankruptcy proceeding; it may involve adjustment of debt and be for the
purpose of a reorganization. Specifically, the addition of adjustment of debt emphasizes that
the scope of . . . chapter 15 is not limited to proceedings involving only debtors which are tech-
nically insolvent, but broadly includes all proceedings involving debtors in severe financial dis-
tress.53 In addition, the foreign proceeding must be for the purpose of reorganization, or
liquidation. Although the term reorganization is not defined in the Bankruptcy Code, courts
have cited multiple legal treatises, encyclopedias, and dictionaries on this point.54 The Legislative
Guide on Insolvency Law defines reorganization as the process by which the financial well-
being and viability of a debtors business can be restored and the business continue to operate,
using various means possibly including debt forgiveness, debt rescheduling, debt-equity con-
versions and the sale of the business (or part of it) as a going concern.55
Recognition involves classifying a foreign proceeding as main or non main. A foreign main 4.31
proceeding is a foreign proceeding pending in the country where the debtor has its center of its
main interests or COMI.56 A foreign non main proceeding is any other proceeding pending
in a country where the debtor has an establishment.57 An establishment is defined as any place
of operations where the debtor carries out a nontransitory economic activity.58

52
11 USC 101(23). See also In re Betcorp Limited, 400 BR 266, 277 (Bankr D Nev 2009) (describing the
seven elements of a foreign proceeding as (i) a proceeding; (ii) that is either judicial or administrative; (iii) that
is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to
insolvency or the adjustment of debts; (vi) in which the debtors assets and affairs are subject to the control or
supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation).
53
HR Rep No 109-31, at 118 (2005) (emphasis added).
54 See Paolini v Albertsons Inc, 482 F 3d 1149, 1152 n 2 (9th Cir 2007) (citing 19 Am Jur 2d Corporations

2306, 2306; (2006) 15 Fletcher Cyclopedia of Law of Private Corporations 7201, 7202, 7205); Lohnes
v Level 3 Commcn, Inc, 272 F 3d 49, 56 (1st Cir 2001) (citing Blacks Law Dictionary (6th edn, 1990), 1298).
55 UNCITRAL, Legislative Guide on Insolvency Law (UN 2005), p 7.
56 11 USC 1502(4).
57 11 USC 1502(5).
58 11 USC 1502(2).

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 The UNCITRAL Model Law on Cross-Border Insolvency

4.32 COMI is not defined in the Bankruptcy Code. The centre of main interests concept is described
in the EC Regulation59 as the place where the debtor conducts the administration of his interests
on a regular basis and is therefore ascertainable by third parties.60 Under chapter 15, there is a
rebuttable presumption that absent evidence to the contrary, the location of the debtors registered
office, or the habitual residence of an individual, is presumed to be the debtors COMI.61
4. Recognition timeline
4.33 Section 1517(c) of the Code provides that a petition for recognition of a chapter 15 case shall
be decided upon at the earliest possible time. However, Bankruptcy Rule 2002(q)(1)
requires 21 days notice of a hearing on a petition for recognition. Thus, an order granting
foreign recognition should in most cases be entered within approximately one month after
the chapter 15 petition and supporting documents are filed.
5. Relief under chapter 15
4.34 Unlike the filing of a chapter 7, 11, or 13 petition, filing a chapter 15 petition does not trigger
automatic relief. Chapter 15 relief depends on whether the bankruptcy court recognizes the
foreign proceedings as main or non main. Only main proceedings trigger automatic relief,
including application of the automatic stay under section 362. Relief in non main proceed-
ings is discretionary.
(a) Automatic relief
4.35 Recognition of a foreign main proceeding triggers the following relief automatically:

Sections 361 (adequate protection) and 362 (automatic stay) apply to the debtor and any
of the debtors property that is within the territorial jurisdiction of the US.
Sections 363 (use, sale, and lease of property), 549 (post-petition transactions), and 552
(post-petition effect of security interests) apply to a transfer of an interest of the debtor in
property that is within the territorial jurisdiction of the US to the same extent that such
sections would apply to property of the estate.
A foreign representative may operate the foreign debtors business and may exercise the
rights of a trustee under sections 363 and 552.62

(b) Discretionary relief

4.36 Upon recognition of a foreign proceeding as either a main or non main proceeding, the court
may grant discretionary relief where necessary to effectuate the purposes of [chapter 15] and
to protect the assets of the debtor or the interests of the creditors.63 Only discretionary relief
is available to a foreign representative of a non main proceeding.
4.37 Discretionary relief includes: (i) staying the commencement or continuation of an individ-
ual action or proceeding concerning the debtors assets, rights, obligations, or liabilities, (ii)
staying execution against the debtors assets, (iii) suspending the right to transfer, encumber,
or otherwise dispose of any of the debtors assets; (iv) providing for the examination of

59
Council Regulation (EC) 1346/2000 on Insolvency Proceedings [2000] OJ L160/1 (hereinafter the EC
Regulation).
60 Ibid, Recitals, para 13.
61 11 USC 1516(c).
62 See 11 USC 1520.
63 11 USC 1521.

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 II. The US VersionChapter 15

witnesses, the taking of evidence, or delivery of information concerning the debtors assets,
affairs, rights, obligations, or liabilities, (v) entrusting the administration, realization, and/or
distribution of all or part of the debtors assets within the US to the foreign representative or
another person authorized by the court, (vi) extending any provisional relief granted under
section 1519(a), and (vii) granting any additional relief available to a trustee under the
Bankruptcy Code (but not authority to bring avoidance actions).64 The court also may order
turnover of assets located in the US to the foreign representative when the court is satisfied
that the interests of the creditors in the United States are sufficiently protected.65
There are various limitations on the grant of discretionary relief including the following: (i) the 4.38
court may not enjoin a governmental units police or regulatory act, including a criminal action
or proceeding,66 (ii) with respect to a foreign non main proceeding, the court must be satisfied
that the relief relates to assets that, under US law, should be administered in the foreign non
main proceeding or concerns information required in that proceeding,67 (iii) discretionary
relief that is injunctive must satisfy the standards, procedures, and limitations generally appli-
cable to injunctions,68 and (iv) avoidance actions are expressly not available.69
(c) Provisional relief
Although the filing of a chapter 15 petition does not trigger automatic relief unlike other chap- 4.39
ters of the Bankruptcy Code, section 1519 allows a foreign representative to obtain provisional
relief that may be necessary during the gap period between the filing of the chapter 15 petition
and the bankruptcy courts decision on recognition. A bankruptcy court may grant provisional
relief at the request of the foreign representative, but only where relief is urgently needed to
protect the assets of the debtor or the interests of the creditors.70 A request for provisional relief
is subject to the standards, procedures, and limitations applicable to an injunction.71
Upon such a finding, provisional relief includes, but is not limited to (i) staying execution 4.40
against the debtors assets,72 (ii) entrusting the administration or realization of the debtors
assets that are perishable, susceptible to devaluation, or otherwise in jeopardy to the foreign
representative or another court authorized person,73 (iii) suspending the right to transfer,
encumber, or otherwise dispose of any of the debtors assets,74 (iv) providing for the examina-
tion of witnesses or the gathering of evidence regarding the debtors assets, affairs, rights,

64 11 USC 1521(a)(1)(7).
65
11 USC 1521(b). Note that additional protections of creditors and others are set forth in s 1522.
66
See 11 USC 1521(d). See also US Intern. Trade Comn v Jaffe, Case No 10-cv-367, 2010 WL 2636096
(Bankr ED Va, 28 June 2010) (holding that the automatic stay, triggered upon entry of the recognition order,
did not apply to a patent infringement action initiated by private entities pending before the International
Trade Commission because the pending action was an enforcement of a governmental units police or regula-
tory power under s 364(b)(4) of the Bankruptcy Code).
67
See 11 USC 1521(c).
68
See 11 USC 1521(e).
69 11 USC 1521(a)(7).
70
11 USC 1519(a).
71
11 USC 1519(e). A bankruptcy court considers the following factors in determining whether to grant
an injunction: (i) whether there is a likelihood of successful reorganization; (ii) whether there is an imminent
irreparable harm to the estate in the absence of an injunction; (iii) whether the balance of harm tips in favour of
the moving party; and (iv) whether the public interest weighs in favour of an injunction. See Calpine Corp v
Nevada Power Co (In re Calpine Corp), 354 BR 45 (Bankr SDNY 2006), affd 365 BR 401 (SDNY 2007).
72 11 USC 1519(a)(1).
73 11 USC 1519(a)(2).
74 11 USC 1519(a)(3), 1521(a)(3).

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 The UNCITRAL Model Law on Cross-Border Insolvency

obligations, or liabilities,75 and (v) granting any additional relief available to a trustee under
the Bankruptcy Code, excluding avoidance powers.76 Unless extended, provisional relief
terminates upon recognition of the chapter 15 petition.
4.41 Provisional relief is not unlimited and may be denied if it would interfere with the adminis-
tration of a foreign main proceeding.77 In addition, a court may not order certain types of
provisional relief, including enjoining a police or regulatory act of a governmental unit78 or
enjoining the exercise of set off rights by non-debtor counterparties to financial contracts
that otherwise are not automatically stayed.79
(d) Additional assistance
4.42 Following recognition, a bankruptcy court may grant additional assistance. Section 1507
authorizes the bankruptcy court to provide additional assistance to a foreign representative
under this title or under other laws of the United States.80 The grant of additional assistance
depends on evaluation of former section 304 factors: (i) just treatment of all holders of claims
against or interests in the debtors property, (ii) protecting US claim holders against prejudice
and inconvenience in processing claims in the foreign proceeding, (iii) prevention of prefer-
ential or fraudulent dispositions of the debtors property, (iv) distribution of proceeds of the
debtors property substantially in accordance with the priority scheme set forth in the
Bankruptcy Code, and (v) if appropriate, the provision of an opportunity for a fresh start for
the individual that such foreign proceeding concerns.81 Section 1507(b) elevates comity to
utmost importance, essentially codifying section 304(c) case law that emphasized its pre-
eminence. Specifically, the introductory paragraph of section 1507(b) provides that in deter-
mining whether to provide additional assistance the court must consider whether such
additional assistance is consistent with the principles of comity.82
4.43 The scope of additional assistance provided for under this section is unclear. The legislative history
states that additional relief is relief beyond that permitted under 15191521.83 Although the
enactment of chapter 15 was intended to change the former approach to ancillary foreign proceed-
ings, the legislative history notes that additional assistance does not expand the scope of relief cur-
rently available under section 304.84 The legislative history for section 1522, however, goes further
and states that the bankruptcy court has broad latitude to mold relief to meet specific circumstances,
including appropriate responses if it is shown that the foreign proceeding is seriously and unjustifi-
ably injuring United States creditors.85 There are express limits, however: section 1507 states that
additional assistance is subject to the specific limitations stated elsewhere in chapter 15.86
4.44 The additional assistance section of chapter 15 departs from the Model Law in that recogni-
tion of the foreign proceeding is a prerequisite. The Model Law provides that [n]othing in

75
11 USC 1519(a)(3), 1521(a)(4).
76
11 USC 1519(a)(3), 1521(a)(7).
77 11 USC 1519(c).
78
11 USC 1519(d).
79
11 USC 1519(f ).
80 11 USC 1507(a).
81
11 USC 1507(b).
82 Ibid.
83 Gropper, supra n 28, at 4 (citing HR Rep No 109-031, 109 (2005)).
84 Ibid (quoting HR Rep No 109-031, 116 (2005)).
85 Ibid.
86 11 USC 1507(a).

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 II. The US VersionChapter 15

the [Model] Law limits the power of a court to provide additional assistance to a foreign
representative under other laws of this State.87
(e) Conditions to relief
A bankruptcy court may impose conditions to relief granted under section 1519 (provisional 4.45
relief) or section 1521 (discretionary relief).88 The bankruptcy court may also impose conditions
on the ability of the foreign representative to operate the foreign debtors business upon recogni-
tion of a foreign main proceeding pursuant to section 1520(a)(3).89 The court may impose any
conditions it considers appropriate, including the giving of security or the filing of a bond.90
(f ) Foreign representative
The foreign representatives ability to act in US courts changes following recognition. After 4.46
recognition, the foreign representative gains the ability to sue and be sued in a US court and
to apply directly to such US court for appropriate relief.91 A US court also must grant comity
or cooperation to the foreign representative92 and a foreign representative may intervene in
any proceeding in a US state or federal court in which the debtor is a party.93
Upon recognition of a foreign main proceeding, the foreign representative may operate the 4.47
debtors business and may exercise the rights and powers of a trustee under sections 363 and
552 of the Bankruptcy Code.94

6. Venue
A case under chapter 15 is commenced in the federal district in which the debtor has its 4.48
principal place of business or principal assets in the US. If there is no such district, then a
chapter 15 case may be commenced in the district in which a federal or state court action is
pending against the debtor. Otherwise, a chapter 15 case may be commenced where venue
will be consistent with the interests of justice and the convenience of the parties, having
regard to the relief sought by the foreign representative.95
The affiliate rule96 which normally permits the filing of related chapter 11 cases in the same 4.49
district where an affiliates chapter 11 case is pending does not appear on its face to apply to

87
UNCITRAL Model Law on Cross-Border Insolvency, Article 7.
88
11 USC 1522(b).
89
Ibid.
90
Ibid.
91 11 USC 1509(b)(1).
92
11 USC 1509(b)(3).
93
11 USC 1524.
94 11 USC 1520(a)(3).
95 28 USC 1410.
96 28 USC 1408. Venue of cases under title 11.

Except as provided in section 1410 of this title, a case under title 11 may be commenced in the district
court for the district
(1) in which the domicile, residence, principal place of business in the United States, or principal
assets in the United States, of the person or entity that is the subject of such case has been
located for the one hundred and eighty days immediately preceding such commencement, or
for a longer portion of such one hundred-and-eighty-day period that the domicile, residence
or principal place of business, in the United States, or principal assets in the United States, of
such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such persons affiliate, general
partner or partnership.
Section 1410 governs venue of chapter 15 cases and contains no language comparable to s 1408(2). See 28 USC
1410.
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 The UNCITRAL Model Law on Cross-Border Insolvency

chapter 15 cases. However, in practice, corporate groups routinely file chapter 15 cases in the
same jurisdiction.

7. Cooperation and communication

4.50 The Guide to Enactment of the Model Law characterizes the articles on cooperation and com-
munication as a core element of the Model Law.97 The objective of these provisions is to
enable courts and insolvency administrators from two or more countries to be efficient and
achieve optimal results.98 Chapter 15 closely tracks the Model Law provisions on cooperation
and communication between US and foreign courts or representatives. Sections 1525 and
1526 direct the bankruptcy court and the trustee, or other person, including an examiner, to
cooperate to the maximum extent possible with a foreign court or foreign representative. In
addition, the bankruptcy court or trustee is authorized to communicate directly with, or to
request information or assistance directly from, a foreign court or foreign representative.99
Chapter 15 provides a non-exhaustive list of the types of cooperation that may occur between
the US court or trustee and the foreign court, including the appointment of a person or body
to act at the direction of the court, communication of information by any appropriate method,
coordination of the administration and supervision of the foreign debtors assets and affairs,
approval or implementation of agreements concerning the coordination of proceedings and
coordination of concurrent proceedings involving the same debtor.100

8. Multiple proceedings
4.51 Chapter 15 acknowledges the possibility of a concurrent plenary case under other chapters
of the Bankruptcy Code. Following recognition, a foreign representative many commence
(i) an involuntary case under section 303 or (ii) if the recognized proceeding is a foreign main
proceeding, a voluntary case under section 301 or 302.101 However, the debtor must have
assets in the US to commence a plenary case under the Bankruptcy Code.102
4.52 If a plenary case is commenced after a foreign main proceeding has been recognized, the case
will only affect (i) the assets of the debtor that are within the territorial jurisdiction of the US
and (ii) to the extent necessary to implement cooperation and coordination with foreign
courts and representatives, other assets of the debtor that are within the courts jurisdiction
and not subject to the jurisdiction and control of a foreign proceeding that has been recog-
nized under chapter 15.103
4.53 A foreign debtor may also have multiple non main proceedings because a foreign debtor may
have multiple establishments, as opposed to only one COMI.104
4.54 A court may dismiss or suspend a plenary bankruptcy case under section 305s abstention
principles at the request of the foreign representative if doing so is consistent with the

97
Guide to Enactment of the Model Law, supra n 6, at para 173.
98 Ibid.
99
11 USC 1525(b), 1526(b).
100 11 USC 1527.
101 11 USC 1511(a).
102 11 USC 1528.
103 Ibid.
104 Ranney-Marinelli, supra n 41, at 298.

186
 III. Chapter 15 Recognition of English Schemes of Arrangement

purposes of chapter 15.105 Filing a motion under section 305 does not subject a foreign rep-
resentative to the jurisdiction of any court in the US for any other purpose.106

9. Interpretation
Under section 1508, a bankruptcy court must consider non-US sources in addition to US 4.55
case law and chapter 15 legislative history when interpreting chapter 15. Non-US sources
that Congress described as persuasive include decisions rendered by foreign courts constru-
ing the Model Law and the report of UNCITRAL and the Guide to Enactment of the
UNCITRAL Model Law on Cross-Border Insolvency. 107 Other sources that interpret provi-
sions similar to the Model Law and may be useful include certain provisions of the EC
Regulation, the Report on the Convention on Insolvency Proceedings by Miguel Virgos and
Etienne Schmitt (which is the principal report on the EU convention on insolvency proceed-
ings), decisions construing the EC Regulation, and reports and commentary on the EC
Regulation prepared by various member states of the EU in connection with their adoption
of the EC Regulation.108

III. Chapter 15 Recognition of English

Schemes of Arrangement
Under chapter 15, bankruptcy courts generally recognize English proceedings involving 4.56
schemes of arrangement under the Companies Act 1985 of Great Britain, which
was superseded by the Companies Act 2006, as foreign proceedings.109 A scheme
of arrangement envisions expeditious court approval of consensual reorganization plans
and is in some ways similar to a prepackaged chapter 11 plan of reorganization.110
A scheme is a binding arrangement between a company and one or more classes of

105 11 USC 305.

106
11 USC 306.
107 HR Rep No 109-031, at 109-10 (2005).
108
Ranney-Marinelli, supra n 41, at 273274.
109
See, eg, In re Petition of Philip Heitlinger, as foreign representative of AXA Insurance UK PLC, Ecclesiastical
Insurance Office plc, Global General and Reinsurance Company Limited and MMA IARD Assurances Mutuelles
(Bankr SDNY, Case No 07-12112) (chapter 15 petition and supporting documents filed on 9 July 2007;
order granting recognition of foreign proceedings, permanent injunction, and related relief entered on 15
August 2007) (no objection filed to requested relief ); In re Europische Rckversicherungs-Gesellschaft in
Zrich (Bankr SDNY, Case No 06-13061) (chapter 15 petition filed on 21 December 2006; order granting
recognition of foreign non main proceeding entered on 14 January 2007) (no objection filed to requested
relief ); see, eg, In re: Petition of Jeffrey John Lloyd, Case No. 05-60100, 2005 Bankr Lexis 2794 (Bankr SDNY
2005) (Lifland J) (chapter 15 petition and supporting documents filed on 11 November 2005; order grant-
ing recognition of foreign main proceeding entered on 7 December 2005) (no objection filed to requested
relief ); see also In re Schefenacker plc (Bankr SDNY, Case No 07-11482) (company voluntary arrangement)
(chapter 15 petition filed on 15 May 2007; order granting recognition entered on 15 June 2007) (objections
filed to requested relief ); In re The Meadows Indemnity Company Ltd (Bankr MD Tenn, Case No 09-08706)
(chapter 15 petition and supporting documents filed on 31 July 2009; order granting recognition of pro-
ceeding implementing solvent scheme of arrangement pursuant to Part 26 of the Companies Act 2006 as a
foreign proceeding entered 9 September 2009).
110 See In re Hopewell Intl Insurance, 238 BR 25, 5052 (Bankr SDNY 1999).

187
 The UNCITRAL Model Law on Cross-Border Insolvency

creditors to restructure the affairs of the company and creditors rights and liabilities.111
Schemes are only effective and binding on the company and its creditors after a requisite
majority of creditors vote in favour of the scheme and the High Court, after a hearing,
issues an order sanctioning the scheme.112
4.57 Prior to enactment of chapter 15, courts granted relief under section 304 when the foreign
proceeding involved a scheme of arrangement.113 Courts continue to recognize such schemes
under chapter 15. In fact, a bankruptcy court in the Southern District of New York recog-
nized the schemes of arrangement for Countrywide plc, the UKs leading estate agency for
residential properties, before such schemes were binding on the various parties in interest.
The bankruptcy court issued an order recognizing the schemes of arrangement as foreign
main proceedings before the required majority of creditors voted on such schemes.114 After
the English High Court issued an order sanctioning the schemes, the bankruptcy court
entered an order recognizing and enforcing the English High Courts order.115 This decision
demonstrates that chapter 15 can be used as a tool to ensure uninterrupted promotion of the
scheme even prior to sanction by the English court.116
4.58 Both solvent and insolvent companies may make use of a scheme of arrangement. Numerous
solvent schemes of arrangement have been recognized under chapter 15 as foreign proceed-
ings.117 When Congress adopted chapter 15, the definition of foreign proceeding was
changed to include proceedings involving adjustment of debt. This addition was intended
to capture solvent schemes of arrangement under Part 26 of the UK Companies Act 2006
or other equivalent legislation.118 Recently, some commentators have suggested that bank-
ruptcy courts should not recognize under chapter 15 schemes of arrangements implemented
under English law by solvent insurance companies.119 Some solvent insurance companies
have used such schemes to shorten the period it takes to run off their business; the insurance
company seeks to determine, settle, and pay all liquidated claims of its insureds on an

111 Howard Seife and Francisco Vazquez, US Courts Should Continue to Grant Recognition to Schemes of

Arrangement of Solvent Insurance Companies (2008) 17 J Bankr L & Prac 4 Art 4.

112 Ibid at 571572.
113 See eg, In re Hopewell Intl Insurance, 238 BR at 53.
114 See In re Castle Holdco 4, Ltd, Case No 09-11761 (REG) (Bankr SDNY, 22 April 2009).
115 In re Castle Holdco 4, Ltd, Case No 09-11761 (REG) (Bankr SDNY, 7 May 2009).
116
Look Chan Ho, Creative Uses of Chapter 15 of the US Bankruptcy Code to Smooth Cross-Border
Restructurings (2009) 9 JIBLR 485. The same article highlights the danger that bankruptcy courts will rubber
stamp recognition in the interests of comity or facilitating a coordinated settlement of all pending litigation at
the expense of statutory recognition requirements. Ibid at 488. The article argues that in the Grand Prix
Associates case, a New Jersey bankruptcy court recognized a British Virgin Islands plan of arrangement, which
is different from an English scheme of arrangement, without fully considering whether the foreign proceeding
should be entitled to recognition. Ibid at 487; see also In re Grand Prix Associates Inc, Case No 09-16545, 2009
WL 1850966 (Bankr DNJ, 26 June 2009).
117
See, eg, In re Petition of Jeffrey John Lloyd, 2005 Bankr Lexis 2794 (Bankr SDNY 2005) (Lifland J); Lion
City Run-Off Private Limited, Case No 06-B-10461 (Bankr SDNY 2006) (Bernstein J); In re Gordian Runoff
(UK) Limited, Case No 06-11563 (Bankr SDNY 2006) (Drain J); In re Petition of Philip Heitlinger, 07-B-12110
(Bankr SDNY 2007) (Gerber J); In re Petition of Clive Paul Thomas, 07-B-12009 (Bankr SDNY 2007)(Glenn J);
In re Petition of PRO Insurance Solutions, 07-B-12934 (Bankr SDNY 2007) (Peck J). In each of these cases the
court recognized an English scheme of arrangement as a foreign proceeding under chapter 15, however, such
orders do not provide any reasoning or analysis to support the courts decision.
118 Look Chan Ho, Recognising an Australian Solvent Liquidation under the UNCITRAL Model Law: In

re Betcorp (2009) 18 J Bankr L & Prac 5 Art 3.

119 See Susan Power Johnson, Why US Courts Should Deny or Severely Condition Recognition to Schemes

of Arrangement for Solvent Insurance Companies (2007) 16 J Bankr L & Prac 6 Art 2; Seife and Vasquez, supra
n 111.

188
 III. Chapter 15 Recognition of English Schemes of Arrangement

expedited basis.120 There is some debate as to whether solvent schemes for insurance compa-
nies fit the definition of foreign proceeding under section 101(23) of the Bankruptcy Code,
are manifestly contrary to US policy, including the sanctity of contracts and due process,
and severely prejudice US claimholders. There has yet to be a published US decision that
addresses this controversy.
In addition to schemes of arrangement, solvent insurance companies in the UK may use Part 4.59
VII insurance transfers, available under section 105 of the Financial Services and Markets
Act 2000, to financially restructure their business. Unlike solvent schemes of arrangement
that are generally recognized under chapter 15, there is no certainty that such a transfer
would be recognized as a foreign proceeding under chapter 15. A Part VII transfer allows an
insurance company to transfer all or a part of its business to another company to discharge it
of the duties and obligations associated with the transferred business.121 If a company decides
to engage in such a transfer, the company must report the terms of the transfer and the poten-
tial impact of the transfer on policyholders and creditors to the Financial Services Authority
(FSA).122 While creditor approval of the proposed transfer is not required, the proposed
transfer is subject to the approval of the English High Court which generally defers to the
opinion of the FSA.123
English insurance companies have sought recognition of such transfers in the US to bind 4.60
US creditors or policyholders to the Part VII transfer; however, at least one bankruptcy
court found that such a transfer was not a foreign proceeding under former section 304.124
In Rose, the bankruptcy court held that such a transfer was not a foreign proceeding
under section 304 because it did not effect a reorganization in the bankruptcy context. The
court explained that section 304 does not cover any type of corporate restructuring within
any type of foreign proceeding.125 Again, there has been no published opinion analysing
whether Part VII transfers qualify as foreign proceedings under chapter 15. Although Part
VII transfers are in some ways analogous to chapter 11 cases of solvent debtors seeking to
discharge burdensome obligations, there are several arguments against recognition of such
transfers, in addition to the case law developed under section 304, including that (i) such
transfers do not arise out of an insolvency-related law, (ii) they do not adjust debts because
creditor liabilities are not determined on a final basis upon such a transfer, and (iii) the
foreign debtor does not have to be in severe financial distress for such a transfer to
occur.126

120 Seife and Vasquez, supra n 111.

121 Jennifer D Morton, Note, Recognition of Cross-Border Insolvency Proceedings: an Evaluation of
Solvent Schemes of Arrangement and Part VII Transfers under U.S. Chapter 15 (2006) 29 Fordham Intl LJ
1312, 1313.
122 Ibid at 1325.
123 Ibid.
124 In re Petition of Rose, 318 BR 771 (Bankr SDNY 2004).
125 Ibid at 774775. But see In re Riverstone, Case No 05-12678, 2005 Bankr WL 2138734 (Bankr SDNY,

26 July 2005) (order recognizing Part VII transfer under s 304). The order entered in Riverstone is not an opin-
ion, and does not provide any discussion regarding whether Part VII transfers should be recognized as foreign
proceedings under s 304. Ibid; see also Morton, supra n 121 at 1336.
126 Morton, supra n 121 at 13541355.

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 The UNCITRAL Model Law on Cross-Border Insolvency

IV. Does the Availability of Chapter 15 Relief Affect the

Willingness of US Courts to Accept Jurisdiction in a Chapter 11
Case Where the Debtors COMI is Outside the US?
4.61 Chapter 15 contemplates that a foreign representative may commence a plenary bankruptcy
case under chapter 11 after recognition of the foreign proceeding.127 Furthermore, a foreign
debtor can avoid chapter 15 altogether and file a chapter 11 petition in the first instance if it
satisfies the eligibility requirements of section 109(b) of the Bankruptcy Code. That a debt-
ors COMI is located outside the US generally will not prevent a foreign debtor from filing
for chapter 11 relief because plenary jurisdiction does not require a principal place of busi-
ness, COMI or meaningful assets in the US.
4.62 A debtor must be eligible to file a petition for relief under the Bankruptcy Code. Specifically,
section 109(a) provides that:
Notwithstanding any other provision of this section, only a person that resides or has a domi-
cile, a place of business or property in the United States, or a municipality, may be a debtor
under this title.128
4.63 The requirements for eligibility are determined as of the date the bankruptcy petition is
filed129 and each related debtor individually must satisfy the test for eligibility.130 The entity
filing the bankruptcy petition carries the burden of establishing eligibility.131 Under section
109(a), even if a debtors COMI is not located in the US, there are other grounds that may
form the jurisdictional basis for a chapter 11 petition. Even a minimal amount of property
in the US will do.132
4.64 Courts generally are receptive to chapter 11 petitions filed by foreign debtors. Recently,
LyondellBasell Industries used the chapter 11 process to protect its European parent,
LyondellBasell Industries AF SCA, organized in Luxembourg with its principal place of
business in the Netherlands, from the commencement of involuntary insolvency proceed-
ings abroad.133 Lyondell Chemical Co, its other US affiliates and one European affiliate, a
subsidiary of LyondellBasell Industries AF SCA, filed for chapter 11 protection on 6 January
2009. There were no ongoing foreign insolvency proceedings to which the US bankruptcy
court could consider granting comity.134 Instead, in a decision that has generated some

127 11 USC 1511(a).

128 11 USC 109(a).
129 In re Global Ocean Carriers Ltd, 251 BR 31, 37 (Bankr D Del 2000); see also In re Axona International

Credit & Commerce, Ltd, 88 BR 597, 614615 (Bankr SDNY 1988).

130 Bank of America v World of English, 23 BR 1015, 10191020 (ND Ga 1982) (even where parent is eligible

to file, subsidiary must be tested separately to see if it is eligible).

131 See Global Ocean Carriers Ltd, 251 BR at 37; In re Secured Equipment Trust of Eastern Air Lines, Inc, 153

BR 409, 412 (Bankr SDNY 1993).

132 In re McTague, 198 BR 428, 431432 (Bankr WDNY 1996) (holding that $194 in a bank account was

sufficient to satisfy eligibility requirements under s 109(a) and noting that s 109(a) seems to have such a plain
meaning as to leave the Court no discretion to consider whether it was the intent of Congress to permit someone
to obtain a bankruptcy discharge solely on the basis of having a dollar, a dime or a peppercorn located in the
United States).
133 See Bench Decision on Motions for Preliminary Injunctions, Lyondell Chemical Company v Centerpoint

Energy Gas Services Inc (In re Lyondell Chemical Company), No 09-01039 (REG) (Bankr SDNY, 26 Feb 2009).
134
Ibid.

190
 IV. Does the Availability of Chapter 15 Relief Affect the US Courts?

controversy, the bankruptcy court granted the debtors motion for an injunction to prevent
creditors from acting against the foreign parent company for 60 days in an effort to protect
Lyondells European operations.135 The parent company then filed for chapter 11 protection
before the injunction expired even though its COMI was outside the US.
Although an extraordinary remedy,136 a foreign debtor filing a chapter 11 petition should 4.65
consider the risk that its chapter 11 case may be dismissed or suspended by a bankruptcy
court.137 Specifically, section 305(a) of the Bankruptcy Code provides that:
(a) The court, after notice and a hearing, may dismiss a case under this title or may
suspend all proceedings in a case under this title if
(1) the interests of creditors and the debtor would be better served by such dismissal
or suspension; or
(2) (A) a petition under section 1515 for recognition of a foreign proceeding has been
granted; and
(b) the purposes of chapter 15 of this title would be best served by such dismissal or
suspension.138
A bankruptcy court considers several factors in determining whether to abstain by dismissal 4.66
or suspension: (1) whether another forum is available to protect the interests of both parties
or there is already a pending proceeding in state court; (2) economy and efficiency of admin-
istration; (3) whether federal proceedings are necessary to reach a just and equitable solution;
(4) whether there is an alternative means of achieving an equitable distribution of assets; (5)
whether the debtor and the creditors are able to work out a less expensive out-of-court
arrangement which better serves all interests in the case; (6) whether a non-federal insol-
vency has proceeded so far that it would be costly and time consuming to start afresh with
the federal bankruptcy process; and (7) the purpose for which bankruptcy jurisdiction has
been sought.139
If a foreign proceeding is pending, a bankruptcy court also must take comity considerations 4.67
into account and give deference to the foreign proceeding.140 One court restated the factors
discussed above if a bankruptcy court is asked to abstain in favour of a foreign proceeding as
follows: (1) whether the foreign forum will determine and adjust the parties rights in a fair
and equitable manner; (2) the relative benefits and burdens of exercising jurisdiction over the
US bankruptcy case, including the physical location of the parties in interest, the existence
of parallel actions, and the nature of the dispute; and (3) the reason for filing the petition.141
For example, the bankruptcy court in Compaa de Alimentos Fargo dismissed an involuntary
chapter 11 case against a foreign debtor initiated by creditors dissatisfied with the progress of
the foreign proceedings in Argentina. The court decided that even though there were differ-
ences between Argentine and US law, including that Argentine law did not provide for an

135
Ibid.
136 See In re Paper I Partners, LP, 283 BR 661, 678 (Bankr SDNY 2002).
137
11 USC 305(a); see also In re Compaa de Alimentos Fargo, 376 BR 427, 433 (Bankr SDNY 2007)
(The decision to abstain, either by suspension or dismissal, is committed to the Courts discretion).
138 11 USC 305(a).
139 In re Compaa de Alimentos Fargo, 376 BR at 434.
140 Ibid.
141 Ibid at 434435.

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 The UNCITRAL Model Law on Cross-Border Insolvency

automatic stay affecting secured creditors, the differences were not at odds with our own
fundamental notions of fairness.142
4.68 In addition, a bankruptcy court may dismiss a foreign debtors chapter 11 case if it has only
tenuous ties to the US and its COMI is located elsewhere. A bankruptcy court may decide
to dismiss a chapter 11 petition as a bad faith filing if the foreign debtors US property had
been specifically placed or left in the US for the sole purpose of creating eligibility that would
not otherwise exist.143 A bankruptcy court in the Southern District of Texas dismissed a
chapter 11 case initiated by Yukos Oil Company after determining that the totality of the
circumstances required a dismissal of the Russian oil companys chapter 11 case under sec-
tion 1112(b) of the Bankruptcy Code.144 There were several facts that contributed to the
dismissal including, among others, that: (i) Yukos plan of reorganization was a not a finan-
cial reorganization because the plan simply provided that the companys tax debts would be
subordinated and causes of action held by the company would be transferred to a trust for
continued litigation; (ii) the ability to effectuate its contemplated plan was unlikely without
the cooperation of the Russian government; (iii) funds were transferred to banks in the US
less than a week before the petition date and were transferred for the primary purpose of
attempting to create jurisdiction in the US bankruptcy courts; (iv) several other forums were
available to resolve the issues presented; (v) the vast majority of Yukos business and financial
activities occurred in Russia; and (vi) the size of Yukos and its impact on the Russian econ-
omy weighed in favour of allowing resolution in a forum in which participation of the
Russian government was assured.145

V. Choosing Between Chapter 15 and Chapter 11

for Foreign Debtors

A. The Automatic Stay

4.69 One of the hallmarks of a chapter 11 case is a stay that goes into effect automatically upon
the filing of the case without the necessity of any court action. The Bankruptcy Code pro-
vides that the commencement of a plenary case under any chapter automatically enjoins,
without the need for a court order, all actions (with certain limited exceptions) to pursue or
collect on a pre-bankruptcy claim against the debtor, obtain possession of property of the
estate, or obtain a lien on property of the estate. This injunction is known as the automatic
stay. By its terms, the stay under section 362 of the Bankruptcy Code applies to protect the
debtor and its property wherever located in the world.146
4.70 The automatic stay benefits the debtor by giving it relief from creditors collection efforts
and benefits the debtors creditors by (a) preserving the debtors going concern value and

142 Ibid at 437.

143
In re McTague, 198 BR at 432.
144 In re Yukos Oil Company, 321 BR 396, 410411 (Bankr SD Tex 2005).
145 Ibid.
146 See also In re McTague, 198 BR at 430 (Although it may be true that orders of this Court have extrater-

ritorial effect, it is fundamental that those orders can be enforced in a foreign nation only to the extent that the
foreign nation grants those orders full faith and credit as a matter of comity, treaty or convention).

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 V. Choosing Between Chapter 15 and Chapter 11 for Foreign Debtors

(b) maintaining the status quo, thereby preventing creditors from obtaining disproportionate recov-
eries in comparison with similarly situated creditors. As a corollary to the automatic stay, and consist-
ent with its goal of promoting the equal treatment of similarly situated creditors, the Bankruptcy
Code prohibits a debtor from paying any pre-bankruptcy, or pre-petition, claims (outside the con-
text of a confirmed chapter 11 plan) without first having obtained bankruptcy court authorization
to do so, and then, only upon giving notice to other creditors and parties in interest. A bankruptcy
court may, upon a creditors request and after notice and a hearing, grant relief from the automatic
stay.147 The Bankruptcy Code provides two primary grounds for allowing relief from the automatic
stay: (1) for cause, including the lack of adequate protection of an interest in property held by such
party in interest, or (2) with respect to an action against property of the estate, if the debtor does not
have any equity in such property (ie the claims against such property exceed its value) and such
property is not necessary for an effective reorganization of the debtor.148
The major difference between the automatic stay under chapter 11 and the automatic stay 4.71
under chapter 15 is scope. The effect of the stay under chapter 15 is limited to the territorial
jurisdiction of the US.149 The limited effect of the automatic stay under chapter 15 is in keep-
ing with the general principle that the foreign main proceeding should ordinarily dominate
the cross-border aspects of the debtors insolvency proceedings because the foreign main
proceeding is, by definition, pending in the center of the debtors main interests.150 If a for-
eign main proceeding does not provide strong debtor protection from creditor actions, a
foreign debtor may be more likely to file a petition under chapter 11 than chapter 15 to
obtain the full benefit of the automatic stay.

B. Debtor in Possession Financing

When a company files for chapter 11 protection, the existing management of the corpora- 4.72
tion generally remains in place as the debtor in possession or DIP and has all the rights and
duties of the trustee.151 These include serving as a fiduciary for the debtors creditors and
interest holders and operating the debtors business. The debtor in possession also may seek
post-petition financing under section 364 of the Bankruptcy Code,152 commonly referred to
as DIP Financing. Under section 364, the trustee or debtor in possession can obtain

147 11 USC 362(d).

148
Ibid.
149
11 USC 1520(a); Westbrook, supra n 8, at 722.
150 See 8 Lawrence P King, Collier on Bankruptcy 1520.01 (15th edn rev 2009).
151 11 USC 1107.
152
Section 364 provides:
(a) If the trustee is authorized to operate the business of a debtor . . . unless the court orders otherwise,
the trustee may obtain unsecured credit and incur unsecured debt in the ordinary course of busi-
ness allowable under section 503(b)(1) of this title as an administrative expense.
(b) The court, after notice and a hearing, may authorize the trustee to obtain unsecured credit or to
incur unsecured debt other than under subsection (a) of this section, allowable under section
503(b)(1) of this title as an administrative expense.
(c) If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as
an administrative expense, the court, after notice and a hearing, may authorize the obtaining of
credit or the incurring of debt:
(1) with priority over any or all administrative expenses of the kind specified in section 503(b) or
section 507(b) of this title;
(2) secured by a lien on property of the estate that is not otherwise subject to a lien; or
(3) secured by a junior lien on property of the estate that is subject to a lien.

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 The UNCITRAL Model Law on Cross-Border Insolvency

financing (i) on an unsecured basis with administrative expense status, (ii) on an unsecured
basis with super-priority status, (iii) on a secured basis with a lien on unencumbered property
and a junior lien on encumbered property, and (iv) on a secured basis with a senior or equal
lien on encumbered property.
4.73 DIP financing is readily available under chapter 11 as compared to chapter 15, under which
it is not automatically available. Under section 1521, a bankruptcy court may grant any
additional relief that may be available to a trustee, except for relief available under sections
522, 544, 547, 548, 550, and 724(a). Such relief is entirely discretionary and only granted
where necessary to effectuate the purpose of this chapter and to protect the assets of the
debtor or the interests of creditors.153 Because there is no guarantee that a court would
permit a foreign debtor to incur post-petition financing under chapter 15, particularly over
objection by a creditor or other party in interest, DIP lenders on the whole prefer that foreign
debtors file for chapter 11 rather than chapter 15 relief.

C. Automatic Relief
4.74 In a voluntary chapter 11 case, the filing of the bankruptcy petition effectively constitutes an
order for relief under the Bankruptcy Code and commences the case. Specifically, upon the
filing of the petition the automatic stay immediately goes into effect and there is no required
proceeding to determine eligibility for relief unless an objection is raised. However, in a
chapter 15 case, the filing of the petition does not automatically trigger relief; rather, it
simply begins the recognition process. Relief is only available after notice of the petition has
been sent, a hearing has been held before the bankruptcy court, and an order recognizing a
foreign proceeding is entered. A foreign debtor may file a motion for provisional relief cover-
ing the period from filing the petition to when the recognition process is complete, but, as
described above, such relief is discretionary. In addition, to obtain provisional relief the for-
eign representative must demonstrate that such relief is urgently needed to protect the assets
of the foreign debtor or the interests of its creditors.

D. Additional Protections Under Chapter 11

4.75 Although a bankruptcy court has broad discretion to extend additional provisions of the
Bankruptcy Code that are not automatically triggered upon recognition to foreign debtors
under chapter 15,154 not all provisions of the Bankruptcy Code are available to chapter 15
debtors. A court may decline to extend certain provisions of the Bankruptcy Code if doing
so would conflict with the insolvency laws of the foreign main proceeding, and foreign

(d) (1) The court, after notice and a hearing, may authorize the obtaining of credit or the incurring of
debt secured by a senior or equal lien on property of the estate that is subject to a lien only if
(a) the trustee is unable to obtain such credit otherwise; and
(b) there is adequate protection of the interest of the holder of the lien on the property of
the estate on which such senior or equal lien is proposed to be granted.
(2) In any hearing under this subsection, the trustee has the burden of proof on the issue of
adequate protection.
11 USC 364(a)(d).
153 11 USC 1521.
154 See 11 USC 1521.

194
 V. Choosing Between Chapter 15 and Chapter 11 for Foreign Debtors

representatives are explicitly excluded from using avoidance powers available under other
chapters of the Bankruptcy Code.
Bankruptcy courts have extended other sections of the Bankruptcy Code to foreign debtors 4.76
under chapter 15.155 However, in Re Qimonda,156 the bankruptcy court, emphasizing the
importance of comity and efficient administration of cross border insolvencies, amended a
supplemental order to exclude relief under section 365 because application of section 365 to
this case would have substantially undermined provisions of German insolvency law, the
location of the foreign main proceeding.157 Patent licensees seeking to obtain the protections
of section 365(n) objected to the modification of the supplemental order arguing that sec-
tion 365 should apply to the disposition of their patent licences.158 The court held that all of
the debtors patents, which were issued under the laws of various countries, should be treated
in the same manner to provide a coherent and efficient resolution to the debtors patent
portfolio.159 The court explained that the German insolvency laws should govern because the
principal idea behind chapter 15 is that the bankruptcy proceedings be governed in accord-
ance with the bankruptcy laws of the nation in which the main case is pending.160
The avoidance powers under the Bankruptcy Code that give a chapter 7 or 11 trustee or 4.77
debtor in possession the ability to set aside preferential and fraudulent transfers161 are specifi-
cally excepted from the discretionary relief that a bankruptcy court may grant to a foreign
representative under section 1521(a)(7) of the Bankruptcy Code.162 In addition, section
1523 provides that upon recognition of a foreign proceeding, the foreign representative only
has standing to assert avoidance actions in a case pending under another chapter of title
11.163 Therefore, a foreign representative that wants to take advantage of the avoiding powers
of a trustee or debtor in possession under the Bankruptcy Code must commence a full ple-
nary chapter 11 case in the US under section 1509. This could put a foreign representative
at risk of ceding control over such case to a trustee or debtor in possession.164
However, there may be other ways for a foreign representative to obtain certain avoiding 4.78
powers. A foreign representative would likely be able to enforce an avoidance order from the

155
See In re MAAX Corporation, Case No 08-11443 (CSS) (Bankr D Del 2008). The bankruptcy court entered
an order for provisional relief that extended s 365(e)(1) of the Bankruptcy Code, which voids ipso facto clauses, to
the real property leases of MAAX Corporation and its subsidiaries to prevent lease counterparties from terminating
these leases based on the commencement of Canadian insolvency proceedings. Ibid. A termination of such leases
may have resulted in a failure to perform under an asset purchase agreement for the sale of all of the foreign debtors
assets that had already been approved by the Canadian court. Ibid. See also In re ROL Manufacturing (Canada) Ltd,
Case No 08-31022 (Bankr SD Ohio, 17 April 2008) (allowing the debtors to obtain post-petition financing with
super-priority claims and liens under s 364 of the Bankruptcy Code).
156
2009 WL 4060083 (Bankr ED Va, 19 Nov 2009), affd in part, 2010 WL 2680286 (ED Va, 2 July 2010)
(on appeal, the district court affirmed the bankruptcy courts decision, but remanded the case to the lower court
to articulate more fully how the court balanced the parties respective interests as required by s 1522 and deter-
mine whether the relief granted violated fundamental US public policies under s 1506).
157
Ibid at *1.
158 Ibid.
159
Ibid at *3.
160 Ibid at *1.
161 11 USC 544, 547, 548.
162 11 USC 1521(a)(7).
163 11 USC 1523(a); see 8 Lawrence P King, Collier on Bankruptcy 1523.01 (15th edn rev 2009).
164 Ibid.

195
 The UNCITRAL Model Law on Cross-Border Insolvency

foreign proceeding in a US court.165 A foreign representative could also pursue an avoidance

action based on foreign law in a US bankruptcy court. In Re Condor Insurance Ltd,166 the
Court of Appeals for the Fifth Circuit held that chapter 15 does not exclude avoidance
actions under foreign law. In that case, the foreign representative of a Nevis-incorporated
insurance company initiated an adversary proceeding seeking to avoid pre-chapter 15 peti-
tion fraudulent conveyances of assets located in the US.167 The foreign representative argued
that the fraudulent transfer action was based on Nevis law rather than section 548 of the
Bankruptcy Code, and, therefore, sections 1521(a)(7) and 1523 did not apply.168 The bank-
ruptcy court dismissed the adversary proceeding and the district court affirmed finding that
sections 1521(a)(7) and 1523, when read together, are intended to exclude all of the avoid-
ance powers specified under either United States or foreign law, unless a Chapter 7 or 11
bankruptcy proceeding is instituted.169 However, the Fifth Circuit Court of Appeals reversed
the lower courts focusing on the legislative history and international origin of chapter 15.170
The Fifth Circuit noted that while section 1521 specifically denies a foreign representative
avoidance powers created by the Bankruptcy Code, the language of the statute does not sug-
gest that other relief might be excepted.171 Therefore, it does not necessarily follow that
Congress intended to deny the foreign representative powers of avoidance supplied by appli-
cable foreign law.172 In addition, the Fifths Circuits conclusion was bolstered by cases under
section 304 that permitted avoidance actions under foreign law when foreign law applied
and would provide for such relief.173 The Fifth Circuits decision has paved the way for for-
eign representatives to pursue avoidance actions under foreign law in US bankruptcy courts,
with the potential for US bankruptcy courts to apply foreign law in other contexts under
chapter 15.174 It also provides foreign representatives with an important tool to protect a
foreign debtors assets in the US.
4.79 A foreign representative may also use other provisions of chapter 15 to avoid certain trans-
fers. In Atlas Shipping A/S, the foreign representative of two international shipping corpora-
tions, debtors in a bankruptcy proceeding in Denmark and petitioners under chapter 15,

165 See In re Condor Insurance Ltd., 411 BR 314, 318 n 6 (SD Miss 2009). The court mentioned in dicta that

the foreign representative could seek avoidance of the fraudulent transfers in the foreign jurisdiction and then
seek recognition of the foreign order in a US court. Ibid (citing In re Ephedra Prods Liab Litig, 349 BR 333
(SDNY 2006).
166
Fogerty v Petroquest Resources Inc (In re Condor Insurance, Ltd), 601 F 3d 319 (5th Cir 2010).
167 Ibid at 320.
168
Ibid at 320321.
169 In re Condor Insurance Ltd, 411 BR 314 at 319.
170 Fogerty v Petroquest Resources Inc (In re Condor Insurance, Ltd), 601 F 3d 319 at 321. It should be noted

that at least one other court was critical of the lower courts conclusion that chapter 15 excludes all avoidance
powers including those under foreign law. In Atlas Shipping A/S, although not deciding the issue, the Bankruptcy
Court for the Southern District of New York found such conclusion unpersuasive based on the legislative hist-
ory of chapter 15 and case law under s 304(c), which permitted a US bankruptcy court to act as a forum for the
assertion of avoiding powers vested in the foreign representative under the law of the jurisdiction where the
foreign proceeding was pending. In re Atlas Shipping A/S, 404 BR 726, 744 (Bankr SDNY 2009).
171 Ibid at 324.
172
Ibid.
173 Ibid at 328329.
174 See, eg, In re Gandi Innovations Holdings LLC, 2009 WL 2916908 (Bankr WD Tex, 5 June 2009) (in the

order recognizing the debtors Canadian insolvency proceedings as foreign main proceedings, the bankruptcy
court gave full force and effect to the Initial Order, based on Canadian law, issued by the Canadian court that
included extensive relief ).

196
 VI. Notable Litigation Arising Under Chapter 15

sought to vacate several Supplemental Rule B attachments in a US bankruptcy court.175 The

bankruptcy court permitted the post-recognition release of the previously garnished funds
subject to the Supplemental Rule B attachments for administration in the Danish bank-
ruptcy case under section 1521(a)(5) and (b), provisions that allow a court to turnover funds
to a foreign representative for administration in the foreign bankruptcy proceeding.176 The
bankruptcy court further determined that the relief sought was not in the nature of an avoid-
ance action. Although the court did not have to push the outer bounds of discretionary relief
under chapter 15 because the relief requested by the foreign representative was expressly
provided for in section 1521(a)(5) and (b), the court left open the possibility that a foreign
representative may be able to pursue additional rights available under chapter 11 through the
additional assistance provision of chapter 15.177

VI. Notable Litigation Arising Under

Chapter 15

A. Litigation Regarding COMI

Sparked by chapter 15 filings by offshore hedge funds, there have been some controversial 4.80
decisions analysing the determination of a foreign debtors COMI. Several are described
below.
1. In re SPinX, Ltd
In re SPhinX, Ltd178 involved the first chapter 15 case where a debtors COMI was disputed. In 4.81
SPhinX, the District Court affirmed the Bankruptcy Courts decision to deny recognition of a
Cayman Islands proceeding as a foreign main proceeding under chapter 15 of the Bankruptcy
Code even though it was the only pending insolvency case involving the debtors.
(a) Facts
In SPhinX, the debtors were a group of hedge funds organized and incorporated under the 4.82
laws of the Cayman Islands.179 With the exception of their corporate books and records and
the retention of auditors who used a Cayman Islands address, the debtors held no assets in
the Cayman Islands.180 Their business was conducted under a management contract with a
Delaware corporation and at least 90 per cent of the debtors $500 million in assets were
located in US accounts.181 Further, none of the directors resided in the Cayman Islands and
no board meetings took place there.182

175
In re Atlas Shipping A/S, 404 BR at 729 (Bankr SDNY 2009). Maritime attachment liens are governed by
Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions to the Federal
Rules of Civil Procedure and permit a plaintiff to obtain an order of attachment against a defendants property
that is in the hands of a garnishee. Ibid at 731732.
176 Ibid at 741742.
177
Ibid at 741.
178 371 BR 10 (SDNY 2007).
179 Ibid at 13.
180 Ibid at 15.
181 Ibid at 1516.
182 Ibid at 16.

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 The UNCITRAL Model Law on Cross-Border Insolvency

4.83 The debtors largest client was Refco Capital Markets, Ltd (RCM), which was undergoing
liquidation as a chapter 11 debtor. As part of its bankruptcy proceedings, the Refco creditors
committee had brought an action against certain SPhinX debtors to recover a $312 million
preferential transfer made by RCM.183 The parties ultimately entered into a settlement
resolving the preference action, however, certain investors in the SPhinX funds objected to
its terms.184
4.84 On 30 June 2006, the SPhinX companies were placed into a voluntary liquidation proceed-
ing in the Cayman Islands.185 Additionally, the Cayman Islands court appointed joint official
liquidators186 who then filed chapter 15 petitions in the bankruptcy court to enjoin further
litigation in the case, claiming additional time was needed to evaluate the proposed settle-
ment.187 The Bankruptcy Court denied such request.188
(b) The Bankruptcy Courts decision
4.85 On 6 September 2006, the Bankruptcy Court issued its opinion recognizing the Cayman
Islands proceeding as a foreign nonmain proceeding under chapter 15. In its opinion, the
Court emphasized the maximum flexibility given to courts under chapter 15.189
4.86 After making an initial determination that the Cayman Islands proceeding should be recog-
nized as a foreign proceeding,190 the Court then turned to the issue of whether the proceed-
ing should be deemed main or nonmain. The Refco trustee objected to the proceeding
being deemed a foreign main proceeding as such a finding would trigger the automatic stay
under section 362 of the Bankruptcy Code and thus prevent further adjudication of the
settlement.191
4.87 In discussing the differences between main and nonmain proceedings, the Bankruptcy
Court explained that this distinction generally has limited specified consequences.192
Nevertheless, because a finding that the Cayman Islands case was a main proceeding would
trigger the automatic stay provision and prevent any final resolution of the settlement, the
Court undertook a careful examination of whether the proceeding was main or nonmain.
4.88 The Bankruptcy Court acknowledged that the Bankruptcy Code provides considerable but
not complete direction on the issue of whether a foreign proceeding should be deemed
main or nonmain.193 Specifically, under section 1502(4) of the Bankruptcy Code, a for-
eign main proceeding is a foreign proceeding pending in the country where the debtor has
its COMI. Further, under section 1516(c) of the Bankruptcy Code, [i]n the absence of
evidence to the contrary, the debtors registered office . . . is presumed to be the [COMI].194
The Court, however, noted that while the legislative history permits such presumption to be

183
Ibid at 13.
184
Ibid.
185
Ibid.
186 Ibid.
187
Ibid at 15.
188
Ibid.
189 In re SPinX, Ltd, 351 BR 103, 112 (Bankr SDNY 2006).
190
Ibid at 116117.
191 Ibid at 115, 121.
192 Ibid at 116. The Court also stated that chapter 15 . . . minimiz[es] the practical differences between the

recognition of a foreign proceeding as main or nonmain under [the Bankruptcy Code]. Ibid at 114.
193 Ibid at 117.
194 Ibid.

198
 VI. Notable Litigation Arising Under Chapter 15

rebutted, the type of evidence required to rebut this presumption is unclear. 195 Nevertheless,
the Bankruptcy Court stated that several factors could be used to make such a determination
including (i) the location of the debtors headquarters, (ii) the location of those who manage
the debtor, (iii) the location of the debtors primary assets, (iv) the location of the majority of
the debtors creditors or of the majority of the creditors who would be affected by the case,
and/or (v) the jurisdiction whose law would apply to most disputes.196
As this was a case of first impression, the Court considered the decision of Bondi v Bank of 4.89
America, NA (In re Eurofood IFSC Ltd) by the European Court of Justice,197 which inter-
preted the EC Regulations provision concerning COMI. Specifically, the Court construed
Eurofood as holding that COMI must be identified based on criteria that are (1) objective
and (2) ascertainable by third parties.
Although the Bankruptcy Court acknowledged that in balancing all of the foregoing factors 4.90
the Court might be inclined to find the Debtors COMI in the Cayman Islands and recog-
nize the proceeding as a foreign main proceeding, the Court ultimately held that it was a
foreign nonmain proceeding.198 The Court further stated that a primary basis for the [chap-
ter 15] petition . . . was improper [and] ha[d] the purpose of frustrating the [settlement] by
obtaining a stay of the appeals upon the invocation of [the automatic stay provision].199
Thus, staying the appeal would have the same effect as overturning the RCM settlement
without addressing or prevailing on the merits.200
In making its determination, the Court emphasized public policy concerns and the notion 4.91
that the liquidators litigation strategy was the only reason they sought recognition as a
foreign main proceeding.201 The Court viewed this strategy as taint[ing] the [liquidators]
request [and] giving the clear appearance of improper forum shopping.202 Thus, the Court
held that where so many objective factors point to the Cayman Islands not being the Debtors
COMI, and no negative consequences would appear to result from recognizing the Cayman
Islands proceedings as nonmain proceedings, that is the better choice.203
(c) The District Courts opinion
On appeal, the District Court upheld the Bankruptcy Courts determination that the 4.92
Cayman Islands proceeding should be deemed a foreign nonmain proceeding. In referring
to the Bankruptcy Courts finding that the chapter 15 filing was initiated solely on the bases
of improper forum shopping and frustration of an existing judgment the District Court
stated that [s]uch circumstances as this support denial of recognition as a foreign main pro-
ceedings on the ground that the recognition is being sought for an improper purpose.204

195
The Court referred to the legislative history as stating that [t]he ultimate burden as to each element [of
recognition] is on the foreign representative, although the court is entitled to shift the burden to the extent
indicated in section 1516. Ibid at 117.
196
Ibid.
197 Case 341/04, Slip op at 6, [2006] ECR I-3813, 2006 WL 1142304 (ECJ, 2 May 2006).
198
Ibid at 120122.
199
Ibid at 121.
200 Ibid (emphasis in original).
201
Ibid.
202 Ibid.
203 Ibid at 122. Additionally, the Court stated that since nothing in chapter 15 provides that there cannot

be a nonmain proceeding unless there is a main proceeding, the Court could recognize the Cayman Islands
proceeding as nonmain even though there was no other pending proceeding. Ibid.
204 371 BR 10, 18 (SDNY 2007).

199
 The UNCITRAL Model Law on Cross-Border Insolvency

Thus, the District Court held that it was appropriate for the bankruptcy court to consider
the factors it considered, to retain its flexibility, and to reach a pragmatic resolution sup-
ported by the facts found.205

2. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd

4.93 In a departure from prior decisions, Judge Lifland in Re Bear Stearns High-Grade Structured
Credit Strategies Master Fund, Ltd206 declined to recognize the Cayman Islands proceedings
of Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd and Bear Stearns
High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd as either
foreign main or nonmain proceedings under chapter 15. This decision was later upheld by
the District Court.207
(a) The Bankruptcy Courts decision
4.94 The Bear Stearns funds, which were organized under Cayman Islands law, invested in a wide
array of securities. While registered in the Cayman Islands as exempt companies, the funds
were administered by a Massachusetts corporation which provided day-to-day administra-
tive services and acted as the funds registrar and transfer agent.208 Additionally, the funds
books and records were maintained in Delaware.209
4.95 In the wake of deteriorating economic conditions, the funds suffered a significant devalua-
tion. As a result, their boards of directors filed winding-up petitions under Cayman Islands
law and joint provisional liquidators were appointed.210 The liquidators then filed petitions
under chapter 15 seeking recognition of the Cayman Islands liquidation proceedings as
foreign main proceedings.211 No objections to the chapter 15 petitions were filed.
4.96 In determining whether the funds deserved recognition, the Court stated that recognition
is not to be rubber stamped by the courts.212 Instead, courts must make an independent
determination as to whether recognition is warrantedeven where no party to the case
objects to such a finding.213 As such, the Court independently considered whether the
Cayman Islands proceedings qualified for recognition.
4.97 First, the Bankruptcy Court held that the proceedings should not be recognized as foreign
main proceedings under chapter 15. Indeed, the Court concluded that the funds COMI
was the United Statesnot the Cayman Islands, noting that [t]he only adhesive connection
with the Cayman Islands that the Funds have is the fact that they are registered there.214
Specifically, the funds maintained no employees or managers in the Cayman Islands, the
investment manager for the funds was located in New York, a Massachusetts Administrator
ran the funds back-office operations, and its books and records also were located in the US.

205 Ibid at 19.

206 374 BR 122 (Bankr SDNY 2007).
207 In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd, 389 BR 325 (SDNY 2008).
208 374 BR at 124.
209 Ibid.
210 Ibid at 125.
211
Ibid.
212 Ibid at 126.
213 Ibid. Moreover, the Court stated that the liquidators contention that this Court should accept the

proposition that the Foreign Proceedings are main proceedings because [they] say so and because no [one] else
says they arent . . . must be rejected. Ibid at 129.
214 Ibid at 129.

200
 VI. Notable Litigation Arising Under Chapter 15

Thus, the Court found that the presumption that the [funds] COMI is the place of [its]
registered offices [was] rebutted by evidence to the contrary.215
The Bankruptcy Court then considered whether the funds should be recognized as foreign 4.98
nonmain proceedings. To so qualify under section 1502(5) of the Bankruptcy Code, there
must be an establishment in the Cayman Islands for the conduct of nontransitory economic
activity, i.e., a local place of business.216 In this case, the Court found that the funds con-
ducted no (pertinent) nontransitory economic activity in the Cayman Islands but rather
only those minimal activities necessary to maintain the funds offshore business. While the
Court acknowledged that its holding was at odds with the District Courts earlier opinion
in SPhinX, it explained this variance by stating that SPhinX did not address the issue of the
establishment requirement, thus no clear conflict resulted.217
It is important to note that the Bankruptcy Court did not foreclose all potential remedies to 4.99
the funds by denying recognition under chapter 15. Rather, Judge Lifland suggested that the
funds would be eligible to commence cases under chapter 7 or chapter 11 of the Bankruptcy
Codeespecially since the court found that COMI was in the US.218
(b) The District Courts opinion
On appeal, District Judge Sweet upheld the Bankruptcy Courts refusal to recognize the 4.100
Cayman proceedings as either main or nonmain.
Specifically, the District Court approved Judge Liflands approach of evaluating recognition 4.101
under chapter 15 through an independent determination of the facts.219 The Court stated
that Judge Lifland was right to reject the notion that simply because no one objects to rec-
ognition that it should automatically be granted. Rather, [s]uch a rebuttable presumption
[regarding a debtors COMI] at no time relieves a petitioner of its burden of proof/risk of
nonpersuasion.220
Additionally, the District Court upheld the Bankruptcy Courts determination that the 4.102
pleadings and facts elicited at hearings before the Bankruptcy Court place the conduct of the
Funds business, their assets, management company and sponsors in New York.221 Thus,
there was no basis to find the Cayman Islands proceeding was a foreign main proceeding.
Furthermore, the District Court upheld the Bankruptcy Courts interpretation of the mean- 4.103
ing of establishment within the context of recognition as a foreign nonmain proceed-
ing.222 Thus, the District Court affirmed that the funds ha[d] failed to put forward facts
establishing that [they] had a place of operations that carried out nontransitory economic
activity in the Cayman Islands.223

215 Ibid at 130.

216
Ibid at 131 (emphasis in original) (internal citations omitted).
217
Ibid.
218 Ibid at 132133.
219
In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd, 389 BR 325, 335 (SDNY
2008).
220 Ibid.
221 Ibid at 337.
222 Ibid at 338339.
223 Ibid (internal citations omitted).

201
 The UNCITRAL Model Law on Cross-Border Insolvency

3. In re Basis Yield Alpha Fund (Master)

4.104 In Re Basis Yield Alpha Fund (Master), the Court took guidance from Bear Stearns on the issue
of whether recognition should be granted where the facts put forth are insufficient to war-
rant such a finding but no party in interest objects.
4.105 The debtor was incorporated in the Cayman Islands and invested in various structured credit
securities.224 In addition to the debtors books and records being located in the Cayman
Islands, its administrator, pre-filing attorneys, and auditors also were located there.225
Following the global economic downturn, the debtor suffered significant devaluation of its
assets causing its shareholders to ultimately file a petition to liquidate the fund under Cayman
Islands law.226 The Cayman Islands court then appointed joint provisional liquidators who
sought recognition of the Cayman Islands proceeding under chapter 15 as a foreign main
proceeding. In finding the liquidators petition silent as to the extent of the debtors business
operations in the Cayman Islands, the Bankruptcy Court ordered that additional evidence
on the issue of the debtors COMI be submitted.227 Instead, the liquidators moved for sum-
mary judgment, claiming that since no party had objected, the presumption under section
1516 of the Bankruptcy Code that a debtors COMI is the place where it is registered war-
ranted a finding as a matter of law that the debtors COMI was the Cayman Islands.228
4.106 In denying the liquidators motion for summary judgment, Bankruptcy Judge Gerber relied
on the recognition requirement of section 1517229 as well as the courts independent right
to inquire under Rule 614 of the Federal Rules of Evidence. 230 Specifically, the Court held
that the liquidators had failed to present evidence that the Cayman Islands proceeding quali-
fied for recognition as a foreign main proceeding.231 Indeed, the court found the liquida-
tors silence in putting forward relevant facts deafening.232
4.107 The Bankruptcy Court then examined section 1516 of the Bankruptcy Code, which con-
tains the presumption that a debtors registered office is its COMI.233 The Court held that
summary judgment was not warranted on two grounds: (1) there was evidence that the
debtors COMI was not the Cayman Islands and (2) courts have the power to examine facts

224 381 BR 37, 41 (Bankr SDNY 2008)

225 Ibid at 4142
226
Ibid at 41.
227 Ibid at 42.
228 Ibid at 43.
229 Under s 1517 of the Bankruptcy Code, an order recognizing a foreign proceeding shall be entered if:

(1) such foreign proceeding for which recognition is sought is a foreign main proceeding or a foreign
nonmain proceeding within the meaning of section 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the petition meets the requirements of section 1515 [which concerns procedural requirements
involved in submitting an application for recognition].
230
Under rule 614 the court is permitted to call witnesses, cross-examine witnesses, or interrogate witnesses
on its own motion. See Fed R Evid 614.
231 381 BR at 48.
232
Ibid. Specifically, the Court referenced several factors mentioned in SPhinX which could be used to show
a debtors COMI including the location of the debtors headquarters, the location of those who manage the
debtor, the location of the debtors primary assets, the location of the majority of the debtors creditors or of the
majority of the creditors who would be affected by the case, and/or the jurisdiction whose law would apply to
most disputes. Ibid at 47 (quoting In re SPinX, Ltd, 351 BR 103, 117 (Bankr SDNY 2006)).
233 11 USC 1516(c).

202
 VI. Notable Litigation Arising Under Chapter 15

underlying a request for recognition under section 1517(c) and to inquire under [Rule] 614
[which] cannot be sidestepped.234
Finally, the Court considered whether the absence of an objection by a party in interest pre- 4.108
cluded it from undertaking its own examination of the record and making an independent
determination on the issue of recognition. Relying on the Bankruptcy Courts decision in
Bear Stearns,235 the Court found that [t]he absence of objections to recognition . . . neither
obviates the [liquidators] evidentiary burden nor prevents the Court from concluding on
the current record that genuine issues of material fact exist so as to prevent determination as
a matter of law.236 Thus, the Court found that it was not bound by the presumption con-
tained in section 1516 of the Bankruptcy Code and, therefore, that the debtor was not
entitled to recognition as a matter of law.237

4. In re Saad Investments Finance Company (No 5) Limited

In contrast to the decisions described above, in Re Saad Investments Financing Company 4.109
(No 5) Limited, the Bankruptcy Court for the District of Delaware recognized a Cayman
Islands liquidation proceeding of a privately owned investment company as a foreign main
proceeding under chapter 15 of the Bankruptcy Code.238
The debtor was organized as an exempted company under the laws of the Cayman Islands on 4.110
10 May 2006. Its principal assets were a portfolio of 57 private equity vehicles and one hedge
fund.239 Such funds were registered in several jurisdictions around the world, with the major-
ity of funds, in terms of the percentage of the debtors total assets by value, registered in the
Cayman Islands and the US.240 The debtor had two classes of equityone class of shares held
by Saad Investments Company Limited (SICL), an exempted company organized under the
laws of the Cayman Islands that also acted as the debtors investment manager, and the other
class of shares held by Barclays Bank plc.241
On 24 July 2009, upon an ex parte application of a third party, the Cayman Grand Court 4.111
appointed receivers over the assets, property, and business entities of the ultimate beneficial
owner of SICL, including the debtor, and ordered a worldwide freeze on the assets of the
various entities based on allegations that certain entities had breached their fiduciary duties

234 381 BR at 48.

235 At the time this opinion was issued the District Court had not yet ruled in Bear Stearns.
236
Ibid at 52.
237
Ibid at 5254. In doing so, the Court referred to the Guide to Enactment of the UNCITRAL Model Law
on Insolvency, promulgated in connection with the Model Act. Ibid at 53. The Guide states that the Model Acts
presumption, embodied in s 1516, does not prevent, in accordance with applicable procedural law, calling for
or assessing other evidence if the conclusion suggested by the presumption is called into question by the court or
an interested party. Ibid. Thus, the court highlighted the Guides favourable view on a courts ability to call for
other evidence under s 1516. Ibid.
238 Order Recognizing Foreign Proceeding, In re Saad Investments Financing Company (No 5) Limited, Case

No 09-13985 (KG) (Bankr D Del, 4 Dec 2009).

239 Declaration of Nicolas Paul Matthews in Support of Chapter 15 Petition for Recognition of Foreign

Proceeding Pursuant to 11 USC 1504, 1509, 1515, 1517, and 1520 at para 23, In re Saad Investments
Financing Company (No 5) Limited, Case No 09-13985 (KG) (Bankr D Del, 5 Nov 2009).
240 Ibid at para 24.
241 Ibid at paras 711.

203
 The UNCITRAL Model Law on Cross-Border Insolvency

and misappropriated funds.242 The Cayman Grand Court eventually issued a winding up
order in respect of SICL on 18 September 2009.243
4.112 On 19 August 2009, Barclays petitioned the Cayman Grand Court for a winding up order
with respect to the debtor.244 On 18 September 2009, the Cayman Grand Court issued the
winding up order appointing joint official liquidators who supplanted the receivers previ-
ously appointed.245 On 11 November 2009, the joint official liquidators filed a petition for
recognition of the Cayman winding up proceedings under chapter 15 of the Bankruptcy
Code to (i) protect the debtors US assets from potential seizure or attachment by third par-
ties through legal, equitable, or judicial action in connection with broad-based litigation
efforts surrounding the beneficial owner of SICL, and (ii) take advantage of the breathing
spell provided by the automatic stay to evaluate the debtors investments in each of its US
funds without triggering defaults under investment agreements of certain funds by failing to
satisfy capital calls made by such funds general partners.246
4.113 The debtor argued that recognition of the Cayman proceeding as a foreign main proceeding
was appropriate given the following facts that supported a finding that the debtors COMI was
located in the Cayman Islands: (i) all decisions regarding the debtors assets and all other aspects
of the debtors business were made by the joint official liquidators from their headquarters in
the Cayman Islands; (ii) the debtors registered office was in the Cayman Islands; (iii) the joint
official liquidators maintain the books and records of the debtor in the Cayman Islands and
such books and records have always been maintained in the Cayman Islands; (iv) the estimated
value of the debtors assets in the Cayman Islands was greater than the estimated value of the
debtors assets in any other country; (v) SICL, one of the debtors two equity holders and its
former investment manager, was also in a liquidation and winding up proceeding in the
Cayman Islands; (vi) the debtor, SICL and other entities related to SICL were defendants in a
litigation proceeding in the Cayman Islands; and (vii) Barclays, the debtors other equity holder,
commenced the winding up proceeding in the Cayman Islands.247 The debtor also emphasized
that the relevant time for determining a debtors COMI is the time that the chapter 15 case is
commenced, without reference to the debtors operational history.248
4.114 Without issuing a written opinion, Judge Gross of the Bankruptcy Court for the District of
Delaware entered an order on 4 December 2009 recognizing the Cayman Islands winding
up proceeding of the debtor as a foreign main proceeding. The Court found that the debtor
had its COMI in the Cayman Islands.249 Although the specific facts of this case appeared to
require a finding that the debtors COMI was in the Cayman Islands, this decision strength-
ens the possibility that hedge funds and investment firms may obtain relief under chapter 15
of the Bankruptcy Code.

242
Ibid at para 16.
243Ibid at para 17.
244
Ibid at para 18.
245
Ibid at paras 19, 21.
246 Ibid at paras 2829.
247
Memorandum of Law in Support of Chapter 15 Petition For Recognition of Foreign Proceeding
Pursuant to 11 USC 1504, 1509, 1515, 1517, and 1520 at para 48, In re Saad Investments Financing
Company (No 5) Ltd, Case No 09-13985 (KG) (Bankr D Del, 11 Nov 2009).
248 Ibid at para 47.
249 Order Recognizing Foreign Proceeding at para H, In re Saad Investments Financing Company (No 5) Ltd,

Case No 09-13985 (KG) (Bankr D Del, 4 Dec 2009).

204
 VI. Notable Litigation Arising Under Chapter 15

5. Lavie v Ran
In Lavie v Ran,250 the Bankruptcy Court considered the issue of COMI under chapter 15 4.115
with respect to an individual debtor. In this case, an involuntary bankruptcy proceeding was
commenced against Yuval Rans property in Israel on 16 June 1997 following a determina-
tion by an Israeli court that Ran had committed an act of bankruptcy under Israeli law and
Zuriel Lavie was appointed as trustee of Rans property in Israel.251 At the time of Lavies
appointment, however, two and a half years had passed since Ran moved from Israel and
established a residence in Houston, Texas.252
In 2006, Lavie sought an order from the Bankruptcy Court for the Southern District of 4.116
Texas recognizing the Israeli proceeding as either a foreign proceeding under chapter 15. The
US Bankruptcy Court, however, found that the Israeli proceeding qualified as neither a for-
eign main nor non main proceeding. Lavie appealed.
The District Courts decision set forth the standard for evaluating the COMI of an individ- 4.117
ual debtor under section 1516(c). Specifically, the debtors habitual residence is presumed,
in the absence of evidence to the contrary, to be the center of the debtors main interests.253
Since Ran had lived and worked in Houston since 1997, the Bankruptcy Court held that his
COMI was indeed Houstonnot Israeland that the pending proceeding in Israel was not
a foreign main proceeding under the Bankruptcy Code.254 While the District Court held
that the Bankruptcy Court had correctly determined that Rans habitual residence, Houston,
was his presumed COMI, the Court remanded the case for further factual findings to deter-
mine if Lavie had met his burden of rebutting such presumption.255
On remand, the Bankruptcy Court reviewed objective factors used to determine habitual 4.118
residence by European courts,256 US courts,257 and Israeli courts.258 Also, the Court con-
ducted a more intensive factual inquiry into the circumstances surrounding Rans residency.
Significantly, the Bankruptcy Court credited Rans testimony that he intended to leave Israel
for the US because of death threats he and his wife had received as well as threats to kidnap
his children.259 Moreover, the Court found that Rans concerns that returning to Israel would
create a hardship on his family were legitimate, that he was not in fact a fugitive of Israeli

250 390 BR 257 (Bankr SD Tex 2008).

251
Ibid at 289 (Bankr SD Tex 2008). Specifically, it was alleged that Ran, CEO of a publicly traded Israeli
company, owed certain personal debts to Bank Hapoalim that remain unpaid. Ibid at 285.
252
Ibid at 289.
253
Lavie v Ran, 384 BR 469, 471 (SD Tex 2008).
254 Ibid.
255 Ibid at 472.
256
In re Ran, 390 BR 257, 267268 (Bankr SD Tex 2008). Such pertinent factors include the length and
continuity of the persons residence before he moved, the length and purpose of his absence, the nature of his
occupation in the other country, family situation, and the persons intentions. Ibid at 268.
257
While no single factor is dispositive, courts generally review the following when determining domicile
including the places where the litigant exercises civil and political rights, pays taxes, owns real and personal
property, has drivers and other licenses, maintains bank accounts, belongs to clubs and churches, has places of
business or employment, and maintains a home for his family. Ibid at 282 (quoting Coury v Prot, 85 F 3d 244,
250251 (5th Cir 1996)). While a persons state of mind is relevant it will receive less weight if it conflicts with
the objective facts. Ibid.
258 Israeli courts apply a centre of life test to determine ones COMI. Specifically, courts there consider the

following factors: (1) the possession of property abroad or the absence of property in Israel; (2) possession of US
passports and green cards indicating that ones centre of life is in the US; (3) possession of a permit for US resi-
dency and employment, and (4) the location of ones family abroad. Ibid at 283.
259 Ibid at 293294.

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 The UNCITRAL Model Law on Cross-Border Insolvency

law and had not violated any Israeli bankruptcy order260 and that he had not continued to
manage any companies located in Israel following his relocation to the US.261 The Bankruptcy
Court found additional facts which indicated that Rans residency in Houston, Texas was
intended to be permanent.262
4.119 Ultimately, the Bankruptcy Court found that evidence put forward by Lavie himself dem-
onstrated that Rans relocation to Houston was indeed permanent and that his COMI was
the US.263 Thus, the Court held that Lavie had failed to prove by a preponderance of the
evidence that Israel is the location of Rans [COMI].264 The Court therefore held that
[h]aving failed to carry his burden of proof as the foreign representative, Lavie is not entitled
to recognition of the Israeli bankruptcy, and denied his petition.265
4.120 The District Court for the Southern District of Texas266 and the Court of Appeals for the Fifth
Circuit267 both affirmed the Bankruptcy Courts decision. The Fifth Circuit emphasized the
timing of the COMI determination; courts should view the COMI determination at the time
the petition for recognition is filed, rather than considering a debtors operational history.268

B. Litigation Regarding Available Relief

1. In re Metcalfe & Mansfield Alternative Investments
4.121 In Metcalfe & Mansfield Alternative Investments,269 the Bankruptcy Court for the Southern
District of New York considered whether broad third party releases included in a plan imple-
mentation order issued in proceedings under Canadas Companies Creditors Arrangement
Act (the CCAA) could be enforced in the US, even if such relief would not be available in a
plenary chapter 11 case.
4.122 A committee of certain investors initiated the CCAA proceedings on 17 March 2008 to
restructure all of the outstanding third party (non-bank sponsored) Asset Backed Commercial
Paper (ABCP) obligations of the debtors.270 The investors paid money to acquire ABCP and in
turn that money was used to purchase a portfolio of financial assets to support and collateralize
each series of ABCP.271 The ABCP market froze in 2007 triggered by the sub-prime mortgage
crisis in the US and a perceived lack of transparency in the ABCP market.272

260 Ibid at 295.

261
Ibid at 299.
262
Ibid at 300. The Court considered an array of pertinent facts that indicated Rans relocation was perma-
nent including, among others, Ran owned a home in the US where he resided with his wife and children, his
children attended school in Texas, Ran worked in the US, Ran had not returned to Israel since he first left in
April 1997, Ran maintained bank accounts in the US, both Ran and his wife were US citizens, Ran was a
member of a local synagogue and he also was an assistant coach to a local little league team. Ibid at 295.
263
Ibid at 300.
264
Ibid at 301. The court further stated that [t]o the extent that Ran might be understood to have the
burden of going forward with evidence to show that he had changed his COMI from Israel . . . to the U.S., Ran
met that burden. Ibid.
265
Ibid at 301302.
266 Lavie v Ran, 406 BR 277 (SD Tex 2009).
267
In re Ran, 607 F 3d 1017 (5th Cir 2010).
268 Ibid at 10241026.
269 421 BR 685 (Bankr SDNY 2010).
270 Ibid at 687.
271 Ibid at 688689.
272 Ibid at 690.

206
 VI. Notable Litigation Arising Under Chapter 15

Considered to be the largest restructuring in Canadian history,273 the Ontario Superior 4.123
Court of Justice entered an Amended Sanction Order and Plan Implementation Order (the
Canadian Orders) on 5 June 2008 sanctioning a plan that included releases for each partici-
pant in the Canadian ABCP market, including non-debtor third parties, from liability for
any claims or causes of action in any way related to the ABCP market in Canada.274 The
releases were included at the insistence of those financial institutions that had sold the assets
that backed the ABCP to ensure their agreement to a plan that shifted the risks associated
with the volatile credit markets to such financial institutions and away from investors.275 In
addition to the global release, the plan provided for an injunction against proceedings against
the parties released under the plan.276
On appeal, the Ontario Court of Appeal decided that the CCAA permits the inclusion of 4.124
third party releases in a plan of compromise or arrangement to be sanctioned by the court
where those releases are reasonably connected to the proposed restructuring.277 The Ontario
Court of Appeal affirmed the Canadian Orders and the Canada Supreme Court denied
review.278
The court-appointed monitor sought recognition of the CCAA proceeding as a foreign main 4.125
proceeding in the US after the plan implementation order became effective in Canada. The
monitor also moved for an order enforcing the Canadian Orders in the US on the basis that
the release and injunction provisions would satisfy the applicable standard in a plenary case
under chapter 11 or in the interests of comity.279
Rather than determining whether the significant limitations established by the Second 4.126
Circuit concerning non-debtor releases and injunctions in confirmed chapter 11 plans
would be satisfied in this case, the Bankruptcy Courts inquiry focused on whether the for-
eign orders should be enforced in the US under chapter 15.280 According to the court,
Chapter 15 specifically contemplates that the court should be guided by principles of comity
and cooperation with foreign courts in deciding whether to grant the foreign representative
additional post-recognition relief .281 Under section 1507, courts may provide additional
assistance, in this case an order enforcing the Canadian Orders in the US; however, such
relief would not be available if manifestly contrary to US public policy.282 The Bankruptcy
Court explained that the public policy exception should be narrowly construed to only the
most fundamental policies of the US, and the relief available in the foreign proceeding need
not be identical as long as the procedures used in the foreign proceeding meet fundamental
standards of fairness in the US.283
Even though the release and injunction provisions may have been unenforceable in a plenary 4.127
chapter 11 case, US law did not preclude non-debtor third party releases in all circumstances.

273
Ibid at 687.
274 Ibid at 692.
275
Ibid.
276
Ibid at 693.
277 Ibid at 694.
278
Ibid at 687.
279 Ibid at 687, 694.
280 Ibid at 696.
281 Ibid.
282 Ibid at 697; see 11 USC 1506.
283 Ibid at 697.

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 The UNCITRAL Model Law on Cross-Border Insolvency

In addition, the jurisdictional challenge to such releases and injunctions was fully and fairly
litigated in Canadian courts that share common law traditions with US courts. Thus, the
Bankruptcy Court found no basis to second guess the Canadian courts decisions and
entered an order recognizing the case as a foreign main proceeding and enforcing the
Canadian Orders.284

VII. Areas for Potential Improvement

4.128 The drafting of chapter 15 and subsequent case law interpreting it, as described above, have
hindered one of the ultimate goals of chapter 15: uniform application.285
4.129 In the US, it is clear that relief will be unavailable if a bankruptcy court does not recognize the
foreign proceeding as either a main or non main proceeding. The exclusion of certain non-
qualifying foreign proceedings appears contrary to the purposes of chapter 15 and the Model
Law. Section 1501(b) makes chapter 15 applicable whenever assistance is sought in the US by
a foreign representative in connection with a foreign proceeding. However, relief under chapter
15, including comity and cooperation, is blocked unless the foreign proceeding is recognized
as either a main or non main proceeding.286 The Model Law, on the other hand, does not deny
a foreign representative access to relief if the foreign proceeding is not recognized. Article 7 of
the Model Law, adopted verbatim in the UK, provides that [n]othing in this law limits the
power of a court to provide additional assistance to a foreign representative under other laws
of this State. Unlike the Model Law, section 1507 of chapter 15, which implements Article 7
of the Model Law, conditions additional assistance on recognition. In addition, once a bank-
ruptcy court refuses to recognize a foreign proceeding, a foreign representative cannot seek
relief in other courts of the US.287 This would seem to encourage foreign representatives in non-
qualifying proceedings to avoid chapter 15 and apply directly to non-bankruptcy courts for
assistance either by arguing that chapter 15 does not apply to non-qualifying foreign proceed-
ings or that the requested relief relates only to recovering a claim that is the property of the
debtor.288 This would defeat the goal of having a centralized forum and procedures for requests
for assistance in connection with a foreign proceeding.
4.130 In addition to limiting the uniform application of the Model Law across all Model Law
jurisdictions, the denial of access to relief for certain foreign proceedings under chapter 15
narrows the circumstances under which courts will provide assistance from the prior section

284 See ibid at 697701.

285
For additional discussion regarding this issue see Ranney-Marinelli, supra n 41, at 298304.
286 One bankruptcy court dismissed an adversary proceeding by chapter 11 debtors against a foreign com-

pany for turnover of assets that were transferred in a Netherlands bankruptcy proceeding based on principles of
comity and deferred to the appeal process in the Netherlands. In re Viking Offshore (USA) Inc, 405 BR 434
(Bankr SD Tex 2008). The foreign company asserted comity, among other things, as a basis for dismissal of the
adversary proceeding even though the Netherlands proceeding was not recognized under chapter 15 as required
by s 1509. Although this issue was not addressed in the Bankruptcy Courts decision, the Bankruptcy Court
may have decided to apply comity in this case because doing so did not undermine the purpose of s 1509pre-
venting foreign representatives from seeking relief by applying directly to non-bankruptcy courts without first
obtaining recognition of the foreign proceeding. In this case, the foreign company only invoked comity to
defend allegations made against it, rather than seeking ancillary assistance from the court.
287 See 11 USC 1509(d); Ranney-Marinelli, supra n 41, at 301302.
288 See Ranney-Marinelli, supra n 41, at 301303.

208
 VII. Areas for Potential Improvement

304 and seems to be a step backward in the area of transnational insolvency.289 To avoid this
outcome, US bankruptcy courts should interpret the concept of establishment broadly to
ensure that a foreign proceeding is not excluded from either the main or non main categories
so that assistance can be granted.290 Section 1507 could also be amended to bring its language
closer to the Model Law that does not condition additional assistance on recognition.
The COMI presumptions embodied in the Model Law appear to be given more weight in 4.131
other Model Law jurisdictions than in the US.291 The foreign debtors COMI is presumed to
be the debtors registered office in the absence of evidence to the contrary. Courts in many
jurisdictions accept that the place of incorporation will be the location of the main or prin-
cipal insolvency proceedings unless such presumption is rebutted by objective evidence.292
However, the US view seems to be that the presumption is only there for speed and conven-
ience where there is no serious controversy.293
Chapter 15 does not seem equipped to deal with different types of debtors.294 The activities of 4.132
a hedge fund consist of entering into contracts with managers and auditors, rather than pro-
ducing goods or employing numerous people.295 A hedge fund chooses a place of incorporation
for tax and regulatory reasons, and may have no actual operations in such venue.296 The courts
decision in Bear Stearns undermines chapter 15 as a viable option for hedge funds and similar
entities and may force such debtors to file full-blown chapter 11 or chapter 7 cases in the US in
addition to insolvency proceedings they may be required to file in the jurisdictions where they
are incorporated.297 However, the 2010 decision in Saad Investments Financing Company (No
5) Limited indicates that at least some courts are more willing to open the door thought to be
closed by Bear Stearns to hedge funds seeking recognition under chapter 15.
In addition, chapter 15 relief may not be available for corporate groups. Many international 4.133
businesses are structured as enterprises with groups of related entities.298 Such related entities
may be incorporated, and thus may have their COMIs, in different countries.299 Because a
parent corporation and its subsidiaries are separate legal entities with COMIs/establish-
ments in different countries, there is a risk that a subsidiary corporations foreign proceeding
may be ineligible for recognition as a main or non main proceeding in connection with the
parent corporations foreign proceeding.300 Even if a multi-tiered corporation is recognized
under chapter 15, the foreign representative at the parent level may have difficulty gaining
control of the subsidiaries assets because each corporation is a separate legal entity.301

289 Kurt Mayr and Evan Flaschen, Courts Issue Bearish Chapter 15 Rulings in Bear Stearns Cases (2008)

25(10) Bankruptcy Strategist 1, 2; Ranney-Marinelli, supra n 41, at 303.

290 Ranney-Marinelli, supra n 41, at 303304.
291
Sandy Shandro, The International Scene: A Plea for the Amendment of Chapter 15 (2009) 28-MAR
Am Bankr Inst J 48, 49.
292
Ibid.
293
Ibid.
294 Ibid.
295
Ibid.
296
Ibid.
297 Mayr and Flaschen, supra n 289, at 1.
298
Samuel L Bufford, Tertiary and Other Excluded Foreign Proceedings Under Bankruptcy Code Chapter
15 (2009) 83 Am Bankr LJ 165, 176177.
299 Ibid.
300 Ibid.
301 See Salafia, supra n 17, at 330 (discussing treatment of corporate group insolvency by US courts before

the enactment of chapter 15).

209
 The UNCITRAL Model Law on Cross-Border Insolvency

VIII. The English Experience of the Model Law

The Cross-Border Insolvency Regulations 2006

A. Implementation
4.134 The Regulations, which implement the Model Law in Great Britain, came into force on 4
April 2006. They were made under powers conferred by section 14 of the Insolvency Act
1986 and have effect throughout England and Wales and Scotland.302
4.135 Prior to their enactment the Insolvency Service issued a consultation document303 which
provided information on how it proposed to implement the Model Law while at the same
time seeking the views of interested parties. Some of the modifications seen in the version
implemented in Great Britain arise as a result of the responses to that consultation and are
intended to provide sufficient protection for British creditors while remaining faithful to the
underlying objectives of the Model Law.304 The Regulations have since been made the sub-
ject of an evaluation questionnaire issued by the Insolvency Service seeking to assess whether
they are meeting the policy objectives.305
4.136 Unless otherwise indicated, all references in this section to articles are references to the arti-
cles comprising the text in Schedule 1 to the Regulations which is the form of Model Law as
enacted in Great Britain.

B. Framework of the Regulations and Limitations on Application

4.137 The Regulations are divided into six main parts: the enacting provisions (articles 1 to 8 inclu-
sive) and five schedules. Schedule 1 contains the text of the Model Law in the form in which
it has the force of law in Great Britain. Schedules 2 and 3 provide for procedural matters in
England and Wales and Scotland, respectively; Schedule 4 makes provision for the delivery
of notices to the registrar of companies; and Schedule 5 contains the forms that are to be used
for applications and orders made pursuant to the Regulations.
4.138 A total of 13 entities are excluded from the scope of the Regulations (article 1(2)). These are
regulated industries which are generally subject to special insolvency regimes under national
laws and, in some cases, these regimes are pursuant to harmonized provisions introduced
through EC directives. The exclusion prevents both assistance being sought in Great Britain
in connection with a debtor from an excluded category and assistance being sought in a
foreign state on the basis of the Model Law in connection with a proceeding under British
insolvency law. Among the excluded entities are credit institutions and insurance undertak-
ings but, at the time the Regulations came into force, the legislature confirmed its intention
to bring them within the scope of the Regulations as soon as practicable.

302
Northern Ireland implemented the Model Law by way of the Cross-Border Insolvency Regulations
(Northern Ireland) 2007, SR 2007/115 which came into force on 12 April 2007.
303
Implementation of UNCITRAL Model Law on Cross-Border Insolvency in Great Britain (Insolvency
Service, August 2005).
304 Key differences include provisions relating to the range of entities falling outside the scope of the

Regulations (art 1(2)), the transaction avoidance provisions (art 23) and the extent of cooperation with foreign
courts and foreign representatives (arts 2527).
305 The consultation closed in December 2009. The results were not available at the time of publication.

210
VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

The British courts may also refuse to provide assistance under the Regulations if it would be 4.139
manifestly contrary to public policy (article 6). The fact that foreign proceedings may differ
from British proceedings, even in relation to creditors rights in respect of priorities, would not
without more be a reason to refuse relief.306 In keeping with the Guide to Enactment, the com-
parable provision in the EC Regulation on Insolvency Proceedings (the EC Regulation),307
and the ECJ guidance in Re Eurofood IFSC Ltd,308 it seems likely that the use of this exception
will be reserved for exceptional cases.
The courts must also have regard to private international law when asked to grant assistance 4.140
(as implied in the definition of British insolvency law) and, where assistance is granted, they
must be satisfied that the interests of creditors in Great Britain are adequately protected
(article 21(2)).

C. Relationship Between the Regulations and Other Bases

of Recognition and Assistance Under English Law
The Regulations operate in parallel with two existing statutory bases of cooperation in cross- 4.141
border insolvency cases in Great Britain. These are:
the EC Regulation, which provides for jurisdiction as well as recognition in EU member
states in which the debtors centre of main interests (COMI) is located;309 and
section 426 of the Insolvency Act 1986, which authorizes international judicial coopera-
tion between courts in the UK and courts in a designated list of mostly Commonwealth
or ex-Commonwealth countries or territories.
As regards the interplay between the three, British insolvency law (defined in the Regulations 4.142
as the insolvency laws of England and Wales, and Scotland) applies with such modifications
as the context requires for the purpose of giving effect to the Regulations. In cases of conflict
between the provisions of British insolvency law and the Regulations, the provisions of the
Regulations will prevail (article 3(2)). In cases of conflict between the provisions of the
Regulations and the obligations of the UK under the EC Regulation, the EC Regulation will
prevail (article 3). In essence, the Regulations provide an alternative basis for judicial coop-
eration where the EC Regulation does not apply, for example where the debtors COMI is
not situated in an EC member state or where the type of proceeding or foreign representative
in question is not listed in the relevant annexes to the EC Regulation, or to the extent that
they do not conflict with the EC Regulation. This approach was adopted with the express
intention of allowing the courts maximum flexibility to apply the Regulations.310
If main proceedings are opened in an EU member state under the EC Regulation after rec- 4.143
ognition and assistance has been granted to a foreign representative in a non-EU state, the

306
Re Stocznia Gdynia SA (Bud-Bank Leasing) Sp zo.o. [2010] BCC 255, citing the decision of the House of
Lords in McGrath v Riddell [2008] 1 WLR 852, HL.
307
Council Regulation (EC) 1346/2000 on Insolvency Proceedings [2000] OJ L160/1, art 26.
308 Case C-341/04 (2006) ECR I-3813.
309 The Regulations are similar in a number of respects to the EC Regulation and share a common approach

in their use of key concepts, such as main and secondary proceedings and the existence of a COMI or
establishment.
310 Supra n 303.

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 The UNCITRAL Model Law on Cross-Border Insolvency

court has the power to review and either terminate or modify recognition (article 17(4)) or
modify the relief granted (articles 20(6) and 22(3)).
4.144 The overlap in jurisdiction between the Regulations and section 426 of the Insolvency Act
1986 is intentional: a decision was taken by the legislators to retain the jurisdiction conferred
by section 426 so that the courts would have maximum flexibility when dealing with issues
involving foreign insolvency proceedings.311 In situations where both the Regulations and
section 426 confer jurisdiction, it will be for the insolvency office holder who is seeking
assistance to determine which of the two offer the most effective assistance. Section 426(5)
expressly allows for the insolvency law of either jurisdiction to be applied in relation to com-
parable matters and, in this respect, it is potentially wider in scope than the Regulations.312
However, the nature of the assistance given in response to the request from the foreign court
remains at the discretion of the English courts.
4.145 It should be noted that the provisions in the Regulations supplement the judicial assistance
available under English common law principles of recognition. Judicial confirmation of this
can be found in Re Stanford International Bank Limited,313 where Lewison J observed that the
common law remains in being as regards corporations that are expressly excluded from the
ambit of the Regulations and expressed the view that it should also continue to exist as
regards entities that fail to satisfy the definition of foreign representative. The common law
jurisdiction, which relies on the debtor having a presence of assets or sufficient connection
with England, can also be used in cases where the debtor has neither its COMI nor an estab-
lishment in the state in question (or is an excluded entity) so cannot seek recognition under
the Regulations. Thus, in the absence of recognition under the Regulations, a foreign repre-
sentative is able to seek enforcement in England of orders and judgments of foreign courts in
certain circumstances, on the grounds of international comity.

D. Key Definitions
4.146 The key definitions which together play a significant part in the operation of the Regulations
have been incorporated from the original Model Law text without amendments. These
include foreign representative, foreign proceeding, foreign main proceeding, and foreign
non main proceeding.
4.147 A foreign representative is defined as a person or body, including one appointed on an
interim basis, authorized in a foreign proceeding to administer the reorganization or the
liquidation of the debtors assets or affairs or to act as a representative of the foreign proceed-
ing (article 2(j)).
4.148 A foreign proceeding is a collective judicial or administrative proceeding in a foreign state,
including an interim proceeding, pursuant to a law relating to insolvency in which proceeding

311 Implementation of UNCITRAL Model Law on Cross-Border Insolvency in Great BritainSummary of

Responses and Government Reply (March 2006), para 7.

312 Although it is arguable that foreign law should be applied under the Regulations: see L Chan Ho,

Applying foreign law under the UNCITRAL Model Law on Cross-Border Insolvency (2009) 24(11)
Butterworths J Intl Banking Financial L 655659. See also n 362 infra.
313 [2009] BPIR 1157 at 100. The decision was upheld by the Court of Appeal in Re Stanford International

Bank [2010] All ER (D) 219.

212
VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

the assets and affairs of the debtor are subject to control or supervision by a foreign court, for
the purpose of reorganization or liquidation (article 2(i)).314 The definition has not been
extended to expressly state that it encompasses all proceedings involving debtors in financial
distress. This may result in foreign proceedings which derive from a statute or code which is
not expressly founded in insolvency law being denied recognition in the courts of Great
Britain and other enacting states who have adopted the definition without amendment. In
enacting states where the definition has been extended, as in the US, a corporate process such
as an English scheme of arrangement will be recognized.315 It remains to be seen whether
British courts will confine themselves to providing assistance only where the foreign pro-
ceeding derives specifically from a law relating to insolvency, or whether they will apply a
more contextual interpretation on the basis of the reference in the definition to a proceeding
for the purpose of reorganization.
A foreign proceeding can be either a foreign main proceeding or a foreign non-main pro- 4.149
ceeding. A foreign main proceeding is a proceeding taking place in the state where the debtor
has its COMI (article 2(g)). A foreign non-main proceeding is a proceeding, which is not a
foreign main proceeding, taking place in a state where the debtor has an establishment (article
2(h)). The former is akin to the concept of main proceedings and the latter to secondary pro-
ceedings under the EC Regulation. Again, COMI is not defined but is presumed to be where
the debtors registered office is located.316 Establishment is defined as any place of operations
where the debtor carries out a non-transitory economic activity with human means and assets
or services (article 2(e)). The words assets or services replace the word goods in the original
text thereby ensuring that both tangible and intangible assets fall within the definition.
The term debtor is not defined in the Regulations but is required for recognition purposes. 4.150
It was considered at first instance in the decision in Rubin and Lan v Eurofinance SA.317 In
that case, a US trustee was seeking recognition of a form of US business trust which, accord-
ing to English law, had no legal personality either as an individual or as a body corporate.
Strauss QC considered it unrealistic to take the view that the term need be given its ordinary
domestic meaning for the following reasons:
(a) the drafting origins of the relevant definitions are international, not domestic;
(b) the definition which is principally relevant is the definition of foreign proceeding,
where the word occurs in the phrase in which proceeding the assets and affairs of the
debtor are subject to control or supervision by a foreign court . It would therefore be
perverse in that context to give the word debtor any other meaning than that given to
it by the foreign court in the foreign proceedings;
(c) article 8 provides that, in interpreting the Model Law, regard is to be had to its interna-
tional origin and to the need to promote uniformity in its application. Both these con-
siderations would be disregarded if the court were to adopt a parochial interpretation of
debtor and as a result refuse to provide any assistance in relation to a bona fide insol-
vency proceeding taking place in a foreign jurisdiction. While the Guide to Enactment

314
The ambit of this expression was considered in Re Stanford International Bank at 3742 and 7195, and
subsequently approved by the Court of Appeal.
315 See section III above (Chapter 15 Recognition of English Schemes of Arrangement).
316 See the discussion in section VIII.E.2 below (Presumptions concerning recognition).
317 [2009] All ER (D) 102. The case was appealed (see section VIII.H.2 but not in respect of this part of the

judgment.

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 The UNCITRAL Model Law on Cross-Border Insolvency

does not specifically address this issue, it is clear from many passages in it that its object
is to promote communication, cooperation, and assistance in cross-border insolvencies
of any kind; and
(d) while article 20 imposes an automatic stay on the commencement or continuation of
proceedings concerning the debtors assets, rights, obligations or liabilities and on exe-
cution against the debtors assets, and suspends the right to transfer, encumber or other-
wise dispose of any assets of the debtor; the stay and suspension would apply to proceedings
involving, or assets held by, the trustees in their capacity as trustees.
4.151 The conclusion drawn was that there should be no difficulty for the English courts in recog-
nizing a debtor which is not a legal entity known to English law since the requirement to
cooperate is expressed in general terms and is mainly discretionary.

E. Recognition of a Foreign Proceeding and Relief

1. Application for recognition
4.152 An application for recognition must be made to one of the Chancerys district registries or
the High Court, for proceedings in England and Wales, or the Court of Session for proceed-
ings in Scotland, as appropriate (article 4). This will be the court in the area where the debtor
has a place of business or assets. If the debtor does not meet these requirements the court can
nonetheless assume jurisdiction if it considers that it is the appropriate forum. Article 4(3)
adds flexibility where there are concurrent proceedings by allowing the court to take into
account the location of other courts where insolvency proceedings are, or may in future be,
taking place.
4.153 The foreign representative is entitled to apply to commence a proceeding under British insol-
vency law if the conditions for commencing such a proceeding are otherwise met (article
11).318 This provision confers procedural standing on the foreign representative to make the
application and differs in this respect from the requirements of the EC Regulation, or the
Insolvency Act 1986, both of which specifically list the office holders able to commence
proceedings. The fact that the foreign representative has procedural standing has proved
advantageous in cases where his position is not included in the list of office holders (described
as liquidators) in Annex C of the EC Regulation. In Re Stocznia Gdynia SA,319 for example,
an application for recognition was successfully made by a Polish compensation administra-
tor where the administrator was recognized as a foreign representative and the related Polish
compensation proceedings (not listed in Annex A to the EC Regulation) were recognized as
foreign main proceedings.
4.154 Article 15 sets out the key procedural requirements for an application for recognition and
lists the requisite supporting documentation. The foreign representative has a right of direct
access to the courts under article 9 so there is no requirement for him to engage in any form
of diplomatic or consular communication prior to making the application. As noted in the

318
Foreign creditors do not have a right to apply for recognition but they do have a right under art 13 to
request the commencement of, and participation in, a proceeding under British insolvency law as creditors in
Great Britain.
319
Re Stocznia Gdynia SA (Bud-Bank Leasing) Sp zo.o. [2010] BCC 255.

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VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

Millhouse Capital case,320 the right of direct access under article 9 now enables the liquidator
of a foreign debtor to commence proceedings on behalf of the debtor instead of having to
resort to the courts winding up jurisdiction.
The foreign representative is under an ongoing obligation to provide information identify- 4.155
ing all foreign proceedings, proceedings under British insolvency law and section 426
requests relating to the debtor which are known to him (articles 15(3) and (18)). This infor-
mation will be used by the court in any decision it has to make when granting relief in favour
of the foreign proceedings. Information on other relevant matters which might have an
impact on the courts exercise of its discretion to grant relief, such as any move to reschedule
the debtors debts, must be provided in the supporting affidavit in accordance with Schedule
2 to the Regulations.
In the hearing of the first application in the High Court under the Regulations,321 in which 4.156
a US trustee sought recognition of US bankruptcy proceedings to facilitate the recovery of
property situated in England, Registrar Nicholls made some observations concerning proce-
dural matters, including as to the content of the supporting affidavit and filing and advertis-
ing requirements, which were intended to assist practitioners in future cases. These
observations have since been made the subject of a practice direction.322

2. Presumptions concerning recognition and insolvency

Article 16 lays down presumptions that allow the court to expedite the process of gathering 4.157
evidence for the purposes of recognition while retaining its ability to assess other evidence if
the conclusion suggested by the presumptions is called into question by the court or an
interested party.
Under article 16(3) there is a presumption that, in the absence of proof to the contrary, a 4.158
debtors COMI will be the place of its registered office. The burden of proof lies with the
party trying to rebut the presumption. The wording is taken verbatim from the text of the
Model Law. Chapter 15, in contrast, presumes the debtors COMI to be the place of its reg-
istered office in the absence of evidence (as opposed to proof ) to the contrary. US jurispru-
dence thus holds that the burden of proof lies on the person who is asserting that particular
proceedings are main proceedings and that the burden of proof is never on the party oppos-
ing that contention. It has been suggested that the change in language of the enactment may
explain why the jurisprudence of the US courts has diverged from that of the ECJ.323
It is for the British court to decide whether the proceeding is a foreign main proceeding or a 4.159
foreign non-main proceeding for the purposes of recognition. In this regard, it is not bound
by the opinion of the foreign court as to where the COMI of the debtor is located.
While the COMI presumption mirrors that found in article 3(1) of the EC Regulation, it 4.160
should be borne in mind that the concept of COMI under the Regulations has a different func-
tion to that in the EC Regulation: the emphasis in the Regulations is on determining the nature
of the foreign insolvency proceeding for recognition purposes only and not, as in the case of the

320
Millhouse Capital UK Ltd v Sibir Energy Plc [2008] EWHC 2614.
321 Re Rajapakse (High Court, 23 November 2006).
322 Re Rajapakse (Note) [2007] BPIR 99.
323
Lewison J, Re Stanford International Bank Limited [2009] BPIR 1157 at 65.

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 The UNCITRAL Model Law on Cross-Border Insolvency

EC Regulation, on determining which member state has jurisdiction to open insolvency pro-
ceedings. For this reason, the law of the state of opening is largely irrelevant and those seeking
assistance from the English courts will not be affected by where main proceedings are opened.
4.161 The determination of COMI has nonetheless been approached by applying similar principles to
those used by the ECJ in the Eurofood case.324 In the Stanford case,325 Lewison J expressed the view
that the framers of the Model Law envisaged that the interpretation of COMI in the EC
Regulation would be equally applicable to COMI in the Model Law.326 He too was guided by
Recital 13 of the EC Regulation (notwithstanding the absence of equivalent clarification in the
Model Law) which states that a companys COMI is where it conducts the administration of its
interests on a regular basis and is therefore ascertainable by third parties. In his view, what is ascer-
tainable by third parties is what is in the public domain and what third parties would learn in the
ordinary course of business with the company. He emphasized that an important purpose of
COMI is that it provides certainty and foreseeability for creditors of the company at the time they
enter the transaction. The Court of Appeal upheld the decision. Morritt C examined the evolu-
tion of both the EC Regulation and the Model Law and laid stress on the Model Laws Guide to
Interpretation which states that the European Convention on Insolvency Proceedings,327 as the
forerunner to the EC Regulation, could be useful when interpreting the meaning of COMI under
the Model Law. He found a clear correlation between the words used and the purpose to which
they are applied in the two instruments and considered that Lewison J was right to follow Eurofood
(again emphasizing that the EC Regulation was successor to the European Convention). He
could see nothing in the respective contexts of the Model Law and the EC Regulation to require
different meanings to be given to the phrase COMI and concluded that the test was the same as
in the Eurofood case.328
4.162 If the Stanford case, by looking to the jurisprudence arising from the EC Regulation, sets the
standard for the way in which COMI is determined for the purposes of the Regulations, it
will have the advantage of promoting a uniform and consistent approach by the courts to
establishing a debtors COMI. By adopting this approach, the courts will be adhering to the
statement of uniformity in article 8.
4.163 There is also a presumption as to insolvency in foreign main proceedings (article 31). Thus,
in the absence of evidence to the contrary, recognition of a foreign main proceeding is, for
the purpose of commencing a proceeding under local insolvency law, proof that the debtor
is insolvent. This may save time and expense by removing the need to prove that the debtor
is insolvent. However the wording is such that the local court may nonetheless seek to prove
or disprove the insolvency.

324 Case C-341/04 Re Eurofood IFSC Ltd (2006) ECR I-3813.

325 Re Stanford International Bank Limited [2009] BPIR 1157.
326 Ibid at 46. This approach has not been without criticism: see L Chan Ho, Cross-border fraud and cross-

border insolvency: proving COMI and seeking recognition under the UK Model Law (2009) 24(9)
Butterworths J Intl Banking Financial L 537542.
327 The Convention itself lapsed in 1995 for political reasons but was enacted in the form of the EC

Regulation with very few changes: see IF Fletcher, Insolvency in Private International Law (2nd edn, 2005),
pp 339358.
328 See in particular paras 39 and 5356 of the Court of Appeals judgment: Re Stanford International Bank

[2010] EWCA Civ 137.

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VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

3. Decision to recognize a foreign proceeding

The critical determination to be made by the court is whether the foreign proceeding falls within 4.164
the scope of the Regulations as defined in article 1 and, if so, whether it is eligible for recognition
as a foreign main proceeding or a foreign non-main proceeding.329 The type of proceeding will
determine the nature and extent of the relief available. Under article 17(1), unless a foreign pro-
ceeding is contrary to public policy, it must be recognized by the British court if:
(a) it is a foreign proceeding within the meaning of article 2(i);
(b) the representative is a foreign representative within the meaning of article 2(j);
(c) the procedural and evidential requirements of article 15(2) and (3) have been complied
with (formal documents provided and statements about other existing foreign proceed-
ings made in supporting documents); and
(d) the application has been made in the appropriate court.
Article 17(3) stipulates that the application must be decided upon at the earliest possible 4.165
time. The shortest known time for recognition to have been granted after an application had
been made to the English court is seven days. The application, which was heard in October
2008, was in relation to winding up proceedings taking place in Belize.
If the foreign proceeding is recognized by the British court, the foreign representative will be 4.166
entitled to participate in proceedings regarding the debtor under British insolvency law
(article 12). These proceedings include extra-judicial proceedings such as some forms of
administration, company voluntary arrangements, and creditors voluntary liquidation.
4. Interim relief pending recognition
Prior to recognition of foreign proceedings the court may grant discretionary relief under 4.167
article 19 from the time of the filing of the application for recognition of a main or non-main
foreign proceeding until the application is determined. Such relief must be required on an
urgent basis to protect the assets of the debtor or the interests of the creditors. The relief
granted is provisional and terminates when the application for recognition is decided upon.
It can be extended if necessary under article 21. Article 19(1) provides a non-exhaustive list
of examples of the type of relief that may be granted. The Guide to Enactment suggests that
it is the type of relief that is usually available in collective insolvency proceedings rather than
that sought in respect of specific assets identified by a creditor. The court must take into
account the interests of creditors and third parties when exercising its discretion and may
refuse to grant relief if it interferes with the administration of a foreign main proceeding.

F. Effects of Recognition
1. Automatic stay
Upon recognition of a foreign proceeding as a foreign main proceeding under the Regulations, 4.168
relief is automatically accorded pursuant to article 20.330 Key elements of that relief include

329 The stay which comes into effect upon recognition of a foreign main proceeding will not prevent local

creditors from initiating or continuing British proceedings in order to preserve a claim against the debtor
(art 20(4) and (5)).
330 The automatic stay under art 20 does not arise in respect of foreign non-main proceedings. Instead,

discretionary relief may be available under art 21.

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 The UNCITRAL Model Law on Cross-Border Insolvency

a mandatory stay of actions of individual creditors against the debtor or a stay of enforce-
ment proceedings concerning the assets of the debtor, and a suspension of the debtors right
to transfer or encumber its assets. Article 20(2) defines the automatic stay in such a way as to
render its scope and effect comparable to that of a debtor made subject to a winding up order
under the Insolvency Act 1986. This suggests that the stay would not have extra-territorial
effect.331 Article 20(3) applies exceptions and limitations to its scope so that certain specified
rights fall outside the stay. These include validly created security rights, rights to repossess
goods subject to hire purchase agreements,332 and set-off rights, insofar as these are exercis-
able in a British winding up. The exceptions, along with those relating to financial collateral
arrangements under the Financial Collateral Arrangements (No 2) Regulations 2003333 and
certain financial markets transactions specified in article 1(4), are intended to provide ade-
quate protection to secured creditors and others and to enable them to have greater predict-
ability on the likely returns and outcomes in a cross-border insolvency.
4.169 It is arguable that the automatic stay may go some way to providing a solution to the difficul-
ties which arise under English common law in relation to debts incurred under English law
contracts. The difficulties stem from the fact that, under English common law, a discharge of
debt negotiated in a foreign jurisdiction will not be given effect in England in respect of debts
governed by English law. It would therefore appear that the debtor has no protection from
English creditors whose debts arose under a contract governed by English law.334 This issue
has not been directly addressed in the Regulations. It has serious implications in cases where
the debtor is expected to continue trading since the debtor may be at risk of claims from
creditors whose debts arise under English law notwithstanding their discharge under foreign
law. Within the Regulations, the automatic stay in article 20 will prevent enforcement action
being taken, at least while the foreign main proceeding remains open. Outside the Regulations,
such debts in an English restructuring could be discharged by an English scheme of arrange-
ment coinciding with the foreign proceedings335 but this solution is likely to be time-
consuming and costly. Otherwise, it is possible that greater protection may be afforded by
way of the discretionary relief available under article 21(1)(g).
4.170 The stay will not affect the right to request or otherwise initiate the commencement of a pro-
ceeding under British insolvency law (for example, to place a company into administration or
into voluntary or compulsory liquidation) or the right to file claims in such a proceeding (arti-
cle 20(5)). Additional text has been included in the Regulations to enable the foreign repre-
sentative or any person affected by the stay to have it modified, terminated, or suspended at the
courts discretion (article 20(6)). The court may also do this of its own accord.

331
Re Oriental Inland Steam Company (1874) LR 9 Ch App 557; Re Vocalion (Foreign) [1932] 2 Ch 196;
Mitchell v Carter [1997] 1 BCLC 673; Harms Offshore AHT Taurus GmbH & Co KG v Bloom [2010] 2 WLR
349, CA.
332 See art 2(k) for the widely drafted definition of hire purchase agreement.
333 SI 2003/3226.
334 Although it has been argued that there are Commonwealth and English authorities to the effect that,

where English creditors have actively participated in foreign restructurings (for example voting in respect of a
plan) this amounts to consent to the foreign process: see P Smart, Cross-Border Restructurings and English
Debts (2009) 6(1) Intl Corporate Rescue 5. The problem does not arise where the EC Regulation applies as it
provides in art 4 for a discharge of debt in a main proceeding to be given effect in other EC member states.
335
An English scheme of arrangement, like other forms of restructuring plan, would discharge all debts,
whether governed by English or foreign law (Dicey, Morris, and Collins, The Conflict of Laws (14th edn, 2006),
p 1512, Rule 200).

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VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

2. Discretionary relief
(a) Stay and suspension
Article 21 empowers the court to grant, at the request of the foreign representative, any 4.171
appropriate relief for the benefit of any foreign proceeding, whether it is a main or non-
main proceeding.336 Such discretionary relief may, to the extent that it has not taken effect
automatically under article 20 in the case of a foreign main proceeding, consist of staying
proceedings or suspending the right to encumber assets, staying execution against a debtors
assets, providing for the examination of witnesses, the taking of evidence or the delivery of
information concerning the debtors assets, affairs, rights, obligations, or liabilities, and
appointing the foreign representative or another person designated by the court to adminis-
ter all or part of those assets.337
The court must take account of the requirements in article 22, relating to the protection of 4.172
creditors and others, when exercising its jurisdiction. It can subject any relief granted under
article 21 (and by way of interim relief under article 19) to such conditions as it considers
appropriate, including the provision of security by the debtor or caution by the foreign rep-
resentative to ensure the proper performance of his functions. As the provision of security is
not automatic, it will be for the interested party to bring any legitimate concerns about the
adequate protection of creditors interests to the attention of the court.
Article 21(1)(g) specifically refers to relief provided under the administration moratorium 4.173
provisions in paragraph 43 of Schedule B1 to the Insolvency Act 1986. In so doing it effec-
tively extends the scope of the automatic stay in main proceedings beyond that which arises
on a winding up to that which arises in an administration. The court therefore has the discre-
tion to override the rights conferred on creditors under paragraphs (2) and (3) of article 20
so that, as in an administration, they are only exercisable with the consent of the office holder
or the permission of the court.
These additional restrictions on the exercise of a creditors rights may provide considerable 4.174
assistance when attempting to rescue or restructure a debtor with interests or assets in several
jurisdictions. The need for these wider restrictions was recognized in the Samsun Logix
case.338 The case concerned a South Korean shipping conglomerate with global operations
which filed for court receivership in Korea and was subsequently made subject to rehabilita-
tion proceedings. Morgan J granted an order for the recognition of the Korean proceedings
as foreign main proceedings under the Regulations and of the Korean receiver as a foreign
representative. The automatic stay under article 20(2) was consequently triggered which
stayed arbitration proceedings due to be heard in London the following day. He also exer-
cised his powers to grant discretionary relief under article 21(1)(g) to provide for a morato-
rium so that no steps could be taken to enforce security over Samsuns property except with
the consent of the receiver or the permission of the court.339

336
Urgently needed relief may already have been granted upon filing an application for recognitionsee
section VIII.E.4 above (Interim relief pending recognition).
337 Article 21(1)(a)(e).
338 Samsun Logix Corporation v DEF [2009] BPIR 1502.
339 Similar relief was requested in Australia, under the Cross Border Insolvency Act 2008, and in the US

under chapter 15.

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 The UNCITRAL Model Law on Cross-Border Insolvency

4.175 Similar relief was subsequently sought in Re TPC Korea Co Ltd.340 The case is similar in a
number of respects to the Samsun Logix case in that a Korean receiver was appointed to a
global shipping company made subject to rehabilitation proceedings. Relief was again
granted under article 21(1)(g) in order to provide extra protection against creditor action. In
both cases the wider moratorium was an appropriate form of relief, given that the aim of
Korean rehabilitation proceedings (which combine elements of an English administration
and a scheme of arrangement) is to rescue the debtor.
4.176 It is arguable that article 21(1)(g) may also be used to achieve a substantive discharge of
English contractual debts in a foreign reorganization.341 This is based on the fact that the
term appropriate relief in article 21(1) is unrestricted. The Preamble to the Model Law
lends weight to this analysis by stating one of its objectives to be the facilitation of the rescue
of financially troubled businesses. Careful attention would need to be given to the drafting
of the court order in any recognition proceedings as the Regulations do not provide for the
direct application of foreign insolvency laws.
(b) Distribution of assets
4.177 Article 21(2) provides that the court may, at the request of the foreign representative in either
type of proceeding, grant a turnover order, thereby entrusting the distribution of all or part
of the debtors assets located in Great Britain to the foreign representative or another desig-
nated person. The court will only grant such an order if it is satisfied that the interests of
creditors in Great Britain are adequately protected.342
4.178 The court was seen to grant such an order in Re Swissair,343 a case in which the debtor was
subject to foreign main proceedings in Switzerland. During the course of its deliberations,
the court considered its long-established power to order the remittal of assets realized in an
English ancillary liquidation to the liquidators in the principal foreign liquidation, where the
law of the principal proceedings provides for pari passu distribution.344
4.179 In Re HIH Casualty,345 in contrast, the English courts had to decide whether it would be right
for an English liquidator to remit assets and claims to principal proceedings in an Australian
liquidation so that distribution could be effected in accordance with Australian insolvency
principles. The difficulty arising from this request was that distribution under Australian law
did not at that time require strict pari passu distribution between all unsecured creditors so
remittal would not be in accordance with the principles of English insolvency law and would
therefore disadvantage some of the English creditors. The High Court refused the request on
the basis of jurisdiction and the Court of Appeal refused the request on the basis of discre-
tion. The House of Lords, however, overturned the decision by unanimous agreement
although their lordships were divided as to whether jurisdiction lay with section 426 of the
Insolvency Act 1986 or at common law, in accordance with the principle of universalism.
Under the common law approach, the foreign main proceedings would then be allowed to

340 High Court, No 19984 of 2009.

341 P Smart, Cross-Border Restructurings and English Debts (2009) 9(1) Intl Corporate Rescue.
342 Prior to the enactment of the Regulations any such application would have relied upon the courts inher-

ent jurisdiction to remit assets.

343
Re Swissair Schweizerische Luftverkehr-Atkiengesellschaft [2009] BPIR 1505.
344 See, eg, Re BCCI (No 10) [1997] Ch 213.
345 Re HIH Casualty & General Insurance Ltd & Ors (otherwise known as McGrath v Riddell) [2008] 1 WLR

852, HL. The case opened before the Regulations came into force.

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VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

have universalist effect. The relevance of the case in the context of the Regulations is that the
universalist views espoused by Lords Hoffmann and Walker may be allowed to prevail as a
result of paragraphs (2) and (3) of article 21. In any event it seems likely that those provisions
may provide an incentive to further developing the universalist approach at a time when
there is arguably greater need to administer the assets of an insolvent company on a world-
wide basis.346 They may at least further stimulate the trend towards greater communication
between courts and increased use of protocols.
The court was also satisfied that the order for remittal was consistent with the ancillary liqui- 4.180
dation in England, as required by article 29(a)(i).
(c) Disclosure
Relief under article 21(1)(d) (for example an order for the production of documents) will not 4.181
be granted if it results in a breach of confidence which amounts to an unjustified infringe-
ment of the rights of an interested third party under article 8 of the European Convention
on Human Rights.347

3. Protection of creditors and interested third parties

The protection of creditors interests is reinforced by article 22 which seeks to ensure that 4.182
there is a balance between the relief that may be granted to the foreign representative and the
interests of persons that may be affected by such relief. It stipulates that the courts must be
satisfied that the interests of creditors and any other interested persons are adequately pro-
tected when granting or denying relief (article 22(1)). The text has been amended to include
a specific reference to secured parties and parties to hire purchase agreements.348
Relief under article 22(2) was provided in a case arising out of the Samsun Logix receiver- 4.183
ship.349 In that case, Norden, a creditor of Samsun, applied to the English court to enforce a
contractual lien in respect of unpaid sums relating to a ship charter, notwithstanding the stay
which had been granted in response to a request for relief under article 21(1)(g) made in the
earlier recognition hearing of Samsun. The validity of Nordens lien was subject to litigation
in Korea and Samsuns receiver had presented a petition to the Korean court to set aside the
lien. Nordens concern was that a finding of invalidity by the Korean court would preclude it
from attempting to enforce the lien in England. Newey QC, as deputy judge, recognized this
to be a valid concern but refused to grant permission to enforce the lien on the basis that it
would pre-empt the outcome of the Korean litigation.350 He was however prepared to exer-
cise his powers under article 22(2) to make the stay conditional on Samsun and its receiver
not arguing in subsequent English proceedings that, as a result of participating in the Korean
proceedings, Norden was bound by the decision of the Korean court and estopped from
challenging the decision in subsequent English proceedings.

346 See Lord Neubergers comments in The International dimension of insolvency (2010) 23(3) Insolvency

Intelligence 4245 and G McCormack, Jurisdictional competition and shopping in insolvency cases [2009]
68(1) CLJ 169170.
347 Anthony John Warner (as trustee in bankruptcy of the estate of the late Rene Rivkin) v Verfides [2009]

Bus LR 500.
348 Defined in art 2(k) to include conditional sale, chattel leasing, and retention of title agreements.
349 D/S Norden A/S v Samsun Logix Corporation [2009] BPIR 1367.
350
See also section VIII.H.1 below (Cooperation with foreign courts and foreign representatives).

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4. Actions to avoid acts detrimental to creditors

4.184 As well as seeking judicial recognition of foreign proceedings, a foreign representative is
granted certain rights of access to the courts to initiate proceedings to avoid or render inef-
fective actions taken which have been detrimental to creditors (article 23). This enables an
application to be made to the British courts under the anti-avoidance provisions of the
Insolvency Act 1986. The provisions are listed in article 23(1)351 and are available to the
foreign representative irrespective of whether the debtor is the subject of an insolvency pro-
ceeding under British law and where the foreign representative would not otherwise have
standing to apply to the court. The revised text of article 23(4) makes it clear that the law of
the state where the proceeding is taking place shall determine the date of commencement of
the foreign proceeding and that any doctrine of relation back352 of the foreign law will
apply.353 It will be for the foreign representative to provide satisfactory evidence to the British
court as to the effective date for the purpose of challenging any such transaction.
4.185 Article 23 does not confer any substantive rights on the foreign representative. It will there-
fore be necessary for him to demonstrate to the court that there is a substantial connection
between England and Wales or Scotland, as the case may be, and the transaction which is
being called into question and that the court could hear the case under the applicable conflict
of law rules. This requirement effectively prevents article 23 from being used as a means of
forum shopping by a party seeking to take advantage of British insolvency law.
4.186 In instances where there might otherwise be an overlap between the rights of a foreign repre-
sentative and a British insolvency office holder to bring an application under the anti-avoid-
ance provisions, if the British proceedings commence after recognition then any existing
article 23 proceedings brought by a foreign representative must be reviewed by the court
(article 29(b)(iii)). If British proceedings have already been opened, the foreign representa-
tive must seek the consent of the court to bring proceedings under article 23.

G. Foreign Creditors Rights of Access to Proceedings Under

British Insolvency Law
4.187 Although the Regulations are mainly concerned with the rights of access of foreign repre-
sentatives to the courts, they also contain provisions which confer rights of access on foreign
creditors. These rights to intervene or participate in insolvency proceedings in Great Britain
are not dependent on the opening of foreign proceedings.
4.188 Foreign creditors have the same rights as local creditors to commence and participate in
insolvency proceedings under British insolvency law (article 13). This does not affect the
ranking of claims under British insolvency law, except that a claim of a foreign creditor shall
not be given a lower priority than that of general non-preferential claims solely because the
holder of such claim is a foreign creditor (article 13(2)). It may however be given a lower

351 An order may be sought in the English courts in connection with ss 238, 239, 242, 243, 244, 245, 339,

340, 342A, 343, and 423 of the Insolvency Act 1986.

352 Under this principle insolvency proceedings are deemed as having started at the time of the filing of the

petition rather than at the time of the hearing.

353
This avoids the difficulties experienced in relation to the equivalent provision in the EC Regulation
which is ambiguous as to whether the relation back principle should be applied. The 2006 ECJ ruling in
Eurofood (n 324 above) confirmed that it should.

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VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

priority if an equivalent local claim would be so ranked, for example in respect of debts due
to a person found liable for fraudulent trading under section 215(4) of the Insolvency Act
1986. Foreign revenue claims are now provable in Great Britain by virtue of article 13(3)
unless challenged as a penalty or rejected on other grounds.
Foreign creditors are also required to be notified of a proceeding under British insolvency law 4.189
whenever notification is required to be given to creditors in an enacting state.

H. Cross-Border Cooperation
1. Cooperation with foreign courts and foreign representatives
The provisions in articles 2527 relating to cooperation between the courts of an enacting 4.190
state and insolvency office holders may facilitate the cross-border disposal of a debtors assets.
Such cooperation is not conditional on recognition of, or application for recognition of, a
foreign proceeding.354 The possible forms of cooperation are listed in article 27 and replicate
those found in the Model Law template. They comprise:
(a) appointment of a person to act at the direction of the court;
(b) communication of information by any means considered appropriate by the court;
(c) coordination of the administration and supervision of the debtors assets and affairs;
(d) approval or implementation by courts of agreements concerning the coordination of
proceedings;
(e) coordination of concurrent proceedings regarding the same debtor.
They were considered broad enough to allow the British courts to develop their own practices 4.191
rather than allow themselves to be fettered by an exhaustive list of specific circumstances.355
Article 25 places cooperation on a discretionary basis by stating that British courts may coop- 4.192
erate to the maximum extent possible with foreign courts foreign representatives, either directly
or through a British insolvency office holder. As such it departs from the original text which
imposes on the courts of an enacting state an explicit duty to cooperate.356 In the Millhouse
Capital case Clarke J found that the intention of the Cross-Border Insolvency Regulations is to
ensure that all proper assistance can be and is provided to a foreign officeholder.357 He cited the
text of articles 25 and 27 in support of this analysis. In effect, these provisions can be viewed as
reinforcing the position at common law, where the principles of cooperation and comity have
long been recognized by the English courts, as is evidenced by the line of English cases which
already emphasize the need to provide assistance.358

354
In 2009 UNCITRAL adopted the Practice Guide on Cross-Border Insolvency which also aims to pro-
mote cross-border coordination and cooperation, particularly by the use of cross-border agreements, and is
intended to complement the Model Law (see section J below (UNCITRAL guidance).
355
For a discussion of the interaction between the courts statutory jurisdiction to declare a foreign company
insolvency under s 221 of the Insolvency Act 1986 and the cooperation inherent in arts 2527: see PJ Omar,
Cross-Border assistance in the common law and international insolvency texts: an update (2009) 20(11) Intl
Company and Commercial L Rev 379386.
356 The amendment was made in response to concerns raised in the course of the Insolvency Service

consultation.
357 Millhouse Capital UK Ltd v Sibir Energy Plc [2008] EWHC 2614 at 52.
358 See, eg, Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112 (per Hoffmann J at 117118)

and Cambridge Gas Transportation Corp v Navigator Holdings Plc [2006] UKPC 26 at 158A.

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 The UNCITRAL Model Law on Cross-Border Insolvency

4.193 Article 26, on the other hand, places British insolvency office holders under an express obli-
gation to cooperate. This is in keeping with the original text although additional wording has
been added to make it clear that such cooperation is only to the extent consistent with their
other duties, including duties towards British creditors, under the laws of Great Britain. The
provision as amended will enable a British office holder to have regard to any perceived con-
flict of interest that might arise between his own position and that of a foreign representative
without forcing him to seek directions from the court in order to safeguard his own legal
position in the event of a subsequent challenge.
2. Extent of cooperation
4.194 The nature and extent of the duty to cooperate between a British court and foreign courts or
foreign representatives has been considered in the landmark Perpetual Trustee case359 which
arose from the Lehman insolvencies and involves parallel proceedings in the English and US
courts. The key issue to be decided was whether a clause in a trust deed, which altered the
swap payment priorities in a structured finance transaction so that the claims of noteholders
would be payable in priority to the claims of the swap counterparty (Lehman Brothers
Special Financing Inc or LBSF) in the event of a swap counterparty default, was valid. The
documentation, other than that relating to the collateral, was governed by English law and
the collateral was located in England. LBSF defaulted on the swap agreement when its
parent, Lehman Brothers Holding Inc filed for chapter 11 protection. LBSF was itself then
made subject to chapter 11 protection and the US Bankruptcy Court was asked to consider
the validity of the clause as a matter of US bankruptcy law.
4.195 In the English proceedings, the Court of Appeal ruled that the clause was valid and enforce-
able under English law. It found that the operation of the clause did not violate the common
law principle that a contractual provision is void if it provides for the transfer of an asset from
the owner to a third party upon insolvency (known as the anti-deprivation principle).
However the US Bankruptcy Court declined to recognize the judgment. Instead, it ruled
that the provision constituted an unenforceable ipso facto clause that violated sections 365
and 542 of the US Bankruptcy Code and that any attempt to enforce the clause as a result of
LBSFs bankruptcy would be contrary to the automatic stay under section 362(a) of the US
Bankruptcy Code.360 As a result a conflict of laws question has arisen as to which of the two
decisions should prevail.
4.196 The case is instructive from the point of view of the duty to cooperate under article 25.
Mindful of this duty, the English court deliberately refrained from going beyond ruling on
the validity of the clause. It chose not to make any further orders or declarations on the basis
that it might be seen as precluding any request or other application to be made by a foreign
representative of LBSF or the US court.361 Both courts were conscious of the need for coop-
eration and, in accordance with article 25, Judge Peck in the US proceedings invited the
High Court to consider the US courts schedule of imminent hearings on the case and not to
make any final disposition of the English proceedings until he was able to consider and rule
on the US bankruptcy issues raised in the summary judgment briefing. He also stated that

359 Perpetual Trustee Company Limited v BNY Trustee Services Limited and Lehman Brothers Special Finance

Inc [2010] BPIR 228, [2010] BCC 59, CA.

360 At the time of going to print appeals are pending in both jurisdictions.
361 Recognition of the US proceedings as foreign main proceedings was subsequently granted.

224
VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

he intended to communicate further with the English court in an attempt to reach a coordi-
nated result in light of each courts eventual ruling.
The case also raises the issue of whether the relief available under article 21 includes granting 4.197
assistance by applying foreign law.362 The Regulations do not expressly provide for this but
nor do they preclude it. This form of assistance may be sought by LBSF in order to have the
order of the US Bankruptcy Court recognized.363 The conflict of laws issues had therefore
not been resolved and the application for relief had not been submitted to the English court.
It remains to be seen, therefore, whether the English court will grant relief under article 21
by applying foreign law.
The question of whether the cooperation available under article 27 extends to enforcing the 4.198
judgments of foreign courts in English courts was considered in Rubin v Eurofinance.364 In
that case, a business trust established by a company incorporated in the British Virgin Islands,
Eurofinance SA, and governed by English law, was made subject to chapter 11 proceedings
in New York. This was done at the request of UK receivers appointed over the trust assets.
The receivers used their powers under the chapter 11 avoidance provisions to recover money
paid by the trust to the respondent trustees (who were resident in the UK) in adversary pro-
ceedings. The respondents were not present in the US at the time that the adversary proceed-
ings were instituted but personal jurisdiction was exercised over them on the basis that they
had chosen the US as the place to carry on their business.365 Judgment was entered in the
New York court against them and the receivers applied to the English court for recognition
of the proceedings relating to the trust as foreign main proceedings under the Regulations.
They also sought an order under article 25 to enforce the monetary judgment arising from
the adversary proceedings, as if it were a judgment of the English court.
The English High Court granted recognition of the New York proceedings relating to the 4.199
trust under the Regulations366 and recognized the adversarial proceedings, finding that they
were an integral part of the New York proceedings under way in relation to the trust. However,
it found that neither the Regulations nor common law had any application to the enforce-
ment of the judgment arising from those proceedings in England. Strauss QC, as deputy
judge, noted that the examples of the forms of cooperation in article 27 provided for the
coordination of proceedings but not for the proceedings in one country to be treated as pro-
ceedings in the other. In his opinion, the judgment was an in personam judgment which
could not be enforced in circumstances where the defendant was not present within the
jurisdiction and had not submitted himself to the jurisdiction of the foreign court. This
would be contrary to the English rules of private international law. The receivers appealed

362
It has been argued that the Model Law is intentionally neutral on this point so that it is for each enacting
state to decide: eg J Clift, The UNCITRAL Model Law on Cross-Border Insolvencya Legislative Framework
to Facilitate Coordination and Cooperation in Cross-Border Insolvency (2004) 12 Tulane J Intl Comparative
L 307, 324 and L Chan Ho, Cross-Border Insolvency: a Commentary on the UNCITRAL Model Law (2nd edn,
2009).
363 At the time of going to print a status meeting between the US and UK courts was anticipated. The appeal

to the English Supreme Court has been scheduled for March 2011.
364 Rubin and Lan v Eurofinance SA [2010] 1 All ER (Comm) 81 (first instance) and [2010] EWCA Civ 895

(Court of Appeal).
365 Most of Eurofinance SAs creditors and assets were in the US and Canada.
366 The court found it immaterial that the trust lacked legal personality under English law (discussed further

in section VIII.D above).

225
 The UNCITRAL Model Law on Cross-Border Insolvency

against this decision and the respondents cross-appealed against the orders for recognition of
the foreign proceedings and the foreign representatives.
4.200 The Court of Appeal dismissed the cross-appeal against the order for recognition of the
adversary proceedings, finding that the avoidance provisions under English law and their
equivalent under the US Bankruptcy Code bore striking similarities, thereby justifying a
harmonized interpretation.
4.201 As regards the enforcement of a foreign judgment, Ward J (supported by Wilson LJ and
Henderson J) found that the English rules of private international law did not apply.367
Instead, he looked to common law, referring to comments in Cambridge Gas Transportation
Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc.368 In that
case, Hoffmann LJJ had said that the process of collecting in assets included the use of powers
to set aside voidable dispositions, even where those powers differ considerably from those in
the English statutory scheme. He had also spoken of the need for there to be a unitary bank-
ruptcy proceeding in the court of the bankrupts domicile which should receive worldwide
recognition and apply universally to all the bankrupts assets. Ward LJ was prepared to follow
that approach and add a further principle that recognition carries with it the active assistance
of the court which should include assistance by doing whatever the court could have done in
the case of domestic insolvency. It was Ward LJs view that, although the New York judg-
ments made in the adversary proceedings had the indicia of judgments in personam, they
were judgments in and for the purposes of the collective enforcement regime of the bank-
ruptcy proceedings. They were therefore governed by the sui generis private international law
rules relating to bankruptcy and were not subject to the ordinary rules of private interna-
tional law. He described this as a desirable development of the common law founded on the
principles of modified universalism369 and, in line with Hoffmann LJJs views on the need to
avoid parallel insolvencies where circumstances permitted, he considered that assistance
should extend to enforcing the judgments in the English court, even though the respondents
had refused to submit to the jurisdiction of the New York court.
4.202 As the appeal had been allowed on the basis of the common law, it was unnecessary to decide
whether to cooperate with the New York court by enforcing its judgment under the
Regulations. Ward LJ noted obiter dicta that it was troubling that the specific forms of coop-
eration provided under the Regulations did not include enforcement but considered that the
article 25 requirement for co-operation to the maximum extent possible should include
enforcement, especially since enforcement was available under the common law.370
4.203 The decision provides a further endorsement of the principle of modified universalism as
espoused in the Cambridge Gas case371 and may further facilitate the functioning of cross-
border insolvency proceedings in cases where foreign judgments which are integral to insol-
vency proceedings are found to be enforceable in the English courts.

367 Supra n 364 at para 61

368 [2006] UKPC 26.
369 See para 4.179 above.
370
But note that this interpretation does not lie comfortably with the fact that art 25 of the Regulations
departs from the UNCITRAL template in that it gives the British courts a discretion (rather than imposing an
obligation) to assist.
371
See also Re HIH Casualty, supra n 345.

226
VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

Finally, article 27 (in particular, article 27(d)) is complemented by the UNCITRAL Practice 4.204
Guide on Cross-Border Insolvency Cooperation which aims to further cooperation between
courts and between insolvency office holders by the implementation of agreements concern-
ing the coordination of proceedings.372

I. Commencement of Concurrent Proceedings

and Coordination of Relief
Article 28 deals with the opening of British insolvency proceedings following recognition of 4.205
a foreign main proceeding. It differs in one important aspect from the original text in that,
by omitting the words may be commenced only if the debtor has assets in this State, juris-
diction to open proceedings can be exercised whether or not the debtor has assets in Great
Britain. This amendment has preserved the position under British law for non-EU cases,373
namely that a foreign company may be wound up as an unregistered company under section
221 of the Insolvency Act 1986 provided there is sufficient connection with Great Britain.374
As in the original text, the effects of a local proceeding would, as far as the assets of the debtor
are concerned, be limited to assets in Great Britain and, to the extent necessary to implement
cooperation and coordination under articles 2528 inclusive to other assets of the debtor
that, under the law of Great Britain, should be administered in that proceeding.
Restructuring plans may be assisted by provisions dealing with coordination of relief between 4.206
local and foreign proceedings concerning the same debtor and between two or more foreign
proceedings concerning the same debtor (articles 29 and 30). The expectation here is that
coordinated decisions will achieve a greater return when realizing the debtors assets and a
more advantageous restructuring of the debtors undertaking. As discussed above, the British
courts are expected (but not required) to cooperate with foreign courts and foreign repre-
sentatives under articles 25 and 30.
Where proceedings under the Insolvency Act 1986 are already underway at the time that 4.207
recognition of a foreign proceeding is requested, any relief granted under articles 19 and 21
for the benefit of the foreign proceeding must be consistent with the British proceeding. If
the foreign proceeding is recognized as a foreign main proceeding the operation of article 20
is disapplied (article 29(a)).
When British proceedings are opened after the filing of an application for recognition of a 4.208
foreign proceeding, the relief that has been granted for the benefit of the foreign proceeding
must be reviewed and modified or terminated if inconsistent with the British proceeding. If
the foreign proceeding is a main proceeding, the stay and suspension provisions of article 20
must also be modified or terminated if inconsistent (article 29(b)).

372 See section J which discusses the UNCITRAL Practice Guide on Cross-Border Insolvency

Cooperation.
373 In contrast, the EC Regulation limits the jurisdiction of the English courts by requiring the debtor, if its

COMI is not in the UK, to have assets and an establishment in the UK in order to open secondary
proceedings.
374 For a discussion as to whether relief is better provided under s 221 of the Insolvency Act 1986 or by

requiring the petitioner to request relief under the Regulations, see Millhouse Capital UK Ltd v Sibir Energy Plc
[2008] EWHC 2614.

227
 The UNCITRAL Model Law on Cross-Border Insolvency

4.209 In circumstances where the court is faced with more than one foreign proceeding, article 30
calls for tailoring relief in such a way that will facilitate coordination of the foreign proceed-
ings; if one of the foreign proceedings is a main proceeding, any relief must be consistent
with that main proceeding. If it is not consistent, it must be terminated.
4.210 The Regulations prescribe rules of payment in concurrent proceedings to ensure equality of
treatment among creditors (thereby codifying the hotchpot principle).375 Thus if a creditor
receives 10 pence in the pound in a foreign proceeding but the dividend in the local proceed-
ing is 25 pence, he will receive only 15 pence in the local proceeding. Secured creditors and
those with rights in rem will not be required to equalize if they receive priority payments.

J. UNCITRAL Guidance
4.211 Finally, this chapter would not be complete without reference to the Practice Guide on
Cross-Border Insolvency Cooperation, adopted on 1 July 2009, and the Legislative Guide
on Insolvency Law, adopted on 1 July 2010.
4.212 The purpose of the interim final text of the Practice Guide on Cross-Border Insolvency
Cooperation is to provide readily accessible information on current practice in insolvency
proceedings with respect to cross-border coordination and cooperation for reference and use
by practitioners and judges, as well as creditors and other stakeholders. Further information
on cross-border insolvency agreements will be added as it becomes available.
4.213 The Guide places emphasis on the use and negotiation of cross-border insolvency agree-
ments. It provides an analysis of a number of agreements entered into since the late 1990s,
which UNCITRAL intends to update as new cases emerge, and includes sample clauses
based on provisions found in existing agreements. It is closely related and complementary to
the promotion and use of the Model Law and, in particular, article 27(d) which provides that
the cooperation between courts and between insolvency office holders referred to in articles
25 and 26 may be implemented by the courts approval or by implementation of agreements
concerning the coordination of proceedings. A summary of the cases where such agreements
have been put to good effect, including Federal Mogul, Daisytek, and Nortel Networks, is also
included.
4.214 The Legislative Guide on Insolvency Law deals with the treatment of enterprise groups in
insolvency. In a press release on 5 July 2010, the Commission acknowledged that, by approv-
ing the text, it recognized that the business of corporations is increasingly conducted, both
domestically and internationally, through enterprise groups, which are therefore an impor-
tant feature of the global economy and significant to international trade and commerce. It
further observed that very few, if any, states recognized enterprise groups as distinct legal
entities or had a comprehensive regime for their treatment in insolvency.

375
Under the hotchpot principle, without prejudice to secured claims or rights in rem, any creditor who has
received part payment in respect of claims abroad may not receive payment for the same claim in British insol-
vency proceedings in respect of the same debtor so long as the payment to the other creditors of the same class
is proportionately less than the payment the creditor has already received.

228
VIII. The English Experience of the Model LawThe Cross-Border Insolvency Regulations 2006

The purpose of the text is therefore to address that lack and provide timely guidance on how 4.215
to develop and improve the administration of the insolvency of enterprise groups, both
domestically and in the cross-border context.
The Commission has also resolved to commence work on developing guidance on the inter- 4.216
pretation and application of selected concepts of the Model Law relating to COMI; consid-
ering the liabilities and responsibilities of officers and directors of enterprises in the context
of insolvency; preparing a study on various aspects of cross-border resolution of the insol-
vency of large and complex financial institutions; and preparing a text providing informa-
tion for judges on the use and interpretation of the Model Law.

229
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 Part II

BANK RESOLUTION
This page intentionally left blank
 5
LEGAL ASPECTS OF BANKING
REGULATION IN THE UK AND USA

I. Introduction 5.015.04 IV. The US Regulation of the Business

of Banks and Safe and Sound
II. The UK Model of Regulation Requirements 5.445.64
and Supervision 5.055.25
A. Safety and Soundness 5.485.51
A. The Scope of the FSAs
B. Capital and Liquidity
Responsibilities 5.085.12
Requirements 5.525.54
B. Bank Supervision 5.135.25
C. The Directors Duties 5.55
III. The US Approach to Bank D. The Common Law Standard 5.56
Supervision 5.265.43 E. The Statutory Position 5.575.59
A. The Dual Banking System 5.285.29 F. Other Enforcement Actions 5.605.64
B. The Individual Regulators 5.305.41
C. Financial Stability Oversight
Council 5.425.43

I. Introduction
The banking industry is one of the most regulated and supervised sectors in any economy in 5.01
light of the real likelihood of collapse if their associated risks are not managed efficiently or
regulated. The banking industry performs a number of services: it manages the distribution
of savings and loans which is essential for an economy to operate effectively; and banks are
also a central vehicle for the exercise of a states monetary policy due to their role in an
economys payment system. The susceptibility of banks to collapse or failure is all too clear as
a result of the maturity mismatch between their borrowing and lending: the former is usu-
ally short term and the latter is normally on a long-term basis. Banks function on a small asset
reserve and hold a large proportion of illiquid assets in the form of loans, which makes them
susceptible to failure. Their weakness is heightened by the fact that the inter-bank market is
made up of a network of large unsecured creditor and debtor relationships, where the failure
of one bank could lead to the collapse of others if confidence in this market was undermined
in some waylike a bank not being able to meet its obligations on time.
In an extreme scenario, the fallout from any failure may have wider systemic consequences, 5.02
with a significant risk of contagion in the financial system where the collapse of a bank could
spread to others in the sector. A systemic failure such as this can have wider repercussions on

233
 Legal Aspects of Banking Regulation in the UK and USA

the performance of an economy. The economic costs of such failures can be considerable,
and require huge amounts of public funds to stabilize the financial system. This requires
specific focus on putting in place adequate legal preconditions and regulatory infrastructure
to ensure the objectives of financial stability are achieved.
5.03 In light of the vulnerability of the banking system, a system of regulation and supervision is
necessary. In general terms, bank regulation refers to the rules banks are required to comply
with and supervision refers to the monitoring process undertaken by a regulator when an
institution seeks entry into the banking industry; supervision also controls the exit of banks
from the industry, so that this is as orderly as possible and does not disrupt the banking
system. In order to ensure banking is undertaken with a degree of prudence, bank supervi-
sors use a number of tools to regulate banks: capital adequacy, liquidity ratios, large exposure
rules, consolidated supervision, and deposit insurance. These tools need to extend over the
domestic and international operations of its business. As a result of this interdependency and
interconnectedness, efforts have been made to improve the way countries regulate and super-
vise the operations of banks.
5.04 This chapter sets out the principle features of the regulation and supervision of UK and US
bank regulation. The first outlines the UK proposals for reform and key features of the
Financial Services Authority (FSA) supervisory regime. The second part outlines the US
federal bank regulatory system and the impact of the Dodd-Frank Wall Street Reform and
Consumer Act 2010 (the Dodd-Frank Act 2010) on it as well as the impact of it on areas of
the regulatory and supervisory regime.

II. The UK Model of Regulation and Supervision

5.05 In 1997, New Labour introduced a single financial regulator, the FSA, with new powers to
regulate and supervise the UK financial markets and financial firms.1 The powers and respon-
sibilities of the FSA are set out in the Financial Services and Markets Act 2000 (FSMA 2000).
As a result of this move to transfer bank supervision away from the Bank of England (the
Bank), it was important to coordinate the work of the Bank, the FSA, and the Treasury so
that the discrete responsibilities and jurisdiction of the individual authorities were suffi-
ciently clear to one another in terms of their day-to-day responsibilities. The Memorandum
of Understanding (MoU) was first published in 1997 and revised in 2006.2 It sets out the
primary responsibilities of the three individual authorities to achieve financial stability.
5.06 The financial crisis brought considerable criticism of the way the UK financial markets are
overseen by the UK Tripartite Authorities, in particular the way the FSA regulated and
supervised the financial firms such as banks. Post-Northern Rock, the FSA made consider-
able changes to the approach to the intensity of supervision with the introduction of the
judgement-based approach which will continue under the new administration, however it

1 Margaret Chamberlain, Regulatory ProcessesAuthorisation, Supervision, Enforcement in Michael

Blair and George Walker (eds), Financial Services Law (2006), 113.
2 Press Release, Bank of England, Memorandum of Understanding for Financial Stability (22 March 2006)

available at <http://www.bankofengland.co.uk/publications/news/2006/037.htm> (hereinafter Memorandum

of Understanding for Financial Stability).

234
 II. The UK Model of Regulation and Supervision

has not been considered sufficient to deal with possible future financial crisis where a more
nuanced relationship is needed between the role of the central bank and day-to-day regula-
tion and supervision of large complex financial firms, to maintain financial stability.
The new coalition government of 2010 have proposed a major overhaul to the UK structure 5.07
of financial regulation.3 The result of the reforms will mean the abolition of the FSA as we
know it and the transfer of prudential regulation and supervision from it to a newly created
Prudential Regulation Authority (PRA); which will be a subsidiary organization of the
Bank.4 In addition to the establishment of the PRA the proposals include the establishment
of a Consumer Protection and Markets Authority (CPMA) to protect retail consumers and
wholesale markets. The reforms primarily transform the UK single regulatory regime in to a
twin peaks model separating prudential and consumer regulation. The proposals indicate
new draft legislation will not be published until mid-2011 so until the changes are formally
enacted the current law remains applicable.

A. The Scope of the FSAs Responsibilities

The FSA has the overall regulatory responsibility for deposit-taking businesses, investment 5.08
businesses (encompassing regulation of recognized investment exchanges), and insurance
businesses. The FSMA 2000 amalgamates the central components of previous regulatory
regimes, designating one authority to make rules governing regulated and prohibited activi-
ties, authorization and exemption, continuous supervision, enforcement powers, and the
establishment of an appeal process. The introduction of the FSMA 2000 transferred to the
FSA the regulation of financial services and markets; to provide for the transfer of certain
statutory functions relating to building societies, friendly societies, industrial and provident
societies and certain other mutual societies; and connected persons.5
The FSA is required to undertake these responsibilities in accordance with the objectives and 5.09
principles set out in the FSMA 2000, which provides a foundation for the decisions the FSA
takes to fulfil its responsibilities.6 These objectives and principles provide the context for
more precise rules and guidance to assist the FSA to undertake its activities. The objectives
place a duty of conduct upon the FSA, and this makes it accountable for its decisions in terms
of those objectives. Moreover a high-level set of Principles for businesses provide a set of fun-
damental obligations to which a regulated firm is required to adhere, and build on the FSAs
regulatory objectives.7 The interests of consumers, regulators, and other financial intermedi-
aries figure largely in them. The Principles for businesses apply not just to the regulated firm
but also across the group and its worldwide activities.8 These principles provide the context

3
HM Treasury, A new approach to financial regulation: judgement, focus and stability (Cm 7874, July 2010).
4
Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, at Mansion House, 16 June
2010, available at <http://www.hm-treasury.gov.uk/press_12_10.htm>. Speech by Mervyn King, Governor of
the Bank of England, at Mansion House, 16 June 2010, available at <http://www.bankofengland.co.uk/publi-
cations/speeches/2010/speech437.pdf>.
5 Preamble to FSMA 2000.
6
FSA (1997) Financial Services Authority: an outline, October; FSA (1999) The Financial Services Authority,
August; FSA (1998) Financial Services Authority: meeting our responsibilities, August; FSA (2000) A new regula-
tor for the new millennium, January.
7 FSA Principles for businesses, chs 1 and 2 respectively, available at <http://fsahandbook.info/FSA/html/

handbook/PRIN>.
8 PRIN 1.1.3G, 1.1.5G, and 1.1.6G respectively.

235
 Legal Aspects of Banking Regulation in the UK and USA

within which regulated business must be undertaken, otherwise the consequences could be
intensive supervision, enforcement actions, or in the worst-case scenario withdrawal of per-
mission to undertake regulated activities.9

1. Authorization and permission

5.10 The first facet of regulation is authorization to undertake a particular type of business.
Authorization serves two main purposes: it attempts to protect the marketplace from incom-
petent players, and encourages depositors and investors to do business confidently within a
secure environment. A formal system of authorization acts as an effective way of limiting entry
to and exit from a marketplace so that it can function in an orderly manner. This ensures that
regulated activities are appropriately undertaken in accordance with the relevant prudential
standards and conduct-of-business rules with which authorized firms are required to comply.
The FSMA 2000, section 19, prohibits any person to carry on or purport to carry on a regulated
activity unless they are authorized or exempt. The regulated activities highlighted in section
22(1) of the FSMA 2000 are set out and defined in secondary legislation, the Financial Services
and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and the Financial Services
and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001
(Business Order). In the case of accepting deposits article 5(1) of the RAO states that any
money received by way of deposit is lent to others or the person accepting the deposit is financed
wholly, or to a material extent, out of the capital of or interest on money received by way of
deposit. A deposit is defined as a sum of money which will be repaid with or without interest
or premium, and either on demand or at a time or in circumstances agreed by or on behalf of
the person.10 The accepting of deposits is further clarified by article 2(1) of the Business Order.
This requires the person to hold themselves out as accepting deposits on a day-to-day basis or if
they are only accepted on particular occasions, how frequent are those occasions.11
5.11 The FSA regime not only governs who can undertake regulated activities at a institutional
level but also those who are responsible for discharging a firms responsibilities on its behalf.12
Individuals performing a controlled function are required to be a fit and proper person.13
The FSA sets out a number of factors that need to be considered, such as honesty, integrity,
reputation, competence, capability, and financial soundness.14 Whether or not an indi-
vidual requires approval by the FSA depends on the role they perform; that is, whether they
perform a controlled function.15 The functions designated as controlled are those that add
value to the regulatory process and assist the FSA to fulfil its regulatory objectives.16 Therefore
no person can exercise a controlled function unless the individual is approved by the FSA
under section 59 of the FSMA 2000.17 In accordance with the FSMA 2000 those approved
have to meet the FSAs fit and proper criteria before they can take up their positions.18

9
PRIN 1.1.7G, 1.1.8G, and 1.1.9G respectively.
10 RAO art 5(2).
11
For an analysis of this see FSA v Anderson [2010] EWHC 599 (Ch).
12
AUTH 6 and exceptions, see AUTH 6.5.1G. See also TC 1 training and competency rules apply to
employees responsible for regulated activities. SUP 10: Approved Persons.
13
FIT 1.1.2G.
14 FIT 1.3.1G.
15 SUP 10.4.5R: Controlled Functions.
16 APER 4.4.1G4.4.9E.
17 SUP 10.2.1G.
18 The Fit and Proper Test for Approved Persons, chs 1 and 2.

236
 II. The UK Model of Regulation and Supervision

The FSA sets out a number of factors that need to be considered, such as honesty, integrity,
reputation, competence, capability, and financial soundness.19 In general terms, to be
fit and proper a person must be suitable to hold a licence and undertake the business of the
licence-holder.20 This requires an assessment of the individuals character and the nature and
complexity of the business undertaken by the regulated firm. In this respect it is the respon-
sibility of the individual to satisfy the FSA that they are fit and proper to undertake a con-
trolled function rather than for the FSA to show that they are not. The FSA has the authority
to withdraw approval of a person if it considers them not to be fit and proper for the control-
led function for which they have sought approval.21 It is the responsibility of the regulated
firm to exercise reasonable care when appointing individuals to undertake a controlled func-
tion to ensure they are appropriate for the position. The FSA has recently introduced an
interview process for particular controlled functions, as part of its significant function review,
to assess the persons competency to undertake the function they seek approval for.22

2. The threshold conditions

The FSMA 2000 provides minimum criteria for granting permission to carry out regulated 5.12
activities. These are referred to as threshold conditions.23 The FSA is required to ensure that
those seeking authorization can satisfy these conditions. The concept of threshold indicates
that these requirements need to be met at the point of entry, although the actual requirement
is to comply with them continuously. The threshold conditions are broad and contain a large
degree of discretion in their scope; they are complemented by a whole host of prudential
rules and guides that flesh out their application24 and are further elaborated in the Principles
for businesses,25 Statements of principles for approved persons,26 and the Prudential sourcebook for
banks, building societies and investment firms.27 These extensive rules and guidance reduce the
level of uncertainty in the minds of the regulated and the regulator, thus reducing the expec-
tation gaps that exist between the FSA and the regulated.

B. Bank Supervision
The FSA outlines its approach to supervision in its Supervision handbook in compliance with 5.13
the FSMA 2000, which places a responsibility on the FSA to put in place arrangements to
ascertain if a regulated firm is complying with its statutory obligations and rules and guid-
ance.28 The arrangements the FSA puts in place need to be designed with its objectives and
principles of good regulation in mind.29 In accordance with these principles, for example,

19
FIT 1.3.1G.
20
R v Hyde JJ (1912) The Times Law Reports, vol 106, 152, 158.
21
FIT 1.2.3G.
22
FSA, Approving and supervising significant influence functionsour more intrusive regulatory approach,
12 October 2009, available at <http://www.fsa.gov.uk/pubs/ceo/ceo_letter1009.pdf>.
23
FSMA 2000, Sch 6 includes legal status, location of offices, close links, adequate resources, and suitability.
See for guidance COND 1.
24 FSMA 2000, s 138.
25
FSA, Principles for businesses.
26 FSA, Statements of principles and code of practice for approved persons, available at <http://fsahandbook.

info/FSA/html/handbook/APER>.
27 BIPRU.
28 FSMA 2000, s.6(1) of Sch 1; SUP 1.1.2G.
29 SUP 1.1.3G.

237
 Legal Aspects of Banking Regulation in the UK and USA

the onus is on a firm and its senior management to exercise reasonable care to undertake
regulated activities in accordance with the requirements, which will ultimately need to be
appropriate in terms of cost and benefit. The approach to supervision has changed from
principles based to a judgement-based approach broadly referred to as judging of judge-
ments such as those underpinning a banks strategy or models. This is broadly part of
the Supervisory Enhancement Programme introduced after the shortfalls identified after
Northern Rock problems surfaced.
5.14 In exercising its responsibilities the FSA focuses on the objectives of market confidence,
protection of consumers, and reduction of financial crime.30 In light of the recent financial
crisis an additional objective of contributing to the protection and enhancement of the sta-
bility of the UK financial system is also included.31 While the FSA has not purported to place
these objectives in order of importance, it is fitting that market confidence is first as it cap-
tures a broad range of factors connected with depositor and investor confidence that directly
or indirectly include reference to the other objectives. The first two objectives introduce the
idea of the financial system, which suggests that they are rather more nebulous, whilst the
latter two require regulated firms and persons to take direct responsibility for implementing
measures to protect consumers and reduce the incidence of financial crime. These two objec-
tives focus on the integrity of the UK financial system, and their reach extends territorially
in light of the fact that financial markets are globally integrated.
5.15 The FSA has put in place a risk-based approach to fulfil its responsibilities of regulation and
supervision so that it uses its resources efficiently to mitigate the risks that ensue from the
financial services industry to it achieving its objectives.32 In addition, the FSA has the respon-
sibility of putting in place arrangements to enforce the provisions set out in the FSMA 2000
and the Handbooks.33 The risk-based approach attempts to apportion resources according
to the degree of risk regulated firms pose to it fulfilling its regulatory objectives.34 This
approach to managing regulatory resources attempts to enhance the efficiency and effective-
ness of supervision for both the regulated and regulator because it allows both parties to focus
attention on areas of greatest concern. The action the FSA takes to deal with a risk to its
objectives is based on multiplying impact by probability to determine the priority it needs
to place on dealing with the risk.35 The FSA decides whether to apply its light ARROW or
full ARROW assessment depending on the risk associated with its activities.36 In this calcu-
lation impact refers to the consequence of a risk and probability refers to the likelihood of
it happening. The possible responses the FSA can take are categorized as: monitoring (tools
to monitor risks), diagnostic (tools to identify and measure risk), preventive (tools to miti-
gate risks), or remedial (tools to address identified risks). The FSA response rises upstream in
line with the severity of the risk.

30 FSMA 2000, s 2; SUP 1.1.3G.

31
SUP1 1.1.3G(1A).
32
SUP 1.3.1G.
33 FSMA 2000, s 6(3).
34
FSA (2000) A new regulator for the new millennium, January; FSA (2000) Building the new regulator:
progress report 1, December; FSA (2002) Building the new regulator: progress report 2, February; FSA (2003) The
Firm Risk Assessment Framework, February, this was replaced by FSA (2006) The firm risk assessment frame-
work, August, p 10.
35 Ibid, FSA (2006), at p 10.
36 Ibid at pp 1819.

238
 II. The UK Model of Regulation and Supervision

1. The threshold conditions

The first threshold condition37 is the requirement that the legal status of the entity seeking 5.16
to authorize a person to accept deposits must be either a body corporate or a partnership.
The second condition38 is the requirement that the head office and registered office both be
located in the UK. This enables the FSA to focus its attention on the head office, where
central management and control of the day-to-day activities of the authorized person are
located. The requirement is designed to avoid another BCCI scenario and complies with
the Post-BCCI Directive to adopt this policy within the EU. It was found that BCCI
avoided effective supervision because its centre for management was in London and its
place of incorporation was Luxembourg, which prevented effective supervision of its opera-
tions.39 The third threshold40 incorporates another requirement of the Post-BCCI Directive:
authorized persons must disclose close links with other persons so that the FSA can identify
the location of possible risks to the authorized person. The FSA has the right to seek infor-
mation about any close link it wishes to know about, even in cases where the close link is an
exempted entity. The FSA can individually discuss its requirements of notification about
close links, especially in the case of non-EEA incorporated credit institutions. The close
links materiality will be assessed, as will changes in links within the banking group. The
fourth threshold41 requires that the authorized person has adequate resources on a solo and
consolidated basis to carry on regulated activities continuously. The FSA interprets ade-
quate resources to refer to the quality and quantity of financial resources as well as staff and
systems of control to manage risks emanating from the business and/or its group-wide
activities. The authorized person must, as part of a group, manage risks in connection with
its business continuously. Extensive guidance is provided to supplement these conditions.42
The fifth threshold condition is the suitability of the firm or the group, if it is part of a group,
in terms of being fit and proper to be granted permission by the FSA to carry on regulated
activities.
2. Consolidated supervision
The FSA undertakes consolidated supervision in addition to individual solo supervision of 5.17
banks.43 Consolidated supervision is not deemed a substitute for solo supervision. The FSAs
consolidated supervision of UK-incorporated banks ensures that they comply with the
threshold conditions of adequate resources and suitability for the business they undertake
as a consolidated group.44 The main concern of the supervision regime is to evaluate on a
qualitative and quantitative basis the risks that arise from the activities of the group to which
the bank belongs. Consolidated supervision is not an attempt to regulate all the activities
undertaken by the group, so it is not a substitute for a single risk-based approach: it focuses
on the risks that could affect the interests of the bank. These can emanate from risks to
the group as a whole; over-reliance on the bank to finance other parts of the group through

37
COND 2.1.
38
COND 2.2.
39 Bank of England, United Kingdom Administrative Arrangements for the Implementation of the Close

Links Provision of the Post-BCCI Directive, No S&S/1996/9.

40 COND. 2.3.
41 COND. 2.4.
42 BIPRU 8.
43 BIPRU 8.
44 BIPRU 8.

239
 Legal Aspects of Banking Regulation in the UK and USA

intra-group lending; and the risk to the banks reputation if problems exist in other parts of
the group.
5.18 Consolidated supervision is undertaken on a quantitative and qualitative basis. The qualita-
tive approach could for instance take into consideration the activities of the insurance com-
panies, or investment businesses that do not form part of the UK consolidated group.45 The
quantitative methods focus on those activities that form part of the consolidated capital
resources requirement.46 The requirements to comply with consolidated supervision include
an obligation on the bank to have in place adequate controls to ensure it can generate the
information to fulfil these rules.
3. Large exposures
5.19 The examination of capital adequacy and consolidated supervision also requires an examina-
tion of the FSAs approach to large exposures.47 It allows the regulator to monitor the excessive
concentration of exposure to a single client, or group of connected clients, that could result in
major losses or seriously affect the solvency of a bank. The broad policy reason for the regulation
of large exposures is to prevent a distortion of the competitiveness of banks by controlling the
level at which they expose themselves to particular counterparties. The provisions of the
Directive indicate the importance of laying down specific standards for exposure by a bank. The
large exposure requirements operate in conjunction with solo and consolidated supervision
and capital adequacy requirements for both the banking and trading sides of a business.
5.20 The FSAs approach is to monitor large exposures of banks and banking groups at a solo
and consolidated level in order to gauge the extent to which the portfolio of customers is
as diversified as possible to avoid excessive concentration of risks. The FSA requires a bank
to set out its own policy on large exposures, including exposures to individual customers,
banks, countries, and economic sectors. The bank is required to have appropriate systems
in place to ensure it can monitor its exposures on a daily basis. The FSA provides specific
levels and requirements as to the extent a bank can commit itself to any one kind of counter-
party or group of closely related counterparties: it is required to report to the FSA if it exceeds
the limit of 10 per cent of capital.48 However, there are proposals suggesting either signifi-
cantly restricting or even prohibiting banks from exceeding the large exposure limits.
4. Capital and liquidity requirements
5.21 The area of capital requirements has come under considerable scrutiny in light of the finan-
cial crisis. Generally, UK banks are expected to improve their Tier 1 capital position to 8 per
cent in light of the crisis. The area of capital requirements is still in the process of negotiation
at the international and regional level with the changes forming Basel III.49 A significant part
of the reforms are to require banks to hold more capital in the good times rather than less to
enable them to continue providing finance in the bad times. The implications of these
reforms is far reaching as they will impact on the level of finance in the economy if banks are

45BIPRU 8.5.2G; BIPRU 8.5.4R; BIPRU 8.5.5R.

46
BIPRU 8.7.1G.
47 BIPRU 10.
48 BIPRU 10.5.310.5.5.
49 Group of Governors and Heads of Supervision announces higher global minimum capital standards, 12

September 2010, available at <http://www.bis.org/press/p100912.htm>. See also Basel Committee on Banking

Supervision, Principles for sound liquidity management and supervision, September 2008.

240
 II. The UK Model of Regulation and Supervision

expected to hold more capital which is likely to be the case. It will reverse the pro-cyclical
nature of capital management of the past. The key areas that have had significant attention
paid to them in the proposed reforms are how the banking and trading books are managed,
liquidity, leverage, the treatment of securitization, and the quality with which banks and
regulators have managed their responsibilities relating to internal risk models.
The adequate resources requirement provided in the threshold condition is fleshed out in 5.22
considerable detail in the FSA General Prudential Sourcebook and Prudential Sourcebook for
banks, building societies and investment firms.50 The requirements set out in these Sourcebooks
echo the broad requirements of Basel III. In terms of adequate resources capital requirements
forms a significant part of threshold condition 4.51 The FSA approach to assessing the ade-
quacy of a regulated firms resources is to consider all the activities of the firm and the risks
to which they give rise.52 This is divided in to capital and liquidity. A specific concern when
considering the adequacy of capital and liquidity is the extent to which they are sufficient to
meet its liabilities.53 In order to assess the adequacy of financial recourses the responsibility
is placed on both the individual firm and the regulator. In this relationship the firm is partly
incentivized (internal capital adequacy standards) to undertake this task in a way which is
thorough, objective and prudent,54 to gain the confidence of the FSA, and ultimately allow
it to self-regulate. In light of this the FSA is required to review the firms assessment and give
guidance on what it thinks the level and quality of capital it should hold on a solo as well as
consolidated basis.55
The FSA places an obligation on the firm to have systems in place to be able to calculate the 5.23
risks it is exposed to. These are categorized as credit risk, market risk, liquidity risk, opera-
tional risk, insurance risk, concentration risk, residual risk, securitization risk, business risk,
interest rate risk, pension obligation risk, and group risk.56 In order to gauge the impact of
some these risks firms are required to carry out stress tests and scenario analysis that are capa-
ble of assessing the extent to which they are exposed to these risks and its ability to manage
them.57 These assessments need to be realistic and be able to assess a firms capability under a
range of adverse circumstances of varying nature, severity and duration.58 A significant
amount of attention is paid to these areas and they apply to a very broad range of scenarios
which could include macroeconomic and financial market scenarios.59 In light of the recent
crisis the implications of having to bring back on to the balance sheet special purposes vehi-
cles is a scenario that could be performed.60 The value of the investments held by firms need
to be calculated according to mark-to-market accounting principles.
The FSA requires firms to maintain adequate liquidity resources both in terms of amount 5.24
and quality.61 The traditional perception of a liquidity problem was that it was a relatively

50
GENPRU and BIPRU.
51
COND 2.4.2G 2.
52 GENPRU 1.2.11G.
53
GENPRU 1.2.15G; 1.2.29G.
54
GENPRU 1.2.19G(1).
55 GENPRU 1.2.19G(2); 1.2.57R.
56
GENPRU 1.2.30R(2).
57 GENPRU 1.2.42(R)(1).
58 GENPRU 1.2.42(R)(2).
59 GENPRU 1.2.73BG.
60 GENPRU 1.2.90G.
61 BIPRU 12.

241
 Legal Aspects of Banking Regulation in the UK and USA

short period of a matter of a few days. However, in light of the recent financial crisis the need
for liquidity was shown to be a crucial factor in safeguarding the viability of an institution
particularly if it holds a limited amount of liquidity and it relies on a narrow range of finance.
The firm is required to utilize this to ensure it can manage its liabilities as they fall due. The
liquidity resources need to be available to the firm on a solo level and not simply be located
in another part of the group, and nor should it include emergency liquidity assistance from
a central bank.62 For the purposes of identifying liquidity resources a firm must ensure that
they are marketable or realizable; able to raise funds from those assets; hold a range of assets
with a range of maturities; able to generate unsecured funds. These resources will also need
to be able to do so in a timely manner and it is this which is crucial to deciding the range of
recourses it holds at any one time.63 The liquidity resources held by a firm need to be man-
aged properly, forming part of the corporate decision-making level on a strategic level.
5.25 Managing liquidity risk requires the need to price liquidity risk and intra-day management
of liquidity, but more importantly stress testing and contingency funding as well; the latter
being a principal gap in the previous regime.64 The FSA requires firms to undertake stress
testing for potential problems and reviewed at least once a year in the first instance with the
frequency of them increasing if circumstances such as periods of market volatility require a
stress test to be carried out.65 The FSA requires the stress test to factor in a variety of scenarios
like institution and market stresses with underlying assumptions such as effectiveness of,
inter alia, the correlations between funding markets, diversification of sources of funding,66
liquidity requirements off balance sheet.67 A firm is also required to have a contingency fund-
ing plan to deal with a liquidity crisis which has got the approval of the board of directors.68
The FSA requires a firm to have a contingency plan which forms part of its strategy that is
able to respond as a liquidity crisis escalates in intensity.69 With a number of banks that oper-
ate in the UK that may have some form of government or central bank assistance to support
them a contingency plan needs to factor that in to their assessment of the robustness of their
planning. It also requires the firm to assess its contingency plans in light of the impact of
stressed market conditions on its ability to sell or securitise assets70 which attempts to miti-
gate the problem recently experienced.

III. The US Approach to Bank Supervision

5.26 The US system of prudential regulation and supervision of banking is without doubt a com-
plex structure, it is not centralized in a single regulator but is the responsibility of a number
of separate and independent regulators.

62
BIPRU 12.2.1R(1), (2).
63
BIPRU 12.2.5G.
64 BIPRU 12.4.1R(1).
65
BIPRU 12.4.2R.
66 BIPRU 12.3.39R.
67 BIPRU 12.4.5E.
68 BIPRU 12.4.10R; 12.4.11R.
69 BIPRU 12.4.13R.
70 BIPRU 12.4.4E.

242
 III. The US Approach to Bank Supervision

In the early periods of the financial crisis of 2007 a number of proposals were put forward 5.27
for wholesale reform of the US regulatory system. These proposals were to improve the
effectiveness of the regulatory structure and to simplify the financial regulatory structure
overseeing the US financial system in the post-Gramm-Leach-Bliley Act 1999 world of
large complex financial conglomerates. These proposals took the form of either a twin
peaks model or a single regulator model.71 However, like other periods of financial crisis the
reforms introduced by the Dodd-Frank Act 2010 have not adopted the initial proposals
for wholesale change to the regulatory structure (with the exception of one sacrificial lamb
in this case the scrapping of the Office of Thrift Supervision) but more specific changes
to improve the regulatory, supervisory, and examination of the financial intermediaries
and markets. The Dodd-Frank Act 2010 is very much a multi-faceted piece of legislation
with specific changes to the regulatory system but also an attempt to allow the appropriate
federal banking agencies ( 2(2)); the responsibility to work out how they will adopt some
of the changes. In addition to this, it also initiates a number of studies on regulatory reform,
so there is a considerable amount of work for both regulatory agencies and banks and non-
banks ahead. The Dodd-Frank Act 2010 provides significant and wholesale changes in a host
of other areas, namely the establishment of the Financial Stability Oversight Council, the
Federal Insurance Office, and the Bureau of Consumer Financial Protection. Moreover, the
Dodd-Frank Act also introduces a number changes at the regulatory level in areas such as
liquidation arrangements for bank holding companies and nonbank financial companies
and derivatives and hedge funds. The Dodd-Frank Act does not change the dual banking
system of state and federal charters for depository institutions and indeed the core responsi-
bilities of the FRB and FDIC.72 One purpose of the legislation is to preserve and protect
the dual system of Federal and State-chartered depository institutions.73 In other areas
the Dodd-Frank Act maintains the status quo with the insurance industry for example,
so it remains the responsibility of individual states. It does however, create the Federal
Insurance Office under the umbrella of the Treasury which will be primarily responsible for
monitoring the insurance industry and review regulation of the industry to assess the gaps
which may exist.74

A. The Dual Banking System

The dual banking system consists of two formal methods of chartering commercial banks 5.28
(authorizing them to undertake the business of banking): at the state level and at the federal
level.75 This is a consequence in many respects of the constitutional make-up of the US, based

71
See the Department of the Treasury blueprint for a modernized Financial regulatory structure, March
2008, available at <http://www.ustreas.gov/press/releases/reports/Blueprint.pdf> at 1314 and Jackson,
Howell E. A Pragmatic Approach to the Phased Consolidation of Financial Regulation in the United States
(12 November 2008). Harvard Public Law Working Paper No 0919. Available at SSRN: <http://ssrn.com/
abstract=1300431>.
72
Dodd-Frank Act: Title IIITransfer of Powers to the Comptroller of the Currency, the Corporation, and
the Board of Governors.
73
301(2).
74 502: see amendments 313(a)(c), in particular.
75 For an examination of the dual banking system see OCC (2003) National Banks and the Dual Banking

System, in particular the limited powers of the state to intervene in the supervision of national banks, at p 16;
Schooner, H M (1996) Recent challenges to the persistent dual banking system, Saint Louis University Law
Journal, vol 41, 263, at 267; Butler, H N and Macey, J R (1988) The myth of competition in the dual banking

243
 Legal Aspects of Banking Regulation in the UK and USA

on both a state and a federal system of governance.76 Historically, state-regulated banks issued
their own notes. This was before the federal government intervened to introduce, at a federal
level, a national currency to support its war efforts at the time.77 The Office Comptroller of
Currency (OCC) was placed at the helm of the national currency to manage it.78 The dual
banking system was a by-product of the legislation to introduce the national currency, and put
an end to states issuing their own banknotes. Indeed, the expectation was that state-chartered
banks would abandon their state charter for a federal charter. But the introduction of the new
federal charter did not result in a mass exodus from the state system, even when a subsequent
punitive tax was imposed on state banknotes to force them to change.79 The result was two
formal systems of chartering: the bank regulator in the individual state charters the state banks,
and the OCC charters national banks pursuant to the National Bank Act of 1864.80 But the
dual banking system is not rigidly divided into two partsa state bank could convert its charter
to a national charter and vice versa.81 According to Kenneth Scott, the core of the dual banking
system is the simultaneous existence of different regulatory options that are not alike in terms
of statutory provisions, regulatory implementation and administrative policy.82
5.29 In addition to these two chartering systems, membership of the Federal Reserve and the
Federal Deposit Insurance Corporation (FDIC) also plays a significant role.83 The FDIC and
the FRB have prudential responsibilities to oversee the activities of their members in addition
to the primary regulators.84 National banks are required to be members of the Federal Reserve
and the FDIC.85 There is a separate FDIC application process in order to become an insured
depository institution.86 State member banks have the option to choose to come under the
jurisdiction of the Federal Reserve87 and thus the FDIC. Membership means the banks are
under the umbrella of their chartering authority, as well as the Federal Reserve and the FDIC,
for the purposes of supervision and enforcement to a lesser or greater extent to fulfil their

system, Cornell Law Review, vol 73, 677. For a critique of the some of the limits of the dual banking system, in
particular the utility of state involvement in banking regulation and supervision, see Wilmarth, A E (1990) The
expansion of state bank powers, the federal response, and the case for preserving the dual banking system,
Fordham Law Review, vol 58, 1113, at 123955.
76 Redford, E S (1966) Dual banking: a case study in federalism, Law and Contemporary Problems,

vol 31, 749.

77
The National Currency Act of 1863 and subsequently modernized with the enactment of the National
Bank Act of 1864.
78
12 USC 1.
79
Schooner, H M and Taylor, M (1999) Convergence and competition: The case of bank regulation in
Britain and the United States, Michigan Journal of International Law, vol 20, 595, at 610.
80 OCC (2003) National banks and the dual banking system, in particular the limited powers of the state to

intervene in the supervision of national banks, at p 16.

81
For conversion from national banks to state banks see 12 USC 214(a).
82
Scott, K E (1977) The dual banking system: A model of competition in regulation, Stanford Law Review,
vol 30, 1, at 41, cited in OCC, n 80 above, at p 3; Schooner, H M (1996) Recent challenges to the persistent
dual banking system, Saint Louis University Law Journal, vol 41, 263, at 272.
83
12 USC 1813(d)(e).
84
Banking institutions and their regulators, available at <http://www.ny.frb.org/banking/regrept/BIATR.
pdf>. This matrix provides a simple outline of the primary regulators and membership system in the US system
of regulation and supervision, deposit insurance, and emergency liquidity support provided therein.
85 12 USC 282; Board of Governors of the Federal Reserve System (1994) The Federal Reserve System:

purposes and functions, Washington, DC, available at <http://www.federalreserve.gov/pf/pf.htm>, at p 12.

86 FDIC Forms, Interagency Charter and Federal Deposit Insurance Application, available at <http://www.

fdic.gov/regulations/laws/forms/>.
87 12 USC 321.

244
 III. The US Approach to Bank Supervision

individual responsibilities.88 For example, a national bank will be chartered by the OCC,
which will have responsibility for its prudential supervision; the FDIC will have supervisory
and enforcement responsibility to fulfil its obligations to the deposit insurance fund; and the
Federal Reserve will have responsibility over its access to the discount window and reserve
requirements.

B. The Individual Regulators

The primary regulators have the main responsibility for prudential regulation. The primary 5.30
regulatory bodies are the Federal Reserve,89 the OCC,90 and the FDIC.91 The Office of Thrift
Supervision (OTS) will be abolished as of 19 October 2011 and its various responsibilities
will be transferred to the Board of Governors of the Federal Reserve and the OCC.92
The regulation and supervision of the business of banking has evolved over a considerable 5.31
period of time, most notably through legislative means codified in various places in Title 12
Banks and Banking of the United States Code (USC); this is divided into over 50 chapters,
giving rise to a considerable level of complexity.93 The responsibilities of the FDIC,94 the
OCC,95 and the FRB96 are broadly speaking set out in separate chapters; these make up the
Appropriate Federal Banking Agency.97 In addition, a significant proportion of responsibil-
ity is conferred on the individual federal regulators as administrative bodies separately within
the Code of Federal Regulations (CFR) designating administrative powers.98 The primary
regulators have devised their own styles of regulation, supervision, and enforcement which
is reinforced by the Dodd-Frank Act. It also allows the federal regulatory agencies to inter-
pret the various changes it requires them to adopt as well.
The OCC is responsible for chartering and supervision of national banks. Pursuant to 27 5.32
of 12 USC,99 it is authorized to grant national bank charters and is responsible on an admin-
istrative level, as provided in 12 CFR s 4.2, for overseeing national banks, with powers
to regulate, supervise, and exercise enforcement actions in accordance with federal laws.100
The OCC can appoint examiners to national banks as often as the [OCC] shall deem
necessary,101 and these banks are required to make reports about their condition, regarding
their financial health in terms of assets and liabilities to the OCC.102 The OCC is also respon-
sible for ensuring that national banks operate in a safe and sound manner, which will be

88
See for instance 12 USC 325326.
89 See <http://www.federalreserve.gov/>.
90 See <http://www.occ.treas.gov/>.
91
See <http://www.fdic.gov/>.
92
312, 313.
93
For a historical account of the evolution of bank regulation at both state and federal level see Davis, A K
(1966) Banking regulation today: A bankers view, Law and Contemporary Problems, vol 31, 639.
94 12 USC, Chapter 16.
95
12 USC, Chapter 1.
96
12 USC, Chapter 3.
97 Until 19 October 2011, Appropriate Federal Banking Agency will also include the OTS. 12 USC

1813(q)(1)(4).
98 12 CFR.
99 12 USC 27.
100 12 CFR 4.2.
101 12 USC 481.
102 12 USC 161.

245
 Legal Aspects of Banking Regulation in the UK and USA

explored further on in this chapter. But it must be mindful that it achieves its other regula-
tory goals, which are to promote competitiveness for national banks and improve efficiency
of examinations and supervision, including reducing supervisory burden.103 It will also pur-
suant to 312(b)(2)(B)(i)(I) take on responsibility for the regulation, supervision, and
examination of federal savings associations that were previously under the jurisdiction of the
OTS.104 It is also required to designate a Deputy Comptroller who will have responsibility
for the supervision and examination of federal savings associations.105
5.33 The Federal Reserve is at the helm of the banking system in its capacity as central bank to manage
monetary stability106 and with a mandate for financial stability. It acts as a central source of liquidity
and a single-note issuer.107 The Federal Reserve puts emphasis on combining its responsibilities for
monetary policy and bank supervision to gauge the prudential stability of the banking system.108
The Dodd-Frank Act introduces changes to the way its credit lines can be sought by non-banks.109
It seeks to limit such support to rescue the financial system rather than being any individual institu-
tion. Moreover, the decision to lend will, inter alia, require the Federal Reserve to consider whether
the security for emergency loans is sufficient to protect taxpayers from losses110 and the facility is
terminated in a timely and orderly fashion.111 If support is going to be provided then the indi-
vidual institution needs to be experiencing liquidity rather an insolvency problem. In this case
insolvency is determined by whether the individual institution has sought bankruptcy protec-
tion.112 This restricts the ability of the Federal Reserve to lend to institutions that are in distress by
providing the support to the financial system it is essentially sending out a message that it is not
willing to rescue individual institutions unless they pose a threat to the financial system. Liquidity
to the financial system means it is primarily attempting to mitigate the impact on it rather than
rescue an individual institution. The vexed issue of when a liquidity crisis is a systemic liquidity
crisis so to speak that warrants action by the authorities, is also given specific attention in the Dodd-
Frank Act. The Federal Reserve is required to undertake consultation with the Treasury and FDIC
to determine whether a liquidity event exists that warrants use of the guarantee program.113 In
order to arrive at this an evaluation of the evidence is required that such an event exists and failure
to take action would have serious adverse effects on financial stability or economic conditions in
the United States; and action is needed to avoid or mitigate potential adverse effects.114
5.34 The Federal Reserve has specific responsibility for supervising financial holding companies,
bank holding companies, state chartered banks, and foreign bank operations.115 The Federal

103
OCC (1996) Bank Supervision Process, p 1; OCC, Comptroller of the Currency Administrator of
National Banks (2005) A Guide to the National Banking System, Washington, DC, April, p 3.
104 Until 19 October 2011, Appropriate Federal Banking Agency will also include the OTS.
105 Revised Statutes of the United States, 327B. Deputy Comptroller for the Supervision and Examination

of Federal Savings Associations.

106
Federal Reserve Act of 1913; Board of Governors of the Federal Reserve System (1944); The Federal Reserve
System: Purposes and Functions, Washington, DC, available at <http://www.federalreserve.gov/pf/pf.htm>, p 13.
107
Ibid.
108 Board of Governors of the Federal Reserve System, n 106 above, at p 72.
109
1101. Federal Reserve Act Amendments on Emergency Lending Authority.
110
1101((a)6)).
111 1101(a)(6).
112
1101(a)(6).
113 1104(a)(1).
114 1104(a)(2)(A)(B).
115 Board of Governors of the Federal Reserve System, n 106 above, Chapter 5, Supervision and Regulation.

For bank holding companies see Bank Holding Company Act of 1956 as amended 12 USC 1841 et seq;
foreign banks, International Banking Act 1978 as amended 12 USC 3101, et seq.

246
 III. The US Approach to Bank Supervision

Reserve will also take over responsibility from the OTS for the supervision and rule-making
powers for savings and loans holding companies and their subsidiary.116 The oversight the
Federal Reserve exercises over the respective holding companies is deemed necessary for the
purposes of gauging the groups safety and soundness. This gives rise to a necessity to cooper-
ate and seek relevant information from the other primary regulators rather than making
duplicate examinations of a bank and its subsidiaries.117
The FDIC was established in 1933 after the huge spate of bank failures in the 1920s and 5.35
1930s.118 It was set up to insure the deposits of all banks and savings associations.119 FDIC
membership gives rise to a further layer of prudential supervision for the purpose of safe-
guarding the deposit insurance fund.120 The FDIC is the primary federal regulator and
supervisor of state-chartered banks that have decided not to become members of the Federal
Reserve system, which are categorized as non-member banks.121 Furthermore, with the abo-
lition of the OTS the FDIC will also take responsibility for state savings associations.122 Its
most important function is the administration of the deposit insurance fund. The level of
protection afforded to depositors has been increased by the Dodd-Frank Act from $100,000
to $250,000 to an individual depositor.123 The basis of calculating the deposit insurance
premium will be changed as wellbased on consolidated total assets rather than deposit
liabilities. This move will mean the large complex institutions will contribute more towards
deposit insurance than the less risky ones.124 This will coincide with the reforms to the FDIC
minimum reserve which will increase to 1.35, by 30 September 2020.125
The Federal Financial Institutions Examination Council (FFIEC) was set up in 1979 to assist the 5.36
federal bank regulators to enhance the level of uniformity and consistency in their supervisory and
examination practices.126 The move towards creating a single body to coordinate and enhance
consistency between the regulators should not come as a surprise: it is designed to reduce the
potential inconsistency that might arise from the fact that a number of regulators have overlap-
ping responsibilities to oversee the activities of federally regulated banks. In addition to enhancing
the level of consistency, another concern is to reduce unnecessary regulatory burdens that might
arise as a result of federal regulators actions. The FFEIC periodically publishes interagency notices
on, for example, the importance of notifying and coordinating information about possible
enforcement decisions taken by a federal regulator with other regulators.127
The Dodd-Frank Act will mean a new level of coordination will be required by FFEIC on a 5.37
federal bank agency level to ensure consistency in the way federal bank agencies apply the

116 312(b)(1)(A).
117 For example, FRB (2000) Framework for Financial Holding Company Supervision, Supervisory Letter
SR 00-13, 15 August.
118
Banking Act of 1933, Public Law 73-66.
119
12 USC 1811(a).
120
12 USC 1811 et seq.
121 12 USC 1815.
122
312(b)(2)(c).
123
335(a).
124 331(b) Deposit Insurance Reforms.
125
334(d).
126 12 USC 33013308, in particular 3305; for information about the Federal Financial Institutions

Examination Council see <http://www.ffiec.gov/>.

127 FFIEC (1997) Interagency coordination of formal corrective action by the Federal Bank regulatory

agencies, revised policy statement, February, available at <http://www.fdic.gov/regulations/laws/federal/

rpsi.pdf>.

247
 Legal Aspects of Banking Regulation in the UK and USA

new reforms. Moreover, it could also be equally called in to doubt whether it can sustain its
current form given it is made up of federal bank agencies and does not include either securi-
ties or insurance regulators. The Dodd-Frank Act seems to better reflect the need for better
coordination and consistency of treatment of banks and non-bank activities that undertake
similar financial activities and so mitigates this with a host of new measures.
5.38 The Bureau of Consumer Financial Protection (BCFP) is a new body on the federal level to
regulate consumer financial products and services.128 The BCFP will form a part of the Federal
Reserve rather than an independent body and so will be classed as an Executive agency rather
than a federal agency. The necessity for such an organization culminates primarily from the
systemic failures to curb the mis-selling of mortgages that formed part of the catalyst for the
financial crisis. The BCFP will have regulatory, supervisory, and enforcement authority over
those that provide financial products and services despite oversight of such banks and non-
banks by the primary regulator. In order to execute its role effectively the BCFP will have the
authority to request information and examination reports provided there are assurances about
its confidentiality.129 The introduction of the BCFP will mean that the federal agencies will lose
a proportion of their responsibilities to the new agency with the mandate to enforce federal
consumer financial law. More specifically the Dodd-Frank legislation significantly curtails the
ability of national banks and their respective regulators to exercise the pre-emption rights.
1. The Gramm-Leach-Bliley Act of 1999
5.39 The move towards the dismantlement of barriers between banks, securities firms, and insur-
ance businesses formally came about with the enactment of the Gramm-Leach-Bliley Act of
1999 (GLB).130 The Acts remit is not to provide for a wholesale change to the regulatory
structure for the dismantled financial services industry, but to take away the barriers that had
prevented financial conglomeration between banks, securities, and insurance firms.131 The
objective of the 1999 Act is to encourage the growth of financial conglomeration to enhance
the efficiency of the financial system in the US. However, it does not allow the co-mingling
of investment and commercial banking under the same roof, as seen in a universal bank
model. The legislation in that respect is not a complete overhaul of the previous system, but
only provides incremental change. It retains in part a functional system of regulation where
financial businesses are overseen by their respective bodies: the Securities Exchange
Commission, the State Insurance Commissioner, and the state or federal regulators will
respectively regulate the securities, insurance, and bank businesses.132 But at the helm of this
system is the Federal Reserve, with the responsibility of being lead regulator to the financial
system as a whole by acting as the consolidated supervisor of financial holding companies
(FHCs). In particular the Federal Reserve is to act as the umbrella supervisor for financial
holding companies, and the State insurance regulators for the purposes of coordinating
supervision of FHCs that have bank and insurance company subsidiaries.133

128 1011(a).
129 1022(c)(6)(B)(i).
130 Public Law 106-102, Gramm-Leach-Bliley Act of 1999: To enhance competition in the financial serv-

ices industry by providing a prudential framework for the affiliation of banks, securities firms, insurance com-
panies and other financial service providers, and for other purposes.
131 Ibid, 101, 103, and 104.
132 See Titles II and III n 131 above. For a critical analysis of functional regulation of a financial services

industry where barriers are closely eroding away giving rise to financial conglomeration see, Schooner, H M
(1998) Regulating risk not function, University of Cincinnati Law Review, vol 66, 441.
133 Public Law 106-102, 307.

248
 III. The US Approach to Bank Supervision

The 1999 Act extends a bank holding companys scope by giving it the right to form an FHC134 5.40
which can engage in activities of a financial nature or incidental to such activities or inciden-
tal to a financial activity135 provided it does not pose a substantial risk to the safety and sound-
ness of depository institutions. The FRB in consultation with the US Treasury is empowered
to decide what activities are financial in nature or may be complementary to financial activi-
ties.136 The provision and the long list of activities included indicate that the idea of financial
in nature is interpreted broadly.137 The restrictions on banks affiliation with commercial busi-
nesses have been relaxed somewhat: FHCs can in certain circumstances hold shares in com-
mercial companies for a limited period, after which they need to be divested.138 The significant
premise for the decision to extend the scope of activities in which an FHC can engage is the
safety and soundness of the deposit-taking institution.139
The Federal Reserve is conferred formal oversight of both bank holding companies (BHCs) 5.41
and FHCs for the purposes of consolidated supervision. The respective functional regulators
are required to provide examination reports to the Federal Reserve.140 It can on the findings
of these reports or its own examination of the holding companies and their subsidiaries, take
the necessary action to deal with their activities if they pose, inter alia, an adverse risk to the
deposit-taking institution or the deposit insurance fund. The Dodd-Frank Act requires
BHCs if they have consolidated assets of $50 billion or greater to be under a programme of
enhanced supervision and more stringent prudential standards to reduce the risks they give
to the stability of the financial system.141

C. Financial Stability Oversight Council

The financial crisis highlighted the need to oversee macro prudential and micro prudential 5.42
matters so as to reduce systemic risks in the financial system. This is by any stretch of the imagi-
nation a significant task so that financial intermediaries and markets are regulated more effec-
tively and consistently, to avoid gaps in the regulation of the whole financial system which
could materialize in possible systemic risks. The primary objective of the Financial Stability
Oversight Council (FSOC) is to undertake this huge task.142 The FSOC is made up of regula-
tors responsible for the financial system.143 The FSOC has three primary purposes namely: to
identify risks to the US financial system from both within the system or outside for the
purposes of financial stability by assessing risks that could arise from individual institutions
or the activities of large interconnected banks or non-bank activities;144 to re-establish the

134 It amends the Bank Holding Company Act 1956, 4; Public Law 106-102, 102.
135 Public Law 106-102, 103 (s 4(k)(1)(A) and (B)).
136 Ibid, 103 (s 4(k)(1)(2)).
137 Ibid, 103 (s 4(k)(4)).
138 Ibid, 103 (s 4 (n)).
139 In some instances a firewall is also allowed to be put in place; see Public Law 106-102, 46, Safety and

Soundness Firewalls for State Banks with Financial Subsidiaries for insured state banks. In addition, to curb the
risks associated with the title of too big to fail for some financial holding companies the Federal Reserve and
the Treasury are required to conduct a study into the feasibility of financial holding companies holding a por-
tion of their capital in the form of subordinated debt to enhance the discipline within such groups by such credi-
tors: Public Law 106-102, 108.
140 Public Law 106-102, 111.
141 165.
142 111. Financial Stability Oversight Council Established.
143 111(1)(A)(J).
144 112(1)(A).

249
 Legal Aspects of Banking Regulation in the UK and USA

constructive ambiguity associated with the expectation counterparties have that the govern-
ment will bail banks or non-banks out of trouble;145 and respond to emerging threats to the
financial stability of the financial system.146 In order to achieve its purpose it will be able to
obtain information and monitor the financial markets both domestically and internationally
in order to determine possible threats to the financial stability of the US financial system. It has
the power to make recommendations to the member agencies for the purposes of following up
on its findings. More importantly it has the power to make recommendations to intensify the
supervision undertaken by the primary federal agencies which includes, inter alia, the federal
banking agencies, the Securities and Exchange Commission, the Commodity Futures Trading
Commission, State Insurance Authority, and the Federal Housing Agency.147 In exceptional
circumstances the FSOC may determine a non-bank financial company poses a threat to the
financial stability of the US and in such circumstances it could decide that the institution
should be supervised by the Federal Reserve.148 In order to decide whether to transfer a non-
bank financial firm to the Federal Reserve the FSOC should take in to account: its leverage, off
balance sheet exposure, and interconnectedness, among other factors.149 These primarily deter-
mine whether the non-banking financial firm is too-big-to-fail or too-interconnected-to-fail
and so requires supervision by the Federal Reserve. Moreover, the FSOC has the authority to
make recommendations to the Federal Reserve regarding how it exercised authority to require
that a non-bank financial company or bank holding company report a plan for its rapid and
orderly resolution in the event of material financial distress or failure.150
5.43 The decision in respect of non-bank financial institutions is open to judicial review to deter-
mine whether the decision is arbitrary and capricious.151 The fact that it has such a broad
mandate does mean it could potentially be a very influential player for both banks and non-
bank activities to mitigate the risks of another systemic crisis, especially with its ability to
influence the intensity of supervision. This will be primarily determined by its ability to
develop an independent view point on matters that can withstand the view points of the
primary regulators and the Federal Reserve during the consultation period. Moreover, any
measures it does recommend will need to be gauged against international efforts as well.

IV. The US Regulation of the Business of Banks and Safe

and Sound Requirements
5.44 The business of banking in the US is primarily interpreted in the light of statute and common
law, giving rise to a broad interpretation of its definition. The business of banking articu-
lated in the National Bank Acts of 18635 identified some specific bank activities such as
acceptance of deposits and note issuance, but with the added proviso powers . . . necessary

145
112(1)(B).
146 112(1)(C).
147
2(12).
148 113(a)(1). There is also power to transfer supervision of a foreign non-bank financial company to the

Federal Reserve, see 113(b).

149 113(a)(2).
150 115(d)(1).
151 113(e)(5)(h).

250
 IV. The US Regulation of the Business of Banks and Safe and Sound Requirements

to carry on the business of banking.152 In common law the traditional business of banks,
while considering receiving deposits to be an indispensable153 and unique154 part of bank-
ing, includes other business that has come to be associated with banking, namely discount
bills and loan money on mortgage.155 The pursuit of either one was considered sufficient
for an institution to be deemed to be undertaking banking business.156
The statutory definition of banking at a federal level therefore focuses on accepting deposits, 5.45
but refers to a whole host of activities such as discounting and negotiating promissory notes
and buying and selling exchange. It consequently provides a broad activity-oriented defini-
tion that refers to all such incidental powers as shall be necessary to carry on the business of
banking.157 This provides scope to include activities that may or may not be in the tradi-
tional domain of banking business but over time are considered appropriate for banks to
pursue under this umbrella.158 The expansion of activities, according to Bernard Shull,
reflects a culmination of almost 20 years of debate regarding permissible activities of bank-
ing firms.159 For example, the OCC encourages national banks to undertake other financial
services to meet the various needs of their customers provided this does not undermine the
safety and soundness of the chartered bank.160 This has led to the inclusion by the OCC of a
whole host of financial services, post-GLB, that banks can pursue, categorized as general
banking activities, fiduciary activities, insurance and annuities activities, securities activities,
and technology and electronic activities.161
The recent financial crisis has brought to the fore the issue as to what banks should be able to 5.46
pursue in addition to the more traditional forms of banking activities, once again reigniting
the debate surrounding the separation of securities business and commercial banking. The
key culprit of the crisis is viewed to be the deregulation and dismantlement of the Glass
Steagall provisions separating commercial banking from various forms of securities business,
with the enactment of the GLB. This is epitomized by the recommendation by Paul Volcker,
former Chairman of the Federal Reserve, for a separation to be put in place once again so
there is a separation between commercial banking and what has been referred to as casino
banking. However, the culprit is different from the one thought of in 1933 the modern one
is considered to be proprietary trading.
The Dodd-Frank Act sets out a number of reforms to the regulation of banks and saving 5.47
associations. These focus on a range of matters namely improving the way regulators cooper-
ate with one another to the way examinations are conducted and decisions surrounding
enforcement matters. However, it is the prohibition on banking entities from engaging in

152
12 USC 24 (seventh). For a historical exposition of US banking see US v Philadelphia National Bank
et al, 374 US 321; 83 S Ct (1963)see footnote 5 where a list of principal banking products is provided.
153
Texas & Pacific Railway Co v Pottorff, Receiver No 128 291 US 245; 54 S Ct 416; 78 L Ed 777; 1934 US
959, p 4.
154 US v Philadelphia National Bank, n 152 above, at p 44.
155
Outlon v Savings Institution, 84 US 109; 21 L Ed 618 (1873) Lexis 1318; 17 Wall, 109, p 620.
156
Ibid.
157 12 USC 24 (seventh).
158
See for example Nations Bank v Variable Annuity Life Insurance Co, 513 US 251 (1995).
159 Shull, B (2000) Financial modernization legislation in the United States: Background and implications,

UNCTAD Discussion Paper No 151, UNCTAD/OSG/DP/151, at p 8.

160 OCC (2005) A guide to the national banking system, p 13. See also OCC (2005) Activities Permissible for

a national bank.
161 Ibid.

251
 Legal Aspects of Banking Regulation in the UK and USA

proprietary trading and acquiring or retaining any equity, partnership, or other ownership
interest in or sponsoring a hedge fund or a private equity fund.162 The prohibition primarily
applies to depository institutions. The scope of the rules applies to banks domestic and
international operations so the impact is far reaching. The Dodd-Frank Act requires the
federal bank agencies, the SEC, and CFTC to consult with one another to ensure a level of
consistency in the application of the prohibition across the various sectors of the financial
system. The prohibition is by no means a carte blanche ban; it does not apply to whole host
of trading activities such as underwriting or market making activities.163 Moreover, the pro-
hibition does not extend to the sale or securitization of loans. However, banks will be required
to maintain 5 per cent of the credit risk associated with these instruments.

A. Safety and Soundness

5.48 The Dodd-Frank Act introduces a vast number of reforms to primarily improve the safety
and soundness of depository institutions, bank holding companies, and non-bank financial
companies classed as a potential threat to US financial stability.
5.49 Safety and soundness is a central tenet of US banking regulation, supervision, and enforce-
ment. The provision was first incorporated in US bank regulation with the enactment of the
Banking Act of 1933 to act as a benchmark to deal with bank mismanagement.164 In accord-
ance with USCA 1831 p-1, federal agencies have in place measures to fulfil the standard of
safety and soundness. The federal agencies can require banks that do not meet the standard
of safety and soundness to correct the deficiencies identified by them. In exceptional cir-
cumstances a lack of compliance with the safety and soundness provision can give rise to a
variety of enforcement sanctions exercised by the federal agencies.165 The provision is fre-
quently referred to but rarely defined in the statutes, thus reliance is placed on the intent of
Congress, the judiciary, and the regulators to provide some clarity as to its meaning.
5.50 The principle of safety and soundness is purposefully left in an ambiguous state in the statute
books in light of the fact that it needs to evolve with the changing expectations of those at the
helm of managing banks and their risks. To assist with its evolving nature, particular respon-
sibility for its scope has traditionally been left to the regulators to articulate acts and omis-
sions considered to threaten the safety and soundness of those institutions they charter or
confer membership upon. The statutes have occasionally assisted in clarifying the scope of
safety and soundness by prescribing certain acts or omissions considered to be associated
with it. But the reason for its first appearance on the statute books seems to be rather unclear.
The early rationale of the principle was to enable regulators to remove bank directors who
failed to comply with their warnings to avoid unsafe and unsound practices. As Holzman
explains, the principle was a tool conferred on regulators by Congress to ensure their deci-
sions and warnings were acted upon with the appropriate level of care and attention.166

162
619.
163 619 amending by adding 13(d)(1)(B)(J).
164
Banking Act of 1933, 30.
165 For a critical look at the way regulators examine banks in accordance with the safety and soundness

standard see GAO (1993) Bank examination quality. FRB examinations and inspections do not fully assess
bank safety and soundness, Report to Congressional Committees, GAO/AFMD-93-13, February.
166 Holzman, T L (2000) Unsafe or unsound practices: Is the current judicial interpretation of the term

unsafe and unsound?, Annual Review of Banking Law, vol 19, 428.

252
 IV. The US Regulation of the Business of Banks and Safe and Sound Requirements

Indeed, the subsequent use of the principle to protect the deposit insurance fund adds fur-
ther weight to the authority of regulators, with the power to withdraw a bank from the insur-
ance scheme if it failed to comply with their directions. According to Schooner, for instance,
the safety and soundness standard is a mechanism to guard against the threat of bank
insolvency.167 In addition to it being a term used to direct bank behaviour, the principle of
safety and soundness is considered a mechanism to reduce regulatory forbearance by having
in place provisions that assist in articulating what is considered to be under the umbrella of
safety and soundness and triggers to initiate regulatory intervention, as with the provisions
regarding prompt corrective action. According to Baxter, safety and soundness has been a
principal concern driving a cradle to the grave regime of tight regulation that has under-
pinned both federal and state bank regulation.168
The principle of safety and soundness has not been formally defined in the statutes, as men- 5.51
tioned above, but it has spawned a considerable level of judicial attention as to its scope and
meaning.169 This attention has tended to rely on the interpretation provided by John Horne
in his written memorandum during the debate on the Financial Institutions Supervisory Act
1966.170 This memorandum is cited in a number of cases by various academics as a generic
interpretation of safety and soundness. It refers to the lack of clarity over terms such as fraud
and negligence as necessary in order to capture the evolving nature of banking business. But
more specifically Horne states that an unsafe or unsound practice embraces any action, or
lack of action . . . the possible consequences of which, if continued, would be abnormal risk
or loss or damage to an institution.171

B. Capital and Liquidity Requirements

The financial crisis highlighted the immediate limits of capital and liquidity requirements to 5.52
cushion against potential losses their business activities may give rise to. The reforms referred
to as the Collins Amendment were initiated by the FDIC and will be introduced in phases
by the individual regulators. The reforms introduced by the Dodd-Frank Act will apply to
insured deposit-taking institutions as well as banking holding companies and those non-
bank financial companies classed as systemically significant. A transition period is built in to
the process of adopting these requirements to give time to implement them and to coincide
as well with the continuing dialogue surrounding Basel III at the international level. However
the Collins Amendment prevents the federal agencies from deviating from the minimum set
by it when the time to adopt Basel III arrives.
The Collins Amendment introduces minimum leverage requirements and risk-based capital 5.53
requirements for insured depository institutions, bank holding companies, and significant

167
Schooner, H M (1995) Fiduciary duties demanding cousin: Bank director liability for unsafe or
unsound banking practices, George Washington Law Review, vol 63, 190.
168 Baxter, L G (1993) The rule of too much law? The new safety/soundness rulemaking: Responsibilities of

the federal banking agencies, Consumer Finance Law Quarterly Report, vol 47, 211.
169 For a jurisprudential analysis of safety and soundness and the policy implications of the various interpre-

tations see Holzman, n 166 above.

170 Horne, J (1996) Memorandum submitted to the Chairman of the Senate Committee on Banking and

Currency, 112 Congress, Record 26.

171 Ibid, at p 474.

253
 Legal Aspects of Banking Regulation in the UK and USA

non-bank financial companies. The Amendment means that the capital requirements applied
to depository institutions will also apply to the bank holding company. These amendments
will eventually mean the leverage requirements and risk-based capital requirements will need
to be designed to take in to account the various activities undertaken by the above institu-
tions. The minimum risk-based capital ratio is tier 1 capital of 6 per cent total capital ratio of
10 per cent and the minimum leverage ratio of 5 per cent, to be judged as well capitalized.
The leverage ratio will attempt to curb the level of exposure recently seen during this period
of crisis.
5.54 A significant component of the wider capital requirements reform has been the focus on
funding and liquidity risk management.172 These elements of prudential supervision are
crucial as they equally give rise to insolvency problems. However, in this case the speed with
which banks could find themselves in such a position needs managing better which is what
the Notice intends to achieve. The Notice highlights the importance of depository institu-
tions managing liquidity risk in a way that is commensurate with the institutions complex-
ity, risk profile and scope of operations.173 It defines liquidity as a financial institutions
capacity to meet its cash and collateral obligations at a reasonable cost. Maintaining an ade-
quate level of liquidity depends on the institutions ability to efficiently meet both expected
and unexpected cash flow and collateral needs without adversely affecting either daily opera-
tions or the financial condition of the institution.174 The Notice sets out the context to miti-
gate liquidity risk by referring to effective corporate governance to manage liquidity risk as
part of its corporate strategy and the need to assess the extent to which it can access funds
from other sources. In the latter case there is a need to assess this on a short, medium, and
long-term basis as sources of funds can change over time. In light of this an unencumbered
set of liquid assets to act as a cushion and contingency funding plans for an emergency
liquidity event are required.175 In the latter case the banks will be expected to undertake stress
testing to gauge the impact and the way it could cope with it in terms of its liquidity needs
and the likelihood of other sources being able. Overall the Notice recommends that an
independent party regularly reviews and evaluates the various components of the institu-
tions liquidity risk management process.176 These measures are a welcome addition as they
reinforce the need for more intensive oversight of liquidity in an area which had been
neglected in comparison to efforts to improve capital requirements.

C. The Directors Duties

5.55 The federal regulators articulate the practical responsibilities and duties of directors to
ensure compliance with their fiduciary duties. The board of directors of a national or state
member bank is required to have at least five and no more than 25 members to be properly
constituted.177 A bank director has the responsibility of both directing the bank strategically
in its affairs and overseeing its management as they undertake their work. Indeed, the

172
Interagency Policy Statement on Funding and Liquidity Risk Management, 17 March 2010.
173 Ibid, p 1.
174 Ibid, p 2.
175 Ibid, p 10.
176 Ibid, p 14.
177 Banking Act of 1933, 31.

254
 IV. The US Regulation of the Business of Banks and Safe and Sound Requirements

FDIC, for example, contends that the board of directors is the source of all authority
and responsibility.178 It is the boards responsibility to appoint and remove executive officers
and managers, and hence it is the boards responsibility to ensure that appointees are suitable
for their positions. Therefore, boards of directors have the ultimate responsibility to ensure
the banks safety and soundness. In the execution of these responsibilities the directors are
required to exercise diligence and loyalty towards the banks interests. In order to ascertain
whether a director has exercised diligence a number of factors have been noted as being
significant: attending meetings, reviewing information about the banks activities, acting
with independent judgement, and reviewing audit and supervisory reports. These factors
evidence the extent to which a director is actively participating within the decision-making
process, and in particular the level of scrutiny a diligent director would show.179

D. The Common Law Standard

The US Supreme Court articulated the broad federal common law duty of care owed by bank 5.56
directors in its decision in Briggs v Spaulding.180 In this case Spaulding and others were direc-
tors of the First National Bank of Buffalo, which was placed into receivership after having
sustained considerable losses through mismanagement and alleged failure to supervise the
banks activities appropriately. However, it was held that the directors, namely Spaulding,
were not liable in negligence for not discovering the losses or preventing their occurrence.181
The case articulated a standard of care based on what an ordinary prudent and diligent man
would exercise under similar circumstances. The decision highlights that the question of
negligence is relative, therefore each case needs to be assessed on its own facts.182 The decision
by the court recognized the balance that needs to be struck between an over-stringent stand-
ard of care and putting inappropriate individuals off from acting as directors of banks. In the
decision of Washington Bancorporation183 the court contended that the simple negligence
standard should apply in specific circumstances, whereas the gross negligence standard
should apply to more routine transactions and actions.184 Indeed, the court also contended
that the standard of care applied in Briggs equated more with a gross negligence standard of
care than a simple negligence test.185 According to Stevens and Neilson, in most cases courts
have found directors liable only when there is evidence of a gross dereliction of duty, whether
that is evidenced by, inter alia, fraud or a conflict of interest.186

178
FDIC Manual of Examination Policies, Management/Administration II, Directors, available at <http://
www.fdic.gov/regulations/safety/manual/Section4-1.html>; FRB Commercial Bank Examination Manual,
Section 5000.1, at p 1; see also Rankin v Cooper et al, 149 F 1010; (1907) US App (Circuit Arkansas).
179 OCC (1997) The Role of a National Bank Director: The Directors Book, at pp 6976.
180
Briggs v Spaulding, 141 US 132 (1891).
181
Ibid, at p 163.
182 Ibid, at p 152.
183
Washington Bancorporation v Wafic R Said, 812 F Supp 1256 (1993).
184 Ibid, at p 1266.
185 Ibid.
186 Stevens, R W and Nielson, B H (1994) The standard of care for directors and officers of federally char-

tered depository institutions: Its gross negligence regardless of whether section 1821 (K) preempts federal
common law, Annual Review of Banking Law, vol 16, 169, at 186.

255
 Legal Aspects of Banking Regulation in the UK and USA

E. The Statutory Position

5.57 The liability of bank directors became a particularly prominent issue in the 1980s with the huge
number of bank and thrift failures. The savings and loans failures led to the introduction of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).187 The
FIRREA gives the bank regulators new powers to disapprove of individuals who seek appoint-
ment at a director and senior management level on the basis that they do not have the appropriate
background, qualifications, experience, and integrity.188 Section 212(a) incorporates 1812(k)
of the FDIA, which confers a federal statutory standard of care on bank directors and officers.
Section 1812(k) enunciates a gross negligence standard as the minimum degree of negligence that
needs to be evident before directors and officers of a federally insured depository bank can be held
liable for personal damages.189 The main point of contention with the introduction of the stand-
ardized approach in the FIRREA is the position regarding the standard of care prescribed by
federal common law and standards espoused by individual states. Section 1812(k) provides a
gross negligence ceiling on the matter of the standard of care expected of directors; thus it prevents
states from exceeding that with the adoption of standards equivalent to wilful neglect.
5.58 This point was articulated in the Supreme Court decision of Atherton v FDIC.190 In this case
City Federal Savings Bank was placed into receivership by the Resolution Trust Corporation
(RTC), which brought an action against its officers and directors due to various bad loans the
bank had made. The court examined the interrelationship of federal and state banking law
to determine the scope of 1812(k) and the applicable standard of care. It held that
1812(k) provides the minimum level of liability of gross negligence when a state has
adopted a more restrictive duty of care. It also held that 1812(k) does not prevent states
from adopting a higher standard of care equivalent to simple negligence. The rationale of the
decision was to prevent states adopting a restrictive liability standard by placing a floor on
what could be applied to federally chartered banks.191
5.59 The Dodd-Frank Act maintains the existing scope for personal liability of directors and
officers.192 The corporation with its powers for an orderly liquidation can pursue for mone-
tary damages in a civil action in its capacity as receiver.193 The action in civil law would cover
actions for gross negligence as well as intentional tortious conduct as defined by state law.194

187
Public Law 101-73: Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (To reform,
recapitalize, and consolidate the federal deposit insurance system, to enhance the regulatory and enforcement
powers of Federal financial institutions regulatory agencies, and for other purposes).
188 FIRREA 914. Agency disapproval of directors and senior executive officers of insured financial institu-

tions or financial institution holding companies, see specifically 12 USC 1831i(e).

189
Shepherd, J (1992) The liability of officers and directors under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, Michigan Law Review, vol 90, 1119; Lowry, P A (1997) The director
liability provision of the Financial Institutions Reform, Recovery and Enforcement Act: What does it do?,
Annual Review of Banking Law, vol 16, 355; Stevens, R W and Nielson, B H (1994) The standard of care for
directors and officers of federally chartered depository institutions: Its gross negligence regardless of whether
section 1821 (K) pre-empts federal common law, Annual Review of Banking Law, vol 16, 169.
190 J W Atherton v FDIC, 519 US 213 (1997); see also Plotkin, W (1999) V. Director and officer liability,

Annual Review of Banking Law, vol 18, 46.

191 Atherton, ibid, at pp 2289.
192 Orderly Liquidation Authority 210 Powers and Duties of the Corporation (f ) Liability of Directors

and Officers.
193 210(f )(1)(A)(C).
194 210.

256
 IV. The US Regulation of the Business of Banks and Safe and Sound Requirements

The Dodd-Frank Act is silent on cases where a higher standard of care is required to be dis-
charged by directors and officers, adopted in a state as explored as above. What is clear is the
minima continues to be gross negligence as a floor.

F. Other Enforcement Actions

The federal banking regulators have a number of enforcement options, embracing infor- 5.60
mal195 and formal powers.196 These can be subdivided into enforcement actions that are
publicized197 and those that are not.198
Informal actions are used in instances where the act or omission of the bank warrants a less 5.61
severe sanction: commitments, board resolutions, and memoranda of understanding.
Nevertheless they can vary in their severity depending on, for example, the nature, extent,
and severity of the banks problems and weaknesses and the extent to which the regulator is
confident that the bank can rectify the issues.199 While the respective regulators can initiate
these informal sanctions, they are deemed voluntary arrangements with no formal compul-
sion. However, Jackson and Symons point out that not complying with an informal action
would lead to formal supervisory action, as it suggests a lack of commitment on the part of
the bank to deal with issues as they arise.200 A bank board resolution (BBR) is a resolution
adopted by the board of directors to implement reforms initiated by the respective regula-
tor.201 A commitment is a request by the regulators to resolve small issues at the bank.202 A
memorandum of understanding (MoU) builds on the former resolution of an action plan to
rectify a number of minor problems at the institution.203
The approach changes with formal enforcement actions, which are publicized.204 These are 5.62
used where serious problems exist which affect for example the safety and soundness of an
institution or a failure of compliance with regulatory rules.205 The action taken by the regula-
tors centres on whether the bank has acted in an unsafe and unsound way which under-
mines, for instance, the interests of depositors.206 The standard of unsafe and unsound is
wide, and amenable to various sorts of non-compliance. It refers to a broad range of incidents
which are serious acts of imprudence that give rise to abnormal risks to the safety of a bank.
The US courts have shed further light on the standard and have not simply accommodated
the decision of the regulator. For instance, in a case of simple breach of contract, the court
held that it is important to assess how remote the breach is from threatening the existence of

195 OCC (2001) Policies and Procedures Manual, Enforcement Act Policy, PPM 5310-3 (Rev), 30 July, at

pp 1821.
196
Ibid, at pp 1821.
197
For power to publicize enforcement actions see 12 USC 1818(u); in relation to a prompt corrective
action directive the authority to publicize is pursuant to 12 USC 1831; for safety and soundness orders see
12 USC 1831 p-1; for a description of publicizing enforcement decisions see OCC, n 195 above, at p 15;
Federal Reserve Bank, Commercial Bank Examination Manual, s 5040.1.
198
See for example OCC, n 195 above, at p 15.
199
Ibid, at p 7.
200 Jackson, H E and Symons E (1999) Regulation of financial institutions, St Paul, West Group, at p 335.
201
OCC (1997) The role of a national bank director: the directors book, at p 97.
202 Ibid. at p 98; see also OCC, n 195 above, at p 18.
203 Ibid.
204 OCC, n 195 above, at p 4.
205 Ibid, at pp 78.
206 12 USC 1831 p-1.

257
 Legal Aspects of Banking Regulation in the UK and USA

the bank, and if it were to continue whether it would result in only a minor financial loss.207
Written agreements are issued to ensure compliance in a broad range of areas which point to
less severe forms of non-compliance.208
5.63 The key sanction is the cease and desist order (C&DO).209 This can require the institution or
its affiliated party to refrain from unsafe or unsound practices, or violating applicable rules and
regulations.210 The order is accepted by the institution or individual before it is formally issued
by the regulator; this avoids having to go through a lengthy administrative hearing simply to
issue the order, which is already accepted by both sides. The order requires the deficient party
to take appropriate action to rectify the problem that resulted in the order being given.211
Under FIRREA a fine in the region of $1 million per day (although fines can range from $1,000
to $25,000 a day) can be levied on an institution or individual.212 The level of the fine relates to
the gravity of the failure, the question of recklessness and/or breach of fiduciary duty, and the
benefit accrued by the individuals or institutions.213 A fine could be levied for violation of a
broad range of regulations, or for non-compliance with an existing enforcement order. For
example, Credit L Credit Agricole, SA, France and its New York affiliates214 were fined in total
$13 million for not complying with a written agreement and additional unsafe and unsound
practices which pointed to poor management supervision of internal controls and risk manage-
ment techniques in its business operation. The ultimate sanction the regulators can initiate is
an order to prohibit or remove authority to conduct banking business.215 This power can be
initiated in circumstances similar to a C&DO where there is evidence that an enforcement
order has not been complied with, or safe and sound rules and regulations have been violated
or depositors interests are threatened. However, the degree of culpability and knowledge on
the part of the institutions or individuals would need to be extensive when exercising the power
to prohibit them from operating in the industry.216 The federal regulator can issue a suspension
order with immediate effect if it considers the interests of depositors are under threat. The evi-
dence would need to point to continuing disregard of regulation, which is interpreted to mean
heedless indifference to the prospective consequences.217
5.64 The above powers are added to by the Dodd-Frank Act by enabling the FRB or the FDIC the
discretion to ban Senior Executives and Directors if they have violated any law or regulation;
any final cease and desist order; any written agreement; or another agency agreement; or
participated in any unsafe or unsound practice or an act or omission of their fiduciary
duties.218 In such circumstances the individual could be given a written notice prohibiting
participation in the companys affairs for two years.219

207
Gulf Federal Saving & Loan Association v Federal Home Loan Bank Board, 651 F 2d 259, 264 (5th Cir 1981).
208
For written agreements see, for example, 12 USC 1818(b)(1).
209
12 USC 1818(b).
210
12 USC 1818(b).
211 12 USC 1818(b)(6).
212
12 USC 1818(i).
213
12 USC 1818(i)(2).
214 Enforcement Action is available at <http://www.federalreserve.gov/boarddocs/press/enforcement/

2004/20040310/attachment.pdf>.
215 12 USC 1818(e)(1) and (7).
216 12 USC 1818(e)(3).
217 Docket No FDIC-85-215e, 1986 FDIC Enf Dec (p 14) p 5069 at 6741.
218 213(b)(1).
219 213(c).

258
 6
BANKS IN DISTRESS

A. Sermons and Burials 6.016.02 G. The Banking Institutions

B. Northern Rock: the Catalyst for Management and Bank Resolution 6.536.61
the Banking Legislation 6.036.11 H. The Impact of Share Transfers
C. The Institutions to which the and Property Transfers 6.626.99
Banking Act Applies 6.12 I. Holding Companies 6.100
D. The Role of the Tripartite J. The Resolution of Dunfermline
Authorities 6.136.27 Building Society 6.1016.108
E. Early Intervention by the Tripartite K. Investment Banks 6.1096.111
Authorities: the Conditions 6.286.42 L. Cross-Border Co-operation
F. The Special Resolution Regime: and Resolution Regimes 6.1126.115
Part 1 of the Banking Act 6.436.52 M. Parent Undertakings of
Banks 6.1166.119

A. Sermons and Burials

The Governor of the Bank of England, Mervyn King, in his speech at the Lord Mayors ban- 6.01
quet on 17 June 2009, a few months after the Banking Act 2009 came into force, made it
clear that he does not consider the present legislation to be sufficient to achieve financial
stability; he said:
The Bank of England has a new statutory responsibility for financial stability . . . To achieve
financial stability the powers of the bank are limited to those of the voice and the new resolu-
tion powers. The Bank finds itself in a position rather like that of a church whose congregation
attends weddings and burials but ignores the sermons in between. Like the church, we cannot
promise that bad things wont happen to our flockthe prevention of all financial crises is in
neither our nor anyone elses power, as a study of history or human nature would reveal. And
experience suggests that attempts to encourage a better life through the power of the voice is
not enough. Warnings are unlikely to be effective when people are being asked to change
behaviour which seems to them highly profitable. So it is not entirely clear how the bank will
be able to discharge its new statutory responsibility if we can do no more than issue sermons
or organise burials.
Whatever the ultimate shape of the structure and regulation of the banking system . . . change
will be necessary.
The new resolution powers referred to by the Governor are the subject matter of the rest of 6.02
this Part on bank resolution.

259
 Banks in Distress

B. Northern Rock: the Catalyst for the Banking Legislation

6.03 The governments initial response to the failure of Northern Rock plc was to introduce emer-
gency legislation; the Banking (Special Provisions) Act 2008 (the BSPA) The BSPA is
described in the pre-amble to the statute as:
An Act to make provision to enable the Treasury in certain circumstances to make an order
relating to the transfer of securities issued by, or of property, rights or liabilities belonging to,
an authorised deposit-taker; to make further provision in relation to building societies; and for
connected purposes.
6.04 This statute introduced a measure of last resort for failing banks: public ownership. The
legislation was itself a temporary, expedient measure, with a sunset clause after 12 months,
to give the Treasury, the Bank of England, and the FSA some breathing space in which to
devise a more sophisticated process for dealing with failing banks and buildings societies:
that process became law in the Banking Act 2009 (the Banking Act) as part of the Special
Resolution Regime (SRR)
6.05 In the meantime, the BSPA was used, through secondary legislation, to deal with the failures
of Northern Rock, Bradford & Bingley, Kaupthing Singer & Friedlander Limited
(Kaupthing), and Heritable Bank.
6.06 The day after the BSPA had received Royal Assent, the government announced that it had
acquired all the shares in Northern Rock thereby bringing it into what was referred to as
temporary public ownership. Although the government, at the time when the legislation
was enacted, had not intended to bring any other financial institution into public ownership;1
when, in late September 2008, the FSA determined that Bradford & Bingley no longer met
its threshold conditions for operating as a deposit taker under the FSMA, all that building
societys shares were taken into public ownership and in exercise of powers conferred on the
Treasury under the BSPA (the Transfer Order), the building societys UK and Isle of Man
retail deposit business and its branch network were transferred to Abbey National plc by
order. Subsequently, pursuant to further Order,2 an independent valuer was appointed to
determine the amount of compensation payable to persons who held Bradford & Bingley
shares immediately before the transfer.
6.07 The government, under the Transfer Order, varied the terms of Bradford & Bingleys subor-
dinated debt and, among other things, extinguished existing share options and provided for
rights and obligations of lenders, bondholders, swap-counterparties, suppliers and other
counterpartieswhich would otherwise be triggered by the transfernot to be triggered.

1 Alistair Darling told the House of Commons on the first reading of the Bill: The Government has no

intention at present to use the Bill to bring any institution other than Northern Rock into temporary public
ownership.
2
The Bradford & Bingley plc Compensation Scheme Order 2008, SI 2008/3249 as amended by the
Bradford & Bingley plc Compensation Scheme (Amendment) Order 2009. The original order provided for an
appointment of the valuer, the amendment provided that on an application by the valuer the court may require
a person to provide any information that is reasonably required for the purpose of assessing the amount of
compensation payable by the Treasury.

260
 B. Northern Rock: the Catalyst for the Banking Legislation

Like the BSPA, the Banking Act gives the Treasury and the Bank of England sweeping powers
to modify contracts and trust arrangements.
In October 2008 when the FSA determined that Kaupthing no longer met the thres- 6.08
hold conditions, the Treasury used powers under the BSPA to protect the depositors of
that bank and the stability of the financial system. Kaupthing was put into administration
in October 2008 pursuant to the provisions of Schedule B1 of the Insolvency Act 1986.
A statutory instrument made under the BSPA provided for the transfer of certain rights
and liabilities of Kaupthing to ING. This order required the administrators of Kaupthing
to perform their functions in accordance with certain objectives overriding those in
paragraph 3(1) of Schedule B1 to the 1986 Act. The administrators were required to
ensure that Kaupthing provided the services and facilities reasonably required by ING
to discharge its obligations in respect of the transferred rights and liabilities and to ensure
that Kaupthing performed the other obligations that had been imposed on it under the
Transfer Order. The Treasury had the power to ensure that these objectives were either
achieved or disapplied.
The Heritable Bank plc was placed into administration on 7 October 2008. The next day the 6.09
retail deposit savings balances were transferred to ING Direct. The transfer was made pursu-
ant to the Heritable bank plc Transfer of Certain Rights and Liabilities Order 20083 made
under powers conferred on the Treasury by the BSPA.
The Banking Act received Royal Assent on 12 February 2009, shortly before the temporary 6.10
provisions under the BSPA ceased to have effect. The Banking Act, section 262, gave the
Treasury the power to repeal the BSPA by way of order and the substantive provisions of the
Banking Act were to come into force by way of Treasury order.
The main provisions of the Banking Act came into force, by order, on 21 February 2009.4 6.11
Part 1 of the Banking Act gives the authorities the tools to deal with banking institutions in
financial difficulties and replaces the temporary special provisions regime that was provided
by the BSPA with a permanent SRR; Part 2 introduces the Bank Insolvency Procedure
(BIP) which provides for the winding up of a failed or failing bank; and Part 3 introduces
the Bank Administration Procedure (BAP) for use where part of a failing banks business
has been transferred, by means of the SRR, to a private bank or a bridge bank.

3 SI 2008/2644. There was a further statutory instrument that made certain amendments to the original

order, SI 2009/310.
4 The Banking Act 2009 (Commencement No 1) Order 2009, SI 2009/296. By separate orders that came

into effect on the same date, an order modified the provisions of Part 3 of the Banking Act, on administration,
the Banking Act (Bank Administration) (Modification for Application to Banks in Temporary Public
Ownership) Regulations 2009, SI 2009/312; the Banking Act 2009 (Bank Administration) (Modification for
Application to Multiple Transfers) Regulations 2009, SI 2009/313; the Bank Administration (Sharing
Information) Regulations 2009, SI 2009/314; the Banking Act 2009 (Parts 2 and 3 Consequential Amendments)
Order 2009, SI 2009/317; the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property
Transfers) Regulations 2009, SI 2009/319; the Banking Act 2009 (Restrictions of Partial Property Transfers)
Order 2009, SI 2009/322. The provisions of the Banking Act that did not come into force on 21 February 2009
came into force during the course of the year.

261
 Banks in Distress

C. The Institutions to which the Banking Act Applies5

6.12 The SRR and the bank administration and insolvency provisions in the Banking Act apply to
deposit taking institutions: this differentiates banks from other companies. The Banking Act
defines a bank as a UK institution6 which has permission under Part 4 of the FSMA to carry
on the regulated activity of accepting deposits.7 Although under the statute, bank does not
include a building society8 or a credit union,9 the SRR regime in Part 1 of the Banking Act is
applied to building societies, with certain provisions; section 84 of the Banking Act. Parts 2 and
3, insolvency and administration, have been applied to building societies by secondary legisla-
tion.10 For ease of reference, the words bank or banking institution should also be read to
include building societies. The Banking Act does not apply to UK branches of banks incorpo-
rated outside the UK. It would not, therefore, have applied to the failure of Icesave.

D. The Role of the Tripartite Authorities

6.13 The Treasury, the FSA, and the Bank of England are required to have regard to specific objec-
tives when using or when considering the use of the stabilization options in the SRR, the BIP,
or the BAP. The special resolution objectives are:11
(1) to protect and enhance the financial systems of the United Kingdom;
(2) to protect and enhance public confidence in the stability of the banking systems of the UK;
(3) to protect depositors;
(4) to protect public funds;
(5) to avoid interfering with property rights in contravention of a Convention right (within
the meaning of the Human Rights Act 1998).12
6.14 The special resolution regime: Code of Practice13 (the Code) makes the point that none of
the terms used in the list of objectives is defined by the Banking Act and that the terms are
context-specific and cannot be defined in an exhaustive or definitive manner.

5 As a consequence of the insolvency of Lehmans the banking legislation was amended to add provisions to
the Banking Act such that the Treasury may, through secondary legislation, make changes to insolvency law
governing UK investment banks if that is deemed appropriate following a consultation exercise. A Consultation
Document was published in May 2009. As noted in the Bank of England, Financial Stability Paper, July 2009,
in practice most of the investment banking business in the UK is carried out by larger financial groups which
often also have deposit taking and in some cases insurance businesses and, therefore, there is an issue as to
whether an SRR for such complex institutions should be developed and, if so, with what objectives.
6
A UK institution means an institution incorporated or formed under the law of any part of the UK.
7
That is accepting deposits within the meaning of s 22 of that Act, taken with Sch 2 and any order under
s 22; s 2 of the Banking Act.
8
That is, a building society within the meaning of s 119 of the Building Societies Act 1986; s 2(2)(a) of the
Banking Act.
9
A credit union within the meaning of s 31 of the Credit Unions Act 1979; s 2(2)(b) of the Banking
Act 2009.
10
The Building Societies (Insolvency and Special Administration) Order 2009, SI 2009/805.
11 Section 4 of the Banking Act.
12
The Explanatory Notes to the Banking Bill stated that a number of human rights issues were raised by the legisla-
tion, in particular the right to property, the right to a fair trial, and the right not to be discriminated against.
13 Banking Act 2009: Special resolution regime: Code of Practice. Section 5 of the Banking Act requires the

Treasury to issue a code of practice about the use of stabilization powers, BIP, and BAP and specifies the areas
on which guidance may be given. The statute requires the authorities to have regard to the Code. Before issuing

262
 D. The Role of the Tripartite Authorities

The Code sets out the factors that the Authorities may consider to be relevant. The first four 6.15
objectives need no explanation. The reason for the fifth objective is explained in the Code:
The inclusion of this objective acknowledges the importance of ensuring that any interference
with the Convention rights is in the public interest and is proportionate.14
This is intended to ensure that the exercise of powers under the SRR does not deprive a credi- 6.16
tor or a shareholder of rights in circumstances that would give rise to a valid claim to com-
pensation under the Human Rights Act.
The statute does not rank the objectives. The weight given to each of them will vary accord- 6.17
ing to the circumstances of each case, in particular, the circumstances specific to the banking
institution in distress and those relating to the financial system.15
The requirement that the Authorities should have regard to these objectives in using or 6.18
considering the use of the stabilization powers, administration, or winding up, gives the
Authorities flexibility, but on the other hand, as Professor Roman Tomasic has written:16
The subjective nature of the phrase, to have regard to makes its effect somewhat uncertain, so
that its use does not inspire confidence; it reminds us of other legal uses of this phrase, such as
in the directors duties provisions found in s. 172(1) of the Companies Act 2006. Perhaps the
SRR objects clause could have been expressed more objectively, as occurs with the goals of
insolvency administration under para. 3(1) in Sch. B1 to the Insolvency Act 1986 . . .
The Bank of Englands position on the objectives is:17 6.19
exactly in line with the approach taken in other countries whose SRRs are subject to an over-
arching financial stability remit or public interest test18 . . . Indeed the United Kingdom pro-
vides more guidance on these issues than most other regimes through the Code of Practice
published under Section 5 of the Act.
While the Code does outline the factors that the Authorities may consider relevant when 6.20
having regard to these objectives as explained below,19 this does not overcome the concern
that the goals are highly subjective.
The role of each of the Tripartite Authorities is as follows:20 6.21
As set out in section 7 of the Act, the FSA will be responsible for making the determination
that a banking institution is failing, or is likely to fail to satisfy the threshold conditions, and
that it is not reasonably likely that action will be taken by or in respect of the institution that
will enable the institution to meet those conditions. The FSA will also be responsible for the
authorisation of a bridge bank and ongoing supervision of institutions in the SRR.
The Bank of England will be responsible for the operation of the SRR, including the decision
on which of the SRR tools to use, and its implementation (with the exception of the power to

the Code, the Treasury was required to consult with the FSA, the Bank of England, and the FSCS, see s 6 of the
Banking Act.
14
The Code, para 3.15.
15
Banking of England New Release on Dunfermline Building Society, 20 March 2009.
16
Creating a Template for Banking Insolvency Law Reform After the Collapse of Northern Rock: Part 2
(2009) 22(6) Insolvency Intelligence.
17
The Bank of Englands Financial Stability Paper No 5July 2009, The UK Special Resolution Regime
for failing banks in an international context, by Peter Brierley.
18 The paper sets out the tests in certain other jurisdictions.
19
The Code, paras 3.23.15.
20 Chapter 4 of the Code.

263
 Banks in Distress

take an institution into public ownership). The Bank of England will also remain responsible
for the provision of liquidity support.
The Treasury is be responsible for decisions with implications for public funds, for ensuring
the UKs ongoing compliance with its international obligations, and for matters relating to the
wider public interest. The Treasury is also responsible for implementing any decision to take a
bank into public ownership. The Treasury will also exercise a number of the ancillary powers
under the SRR (particularly those where Parliamentary scrutiny is required), including the
power to modify the law and powers in relation to compensation.
6.22 The Governor of the Bank of England made it clear that in his view the decision to invoke
the SRR should not be that of the FSA alone. His argument was that if the Bank of England
also had the right to trigger the regime in addition to the FSA this could prevent the risk of
regulatory forebearancewhere banking supervisors delay too long before implementing
the regime because of the concern that the need to implement the SRR is seen as a failure on
the part of the regulators.21 The government refused to agree to dual control of the trigger for
implementation of the SRR on the grounds that this would lead to dual regulation of banks
which would be wasteful and costly.22 By way of compromise, the framework (but not the
statute) allows the Bank of England to make a recommendation to the FSA that the regime
be implemented.
6.23 The Code states that a revised Memorandum of Understanding (MoU) between the
Authorities will outline how the Authorities will coordinate their decisions and actions
before and during the resolution of an institution through the operation of the Tripartite
Standing Committee. A Memorandum of Understanding, which pre-dates the new legisla-
tive regime but which appears to be in sufficiently general terms that it does not require
revision to reflect the new regime, sets out the arrangements for cooperation between the
Standing Committee members.23 The guiding principles of the MoU are that there should
be clear accountability, transparency, no duplication of efforts, and regular information
exchange between the parties. These are simple principles, but in practice, because there are
three Authorities, these aims are not easy to achieve.
6.24 The institutional structure for clear accountability, transparency includes a number of com-
mittees: the Standing Committee generally meets monthly at deputies level. Meetings may
be called at short notice if necessary. A sub-group of the Standing Committee also meets
monthly to consider work on contingency planning for operational disruption and financial
sector resilience. A Banking Liaison Panel has been established under section 10 of the
Banking Act to advise the Treasury on the effect of, among other things, the SRR and the
financial markets. The Panel members are participants in the banking and financial sector
and representatives from relevant government bodies. The Panel gives formal advice to the
Treasury.
6.25 While each of the Authorities has a role, the Treasury is clearly the senior partner. The FSA
decides whether resolution is required, but does not decide the means by which the bank is

21 Mervyn Kings speech to the BBA on 10 June 2008 and his evidence to the Treasury Select Committee on

22 July 2008.
22 This view was expressed by Ian Pearson, Economic Secretary to the Treasury, during the House of

Commons committee stage debate on s 7 of the legislation on 6 November 2008.

23
The 2006 MoU governing the relationship between the Tripartite Authorities does not appear to have
been updated.

264
 E. Early Intervention by the Tripartite Authorities: the Conditions

resolved. The Bank of England can decide how a bank is resolved, but is unlikely to be able
to make such a decision without the consent of the Treasury in most cases because section 9
of the Banking Act prohibits the Bank of England from exercising any powers without the
consent of the Treasury where:
(1) The Treasury issues a written notice to the effect that the exercise of the Banks powers
would contravene the international obligations of the UK.
(2) The Banks proposed actions have implications for public funds.
(3) The Treasury specifies considerations regarding public funds that need to be taken into
account by the Bank of England before stabilization powers are exercised.
There are, in reality, unlikely to be many proposed resolutions for failing banks or banks that 6.26
are about to fail that do not have implications for public funds.
While the government was of the view that it was only necessary to revise and not wholly to 6.27
reform the tripartite structure, it is of concern that in failing to revise the structure the
reforms have not gone far enough to provide a means of quickly resolving a failing bank. For
bank resolution to involve three separate institutions, however good the lines of communica-
tion, is clearly not ideal. It is obvious that consultation takes time, in particular if there is a
disagreement on what should be done.

E. Early Intervention by the Tripartite Authorities: the Conditions

In circumstances where a bank is moving towards the point where it no longer has adequate 6.28
capital or adequate liquidity the FSA intensifies its monitoring of the bank and makes greater
demands that the bank take corrective action to raise capital or increase its liquidity than
would have been the case before the recent crisis in the banking system. Thomas Huertas,
director, banking sector, FSA gave a speech to the London Financial Regulation Seminar on
19 January 2009 in which he used Bradford & Bingley as an example of early resolution of a
banking institution in distress. He said:
Bradford & Bingley is a case in point. As the risk of Bradford & Bingley increased during
2008, the FSA intensified its monitoring of the bank, required the bank to undertake actions
to mitigate that risk, including raising new capital. The FSA also worked with private sector
investors to find a solution to the banks problems. In addition, the FSA engaged in extensive
contingency planning with the Bank of England, the Treasury and the FSCS so that a resolu-
tion (through taking the bank into TPO24 and transferring its deposits to Abbey) could be
effected over a weekend following the FSAs determination that the bank no longer met thresh-
old conditions.25
The powers under the Banking Act can only be exercised where the FSA has determined that 6.29
two conditions, set out in section 7, are met, whether the bank is to be resolved by stabiliza-
tion options, by way of bank administration or wound up.
Condition 1: The bank is failing, or is likely to fail, to satisfy the threshold conditions
(within the meaning of section 41(1) of the FSMA); and

24 Temporary Public Ownership.

25 Although that speech was delivered shortly before the introduction of the Banking Act, the threshold
conditions in the Bill were subsequently enacted.

265
 Banks in Distress

Condition 2: Having regard to timing and other relevant circumstances it is not reason-
ably likely that (ignoring stabilization powers) action will be taken by or in respect of the
bank that will enable the bank to satisfy the threshold conditions.
6.30 The FSA is not required to have regard to the Special Resolution Objectives when determin-
ing whether a bank is failing or has failed.26
6.31 In determining whether Conditions 1 and 2 are met, the FSA is required to ignore the effect
of any financial assistance provided to the bank by the Treasury or the Bank of England,
although this does not include ordinary market assistance offered by the Bank of England
on its usual terms. The Banking Act also provides that the Treasury may, by Order, decide
that a specified activity or transaction or class of activity or transaction is not to be treated as
financial assistance for a specified purpose of that statute.
6.32 The FSA publishes guidance on the threshold conditions in the FSA Handbook.27 The main
conditions are, in brief, adequate financial resources, competent and able management, and
the managements commitment to carrying on the business with integrity and in compliance
with the regulatory regime.
6.33 On Condition 2: the FSA has set out in writing the approach that it takes to assessing
whether this condition is met.28 The FSA is required to ignore the issue as to whether the
stabilization powers could resolve the situation because it is considering whether alternative
measures might resolve the position and not whether the stabilization powers will work. In
considering the timeframe within which actions could be taken and could have effect, the
FSA may consider, in particular:29
(1) The extent of any loss, or risk of loss, or other adverse effect on consumers.
(2) The seriousness of any suspected breach of the requirements of the FSMA.
(3) The risk that the banks conduct or business presents to the financial system and to con-
fidence in the system.
(4) The likelihood that remedial action that could be taken by or in relation to the bank will
take effect before consumers or market confidence suffers significant detriment.
6.34 The circumstances that the FSA may take into account depend on the nature of the FSAs
concerns about the bank, in particular whether they relate to adequacy of liquidity, capital
adequacy, adequacy of non-financial resources, and the prospects of the bank securing a
material and relevant transaction with a third party. The FSA will also assess the reasons
behind any likely or actual failure of compliance. Serious failures of management, systems,
or internal controls may call into question the adequacy of the banks non-financial resources
or suitability.
6.35 The FSA, before determining whether Condition 2 is met, must consult the Treasury and the
Bank of England. In the FSAs Consultation Paper on Financial stability and depositor pro-
tection: FSA responsibilities, December 2008,30 the FSA states:

26
Section 7(6) of the Banking Act.
27 See <http://fsahandbook.info/FSA/html/handbook/COND>.
28 Banking Act 2009, Chapter 1, Threshold Conditions, FSA Handbook, Release 093, September 2009.
29
Banking Act 2009, Chapter 3, Threshold Conditions, FSA Handbook, Release 093, September 2009.
30 Consultation Paper 08/23.

266
 E. Early Intervention by the Tripartite Authorities: the Conditions

In practice, any decision to trigger the special resolution regime and to deploy one or more of
the tools within it, would only be taken following intensive discussion and consultation by the
Tripartite authorities through the Tripartite Standing Committee.31 Although the Bill does
not oblige us to consult the FSCS in connection with our determination under section 7, the
FSCS will be involved in these discussions because of its important role in bank resolution.
The breadth of the scope for determining whether the Conditions are satisfied gives the 6.36
Authorities flexibility which enables them to react to different circumstances in a pragmatic
manner.
The rationale for this approach is that the Authorities will take steps to deal with a failing 6.37
bank or a bank that is likely to fail before it is balance sheet insolvent and will, therefore, be
in a position to resolve the position of the bank quickly and preserve more value than would
be the case were action only permitted once a bank was insolvent or on the verge of insol-
vency. The idea behind this is that the FSA will be less likely to indulge in regulatory fore-
bearance if, after a period of heightened supervision that has not remedied the problem, it
can trigger the resolution of a bank that does not involve, at least at the outset, formal insol-
vency proceedings.32
The corollary of the banking regulators flexibility in deciding at what stage to step in to 6.38
resolve a bank is that it is difficult for the banks and financial markets to form any clear idea
as to when and in what circumstances the Authorities will invoke any particular resolution
procedure.
Furthermore, the flexible approach to bank resolution goes so far as to give Treasury order- 6.39
making powers to make orders with retrospective effect. Section 75(3) of the Banking Act
provides that:
in so far as the Treasury consider it necessary or desirable for giving effect to the particular
exercise of a power under this Act in connection with which the order is made (but in relying
on this subsection) the Treasury shall have regard to the fact that it is in the public interest to
avoid retrospective legislation.
In debates in Parliament the government made it clear that this power was to be used to over- 6.40
ride law that prevented the SRR from operating in a timely fashion. The House of Lords
Select Committee on the Constitution expressed the view that desirability should not be a
basis on which to allow ministers to change the law retrospectively.33 The Committee had
noted, in correspondence, that there had been no exact precedent for retrospective law-
changing powers based on a ministers perception of what is desirable rather than what is
necessary. The Committees report concludes that:
We note Lord Myners statement that section 75(3) of the Banking Act 2009 does not set a
precedent for the use of retrospective powers. The fact of the matter is, however, that a prec-
edent has been set. It is not, in our view, an acceptable precedent.
The government did not change its position; the government remains of the view that the 6.41
flexibility is required to enable the SRR powers to be used effectively in an emergency.

31
The Memorandum of Understanding between the Tripartite Authorities covers the standing committee.
The MoU is at <http://www.publications.parliament.uk/pa/cm200708/cmbills/170/2008170.pdf>.
32 See, eg, Financial Stability Paper No 5July 2009, Bank of England, p 7.
33
House of Lords Select Committee on the Constitution, 11th Report of Session 200809, Banking
Act 2009: Supplementary report on retrospective legislation, HL Paper 97.

267
 Banks in Distress

6.42 When the FSA determines that the Conditions are satisfied, the next step for the Authorities
is the choice of the appropriate stabilization option.

F. The Special Resolution Regime: Part 1 of the Banking Act

6.43 The purpose of the SRR is to address situations where:34
. . . all or part of the business of a bank encountered, or is likely to encounter, financial
difficulties . . .
6.44 A banking institution does not have to be insolvent before the Authorities can use the powers
of the Special Resolution Regime. Thomas Huertas, in the same speech to the seminar on
19 January 2009,35 explained the FSAs approach to the assessment of threshold conditions
in the following terms:
This is necessarily a judgment rather than a simple quantitative test, but the Bill plainly envis-
ages the possibility that the bank could be put into resolution whilst it still has positive net
equity. The resolution regime is very much an early intervention regime to allow the authori-
ties to intervene well in advance of the point at which corporate insolvency procedures would
permit intervention. This early intervention feature broadly implements the lessons drawn
from the theory of early intervention and the practice of early intervention in other countries,
namely that early intervention limits both the losses of the troubled institution in question as
well as potentially society at large.
6.45 The SRR provides the Tripartite Authorities with a number of procedures to deal with
failing banks and, therefore, to avert a crisis in the banking system at an early stage and
thereby avoid insolvency and achieve an orderly resolution of the banks problems:
6.46 The three stabilization options are:

(1) the transfer by the Bank of England of a bank or building society or some or all of its
business to a private sector purchaser; or
(2) the transfer by the Bank of England of some or all of the business of a bank or building
society to a bridge bank; or
(3) the transfer by HMT of a bank, building society, or holding company of a bank into
temporary public ownership, in one word, nationalization.
6.47 The Bank of England may exercise the power to make one or more share transfer instru-
ments, or property transfer instruments, to transfer the shares or property of the failed or
failing banking institution to a private sector purchaser, or to make one or more property
transfer instruments to transfer that institutions property to a bridge bank. The Bank of
England may only exercise these powers, or any of them, if Condition A36 is satisfied:37
8 Specific conditions: private sector purchaser and bridge bank . . .
(2) Condition A is that the exercise of the power is necessary, having regard to the public
interest in
(a) the stability of the financial systems of the United Kingdom,

34 Section 1(1) of the Banking Act.

35 In his speech, The rationale for and limits of bank supervision.
36
Condition A is how these conditions are defined in the Banking Act, s 8(2).
37 Sections 8(1) and (2), 11(2), and 12(2) of the Banking Act.

268
 F. The Special Resolution Regime: Part 1 of the Banking Act

(b) the maintenance of public confidence in the stability of the banking systems of
the United Kingdom,
(c) the protection of depositors.
The Bank of England, before determining whether Condition A is satisfied and, if so, how
to react, must consult the Treasury and the FSA.38
If the Treasury has provided financial assistance39 to the failing or failed banking institution, 6.48
then the Bank may only exercise the stabilization option if Condition B,40 not Condition
A is met:41
8 Specific conditions: private sector purchaser and bridge bank . . .
(5) Condition B is that
(a) the Treasury have recommended the Bank of England to exercise the stabilisation
power on the grounds that it is necessary to protect the public interest, and
(b) in the Banks opinion, exercise of the stabilisation power is an appropriate way to
provide that protection.
The statute expressly states that Condition A and Condition B are in addition to the
section 7 Conditions.42
It is for the Treasury to decide whether failing or failed banking institution should be taken 6.49
into temporary public ownership by making a share transfer order in which the transferee is
a nominee of the Treasury or a company wholly owned by the Treasury. The Treasury may do
so only if it is satisfied that one of the following conditions is met:43
9 Specific conditions: temporary public ownership . . .
(2) Condition A is that the exercise of the power is necessary to resolve or reduce a serious
threat to the stability of the financial systems of the United Kingdom.
(3) Condition B is that the exercise of the power is necessary to protect the public interest,
where the Treasury have provided financial assistance in respect of the bank for the
purpose of resolving or reducing a serious threat to the stability of the financial systems
of the United Kingdom.
The Authorities strongly favour the use of a private sector solution. The paper Financial 6.50
Stability and depositor protection: special resolution regime, presented to Parliament by the
Chancellor of the Exchequer states:44
A private sector solution is likely to be the resolution outcome that best meets the SRR objec-
tives. Such an outcome has the potential to maintain financial stability, provide continuity of
banking services to depositors, achieve desirable outcomes for creditors and counterparties
and protect public funds.

38
Section 8(3) of the Banking Act.
39
Financial assistance means what the Treasury decides it should mean. The definition of financial assis-
tance in s 257 of the Banking Act is as follows: (1) . . . financial assistance includes giving guarantees or
indemnities and any other kind of financial assistance (actual or contingent). (2) The Treasury may by order
provide that a specified activity or transaction, or class or activity or transaction, is to be or not to be treated as
financial assistance for the specified purpose of this Act; and subsection (1) is subject to this subsection . . .
40
Condition B is how these conditions are defined in the Banking Act, s 8(5).
41 Section 8(4) and (5) of the Banking Act.
42 Section 8(6) of the Banking Act 2009.
43
Sections 9 and 13 of the Banking Act 2009.
44 2008, CM 7459, para 3.15.

269
 Banks in Distress

6.51 Between sale to the private sector and temporary public ownership,45 the intermediate solu-
tion, is the use of a bridge bank which combines private and public sector involvement in
that part of the business is transferred to the private sector while the remainder of the busi-
ness is run by a bridge bank which is a limited company established and owned by the Bank
of England. The Bank of England would have the rights of shareholders to determine the
direction of the bridge bank even in cases where the day-to-day management of the bank was
conducted by directors who were not employees or directors of the Bank of England.
6.52 The stabilization options can be achieved by the use of certain specific procedures provided
for in the Banking Act, in particular by the transfer of the banks shares or, in some cases the
shares of the banks holding company, or a transfer of some or all of the banks property rights
and liabilities.

G. The Banking Institutions Management and Bank Resolution

6.53 The Bank of England is concerned to promote advance planning by banking institutions
management and directors. As Paul Tucker, Bank of England Deputy Governor with respon-
sibility for Financial Stability said in his speech to the British Bankers Association Annual
International Banking Conference on 30 June 2009, banks should structure themselves so
as to permit orderly resolution which:
. . . entails banks maintaining up-to-date information on their retail deposits in a way that
facilitates rapid payout under the FSCS. Rapid payment is necessary to maintain the confi-
dence of depositors in other banks. It is all very well most retail depositors being 100% pro-
tected, but not so comforting if they had to wait ages to receive repayment from the deposit
insurer after their bank failed . . .
6.54 He went on to explain that information was needed by the Bank of England to assess whether
any of the SRR tools could meet the statutory objectives more effectively than liquidation.
He stressed that, because the Banking Act could be used by the Bank, working with the FSA
and the Treasury, to split up the business, with deposits going to a buyer, some assets else-
where and some parts going into administration, up-to-date coherent management accounts
for all parts of the business were essential.
6.55 There have been a number of speeches by Bank of England officials promoting the need for
banks to have Recovery and Resolution Plans or RRPs. These are also referred to as living
wills; the description living wills and not just wills suggests the testator is intended not
to die but to survive.
6.56 The FSA has issued a consultation paper on RRPs and conducted a pilot exercise. Andrew
Bailey, Bank of England Executive Director for Banking Services and Chief Cashier stressed
the importance of directors involvement in RRPs in his speech at the Santander International
Banking Conference in Madrid on 17 November 2009 when he said:
RRPs need to be owned by financial institutions at Board level. They should be of such
importance that Boards need to understand that they are responsible for them.

45
There does not appear to be any guidance on how long a banking institution can be in public ownership
before that status ceases to be temporary.

270
 H. The Impact of Share Transfers and Property Transfers

Although it seems that the plans may have more than one owner, as Andrew Bailey also said 6.57
later in his speech:
Resolution plans must be produced and owned by the authorities, since only we can deter-
mine how best to apply the tools of our regime . . .
In a subsequent speech on 26 November 2009 to the ICAEW in London, Andrew Bailey 6.58
described the position in relation to the RRPs as follows:
In the ideal world, we want to work closely with the management of the bank to plan a resolu-
tion, at a time when it remains a contingency option that management naturally wish to avoid.
But we also want to avoid the sense that a bank is receiving the attention of the undertakers. A
very important development here will be the production and maintenance of resolution plans,
as part of the overall recovery . . .
Once a resolution plan has been implemented that involves transfer of shares pursuant to a 6.59
share transfer instrument made by the Bank of England, a director of the bank whose shares
have been transferred may be removed or his service contract varied, on terms agreed by the
Bank. The Bank of England may also appoint new directors. Where a share transfer order is
made by the Treasury, the order can give the Treasury the power to remove directors and/or
to vary their service contracts.
It is the responsibility of the Bank of England to put in place the arrangements for the man- 6.60
agement of a bridge bank. The Bank of England appoints the directors, who may or may not
include employees of the Bank of England and who would need to be approved by the FSA.
It is envisaged that typically a bridge bank will not last for more than one year,46 but if this
were to happen the Bank of England would need to ensure that the composition of the board
of directors remains appropriate.
On the transfer to public ownership the Treasury will be closely involved in the management 6.61
of the affairs of the bank, although the Treasury will also seek to introduce corporate govern-
ance arrangements as soon as is reasonably practicable. If the bank is likely to remain in
public ownership for a longer period the Treasury will set objectives for the directors as to
how the bank should be run. In circumstances where an institution is likely to remain in
public ownership for longer than a short period the Treasury may seek to put in place
arrangements such that the bank is run at arms length.47

H. The Impact of Share Transfers and Property Transfers

Where the Authorities intervene to resolve a bank that is likely to fail or is failing, if they 6.62
choose to sell the business of the bank to a commercial purchaser then the Bank of England
may make a property transfer instrument and/or a share transfer instrument. If the resolu-
tion is to be by way of the transfer of all or part of the business to a bridge bank established
and controlled by the Bank of England then the Bank of England may make a property
transfer instrument. If the bank is to be taken into temporary public ownership, the Treasury
may make a share transfer order. There are different provisions for each type of transfer and
safeguards for shareholders and creditors, including provision for compensation.

46
The Code, para 8.26.
47 The Code, paras 9.59.14.

271
 Banks in Distress

1. Shareholders interests
6.63 There are two situations in which the Authorities have the power to transfer shares. The first
is where the Authorities are able to find a private sector purchaser for the bank and for that
purpose the Bank of England may make a share transfer instrument.48 The second is where
the bank is taken into temporary public ownership and for that purpose the Treasury may
make a share transfer order.49
6.64 When the Bank of England makes a share transfer instrument it is required to send copies,
as soon as reasonably practicable, to the banking institution concerned, the Treasury, and the
FSA and is required to publish a copy on its website and in two newspapers chosen by the
Bank of England to maximize the likelihood of the instrument coming to the attention of
persons likely to be affected.50
6.65 A share transfer order is made by statutory instrument and may be subject to annulment
pursuant to a resolution of either House of Parliament. The notice provisions that apply to
the Bank of England apply, mutatis mutandis, to the Treasury.51
6.66 A share transfer instrument52 and a share transfer order53 provide for securities issued by a
specified bank to be transferred and may relate to either specified securities or securities of a
specified description. A transfer takes effect by virtue of the instrument or order and in
accordance with the provisions on ancillary matters54 and can provide for continuity as they
can provide for the transferee to be treated for any purpose connected with the transfer as the
same person as the transferor.55
6.67 For the purpose of share transfers securities is broadly defined:56
(1) . . . securities includes anything falling within any of the following classes.
(2) Class 1: shares and stock.
(3) Class 2: debentures including
(a) debenture stock,
(b) loan stock,
(c) bonds,
(d) certificates of deposit,
(e) any other instrument creating or acknowledging a debt.
(4) Class 3: warrant and other instruments that entitle a holder to acquire anything in
Class 1 or 2.
(5) Class 4: rights which
(a) are granted by a deposit-taker, and
(b) form part of the deposit-takers own funds for the purposes of section 1 of
Chapter 2 of Title V of Directive 2006/48/EC (on taking up and pursuit of
business of credit institutions).

48
Section 11 of the Banking Act.
49
Section 13 of the Banking Act.
50
Section 24 of the Banking Act.
51 Section 25 of the Banking Act.
52
Section 15 of the Banking Act.
53 Section 16 of the Banking Act.
54 Section 17 of the Banking Act.
55
Section 18(1) of the Banking Act.
56 Section 14 of the Banking Act.

272
 H. The Impact of Share Transfers and Property Transfers

Thus share transfer orders that may be made by the Treasury to take a bank into public own- 6.68
ership and the share transfer instrument by which the Bank of England can sell all or part of
a banks business to a private sector purchaser can have very wide effect, in particular as the
orders and instruments are not limited to share transfers but include the transfer of a range
of other securities including bonds, loan stock, and warrants.57
The Banking Act expressly provides that a transfer takes effect despite any restriction arising 6.69
by virtue of contract or legislation or in any other way. Restriction is defined as follows:58
(a) any restriction, inability or incapacity affecting what can and cannot be assigned or
transferred (whether generally or by a particular person), and
(b) a requirement for consent (by any name).
A share transfer instrument or order may also provide for a transfer to take effect free from 6.70
any trust, liability or other encumbrances (and may include provision about their extin-
guishment) and may also extinguish rights to acquire shares, stock, and debentures.59
Further, the Banking Act expressly provides that a share transfer instrument or order may 6.71
provide that, for the purpose of determining whether there has been an event of default, the
share transfer instrument or order, as the case may be, is to be disregarded.60 The reason for
this is that if a share transfer were to cause an event of default this could seriously damage the
value of the banks assets at a time when the Authorities are intervening to try to protect the
value of those assets and stabilize the banks business.
The Banking Act provides for two different methods for compensating shareholders for loss 6.72
caused by a share transfer under the statute:61
(1) A compensation scheme order which establishing a scheme for determining whether
compensation should be paid and for paying any compensation.
(2) A resolution fund order which is a scheme pursuant to which the transferors are
entitled to the proceeds of the disposal of the securities that have been transferred.
These orders are required to be made by statutory instrument and may not be made unless a 6.73
draft has been laid before and approved by resolution of each House of Parliament.62
Where the Bank of England makes a share transfer instrument to transfer shares in a bank to 6.74
a private sector purchaser, the Treasury is required to make a compensation scheme order.
Where the Treasury makes a share transfer order to take the bank into temporary public
ownership, the Treasury is required to make either a compensation scheme order or a resolu-
tion fund order.63 A compensation scheme order may provide for the appointment of an

57
The interpretation of securities is widely drawn; s 14 of the Banking Act. Share transfer instruments can
be made in respect of securities as can share transfer orders; ss 15 and 16 of the Banking Act.
58
Section 17(4) of the Banking Act.
59
Section 17(3), (5), and (6) of the Banking Act.
60
Section 22 of the Banking Act. It has been suggested that this provision also applies to contracts between
third parties on the basis that ISDA raised this concern in response to the Treasurys consultation and the matter
was raised by Baroness Noakes in the House of Lords, but Lord Myners response in the debate did not deal with
this point; see The Banking Act: The New Special Resolution Regime for Dealing with Failing Banks and its
Legal Consequences, Mike Bake, Stephen Walsh, and Kevin Hawken, The Banking Law Journal, April 2009.
61 Section 49 of the Banking Act. There is also provision for compensation to be paid to persons other than

the transferors; see also ss 59 and 60.

62
Section 62 of the Banking Act.
63 Sections 50 and 51 of the Banking Act.

273
 Banks in Distress

independent valuer and may specify valuation principles.64 The statute expressly sets out the
following valuation principle:
In determining an amount of compensation (whether or not in accordance with valuation
principles) an independent valuer must disregard actual or potential financial assistance pro-
vided by the Bank of England or the Treasury (disregarding ordinary market assistance offered
by the Bank on its usual terms).65
6.75 This assumption was also in the BSPA66 and was challenged by the shareholders of Northern
Rock plc who brought proceedings for a declaration under section 4 of the Human Rights
Act 1998 that the material terms of the BSPA and the compensation scheme order were
incompatible under Article 1; SRM Global Master Fund LP & Ors v Commissioners of Her
Majestys Treasury.67 The shareholders challenge was to the assumptions under section 5(4) of
the BSPA determining the amount of compensation payable to them, in particular that the
assumptions were that all the financial assistance provided by the Bank of England and the
Treasury had been withdrawn and that neither of those institutions would provide further
financial assistance to Northern Rock.68 The shareholders argument was that the conse-
quence of the assumptions was that the shares would be valued on a forced sale basis and
therefore be valued at nil. The decision of the court was that it would only interfere where the
judgement of the state as to what was in the public interest was manifestly without reasona-
ble foundation. The financial assistance had been given to Northern Rock to protect the
banking system and the economy and the purpose of the assumptions was to put the share-
holders in the position they would have been in if that assistance had not been provided. The
court would not, therefore, interfere in the judgement of the state.
6.76 A resolution fund order is required to provide for determination of who is entitled to the
proceeds on disposal of things transferred and the way in which the proceeds and the shares
will be calculated.69 The proceeds are likely to be calculated net of the costs of resolution
which costs could include the costs of financial assistance provided by the Treasury and/or
the Bank of England in the course of the resolution.70
6.77 The sources of compensation where there have been compensation scheme orders or resolu-
tion fund orders71 are the Treasury and the FSCS.72
6.78 There are provisions for continuity after the transfer of shares which is of particular importance
where the banking institution is part of a group. First, the transferee is also treated for any purpose
connected with the transfer as the same person as the transferor.73 Secondly, the former group

64
Section 57 of the Banking Act.
65
Section 57(3) of the Banking Act.
66
Sections 4962 set out the provisions on compensation in the Banking Act.
67
[2009] EWCA Civ 788.
68
There is an equivalent provision in s 57 of the Banking Act: In determining the amount of compensation . . .
an independent valuer must disregard actual or potential financial assistance provided by the Bank of England
or the Treasury (disregarding ordinary market assistance offered by the Bank on its usual terms).
69
Section 58 of the Banking Act.
70
The Code, para 10.4.
71 Section 61 of the Banking Act. These sources are also available for third party compensation orders.
72
The orders may also specify any other person.
73 Section 18 of the Banking Act. The section also provides that the instrument or order may provide for

agreements made or other things done by the transferor to be treated as if they had been done by the transferor,
to modify references in an instrument or document to a transferor and require or permit the transferor and/or
transferee to provide information and assistance to the other.

274
 H. The Impact of Share Transfers and Property Transfers

company must provide services and facilities that are required to enable the transferred bank to
operate effectively (the continuity obligation) and this obligation may be enforced as if created
by contract between the transferred bank and the former group company.74 The continuity obli-
gation is subject to the right to receive reasonable consideration. The continuity obligation is not
limited to the provision of services or facilities to the transferred bank; the continuity authority
(the Bank of England where ownership was transferred to a private sector purchaser and the
Treasury where the bank has been taken into public ownership) may give notice to the former
group company that specific activities are required to be undertaken in accordance with the con-
tinuity obligation and on specified terms. The statute also give the continuity authority the right
to cancel or modify any contract or other arrangement between the transferred bank and the
former group company and confer and impose rights and obligations on the former group com-
pany which has the effect as if created by contract between them. In so doing, the continuity
authority shall aim, so far as is reasonably practicable to preserve or include provision for reason-
able consideration.75 The power to cancel, modify, and confer and impose rights and obligations
is circumscribed to the extent that it may only be exercised insofar as the continuity authority
considers it necessary to ensure the provision of services and facilities to enable the transferred
bank to operate effectively and may be exercised by the Bank of England only with the consent of
the Treasury and must be exercised by way of the share transfer instrument or order or supplemen-
tal instrument or order.

2. Creditors interests
When a bank becomes subject to the SRR the Bank of England has the power to cause a banks 6.79
property to be transferred pursuant to a property transfer instrument made under the Banking
Act.76 The transfer instrument may relate to all property, rights or liabilities of the bank; or all its
property, rights and liabilities subject to specified exemptions; or specified property, rights and
liabilities; or property, rights or liabilities of a specified description.77 The property that may be
transferred includes, the rights and liabilities under the law of a country or territory outside the
United Kingdom.78 The transfer may also make other provisions for the purposes of or in connec-
tion with the transfer of property, rights, or liabilities of a banking institution.79
A property transfer or partial property transfer, like share transfers, can include provisions 6.80
such that any or all of the contractual consequences of a transfer can be disregarded under
the terms of the property transfer instrument.80
A property transfer instrument may provide for a transfer to be conditional on a specified 6.81
event occurring or not occurring or a situation arising or not arising81 and may make provi-
sion for the consequences of a breach of the condition.82

74
Sections 66 and 67 of the Banking Act.
75
The Treasury may by order specify matters which are to be or which are not to be considered in determin-
ing what amounts to reasonable consideration; s 69(1) of the Banking Act.
76
Section 33(1) of the Banking Act.
77
Section 33(2) of the Banking Act.
78
Section 35(1)(d) of the Banking Act.
79 Section 33(2) of the Banking Act.
80
Section 34(3) and (4) of the Banking Act.
81 Section 34(5) of the Banking Act.
82 Section 34(6) of the Banking Act. The consequences may include automatic vesting in the original trans-

feror; or an obligation to effect a transfer back to the original transferor; or, a provision making a transfer or
anything done in connection with a transfer void or voidable.

275
 Banks in Distress

6.82 The statutory provisions for continuity where there has been a property transfer are in sub-
stantially the same as those that provide for continuity in respect of share transfers.83
(a) Partial property transfers84
6.83 The main issue that has caused concern in relation to property transfers is the effect of a
partial property transfer which is the power to split a bank and to make a transfer of a part of
the banks property. The power to make a property transfer instrument in respect of some
but not all of the property could have an adverse impact on secured financing, set-off, and
netting arrangements. The most likely use for this power is to transfer the valuable part of an
institutions business to a private sector bank or a bridge bank, leaving the original bank with
poor quality assets and all the liabilities. Although it could be used to transfer the poor qual-
ity assets to a bridge bank, leaving the original bank in an improved financial position.85
6.84 The statutory provisions on partial property transfers in the Banking Act are:

(1) Section 47 gives the Treasury the power to make orders restricting the making of partial
property transfers, to impose conditions on the making of such transfers, to require such
transfers to make provision for specified effect and/or to provide for a property transfer
to be void or voidable if made or purported to be made in contravention of the provi-
sions of the order or any other order under that section.
(2) Section 48 gives the Treasury powers similar to those in section 47 to be used in cases
where the making of partial property transfers might effect certain interests,86 namely,
security interests, title transfer collateral arrangements, set-off arrangements, and net-
ting arrangements.
6.85 The government, aware of creditor and market issues arising from the provisions governing
property transfers, published a consultation document: Special resolution regime: safe-
guards for partial property transfers in November 2008. In the light of the responses to the
consultation and the advice from the Bank of England, the FSA and an expert liaison group
on banking (which included legal, financial, and insolvency experts from the banking sector)
the secondary legislation providing safeguards for partial transfers was laid before Parliament
on 20 February 2009 and commenced on 21 February 2009, at the same time as the second-
ary legislation on partial transfers. These orders are: the Banking Act 2009 (Restriction
of Partial Property Transfers) Order 2009 (the Safeguards Order) and the Banking Act 2009
(Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009.
The Safeguards Order provides that:
Where a person and a bank have entered into a set-off, netting or title transfer financial
collateral arrangement, all rights and liabilities under that arrangement have to be transferred,
or none at all.87
6.86 The Safeguards Order also prevents the termination provisions from being disregarded in
respect of set-off, netting, or title transfer of financial collateral arrangements relating to
relevant financial instruments.88

83 Sections 6365 of the Banking Act.

84
Defined in s 47(1) of the Banking Act: means a property transfer instrument which provides for the
transfer of some, but not all, of the property, rights and liabilities of a bank.
85 The Code, para 7.3.
86
As defined in s 48(1)(a)(d).
87 Article 3 of the Order.
88 Clause 9 of the Safeguards Order.

276
 H. The Impact of Share Transfers and Property Transfers

There was, however, concern among market participants that the Safeguards Order did not 6.87
go far enough to provide the necessary protection. Lord Myners told the House of Lords on
16 March 2009:
I am aware that some market participants are concerned that the scope of the safeguards is not
wide enough, in particular with regard to the protections provided for set-off and netting.
I understand that these concerns are primarily related to technical drafting, rather than the
property that the order clearly excludes as a result of government policy, and that there are
varied legal interpretations on whether some financial contracts have been excluded . . . I can
review the safeguards order. If changes to the order are necessary and compatible with the
authorities flexibility, the Government will make such changes before the Summer Recess.89
The issue concerning scope of the Safeguards Order was considered by the Banking Liaison 6.88
Panel which provided advice to the Treasury on 17 June 2009.90 The Panel recommended
that the Safeguards Order be amended to cover the full range of transaction types that could
be covered by netting arrangements and that it should be extended to include certain finan-
cial instruments that were not covered by the definition of relevant financial instruments.
The rights that were excluded by the Safeguards Order91 were defined by reference to the
Markets in Financial Instruments Directive (MiFID). The Panel noted that:
The first problem arises from the extent to which the MiFID definitions of financial instru-
ment do not, or arguably do not, cover a range of transaction types that can be or are typically
covered in netting arrangements. Particular transactions include spot and forward FX, com-
modity/bullion forwards and options, and longevity/mortality derivatives. A related issue is
the treatment of banking transactions not currently covered by the relevant financial instru-
ments (RFI) definition: a range of transactions not least in trade finance is not currently
covered.
The Panel therefore recommended extending the definition of relevant financial instru- 6.89
ments to include certain types of additional transactions and certain additional types of
banking activities.
The Panel also advised on certain other amendments to the definition of excluded rights in 6.90
article 1 of the Safeguards Order. The issue that had been raised was the wording of the
excluded rights that provided for the netting arrangements to be excluded where they relate
to a contract entered into . . . in the course of carrying on an activity which relates solely92 to
relevant financial instruments. The concern was that the word solely would be construed to
mean that if there were one transaction that fell outside this type of transaction this would
invalidate the netting agreement in its entirety, described by the Panel as one bad apple spoils
the barrel.93 The example of the problem caused by the use of the word solely given by the
Panel was where a bank entered into a series of cash settled commodity derivatives transac-
tions with a counterparty as a hedge for a purchase of physical commodities. In this case
the Panel stated, it would appear that the transaction would not constitute protected
rights and liabilities because they had been entered into in the course of an activity which
does not relate solely to the relevant financial instruments as this definition does not include

89
Official Record, 16 March 2009: Column GC2GC3.
90 Banking Liaison Panel, Subgroup on the Banking Act 2009 (Restriction of Partial Property Transfers)
Order 2009.
91
Article 1(3).
92 Emphasis added.
93 Paragraph 36 of the Advice.

277
 Banks in Distress

physical commodities. The Panel also noted that similar issues would arise with respect to
derivatives entered into by a bank to hedge its loan or mortgage book. The Panel recom-
mended that the word solely be deleted from the clauses in the excluded rights and that a
new paragraph be inserted to reinforce the point that the inclusion of an unprotected right
or liability under a set-off, netting, or title transfer collateral arrangement would not cause
the arrangement to lose the protection provided by the Safeguards Order.
6.91 The Banking Act 2009 (Restriction of Partial Property Transfers) (Amendment) Order 2009
which came into force on 9 July 2009 seeks to amend the existing statutory instrument on
partial property transfers94 in accordance with the recommendations of the Banking Liaison
Panel advice to the Treasury.
6.92 In effect the Bank of England cannot cherry-pick financial contracts with a given party that
are subject to set-off and netting arrangements. Either all such contracts have to be trans-
ferred or none of them can be transferred.
6.93 Secured creditors are protected by the Safeguards Order in that no partial property transfer
instrument can transfer assets over which a bank has security without also transferring the
relevant liabilities:95 ie their claims cannot be separated from the assets that secure the liabili-
ties. This protection is in respect of all security interest, including floating charges.
6.94 Structured finance arrangements, such as securitizations and covered bond programmes, are
also protected: the liability cannot be separated from the collateralization pool in a partial
property transfer and it is not possible to transfer some but not all of the rights and obliga-
tions under such arrangements.
6.95 The junior creditors are particularly vulnerable in the case of a partial property transfer. Peter
Brierley in a Bank of England paper explained the position of these creditors as follows:
. . . one of the key advantages of a PPT96 is that it makes it possible to effect a resolution at a
lower cost to the taxpayer, for example by allowing a greater proportion of the losses to be
imposed on junior creditors, such as subordinated debt holders, whose claims may be left
behind in the rump of the failed bank rather than being transferred to a private sector pur-
chaser or bridge bank. In current conditions,97 therefore, the SRRs stabilization powers, if
they can be deployed, are more likely to be used to effect a PTT rather than a whole-bank
resolution.
6.96 So far as the creditors remain with the residual bank, the Treasury has the power to make
regulations to compensate the creditors of a residual bank98 and is required to ensure that
these creditors are compensated so that they are no worse off than they would be had the
whole of the bank been in an insolvency proceeding and there had been no PPT and no bank
administration. This is referred to as the no creditor worse off safeguard (the NCWO). The
NCWO Order99 provides for the appointment of an independent valuer and sets out prin-
ciples for valuing what the creditors would have received in a hypothetical liquidation.

94
The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009.
95 Article 5.
96
Partial Property Transfer.
97 The paper was published in July 2009, but the conditions do not appear to have changed materially since

that date.
98
Section 60 of the Banking Act.
99 SI 2009/319.

278
 I. Holding Companies

(b) Property held on trust

A property transfer instrument may make provision in respect of property held on trust 6.97
(however that trust arises) and it may also make provision in respect of the terms on which
the property is to be held after transfer and the how any powers, provisions, and liabilities in
respect of the property are to be exercisable after the transfer or have effect on the instrument
coming into effect (the Trust Issue).
The Panel also considered whether section 34(7) of the Banking Act extended to trusts where 6.98
the bank is either the trustee or beneficiary and that the trust arrangements for any bond held
by a failing bank could be modified or terminated irrespective of the consequences for the
transaction, bondholders, or other interested parties. The concern was that this could result
in trust business and financial and corporate transactions with a trust element being lost to
UK banks. The Panel recommended that the Safeguards Order be amended to reduce the
scope of the problem by limiting the power to remove or alter the terms of a trust to circum-
stances where it was necessary or expedient to do so;100 where the transferor was the trustee
of the trust and its obligations became those of the transferee; and where the transferor was
the beneficiary of the trust, such property interests as it has as a beneficiary.
(c) Compensation
The Banking Act makes provision for compensation orders where the Bank of England has 6.99
made a property transfer order which is analogous to the orders that may be made for com-
pensation where there has been a share transfer order or instrument: there may be a compen-
sation scheme or a resolution fund order.101 As with the compensation for share transfers, an
independent valuer is appointed by the Treasury to deal with compensation. The valuer is
required to adhere to certain assumptions set out in the statute, including a requirement that
the valuer must disregard actual or potential financial assistance provided by the Bank of
England or the Treasury. This was the assumption that was unsuccessfully challenged in the
courts by the shareholders of Northern Rock.

I. Holding Companies
Banks that are deposit-taking are often part of a group of companies. In addition to 6.100
imposing the continuity obligations on the groups (see above),102 the Banking Act103 enables
a company which is a UK-incorporated holding company of a deposit-taker to be subject to
one specific SRR, temporary public ownership, if the SRR is triggered in respect of the
deposit-taker and this is necessary to resolve or reduce a serious threat to financial stability.104
Once a holding company is placed into public ownership the Banking Act powers to transfer
shares and property are applicable to any other bank that is at the time, or was, in the same
group.

100 There is no equivalent safeguard where there is a full property transfer, but these are unlikely to arise in

practice and the same principle would be expected to be applied to such transfers.
101 The same statutory provisions that apply are ss 49, 5266.
102 Sections 6370 of the Banking Act.
103
Sections 8283 of the Banking Act.
104 Section 82 of the Banking Act.

279
 Banks in Distress

J. The Resolution of Dunfermline Building Society

6.101 The first and only use to date of the resolution regime is in relation to the Dunfermline
Building Society at the end of March 2009.
6.102 The Authorities subjected all banks and building societies to a severe stress test when assess-
ing whether the institution was eligible to participate in the Credit Guarantee Scheme that
was established following the collapse of Lehman Brothers. The result of the test on
Dunfermline indicated that it did not have sufficient capital to meet the requirements of the
scheme. The FSA also had doubts about the ability of the building societys management to
cope with the turbulent market conditions.105 The FSA used its powers to instruct a skilled
person to report on the position of Dunfermline. The first report concluded that a specific
loan provision should be increased by 3 million and that there should be a general provision
of 15 million (an increase of 13 million on the provision at the end of 2007). The second
report concluded that while the society could be viable for another 12 months, it faced a
number of execution and financial risks to the implementation of its plan. A new Chief
Executive was appointed in December 2008. Lord Turner states in the letter to the
Chancellor:106
It is worth noting that in liquidity terms there was no immediate problem: the problems
related to future possible solvency under stressed conditions; Dunfermlines situation was
therefore different from that faced with Northern Rock or Bradford & Bingley.
6.103 The FSA considered a number of options and as recapitalization was not available, the board of
the Dunfermline Building Society decided on 28 March 2009, that the society was unable to
continue as a going concern. The FSA then reached the conclusion that the society was likely
to fail to satisfy the threshold conditions and that it was not reasonably likely that action would
be taken to rectify the situation. This decision triggered the resolution process.
6.104 On 30 March 2009 the Chancellor of the Exchequer and the Governor of the Bank of
England announced a resolution for the Dunfermline Building Society.107 Under the Banking
Act 2009, Dunfermlines retail and wholesale deposits, branches, head office, and residential
mortgages (other than social housing loans and related deposits) were transferred to
Nationwide Building Society. The sale to Nationwide followed a sale process conducted by
the Bank of England under the SRR provisions over the weekend of 28 and 29 March 2009.
Dunfermlines social housing loan book was transferred to a bridge bank, wholly owned by
the Bank of England. On the same date, and in advance of the announcement the court
made an order putting the remainder of Dunfermlines business, comprising commercial
loans, certain residential mortgages, subordinated debts, and most treasury assets, into the
Building Society Special Administration Procedure (BSSAP).
6.105 The Treasury had concluded that Dunfermline would require substantial future capital given
the scale of future losses and that it had only a limited capacity to service new capital because
of historically low profits. The Treasury concluded that an injection of funds would not be

105 Lord Turner wrote to the Chancellor of the Exchequer on 17 April 2009 setting out the FSAs approach

to the Dunfermline Building Society.

106
See supra n 105.
107 See <http://www.hm-treasury.gov.uk/press_32_09.htm>.

280
 K. Investment Banks

likely to provide value for money and would not provide a sustainable and lasting solution.
The announcement states that the Treasury consulted the Bank and the FSA and concluded
that the conditions for entry into the SRR were satisfied and that the Bank of England, fol-
lowing consultation with the Treasury and the FSA, had concluded that the offer from
Nationwide best met the objectives of the SRR.
When the Tripartite Authorities needed to use the provisions in Parts 2 and 3 of the Banking 6.106
Act to resolve the Dunfermline Building Society, the provisions of the statute did not apply
to building societies at the time when the Treasury concluded that Dunfermline was failing
or likely to fail. The Treasury, in the exercise of powers conferred by sections 130, 158, and
259(1) of the Banking Act, made an order that it was necessary to exercise the powers in sec-
tions 130 and 158 of the Banking Act without laying a draft order before Parliament, and
made an order applying Parts 2 and 3 of the Banking Act to building societies.108 The Order
was laid before Parliament on 30 March 2009, the day after it was made.
On 22 December 2009 an independent Appointment Panel appointed an independent 6.107
valuer for the purposes of the compensation arrangements that had been put in place as a
consequence of the partial property transfers to Nationwide and to the bridge bank.109
What the Authorities did in relation to Dunfermline was, in effect, to use the transfer powers, 6.108
the administration procedure, and a bridge bank to resolve the problems of that building
society.

K. Investment Banks
The failure of Lehman Brothers in 2008 highlighted the need to put in place a special resolu- 6.109
tion regime for investments firms.110 The Banking Act 2009 provides scope for introducing
a new resolution regime for investments banks in accordance with ss 233 and 234 of the
Banking Act 2009. The Treasury initiated a consultation process on the proposed regime in
2009 to tackle the problems associated with the fall out of Lehman Brothers. A key rationale
for the special administrative regime is to minimize the disruption of an investment firm
failing and ensure continuation of business functions to safeguard the interests of creditors
and its counterparties. The special resolution regime needs to ensure that a sufficient amount
of time is given to deal with the complexities of an investment bank in administration such
as the time needed to reconcile the books and dealing with client and house assets. The cross-
border nature of the business of investment banks is equally important and requires the UK
authorities to be mindful of monitoring international efforts to introduce a special resolu-
tion regime for investment banks; to improve coordination between the respective authori-
ties when dealing with the fallout from an insolvent investment firm.111

108
The Building Societies (Insolvency and Special Administration) Order 2009, SI 2009/805, made on
29 March 2009.
109
Secondary legislation was used to put the compensation arrangements in place: the Dunfermline
Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009, SI
2009/1800.
110
Which is interpreted to mean investment banks as defined in s 232 of the Banking Act 2009. HM
Treasury, Special administration regime for investment firms, September 2010 available at <http://www.hm-
treasury.gov.uk/consult_investment_banks2.htm>.
111
Ibid, p 6 Report and Recommendations of the Cross-border Bank Resolution Group Issued for comment
by 31 December 2009, September 2009 available at <http://www.bis.org/publ/bcbs162.pdf?noframes=1>.

281
 Banks in Distress

6.110 HM Treasury wants the new special resolution regime to:

clarify the protections already available to clients, creditors, and counterparties of a failing
investment firm under the existing UK regime;
ensure more precautionary action by a failing investment firm, prior to its entry into insol-
vency, to smooth the wind-down process;
improve continuity of an investment firms infrastructure, services and staffing to enable a
more orderly, efficient wind-down;
improve administrators abilities to access and control client assets post-insolvency, and
distribute them once control is established; and
reduce negative impacts on counterparties, by improving clarity and certainty at trading,
clearing, and settlement stages.
6.111 The proposed Special Resolution Regime will achieve the following objectives: Objective 1
ensuring the return of client assets and money; Objective 2 engaging with market infra-
structure bodies and Authorities; and Objective 3 winding up or rescue the firm. These
objectives will improve the timeliness of returning client assets and dealing with shortfalls.
The administrator is required to cooperate with market infrastructure bodies to deal with
the application of default rules and settlement or cancellation of trades. The final objective
seeks to improve the efficiency of the winding up to either put the investment bank in a
position to carry on as a going concern or ensure the investment firm is wound up in the
best interests of the creditors. The other proposals include: the Treasury is also proposing
to give the FSA the power to direct the administrator to prioritize one or more of the objec-
tives in times of crisis. The proposals seek to reconcile the differences between the bank
resolution regime and the investment bank resolution regime specifically in the area of
administration and liquidation given that so many banks undertake a variety of investment
activities.

L. Cross-Border Cooperation and Resolution Regimes

6.112 The development of cross-border cooperation is at a very early stage. Indeed, as the remarks
of Paul Tucker, Deputy Governor, Financial Stability, the Bank of England, make clear reso-
lution regimes do not exist in many other EU countries and are, in fact, only a relatively
recent, post-Northern Rock, development here.
6.113 On 30 September 2010, Paul Tucker, spoke to the Eurofi Financial Forum about Developing
an EU cross-border crisis-management framework. He made the point that it was essential
that each EU member state (and indeed all the countries in the world) should have national
resolution regimes for banks. He set out a number of issues that need to be addressed by the
EU including, resolution of bank holding companies and the groups and non-bank financial
institutions; proposals for coping with cross-border elements of financial firms within the
EU, and arrangements for global resolution.
6.114 In his subsequent remarks to the Institute of Bankers in Washington DC on 11 October
2010, Paul Tucker spoke about resolution regimes in the context of banks that are Too Big
To Fail. He stated that resolution regimes would be central to the recommendations of the
G20 Financial Stability Board. In this speech he stressed that not much progress could
be made in cross-border cooperation without more intimate and trusting co-operation

282
 M. Parent Undertakings of Banks

between home country supervisors and resolution authorities and host country authorities.
On this he said:
We should not exaggerate the extent to which this has worked well in the past . . .
He referred, in particular, to the reluctance to share information between home and host
authorities when regulated firms are distressed which is when it matters most that they
should co-operate.
There is clearly a considerable amount of work to be done to develop cross-border co-opera- 6.115
tion in the implementation of resolution regimes.

M. Parent Undertakings of Banks

The Banking Act does take one step towards taking resolution regimes beyond the bank to 6.116
its holding company.
The Treasury may bring the holding company of a bank into temporary public ownership.112 6.117
A bank holding company may, however, only be taken into temporary public ownership if
the FSA is satisfied that a bank in the group satisfies the general conditions set out in section
7 of the Banking Act. The Treasury is also required to be satisfied that it is necessary to
take this action for purposes specified in the conditions for temporary public ownership in
section 9 of the Banking Act, to resolve or reduce a serious threat to the stability of the finan-
cial system or to protect the public interest. The Treasury will consider whether action in
relation to the bank alone would be sufficient for the purposes of section 9 before taking
a bank holding company into temporary public ownership. The Treasury will also balance
the interests of relevant parties against the public interest in resolving the financial difficulties
caused by the failing bank. The Treasury can also cause there to be partial transfers of the
companys private sector purchasers. The limitations on partial property transfers provided
for in sections 47, 48, and 69 of the Banking Act and the secondary legislation apply to these
transfers.
Where the Treasury takes a bank holding company into temporary public ownership, certain 6.118
provisions of the Banking Act are also applied to bank holding companies by section 83 of
the Banking Act.
The Code makes it clear that it is highly unlikely that circumstances will arise in which it 6.119
would be desirable for the Treasury to take a holding company into public ownership, where
the holding company did not have a close connection with the operation of a bank or where
the primary activities of the holding company were not closely related to financial services.113

112
Banking Act; s 82.
113 Code, para 5.41.

283
This page intentionally left blank
 7
BANKING ACT RESTRUCTURING AND
INSOLVENCY PROCEDURES

A. Introduction 7.017.08 F. The Treatment of Creditors in Bank

B. The Administration and Liquidation Insolvencies 7.807.83
Regime for Banking Institutions 7.09 G. Deposit Insurance 7.847.100
C. The Bank Administration H. Cross-Border Bank Insolvency 7.1017.108
Procedure (BAP) 7.107.54 I. Potential Reforms: Investment
D. Bank Insolvency Procedures 7.557.75 Bank Failure 7.1097.112
E. Building Societies 7.767.79 J. Commissions on Banking 7.1137.117

A. Introduction
The general insolvency legislation, contained for the most part in the Insolvency Act 1986 and 7.01
the Insolvency Rules 1986 works effectively, for the most part, in the rescue or liquidation of
companies. Over the years special insolvency regimes have been put in place for a number of
important industries, including certain types of utility1 and transport companies.2 The purpose
of these special regimes is to meet the situation where the application of the normal corporate
insolvency law to a monopoly company causes essential services to be interrupted.
Historically, company insolvency procedures have been used more or less successfully to deal 7.02
with consequences of bank insolvency. In the 1990s, the most notable insolvency proceed-
ings were the provisional liquidation of the Bank of Credit and Commerce International SA
in July 1991 and the administration orders made in respect of members of the Barings group
in February 1995. Company insolvency procedures were also used more or less satisfactorily
for other less high-profile bank insolvencies.3
As no retail bank has a monopoly of the market the government did not respond to Northern 7.03
Rock by proposing special insolvency proceedings,4 the governments focus was on the devel-
opment of the SRR.5 So far as the normal insolvency procedures were concerned according

1
For example, the Energy Act 2004 created a special administration procedure for companies owning or
operating gas and electricity networks with the objective of ensuring a continuity of supply through either the
rescue of the company as a going concern or the transfer of the business to another company or companies.
There is also a special regime for the water industry.
2 Railway Act 1993; see also Railway Act 2005 for Scottish services.
3 For example, Mount Banking plc and Equatorial Corporation plc.
4 Paragraphs 3.17 and 3.18 of the discussion paper published in October 2007.
5 The SRR is considered in Chapter 6.

285
 Banking Act Restructuring and Insolvency Procedures

to the first discussion paper Banking reformprotecting depositors: a discussion paper, published
in October 2007, the Authorities opinion of the normal insolvency proceedings was:6
Generally, financial firms are subject to normal corporate insolvency procedures, which have
a narrow focus on the failing firm and the interests of creditors. In a normal administration,
the administrator is able to suspend creditors (including retail depositors) ability to exercise
their contractual rights so that the amount of loss can be established and apportioned among
them. This means that firms and individuals may not be able to use their accounts or access
their moneypossibly for a period of weeks or even months. Any outstanding debts may also
be offset against the relevant creditors claim, in effect recovering those debts before repaying
those creditors a proportion of their net claim on the bank. While any difference may be
recoverable through the FSCS, this may cause disruption, not only to the customers of the
bank, but also to the firms and consumers with whom the customers of the bank interact.
7.04 On 30 January 2008, a further paper, Financial stability and depositor protection: strengthen-
ing the framework, was published by the Authorities.7 In that paper the government proposed
legislation to introduce a modified insolvency process for banks as a stand alone insolvency
regime for banks based on existing insolvency provisions and practice.8 Although the main
focus of the paper was the SRR, the extensive list of questions for consultation included the
following:9
Should a new bank insolvency procedure be introduced for banks and building societies
as an option for the Authorities instead of normal insolvency procedures?
Do you think that there ought to be provision in the bank insolvency procedure for con-
tinued trading of some of the banks business in the interests of depositors or other credi-
tors? If so, how do you think this might work?
Should a bank insolvency procedure be a stand-alone regime in which the bank liquidator
has the combined powers of an administrator and liquidator? Are any other powers
required?
The majority response was that it was unnecessary to make wholesale changes to the normal
insolvency provisions to ensure rapid payments to eligible FSCS claimants.10
7.05 In a subsequent paper presented to Parliament by the Chancellor of the Exchequer in July
2008 the purpose of which was to provide more technical detail on the SRR,11 Financial
stability and depositor protection: special resolution regime, the Chancellor explained the
Governments opposition to a special insolvency regime for banks as follows:
a modified form of insolvency as a first step is unlikely to enhance consumer or market confi-
dence, particularly in the ability of the bank to continue to meet its financial obligations.
Further, it puts the bank into a governance framework that is very unlike that of other com-
mercial banks. Taken together, these factors could reduce the likelihood of a private sector
solution . . .12
7.06 The paper concludes on this point that, for these reasons:

6 Paragraph 2.7.
7
Cm 7308.
8 See paras 4.334.35.
9 Questions 4.144.15 and 4.18.
10 Summary of Consultation Responses, p 137 of the July paper, Cm 7436.
11 Cm 7459.
12 Cm 7459, para 3.6, Box 3.1.

286
 B. The Administration and Liquidation Regime for Banking Institutions

[T]he Authorities do not propose to establish a form of special insolvency regime for UK
banks. The Authorities preferred model is more in line with aspects of the US approach for
resolving failing banks. While the United States has a statutory regime for banks that is distinct
from that which applies to other companies, it does not use this model. One important US
method for resolving failing banks, whereby assets and liabilities are split between a newly
created bridge bank and the residual company, is broadly similar to the bridge bank tool pro-
posed for the UK.
The Authorities gave a number of reasons for the need to develop the SRR rather than focus 7.07
on developing a special form of insolvency proceedings, two of them appear to have been of
particular importance. The first reason is the insolvency requirements that must be met
under the Insolvency Act 1986.13 A company in financial difficulties may only be put into
administration if the company is or is likely to become unable to pay its debts14 and a com-
pany may only be wound up if it is unable to pay its debts.15 This precludes early and pre-
emptive steps which may be necessary to prevent the financial problems in one bank from
causing a run on other banks and more general financial instability.
The second reason was that neither the court nor the insolvency practitioner who has been 7.08
appointed as office holder is required to take any account of the public policy objectives that
come into play when a certain course of action may have wider systemic consequences by caus-
ing a loss of confidence in the banking system. The course of action that is appropriate to
addressing the problems of an individual bank looked at in isolation from the financial system
could cause or worsen a crisis in the financial system. Banks are essentially different from com-
mercial firms in that they issue liquid deposits, extend credit and process payments and their
failure is potentially more damaging to economic activity than the failure of other companies.
There are also banks that are too big to fail. A sound banking system is essential to the efficient
performance of other economic activities. This second issue has not only determined the char-
acteristics of the SRR, but as explained below, is reflected in the modification of the objectives
of administration and liquidation as applied to banking institutions.

B. The Administration and Liquidation Regime for Banking Institutions

The government, having rejected a special insolvency regime for banks, included provision 7.09
in the Banking Act for the administration and liquidation of banking institutions that are
based in large part on the existing procedures set out in the Insolvency Act 1986 and the

13 Unable to pay its debts has the meaning given in s 123 of the Insolvency Act 1986; see Sch B1, para

111(1). The meaning in s 123 encompasses cash flow insolvency in the sense of inability to pay debts as they
fall due and balance sheet insolvency where the value of the companys assets is less than its liabilities, including
contingent liabilities.
14
Likely in this context means more probable than not; Re Colt Telecom Group plc [2002] EWHC 2815
(Ch); BPIR 324. Where, however, a qualifying floating charge holder (as defined in Sch B1, para 14 of the 1986
Act) makes an application to the court for an administration order the court may make an administration order
whether or not it is satisfied that the company is or is likely to become unable to pay its debts; see Sch B1, para
35(2). Where the appointment is by the company or the directors the requisite statutory declaration must
include a statement that the company is unable or likely to become unable to pay its debts within the meaning
of s 123 of the 1986 ActSch B1, paras 27(2)(a) and 30(a).
15 Sections 122(1)(f ) and 123 of the Insolvency Act 1986. Companies can, of course, be wound up for

reasons other than insolvency, for example, when a company either does not trade for a year or has ceased to
trade for a year or on just and equitable grounds. The grounds on which a company may be wound up are listed
in s 122(1) of the Insolvency Act 1986.

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 Banking Act Restructuring and Insolvency Procedures

Insolvency Rules 1986, with some modifications. The bank administration procedure
and the bank insolvency procedure exist alongside the normal insolvency procedures. This
is to ensure that, in principle, creditors can wind up a bank or building society or to put
it into administration,16 or have a provisional liquidator in respect of a bank or building
society.17

C. The Bank Administration Procedure (BAP)

7.10 The primary legislation on the bank administration procedure comprise specific provisions
in Part 3 of the Banking Act, the modified provisions of the Schedule B1 to the Insolvency
Act 1986, the modifications to which are set out in Table 1 in Part 3 of the Banking Act, and
the other provisions of the Insolvency Act 1986, also with some modifications, as set out in
Table 2 in Part 3 of the Banking Act. The rules that apply to bank administrations are set out
in the Bank Administration (England and Wales) Rules 2009 which apply, with some modi-
fications, the Insolvency Rules 1986.18
7.11 The paper entitled Financial stability and depositor protection; special resolution regime by the
Bank of England, the Treasury, and the FSA explained the purpose of the bank administra-
tion as follows:19
The Authorities therefore propose the creation of a special bank administration procedure for
the residual company which would be modelled on existing insolvency proceduresprinci-
pally administration under Schedule B1 to the Insolvency Act 1986. It is recognised that given
the overall objectives of the SRR, some significant departures from, and modifications to,
these ordinary administration provisions will be necessary.
7.12 Bank administration is intended to be used where only part of the business of the failing
bank has been or is to be transferred to a private purchaser or bridge bank.20 The part that has
not been transferred (the residual bank) is likely to retain property, information, and rights
essential to the successful continuation of the business that has been transferred to the private
purchaser or to the bridge bank. If, as is likely, the residual entity is insolvent, then that entity
can be subject to the bank administration procedure.
7.13 The first aim of the administration procedure is to ensure that the residual bank supports the
bridge bank or the private bank to which the banks business has been sold or transferred, by
providing such services, systems, contracts, and other facilities as may be necessary to ensure
the new banks effective operation.21 This is intended to assist the bridge bank or the private
purchaser to operate effectively in circumstances where these services cannot be transferred
immediately to the bridge bank or private purchaser. Only once this objective has
been achieved, do the objectives of the bank administration become those of the normal

16
HM TreasuryNote to the BLP subgroup on building society insolvency, 8 December 2009, para 2.
17
Pursuant to s 135 of the Insolvency Act 1986.
18 There are also a number of other relevant regulations: the Banking Act 2009 (Bank Administration)

(Modifications for Application to Banks in Temporary Public Ownership) Regulations 2009; the Banking Act
(Bank Administration) (Modifications for Application to Multiple Transfers) Regulations 2009; and the Bank
Administration (Sharing Information) Regulations 2009.
19 Cm 7459, para 3.82.
20 Banking Act, s 136(2)(a).
21 Banking Act, s 136(2)(c).

288
 C. The Bank Administration Procedure (BAP)

administration. The position was described as follows in the Explanatory Notes to the
Banking Bill:
The bank administrator has specified objectives. First, either to provide support to the bridge
bank or private sector purchaser. Once such support is no longer required, the objective is to
achieve either of the two principal aims or an ordinary administration; either to rescue the
company as a going concern or to achieve a better result for creditors than in an immediate
liquidation.22

1. The application for an administration order

Under the Banking Act provisions only the Bank can apply for an administration order and 7.14
must nominate a person to be appointed as the bank administrator.23 A bank administrator
must be a licensed insolvency practitioner and must have consented to act.24
The Bank may apply to the court for a bank administration order25 in respect of a residual 7.15
bank where: (i) a partial property transfer has occurred or is intended pursuant to the SRR
stabilization powers; and (ii) where the Bank of England is satisfied that the residual bank is
unable to pay its debts or is likely to become unable to pay its debts as a result of a property
transfer that the bank has made or intends to make.26
The content of the application, the statement of the proposed bank administrator, and the 7.16
Bank of England is set out in detail in the Bank Administration (England & Wales) Rules
2009 (the Administration Rules),27 which is a modified form of the rules governing normal
administrations in the Insolvency Rules 1986.
The Bank of England is required to serve the application on the bank, the proposed 7.17
administrator(s), any holder of a qualifying floating charge28 who is known to the Bank of
England, any person who to has given notice to the FSA of the intention to commence insol-
vency proceedings against the bank,29 and transferees of property where the transfer was
made pursuant to a property transfer order.30 The Bank is also required to give notice to the
FSA and to any person known to the Bank of England to be charged with execution against
or has distrained against the bank or its property.31
The court, when fixing the venue, is required to have regard to the desirability of having an 7.18
application heard as soon as reasonably practicable and the need of the banks representatives
to be at the hearing.32 The Bank of England, the FSA, the bank, a director of the bank, and

22 Para 289 of the Explanatory Notes.

23 Banking Act, s 142. The Banks right to appoint an administrator is described as one of the main features
of bank administration; s 136(2)(b).
24
Banking Act, s 143(2) and (3).
25
Banking Act, s 136(2)(b). Court practice and procedure governing applications in normal insolvency
proceedings, rr 7.17.10 of the Insolvency Rules 1986 do not apply to bank administrations. The practice and
procedure is set out in rr 5057 of the Bank Administration Rules.
26
Banking Act, s 143.
27
Rules 9, 11, and 12.
28 As defined in para 14(2) of Sch B1 to the Insolvency Act 1986.
29
Banking Act, s 120.
30 Rule 15 of the Administration Rules. The method of service is governed by r 18 and service is required to

be verified by witness statement, r 19. The property transfer order is one that is made under s 11(2)(b) of the
Banking Act.
31 Rule 20 of the Administration Rules.
32 Rule 21 of the Administration Rules.

289
 Banking Act Restructuring and Insolvency Procedures

any person who has given notice to the FSA of intention to commence insolvency proceed-
ings may appear or be represented at the hearing, together with any person who appears to
have an interest and has the courts permission to appear.33

2. The purpose of the administration

7.19 The bank administrator has two objectives.34 Objective 1 the objective of support for the
private purchaser of the banks business or the bridge bank by ensuring that the business that
has been purchased continues to be supplied with services and facilities that the Bank of
England thinks are required for the effective conduct of the business;35 and Objective 2 the
objective of standard non-bank company administration, namely, rescue as a going concern
or achieving a better result for creditors than an immediate winding up.36
7.20 The purpose of Objective 1 is to ensure that a private sector purchaser of the banking busi-
ness or a bridge bank, as the case may be, is provided with the services and the facilities that
enable it, in the opinion of the Bank of England, to operate effectively.37 The Bank of England
has a central role in the administration of the bank until the Bank of England considers
Objective 1 has been achieved.
7.21 The bank administrator is required to ensure that the non-sold or non-transferred part of
the bank (the residual bank) provides the services and/or the facilities required to enable the
private sector bank or a bridge bank to operate effectively38 and, whether the sale or transfer
is to a private sector bank or a residual bank, the bank administrator is required to enter into
any agreement, at the request of the Bank of England, for the residual bank to provide serv-
ices and/or facilities to the residual bank.39
7.22 Where there has been a transfer or sale to a private sector bank, the administrator in the
pursuit of Objective 1 is required to have regard to the terms of agreements made at the
request of the Bank of England and any other agreement between the private sector bank and
the residual bank.40 The statute also expressly provides for the administrator, if the adminis-
trator is in doubt about the effect of the terms of any agreement made between the residual
bank and the private sector bank, to seek the direction of the court under paragraph 63 of
Schedule B1 to the Insolvency Act 1986. In addition the private sector bank may also apply
under that provision where there is a dispute about any agreement with a residual bank.41
7.23 Where the sale is to a bridge bank, the administrators must ensure that, so far as is reasonably
practicable, an agreement entered into includes provision for consideration at a market rate,
although this does not prevent the bank administrator from entering into an agreement on
any terms the administrator thinks necessary in pursuit of Objective 1.42

33
Rule 22 of the Administration Rules.
34 Banking Act, s 137.
35
The Bank Administration (Sharing Information) Regulations 2009 set out the mandatory provisions govern-
ing information sharing between a bank administrator, the Bank, and, after a partial transfer, to a bridge bank.
36 See para 7.27 below.
37
Banking Act, s 138(1).
38 This is one of the main features of bank administration; Banking Act, s 136(2)(c).
39 Banking Act, s 138(3) and (4).
40 Banking Act, s 138(3)(a).
41 Banking Act, s 138 (2)(4).
42 Banking Act, s 138 (4)(b) and (c).

290
 C. The Bank Administration Procedure (BAP)

Whether the sale or transfer is to a private sector bank or a residual bank, the administrator 7.24
must avoid action that is likely to prejudice the performance by the residual bank in accord-
ance with those terms.43
Where a bank administrator requires approval of or consent from the Bank of England to any 7.25
action pursuant to the provisions of the Banking Act on administration, the Bank of England
may withhold approval or consent only on the grounds that the action might prejudice the
achievement of Objective 1.44
The pursuit of Objective 1 ceases when the Bank of England notifies the administrator that 7.26
the residual bank is no longer required for the purposes of the private sector purchaser or the
residual bank. If the administrator thinks that Objective 1 should cease and the Bank of
England has not given notice, the administrator may apply to the court for directions under
paragraph 63 of Schedule B1, and the court may direct the Bank to consider whether to give
notice.45 Therefore, as the courts power is limited to directing the Bank of England to con-
sider giving notice, the decision as to whether Objective 1 has been achieved is, in effect, a
decision that only the Bank of England can make.
Objective 2 is described in the statute as normal administration,46 which is to rescue the 7.27
bank as a going concern (Objective 2(a)) or achieve a better result for the residual banks
creditors as a whole than would be likely if the residual bank were wound up without first
being in bank administration (Objective 2(b)). The administrator is required to aim to
achieve Objective 2(a) unless of the opinion47 either that it is not reasonably practicable to
achieve it or Objective 2(b) would achieve a better result for the residual banks creditors as
a whole. These provisions are the same as the first two objectives for normal administrations
of non-bank companies at paragraph 3 of Schedule B1 to the Insolvency Act 1986.48

3. The process of administration

The bank administrator is deemed to be an officer of the court.49 The duties and powers of a 7.28
bank administrator are substantially the same as those of a non-bank administrator50 and, as
in a normal administration, the bank administrator may do anything necessary or expedient
for the pursuit of the objectives.51
As in a normal administration, the administrator is required to prepare a statement of pro- 7.29
posals for achieving the objectives as soon as is reasonably practicable after appointment.52
The administrator is required, however, to produce two separate sets of proposals; one for the

43
Banking Act, s 138(3)(b) and (4)(a).
44
Banking Act, s 138(5).
45
Banking Act, s 139.
46
Banking Act, s 140the heading to that section.
47 It is unclear why the change has been made to unless of the opinion in para 3(3) of Sch B1 to the

Insolvency Act, which is unless he thinks has not been copied into this provision. In this context there is no
material difference between the phrases.
48 The third objective in normal administration, realising the property to make a distribution to one or

more secured or preferential creditors; para 3(1)(c) of Sch B1 to the Insolvency Act 1986 is not included as an
objective in the bank administration procedure.
49 Banking Act, s 146.
50 Banking Act, s 145.
51 Banking Act, s 145(1); the objectives are described in s 137.
52 Banking Act, s 147.

291
 Banking Act Restructuring and Insolvency Procedures

Objective 1 Stage and the other for the Objective 2 Stage.53 The administrator is required to
agree the Objective 1 Stage proposals with the Bank of England. If the administrator and the
Bank of England are unable to agree, the administrator may apply for directions pursuant to
paragraph 63 of Schedule B1 to the Insolvency Act 1986 and the court may make any order,
including an order dispensing with the need for the Bank of Englands agreement.54 The
administrator must also send the statement of proposals to the FSA. The administrators
proposals concerning the Objective 1 Stage, notwithstanding that they are made under sec-
tion 147 of the Banking Act, have the same effect as those produced in a normal administra-
tion pursuant to paragraph 49 of Schedule B1 to the Insolvency Act 1986. The Objective 2
Stage proposals are, as is the case with normal administration proposals, made pursuant to
paragraph 49 of Schedule B1 to the Insolvency Act 1986.
7.30 There is a specific rule governing the contents of the report to creditors during the Objective
Stage 1 process which requires the report to contain the same information as in a normal
administration, but also details of additional information, in particular details of transfers,
any requirements that have been imposed on the bank to achieve Objective 1 and arrange-
ments for managing and financing the bank during Objective 1 Stage 1.

(a) The Objective 1 Stagethe Bank of Englands control of the administration process
7.31 The bank administrator is required to accede to requests made by the Bank of England for
the residual bank in administration to enter into an agreement for the residual bank to pro-
vide services or facilities to achieve the first objective. Further, until this objective is achieved,
the administrator is also required to provide such information and records that may be
requested by the Bank of England or the bridge bank. The Treasury is also empowered to
make regulations concerning the information that must be provided to the Bank of England
or the bridge bank.55
7.32 The administrator is obliged to pursue the first objective until the Bank of England issues an
achievement notice signifying that the support of the residual bank or bridge bank is no
longer required.56 Until this notice has been issued the interests of creditors other than the
depositors are secondary.
7.33 A creditors committee cannot be established until Objective 1 has been completed, this is
achieved under the legislation by the amendment of the provisions of Schedule B1 to the
Insolvency Act 1986 on creditors meetings such that these provisions do not apply on the
company entering into administration but only on the giving of notice of the achievement
of Objective 1.57 Until notice is given the Bank of England has the functions of the creditors
committee.
7.34 An administrator may apply to the court for directions before Objective 1 has been achieved,
but he is required to give notice to the Bank of England and the Bank of England is entitled
to participate in the proceedings.58

53
Rules 28 and 29 of the Administration Rules.
54 Banking Act, s 147.
55 Banking Act, s 148.
56 Banking Act, ss 139 and 153.
57 The amendments to paras 5058 of Sch B1 are in Table 1 in the Banking Act.
58 Schedule B1, para 63 as amended in Table 1.

292
 C. The Bank Administration Procedure (BAP)

Until the Bank of England has given an Objective 1 Achievement Notice, a distribution to 7.35
creditors may be made only with the Bank of Englands consent.59 Where, however, there has
been a transfer to a bridge bank and before the Bank of England has given an Objective 1
Achievement Notice, a distribution of the prescribed part may be made with the Bank of
Englands consent or out of assets which have been designated as realizable by agreement
between the bank administrator and the Bank of England.60
The management of the banks affairs, business, and property must be conducted in accord- 7.36
ance with the principles agreed between the bank administrator and the Bank of England.61
The discretion in managing and distributing the assets are fettered where the bank is in
administration under the Banking Act in that, following the transfer to a bridge bank, until
the Bank of England has given an Objective 1 Achievement Notice distribution may be
made by the administrator only with the Bank of Englands consent or out of assets which
have been designated as realizable by agreement between the bank administrator and the
Bank of England.62
The bank administrator can disclaim onerous property only with the consent of the Bank of 7.37
England following a transfer to a bridge bank and before the Bank of England has given an
Objective 1 Achievement Notice.63
The administrator may only dispose of or take any action relating to property subject to a 7.38
floating charge as if it were not subject to a charge and the court may only make an order
relating to property subject to a fixed charge if the administrator or the court (as the case may
be) is satisfied that the action will not prejudice the pursuit of Objective 1.64 An application
to dispose of goods which are in the possession of the bank under a hire-purchase agreement
may only be made with the Bank of Englands permission.65
Misfeasance proceedings may be brought by the bank administrator and also by the Bank of 7.39
England.66 The Bank of England may also make an application challenging the administra-
tors conduct of the residual bank on any grounds, not just on grounds of unfair prejudice,
and the grounds may include insufficient pursuit of Objective 1.67
Only the Bank of England can apply to replace an administrator during the Objective 1 7.40
Stage.68 The modification to the normal insolvency provision is that until an Objective 1
notice has been given the Bank of England and no other person may make an application to

59
Schedule B1, para 65 as amended in Table 1.
60 Section 176A of the Insolvency Act 1986 as amended in Table 2.
61 Schedule B1, para 68 as amended in Table 1.
62
Section 168(4) of the Insolvency Act 1986 and para 13 of Sch 4 thereto, modified in Table 2 of the
Banking Act.
63
Sections 178188 of the Insolvency Act 1986 as modified by Table 2.
64
Schedule B1, paras 70 and 71 as amended in Table 1.
65 Schedule B1, para 73 as amended by Table 1.
66
Schedule B1, para 75 as amended by Table 1.
67
Schedule B1, para 74 as amended by Table 1. A court may only make an order on an application by a credi-
tor under this provision until notice of the achievement of Objective 1 has been served if the court is satisfied
that the order would not prejudice the pursuit of Objective 1.
68 Paragraph 91 of Sch B1 to the Insolvency Act 1986 as modified by the Banking Act in Table 1, s 145(6)

of the Banking Act. The rules on who is to be served, given notice, and appear are the same as those that apply
where there is an application for a bank administration order. In addition the administrator whose removal is
sought and the administrator who is to be appointed are entitled to be served. Rule 39 of the Administration
Rules.

293
 Banking Act Restructuring and Insolvency Procedures

replace the administrator; as in a normal administration an administrator can only be

replaced where he dies, resigns, is removed from office, or where he vacates office because he
ceases to be qualified.69 Where a bank administrator has been appointed on an application
to the court made by the Bank of England, he can resign by notice in writing to the court or
to the Bank of England.70 Until Objective 1 Stage has been achieved, an application to
remove the administrator may only be made with the consent of the Bank of England.71
7.41 Where an administrator vacates office before the achievement of Objective 1, the discharge
of the administrators liability takes effect at a time determined by the Bank of England.72
The former administrators remuneration and expenses that are charged on the property in
his custody and control immediately before he ceased to be an administrator, are only pay-
able in accordance with the directions of the Bank of England and if the Bank of England is
satisfied that they will not prejudice the achievement of Objective 1.73
7.42 Applications to vary the time periods in Schedule B1 may only be made with the Bank of
Englands consent until an Achievement Notice has been served and the court is required to
have regard to the achievement of Objective 1.74 The Bank of Englands consent is required
to vary time for the submission of the administrators proposals, to vary the time for notice
of creditors meetings and to vary the date for the initial creditors meeting.75
7.43 The administrators remuneration is fixed by the Bank of England as a percentage of the value
of the property with which he has to deal or by reference to the time properly given by the
administrator and his staff to the matters arising in the administration. The administrator may
challenge the remuneration fixed by the Bank of England. Notice of any such application must
be given to the FSA and the FSA may appear and be heard. The rule permitting a creditor to
claim that the remuneration is excessive does not apply in the Objective 1 Stage.76
7.44 The provisions governing the administration of the residual bank during the Objective 1
Stage give the Bank of England extensive and close control over the conduct of the adminis-
tration. The degree of control over all aspects of the administration is such that, in reality, the
administrator during Objective Stage 1 has very little scope for action without the concur-
rence of the Bank of England.
7.45 The court may appoint a provisional administrator of a bank pursuant to section 135 of
the Insolvency Act 1986 as modified in Table 2 of the Banking Act. A provisional bank
administrator may only pursue Objective 1 and the court may confer on the provisional
bank administrator functions in connection with pursuit of Objective 1. An application to
terminate the provisional administration may be made by the provisional bank administrator

69
Paragraph 90 of Sch B1 applies to bank administration.
70
Schedule B1, para 87 as amended by Table 1.
71
Schedule B1, para 88 as amended by Table 1.
72 Schedule B1, para 98 as amended by Table 1.
73
Schedule B1, para 99 as amended by Table 1. The amendment does not expressly state that this restriction
on payment only applies until an Objective 1 Achievement Notice has been given by the Bank. It would, how-
ever, be contrary to the other provisions of the statute were the Bank to continue to have this control over
remuneration and expenses once the Bank had formed the view that Objective 1 had been achieved and given
notice of that achievement.
74 Schedule B1, para 107 as amended by Table 1.
75 Schedule B1, para 108 as amended by Table 1 substitutes the Banks consent for the consent of the secured

creditor and certain preferential creditors.

76 Rules 2.1062.109 of the Insolvency Rules 1986 as modified by the Bank Administration Rules.

294
 C. The Bank Administration Procedure (BAP)

or the Bank of England. The appointment of a provisional administrator lapses on the

appointment of an administrator.77

(b) The Objective 2 Stage

The modifications to and comments on Schedule B1 in Part 3 of the Banking Act (Table 1) are 7.46
relevant only to the conduct of the administration during the Objective 1 Stage, once the Bank
of England has issued an achievement notice in relation to that objective, the administration
continues in the same manner as a company administration under Schedule B1 to the Insolvency
Act. It is only at this stage that a creditors committee can be constituted as the Bank of England
performs the function of such a committee during the Objective 1 Stage.78
There are, however, some modifications to the Bank Administration Rules that apply to this 7.47
stage of the administration. The requirements governing the meetings to consider the admin-
istrators proposals apply to the proposals for the Objective 2 Stage and an invitation to the
meeting must be sent to the FSA and to the FSCS. When the administrator fixes a venue for
the meeting he is required to have regard not only to the convenience of creditors, as in a
normal administration, but also to the convenience of the FSA and FSCS. The FSA and
FSCS are to be given notice in relation to issues concerning appeals against proofs of debt
and distributions to the FSCS.79
The rules on the priority of expenses of a bank administration are the same as those in a 7.48
normal administration, save that super priority is given to expenses incurred in any provi-
sional bank administration.80 Remuneration is fixed, at the Objective 2 Stage, in the same
way as in a normal administration, subject to any pending application made by the Bank in
the Objective 1 Stage.81
(c) Statutory claims available to bank administrators
During the administration the provisions in the Insolvency Act 1986 for fraudulent trading, 7.49
wrongful trading,82 preferences and transactions at an undervalue, extortionate credit trans-
actions, transactions de-frauding creditors, and avoidance of floating charges all apply in
bank administrators, with minor modifications.83 The bank administrator may also use the
powers to get in the banks property, require cooperation, and make inquiries.84
(d) Termination of the administration
In circumstances where the Bank of England has served an Objective 1 Achievement Notice 7.50
and the administrator believes that the residual bank has been rescued as a going concern, the

77
Section 172(1), (2), and (5) of the Insolvency Act 1986 apply as do rr 4.254.31 of the Insolvency Rules
as modified by the Bank Administration Rules.
78
Rule 2.5 of the Insolvency Rules 1986 as modified by Bank Administration Rules.
79
Rules 2.78, 2.80. 2.95, 2.98, 2.100, 2.103 of the Insolvency Rules 1986 are modified by the Bank
Administration Rules to include the FSA and FSCS.
80
Rule 2.67 of the Insolvency Rules 1986 as modified by the Bank Administration Rules.
81
Rule 2.106 of the Insolvency Rules 1986 as modified by the Bank Administration Rules.
82 The Banking Act provides (s 120(9)) that a person giving notice to the FSA of an application for a bank

insolvency order can be a step with a view to minimizing the potential loss to a banks creditors for the purpose
of wrongful trading; see para 7.54.
83 Insolvency Act 1986, ss 213, 214, 238, 239, 240246 are applied by Table 2. When making orders under

ss 238 (transaction at under value) and 239 (preference), the court when considering making an order is
required to have regard to Objective 1.
84 Sections 234237 of the Insolvency Act 1986 are applied by Table 2, unmodified.

295
 Banking Act Restructuring and Insolvency Procedures

administrator may give notice of the termination of administration and file a notice with the
court, the registrar of companies, and the FSA. On filing the notices the administrators
appointment ceases to have effect.85
7.51 If the Bank of England has given an Objective 1 Achievement Notice and the bank admini-
strators pursue the objective of achieving a better result for the residual banks creditors as a
whole than would be likely to be achieved were the residual bank to be wound up without
first being in bank administration, the bank administrator may bring the administration to
an end in one of two ways. If there is no property which might permit a distribution to credi-
tors, the administrator may take steps to dissolve the company. Alternatively, the bank
administrator may make a proposal for a company voluntary arrangement.86 The bank
administrator may not take either of these steps unless he is satisfied that he has received any
funds likely to be received from any scheme under a resolution fund order made under sec-
tion 52 of the Banking Act.87
7.52 The Banking Act 2009 (Bank Administration) (Modification for Application to Multiple
Transfers) Regulations 2009 modify the administration provisions that apply to banks pur-
suant to Part 3 of the Banking Act where more than one property transfer instrument is made
by the Bank of England. This could arise where the property is transferred first to a bridge
bank and then to an end transferee.
7.53 The provisions of the Company Directors Disqualification Act 1986 are applied to the new
bank administration regime to ensure that appropriate action can be taken against the direc-
tors of a failed bank.
7.54 The provisions of the Banking Act do not preclude a bank administration under the
Insolvency Act 1986. On an application for an administration order in respect of a bank the
court may, instead, make a bank insolvency order. The FSA or the Bank of England may
apply for such an order.88 An administrator of a bank may not be appointed unless the FSA
has been notified by the application for the administration order that an application has been
made or by the person proposing to appoint an administrator, of the proposed appointment.
The FSA must, therefore, be notified of proposals to appoint an administrator by order of the
court and by way of an out-of-court appointment. The FSA is required to inform the Bank
of England. A copy of the notice to the FSA must be filed with the court. An appointment may
not be made until a period of two weeks, which begins with the day on which the notice is
received by the FSA, has ended or the FSA has informed the proposed appointor that it does
not intend to apply for a bank insolvency order and the Bank of England has informed the
proposed appointor that it does not intend to apply for a bank insolvency order or exercise a

85
Banking Act, s 153; para 80 of Sch B1 to the Insolvency Act 1986 and r 48 of the Bank Administration
Rules.
86 Banking Act, s 153. Part 1 of the Insolvency Act 1986 on company voluntary arrangements applies to

bank administrators, subject to the modification in s 154(3) that the meeting must be summoned by the admin-
istrator as nominee and may not be summoned by any other person. (The Insolvency Act 1986, s 3(2) applies
and s 3(1) does not apply.) Rule 49 of the Bank Administration Rules supplements the statutory provision on
dissolution at the end of administration.
87 Banking Act, s 154(6). A resolution fund order is an order under s 52 of the Banking Act. Where the Bank

has made a property transfer instrument that transfers all or part of the property owned by the bank to a bridge
bank, the Treasury is required to make a resolution fund order making provision for compensation whether by
a compensation scheme order or a third party compensation order.
88 Banking Act, s 117.

296
 D. Bank Insolvency Procedures

stabilization power under Part 1 of the Banking Act. Finally a normal administration order
in respect of a bank cannot be made if a bank insolvency order is pending.89

D. Bank Insolvency Procedures

Part 2 of the Banking Act is concerned with the winding up of a bank based on the existing 7.55
compulsory winding up process for commercial companies and is supplemented by the
Bank Insolvency (England & Wales) Rules 2009.90 The institutions that can be subject to
the bank insolvency procedure are FSMA-approved institutions.91 The insolvency procedure
has been applied to building societies by secondary legislation.92

1. The application for a bank winding up order

To try to deal with the need to avoid a run on a failing bank and to preserve the banks assets, 7.56
the process of applying for a bank insolvency order is modified as compared with the rules
that apply in the normal procedures so that there can be a court hearing without delay. An
application to court under the Banking Act to appoint a person as liquidator can be made by
the Bank of England, the FSA, or the Secretary of State.93
There are three grounds for an application for an insolvency order in respect of a bank: 7.57

(1) ground A: the bank is unable to pay or likely to become unable to pay its debts.94 In
addition it is necessary to show that a bank is in default of an obligation to pay an
amount that is due and payable under an agreement;95
(2) ground B: it is in the public interest to wind up the bank;96 and
(3) ground C: it is fair to wind up the bank. This appears to be intended to be no different
from just and equitable that is familiar in the context of the winding up of non-bank
companies.97
Where the insolvency order is sought the court may only, in the exercise of its discretion, 7.58
make an insolvency order in respect of a bank if the court is satisfied that the bank has eligi-
ble depositors; ie depositors eligible for compensation under the FSCS.98 On an application
by the Bank of England or by the FSA the court must be satisfied that grounds A or C are
satisfied and on application by the Secretary of State the court must be satisfied that grounds
B and C are satisfied.
Further, where the Bank of England or the FSA apply for an insolvency order in respect of a 7.59
bank there are further requirements. The bank is required to be failing or likely to fail to meet

89
Banking Act, s 120.
90
These came into effect on 25 February 2009.
91
Banking Act, s 91.
92 The Building Societies (Insolvency and Special Administration) Order 2009, SI 2009/805.
93
Banking Act, s 95.
94
The definition in s 123 of the 1986 Act applies to banks.
95 Banking Act, s 893(4).
96
Building societies cannot be wound up on grounds of public interest. The governments view is that it is
not necessary to make ground B available to the FSA.
97 Banking Act, s 93(8). The Act points out that fair has a meaning similar to that of just and equitable.

The Explanatory Notes to the Banking Bill explain that fair is used in place of the well-known words just and
equitable and that fair has replaced these words because they are somewhat antiquarian.
98 Banking Act, s 97(1).

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 Banking Act Restructuring and Insolvency Procedures

the threshold conditions in section 41(1) of the FSMA and it is not reasonably likely that
action will be taken by the bank to satisfy these conditions (in the absence of the use of the
stabilization powers under Part 1 of the Banking Act).99

2. The process of the winding up

7.60 The bank liquidator, who is an officer of the court,100 has two objectives. Objective 1 is to
ensure that each eligible depositor has their account transferred to another financial institu-
tion or receives payment from the FSCS as soon as practicable.101 Objective 2 is to wind up
the affairs of the bank so as to achieve the best result for the banks creditors as a whole.
Although the bank liquidator is required to begin working towards both objectives, Objective
1 takes precedence over Objective 2.102 The position is described in the Explanatory Note
to the Banking Bill as follows:103
Once objective 1 has been achieved, or has been substantially completed, the process of liqui-
dation will continue in much the same way as a normal winding up with the liquidator calling
a meeting of creditors, realising the assets of the failed bank and distributing the proceeds to
creditors.
7.61 Therefore, as with bank administration, the normal provisions are varied to give priority to
the protection of the interests of depositors eligible for compensation under the FSCS. The
aim of these provisions is the orderly winding up of a failing bank together with prompt
compensation payments from the FSCS to eligible depositors. Alternatively, their deposits
are transferred to different, financially sound, institutions.
7.62 The general powers and duties of the liquidator are set out in section 103 of the Banking Act
which lists, with only minor modifications, the main provisions of the Insolvency Act 1986
that apply to non-banks. In short, most of the standard company insolvency provisions
apply equally to banks.
7.63 From the commencement of the liquidation the members of the liquidation committee will
be nominees of the bank, the FSA, and the FSCS and the liquidator is required to report to
this committee.104 A meeting of this committee is only quorate if all members (or their nomi-
nated representatives) are present.105 The liquidator is required to report on the progress
concerning the eligible depositors and must recommend to the liquidator the manner in
which he should pursue the principle objective of protecting the depositors. When the eligi-
ble depositors have been paid by the FSCS or have been transferred to a different bank, the
liquidator would then seek to form a new creditors committee from representatives of credi-
tors who were not eligible depositors.106 The meeting to convene a new committee may elect
2 or 4 individuals as new members. Two of these individuals replace the Bank of England
and the FSA. The FSCS may continue on the committee, or may resign from the committee
(in which case three or five new members may be elected). If the resulting committee has
fewer than three members or an even number of members the liquidation committee ceases

99
These conditions are conditions 1 and 7 in s 7 of the Banking Act.
100 Banking Act, s 105.
101
Banking Act, s 99.
102 Banking Act, s 99(4).
103 Paragraph 234.
104 Banking Act, s 100.
105 Banking Act, s 101(2).
106 Banking Act, s 100(6).

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 D. Bank Insolvency Procedures

to exist at the end of the meeting,107 although the committee may be reformed at the instiga-
tion of the liquidator.108
For the purpose of achieving Objective 1, the FSCS may make or arrange for payments to be 7.64
made to eligible depositors and may make money available to facilitate the transfer of
accounts of eligible depositors. A bank liquidator must comply with a request from the FSCS
for information and must provide information to the FSCS which he thinks might be useful
for the purpose of cooperating in the pursuit of Objective 1.109 Where a bank liquidator
arranges the transfer of eligible depositors accounts from the bank to another financial insti-
tution, the arrangements may disapply or provide that they shall have effect despite any
restriction arising by virtue of contract or legislation or in any other way. For this purpose
restriction includes any restriction, inability, incapacity affecting what can and cannot be
assigned or transferred . . . and a requirement for consent (by any name). The bank liquida-
tor, in making the arrangements, is required to ensure that the eligible depositors will be able
to remove money from the transferred accounts as soon as reasonably practicable after the
transfer.110
Even after their removal as members of the committee, the Bank of England and the FSA 7.65
may attend meetings of the liquidation committee and are entitled to copies of documents
relating to the committees business, may make representations to the committee, and may
participate in legal proceedings relating to the committee.
The liquidation committee is required to recommend to the liquidator whether to pursue the 7.66
transfer of relevant accounts to another financial institution (Objective 1) or whether to
pursue payment of the eligible depositors by the FSCS (Objective 2). The liquidation com-
mittee is required to consider the desirability of achieving Objective 1 as soon as possible and
Objective 2 which is to wind up the affairs of the bank so as to achieve the best result for the
banks creditors as a whole. Objective 1 takes precedence over Objective 2, but the bank
liquidator is obliged to begin working towards both objectives form the commencement of
his appointment.111
The provisions of the Insolvency Act are applied with some modifications and comments as 7.67
set out in the Table of Applied Provisions in Part 2 of the Banking Act. The modifications are
for the most part not substantial. The general functions of a winding up, to secure that the
assets of the company are got in, realized, and distributed to the companys creditors are also
the general function of a bank liquidator, save that these functions are subject to Objective
1, the transfer or payment of eligible depositors.112
The general powers of the liquidator in a bank liquidation are those of a liquidator in a 7.68
normal liquidation, save that in the former neither a creditor nor a contributory may apply
to the court with respect to the exercise of the liquidators powers unless the liquidation

107 Banking Act, s 100.

108
Banking Act, s 101(8).
109 Banking Act, s 123.
110 Banking Act, s 124.
111 Banking Act, ss 102 and 99.
112 Section 143 of the Insolvency Act 1986 as modified by the Table of Applied Provisions in Part 2 of the

Banking Act.

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 Banking Act Restructuring and Insolvency Procedures

committee has passed a full payment resolution,113 although a person aggrieved by an action
of the liquidation committee before it has passed such a resolution may apply to the court.114
A full payment resolution is a resolution by the liquidation committee that Objective 1, the
transfer of eligible deposits to a private bank or payment by the FSCS, has been achieved
entirely or so far as reasonably practicable.115
7.69 Further, in exercising the liquidators powers under Schedule 4 to the Insolvency Act 1986,
the bank liquidator is required to have regard to Objective 1. In addition, the power to bring
or defend any action or legal proceedings has been varied to expressly include the power to
submit matters to arbitration. The Banking Act also confers some additional express powers
on the bank liquidator: the power to insure the business and property of the bank, the power
to do all such things (including the carrying out of works) as may be necessary for the realiza-
tion of the property of the bank, and the power to make any payment which is necessary or
incidental to the performance of the liquidators business.116 The implication of the addition
of these express powers is that the legislature has taken the view that these powers do not fall
within the liquidators general powers, in a normal liquidation, to carry on the business of
a company so far as may be necessary for its beneficial winding up or the power to do all
such things as may be necessary for winding up the companys affairs and distributing its
assets.117
7.70 The bank liquidator may not apply to the court for directions in relation to any particular
matter arising in the winding up and a person aggrieved by an act or decision of the bank
liquidator may not apply to the court unless the liquidation committee has passed a full pay-
ment resolution, ie until the committee has resolved that Objective 1 has been achieved
insofar as is reasonably practicable.
7.71 The bank liquidator remains in office until he vacates that office by resigning (which requires
that he gives notice to the court), on removal on disqualification, on appointment of a
replacement, or because the bank has been put into voluntary arrangement, administration,
or been dissolved.118
(a) Claims for misfeasance, misconduct, and adjustment of prior transactions
7.72 The provisions on misfeasance, fraudulent trading, wrongful trading, restriction on re-use of
company names, transactions at an undervalue, preferences, the avoidance of floating
charges, transactions defrauding creditors, and other claims available to a liquidator in a
normal liquidation are available to the bank liquidator. There are a few modifications, most
notably the provision that anything done by the bank in connection with the exercise of a
stabilization power under Part 1 of the Banking Act is not a transaction at an undervalue for
the purposes of sections 238 and 423 and does not amount to giving a preference under
section 239.119

113
Section 167 of the Insolvency Act 1986 as modified by the Table of Applied Provisions in Part 2 of the
Banking Act.
114
Banking Act, s 101(3).
115 Banking Act, s 100(5)(a).
116 Banking Act, s 104.
117 The Insolvency Act 1986, Sch 4, paras 5 and 13.
118 Banking Act, ss 106116.
119 Sections 238, 239, and 423 of the Insolvency Act 1986.

300
 E. Building Societies

(b) Termination of the liquidation

The liquidator can bring the liquidation to an end by proposing a company voluntary 7.73
arrangement pursuant to section 1 of the Insolvency Act120 or may apply for the appoint-
ment of an administrator pursuant to Schedule B1, paragraph 38 of that statute.121 On the
completion of the liquidation, the bank liquidator is required to hold a meeting of the liqui-
dation committee to report to the committee on the conducted insolvency. He is also
required to send a copy of the report to the FSA, the FSCS, the Bank of England, the
Treasury, and the Registrar of Companies.122
A petition for a winding up order may be presented against a bank under the Insolvency Act 7.74
1986. The same conditions apply to the presentation of a winding up petition as to the
appointment of an administrator of a bank under the Insolvency Act 1986.123 A resolution for
voluntary winding up of a bank may not be made unless those conditions are satisfied.124
On 18 January 2010, the BLP advised that provision should be made in the legislation for 7.75
the building society administrator to have the power to change the name of the residual
society so that it is distinguished from the business of the society that has been transferred.
The BLP noted that in the administration of the residual company of Dunfermline.
Building societies may only change their name by special resolution and must notify the
FSA.125 So far as banks are concerned, Companies House takes the view that the administra-
tor has the power to change the name of the company and will register changes made by the
administrator.

E. Building Societies
The Building Societies Act 1986 as amended by the 1997 Building Societies Act applied UK 7.76
insolvency legislation to building societies.126 The Insolvency Rules 1986 were not directly
applied to building societies with the consequence that the mandatory set-off rules therein
do not apply.
As explained above, the BAP and BIP are applied to building societies by secondary legisla- 7.77
tion. The Banking Liaison Panel Subgroup on building society insolvency and special admini-
stration127 provided advice to the Treasury on 18 January 2010 on the following issues:
(1) the application of the Insolvency Rules 1986 to building societies and set-off;
(2) the building societies special administration procedure (BSSAP); and
(3) the building societies insolvency procedure (BSIP).
On the first issue, the BLP were concerned that the Insolvency Rules 1986 did not apply to 7.78
building societies and that, although the Building Societies Act 1986 provides that rules may

120
Section 1 of the Insolvency Act 1986.
121
Pursuant to Sch B1 to the Insolvency Act 1986.
122 Banking Act, s 115(2)(b).
123
See para 7.54.
124 Banking Act, s 120.
125 The procedure is set out in the Building Societies Act, Sch 2, para 9.
126 Sections 8692 and Schs 15 and 15A of the 1986 Act.
127 The remit of the subgroup is to provide advice to the Treasury on behalf of the Banking Liaison Panel

under s 10 of the Banking Act 2009.

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 Banking Act Restructuring and Insolvency Procedures

be made under the Insolvency Act 1986 to give effect, in relation to building societies, to the
provisions of the applicable winding up legislation, no such rules had been made. The BLP agreed
with the principles outlined in the consultation document, but were concerned to ensure that
there was equal treatment of banks and building societies in the administration and insolvency
procedures. The draft rules for building societies insolvency included provision for set-off, by
contrast if normal insolvency proceedings were commenced by ordinary creditors there were no
rules on set-off and these should be made under the Building Societies Act 1986.
7.79 The BLP also noted that the draft BSIP rules provide that sums owed to building society
members are carved out of the set-off provisions because the members are technically share-
holders and rank below creditors in insolvency.

F. The Treatment of Creditors in Bank Insolvencies

7.80 The new feature of the insolvency regime as it applies to banks is the focus on the eligible
depositors and the objective of prompt payment to this class of creditors, whether in admini-
stration or liquidation. This first objective or putting payment of depositors ahead of all else
means that the rights of other creditors, including secured creditors, have a lower priority in
the process, albeit not in the distribution because the depositors claims are paid by the FSCS
which becomes subrogated to their claims; the FSCS therefore becomes an unsecured credi-
tor of the bank.
7.81 The court has been asked to consider the set-off provisions of the insolvency rules as they
apply to bank deposits. Kaupthing Singer & Friedlander Limited (KSF), an Icelandic bank
with branches in the UK, went into administration on 8 October 2008 and on the same day
certain deposits (the Edge Accounts) were transferred from KSF to ING Direct NV.128 In
administration KSFs creditors were the FSCS for sums paid by the FSCS to ING so that
FSCS would take over liability to the Edge depositors for deposits of 2.6 billion; the Non-
Edge Deposit with deposits of about the same value, 2.6 billion, and trade and other credi-
tors who ranked equally with the FSCS and the Non-Edge Depositors. Some creditors of
KSF also owed money to KSF. In Kaupthing Singer & Friedlander Limited (in administration)129
the court was asked to give directions concerning four issues arising from the rules governing
set-off. The judge held that for the purposes of set-off in administration a future debt is a
debt that is not due for payment at the date of notice of intention to make a distribution; the
same valuation principles applied to sums owed to the creditor and sums owed by the credi-
tor; a creditor could not claim post-administration interest but the company could do so;
set-off for debts falling due before the distribution date should be given full value while set-
off for debts falling due after the distribution date should be discounted; in applying insol-
vency set-off to interest bearing debts that were future debts the discount should apply at the
date of the notice of distribution and the company cannot add on interest arising between
that date and the date on which the loan matures.
7.82 Rule 72 of the Bank Insolvency (England & Wales) Rules 2009 provides for the mandatory
set-off of mutual credits and debits, similar to rule 4.90 of the Insolvency Rules. Rule 73
provides that, with regard to eligible depositors, set-off will only apply to any balance

128 Under the BSPA.

129 [2009] EWCA 2308.

302
 G. Deposit Insurance

exceeding the compensation limit. The FSA has consulted about this and these rules may be
amended to make compensation payments to eligible depositors on a gross basis with no
set-off of any debts owed by the eligible depositor to the failed bank.
The Companies Act requirement to register a charge is disapplied by section 252 of the 7.83
Banking Act where a charge is given by a bank to the Bank of England, the European Central
Bank, or any other central bank. The purpose of this provision is to ensure that banks are not
discouraged from taking advances from these institutions when they are in need of liquidity
by the disclosure of a charge given in respect of advances from these institutions where the
advances can include emergency funding. This provision appears to undermine one of the
objectives of the statutory requirements for the registration of charges under the Companies
Act; the provision of information to prospective lenders as to the companys general financial
position and the extent to which the companys assets are charged.

G. Deposit Insurance
The FSCS was set up under the FSMA as the UKs compensation fund of last resort for cus- 7.84
tomers of financial services firms. The FSCS is a non-profit-making body with an independ-
ent board. The FSA sets the framework within which the FSCS operates. In particular, the
FSA is responsible for setting the eligibility and compensation limits that apply to the FSCS.
The scheme covers business conducted by firms authorized by the FSA and depositors with
the UK branches of credit institutions from other EEA states that have joined the top-up
arrangements under the Deposit-guarantee Scheme Directive. Under this Directive the
deposit-guarantee scheme in the banks home member state is responsible for paying all or
part of the compensation to the claimant.
The FSCS only pays compensation for financial loss. 7.85

The FSCS provides compensation for bank deposits and other financial products.130 7.86

The scheme has, historically, been funded from a levy on the financial services industry. The 7.87
government considered, but rejected, the introduction of a pre-funded FSCS. The main
reason for this decision was that a pre-funded scheme would:
tie up a considerable amount of resources which would otherwise be used productively in the
UK financial system while the introduction of a pre-funded scheme at this time would mean
that the levy payers had to finance both the existing post-funded scheme and the new pre-
funded scheme during the transitional period. The introduction of a pure pre-funded scheme
would also require changes to the Financial Services and Markets Act 2000.
See the discussion paper on Banking reformprotecting depositors by the Treasury, the
FSA, and the Bank of England issues in October 2007.
At the time when the discussion paper was published the first stage of the reforms to the 7.88
FSCS had already been implemented. Before 1 October 2007 compensation was limited to
the first 2,000 plus 90 per cent of the deposit between 2,000 and 35,000; the maximum
compensation payable in respect of a 35,000 deposit was 31,700.131 On 1 October 2007

130 Long-term insurance, insurance brokering, investment business, and mortgage advice and arranging

mortgages.
131 (2,000 + (0.9 (35,000 - 2,000))).

303
 Banking Act Restructuring and Insolvency Procedures

the FSA announced an increase in the limits on compensation payable under the FSCS of up
to 35,000 equal to 100 per cent of the loss incurred.
7.89 The Authorities were concerned that normal corporate insolvency procedures had a narrow
focus on the failing firm and the interests of creditors and that the suspension of a creditors
contractual rights so that the loss could be established and apportioned among creditors
meant that firms and individuals could not use their accounts for a period of weeks or even
months and that even where the difference could be recoverable from the FSCS, this caused
disruption to the customers of the bank and the firms and consumers with whom the cus-
tomers of the bank had relationships.
7.90 The policy position on deposit insurance has changed dramatically since 2007. As Paul
Tucker explained, in his speech to the British Bankers Association Annual International
Banking Conference, Restoring ConfidenceMoving Forward, on 30 June 2009:132
For most of the past thirty years, deposit insurance in the UK applied to modest amounts, and
provided less than 100% cover of the insured amount. The element of co-insurance was
intended to leave retail depositors with an incentive to take care where they deposited their
savings. It turned out to be naive on two fronts. First, it proved unrealistic to expect house-
holds generally to take such care. And second, it brought politics into bank rescues, because of
the hardship that could still be suffered by regular depositors when their bank failed. Nearly a
decade ago I became convinced of the need for 100% insurance of a meaningful amount in
order, as I put in internal exchanges, to take the politics out of crisis management.
7.91 The catalyst for change was Northern Rock and Bradford & Bingley. The FSA moved to
100 per cent insurance of 50,000. The FSA has estimated, using data provided by the
British Bankers Association for two large banks, that the share of accounts covered by the
increase in deposit insurance from 35,000 to 50,000 would rise from 96 per cent to 98 per
cent while the share of the overall value of deposits insured would rise from 52 per cent to
60 per cent. The data for building societies showed similar coverage for individuals and a
higher shares of the overall deposit value at 77 per cent.133
7.92 The FSCS does not operate a pre-funded scheme in which money is available on call to replace
a deposit. The FSCS may, therefore, have to borrow from the Treasury in order to contribute to
the immediate cost of the resolution. This happened in the case of Bradford & Bingley.
7.93 When a bank (including a building society) goes into an insolvency procedure the FSCS will
pay compensation to their customers who are eligible for compensation under FSCS rules.
7.94 In a building society insolvency, the FSCS takes over two types of claims. This arises because
building society customers can hold their account in one of two ways: as members of the
society, in which event they are members not creditors; or as non-members, for example,
current account holders, in which event they are creditors. The FSCS holds rights equivalent
to the members who it has paid and will be a creditor in respect of monies it has paid to non-
members. Therefore, the FSCS could be owed a substantial sum of money by the building
society, but will only be a creditor in respect of the sums paid to creditors.134

132 The Deputy Governor, Financial Stability, Bank of England.

133 FSA paper, Financial Services Compensation Scheme: Review of limits (CPO8/15).
134 The Treasury decided that to treat the FSCS as a creditor in respect of the monies that it had paid out to

shareholders would diverge from the provisions of standard insolvency which the Treasury was keen to follow
as closely as possible.

304
 G. Deposit Insurance

The FSCS has, therefore, been given particular rights in a building society liquidation: it is a 7.95
member of the liquidation committee as of right; it will have a right to apply to court to chal-
lenge the liquidators remuneration even if it is a creditor for less than 25 per cent of the total
value of claims in the liquidation;135 it will have the right to call a meeting of the liquidation
committee;136 and it will have the right of a creditor who is a member of the liquidation com-
mittee to stop a resolution by post.137
The FSCS also becomes subrogated to the rights of members that have been paid by the 7.96
FSCS138 on payment the FSCS is:
immediately and automatically subrogated, subject to such conditions as the FSCS deter-
mines are appropriate, to all or any part . . . of the rights and claims . . . of the claimant against
the relevant person.
The effect of subrogation is that the FSCS has the right to participate in the distribution of
the surplus after the distribution to ordinary creditors and enables the FSCS to attend meet-
ings of contributories.
The Banking Liaison Panel (BLP) agreed with the Treasury that the following rights should 7.97
be given to the FSCS:
(1) the right of creditors that are owed at least 25 per cent of the total in value to apply to the
court claiming that the liquidators remuneration is excessive. The right of a the FSCS
should not be dependent on the extent to which they are a creditor or on the value of
members claims subrogated;
(2) the right of a creditor who is a member of the liquidation committee to call a meeting of
the liquidation committee; and
(3) the right of a creditor who is a member of the liquidation committee to stop a resolution
by post.
The BLP were also concerned that where members rights are transferred to the FSCS, it is 7.98
important that these rights should revert to the members after the FSCS has ceased to be
involved in the insolvency process.
The Financial Services Act 2010 provides for an expansion of the role of the FSCS to act as 7.99
paying agent for other compensation schemes or arrangements.139 This legislation has been
introduced because in 2008 the FSCS went beyond its remit to ensure that eligible claimants
in failed banks were fully compensated for their deposits, including those in the UK branch
(Icesave) of Landsbanki by paying compensation due from the Icelandic deposit-guarantee
scheme to ensure that eligible depositors were fully compensated for their deposits. This was
done by private agreement.
The Financial Services Bill makes provision for the cost of funding the exercise of the SRR 7.100
powers to be recovered from the FSCS up to the net costs that the FSCS would have incurred
had the bank gone into default and FSCS compensation been paid in the normal way

135 BSIP, r 106; r 4.131 in the 1986 Rules.

136 BSIP, r 121; r 4.156 of the 1986 Rules.
137 BSIP, r 131; r 4.167 of the 1986 Rules.
138 COMP 15.
139 Financial Services Act, s 17.

305
 Banking Act Restructuring and Insolvency Procedures

(subject to a cap). There is provision in the FSMA140 for the FSCS to contribute to the cost
of the use of SRR powers, but it did not take into account the actual costs (if money were to
be borrowed) or opportunity costs (because money could have been used elsewhere).

H. Cross-Border Bank Insolvency

7.101 The Reorganisation and Winding-up of Credit Institutions Directive141 was introduced in
the wake of the failure of BCCI and was implemented in the UK by the Credit Institutions
(Reorganisation and Winding Up) Regulations 2004. This, in the context of cross-border
bank failures, provides for a single set of proceedings in the home country and for an equal
treatment of creditors.142 The Directive did not, however, harmonize national bank insol-
vency procedure.
7.102 The absence of harmonization means that the basis of insolvency law in different jurisdic-
tions can be incompatible. Some countries adopt the universal approach in which a home
country will seek to resolve a locally incorporated international bank as a single entity, apply-
ing a single proceeding to the bank and its branches worldwide and treating creditors equi-
tably regardless of their location. Others use a territorial approach such that the international
activities of a bank are resolved through separate entity resolutions applied by the host coun-
tries to the local entities, including branches and subsidiaries of the bank completely sepa-
rately from the main proceedings applied to the parent bank by the authorities in the home
country.
7.103 The Directive is based on a form of universality; it applies the universal approach to the reso-
lution of a bank and its branches abroad, but preserves the ability of the host countries to
apply territorial approaches to locally incorporated subsidiaries. The combination can
become a problem if the authorities in the host country ring-fence assets attributable to the
local branch of a foreign bank and use them to pay the claims of creditors of that branch. The
Bank of England is concerned that this could be adopted by any non-EU country in respect
of local branch activities of a UK bank and undermine the administration procedure. In
Financial Stability Paper No 5 (July 2009) the Bank of England notes that:143
. . . it could potentially reduce the assets that might be transferred to a bridge bank or PSP in
the United Kingdom, thereby limiting the going-concern premium from the sale of assets and
hence lowering recoveries from the creditors.
7.104 In 1994 the EU introduced a Deposit Guarantee Directive144 which required every credit
institution to join a national deposit-guarantee scheme. The minimum level of guarantee
was 20,000 for a number of years. The 1994 Directive was amended during the crisis when
it quickly transpired that the coverage limit and the delay for a payout were inadequate to

140 This was implemented in the FSMA and in the FSMA (Contribution to Costs of Special Resolution

Regime) Regulations 2009.

141
Directive 01/24/EC, 4 April 2001.
142 The City of London Law Societys response of 17 September 2008 to the consultation document dated

July 2008 entitled Financial Stability and Depositor Protection: Special Resolution Regime made the point that it
was unclear whether bank administration proceedings would be an insolvency proceeding for the purpose of
this Directive so as to be recognized in the EEA because the primary purpose of the procedure is to support the
bridge bank rather than the procedure being a collective procedure for the creditors.
143 The UK Special Resolution Regime for failing banks in an international context, Peter Brierley.
144 Directive 94/19/EC, 30 May 1994.

306
 H. Cross-Border Bank Insolvency

maintain consumer confidence.145 The new coverage limit is 50,000 with the option of
increasing it to 100,000 by 31 December 2010.
In November 2008 the Chancellor of the Exchequer wrote to the Commissioner for the 7.105
Internal Market.146 On crisis resolution he said that he was disappointed that the recent
amendment to the Deposit Guarantee Scheme Directive did not include further steps to
require cooperation between national schemes.
In his address to the BBAs annual conference in June 2009, Adair Turner, Chairman of the 7.106
FSA, expressed his views about banks that were too big and too cross-border to save. The
example he gave was the Icelandic case where the banks were large relative to their home
country and which could not afford the rescue. On this concern he suggested that there was
a need to be realistic about what intelligent cooperation could achieve. He suggested that one
possible way forward was to focus on legal entities, making large global banks into holding
companies of stand-alone national banks and,
perhaps making possible overt agreement that in conditions of failure there is no one country
responsible for rescue but rather different nations responsible for the rescue of specific legal
entitles.
Mr Turner acknowledged that this would mean that large cross-border banks would have to 7.107
hold even more capital than a capital surcharge regime would require from a too-big-to-fail
but purely national bank, but if there are additional systemic risks arising from the cross-
border operation this may be appropriate. He concluded his speech on this issue with the
following statement:
There are extremely complex issues here to which at present we do not have certain answers.
But the question is clear: it is not whether measures to reduce the risk arising from cross-border
operation will create hassle and costs for individual banks; it probably will, but those costs may
simply have to be accepted. Instead the question has to be how the regulation of cross-border
banks best contributes to global economic growth and to global financial stability.
This speech was given in the context of the collapse of Landsbanki FH in October 2008. 7.108
Landsbankis UK branch was not subject to full prudential supervision by the FSA147 by reason of
the EU single market rules (which rules also apply to countries in the EEA) which allow banks in
one country to operate branches in another with the supervision of solvency and liquidity being
left to the supervisory authorities of the home country; in this case Iceland. Under the Icesave
brand, Landsbanki had some 4.5 billion retail deposits when it failed. Under the Icelandic com-
pensation scheme these deposits were covered to a value of 20,887. The deposits were also cov-
ered on a top-up basis by the FSCS as Landsbanki had opted into the scheme. The Icelandic
government could not meet the liabilities of the Icelandic insurance scheme. In addition there
were 800 million of retail deposits which, because they were in excess of 50,000, were not
covered by either the Icelandic or the UK compensation scheme. Therefore, if the home country
does not have the resources to fund the rescue of a bank or provide appropriate deposit insurance,
the host country is vulnerable to the failure of the bank.

145 Directive 09/14/EC of the European Parliament and the Council of 11 March 2009 amending Directive

94/19/EC on deposit-guarantee schemes as regards the coverage and the payout delay.
146 Mr Charlie McCreevy.
147 The FSA had only limited powers relating to the supervision of local liquidity in cooperation with the

Icelandic supervisors, the conduct of investment business, and financial crime.

307
 Banking Act Restructuring and Insolvency Procedures

I. Potential Reforms: Investment Bank Failure

7.109 The Treasury has commenced consultation on new measures that may be introduced to deal
with failed investment banks. The definition of investment bank is the broad definition of
investment firm in the Markets in Financial Instruments Directive; the proposed legislation
is intended to apply to all investment firms that carry on investment activities on a regular
basis. Although, the government proposed to adopt a narrower definition in relation to pro-
posals for an administration procedure which would apply to an investment bank that: (i)
has permission under Part 4 of the FSMA to carry on the regulated activities of safeguarding
and administering investments, dealing in investments as principal ,or dealing in investment
as agent; (ii) holds client assets; and (iii) is incorporated in, or formed under the laws of any
part of, the UK. The government is also considering how to apply the BIP to investment
banks.
7.110 After a period of consultation, on 16 December 2009, the Treasury published proposals to
strengthen the Authorities ability to deal with any future failure of an investment bank,
Establishing resolution arrangements for investment banks.148 The deadline for responses
was 16 March 2010.
7.111 The aim is to develop a resolution regime that would enable a more effective management of
the failure of an investment bank that was achieved with Lehman Brothers International
Europe (LBIE). Insolvency proceedings in respect of Lehman Brothers were commenced in
more than 20 countries. Moreover, Lehman Brothers operated a centralized cash manage-
ment system to collect funds from and transfer funds to different parts of its organization. A
cross-border insolvency protocol and guidelines have been developed to promote informa-
tion sharing among the officeholders. The US courts have approved the arrangements,
although the office holders in some jurisdictions have not signed up to the arrangements
(France, Japan, and the UK).
7.112 As retail banking and investment banking are often conducted by the same institutions, any
insolvency regime for investment banking will need to be consistent with the provisions of
the Banking Act 2009.

J. Commissions on Banking
7.113 It is not only the Treasury, the Bank of England, the FSA, and the advisory panels who serve
these authorities which are continuing to consider how best to prevent financial crises in the
banking system and what to do about those that do arise.
7.114 In December 2009 Rt Hon David Davis MP, Rt Hon John McFall MP, Dr Vince Cable MP,
and Which? joined forces to launch the 'Future of the Banking Commission' to hold a public
debate on Britain's banking system. The recently published report recommends 39 changes
to the banking industry. Some of the recommendations are concerned with the issues

148 This was the second consultation paper on this issue and sets out detailed proposals for effective resolu-

tion of a failed investment firm. The first paper, published in May 2008, was titled, Developing effective resolu-
tion arrangements for investment banks. Both consultation papers were developed with input from the Bank
and the FSA and the advice of industry experts.

308
 J. Commissions on Banking

addressed in this Part of the book, in particular the report's recommendation on resolution
regimes and on depositor protection. The Commission supports the proposals for 'living
wills' and calls for these documents to be made public. On depositor protection, the
Commission recommends that the 50,000 limit should be applied to each brand rather
than to each licensed institution and that the insolvency procedures should be reformed so
that the rank of creditors is changed to put depositors at the top.
These recommendations will no doubt be considered by the Independent Commission 7.115
on Banking which was announced on 16 June 2010 by the Chancellor of the Exchequer
and which is chaired by Sir John Vickers. The terms of reference are broad, but appear to
be directed at policies that are aimed at avoiding financial difficulties as opposed to policies
to address financial difficulties once they have materialized. The announcement of this
Commission stated that:
The Commission will make recommendations covering:
Structural measures to reform the banking system and promote stability and
competition, including the complex issue of separating retail and investment banking
functions.
Related non-structural measures to promote stability and competition in banking for
the benefit of consumers and businesses.
The issues paper published by the Independent Commission on Banking on 24 September 7.116
2010 is directed at the structure of banks and the structure of markets, in particular market
concentration, and none of the issues is directed at banks that are in financial difficulties,
although it is made clear that the list is not, at this stage, intended to be exhaustive.
The Commission will produce a final report by the end of September 2011. 7.117

309
This page intentionally left blank
 8
RESOLUTION OF US BANKS AND OTHER
FINANCIAL INSTITUTIONS*

I. Introduction 8.018.04 V. Resolution Authority over Systemically

II. Fundamentals of Resolution Important Financial
Authority 8.058.19 Institutions 8.1578.211
III. Resolution of US Banks 8.208.140 A. Orderly Liquidation Authority
Framework 8.1598.167
A. Background 8.228.32
B. Key Policy Issues 8.1688.203
B. Supervisory and Other Tools to
Prevent Failure 8.338.47 C. Alternatives Based on Bankruptcy
Model 8.2048.211
C. Resolution Process 8.488.62
D. FDIC-assisted Transactions 8.638.99 VI. International Coordination of
E. Claims Process 8.1008.101 Cross-Border Resolutions 8.2128.221
F. FDIC Super Powers 8.1028.140 A. Living Wills 8.2158.216
IV. Resolution Authority over Fannie B. Cross-Border Bank Resolution
and National Bank Insolvency
Mae, Freddie Mac, and the Federal
Regimes 8.2178.219
Home Loan Banks 8.1418.156
C. Contingent Capital, Recapitalization
A. Background 8.1418.148 Programmes, and Bail-Ins 8.2208.221
B. Resolution Authority 8.1498.154
VII. Conclusion 8.222
C. Exercise of New Resolution
Authority 8.1558.156

I. Introduction
Resolution authority refers to a particular way of dealing with bank failures or the failures of 8.01
other financial institutions. It was first introduced in the United States in 1933 as part of the
deposit insurance programme for banks.1 As originally enacted, it was little more than the

The authors John L Douglas and Randall D Guynn acknowledge the superb contributions of Reena
Agrawal Sahni, Thomas J Clarke, Priya Bindra, Pengyu Jeff He, Gabriel Rosenberg, and Caroline Chan in the
preparation of this chapter. Unless otherwise noted, this chapter reflects legislative and regulatory developments
as of 1 August 2010.
1 Banking Act of 1933, ch 89, 8(l)(n), 48 Stat 162, 172177. The Bank Conservation Act was also enacted

in 1933 as part of the Emergency Banking Relief Act of 1933. It permitted the Comptroller of the Currency to
appoint conservators for national banks [w]henever he shall deem it necessary in order to conserve the assets of any
bank for the benefit of the depositors and other creditors thereof . . . . Pub L No 73-1, tit II, 48 Stat 1. Previously,
bank insolvencies had been handled under a variety of state statutes and common law receivership proceedings.

311
 Resolution of US Banks and other Financial Institutions

method by which the Federal Deposit Insurance Corporation (FDIC) honoured its obligations
to insured depositors.2 It evolved over time into a complementary method of promoting and
maintaining public confidence in the banking systemthe fundamental purpose of deposit
insuranceas well as minimizing the cost to the banking system of providing deposit
insurance.3 The most significant revision to the FDICs resolution powers was made by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).4 The US
bank resolution statute is contained within the Federal Deposit Insurance Act.5 It operates
like a special type of insolvency code administered by the FDIC.
8.02 Congress subsequently created a resolution authority modelled on the bank resolution statute for
Fannie Mae and Freddie Mac,6 the large government-sponsored enterprises that provide financial
support to the US residential mortgage market,7 as well as for the Federal Home Loan Bank
system. This resolution authority is currently administered by the Federal Housing Finance
Agency (FHFA), rather than the FDIC. It was used by FHFA to put Fannie Mae and Freddie Mac
into conservatorship one week before Lehman Brothers was allowed to fail in September 2008.8
8.03 As a result of the global financial panic of 2008, a growing interest in resolution authority
seemed to arise around the world, as did an interest in expanding resolution authority in the
US to cover all systemically important financial institutions. For example, the Basel
Committee on Banking Supervision has issued a series of recommendations on resolution
authority, including a recommendation that each member country have effective national
resolution powers and a framework for coordinating cross-border resolutions.9 The FDIC
has entered into memoranda of understanding with the Bank of England and the UK
Financial Services Authority governing the resolution of cross-border banking groups that
have operations in both the US and the UK.10 The UK has enacted a bank resolution statute,11
commenced a pilot programme to require banks to have rapid resolution and recovery plans
(otherwise known as living wills),12 and proposed expanding resolution authority to apply

2 Banking Act of 1933, ch 89, 8(l), 48 Stat at 172173 (resolution power limited to transferring insured

deposits to a depository institution national bank (DINB)); FDIC, The First Fifty Years: A History of the FDIC
19331983, at 81 (1983).
3 See, eg, Banking Act of 1935, 101, 49 Stat 684, 695696, 699 (resolution authority expanded to include

power to make direct pay-offs to depositors or to transfer assets and liabilities of failed or troubled banks to, or
merge them with, third parties); Federal Deposit Insurance Act of 1950, 11, 64 Stat 873, 884887 (further
spelling out resolution powers of the FDIC); Financial Institutions Reform, Recovery and Enforcement Act of
1989, Pub L No 101-73, tit VIII, 103 Stat 183, 441.
4
Pub L No 101-73, tit VIII, 103 Stat 183, 441.
5 The deposit insurance provisions are generally contained in ss 5, 6, 7, and 11 of the Federal Deposit

Insurance Act, 12 USC 1815, 1816, 1817, and 1821, and most of the resolution authority provisions are in
ss 11 and 13 of the Federal Deposit Insurance Act, 12 USC 1821, 1823.
6
Fannie Mae is the common name for the Federal National Mortgage Association and Freddie Mac is the
common name for the Federal Home Loan Mortgage Corporation.
7
These institutions had combined assets and guarantee liabilities of approximately $5.5 trillion at 30 June
2008.
8
Press Release, Federal Housing Finance Agency, Statement of FHFA Director James B Lockhart at News
Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (7 September 2008).
9 Basel Committee on Banking Supervision, Report and Recommendations of the Cross-border Bank Resolution

Group (September 2009).

10 FDIC and Bank of England, Memorandum of Understanding (22 January 2010); FDIC and Financial

Services Authority, Memorandum of Understanding (25 June 2008).

11 Banking Act 2009, ch 1.
12 Financial Services Authority, Turner Review Conference Discussion Paper: A Regulatory Response to the Global

Banking Crisis: Systemically Important Banks and Assessing the Cumulative Impact, Annex 1 (October 2009).

312
 II. Fundamentals of Resolution Authority

to securities firms.13 The US has recently expanded resolution authority in Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act, or the
Act) to apply to a wide range of systemically important financial institutions and require
such institutions to adopt and maintain rapid resolution and recovery plans.14
This chapter first describes the fundamentals of resolution authority as conceived in the US. 8.04
It then discusses the US bank resolution statute and how it has been used to resolve troubled
and failed banks in the US. It outlines the resolution authority that applies to Fannie Mae,
Freddie Mac, and the Federal Home Loan Bank system, which was based on the US bank
resolution model. It describes the new resolution authority that applies to all systemically
important financial institutions. It concludes with a summary of the international initiatives
to expand and coordinate the use of resolution authority across borders.

II. Fundamentals of Resolution Authority

Resolution authority, as conceived in the US, has two principal components. The firstthe 8.05
core resolution powersprovides a designated administrative agency with the authority to
take control of a troubled or failing institution. The agency can typically exercise several options.
It can operate the institution as a going concern until the institution can be returned to the
private sector or liquidated in an orderly manner. The US calls this conservatorship. Or it can
liquidate the institution immediately or, more typically, after it has identified and sold any part
of the business worth preserving to a third party at fair value. The US calls this receivership
or orderly liquidation of an institution. If a third party buyer cannot be found at fair value, the
agency can also establish a temporary entity called a bridge bank or other bridge financial
company to hold the part of the business worth preserving until it can be sold to a third party
at fair value or otherwise liquidated in an orderly fashion. In the context of US insured banks,
it also includes the obligation of the FDIC to assure that insured depositors are paid in full, a
process the FDIC generally performs by enticing another institution to assume the insured
deposit liabilities in full or, absent a willing acquirer, paying off the insured deposits in full.
The second component of resolution authoritythe claims process for left behind assets 8.06
gives the agency authority over the process for deciding which creditors receive what, in what
order, from the liquidation of any left-behind assets (including any value received from the sale
of any portion of the business).15

13
Her Majestys Treasury, Establishing Resolution Arrangements for Investment Banks (2009).
14 Wall Street Reform and Consumer Protection Act of 2010, HR 4173, 111th Cong, 2nd Sess (hereinafter
Dodd-Frank Act), 165(d), 201217 (2010). Previous proposals include: Restoring American Financial
Stability Act of 2010, Senate Substitute Amendment for HR 4173, 111th Cong, 2nd Sess, 165(d), 201214
(2010); Wall Street Reform and Consumer Protection Act of 2009, HR 4173, 111th Cong, 1st Sess, 1104(f ),
(i), 16011617 (2009). See also Staff of S Comm on Banking, Housing, and Urban Affairs, 111th Cong, 1st
Sess, Restoring American Financial Stability Act of 2009, 109(b), 201210 (Comm Print 10 November
2009); Staff of S Comm on Banking, Housing, and Urban Affairs, 111th Cong, 2nd Sess, Restoring American
Financial Stability Act of 2010, 165(d), 201211 (Comm Print 20 March 2010).
15 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 2.

313
 Resolution of US Banks and other Financial Institutions

8.07 The core resolution powers are designed to overcome the weaknesses of the traditional bank-
ruptcy model during a financial panic. The two main goals of the bankruptcy model are to
maximize the value of an insolvent company for the benefit of creditors as a group and to
determine who gets what, in what order.16 The goals of bankruptcy do not include restoring
public confidence in the financial system during a financial panic. Nor do bankruptcy judges
have the requisite experience or tools to achieve that objective.
8.08 What is needed to achieve that goal are experienced financial regulatory agencies with the
power to take swift actions with the right toolkit. During a financial panic, credit dries up,
financial assets become illiquid, and the perceived value of financial assets drops to exagger-
ated levels with extraordinary speed. The disorderly failure of a large financial institution or
a large number of smaller financial institutions during a financial panic can intensify the
panic, causing counterparties to fall like dominos, destabilizing the entire financial system,
and increasing the ultimate cost of restoring public confidence. The core resolution authority
is designed to provide stability and confidence until the markets recover, credit again flows
freely, and asset prices become more easily determinable.
8.09 Core resolution powers provide the tools for an experienced financial regulatory agency to
restore public confidence in the financial system in the most cost-effective way. A key tool in
the agencys toolkit is the power to cherry-pick the assets or liabilities of the failed institution
and transfer them to a third party or bridge institution without the need to obtain any credi-
tors consent or prior court review. This authority includes the power to differentiate between
creditors within the same class or to treat junior creditors better than senior creditors. This sort
of cherry-picking would normally be antithetical to established bankruptcy policies, which
generally require equality of treatment for similarly situated creditors. It is justified, however,
as necessary to restore public confidence in the financial system, so long as the left-behind
claimants have a minimum recovery right equal to what they would have received in a liqui-
dation had the core resolution powers not been exercised.
8.10 If a resolving agency decides to liquidate an institution after a temporary conservatorship or after
failing to sell the entire institution to a third party, a claims process for left-behind claimants is
required. The claims process involves the determination of the validity and scope of unpaid and
unsatisfied liabilities. The entity conducting the claims process is charged with liquidating any
left-behind assets and marshalling the resulting funds for the benefit of the unpaid creditors.
8.11 The claims process is typically administered by the same administrative agency that exercises
core resolution powers. For example, the FDIC administers the claims process in the liquida-
tion of an insured US bank. But the claims process could be administered by an ordinary
bankruptcy court or other judicial body. The urgency for swift action that exists for the exer-
cise of core resolution powers does not exist for the claims process. The speed with which the
pie is divided up among left-behind claimants generally does not affect confidence in the
financial system or financial stability, as long as the process is carried out at a normal speed
and otherwise in a fair and equitable manner. The claims process does not need to bypass the
normal due process and substantive safeguards of bankruptcy.
8.12 If any creditors or counterparties receive more than they would have received in a liquidation
because the resolving authority chooses to transfer their claims to a third party or bridge

16 Thomas Jackson, The Logic and Limits of Bankruptcy Law (2001), pp 1017, 20.

314
 II. Fundamentals of Resolution Authority

company, sufficient assets may not be left behind for all the left-behind creditors and coun-
terparties, if any, to receive what they would have received in a liquidation. Indeed, unless the
acquiring entity pays the failed institution a premium for the transferred assets and liabilities,
the shortfall to the left-behind claimants will equal the amount of the excess benefits received
by the transferred claimants.
For example, assume that on the day a particular financial institution is put into liquidation, 8.13
it has $100 in liabilities, but its assets are only worth $60. In other words, its assets are only
worth 60 per cent of the claims against it.17 Assume also that all creditors belong to a single
class. Under those conditions, the creditors would receive 60 per cent of their claims in a
liquidation. Assume that before liquidating the institution, the resolving authority trans-
ferred half of the claims to a third party or bridge company, along with assets worth the same
as the amount of the transferred claims, for a purchase price of $0. The transferred creditors
would receive 100 per cent of their claims (that is, $50 of assets would be transferred along
with the $50 in liabilities, providing 100 per cent coverage for their claims), whereas the
assets left behind would only be enough to give the left-behind creditors 20 per cent of their
claims (that is, only $10 in assets would be available to cover their $50 in claims).
The resolving agency could theoretically eliminate both the excess benefits and any related 8.14
shortfall by haircutting the direct beneficiaries of the transferthe transferred creditorsby
requiring them to make a payment to the failed institution equal to the excess benefits
received. But if the resolving agency determined that delaying or foregoing such a haircut
was necessary to avoid destabilizing the financial system during a financial panic, it would
need access to a source of liquidity, such as a line of credit from the national treasury, to cover
the shortfall. It could then recoup the cost of the shortfall from several sources:
the direct beneficiaries of the transactionthe transferred creditorsby making assess-
ments on them in one lump sum or instalments over time after the financial panic has
ended; or
some or all of the indirect beneficiaries of a stabilized financial systemfor example, some
or all financial institutions, other businesses, or even individual taxpayers.
Recouping the shortfall from the direct beneficiaries has the benefit of reducing any moral 8.15
hazard otherwise produced by allowing them to receive excess benefitsthat is, the incen-
tive for creditors to engage in excessive risk-taking if they are insulated against losses they
would otherwise incur in a normal liquidation.
The selective transfer of assets and liabilities does not inevitably produce a shortfall. For exam- 8.16
ple, assume the same facts as above (assets are worth 60 per cent of liabilities), except that the failed
institutions creditors fall into two classes, unsecured general creditors and subordinated credi-
tors. Assume further that unsecured general creditors account for 60 per cent of the liabilities

17
This appears to be a realistic assumption based on our review of ten of the largest banks and thrifts that
were resolved by the FDIC in 2008 and 2009. It appears from this data that the value of the assets of such insti-
tutions, as determined by the FDIC, were on average approximately 65% of their liabilities on the day the
FDIC announced its final resolution of the institutions. See ANB Financial, NA (Closed 9 May 2008) (79%);
BankUnited (Closed 21 May 2009) (56%); Colonial Bank (Closed 14 August 2009) (76%); Corus Bank, NA
(Closed 11 September 2009) (65%); Downey Savings and Loan, FA (Closed 21 November 2008) (81%); First
National Bank of Nevada (Closed 25 July 2008) (60%); Georgian Bank (Closed 25 September 2009) (49%);
Guaranty Bank (Closed 21 August 2009) (63%); Indymac, FSB (Closed 11 July 2008) (57%); Silver State Bank
(Closed 5 September 2008) (63%).

315
 Resolution of US Banks and other Financial Institutions

and subordinated creditors account for the remaining 40 per cent. Under those conditions, the
unsecured general creditors would receive 100 per cent of their claims in a liquidation, and
the subordinated creditors would receive 0 per cent. Assume, however, that before liquidating
the institution, the resolving authority transferred all of the unsecured general claims, along
with all the assets of the institution, for a purchase price of $0. In that case, the transferred
unsecured creditors would still receive 100 per cent of their claims (no excess benefit), and the
left-behind subordinated creditors would still receive 0 per cent of their claims (no shortfall).
8.17 The same example could be used to show that the transfer of secured claims also would not
necessarily produce a shortfall. Assume the same facts as above (assets are worth 60 per cent of
liabilities), except that the failed institutions creditors fall into two classes, fully secured credi-
tors and unsecured general creditors. Assume further that fully secured creditors account for 60
per cent of the liabilities and unsecured general creditors account for the remaining 40 per cent.
Under those conditions, the fully secured creditors would receive 100 per cent of their claims
in a liquidation, and the unsecured general creditors would receive 0 per cent. Assume, how-
ever, that before liquidating the institution, the resolving authority transferred all of the fully
secured claims, along with all the collateral pledged to secure those claims (ie, in this example,
all of the assets of the company), for a purchase price of $0. In that case, the transferred secured
creditors would still receive 100 per cent of their claims (no excess benefit), and the left-behind
unsecured general creditors would still receive 0 per cent of their claims (no shortfall).
8.18 Finally, it is important to distinguish any excess benefits and shortfalls that can be produced
from the exercise of core resolution powers from deposit insurance. Insured depositors are
protected to the extent of their insurance regardless of whether sufficient assets exist to cover
their claims. The method of resolution may be of little import, since the resolving authority
may elect to transfer their claims to a third party, transfer them to a bridge bank, or simply
pay them off as part of a liquidation.
8.19 For example, assume the same facts as above (assets are worth 60 per cent of liabilities), except
that the failed institution is an insured bank and its creditors fall into three classes, insured deposi-
tors, fully secured creditors, and unsecured general creditors. Assume further that the claims
of insured depositors are senior to the claims of unsecured general creditors, but are subject to
the property rights of fully secured creditors, as they would be in the US. Also assume that
fully secured creditors (eg, a Federal Home Loan Bank or a reverse repurchase agreement
counterparty) account for 20 per cent of the liabilities of the failed institution, insured depositors
account for 77 per cent of its liabilities, and unsecured general creditors account for only
3 per cent.18 Under those conditions, the fully secured creditors and insured depositors would
receive 100 per cent of their claimsthe fully secured creditors by receiving the value of their
collateral (20 per cent of the institutions assets) and the insured depositors by receiving payment

18
This appears to be a realistic assumption based on our review of 11 of the largest banks and thrifts that were
resolved by the FDIC in 2008 and 2009. Based on this data, deposits, secured advances from a Federal Home Loan
Bank and securities sold subject to an agreement to repurchase averaged 97% of the failed institutions liabilities as
of the date of its call report as of the quarter ended immediately before it was closed, with the low being Washington
Mutual Bank at 89%. Conversely, unsecured general credit, including trade credit, or subordinated debt averaged
3%, with the high being Washington Mutual at 11%. See ANB Financial, NA (Closed 9 May 2008) (98%);
BankUnited (Closed 21 May 2009) (99.5%); Colonial Bank (Closed 14 August 2009) (98%); Corus Bank, NA
(Closed 11 September 2009) (99%); Downey Savings and Loan, FA (Closed 21 November 2008) (99.5%); First
National Bank of Nevada (Closed 25 July 2008) (95%); Georgian Bank (Closed 25 September 2009) (99%);
Guaranty Bank (Closed 21 August 2009) (98%); Indymac, FSB (Closed 11 July 2008) (98%); Silver State Bank
(Closed 5 September 2008) (95%); Washington Mutual Bank (Closed 25 September 2008) (89%).

316
 III. Resolution of US Banks

from the insurance provider. The insurance provider would in turn recover 52 per cent of the insur-
ance payment in any liquidation by being subrogated to the claims of the insured depositors, but
being subject to the claims of the secured creditors (ie 40 per cent of the assets, which is what remains
after 20 per cent of the assets are used to satisfy the claims of the fully secured creditors, in partial
satisfaction of the insurance providers subrogated claims equal to 77 per cent of the liabilities).
Unsecured general creditors would receive 0 per cent in a liquidation. Now assume that before liq-
uidating the bank, the resolving authority transferred all of the fully secured claims, insured deposits
and all of the assets, and made a payment for the difference between the amount of the insured
deposits and the value of the assets to a third party or bridge bank (ie 48 per cent of the transferred
deposits). The fully secured creditors and insured depositors would again receive 100 per cent of
their claims and the unsecured general creditors left behind would receive 0 per cent.

III. Resolution of US Banks

The resolution of US insured depository institutions (including insured banks and thrifts) is 8.20
governed primarily by Sections 11 and 13 of the Federal Deposit Insurance Act. The US is
currently in the midst of the largest wave of bank and thrift failures since the US savings and
loan crisis ended in the early 1990s.19 The FDIC resolved over 25 failed institutions in 2008,
140 in 2009, and 78 up until the end of May 2010.20 As of 31 March 2010, the FDIC had
nearly 780 insured institutions on its problem list, with over $430 billion in aggregate
assets,21 suggesting that it may be forced to resolve many more depository institutions before
the current wave of failures is over. For graphic representations of the current wave of bank
failures, see Figures 81.1 to 81.3. For a comparison between the US Bankruptcy Code and
the US bank resolution statute, see Annex A.

600

500

400 S&L Crisis

2,935 Bank Failures

300

200

100

0
1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 8.1 US Bank Failures (19352009)

19 2008 FDIC Annual Report, at 5; First Quarter 2010, Quarterly Banking Profile, March 2010, at p 3.
20 FDIC, Historical Statistics on Banking, Failures and Assistance Transactions, Number of Institutions,
United States and Other Areas, 20082010; Testimony of Mitchell L Glassman, Director, Division of
Resolutions and Receiverships, Federal Deposit Insurance Corporation, at 1, in Hearing before the Subcomm on
Financial Institutions and Consumer Credit, H Comm on Financial Servs (21 January 2010).
21
FDIC, First Quarter 2010, Quarterly Banking Profile, March 2010, at p 3.

317
 Resolution of US Banks and other Financial Institutions

10 200
Failures per week Cumulative 190
9 180
170
8 160
150
Bank failures per week

Cumulative failures
7 140
130
6 120
110
5 100
90
4 80
70
3 60
50
2 40
30
1 20
10
0 0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Figure 8.2 FDIC Bank Failures per Week in 2009

$500 900
Assets of problem institutions Number of institutions 775
$450 800
702
$400 700
Assets ($ in billions)

Number of institutions
$350
552 600
$300
500
$250 416
$431.0 400
$200 305 $402.8
252 $345.9 300
$150 $299.8

$100 136 $220.0 200

114 116
80 76 $159.4
$50 52 50 100
$22.2
$39.8 $38.9 $29.9 $28.3 $6.6 $8.3
$0 0
1-Dec 12/02 12/03 12/04 12/05 12/06 12/07 08-Dec 09-Mar 09-Jun 09-Sep 09-Dec 10-Mar
Figure 8.3 FDIC Insured Problem Institutions (20012010)

8.21 In this Part on bank resolutions, we first discuss certain background issues, including the
chartering authorities of the institutions that are subject to resolution authority, the deposit
insurance requirement, the structure of the FDICs resolution unit, the administrative nature
of the resolution process, and the relatively high level of legal uncertainty in this area of US
law. We then describe the supervisory and other tools designed to prevent troubled banks
and thrifts from failing. We also discuss the resolution process, including an extended discus-
sion of FDIC-assisted purchase and assumption transactions designed to keep the healthy
part of a failed institution alive by transferring it to a healthy third party or bridge bank. We
next discuss the ancillary claims process for assets and liabilities left behind to be liquidated,
including a detailed discussion of the FDICs super powers to avoid, set aside, or otherwise
limit the claims of creditors or other stakeholders in the liquidation process.

A. Background
1. Chartering authorities
8.22 Banks and thrifts, otherwise known as depository institutions in the US, may be chartered
under US federal law or under the laws of any state. The chartering authority and primary

318
 III. Resolution of US Banks

federal banking supervisor for national banks is the Office of the Comptroller of the Currency
(OCC). The chartering authority and primary federal banking supervisor for federally
chartered savings associations is the Office of Thrift Supervision (OTS). The chartering
authority for state-chartered banks is typically the banking supervisor of the chartering state.
State-chartered banks may elect to be members of the Federal Reserve System or not. The
primary federal banking supervisor for state-chartered member banks is the Board of
Governors of the Federal Reserve System (Federal Reserve). The FDIC is the primary bank-
ing supervisor for FDIC-insured state-chartered non-member banks.
All bank holding companies are regulated by the Federal Reserve and all thrift holding compa- 8.23
nies are regulated by the OTS. However, neither the FDIC nor any other federal regulator
currently has any resolution authority over such holding companies. Instead, such holding
companies are currently resolved under the normal bankruptcy laws.

2. Deposit insurance
All federally chartered depository institutions and virtually all state-chartered institutions 8.24
are required to be FDIC insured.22 This means that their deposits are insured by the FDIC
up to certain statutory caps. At the present time, these caps are generally $250,000 per
person per institution.23 The FDIC is an independent government agency. It maintains a
deposit insurance fund paid for by assessments on deposits of insured institutions through-
out the US.24 In addition to the fund itself, the FDIC has a line of credit from the Treasury,
which it can use to honour deposit insurance claims and provide assistance to troubled or
failed depository institutions if the fund is insufficient to cover these expenses.25 The FDIC
takes the position that the insurance obligations of the FDIC are backed by the full faith and
credit of the US, even though as a technical matter funds would need to be appropriated to
meet the obligations if the deposit insurance fund or other resources at the disposal of the
FDIC were insufficient.26

3. Structure of the FDICs resolution unit

The FDIC was created by the Banking Act of 1933.27 It is governed by a board of directors 8.25
composed of five members, including the Comptroller of the Currency (the federal regulator
of US national banks), the Director of the Office of Thrift Supervision, and a chairman and
vice chairman designated from among three appointed public members. One of the three
public members must have state bank supervisory experience.28 It has a permanent staff that
is organized into divisions and offices. The Division of Resolutions and Receiverships is the
division principally responsible for the resolution of insured banks and thrifts, although the
Division of Supervision and Consumer Protection and the Legal Division also play impor-
tant roles.

22
Federal Deposit Insurance Act, 5(a), 12 USC 1815(a).
23
Dodd-Frank Act, 335.
24 Federal Deposit Insurance Act, 11, 12 USC 1821.
25
Federal Deposit Insurance Act, 14(a), 12 USC 1824(a).
26 Full Faith and Credit of US Government Behind the FDIC Deposit Insurance Fund, FDIC Advisory Op,

No 36 (9 November 1987); FDIC, Frequently Asked Questions: Temporary Liquidity Guarantee Program
(2009).
27 Banking Act of 1933, ch 89, 8, 48 Stat. 168, 172177.
28 Federal Deposit Insurance Act, 2(a)(1), (b), 12 USC 1812(a)(1), (b).

319
 Resolution of US Banks and other Financial Institutions

8.26 The FDIC operates primarily through regional offices. The examination and supervisory staff
of the Division of Supervision and Consumer Protection is primarily located within these
regional offices. Each of the regional offices has established local field offices to facilitate the
examination process. The Division of Resolutions and Receiverships, however, operates pri-
marily though the FDICs main office in Washington DC, and a large regional office in Dallas,
Texas. Smaller offices are also located in areas where a large concentration of failures has
occurred.

4. Administrative nature of resolution process

8.27 In contrast to a bankruptcy proceeding under the US Bankruptcy Code, which is a judicial
process, a proceeding under the bank resolution statute is fundamentally an administrative
proceeding conducted by the FDIC, with little input from creditors or other claimants and
virtually no judicial review. As conservator or receiver, the FDIC succeeds by operation of law
to all of the rights, powers, and interests of the failed depository institution, its officers, direc-
tors, and shareholders, and is given plenary power to administer its affairs.29 Unlike a proceed-
ing under the Bankruptcy Code, no creditors committees or trustees exist, and no court
oversees the FDICs activities. Any claims against the failed institution must first be submitted
to the FDIC for its own administrative determination, and only after the FDIC considers the
claim will a claimant be permitted to assert its claim before a court for de novo review.30
8.28 The administrative nature of the proceedings, and the FDICs manner of carrying out its
authority, often create substantial frustrations for creditors and other parties affected by the
failure. In one sense, everyone other than the FDIC is a passive observer, without direct
access or input to the FDIC as it performs its functions. Part of this frustration arises from
the FDICs inherent conflict of interest; it is not only the sole administrator of the receiver-
ship process, but it is also typically the largest creditor of the receivership estate. The FDIC
has a statutory obligation to insure deposits of failed institutions up to certain statutory
limits.31 When it is called upon to make good on those deposits, it becomes subrogated to the
claims of insured depositors and is therefore a creditor against the failed institution.32
8.29 Although as conservator or receiver the FDIC is supposed to function as the neutral arbiter
of the claims process, its interest as the largest creditor is often pitted against the interests of
competing creditors. It has a strong incentive to use its extraordinary powers to deny, avoid,
or set aside conflicting creditor claims. In addition, the statutory framework gives the FDICs
subrogated deposit claims priority over the claims of general creditors.33

5. Limited legal guidance

8.30 Further, unlike the extensive body of case law, legal commentary, and other guidelines that
exists with respect to reorganizations and liquidations under the US Bankruptcy Code, only
a very limited body of legal guidance supplements the bank resolution statute. As described

29
Federal Deposit Insurance Act, 11(d)(2)(A)(D), 12 USC 1821(d)(2)(A)(D).
30 Federal Deposit Insurance Act, 11(d)(6)(A), 12 USC 1821(d)(6)(A). See Connolly, The Liquidation
of Failed Financial Institutions under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 in Litigating with the FDIC and RTC: Asset-Based Claims, PLI Order No A4-4319 (Practising Law
Institute, 1990).
31 Federal Deposit Insurance Act, 11(a), 12 USC 1821(a).
32 Ibid, 11(g), 12 USC 1821(g).
33 Ibid, 11(d)(11), 12 USC 1821(d)(11).

320
 III. Resolution of US Banks

by two former general counsels to the FDIC and the Federal Home Loan Bank Board
(the predecessor to the Office of Thrift Supervision), respectively:
This is a confusing area. The challenge arises less because of the complexity of the rules than
because of their ambiguity and obscurity. The Bankruptcy Code generally constitutes the
starting point for rules governing the financial failure of companies in the United States. It
contains a detailed set of rules that fill three volumes of U.S. Code Annotated, volumes of
Wests Bankruptcy Reporter, and over four linear feet of Colliers [on Bankruptcy]. But the
statutes governing conservatorships and receiverships of federally insured banks and thrifts
fill, at most, about 111 pages of the U.S. Code Annotated. Moreover, those 111 pages were
fundamentally changed less than 18 months ago in the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA).34
The FDIC has only promulgated a few regulations to implement the statute,35 and has issued 8.31
only a relatively small number of advisory opinions, policy statements, and other guidelines
to supplement it. The FDIC also takes the position that advisory opinions issued by its staff,
including its general counsel, are not binding on it.36 In addition, the FDIC reserves the right
to withdraw any of its policy statements at any time,37 potentially with retroactive effect. As
a result, uncertainty surrounds how various issues would be resolved in the conservatorship
or receivership of an insured institution.
Moreover, very little case law or legal commentary exists because depository institution fail- 8.32
ures tend to occur in waves with much lower frequency than insolvencies governed by the US
Bankruptcy Code. For example, it has been nearly 20 years since the US savings and loan
crisis, which marked the last wave of US bank and thrift failures.38 Few cases and almost no
demand for legal commentaries have arisen in the intervening period. As a result, the case law
is sparse and little economic incentive has existed to invest time and effort into a body of legal
commentary that seems irrelevant for long periods of time.

B. Supervisory and Other Tools to Prevent Failure

1. Supervision, examination, and enforcement
The FDIC and the other federal (and, where appropriate, state) banking regulators are 8.33
granted extensive supervisory powers over depository institutions and their holding compa-
nies. This supervision is designed to address the safety and soundness of the institution and
monitor compliance with laws and regulations. The supervisory powers include both on-site
and off-site examination and evaluation of the institution.
When the regulatory authorities determine that a bank may be operating in an unsafe or 8.34
unsound manner, may be violating a law, rule, or regulation, or is otherwise engaging in
behaviour determined to pose a risk to the depository institution, the regulators will engage

34
Douglas, Luke, and Veal, Introduction, Counselling Creditors of Banks and Thrifts: Dealing with the FDIC
and RTC, PLI Order No A4-4323 (14 January 1991).
35 12 CFR Part 360.
36
See, eg, Whether a Pledge of Assets by a Bank to Secure a Deposit by a Nonprofit Organization Would Be Legally
Enforceable in the Event of the Appointment of the FDIC as a Receiver or Conservator for the Institution, FDIC
Advisory Op, No 1 (6 January 1997).
37 Statement of Policy on the Development and Review of Regulations, 63 Fed Reg 25157 (7 May 1998).
38 FDIC, The Savings and Loan Crisis and Its Relationship to Banking, An Examination of the Banking

Crises of the 1980s and Early 1990s (1997), at p 167.

321
 Resolution of US Banks and other Financial Institutions

in either informal or formal enforcement actions designed to have the bank address and
remedy the problems.39 Informal tools range from simple discussions between the institu-
tion and its regulator as part of the supervisory process, to commitment letters, board resolu-
tions, or memoranda of understanding.40 The Federal Deposit Insurance Act also grants the
regulators authority to use a variety of formal enforcement tools, such as written agreements,
cease and desist orders, civil financial penalties, or removal and prohibition orders.41 For a
graphical representation of this continuum, see Figure 8.4. Cease and desist orders are avail-
able not only to prohibit certain actions, but also to mandate corrective action on the part of
the institution or those individuals or entities participating in the affairs of the institution.42
Civil money penalties can run up to $1 million per day per violation under certain circum-
stances.43 The removal and prohibition powers can preclude an individual from participating
in the affairs of any insured depository institution.44

Informal supervisory actions Formal supervisory actions

Nonpublic, by consent Public

Cease and
desist order/
consent order
Formal written
agreement Civil money
penalties
Memorandum of
understanding Removal authority

Board MOU
resolutions
Commitment
letter,
supervisory
letter

Less severe More severe

Figure 8.4 Range of Supervisory Actions by Banking Regulators

2. Prompt corrective action

8.35 Before an insured depository institution fails and is placed in conservatorship or receiver-
ship, the appropriate federal banking agency and the FDIC are required under Section 38 of
the Federal Deposit Insurance Act to take prompt corrective action designed to prevent the
institution from failing.45

39
OCC, Enforcement Action Policy, Policies and Procedures Manual (2001); Federal and State Enforcement
of Financial Consumer and Investor Protection Laws: Hearing before the H Comm on Financial Serv, 111th Cong
47 (2009) (testimony of John C Dugan, Comptroller of the Currency); Federal Reserve Bank of Kansas City,
Types of Enforcement Actions (2009).
40 Ibid.
41
Federal Deposit Insurance Act, 8, 12 USC 1818.
42 Ibid, 8(b)(1), 12 USC 1818(b)(1).
43 Ibid, 8(i), 12 USC 1818(i).
44 Ibid, 8(e), 12 USC 1818(e).
45 Ibid, 38(a)(2), 12 USC 1831o(a)(2). See also Carnell, Prompt Corrective Action Under the FDIC

Improvement Act of 1991 in Litigating For and Against the FDIC and the RTC (Practising Law Institute, 1992).

322
 III. Resolution of US Banks

Prompt corrective action powers are triggered if an insured institution becomes undercapi- 8.36
talized, is found to be in an unsafe or unsound condition, or is found to be engaging in an
unsafe or unsound practice.46 Depending on the severity of the circumstances, the institu-
tions federal banking supervisor has the authority to take a number of actions in response to
a triggering event, including:
requiring the insured institution to adopt a capital restoration plan that, in order to be
acceptable, must be guaranteed by its parent (up to a maximum exposure of 5 per cent of
the insured institutions total assets);
imposing restrictions on dividends by the insured institution or its parent;
restricting the insured institutions growth or requiring it to terminate certain activities or
sell certain assets;
requiring the insured institution or any affiliate to be divested;
imposing limits on the interest rates payable on deposits; or
imposing limits on executive compensation or requiring the insured institutions board or
senior management to be replaced.47
The prompt corrective action provisions also create a regulatory presumption that critically 8.37
undercapitalized institutions will be placed in receivership.48
These prompt corrective action tools are designed to force the insured institution and its 8.38
owners to take remedial action to rehabilitate a weakened institution before it becomes insol-
vent. Notwithstanding these provisions, however, insured institutions are typically deeply
insolvent before they are closed since the capital measurements that trigger the prompt correc-
tive action restrictions are largely based on historical cost rather than marked-to-market bal-
ance sheets. Therefore, they are often lagging indicators of the true health of an institution.
3. Source of strength obligations
Closely related to the prompt corrective action tools is the source of strength obligation that 8.39
the Federal Reserve imposes on bank holding companies.49 According to the Federal Reserve,
a bank holding companys failure to assist a troubled or failing bank or thrift subsidiary
would generally be viewed as an unsafe or unsound practice.50 The Federal Reserve has gener-
ally viewed this obligation as unlimited. In other words, this obligation is not subject to a cap
in the same way as the guarantee of a capital restoration plan. Notwithstanding the Federal
Reserves position, it is not clear that a court would uphold an order to require holding com-
panies to inject capital into insolvent bank subsidiaries.51 Accordingly, the source of strength
obligation is perhaps more likely to be a subject of discussion and regulatory pressure than a
strict legal obligation.

46 Federal Deposit Insurance Act, 38(e)(i), 12 USC 1831o(e)(i).

47
Ibid, 38(e)(i) , 12 USC 1831o(e)(i).
48
Ibid, 38(h)(3), 12 USC 1831o(h)(2).
49 12 CFR 225.4(a).
50
Policy Statement on the Responsibility of Bank Holding Companies to Act as Sources of Strength to Their
Subsidiary Banks, 52 Fed Reg 15707 (30 April 1987).
51 MCorp Fin, Inc v Bd of the Governors of the Fed Reserve Sys, 900 F 2d 852 (5th Cir 1990), revd in part on

procedural grounds, 502 US 32 (1991); Miller, Bankruptcy Code FDIC/RTC Interplay: Holding Company
vs. Subsidiary/Affiliates Interplay in Counselling Creditors of Banks and Thrifts: Dealing with the FDIC and RTC,
PLI Order No A4-4323 (Practising Law Institute, 1415 January 1991).

323
 Resolution of US Banks and other Financial Institutions

8.40 The Office of Thrift Supervision has adopted a legal doctrine similar to the Federal Reserves
source of strength doctrine, and states that savings and loan holding companies should main-
tain sufficient capital to support the operations of their subsidiary institutions.52
8.41 While neither the Office of the Comptroller of the Currency nor the FDIC has historically
imposed source of strength obligations on other depository institution holding companies, from
time to time both have imposed them contractually on owners of depository institutions that are
not otherwise subject to the Bank Holding Company Act.53 They have typically done so as a
condition to certain regulatory action in connection with acquisitions of specialized institutions,
such as trust companies, credit card banks, or industrial banks, where the owner may not be
subject to the Federal Reserves oversight.54 Similarly, the Office of Thrift Supervision has imposed
net-worth maintenance obligations by contract in connection with certain transactions.55

4. Discount window and other emergency lending facilities

8.42 While the agencies may use various criteria to close a bank, one widely accepted definition of
insolvency is the inability to meet the obligations of creditors when duein other words, illi-
quidity. The Federal Reserve has authority to help prevent insured institutions from failing
as a result of a lack of liquidity by providing them with secured credit through its discount
window when it believes that the underlying entity is sound and adequate collateral exists.56
Historically, the Federal Reserve has discouraged the use of the discount window by stigma-
tizing and imposing a penalty rate on its use.57 Early on during the period leading up to and
after the financial panic of 2008, however, the Federal Reserve took several steps to eliminate
the stigma and encourage insured institutions to borrow from the discount window as
needed during the financial crisis.58
8.43 The Federal Reserve also has the authority to help prevent other institutions from failing as
a result of a liquidity squeeze by providing secured credit under Section 13(3) of the Federal
Reserve Act.59 Section 13(3) authorizes the Federal Reserve to provide emergency secured

52 Office of Thrift Supervision, Holding Companies Handbook (2009), 300.

53 Capital Maintenance Agreement By and Among the FDIC, GMAC LLC, IB Finance Holding Company LLC
and GMAC Bank 23 (2006). Operating Agreement Between Direct Merchants Credit Card Bank, NA, Metris
Companies Inc and the OCC 78 (2003).
54
Ibid.
55 Helfer, Conaway, and Bracher, Net Worth Maintenance Actions in Litigating For and Against the FDIC

and the RTC 1991, PLI Order No A4-4349 (Practising Law Institute, 1991); Cayne and Caglioti, Holding
Company Liability for the Costs of Disposing of Failed Bank or Thrift Subsidiaries and the Interaction Between
Banking Law and the Bankruptcy Code in Litigating For and Against the FDIC and the RTC, PLI Order No
A4-4382 (Practising Law Institute, 1992).
56
Federal Reserve Act, 10B, 12 USC 347b(b); 12 CFR Part 201 (Regulation A). For a chart of the
Federal Reserves various emergency lending facilities, including the discount window, see Forms of Federal
Reserve Lending to Financial Institutions (July 2009). See also Small and Clouse, The Scope of Monetary Policy
Actions Authorized under the Federal Reserve Act (2004). Madigan and Nelson, Proposed Revision to the Federal
Reserves Discount Window Lending Programs (July 2002) Federal Reserve Bulletin 313319; Clouse, Recent
Developments in Discount Window Policy (November 1994) Federal Reserve Bulletin, 965977.
57
Board of Governors of the Federal Reserve System, Extensions of Credit by Federal Reserve Banks; Reserve
Requirements of Depository Institutions, 12 CFR Pt 201, Federal Reserve Docket No R-1123, 67 Fed Reg
67777, 67782 (7 November 2002); Furfine, The Feds New Discount Window and Interbank Borrowing (13 May
2003).
58 See, eg, Madigan, Bagehots Dictum in Practice: Formulating and Implementing Policies to Combat the

Financial Crisis (21 August 2009); Bernanke, The Federal Reserves Balance Sheet, Speech at the Federal Reserve
Bank of Richmonds 2009 Credit Markets Symposium (3 April 2009).
59 Federal Reserve Act, 13(3), 12 USC 343.

324
 III. Resolution of US Banks

credit to a wide range of institutions under unusual and exigent circumstances.60 It was
enacted in 1932, but had not been invoked until the global financial panic of 2008,61 during
which it was used extensively. Indeed, it has been the tool of choice for almost all of the
Federal Reserves emergency assistance programmes, including its rescue of AIG, its Primary
Dealer Credit Facility, and its Term Asset-Backed Securities Loan Facility.62

5. Troubled asset relief programme

The Treasury does not have standing authority to provide financial assistance to troubled 8.44
banks and thrifts to help prevent them from failing. However, Congress gave it temporary
authority to invest up to $700 billion in certain assets and instruments of financial institu-
tions pursuant to the Emergency Economic Stabilization Act of 2008.63 The Treasury has
used this authority for various financial assistance programmes during the financial crisis,
including its programme to provide capital to various bank holding companies and thrift
holding companies and its Public-Private Investment Programme, which focuses on legacy
loans and securities held by depository institutions.64

6. Open bank assistance

Until recently, the FDIC had the authority, under Section 13(c) of the Federal Deposit 8.45
Insurance Act, to provide financial assistance to troubled banks or thrifts to prevent them
from failing or facilitating the resolution of a failed institution.65 This type of assistance was
called open bank assistance because it was provided before an institution is closed. Such
assistance could take a variety of forms, including equity infusions or loss-sharing arrange-
ments on troubled assets, where the FDIC would agree to bear a certain percentage of the
losses (eg 80 per cent) and the bank would retain the rest of the losses. This was the authority
used by the FDIC to bail out Continental Illinois and other troubled banks during the sav-
ings and loan crisis of the late 1980s and early 1990s.66 During the global financial panic of
2008, the FDIC used this authority in connection with the proposed Citigroup/Wachovia
transaction, where the FDIC agreed to provide Citigroup with protection against certain
potential losses on a portfolio of troubled Wachovia assets.67 The FDIC also used this authority

60
Ibid, 13(3), 12 USC 343.
61 David Fettig, The History of a Powerful Paragraph: Section 13(3) enacted Fed business loans 76 years
ago, The Region, June 2008, at p 34.
62
Davis Polk, Financial Crisis Manual (2009), pp 144180.
63 Emergency Economic Stabilization Act, 12 USC 5205(5). See also Davis Polk, Financial Crisis Manual

(2009), pp 4166.
64
Press Release, US Department of the Treasury, Treasury Department Releases Details on Public Private
Partnership Investment Program (23 March 2009); US Department of the Treasury, White Paper: Public-Private
Investment Program (2009); Press Release, US Department of the Treasury, Treasury Announces TARP Capital
Purchase Program (14 October 2008). See also Davis Polk, Financial Crisis Manual (2009), pp 181205.
65 Federal Deposit Insurance Act, 13(c), 12 USC 1823(c).
66
For resource materials on the FDICs policies and practices with respect to open bank assistance prior
to 1991, see Murphy, FDIC Assistance, The Thrift Industry Restructured: The New Regulators and Opportunities
for the Future, PLI Order No A4-4264 (Practising Law Institute, 1989). See also Inquiry into Continental
Illinois Corp. and Continental Illinois National Bank: Hearings before the Subcomm on Financial Institutions
Supervision, Regulation and Insurance of the H Comm. on Banking, Finance and Urban Affairs, 98th Cong,
(1984); Continental Illinois and Too Big to Fail in An Examination of the Banking Crises of the 1980s and
Early 1990s (1997), p 236.
67 Press Release, FDIC, Citigroup Inc. to Acquire Banking Operations of Wachovia: FDIC, Federal Reserve and

Treasury Agree to Provide Open Bank Assistance to Protect Depositors (29 September 2008).

325
 Resolution of US Banks and other Financial Institutions

for its Temporary Liquidity Guarantee Program (TLGP),68 its participation in the asset
guarantee programmes for Citigroup and Bank of America,69 and the legacy loan portion of
the Public-Private Investment Programme.70

7. Liability guarantees
8.46 The TLGP was a critical part of the effort by the FDIC, the Treasury, and the Federal Reserve
to stabilize the US financial system in the fourth quarter of 2008.71 Through the TLGP, the
FDIC guaranteed certain senior unsecured debt issued by participating insured depository
institutions, their holding companies, or their affiliates. The TLGP was highly attractive to
participating entities, particularly the larger bank holding companies, because it provided
access to funding at relatively low cost. Regardless of the participating entitys credit rating,
the three major credit rating agencies rated debt issued under the TLGP with their highest
ratings based on the FDIC guarantee. Most fixed-rate debt issued under the Debt Guarantee
Programme bore an annual interest rate between 1.5 per cent and 3 per cent.
8.47 The Dodd-Frank Act repealed the FDICs authority to provide open bank assistance.72 At the
same time, it provided express authority for the FDIC to establish liability guarantee pro-
grammes like the TLGP, but subjected that authority to certain substantive and procedural
hurdles. The programmes must be widely available, may only be provided during times of
severe economic distress to provide credit support to the liabilities of depository institutions,
depository institution holding companies or their affiliates that are solvent, and may not
include investments in equity in any form.73 In order for the FDIC to have the power to
establish such a programme, both the Federal Reserve and two-thirds of the FDIC board
must have determined that a liquidity event has occurred and that a failure to establish the
programme would have serious adverse effects on financial stability or economic conditions
in the US. The FDIC must also obtain a joint resolution of Congressional approving the
programme and establishing the maximum amount of debt that can be guaranteed.

C. Resolution Process
8.48 If all these tools for preventing the failure of a troubled insured institution do not save the
institution, its chartering authority will issue an order to close it (that is, revoke its charter to
conduct business).74 If the financial institution is an insured federal depository institution
and a receiver is appointed, the FDIC must be appointed as its receiver.75 Although this
requirement does not extend to state-chartered banks, the FDIC has the power to appoint

68
FDIC, 2008 Annual Report 100-101. Temporary Liquidity Guarantee Program, 73 Fed Reg 72244 (26
November 2008).
69
FDIC, 2008 Annual Report 100-101. See also Press Release, FDIC, Joint Statement by Treasury, Federal
Reserve and the FDIC on Citigroup (23 November 2008); Press Release, FDIC, Treasury, Federal Reserve and the
FDIC Provide Assistance to Bank of America (16 January 2009).
70
FDIC, 2008 Annual Report 100-101; Press Release, FDIC, Joint Statement by Secretary of the Treasury
Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and
Chairman of the Federal Deposit Insurance Corporation Sheila Bair (8 July 2009).
71
See Davis Polk, Financial Crisis Manual (2009), pp 116143.
72 Dodd-Frank Act, 1106.
73 Ibid, 11051106.
74 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 5.
75 Federal Deposit Insurance Act, 11(c)(2), 12 USC 1821(c)(2).

326
 III. Resolution of US Banks

itself as their conservator or receiver, which overrides or pre-empts the appointment of any
other state or federal agency.76

1. Grounds for closing an institution

The grounds for closing an institution and appointing the FDIC as its receiver or conservator 8.49
are extremely open-ended and may be satisfied well before insolvency.77 Indeed, some of the
grounds overlap with the grounds for prompt corrective action.78 Thus, the FDIC and an
institutions federal banking supervisor have considerable discretion in deciding whether to
close an institution or to subject it to prompt corrective action. The grounds that allow the
FDIC to be appointed conservator or receiver of an insured institution include:
the institution being unable to pay its obligations in the normal course of business;
the institution being in an unsafe or unsound condition;
the board or shareholders consenting;
the institution being critically undercapitalized;
the institution engaging in an unsafe or unsound practice likely to weaken its condition;
the institution wilfully violating a cease and desist order;
books, papers, records, or assets being concealed; or
the institution being found guilty of a federal criminal anti-money laundering offence.79
The FDIC can serve as either conservator or receiver of an insured institution.80 A conserva- 8.50
tor takes control of an insured institution with the intent and ability to operate the institu-
tion as a going concern. Generally, the conservator does not engage in wholesale liquidation
of the business, although it may sell assets, cease lines of business, or take other similar
actions. In contrast, a receiver generally operates as the liquidator of an insured institution.
Conservatorships have been extremely rare. Indeed, most historical examples of conservator- 8.51
ships have been limited to so-called pass-though conservatorships.81 These conservatorships
are more like receiverships with a bridge bank than a true conservatorship because the origi-
nal institution is left behind and liquidated rather than conserved. They are sometimes more
accurately referred to as pass-through receiverships. Many of the savings and loan associa-
tions handled by the Resolution Trust Corporation (the specialized agency established

76
Ibid, 11(c)(4), 12 USC 1821(c)(4). Note that the FDICs resolution authority does not extend to
holding companies, for only FDIC-insured depository institutions are subject to the conservatorship and receiv-
ership powers contained in the Federal Deposit Insurance Act. The extent of the FDICs resolution authority
over subsidiaries of banks is a bit unclear. At a minimum, the equity of the subsidiary is an asset of the failed bank
and would be under the control of the FDIC. However, whether a claim against a subsidiary is subject to the
claims process, for instance, or whether the FDIC could repudiate a contract to which a subsidiary entered into
is, to our knowledge, an open question. See In re Landmark Land Company, 973 F 2d 283 (4th Cir 1992).
77 Ibid, 11(c), 12 USC 1821(c). For a discussion of grounds for challenging a decision to close an insured

institution, see Schulz, Bank and Thrift Closing Challenges in Litigating For and Against the FDIC and the
RTC, PLI Order No A4-4312 (Practising Law Institute, 16 July 1990).
78 Compare the grounds for appointing a conservator or receiver in s 11(c)(5) of the Federal Deposit

Insurance Act, 12 USC 1821(c)(5), with the grounds for prompt corrective action in s 38(e) to (i) of the
Federal Deposit Insurance Act, 12 USC 1831o(e)(i).
79 Federal Deposit Insurance Act, 11(c)(5), 12 USC 1821(c)(5).
80 Ibid, 11(c)(1), 12 USC 1821(c)(1).
81 Press Release, FDIC, FDIC Approves Sale of Superior Federal Bank, FSB, Hinsdale, Illinois (31 October

2001).

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 Resolution of US Banks and other Financial Institutions

during the savings and loan crisis of the late 1980s to handle failed thrifts) were operated as
conservatorships for a period of time, until the Resolution Trust Corporation was prepared
to commence liquidation of the failed institution.82 IndyMac, which failed in 2008,
also involved a conservatorship, although in that case the original institution was placed
into receivership and the FDIC as receiver transferred the assets and many of the liabilities
to a newly chartered institution which was immediately placed into conservatorship.83
Before the assets of this new institution were sold to an investor group, it was placed into
receivership and the FDIC effected the resolution transaction.84
8.52 Freddie Mac and Fannie Mae are possibly the only genuine conservatorships, and their con-
servatorships were effected under the Housing and Economic Recovery Act of 2008, which
was based on the bank resolution model.85 However, the FDIC might use a genuine conser-
vatorship in the case of a systemically important bank. Conservatorship could be coupled
with open bank assistance, as they were effectively combined in the case of Fannie and
Freddie.
8.53 The distinction between conservatorships and receiverships can appear fuzzy. In general,
however, the FDIC uses conservatorships to operate institutions until it is prepared to effect
a resolution transaction. The receivership is typically used by the FDIC to effect a sale of the
assets of the failed institution to a third party or to effect a liquidation or both.
2. Effect of appointment
8.54 When the FDIC is appointed as conservator or receiver of an institution, it succeeds by
operation of law to all of the rights, titles, powers, and privileges of the insured institution
and its stockholders, members, directors, officers, account holders, and depositors, subject
to the provisions of the Federal Deposit Insurance Act.86 According to the US Supreme
Court in OMelveny & Myers v FDIC,87 this provision of the act effectively places the FDIC
in the shoes of the insolvent [institution], to work out its claims under state [and other appli-
cable] law, except where some provision in [the Federal Deposit Insurance Acts] extensive
framework specifically provides otherwise.88

3. Timing of appointment
8.55 An insured institution is typically closed and the FDIC is appointed receiver after the close
of business.89 Closings typically occur on a Friday to minimize disruption to customers and
facilitate the transfer of assets and liabilities to a new acquirer, giving the new acquirer the
weekend to prepare for a Monday reopening. In the case of a systemically important institu-
tion with an international business, the deadline is typically the opening of the Asian markets

82See FDIC, Managing the Crisis: The FDIC and RTC Experience 19801994, Vol 1 (1998), pp 116118.
83
FDIC Press Release, FDIC Establishes IndyMac Federal Bank, FSB as Successor to IndyMac Bank, F.S.B.,
Pasadena, California (11 July 2008).
84 FDIC Press Release, FDIC Closes Sale of IndyMac Federal Bank, Pasadena, California (19 March 2009).
85
Housing and Economic Recovery Act of 2008, 1145, Pub L No 110-289, 122 Stat 2654, 2734.
86 Federal Deposit Insurance Act, 11(d)(2)(A), 12 USC 1821(d)(2)(A).
87 512 US 79 (1994).
88 Ibid at 80.
89 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 16.

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 III. Resolution of US Banks

on Monday morning (ie Sunday evening in the US).90 While the FDIC will attempt to
engage in a transaction that will transfer assets and liabilities to another healthy privately
owned banking organization, on occasion a suitable acquirer cannot be found. In such cases,
the FDIC may elect to operate the failed institution through a conservatorship or use its
bridge bank authority, or it may be forced to conduct a pay-off of the depositors.91

4. FDICs duties
The FDIC has a general statutory duty to resolve all failed institutions in a manner that is 8.56
least costly to the deposit insurance fund of all possible methods.92 It is also generally pre-
cluded from using the deposit insurance fund to benefit existing shareholders.93 The FDIC
also has a policy to resolve failed institutions in a manner that maintains public confidence
in the US financial system and is least disruptive to depositors and other stakeholders.94

5. Resolution transaction
As receiver, the FDIC has the authority to transfer the assets and liabilities to a third party 8.57
without obtaining anyones consent or approval.95 It uses this authority to engage in what is
typically known as a purchase and assumption transactionthat is, it identifies a third party
bank that will purchase some portion of the assets and assume some portion of the liabilities
of the failed institution.96 The purchaser must have a bank or thrift charter, although the
charter may be granted at the time of the purchase and assumption transaction.97
The FDIC has discretion to determine which assets are sold to the acquirer.98 Since it remains 8.58
subject to the least cost resolution test as receiver, its determination as to which assets to sell
will be based on its analysis of whether the deposit insurance fund is better off transferring
the assets to the acquiring institution as part of the purchase and assumption transaction or
whether it should sell the assets separately. The assets sold can include cash and securities,
performing loans, non-performing loans, buildings, furniture, fixtures, and equipment, or
any combination thereof. To facilitate the sale, the FDIC can offer loss-sharing or other
forms of protection to the purchaser.99

90 During the worst weeks of the financial crisis in the fall of 2008, weekend rescues generally operated under

a Sunday evening deadline, reflecting the importance of Asian markets. According to one commentator, econo-
mists at Goldman Sachs sent one of their weekly emails with the subject line, Sunday is the New Monday. See
David Wessel, In Fed We Trust (2009), pp 12.
91
FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States
(2003), pp 3540, 4146, 69. See, eg, FDIC Press Release, FDIC Approves the Payout of the Insured Deposits of
MagnetBank, Salt Lake City, Utah (30 January 2009). FDIC Press Release, FDIC Creates Bridge Bank to Take
Over Operations of Independent Bankers Bank, Springfield, Illinois (18 December 2009).
92
Federal Deposit Insurance Act, 13(c)(4), 12 USC 1823(c)(4).
93
Ibid, 11(a)(4)(C). 12 USC 1821(a)(4)(C).
94
FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States
(2003), p 77.
95 Federal Deposit Insurance Act, 11(d)(2)(G)(i)(II), 12 USC 1821(d)(2)(G)(i)(II).
96
FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States
(2003), pp 1935. See, eg, Purchase and Assumption Agreement, Whole Bank, All Deposits, Among FDIC,
Receiver of Horizon Bank, Bellingham, WA, FDIC and Washington Federal Savings and Loan (8 January
2010).
97 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 9.
98 Federal Deposit Insurance Act, 11(d)(2)(G)(i)(II), 12 USC 1821(d)(2)(G)(i)(II).
99 Ibid, 13(c)(2)(A), 12 USC 1823(c)(2)(A). See also FDIC, Resolutions Handbook: Methods for Resolving

Troubled Financial Institutions in the United States (2003), pp 2935; FDIC, Managing the Crisis: The FDIC and

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 Resolution of US Banks and other Financial Institutions

8.59 The acquiring institution will assume the insured deposits and may elect to assume unin-
sured deposits as well.100 On occasion, the acquiring institution will assume certain secured
liabilities such as Federal Home Loan Bank advances.101
8.60 Any assets not purchased by the acquiring institution will be left with the FDIC as receiver,
which will liquidate the assets over time. The proceeds of the asset sales, including the pro-
ceeds of the sale to the acquiring bank under the purchase and assumption transaction, will
be used to satisfy the claims of creditors of the failed institution.
6. Bridge banks
8.61 If the FDIC is unable to sell all or any part of a failed institution before it must be closed, the
FDIC may request the Office of the Comptroller of the Currency or the Office of Thrift
Supervision to charter a new national bank or federal thrift to operate as a bridge bank.102
A bridge bank is an entity used by the FDIC to assume all or any portion of a failed institu-
tions business, and thereby continue to operate the business as a going concern without
interruption. The FDICs board selects a CEO and board of directors for the bridge bank,
generally consisting of senior FDIC personnel, retired FDIC executives, and experienced
bankers. An acquirer can then make a bid for all or any portion of the assets and liabilities of
the bridge bank, or for the bridge bank as a whole. The FDIC generally uses this option if it
believes that the temporary operation and subsequent sale of the institution would be more
financially attractive to the FDIC than an immediate liquidation, or if it determines that
temporarily operating the business through a bridge bank will facilitate financial stability.
8.62 The FDIC has the authority to transfer any assets or liabilities from the closed bank to the
bridge bank without the need for consent or approval from any party.103 The original bank
and any of its left-behind assets and liabilities will be liquidated. The FDIC must merge,
transfer, or terminate and dissolve the bridge bank within two years of its organization, with
the option of three additional one-year periods at the FDICs discretion.104 This period is
designed to give the FDIC time to find one or more third party acquirers for all or part of the
bridge banks assets and liabilities, or for the bridge bank itself. The FDIC will often enter
into loss-sharing agreements or provide other financial assistance to encourage third parties
to maximize the net value of the bridge banks assets and liabilities.105

RTC Experience 19801994, Vol 1 (1998), pp 193209; FDIC Staff Presentation, The Failing Bank Marketing
Process: Whole Bank Transactions and Loss Share Transactions (American Bankers Association, 2 September
2009); FDIC Staff Presentation, Resolutions: The Process of Bidding on Distressed Banks in the New Millennium
(18 July 2008). See also, eg, Purchase and Assumption Agreement, Whole Bank, All Deposits, Among FDIC,
Receiver of Colonial Bank, Montgomery, AL, FDIC, and Branch Banking and Trust Company, Winston-
Salem, NC 4.15A4.15C (14 August 2009).
100
See, eg, Purchase and Assumption Agreement Among Federal Deposit Insurance Corporation, Receiver
of First National Bank of Nevada, Reno, NV, FDIC and Mutual of Omaha Bank, Omaha, NE 2.1 (25 July
2008) (acquiring institution assumed both insured and uninsured deposits).
101
See, eg, Purchase and Assumption Agreement, Whole Bank, All Deposits, Among FDIC, Receiver of
Georgian Bank, Atlanta, GA, FDIC and First Citizens Bank and Trust Company, Inc, Columbia, SC 2.1 (25
September 2009).
102
Federal Deposit Insurance Act, 11(n)(1)(A), 12 USC 1821(n)(1)(A).
103 Ibid, 11(n)(1)(B), 12 USC 1821(n)(1)(B).
104 Ibid, 11(n)(9), 12 USC 1821(n)(9).
105 Federal Deposit Insurance Act, 11(n)(7), 12 USC 1821(n)(7). See also FDIC, Resolutions Handbook:

Methods for Resolving Troubled Financial Institutions in the United States (2003), p 38. FDIC Press Release, FDIC
Creates Bridge Bank to Take Over Operations of Silverton Bank, National Association, Atlanta Georgia (1 May 2009).

330
 III. Resolution of US Banks

D. FDIC-assisted Transactions
In most bank or thrift resolution transactions, the FDIC provides some form of financial 8.63
assistance in the form of cash or other value to the acquiring institution. This is because the
insured deposit liabilities assumed usually exceed the value of the assets transferred (even
when the FDIC is providing additional protection in the form of loss sharing). Because of
the importance of these assisted transactions both to the FDIC and to potential bidders, this
section provides more detail about resolution transactions with FDIC assistance.
1. Initiation of the process
The process for an FDIC-assisted transaction, like any resolution transaction, begins when 8.64
the FDIC receives a failing bank letter from an insured institutions chartering authority.106
The existence of a failing bank letter is kept confidential by the regulators, who impose a
confidentiality requirement on any potential bidder who is told about it.
While receipt of a failing bank letter is not a guarantee that the bank will be closed, it is a 8.65
strong indication of concern on the part of the regulators. The actual decision to close the
institution is reached by the chartering authority in consultation with the FDIC.
When the FDIC receives a failing bank letter, it sends a resolution team to the failing bank 8.66
or thrift to obtain the necessary data to conduct an auction process. The resolution team
prepares an information package for potential bidders, performs an asset valuation, deter-
mines the appropriate resolution structure, and conducts an on-site analysis to prepare for
the closing. The time between the FDICs receipt of a failing bank letter and the closing of
an assisted transaction is typically about 90 to 100 days, although it may be longer or shorter
depending upon the facts and circumstances surrounding the institution.
2. The bidding process
As part of the bidding process, the FDIC establishes a reserve price for the failing institution, 8.67
by estimating the fair market value of its assets and then deducting any estimated costs of
disposition and direct marketing, arriving at a net figure that is known as the liquidation
value of the assets. The estimated liquidation value of the assets is part of the FDICs cost test
for the resolution of the institution. In the early 1990s, the FDIC attempted to increase the
volume of assets sold at resolution by revealing its reserve price for asset pools. The FDIC has
observed that revealing the reserve price has advantages and disadvantages, including, in
circumstances where few bids are submitted, by biasing the bidding toward that price.107 The
FDIC does not currently reveal its reserve price, primarily to reduce the risk of receiving bids
that are lower than a bidders maximum willingness to pay.
The FDIC also does not voluntarily disclose the names or number of bidders for a particular 8.68
failing institution during the bidding process. Nor does it disclose that information in its
press release identifying the winning bidder. It will only reveal the names and number of

FDIC Press Release, FDIC Creates Bridge Bank to Take Over Operations of Independent Bankers Bank, Springfield,
Illinois (18 December 2009).
106 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 6. OCC, Failure Acquisitions, Comptrollers Corporate Manual (April 1998), pp 67 .

107 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), pp 1011.

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 Resolution of US Banks and other Financial Institutions

other bidders to the extent required to do so under the US Freedom of Information Act.108
The FDIC has an interest in maximizing the number of bidders and in fostering the belief
that many bidders exist in every situation.
8.69 The goal of the FDIC is to sell as much of the bank as possible to the highest bidder in a
manner that maintains public confidence in the US financial system and results in the least
disruption to insured depositors and other stakeholders of the bank,109 consistent with the
FDICs statutory obligation to resolve the bank in a manner that is least costly to the deposit
insurance fund. The FDIC is required to reject all bids if they would result in a more costly
resolution of the institution than a deposit payoff and liquidation of the assets. If the FDIC
receives at least one bid that would result in a lower amount of losses to the deposit insurance
fund than a deposit payoff and liquidation of the institution, the FDIC is required by statute
(at least in theory) to accept the highest such bid it receives.
8.70 In deciding what resolution structure to offer to potential bidders, the FDIC considers a
variety of factors, including the following:
Should it offer the bank in whole or in parts? The FDIC has found that it is sometimes
easier to sell certain parts of a bank separately, such as a trust business, a credit card opera-
tion, or branches. Occasionally, the FDIC will divide a bank into geographic regions if it
believes doing so will facilitate the sale.
Which types of assets should it offer to bidders?
How should it package saleable assets? Should they be sold with or without loss sharing?
How should the assets be priced? Should they be sold at book value, market value, or with
reserve pricing?
8.71 After the FDIC has completed its initial work on the failing institution, the Franchise and
Asset Marketing Branch of the FDICs Division of Resolutions and Receiverships sends a
notice of the opportunity to bid on the failing institution to approved bidders through
IntraLinks, a secure website. Approved bidders are required to register as such on FDICconnect
Business Center, the FDICs secure internet channel. They are requested to designate two
contacts, and to provide the email addresses and phone numbers of the two contacts. They
are also invited to indicate their geographic preferences for future acquisitions and whether
they are interested in purchasing deposit franchises or asset portfolios, or both. The FDIC
requires approved bidders to keep the names of failing institutions confidential to avoid
causing a run on the institutions before they can be resolved in an orderly fashion.
8.72 In general, approved bidders are limited to banks, thrifts, or bank or thrift holding compa-
nies that are well capitalized and in satisfactory condition.110 The FDIC also generally limits
access to its IntraLinks secure website to banks, thrifts, or bank or thrift holding companies
that have registered as approved bidders through FDICconnect Business Center. The FDIC
will only give non-banking institutions access to IntraLinks in special situations. The FDIC

108 5 USC 552. The FDICs policy on releasing bidding information in response to requests is set forth at

<http://www.fdic.gov/about/freedom/biddocs.html>.
109 FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States

(2003), p 77.
110 FDIC Staff Presentation, The Failing Bank Marketing Process: Whole Bank Transactions and Loss Share

Transactions (American Bankers Association, 2 September 2009). FDIC Staff Presentation, Resolutions: The
Process of Bidding on Distressed Banks in the New Millennium (18 July 2008).

332
 III. Resolution of US Banks

tends to permit institutions to bid on institutions in its geographic area, but may make excep-
tions for strong management teams. It also generally permits an institution to bid on an institu-
tion that is smaller, not larger, in size, but may make exceptions for strongly capitalized banks
with strong management teams.
It is possible for other bidders to participate in the auction if they obtain a de novo bank or 8.73
thrift charter. This option is occasionally referred to as a shelf charter, meaning that the
FDIC and the chartering authority have received sufficient information from the propo-
nents to be satisfied with the financial, managerial, and business plan aspects of the propo-
nents. In that light, the regulators indicate a willingness to activate a charter, with deposit
insurance, if and when a bid from the proponents for a failed bank is accepted. The FDIC
has permitted potential investors without an active charter (but with a shelf charter) to
participate in the bidding process when few other feasible purchasers exist. Examples include
the IndyMac, BankUnited, and Silverton transactions. It is also possible to persuade the
FDIC to sell these other bidders a bridge bank that will have assumed some or all of the assets
and liabilities of the failed bank. The FDIC has the statutory authority to establish and sell a
bridge bank in order to facilitate a transaction, but the FDIC has rarely used this transaction
structure.
The FDIC typically invites all approved bidders that indicate an interest in bidding on a 8.74
particular failing institution to an information meeting with the Franchise and Asset
Marketing Branch of the Division of Resolutions and Receiverships. Under certain circum-
stances, the FDIC dispenses with the informational meetings. They tend to be used in smaller
situations where the potential purchasers are relatively unsophisticated. After signing a con-
fidentiality agreement, each bidder is given access to an information package, which includes
financial data on the failing institution, descriptions of the resolution methods being offered,
the legal documents, including any proposed purchase and assumption or loss-sharing agree-
ments, details on the due diligence process, and the bidding procedures. The FDIC provides
the bidder access to these materials through its IntraLinks secured website. The materials
available through IntraLinks generally include information about the transaction structure,
financial information about the target, proposed legal documentation, regulatory applica-
tion information, and other relevant information. The FDIC does not currently disclose its
internal evaluation of asset values.
In order to participate in the bidding process, the party must have received assurance from 8.75
its primary federal regulators that it would be permitted to acquire the failed institution. In
order to submit a bid on the failed institution and have it considered by the FDIC, a bidder
must satisfy a variety of conditions, including the following:
The bidder must contact all appropriate state and federal regulators and arrange to receive
all necessary regulatory approvals for the transaction before the FDICs proposed closing
of the failed bank transaction.
The institution resulting from the transaction must be well capitalized and have a fully
funded allowance for loan losses as of closing.
If a bidder is a de novo institution, the resulting institution will also be required to satisfy
any additional conditions imposed by the chartering authority of the de novo institution,
such as super capital requirements imposed on de novo institutions (eg a 10 per cent Tier 1
risk-based capital ratio for the first three years of operation), a comprehensive business
plan, and qualified directors and senior executive officers.

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 Resolution of US Banks and other Financial Institutions

In the case of a bidder that is a private capital investor, the FDIC has proposed additional
requirements.111
8.76 If a prospective bidder fails any of these conditions, the FDIC reserves the right to reject
the bid.
8.77 Each approved bidder is permitted to conduct due diligence on the bank. The FDIC tightly
controls the due diligence process, ensuring that all bidders have equal access to information.
Approved bidders are required to sign confidentiality agreements, are provided access
to a virtual data room through IntraLinks and if sufficient time exists may be allowed
on-site inspection of certain books and records of the institution. Potential acquirers
are occasionally given the opportunity to speak with management of the bank, but access
to information may be limited by the FDIC. For instance, the FDIC generally takes the
position that bidders will not have access to the targets examination reports or other super-
visory information.
3. The transaction structure
8.78 All FDIC-assisted transactions revolve around the assumption of liabilities and the purchase
of assets. The transaction structures may include the following options:
On the liability side of the balance sheet:
insured deposits only;
insured and uninsured deposits;
insured and uninsured deposits, with certain secured liabilities such as Federal Home
Loan Bank advances and covered bonds; or
all deposits plus secured liabilities plus certain other debt obligations.
On the asset side of the balance sheet:
cash and readily marketable securities;
performing assets, with or without loss sharing;
non-performing assets, with or without loss sharing; and
premises and equipment.
8.79 In a so-called whole bank transaction, virtually all the banks assets are purchased and all or
certain of its liabilities assumed pursuant to a purchase and assumption agreement. The
parent holding company and its non-bank subsidiaries are excluded from the FDICs resolu-
tion process, although the FDIC Chairman has asked Congress to expand its resolution
authority to include such entities.112 Subsidiaries of the failed institution are not placed into
receivership when the FDIC deals with the failed institution, although the equity of a sub-
sidiary is treated as an asset of the receivership estate of the failed institution and will gener-
ally be sold by the FDIC.
8.80 The purchased assets typically include the securities portfolio, loan portfolio (including non-
performing assets and other real estate owned), operations, intellectual property, employee
relationships, equity in subsidiaries, and joint ventures. The liabilities assumed may include
insured, uninsured, or brokered deposits; liabilities under liquidity funding arrangements,

111 FDICs Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions, 74 Fed Reg 32931

(9 July 2009).
112 See Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the H.

Comm. on Financial Servs (29 October 2009) (testimony of Sheila C Bair, Chairman, FDIC).

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 III. Resolution of US Banks

and borrowings from the Federal Reserve and the Federal Home Loan Board; and other
secured or unsecured liabilities. The FDIC also decides whether it needs to offer loss-sharing
or other financial assistance to make the structure marketable. The FDIC will sell or liqui-
date assets that are not purchased and will address the rights of unassumed liabilities as part
of its receivership duties.
The FDIC normally provides a cash payment to the acquirer that approximates the difference 8.81
in the value of assets and liabilities. As the other structures imply, they involve the purchase of
only part of the assets or liabilities of the failed institution.
If the FDIC offers additional financial assistance to facilitate the transaction, it will virtually 8.82
always be in the form of the FDICs standard loss-sharing arrangements.113 Under these
arrangements, loss sharing is typically structured as follows. The assuming bank bears
100 per cent of the losses on an amount called the first loss tranche, which can be a positive
number or zero. If it is zero, loss sharing starts immediately upon any losses. Losses incurred
in excess of the first loss tranche and up to an amount called the stated threshold are shared
80 per cent by the FDIC and 20 per cent by the assuming bank. The stated threshold gener-
ally represents the FDICs estimate of the maximum amount of expected losses. Any losses
above the stated threshold are shared 95 per cent by the FDIC and 5 per cent by the assuming
bank. The FDIC currently has two standard loss-sharing arrangementsone for single
family (ie one-to-four family) residential mortgage loans and another for other loans on an
institutions balance sheet.
The FDIC used a variety of different assisted transaction structures during the savings and 8.83
loan crisis of the 1980s and early 1990s. But a major study of these structures after the savings
and loan crisis persuaded the FDIC that whole bank or asset pool transactions, with loss
sharing, were the most effective structure in producing the least-cost result for the FDIC in
most closed-bank transactions.114 As a result, the FDIC is now exceedingly resistant to
any asset structure other than whole bank or asset pool transactions, with its standard
loss-sharing provisions.115
Several important reasons explain why an FDIC-assisted transaction can be attractive to a 8.84
bidder. First, the FDIC process gives the purchaser the option to avoid assuming certain
types of liabilities. Thus, any unsecured senior or subordinated debt is typically not assumed,
nor is any obligation to shareholders. For example, in the JPMorgan Chase acquisition of
Washington Mutual, the acquirer was able to avoid approximately $30 billion in unsecured
debt of the failed bank.
Second, as a general proposition, contingent claims, including litigation exposure, can be 8.85
avoided. Accordingly, the assuming bank will generally not have to worry about past actions
of the institution and its management.

113
FDIC Staff Presentation, The Failing Bank Marketing Process: Whole Bank Transactions and Loss Share
Transactions (American Bankers Association, 2 September 2009); FDIC Staff Presentation, Resolutions: The
Process of Bidding on Distressed Banks in the New Millennium (18 July 2008).
114 FDIC, Managing the Crisis: The FDIC and RTC Experience 19801994, Vol 1 (1998); FDIC, Resolutions

Handbook: Methods for Resolving Troubled Financial Institutions in the United States (2003), pp 2935.
115 For a discussion of some of the other structures, which the FDIC now strongly resists, see FDIC,

Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States (2003),
pp 1940.

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 Resolution of US Banks and other Financial Institutions

8.86 Third, the acquirer will be able to piggyback off the FDICs repudiation power. As explained
more fully in Section III.F.5 below, the FDIC has the power to repudiate any contract that it
finds burdensome within a reasonable period of time after the institution is closed. This repu-
diation power applies to both executory and non-executory contracts. As a practical matter,
the FDIC does not repudiate contracts that have been fully executed. It is only where some
performance obligation remains on the part of the failed bank that the FDIC will exercise the
repudiation power. The FDIC also has the power to cherry-pick the contracts it will repudi-
ate, unless the contract is a special type of contract called a qualified financial contract (QFC).
QFCs include securities contracts, commodities contracts, forward contracts, repurchase
agreements, swap agreements, and master agreements for any of the foregoing. In the case of
QFCs, the FDIC must repudiate all or none of the QFCs with a particular counterparty.
8.87 When the FDIC repudiates a contract, it must pay the counterparty damages. But rather
than measure damages as the lost benefit of the counterpartys bargain, the Federal Deposit
Insurance Act provides that damages are generally limited to actual direct compensatory
damages, determined as of the date the FDIC was appointed as conservator or receiver. This
damages formula excludes punitive or exemplary damages, damages for lost profits, or
opportunity or damages for pain and suffering. Special rules exist for leases, which require
the FDIC to pay accrued and unpaid rent through the date of repudiation of the lease.
8.88 An exception is made for QFCs, where damages are measured as of the date of repudiation
and damages may include the cost of cover and are calculated in light of industry practices.
However, damage claims arising from repudiation are generally unsecured claims against the
receivership estate. They are treated as general creditor claims, subordinate in priority to the
claims of depositors. General creditor claims are rarely paid in full following a receivership,
and in many instances receive no recovery at all.
8.89 The FDIC effectively passes this repudiation power on to the winning bidder, by giving it the
option for up to 90 days or more to assume certain contracts, including leases for bank prem-
ises or data processing facilities and most other contracts providing for services to or by the
failed bank. Because the FDIC will typically repudiate any contract or lease for which the
option to assume is not exercised by the winning bidder, the counterparty on any such con-
tract or lease has a powerful financial incentive to renegotiate the terms of any contract or
lease that has terms that are above market at the time of the closed-bank transaction in order
to induce the bidder to exercise the option. If a bidder exercises the option to assume any
leases for bank premises, the bidder is required to purchase the related furniture, fixtures, and
equipment at fair market value. The FDIC also typically gives the winning bidder the option
for up to 90 days or more to purchase any owned bank premises, and the related furniture,
fixtures, and equipment, at fair market value.
8.90 Closely related to the repudiation power is the ability of the FDIC to avoid termination of
any contract solely as a result of the institutions insolvency. See Section III.F.4 below. Thus,
the acquirer will generally have the ability to keep in effect those contracts it needs for the
operation of the institution, even if it later determines to use the option to have the FDIC
repudiate them when they are no longer necessary.
4. Marketing the structure
8.91 The FDIC is generally quite rigid in the way it markets failed banks. The FDIC decides
without any input from potential bidderswhich transaction structures to offer bidders,

336
 III. Resolution of US Banks

based on what it believes to be the options most likely to produce the least-cost result for the
deposit insurance fund. It alone decides the structure of any assistance, such as loss sharing.
It marks up its standard form purchase and assumption agreement to reflect the selected
structure, and then instructs bidders to bid on that structure on a take it or leave it basis. In
other words, the FDIC generally will not permit any negotiation of the legal documentation
it proposes. Instead, it purports to require bidders simply to increase or decrease their bids to
reflect any perceived flaws in the non-financial terms of the proposed legal documentation,
rather than to negotiate the non-financial terms.
While the FDICs standard forms are not publicly available, examples of executed purchase 8.92
and assumption agreements are available on the FDICs website, including those with loss
sharing (eg Downey Savings) and those without loss sharing (eg Washington Mutual). Most
posted forms follow a common pattern, but a few appear to be highly negotiated (eg IndyMac
and BankUnited) probably because bidding was less competitive.
The FDIC is more successful in enforcing this marketing strategy in a competitive bidding 8.93
situation. Instances exist where strategic buyers (ie other financial institutions) have been
unable or unwilling to bid on a particular institution. The FDIC has shown a willingness to
consider modifications proposed by potential bidders, but at the end of the process, the
FDIC will nonetheless determine the legal form of documentation and the required bidding
format. It reserves the right to reject, and will generally reject, any bid that it considers to be
non-conformingthat is, a bid that reflects a modification of the legal documentation
because that modification will introduce a variable that the FDIC finds hard to compare
with those that bid in accordance with the predetermined format.
In situations where the FDIC is faced with a single serious bidder or liquidation, it has shown 8.94
far more flexibility in negotiating both financial and non-financial terms.116 Even in such
extreme situations, a bidder will find the FDIC to be far less willing to negotiate terms than a
typical private counterparty in a merger or acquisition transaction. The bidder will therefore
need to be sparing in the changes it proposes to the FDICs standard documentation in order
to avoid having its bid rejected by the FDIC staff. While the FDICs rigidity can be extremely
frustrating to many bidders, it can work to a well-advised bidders advantage by providing it
with opportunities to make lower bids and therefore real opportunities for enhanced value.
In times of crisis, bank failures tend to come in waves, and a backlog of insolvent or near 8.95
insolvent banks can develop. Several reasons can account for this. First, the FDIC typically
becomes overworked and understaffed, placing limits on its ability to process failures through
its pipeline.117 Second, strategic buyers may have their own problems or otherwise have lim-
ited capacity to absorb all the failed banks. The FDIC may even create disincentives for cer-
tain groups to bid on failed banks.118 These factors, in turn, discourage early intervention,
resulting in greater deterioration in asset values before a failed bank is closed and lower bids

116
See, eg, Amended and Restated Insured Deposit Purchase and Assumption Agreement Among FDIC,
Receiver of IndyMac Bank, FSB, Pasadena, CA, USA, FDIC and FDIC as Conservator for IndyMac Federal
Bank, FSB, Pasadena, CA (11 July 2008).
117 Testimony of Mitchell L Glassman, Director, Division of Resolutions and Receiverships, Federal Deposit

Insurance Corporation, at 9, in Hearing before the Subcomm. on Financial Institutions and Consumer Credit,
H. Comm. on Financial Servs (21 January 2010).
118 See, eg, FDIC Final Statement of Policy on Qualifications for Failed Bank Acquisitions, 74 Fed Reg

45440 (2 September 2009).

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 Resolution of US Banks and other Financial Institutions

from approved bidders. This, in turn, results in increased cost to the deposit insurance fund
of resolving failed banks. These conditions create two potential opportunities for bidders
greater leeway on legal documentation and the ability to make a least-cost bid closer to the
FDICs actual cost of liquidation.
8.96 As noted above, the FDIC is required to accept any least-cost bid.119 If a particular bidder
is the only bidder for a particular institution, the FDICs only other options are to liquidate
the bank or transfer its assets and liabilities to a bridge bank to wait for better market condi-
tions. The FDICs net liquidation cost therefore becomes its only alternative to the bidders
bid. The FDIC calculates its net liquidation cost based upon its experience as liquidator with
the type of assets it will be required to dispose of. Bids are evaluated against this net liquida-
tion cost. The best bid will be the one that ultimately costs the FDIC the least amount of
money. If no bid results in a cost to the FDIC that is less than its net liquidation cost, the
FDIC will refuse to sell the institution and proceed with liquidation.
8.97 If the bidder can accurately estimate the FDICs net liquidation cost, it can bid $1 above that
amount and qualify as the least-cost bid. For example, assume that the FDIC is selling an insti-
tution with $100 of insured deposit liabilities and assets with a net liquidation value of $75. In
this example, the FDICs loss as a result of liquidation would be $25. Assuming the FDIC is
not confident that its costs would fall if it transferred the institutions assets and liabilities to a
bridge bank, a buyer would be able to be the least-cost bid by submitting a negative bid of $24,
meaning that the FDIC will, upon the buyers assumption of the deposit liabilities and pur-
chase of the assets, pay the buyer $24 in cash to entice the buyer to purchase the institution.
8.98 After the FDIC accepts one or more bids in a closed-bank auction, it determines which bid
satisfies the least-cost test, clears the bid with the other relevant regulators, notifies the win-
ning bidder, and signs the appropriate legal documentation. The chartering authority then
closes the bank, typically on Friday after the close of business, and the FDIC simultaneously
announces the agreement with the winning bidder. The failed institution reopens for busi-
ness as a subsidiary or part of the new owner on Saturday or Monday. This is an important
aspect of the FDIC process. The winning bidder must be prepared to operate the bank
immediately. No extended period will be provided to prepare for the process of assuming
operational control of the failed institution.
8.99 The FDICs Resolution Handbook contains further details on assisted transactions. Some of
the material in that handbook reflects the FDICs current policies.120 But much of the rest is
interwoven with historical information and discussions that do not reflect current FDIC
policies and practices. Similarly, the FDICs review of the savings and loan crisisManaging
the Crisis121includes some material that generally reflects current FDIC policies and prac-
tices (eg chapter 2), but other parts are historical and do not reflect its current practices.
The FDIC staff has made certain PowerPoint presentations available that reflect the FDICs
current closed-bank bidding process.122

119 Federal Deposit Insurance Act, 13(c)(4), 12 USC 1823(c)(4).

120
FDIC, Resolutions Handbook: Methods for Resolving Troubled Financial Institutions in the United States
(2003) (overview, chapter 2, section 3-6, chapter 8 and glossary).
121 FDIC, Managing the Crisis: The FDIC and RTC Experience 19801994 (1998).
122 FDIC Staff Presentation, The Failing Bank Marketing Process: Whole Bank Transactions and Loss Share

Transactions (American Bankers Association, 2 September 2009); FDIC Staff Presentation, Resolutions:
The Process of Bidding on Distressed Banks in the New Millennium (18 July 2008).

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 III. Resolution of US Banks

E. Claims Process
As an ancillary proceeding to the resolution transaction, the FDIC liquidates any of the 8.100
institutions assets and liabilities left behind. The central element of a liquidation is the claims
process. The FDIC administers the claims process, sorting out valid from invalid claims,
determining priorities, and administering distributions from the receivership estate, which
it refers to as dividends.123 When the various claims and priorities are sorted out, the FDIC
uses the institutions assets to satisfy accepted claims to the extent of such assets in accordance
with the statutory priorities.124 Section 11 authorizes the FDIC to conduct the claims proc-
ess without any court supervision.125 Indeed, it makes the FDICs decision to disallow a
claim unreviewable by any court, although the validity of a claim is subject to de novo judicial
consideration following completion of the administrative claims process.126
In general, the FDIC notifies potential claimants of the failure after the institution is closed.127 8.101
Claimants have 90 days in which to submit a claim and the FDIC has 180 days to consider the
claim.128 If the FDIC denies the claim, or if the 180-day consideration period lapses without a
determination, only then can the claimant obtain judicial consideration of the claim, but the liti-
gation must be filed within 60 days of the earlier to occur of the denial or the lapse of the period.129
Failure to abide by these time limits will result in a bar of further prosecution of the claim.130

F. FDIC Super Powers

The FDIC has a variety of super powers that allow it to avoid, set aside or otherwise limit 8.102
the claims of creditors and other stakeholders. The last ten have been referred to as the ten
most significant rules.131 But their impact has been largely overshadowed by the depositor
preference rule, which was enacted last.132 With only a few important differences, the FDICs
super powers are the same whether it acts as a receiver or conservator.
1. Domestic depositor preference rule
The FDICs most important super power is simply the statutory priority that was given to 8.103
domestic deposit claims in 1993 by the National Depositor Preference Law.133 Section 11(d)(11)

123
Federal Deposit Insurance Act, 11(d)(10), 12 USC 1821(d)(10).
124
Ibid, 11(d)(4)(B), 12 USC 1821(d)(4)(B).
125 Ibid, 11(d)(13)(D), 12 USC 1821(d)(13)(D).
126 Ibid, 11(d)(5)(E), (d)(6)(A), 12 USC 1821(d)(5)(E), (d)(6)(A).
127
Ibid, 11(d)(3)(B), 12 USC 1821(d)(3)(B).
128
Ibid, 11(d)(3)(B)(i), (d)(5)(A)(i), 12 USC 1821(d)(3)(B)(i), (d)(5)(A)(i).
129
Ibid, 11(d)(6)(A), 12 USC 1821(d)(6)(A).
130
Federal Deposit Insurance Act, 11(d)(6)(B), 12 USC 1821(d)(6)(B).
131 Douglas, Luke, and Veal, Introduction, Counselling Creditors of Banks and Thrifts: Dealing with the

FDIC and RTC, PLI Order No A4-4323 (14 January 1991). Zisman, Availability of the Superpowers to
Collecting Banks, Indemnified Institutions, and Other Third Parties in Civil and Criminal Liability of Officers,
Directors, and Professionals: Bank & Thrift Litigation in the 1990s, PLI Order No A4-4355 (Practising Law
Institute, 1516 October 1991); Zisman and Spears, FDIC/RTC Superpowers and their Effect on Creditors
and Shareholders in Litigating For and Against the FDIC and the RTC 1991, PLI Order No A4-4349 (Practising
Law Institute, 1819 July 1991).
132 Omnibus Budget Reconciliation Act of 1993, 3001, 107 Stat 312, 336.
133 Ibid, which added s 11(d)(11) to the Federal Deposit Insurance Act, 12 USC 1821(d)(11). See also

Marino and Bennett, The Consequences of National Depositor Preference 12 FDIC Banking Rev No 2, 19;

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 Resolution of US Banks and other Financial Institutions

of the Federal Deposit Insurance Act now gives deposits payable in the US priority over
all other unsecured claims, including those of depositors whose claims are payable solely
outside the US (foreign deposits) and general unsecured creditors. In summary, Section
11(d)(11) contains the following priority of claims:
administrative expenses of the receiver;
any deposit liability (other than deposit liabilities payable solely outside the US);
any other general or senior liability;
any obligation subordinated to depositors or general creditors; and
any obligation to shareholders or members.134
8.104 The reason that this super power is so important is that insured institutions generally have
very few unsecured liabilities other than deposit liabilities and the assets of a failed institution
are typically insufficient to satisfy the claims of both depositors and any creditors junior to
depositors. For example, based on our review of ten of the largest institutions to fail in 2008
and 2009, we estimated that unsecured non-deposit liabilities averaged only 3 per cent of the
failed institutions liabilities,135 and that the value of the institutions assets averaged just 65
per cent of total liabilities.136 Under these conditions, the assets will be insufficient to satisfy
the claims of all depositors; as a result, nothing will be left for unsecured general creditors or
any other claimant junior to depositors. Moreover, if domestic deposits and secured advances
account for 65 per cent or more of the institutions liabilities, the institutions assets will typi-
cally be insufficient to satisfy the claims of foreign deposits since foreign deposits are treated
as junior to domestic deposits and pari passu with general unsecured creditors.
2. Contingent claims not provable
8.105 Although it has no statutory basis for doing so, the FDIC has long taken the position that
claims against an insured institution for contingent obligations are not provable in a conser-
vatorship or a receivership.137 Thus, the beneficiary of an undrawn line of credit, letter of

Thompson, The National Depositor Preference Law, Economic Commentary, Federal Reserve Bank of Cleveland (15
February 1994).
134
Federal Deposit Insurance Act, 11(d)(11), 12 USC 1821(d)(11).
135
Our estimates were based on data contained in the closed institutions call report as of the quarter ended
immediately before it was closed. See ANB Financial, NA (Closed 9 May 2008) (2%); BankUnited (Closed 21
May 2009) (0.5%); Colonial Bank (Closed 14 August 2009) (2%); Corus Bank, NA (Closed 11 September
2009) (1%); Downey Savings and Loan, FA (Closed 21 November 2008) (0.5%); First National Bank of
Nevada (Closed 25 July 2008) (5%); Georgian Bank (Closed 25 September 2009) (1%); Guaranty Bank
(Closed 21 August 2009) (2%); Indymac, FSB (Closed 11 July 2008) (2%); Silver State Bank (Closed 5
September 2008) (5%); Washington Mutual Bank (Closed 25 September 2008) (11%).
136
See ANB Financial, NA (Closed 9 May 2008) (79%); BankUnited (Closed 21 May 2009) (56%);
Colonial Bank (Closed 14 August 2009) (76%); Corus Bank, NA.(Closed 11 September 2009) (65%); Downey
Savings and Loan, FA (Closed 21 November 2008) (81%); First National Bank of Nevada (Closed 25 July
2008) (60%); Georgian Bank (Closed 25 September 2009)(49%); Guaranty Bank (Closed 21 August 2009)
(63%); Indymac, FSB (Closed 11 July 2008) (57%); Silver State Bank (Closed 5 September 2008) (63%).
137 See Douglas, Luke, and Veal, Introduction, Counselling Creditors of Banks and Thrifts: Dealing with the

FDIC and RTC, PLI Order No A4-4323 (14 January 1991); Glancz and Gunsalus, Rights of Debtors and
Creditors of Failed Financial Institutions in Banks and Thrifts: Introduction to FDIC/RTC Receivership Law, PLI
Order No A4-4373 (Practising Law Institute, 1992). The FDICs position was rejected by the courts under the
law in effect prior to enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA). See First Empire Bank v FDIC, 572 F 2d 1361 (9th Cir 1978); FDIC v Liberty National Bank & Trust
Co, 806 F 2d 961 (10th Cir 1986). But the FDIC apparently takes the position that FIRREA strengthened its
position. In contrast, the definition of claim in the Bankruptcy Code includes contingent or unliquidated rights,

340
 III. Resolution of US Banks

credit, or guarantee has no provable claim to draw down additional amounts or to exercise
its indemnification or guarantee rights once the FDIC has been appointed receiver or
conservator. Alternatively, the FDIC has taken the position that contracts for contingent
obligations can be repudiated as burdensome, and that damages for such repudiation will
be zero.138
On rare occasions, the FDIC may include contingent obligations in any assets or liabilities 8.106
transferred to a third party bank in a purchase and assumption agreement. If they are trans-
ferred, the beneficiaries may enforce their rights against the third party bank. For example,
the FDIC transferred certain contingent obligations in both the JP Morgan/WaMu and the
US Bank/Downey Savings transactions.139 Whether the FDIC would do so in other large
bank failures is uncertain, although we could envision the FDIC doing so in a systemically
important institution if it believed such a practice would otherwise further its policy goals
for the system.
3. High bar to enforceability of contracts
Section 13(e) of the Federal Deposit Insurance Act provides that any agreement with an 8.107
insured institution that tends to diminish or defeat the interest of the [FDIC] in any asset
acquired by it [as receiver or conservator under the FDIA], either as security for a loan or by
purchase or as receiver is not enforceable against the institution or the FDIC, and may not
form the basis of a claim against the institution, unless the agreement:
is in writing;
was executed by the insured institution and any person claiming an interest under it con-
temporaneously with the acquisition of the asset by the institution;
was approved by the board of directors of the insured institution or its loan committee and
the approval is reflected in the minutes of the board; and
has continuously been an official record of the insured institution.140
Section 13(e) has been one of the most litigated provisions, because it goes so far beyond the 8.108
normal enforceability requirements under otherwise applicable non-insolvency law and is so
difficult to satisfy as a practical matter.141

such as undrawn guarantees or letters of credit, loan commitments, or unused portions of committed lines of
credit. 11 USC 101(5). In addition, such contingent claims can be estimated by the bankruptcy court for
purposes of allowing the claim. 11 USC 502(c). The theory behind the FDICs position is apparently derived
in part from the repudiation powers, which limit damages for repudiation to actual, direct, compensatory dam-
ages determined as of the date of the conservatorship or receivership (12 USC 1821(e)).
138
See Douglas, Luke, and Veal, Introduction, Counseling Creditors of Banks and Thrifts: Dealing with the
FDIC and RTC, PLI Order No A4-4323 (14 January 1991).
139
Press Release, FDIC, JPMorgan Chase Acquires Banking Operations of Washington Mutual: FDIC Facilitates
Transaction that Protects All Depositors and Comes at No Cost to the Deposit Insurance Fund (25 September 2008);
Purchase and Assumption Agreement Among FDIC, Receiver of Washington Mutual Bank, Henderson, NV,
and JPMorgan Chase Bank, NA 2.1, 3.1 (25 September 2008); Press Release, FDIC, U.S. Bank Acquires All
the Deposits of Two Southern California Institutions: Downey Savings and Loan Association, Newport Beach and
PFF Bank & Trust, Pomona (21 November 2008); Purchase and Assumption Agreement, All Deposits Among
FDIC, Receiver of Downey Savings and Loan Association, FA, Newport Beach, CA and US Bank NA 2.1,
3.1 (21 November 2008).
140 Federal Deposit Insurance Act, 13(e), 12 USC 1823(e).
141 See Douglas, Luke, and Veal, Introduction, Counseling Creditors of Banks and Thrifts: Dealing with the

FDIC and RTC, PLI Order No A4-4323 (14 January 1991).

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 Resolution of US Banks and other Financial Institutions

8.109 These requirements were added in 1950142 to codify and expand the Supreme Courts deci-
sion in DOench Duhme & Co v FDIC.143 They defeat the enforceability against an insured
institution in receivership or conservatorship of any otherwise enforceable oral contracts.
They also create a substantial risk that many otherwise enforceable written contracts will not
be enforceable against an insured institution in receivership or conservatorship.
8.110 For example, if a creditor had an otherwise enforceable and perfected security interest in
certain assets, but the security agreement failed to satisfy one of the requirements in Section
13(e), the security interest could be unenforceable against the FDIC and could not form the
basis of a claim against the institution. While these provisions were designed to protect the
FDIC against secret or side agreements not reflected on the records of the institution (eg a
guarantor that a loan officer supposedly promised would never be called upon), in practice the
breadth of the provisions can be traps for the unwary.
8.111 The contemporaneous execution requirement is particularly difficult to satisfy in the context
of contractual arrangements that purport to govern a series of transactions over a long period
of time before or after the contract is executed, such as a revolving line of credit or a security
agreement that grants a security interest in previously or subsequently acquired collateral.
The statute contains an exception for agreements for revolving lines of credit from the Federal
Reserve or any Federal Home Loan Bank.144 Such lines of credit agreement are deemed to
have been executed contemporaneously with any drawdown. The FDIC has also issued a
policy statement on security interests to the effect that the FDIC will not seek to avoid oth-
erwise legally enforceable and perfected security interests solely because the security agree-
ment granting or creating such security interest does not meet the contemporaneous
requirement of [the Federal Deposit Insurance Act].145 Of course, the FDIC has the right to
withdraw its policy statements at any time,146 potentially with retroactive effect.

4. Power to enforce contracts despite ipso facto clauses

8.112 The FDIC has the power to enforce any contract . . . entered into by the depository institu-
tion notwithstanding any provision of the contract providing for termination, default, accel-
eration, or exercise of rights upon, or solely by reason of, insolvency or the appointment of
or the exercise of rights or powers by a conservator or receiver.147
8.113 This means that contractual counterparties are prohibited from accelerating, terminating, or
otherwise exercising any rights under any contract against the insured institution solely as a
result of the appointment of a receiver or conservator for the institution.
8.114 Two exceptions to this rule exist. First, the rule does not apply to qualified financial
contracts in receivership (as distinguished from conservatorship) after a one business day

142 Federal Deposit Insurance Act, 13(e), 12 USC 1823(e).

143
315 US 447 (1942).
144
Federal Deposit Insurance Act, 13(e), 12 USC 1823(e).
145 Statement of Policy Regarding Treatment of Security Interests After Appointment of the FDIC as

Conservator or Receiver, 58 Fed Reg 16833, 16834 (31 March 1993).

146 Statement of Policy on the Development and Review of Regulations, 63 Fed Reg 25157 (7 May 1998).
147 Federal Deposit Insurance Act, 11(e)(12)(A), 12 USC 1821(e)(12)(A). Similarly, under the

Bankruptcy Code, an executory contract or unexpired lease cannot be terminated or modified due to an
ipso facto clause, with exceptions for financing contracts, protected financial contracts, and other protected
agreements. 11 USC 365(e).

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 III. Resolution of US Banks

cooling-off period.148 Second, the rule does not apply to directors or officers liability insur-
ance contracts or depository institution bonds in either conservatorship or receivership.149
Counterparties to such contracts may accelerate, terminate, or otherwise exercise the rights
solely because of the insolvency or the appointment of a conservator or receiver.

5. Repudiation of contracts
The FDIC also has the power to disaffirm or repudiate any contract or lease, including quali- 8.115
fied financial contracts, to which the insured institution is a party if the FDIC determines
within a reasonable period of time that:
the contract would be burdensome; and
the repudiation or disaffirmance of the contract would promote the orderly administra-
tion of the institutions affairs.150
This repudiation power was added to the FDICs toolkit by Section 212(e) of the Financial 8.116
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Prior to FIRREA,
the FDIC relied on the common law right of an equity receiver to disaffirm executory
contracts.151
Under the Bankruptcy Code, executory contracts and unexpired leases must either be 8.117
assumed and performed, or assigned or rejected, with the approval of the Bankruptcy
Court.152 In contrast, the FDICs repudiation power applies to both executory and non-
executory contracts, although repudiation of a contact that has been fully executed presents
substantial difficulties and to our knowledge has not been attempted by the FDIC. The
FDIC may cherry-pick in exercising this power, even among similar contracts involving
the same parties, except in the case of qualified financial contracts, where it must repudiate
all or none of the contracts with a particular counterparty.153
The statute itself does not define what constitutes a reasonable period of time. The FDIC 8.118
has indicated, however, in the context of security interests, that a reasonable period of time
would generally be no more than 180 days after the FDICs appointment as receiver or
conservator,154 and in its standard purchase and assumption agreement, appears to operate
under the six-month guideline. At least one court has indicated that approximately six months
to one year should generally qualify as a reasonable period of time.155 But a more recent deci-
sion states that the amount of time that is reasonable must be determined according to the

148
Federal Deposit Insurance Act, 11(e)(8)(G)(ii), 12 USC 1821(e)(8)(G)(ii).
149
Ibid, 11(e)(13)(A), 12 USC 1821(e)(13)(A)
150
Ibid, 11(e)(1)(C), 12 USC 1821(e)(1)(C).
151
See Veal, Contract Repudiation under the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 in Counseling Creditors of Banks and Thrifts: Deal with the FDIC and RTC, 561 PLI/Comm 129
(14 January 1991); Glancz and Gunsalus, Rights of Debtors and Creditors of Failed Financial Institutions in
Banks and Thrifts: Introduction to FDIC/RTC Receivership Law, PLI Order No A4-4373 (Practising Law
Institute, 1992).
152
11 USC 365(a).
153 Federal Deposit Insurance Act, 11(e)(11), 12 USC 1821(e)(11).
154 Statement of Policy Regarding Treatment of Security Interests After Appointment of the FDIC as

Conservator or Receiver, 58 Fed Reg 16833 (31 March 1993).

155 See Texas Co v Chicago & AR Co, 36 F Supp 62, 65 (D Ill 1940), revised on other grounds, 126 F 2d 83,

8990 (7th Cir 1942).

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 Resolution of US Banks and other Financial Institutions

circumstances of each case.156 The statute contains no definition of the term burdensome,
so the FDIC has wide latitude to interpret that standard, provided that its interpretation is
reasonable.157 Indeed, one court has held that the FDIC is not required to make a formal
finding as to why a contract is burdensome.158
8.119 If the FDIC disaffirms or repudiates a contract, it must pay the counterparty damages.159 But
rather than measure damages as the lost benefit of the counterpartys bargain, the Federal
Deposit Insurance Act provides that the damages are generally limited to actual direct com-
pensatory damages; and determined as of the date of the appointment of the conservator or
receiver.160 This very narrow definition of damages was added by Section 212(a) of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989. In contrast, under
the Bankruptcy Code, breach of contract damages are generally allowed for rejected con-
tracts, and administrative expense claims are often allowed to the extent that the debtor
accepted benefits under the contract after the petition date. The damages formula in the
Federal Deposit Insurance Act excludes punitive or exemplary damages, damages for
lost profits or opportunity, or damages for pain and suffering. The Act contains a special rule
for qualified financial contracts, under which damages include the cost of cover and are
determined based on industry standards.161
8.120 As noted, the damages are generally measured as of the date the FDIC was appointed as
conservator or receiver.162 The Act does not require the FDIC to pay interest for the period
between appointment and repudiation. Thus, for instance, if the FDIC repudiated a debt
obligation, the institution would be required to pay the counterparty damages in the form of
principal plus accrued interest until the date of appointment, but not until the date of repu-
diation or the original maturity date of the debt obligation. The FDIC is not required to pay
post-appointment interest. In the case of qualified financial contracts, damages are measured
as of the date of disaffirmance or repudiation, which eliminates the post-appointment interest
issue through the later date but does not necessarily preserve the benefit of the original
bargain.
8.121 The statute contains special rules for leases, governing both cases where the failed institution
was lessor and cases where it was lessee.163 In general, when the institution is lessee the FDIC
will pay rent until the effective date of repudiation.164 This is particularly important for
leased bank premises, where the FDIC or third party acquirer will take a period of time to
determine whether it wishes to continue use of the property. Generally, if repudiated, the
FDIC will not be obligated to pay future rent or be subject to acceleration or other penalties
associated with unpaid future rent.165

156 Resolution Trust Corp v CedarMinn Bldg Ltd Pship, 956 F 2d 1446, 1455 (8th Cir 1992).
157
Union Bank v FSLIC, 724 F Supp 468, 471 (ED Ky 1989).
158
1185 Ave of Americas Assoc v Resolution Trust Corp, 22 F 3d 494, 498 (2nd Cir 1994).
159 Federal Deposit Insurance Act, 11(e)(3), 12 USC 1821(e)(3).
160
Ibid, 11(e)(3)(A), 12 USC 1821(e)(3)(A).
161 Ibid, 11(e)(3)(C), 12 USC 1821(e)(3)(C).
162 Ibid, 11(e)(3)(A)(ii)(I), 12 USC 1821(e)(3)(A)(ii)(I).
163 Ibid, 11(e)(4)(5), 12 USC 1821(e)(4)(5).
164 Ibid, 11(e)(4)(B), 12 USC 1821(e)(4)(B).
165 Ibid.

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 III. Resolution of US Banks

6. Special treatment for qualified financial contracts

Qualified financial contracts are a special class of contract that receives preferential treatment 8.122
in receivership and, to a far lesser extent, in conservatorship. Qualified financial contracts
include securities contracts, commodities contracts, forward contracts, repurchase agree-
ments, swap agreements, and master agreements for any of the foregoing.166 They are
basically the same as the list of protected contracts under the US Bankruptcy Code.167
The enforceability of ipso facto clauses in qualified financial contracts is different depending 8.123
on whether the institution is in receivership or conservatorship. If in receivership, counter-
parties have the right to exercise any contractual rights to terminate, liquidate, close out, net,
or resort to security arrangements upon the appointment of the FDIC as receiver, subject to
a one business day cooling-off period.168 This right overrides the general prohibition against
the enforceability of ipso facto clauses by counterparties. During the one business day cool-
ing-off period, the FDIC has the option to transfer all, but not less than all, of the qualified
financial contracts with a particular counterparty to a single third party financial institu-
tion.169 If the FDIC exercises this option, the counterparty is not permitted to terminate,
accelerate, or otherwise exercise its rights with respect to the transferred qualified financial
contracts.
In a conservatorship, the general rule against the enforceability of ipso facto clauses applies. 8.124
Counterparties may not terminate, close out, or net qualified financial contracts solely on
account of the insolvency, financial condition, or appointment of the conservator.170 This, in
effect, continues all relationships under their existing contractual provisions.
If the FDIC repudiates any qualified financial contracts, it is not permitted to cherry-pick 8.125
with respect to a particular counterparty. It must repudiate all or none of the qualified finan-
cial contracts with a particular counterparty.171 Damages for repudiated qualified financial
contracts are determined as of the date of repudiation, and may include the cost of cover, and
are calculated in light of industry practices.172
The Federal Deposit Insurance Act prohibits the enforceability of walkaway clauses, even in 8.126
qualified financial contracts, in both conservatorship and receivership.173

7. Security interests
Notwithstanding the FDICs general repudiation power, the Federal Deposit Insurance Act 8.127
protects legally enforceable and perfected security interests from being avoided for any
reason, unless:
the underlying security agreement does not satisfy the requirements of Section 13(e);
the security interest was taken in contemplation of the institutions insolvency;174 or

166
Ibid, 11(e)(8)(D)(i), 12 USC 1821(e)(8)(D)(i).
167
11 USC 362(b)(6).
168 Federal Deposit Insurance Act, 11(e)(10)(B)(i), 12 USC 1821(e)(10)(B)(i).
169
Ibid, 11(e)(9)(A)(i), 12 USC 1821(e)(9)(A)(i).
170 Ibid, 11(e)(10)(B)(ii), 12 USC 1821(e)(10)(B)(ii).
171 Ibid, 11(e)(11), 12 USC 1821(e)(11).
172 Ibid, 11(e)(3)(C), 12 USC 1821(e)(3)(C).
173 Ibid, 11(e)(8)(G)(i), 12 USC 1821(e)(8)(G)(i).
174 Ibid, 11(e)(12), 12 USC 1821(e)(12).

345
 Resolution of US Banks and other Financial Institutions

the security interest was taken with the intent to hinder, delay, or defraud the institution
or its creditors.175
8.128 An exception to the avoidance powers exists for any extension of credit from any Federal
Home Loan Bank or any Federal Reserve Bank, and for any security interest in assets securing
such an extension of credit.176
8.129 In the case of national banks and possibly federally chartered savings associations, the FDIC
is also permitted to rely on the preference avoidance powers contained in 12 USC 91 to set
aside security interests that amount to preferential transfers.177 By contrast, under the
Bankruptcy Code, preferential transfers made on account of antecedent debt, within 90 days
of bankruptcy while the debtor was insolvent, and which allow the creditor to receive more
than the creditor would receive in liquidation, may be avoided, subject to defences if the
transfer was for new value or outside the 90-day preference period.178
8.130 Because all security interests are in some sense taken in contemplation of an institutions
insolvency, depending on how it is interpreted the second exception could swallow the rule.
The FDIC has provided no guidance on how the second exception would be interpreted
generally, but has not attempted to avoid security interests taken in the normal course of
business. In 2005, however, the Act was amended to delete the second exception for collat-
eral securing qualified financial contracts.179 Such security interests are avoidable only if
taken with the actual intent to defraud, and not merely because they were taken in contem-
plation of an institutions insolvency.180

8. Maximum recovery right

8.131 Section 11(i) of the Act provides that the maximum liability of the FDIC to a person having a
claim against an institution is the amount the claimant would have received had the FDIC
liquidated the institution. This rule allows the FDIC to discriminate in the treatment of credi-
tors even if they are within the same or a senior class.181 This limited power to favour one credi-
tor over another, even within the same or senior classes, was added by Section 212(a) of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989. The FDIC was previ-
ously subject to a pro rata distribution rule that required similarly situated creditors to be
treated similarly. In contrast, chapter 11 of the Bankruptcy Code generally requires equal

175
Ibid, 11(e)(12), 12 USC 1821(e)(12).
176
Ibid, 11(e)(14), 12 USC 1821(e)(14).
177 See Perlstein, Preference and Fraudulent Conveyance Issues in Obtaining Security Interests and

Guarantees in Counseling Creditors of Banks and Thrifts: Dealing with the FDIC and RTC, PLI Order No
A4-4323 (Practising Law Institute, 1991)
178
11 USC 547.
179
Pub L No 109-8 903, 119 Stat 23, 16065. See also Federal Deposit Insurance Act, 11(e)(8)(C)(ii),
12 USC 1821(e)(8)(C)(ii).
180 Krimminger, Adjusting the Rules: What Bankruptcy Will Mean for Financial Markets Contracts (2005),

p 4 and note 9.
181
Zisman and Spears, FDIC/RTC Priority over Creditors, Bondholders and Shareholders Subrogation to
the Position of Depositors FDIC/RTC Superpowers in Civil and Criminal Liability of Officers, Directors, and
Professionals: Bank and Thrift Litigation in the 1990s, PLI Order No A4-4327 (Practising Law Institute, 1991);
Connolly, The Liquidation of Failed Financial Institutions under the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 in Litigating with the FDIC and RTC: Asset-Based Claims, PLI Order No A4-4319
(Practising Law Institute, 1990); Guy, Unsecured Creditors in Litigating with the FDIC and RTC: Asset-Based
Claims, PLI Order No A4-4319 (Practising Law Institute, 1990); First Empire Bank v FDIC, 572 F 2d 1361,
1371 (9th Cir 1978); MBank New Braunfels, NA v FDIC, 721 F Supp 120 (ND Tex 1989).

346
 III. Resolution of US Banks

treatment within classes of creditors consistent with the absolute priority rule or at least fair
and equitable principles.182
This rule also permits the FDIC to use its own resources (or theoretically other resources of the 8.132
receivership) to make additional payments to certain claimants if it believes that it would help
minimize its losses. If it elects to do so, it is not obligated to make such payments to any other
claimant or category of claimant, even if of the same type. As an example, the FDIC may deter-
mine that unpaid utility bills should be paid in full in order to assure uninterrupted service. The
payment of a utility bill, which is a general unsecured claim, does not require the FDIC to pay
an unpaid bill for legal services.

9. Super-priority over fraudulent transfers by insider or debtor

As conservator or receiver of an insured institution, the FDIC has the right to avoid and 8.133
recover any fraudulent transfer by an insider or debtor of the insured institution to a third
party that occurs within five years of appointment.183 The FDICs claim is senior to any claim
by a trustee in bankruptcy or other person (except another federal agency) in a proceeding
under the Bankruptcy Code.184 But the transfer must have been made with the intent to
hinder, delay, or defraud the insured institution or the receiver or conservator.185 The FDIC
may recover from any immediate or intermediate transferee, except for a transferee who took
as a good-faith purchaser for value.186

10. Cross-guarantees
The FDIC has the right to recover any losses incurred in assisting or resolving any insured 8.134
institution from any other insured institution under common control with the first institu-
tion.187 The FDICs claim may be estimated and assessed in advance of any expenditure of
funds and is subordinated to general creditors and depositors, but senior to the claims of
shareholders and affiliates.188

11. Statute of limitations, tolling, and removal powers

The FDIC enjoys special powers with respect to litigation and claims involving failed 8.135
institutions.
First, any ongoing litigation against the failed institution will be stayed. The FDIC would like 8.136
to drive all potential claimants through the administrative claims process; however, the stay will
only last 45 days in the case of a conservatorship and 90 days in the case of a receiver.189 Courts
are required to grant the stay on request of the FDIC.190 Note that the filing of a claim with the
receiver (which many claimants often do in order to preserve all remedies) does not affect the

182
Douglas Baird, The Elements of Bankruptcy (4th edn, 2001).
183
Federal Deposit Insurance Act, 11(d)(17)(A), 12 USC 1821(d)(17)(A). See also, Perlstein, Preference
and Fraudulent Conveyance Issues in Obtaining Security Interests and Guarantees in Counseling Creditors of
Banks and Thrifts: Dealing with the FDIC and RTC 23 (Practising Law Institute, 1991).
184
Federal Deposit Insurance Act, 11(d)(17)(D), 12 USC 1821(d)(17)(D).
185
Ibid, 11(d)(17)(A), 12 USC 1821(d)(17)(A).
186 Ibid, 11(d)(17)(B)(C), 12 USC 1821(d)(17)(B)(C).
187
Ibid, 5(e)(1), 12 USC 1815(e)(1). See also Testimony of Mitchell L Glassman, Director, Division of
Resolutions and Receiverships, Federal Deposit Insurance Corporation, at 56, in Hearing before the Subcomm.
on Financial Institutions and Consumer Credit, H. Comm. on Financial Servs. (21January 2010).
188 Federal Deposit Insurance Act, 5(e)(2)(A)(C), 12 USC 1815(e)(2)(A)(C).
189 Ibid, 11(d)(12)(A), 2 USC 1821(d)(12)(A).
190 Ibid, 11(d)(12)(B), 12 USC 1821(d)(12)(B).

347
 Resolution of US Banks and other Financial Institutions

ability of the claimant to continue any action that was filed before the appointment of the
FDIC as receiver.191
8.137 Second, claimants (unless they had previously commenced litigation) will be required to file an
administrative claim that will be handled by the FDIC.192 When a claimant files an administra-
tive claim under the claims procedure, it will be deemed to have commenced an action for
applicable statute of limitations purposes, even though the plaintiff may be precluded from
actually commencing litigation in court until the administrative process concludes.193
8.138 Third, the FDIC will have the power to remove most actions filed in state court to federal
court.194
8.139 Fourth, with respect to claims that the FDIC might wish to assert as receiver, the FDIC
enjoys a special statute of limitations of six years for contract claims and three years for tort
claims or, if longer, the statute provided by state law.195 The statute of limitations does not
begin to run until the date of the FDICs appointment as conservator or receiver or, if later,
the date the cause of action accrues.196 Accordingly, unless a cause of action has expired as of
the date of conservatorship or receivership, the FDIC has the benefit of an entirely new statu-
tory period within which to bring claims. Indeed, for claims of fraud or intentional miscon-
duct resulting in unjust enrichment or substantial loss to the institution, unless the cause of
action accrued more than five years from the date of appointment, the FDIC is entitled to
take advantage of the special statute of limitations.
8.140 These litigation powers are extremely important. In addition to having to address litigation
to which the failed institution was a party, as receiver the FDIC will both initiate and be
subject to multiple claims. For instance, following a failure it routinely investigates director
and officer liability claims and professional malpractice claims. The extended statute of limi-
tations provides ample opportunity for the FDIC to conduct investigations and bring claims
without having to worry about rapidly expiring state statutes of limitation.

IV. Resolution Authority over Fannie Mae,

Freddie Mac, and the Federal Home Loan Banks

A. Background
1. Fannie Mae and Freddie Mac
8.141 Fannie Mae, the common name for the Federal National Mortgage Association, was
originally chartered in 1938 to provide liquidity and stability to the US secondary

191 Ibid, 11(d)(6)(A), 12 USC 1821(d)(6)(A).

192
Ibid, 11(d)(12), 12 USC 1821(d)(12). See also Self-Help Liquidation of Collateral by Second
Claimants in Insured Depository Receiverships, FDIC Advisory Op, No 49 (15 December 1989).
193 Federal Deposit Insurance Act, 11(d)(5)(F)(i), 12 USC 1821(d)(5)(F)(i).
194
Ibid, 11(d)(13)(B), 12 USC 1821(d)(13)(B).
195 Ibid, 11(d)(14)(A), 12 USC 1821(d)(14)(A).
196 Ibid, 11(d)(14)(B), 12 USC 1821(d)(14)(B).

348
 IV. Resolution Authority over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks

mortgage market.197 Fannie Maes charter was amended in 1968 to make it a congressionally
chartered, privately owned corporation.198 Fannie Mae does not make direct loans to borrowers.
Rather, it purchases residential mortgages and mortgage-related securities in the secondary
mortgage market, packages these instruments into pools, issues interests in the pools called
mortgage-backed securities (MBS), guarantees the MBSs and sells the guaranteed MBSs into the
secondary market. Fannie Mae also purchases mortgages for its own investment portfolio.199
Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, was char- 8.142
tered by the US Congress in 1970 to provide further stability, liquidity, and affordability to
the US housing market.200 Freddie Mac has a similar congressional mandate to Fannie
Mae.201 As a result of their public charter and private ownership, Fannie Mae and Freddie
Mac are referred to as government-sponsored enterprises or GSEs.
In 1992, the Federal Housing Enterprises Financial Safety and Soundness Act (the Safety 8.143
and Soundness Act) created the Office of Federal Housing Enterprise Oversight (OFHEO)
as a regulatory office within the Department of Housing and Urban Development (HUD)
with oversight over Fannie Mae and Freddie Mac.202 HUD was responsible for overseeing
that Fannie Mae and Freddie Mac accomplished the purposes articulated in their charters,
including the promotion of home ownership in the US, while OFHEO was responsible for
overseeing the safety and soundness at the organizations.203
As of September 2008, Fannie Mae and Freddie Mac had purchased roughly 80 per cent of 8.144
all new home mortgages in the US,204 and their combined investment portfolios held mort-
gage assets (loans and MBSs) of approximately $1.5 trillion.205 When combined with their
guarantee liabilities on MBSs sold to third parties, Fannie Mae and Freddie Mac owned or
guaranteed almost 31 million home loans worth about $5.5 trillion, or about half of all
mortgages in the US.206

2. Federal Home Loan Bank System

The Federal Home Loan Bank Act was passed by Congress in 1932, and established the Federal 8.145
Home Loan Bank System.207 The System was created to provide liquidity to the housing finance

197 See Federal National Mortgage Association, Annual Report on Form 10-K, for the fiscal year ended 31

December 2008.
198 See Housing and Urban Development Act of 1968, Pub L No 90-448, tit VIII, 82 Stat 476, 536, 12 USC

1717.
199 See Federal Home Loan Mortgage Corporation, Annual Report on Form 10-K, for the fiscal year ended

31 December 2008.
200
See Federal Home Loan Mortgage Corporation Act, Pub L No 91-351, 301, 84 Stat 451 (1970), codi-
fied at 12 USC 1451 note.
201
See Federal National Mortgage Association Charter Act, 301, 12 USC 1716.
202 See Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Pub L No 102-550,

1311, 106 Stat 3941, 3944.

203
Ibid, 1321, 106 Stat at 3952.
204 Press Release, Fed Housing Fin Agency, Statement of Federal Housing Finance Agency Director James B.

Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (7 September 2008).
205 See Nick Timiraos, Questions Surround Fannie, Freddie, Wall St J (30 December 2009).
206 See Associated Press, Chairman in House Proposes Replacing Freddie and Fannie, New York Times, 22

January 2010, at B2; Congressional Research Service, Financial Institution Insolvency: Federal Authority over
Fannie Mae, Freddie Mac, and Depository Institutions (10 September 2008).
207 Federal Home Loan Bank Act, Pub L No 72-304, 47 Stat 725 (1932).

349
 Resolution of US Banks and other Financial Institutions

market, which had been severely affected by the Great Depression.208 The Federal Home Loan
Bank Act created 12 Federal Home Loan Banks, which functioned as regional cooperatives.209
All federally chartered thrifts were required to become members of the Federal Home Loan
Bank in their district, and to invest capital in the bank.210 The System acted as a central credit
facility that made advances to thrifts, which used the liquidity to make mortgage loans to home-
buyers.211 The thrifts were required to secure their advances by granting security interests to the
Federal Home Loan Banks in high-quality assets in excess of the value of their advances.212
8.146 The Federal Home Loan Bank Act also created the Federal Home Loan Bank Board to over-
see the safety and soundness regulation of the Federal Home Loan Banks and of thrifts.213
In the 1980s, the Board delegated its oversight responsibility over thrifts to each of the
Federal Home Loan Banks.214 Also in the 1980s, a large number of thrifts failed, forcing
Congress to appropriate billions of dollars to cover the costs associated with ensuring the
payment of insured thrift deposits.215
8.147 In 1992, Congress passed FIRREA, which abolished the Federal Home Loan Bank Board
and established the Federal Housing Finance Board to oversee the Federal Home Loan
Banks.216 Oversight over thrifts was transferred to the Office of Thrift Supervision.217
FIRREA also opened up the Federal Home Loan Bank System to commercial banks and
credit unions engaged in mortgage activities.218 In 1999, with the passage of the Gramm-
Leach-Bliley Act, thrifts were no longer required to become members of the Federal Home
Loan Bank System.219
8.148 By 2008, the Federal Home Loan Bank System consisted of 12 cooperatively owned banks,
which acted as a general source of liquidity to over 8,000 member financial institutions,
which include commercial banks, thrifts, community banks, credit unions, community
development financial companies, insurance companies, and state housing finance agen-
cies.220 The members made up approximately 80 per cent of the insured lending institutions
in the US.221 In the first nine months of 2008, Federal Home Loan Banks had more than $1
trillion in outstanding secured advances.222

208 See US Govt Accountability Office, Testimony Before the Committee on Banking, Housing and Urban

Affairs, U.S. Senate, Federal Home Loan Bank System: An Overview of Changes and Current Issues Affecting the
System (13 April 2005), p 5.
209 Federal Home Loan Bank Act, Pub L No 72-304, 3, 47 Stat 725, 726 (1932).
210
Home Owners Loan Act, Pub L No 73-43, 5(f ), 48 Stat 128, 133 (1933).
211 See US Govt Accountability Office, Testimony Before the Committee on Banking, Housing and Urban

Affairs, U.S. Senate, Federal Home Loan Bank System: An Overview of Changes and Current Issues Affecting the
System (13 April 2005), p 5.
212 Federal Home Loan Bank Act, Pub L No 72-304, 10, 47 Stat 725, 731732 (1932).
213
Ibid, 17, 47 Stat at 736; Home Owners Loan Act, Pub L No 73-43, 5, 48 Stat 128, 132 (1933).
214 See US Govt Accountability Office, Testimony Before the Committee on Banking, Housing and Urban

Affairs, U.S. Senate, Federal Home Loan Bank System: An Overview of Changes and Current Issues Affecting the
System (13 April 2003), p 5.
215 Ibid at p 6.
216 See Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub L No 101-73, 401,

702, 103 Stat 183, 354, 413.

217
Ibid, 301, 103 Stat at 278.
218 Ibid, 702, 103 Stat at 413.
219 See Financial Services Modernization Act of 1999, Pub L No 106-102, 603, 113 Stat 1338, 14501451.
220
Council of Fed Home Loan Banks, FHLBanks White Paper: The Federal Home Loan Banks 12.
221 Ibid at 2.
222 Ibid.

350
 IV. Resolution Authority over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks

B. Resolution Authority
1. Housing and Economic Recovery Act of 2008
In response to widespread concern that Fannie, Freddie, and the Federal Home Loan Banks 8.149
were in troubled financial condition just before the global financial panic of 2008,223 the US
Congress passed the Housing and Economic Recovery Act of 2008 (HERA).224 HERA con-
solidated the federal regulatory oversight of Fannie, Freddie, and the Federal Home Loan
Banks into a single new agency called the Federal Housing Finance Agency (FHFA). FHFA
replaced both OFHEO and HUD as Fannie and Freddies safety and soundness and mission
regulator.225 FHFA replaced the Federal Housing Finance Board as the federal supervisor of
the Federal Home Loan Banks.
2. New resolution authority
Prior to the passage of HERA, the resolution authority over Fannie Mae and Freddie Mac 8.150
was limited to the appointment of a conservator, with no statutory authority for placing
either of them into receivership.226 In addition, the grounds for placing them into conserva-
torship were quite limited.227 The conservator also had few express statutory powers.228
HERA created a much more detailed resolution scheme for Fannie Mae, Freddie Mac, and 8.151
the Federal Home Loan Banks based on the US bank resolution model.229 It also gave FHFA
prompt corrective action powers similar to those enjoyed by the federal banking regulators
under the Federal Deposit Insurance Act.230 Finally, it gave the Secretary of the Treasury
temporary authority to provide unlimited financial assistance to Fannie, Freddie, and the
Federal Home Loan Bank System.231
The new resolution authority gave FHFA the authority to appoint itself as conservator or 8.152
receiver of any of the covered entities. The grounds for putting any of them into conservator-
ship or receivership were expanded to mirror the grounds set forth in the Federal Deposit
Insurance Act.232 The effect of conservatorship or receivership was the same: FHFA would
succeed by operation of law to the rights, titles, powers, and privileges of the entity, and its
officer, directors, and stockholders.233 FHFA could also prescribe regulations regarding the
conduct of conservatorships or receiverships.234

223
The publicly traded shares of Fannie and Freddie dropped by more than 60% during the first half of July
2008 alone.
224
Housing and Economic Recovery Act of 2008, Pub L No 110-289, 122 Stat 2654.
225
Ibid, 1101, 1102(a), 12 USC 4511, 4513 (a).
226
Federal Housing Enterprises Financial Safety and Soundness Act, Pub L No 102-550, 1367, 106 Stat
3941, 3980 (1992).
227 Ibid, 1369, 106 Stat. at 39813982.
228
Ibid, 1369A, 106 Stat. at 39833984. The powers of a conservator included the power to avoid a secu-
rity interest taken by a creditor with the intent to hinder, delay, or defraud the enterprise or creditors; and the
ability to enforce a contract notwithstanding an ipso facto clause. Ibid.
229
Ibid, 1002(a)(3), 1145(a), 12 USC 4502(20), 4617.
230 Ibid, 1361, 12 USC 46114616.
231 Ibid, 1117(a), 12 USC 1719(g).
232 12 USC 4617(a)(3).
233 12 USC 4617(b)(2).
234 12 USC 4617(b)(1).

351
 Resolution of US Banks and other Financial Institutions

8.153 The statute gave FHFA core resolution powers, including the power to establish temporary
bridge companies to facilitate orderly resolution.235 In exercising any power as conservator or
receiver to sell or dispose of any assets, FHFA must maximize the net present value return
from the sale or disposition, minimize the amount of losses realized in the resolution, and
ensure adequate competition and fair and consistent treatment of offerors.236
8.154 HERA also gave FHFA the authority to liquidate covered companies and conduct an
administrative claims process,237 with the same sort of limited judicial oversight.238 It
further gave FHFA many of the super powers enjoyed by the FDIC to set aside, avoid,
or otherwise limit otherwise enforceable claims of creditors. For example, FHFA has the
power to treat similarly situated creditors differently in its exercise of core resolution powers,
so long as each creditor receives what it would have received in a liquidation proceeding
as if such core resolution authorities had not been exercised.239 It also has the power to
enforce contracts despite ipso facto clauses that would otherwise give the counterparty rights
to accelerate performance upon the appointment of a conservator or receiver or the insol-
vency of the institution, with similar exceptions for the close-out of qualified financial con-
tracts.240 In addition, the statute authorizes FHFA to repudiate any burdensome contracts
within a reasonable period of time,241 with damages for repudiation calculated in the same
limited way as under the bank resolution statute,242 with similar exceptions for qualified
financial contracts. But because these entities do not take deposits, no depositor preference
or least cost resolution requirement is imposed, as is contained in the Federal Deposit
Insurance Act.

C. Exercise of New Resolution Authority

8.155 On 7 September 2008, less than six weeks after Congress provided the newly created FHFA
with a full array of resolution powers and the Secretary of the Treasury with his temporary
financial assistance powers, FHFA put Fannie Mae and Freddie Mac into conservatorship
with the consent of their respective boards of directors.243 At the same time, the Treasury
Secretary announced a programme to provide financial assistance of up to $200 billion to
these two institutions ($100 billion each), in return for senior preferred stock and warrants
for 79.9 per cent of the common stock of each institution.244 In effect, the US Treasury guar-
anteed approximately $5.5 trillion of Fannie Maes and Freddie Macs combined debt and

235 12 USC 4617(b)(2)(E) and (i).

236
12 USC 4617(b)(11)(E).
237 12 USC 4617(b)(3).
238 12 USC 4617(b)(5)(E).
239 12 USC 4617(c)(2).
240 12 USC 4617(d)(8), (d)(13).
241 12 USC 4617(d).
242 12 USC 4617(d)(3).
243
Press Release, Fed Housing Fin Agency, Statement of Federal Housing Finance Agency Director James B.
Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (7 September 2008).
See also Press Release, Fed Housing Fin Agency, Fact Sheet: Questions and Answers on Conservatorship (7
September 2008).
244 See also Press Release, Fed Housing Fin Agency, Fact Sheet: Questions and Answers on Conservatorship (7

September 2008).

352
 V. Resolution Authority over Systemically Important Financial Institutions

guarantee liabilities. The US Treasury also created a temporary backstop lending facility for
the Federal Home Loan Banks, which facility expired at the end of 2009.245
The articulated purpose of these actions was to stabilize the US financial markets.246 As the 8.156
failure of Lehman Brothers and the rescue of AIG one week later demonstrate, this exercise
of resolution authority over Fannie and Freddie did not stabilize the financial markets. On
the contrary, these actions may have contributed to the conditions that resulted in the full-
fledged financial panic that followed.247

V. Resolution Authority over Systemically Important

Financial Institutions
With some notable dissenters,248 a consensus developed in the US after the financial panic of 8.157
2008 that some form of resolution authority based on the bank resolution model should be
extended to all systemically important financial institutions under certain circumstances.
Proponents argued that resolution authority is essential to ending bailouts. They argued that
because ordinary bankruptcy proceedings have the potential to trigger a chain reaction of
failures throughout the financial system during a financial panic, such proceedings produce
an irresistible temptation to bail out financial institutions that are considered to be too big
or interconnected to fail during such a panic.249 Opponents countered that far from being a
solution to bail outs, resolution authority actually institutionalizes bail outs.250
The Obama Administration released its original proposal on 25 March 2009 and a revised 8.158
version on 23 July 2009.251 The US House of Representatives passed an amended version of
the Administrations proposal as part of the Wall Street Reform and Consumer Protection
Act of 2009 (House Bill).252 The Senate passed a different version as part of the Restoring
American Financial Stability Act of 2010 (Senate Bill), and previous versions of the Senate
Bill included other versions of the resolution authority proposal.253 The House and Senate

245 Press Release, US Treasury Dept, Fact Sheet: Government Sponsored Enterprise Credit Facility (7 September

2008). See also US Treasury Dept, Lending Agreement 1.0, 17.1 (September 2008).
246
Press Release, US Treasury Dept, Statement by Secretary Henry M. Paulsen, Jr. on Treasury and Federal
Housing Finance Agency Action to Protect Financial Markets and Taxpayers (7 September 2008); US Treasury
Dept, Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement (7 September 2008).
247 See, eg, Chris Isidore, Fannie, Freddie aftershocks: More bank woes, CNNMoney.com (8 September

2008).
248 See, eg, Paul Mahoney and Steven Walt, Viewpoint: Treasury Resolution Plan Solves Nothing, Am

Banker, 20 November 2009; Peter J Wallison and David Skeel, Op-Ed: The Dodd Bill: Bailouts Forever, Wall
St J, 7 April 2010; John B Taylor, Op-Ed: How to Avoid a Bailout Bill, Wall St J, 3 May 2010.
249
See Too Big to Fail: The Role of Bankruptcy and Antitrust Law in Financial Regulation Reform: Hearing
Before the Subcomm. on Commercial and Administrative law, H. Comm. on the Judiciary, 111th Cong (2009)
(testimony of Michael S Barr, Assistant Secretary of the Treasury).
250
See, eg, Hearings Before the House Financial Services Committee (29 October 2009) (remarks of Rep
Hensarling).
251 See Davis Polk, Client Memorandum, Treasurys Proposed Resolution Authority for Systemically Significant

Financial Companies (30 March 2009); Davis Polk, Client Memorandum, The Regulatory Reform Marathon
(28 July 2009).
252 Wall Street Reform and Consumer Protection Act of 2009, HR 4173, 111th Cong, 1st Sess 1601 et

seq (2009).
253 Restoring American Financial Stability Act of 2010, Senate Substitute Amendment for HR 4173, 111th

Cong, 2nd Sess, 201214 (20 May 2010). See also Staff of S Comm on Banking, Housing, and Urban

353
 Resolution of US Banks and other Financial Institutions

Conference Committee used the version contained in the Senate Bill, after reflecting certain
technical amendments, as its base text (Conference Base Text).254 On 21 July 2010, the US
passed the final version as Title II of the Dodd-Frank Act.255 The purpose of this chapter is to
summarize the key elements of the new resolution authority, identify the main policy issues
raised in the debate over the various proposals, and summarize certain alternative proposals
that were made based on the bankruptcy model.

A. Orderly Liquidation Authority Framework

8.159 The new resolution authority is modelled largely on Sections 11 and 13 of the Federal Deposit
Insurance Act, but with several significant differences. These differences were designed to har-
monize the rules defining creditors rights with those contained in the Bankruptcy Code, dis-
courage bailouts, and reduce the moral hazard that could result if shareholders or unsecured
creditors are insulated from the losses they would have suffered in a liquidation under the US
Bankruptcy Code. Thus, section III of this chapter provides a good summary of the basic
framework of this new resolution authority, except for the following key differences:
Orderly liquidation authority. The new resolution authority has been renamed orderly
liquidation authority to emphasize that it does not provide authority to bail out going
concerns, is limited to receivership, does not contain a conservatorship option, and does
not permit the FDIC to provide open company assistance, unless the assistance is part of
a widely available programme for all financial companies.
Covered companies. Unlike almost any other statute, the orderly liquidation authority is
not limited to a fixed category of persons, determinable in advance, such as all systemically
important financial companies. Instead, it could apply to any financial company256 if

Affairs, 111th Cong, 1st Sess, Restoring American Financial Stability Act of 2009 201210 (Comm Print
10 November 2009); Staff of S Comm on Banking, Housing, and Urban Affairs, 111th Cong, 2nd Sess,
Restoring American Financial Stability Act of 2010 201211 (Comm Print 20 March 2010). See Davis
Polk, Client Memorandum, House and Senate Debate Resolution Authority (12 November 2009); Davis Polk,
Client Memorandum, Summary of the Wall Street Reform and Consumer Protection Act Passed by the House of
Representatives, December 11, 2009, Resolution Authority (15 December 2009); Davis Polk, Client Memorandum,
Summary of the Restoring American Financial Stability Act, Passed by the Senate on May 20, 2010, Resolution
(Orderly Liquidation) Authority (22 May 2010).
254
Restoring American Financial Stability Act of 2010, Conference Base Text for HR 4173, 111th Cong,
2nd Sess, Title II (10 June 2010).
255
Dodd-Frank Act, Title II (21 July 2010).
256
Subject to the exclusions and qualifications, the term financial company is defined as any company that
is incorporated or organized under US Federal or State law that is: (i) a bank holding company, as defined by
the Bank Holding Company Act; (ii) a non-bank financial company (including an insurance company or a
securities broker-dealer) that has been determined by the Council to be systemically important and therefore
subject to supervision by the Federal Reserve; (iii) any company that is predominantly engaged in activities that
are financial in nature or incidental to a financial activity under s 4(k) of the Bank Holding Company Act
(including an insurance company or securities broker-dealer); and (iv) any subsidiary of any of the foregoing
that is predominantly engaged in activities that are financial in nature or incidental to a financial activity under
s 4(k) of the Bank Holding Company Act (other than a subsidiary that is an insured depository institution or
an insurance company). The following companies are excluded from the term financial company for purposes
of the orderly liquidation authority: Fannie Mae, Freddie Mac, any Federal Home Loan Bank, any Farm Credit
System institution and any government entity. No company may be deemed to be predominantly engaged in
activities that are financial in nature or incidental to a financial activity unless the consolidated revenues of such
company from such activities constitute at least 85% of the total consolidated revenues of such company
(including any revenues attributable to a depository institution investment or subsidiary). Dodd-Frank Act,
201(a)(11).

354
 V. Resolution Authority over Systemically Important Financial Institutions

certain determinations are made. The required determinations depend as much on general
market conditions as they do on the systemic importance of a particular firm in a vacuum.
The conditions for coverage are more likely to be found during a financial panic. They are
less likely to be found during periods of relative calm.
Subject to the exceptions described below for broker-dealers or insurance companies, a
financial company will be designated as a covered financial company, and the FDIC will
be appointed as its receiver, if at any time (including on the eve of bankruptcy) the Treasury
Secretary makes certain insolvency257 and systemic risk determinations,258 upon the rec-
ommendation of two-thirds of the Federal Reserve Board and two-thirds of the FDIC
Board, and in consultation with the President.259 The new resolution authority applies to
all financial subsidiaries of a covered financial company other than insured depository
institutions (which continue to be covered by the Federal Deposit Insurance Act resolu-
tion provisions). Systemically important insurance companies could be covered financial
companies, but they would be resolved by state insurance authorities under otherwise
applicable state insurance insolvency laws, rather than by the FDIC under the substantive
provisions of the new resolution authority.260 Insurance company subsidiaries, however,
would not be covered financial companies merely because they are subsidiaries of a covered
financial company.261
Harmonized with the Bankruptcy Code. It reflects a substantial harmonization of the rules
defining creditors rights with those contained in the Bankruptcy Code, thus narrowing
the gap between these two laws on this important issue. The rules are therefore very different

257
The financial distress condition for putting a financial company in receivership under the new orderly
liquidation authority is limited to insolvency and does not extend to the pre-insolvency conditions described in
Section III.C.1 for closing an insured depository institution. Dodd-Frank Act, 203(4). Indeed, unless the
board of directors or shareholders of a financial company consent to the companys receivership, the Secretary
of the Treasury is required to obtain an order from the US Federal District Court for the District of Columbia
to the effect that the Secretarys determination that the company is insolvent was not arbitrary or capricious.
Dodd-Frank Act, 202.
258
The required determinations include: (i) the financial company is in default or in danger of default; (ii)
the failure of the financial company and its resolution under otherwise applicable insolvency law would have
serious adverse effects on financial stability in the United States; (iii) no viable private sector alternative is avail-
able to prevent the default of the financial company; (iv) any effect of using the orderly liquidation authority on
the claims or interests of creditors, counterparties, and shareholders of the financial company and other market
participants would be appropriate given the beneficial impact of using the orderly liquidation authority on US
financial stability; (v) the use of the orderly liquidation authority would avoid or mitigate the adverse effects that
would result from resolving the financial company under otherwise applicable insolvency law; (vi) a Federal
regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are
subject to being converted by regulatory order; and (v) the company satisfies the definition of financial com-
pany contained in the statute. Dodd-Frank Act, 203(b).
259 If the financial company is a securities broker-dealer or its largest US subsidiary is a securities broker-

dealer, the designation must be approved by two-thirds of the Securities and Exchange Commission and two-
thirds of the Federal Reserve Board, provided that the FDIC is consulted. If the financial company is an
insurance company or its largest US subsidiary is an insurance company, the designation must be approved by
the Director of the new Federal Insurance Office and two-thirds of the Federal Reserve Board, provided that the
FDIC is consulted. Dodd-Frank Act, 203(a).
260 The Dodd-Frank Act provides that the FDIC has backup authority over insurance companies under

applicable state insurance insolvency law, if the appropriate state regulatory agency has not filed the appropriate
judicial action to place the company in liquidation under state law within 60 days of a determination by the US
District Court for the District of Columbia to authorize the Treasury Secretary to appoint the FDIC as receiver
for such company. Dodd-Frank Act, 203(e).
261 Insurance company subsidiaries are carved out of the definition of covered subsidiaries. Dodd-Frank

Act, 201(a)(9).

355
 Resolution of US Banks and other Financial Institutions

from the FDICs super powers discussed in Section III.F, which remain in place only for
the resolution of insured depository institutions under the Federal Deposit Insurance Act.
Important differences include:
No depositor preference rule. Since the covered financial companies are not authorized to
take deposits, the statute would not include a depositor preference rule.
Key contingent claims are provable. Contingent claims in the form of guarantees, letters
of credit, lines of credit, and other similar claims are recognized as provable claims equal
to their estimated value as of the date of the FDICs appointment as receiver, which is
essentially the same as under the Bankruptcy Code.262
Special enforceability requirements. Although agreements against the interest of the
receiver or a bridge financial company must be in writing and meet certain other special
enforceability requirements as required by the bank resolution statute (but not the
Bankruptcy Code), any written agreement that is duly executed or confirmed in the
ordinary course of business that the counterparty can prove to the satisfaction of the
receiver is enforceable (closer to the Bankruptcy Code).263
Damages for a repudiated debt obligation. Are calculated as the face amount of the obliga-
tion plus accrued interest and accreted original issue discount, determined as of the date
of the receivers appointment.264
{ Limited right to post-appointment interest. Similar to the post-petition interest provi-

sions of the Bankruptcy Code for a secured claim, any accrued interest is calculated
through the date of repudiation, to the extent that such allowed secured claim is
secured by property worth more than the amount of such claim.
Security interests and security entitlements. Legally enforceable or perfected security inter-
ests and legally enforceable security entitlements in respect of assets held by the covered
financial company must be respected as property rights.265
Preferential or fraudulent transfers. Legally enforceable or perfected security interests and
other transfers of property are not avoidable if taken in contemplation of the companys
insolvency as the FDIC has consistently asserted under the Federal Deposit Insurance
Act. Instead, they are avoidable only if they amount to preferential or fraudulent trans-
fers under language that was lifted directly from Sections 546, 547, and 548 of the
Bankruptcy Code.266
Set-off rights. Set-off rights must be respected as under the Bankruptcy Code, with some
qualifications to permit the receiver to transfer liabilities to a third party or bridge finan-
cial company even if the transfer destroys the mutuality of offsetting claims.267
Choice of law rules. Non-insolvency choice of law rules determine the applicable
non-insolvency law governing the perfection of security interests and the creation and
enforcement of security entitlements.268
Additional due process. This narrows the gap between the due process protections of the
Bankruptcy Code and those provided under the bank resolution statute, including the
gatekeeping role of the US Federal District Court for the District of Columbia discussed

262 Dodd-Frank Act, 210(c)(3)(E).

263
Ibid, 210(a)(6).
264 Ibid, 210(c)(3)(D).
265 Ibid, 210(c)(12).
266
Ibid, 210(a)(11).
267 Ibid, 210(a)(12).
268 Ibid, 210(a)(1)(I).

356
 V. Resolution Authority over Systemically Important Financial Institutions

above, additional opportunity for judicial review of the claims process, and certain
notice and hearing rights.269
Minimum recovery right. To ensure minimum due process, all creditors are entitled to
receive at least what they would have received in a liquidation of the covered financial
company under chapter 7 of the Bankruptcy Code. A creditors maximum entitlement
is both its maximum and minimum entitlements.270
Mandatory rule-making. The FDIC is required to promulgate rules to implement the
orderly liquidation authority in a manner that further reduces the gap between how
creditors are treated in a liquidation under the Bankruptcy Code and how they are
treated under the orderly liquidation authority.271
Despite these important differences, the new resolution authority is still modelled on the 8.160
bank resolution authority and therefore shares most of its features. The FDIC is the resolving
authority. It has the power to take control of certain troubled or failing financial institutions,
and possibly even some non-financial institutions, if an insolvency and certain systemic risk
determinations are made. It may transfer any part of a covered institutions business to a third
party at fair value. If a third party buyer can not be found at fair value, the FDIC may estab-
lish a bridge financial company to hold the part of the business worth preserving until it can
be sold to a third party at fair value or otherwise liquidated in an orderly fashion.
The FDIC has the power to provide a wide range of financial assistance, including loss- 8.161
sharing arrangements, to facilitate the transfer of assets and liabilities to a third party in con-
nection with the liquidation of a covered institution.272 But certain limitations are imposed
on the FDICs discretion that do not apply when it resolves insured depository institutions
under the Federal Deposit Insurance Act, including that:273
unsecured creditors must bear losses (up to the amount they would have suffered in a liq-
uidation under chapter 7 of the Bankruptcy Code); and
the management and board members responsible for the failed condition must be
removed.
The FDIC is generally responsible for liquidating the covered institution left behind and 8.162
conducting an administrative claims process for left-behind assets and liabilities with very
limited judicial oversight.274 In its administration of the claims process, the FDIC has the
power to treat similarly situated creditors differently by cherry-picking which assets and
liabilities to transfer to a third party or bridge financial company, provided that each creditor
left behind receives what it would have received in a liquidation under chapter 7 of the
Bankruptcy Code as if no such transfer had taken place.275 The FDIC has the power to treat
all oral and some written contracts as unenforceable, even if they would be enforceable
under applicable state or other non-insolvency law. It has the power to enforce contracts
despite any so-called ipso facto clauses that purport to accelerate the contracts upon the com-
mencement of a resolution or insolvency proceeding, subject to the same exceptions for

269 Ibid, 202.

270
Ibid, 210(b)(4), (d)(4) and (h)(5)(E).
271 Ibid, 209.
272 Ibid, 204(d).
273 Ibid, 206.
274 Ibid, 210(a).
275 Ibid, 210(b)(4), (d)(4) and (h)(5)(E).

357
 Resolution of US Banks and other Financial Institutions

qualified financial contracts as in the bank resolution statute.276 The FDIC also has the dis-
cretion to repudiate any burdensome contract within a reasonable period of time, and
limit the amount of any claim for damages as a result of repudiation to actual direct com-
pensatory damages, subject to the same exceptions for QFCs and to certain new exceptions
for contingent claims and debt obligations.277 And it enjoys the same special powers with
respect to litigation.278
8.163 Because the new resolution authority could apply to securities broker-dealers that are mem-
bers of the Securities Investment Protection Corporation (SIPC), the statute includes provi-
sions that are intended to provide customers with the same level of protection for customer
property as would be provided in a normal SIPC proceeding under the Securities Investor
Protection Act (SIPA).279 If the FDIC were appointed receiver of a systemically important or
other covered broker-dealer that is a member of SIPC, the FDIC would be required to
appoint SIPC as trustee for the liquidation of the broker-dealer. Effectively, the FDIC would
exercise the core resolution powers and SIPC would conduct the claims process for left-
behind assets and liabilities, including left-behind customer claims and customer property.
The FDIC would have the power to transfer any assets and liabilities of a covered broker-
dealer (including any customer claims and corresponding customer property held by the
covered broker-dealer) to a bridge financial company, and SIPC would be required to satisfy
any left-behind customer claims in the same manner and amount as if the FDIC had not
been involved in the receivership and no transfer of assets or liabilities to a bridge financial
company had taken place.
8.164 The new resolution authority also contains certain provisions designed to reduce the moral
hazard potentially caused by allowing the FDIC to transfer certain cherry-picked liabilities
to a third party or bridge financial company, while preserving the FDICs authority to use its
cherry-picking power to preserve, promote or restore financial stability during a financial
panic. The new resolution authority attempts to strike an appropriate balance between these
anti-moral-hazard, anti-bailout, and pro-financial-stability goals by requiring the FDIC to
recover any costs incurred in resolving a covered financial company from any of the compa-
nys creditors who received excess benefits in the resolution proceeding, but only to the
extent of such excess benefits and over an extended period of time.280
8.165 The FDIC may incur costs in a resolution proceeding in a variety of ways, including by being
required to top up any left-behind creditors for any shortfall between what the creditors
would have received in a liquidation under chapter 7 of the Bankruptcy Code and any lesser
amount they actually received in the resolution proceeding. Transferred creditors could
receive an excess benefit to the extent they received more on their claims as a result of the
transfer than they would have received in a liquidation under chapter 7 of the Bankruptcy
Code. The FDIC would have the power to finance any costs it incurs by borrowing from the
Treasury, but would be required to repay such borrowed funds within five years, first, by
recovering any excess benefits from any creditors and, second, by imposing assessments on

276 Ibid, 210(c)(13).

277 Ibid, 210(c)(1)(3), (c)(8)(12).
278
Ibid, 210(a)(8)(10).
279 Ibid, 205.
280 Ibid, 210(o)(1).

358
 V. Resolution Authority over Systemically Important Financial Institutions

financial companies with assets of $50 billion or more.281 Because the FDIC could take up
to five years to complete the resolution of a covered company, it could conceivably allow
transferred creditors to use their excess benefits for up to ten years from the time the institu-
tion is first put into receivership (if the cost and the borrowing were incurred at the end of
the receivership).
Unlike the proposed resolution authority in the House Bill, the final resolution authority in 8.166
the Dodd-Frank Act does not include a pre-funded orderly liquidation fund or a provision
allowing the FDIC to impose haircuts on secured creditors. The House Bill would have
required the creation of a pre-paid systemic dissolution fund of at least $150 billion, which
would have been funded through assessments on all financial companies with assets of
$50 billion or more and all financial companies that manage a hedge fund with assets under
management of $10 billion or more.282 The House Bill also would have allowed the FDIC to
recover some of its losses by imposing a 10 per cent haircut on the claims of certain secured
creditors.283 This provision would essentially have allowed the FDIC to convert up to
10 per cent of a secured claim into an unsecured claim. It was aimed primarily at short-term
financing in the form of repurchase agreements based on non-US government security
collateral.
The new resolution authority gives the FDIC one business day to decide whether to transfer 8.167
or repudiate qualified financial contracts (QFCs).284 This is the same as the bank resolution
statute. The original Senate proposals would have given the FDIC a longer period of time,
such as three or five business days, to make this decision. The FDIC argued that it needed
this extra time to make the required determination with systemically important financial
companies because they generally have more complex QFC portfolios than the type of
insured depository institutions that the FDIC has experience resolving. Critics argued that
three or five days was too long during a financial crisis when asset and collateral values can be
extremely volatile.

B. Key Policy Issues

The debate over the treatment of systemically important non-bank financial companies fol- 8.168
lowing their insolvency is extremely important, for the debate frames the key policy issues
that must be addressed before any new insolvency framework is introduced. The insolvencies
of AIG and Lehman Brothers convinced the administration and Congress that new powers
were needed, but there was vigorous debate over the proper approach. This section outlines
the key policy issues that were debated.
1. Why not apply the Bankruptcy Code?
In the absence of the required financial distress and systemic risk determinations under 8.169
the new resolution authority, the US Bankruptcy Code would govern the liquidation or

281
Ibid.
282 Wall Street Reform and Consumer Protection Act of 2009, HR 4173, 111th Cong, 1609(n)(6)
(2009).
283 Wall Street Reform and Consumer Protection Act of 2009, HR 4173, 111th Cong, 1609(a)(4)(D)(iv)

(2009).
284 Dodd-Frank Act, 210(c)(10).

359
 Resolution of US Banks and other Financial Institutions

reorganization of a financial company other than an insured depository institution or insur-

ance company. Even broker-dealers that are members of the Securities Investor Protection
Corporation are resolved under the Bankruptcy Code, with the Securities Investor Protection
Act supplementing its provisions with respect to customer property. The Bankruptcy Code
prevents moral hazardthat is, the incentive to take excessive risks if investors are entitled
to the upside from their investments but are protected from the downsideby ensuring that
shareholders, creditors, and counterparties of covered financial companies suffer appropriate
losses if such companies are insolvent. The US bankruptcy process is generally considered to
be transparent and consistent with due process. It has rules governing creditors rights that
are widely understood and considered to be neutral among similarly situated classes of
creditors.
8.170 Unless harmonized with the US Bankruptcy Code or other applicable insolvency laws, any
new resolution authority would change the rules of the game for creditors and counterpar-
ties on the eve of bankruptcy, and thereby disrupt their reasonable expectations with little or
no prior notice. Creditors, counterparties, customers, and other stakeholders have very dif-
ferent rights depending on whether their claims are governed by the US Bankruptcy Code
or the Federal Deposit Insurance Act, and changing the rules of the game on the eve of bank-
ruptcy could itself create systemic risk. This problem was addressed in the Dodd-Frank Act
by largely harmonizing the rules that define creditors rights in the new resolution authority
with their counterparts under the US Bankruptcy Code. This approach leaves a federal
agency in charge of the process, with the bridge financial company option, but otherwise
requires it to apply the substantive rules defining creditors rights as they currently exist in
the US Bankruptcy Code, with only a few exceptions.
8.171 While there remain substantial procedural differences in the way failures are handled under
the Bankruptcy Code and the new orderly liquidation authority under the Dodd-Frank Act
(primarily in the judicial oversight and relative transparency of Bankruptcy Code proceed-
ings), Congress attempted to strike a reasonable balance between the desired need for gov-
ernment control over how these systemically important institutions should be addressed and
the expectations of creditors.
2. The too big to fail/moral hazard debate
8.172 The US Treasury and other proponents of the new resolution authority argued that some
form of resolution authority was necessary to eliminate taxpayer-funded bailouts of financial
companies that are perceived to be too big to fail, and the moral hazard that such bailouts
produce, in a way that does not destabilize the financial system.285 These proponents noted
that a resolution authority would combat the notion that certain firms are too big to fail by
providing for a mechanism to allow them to be liquidated in an orderly fashion. For example,
Federal Reserve Chairman Bernanke stated that establishing a credible process for imposing
such losses is essential to restoring a meaningful degree of market discipline and addressing
the too-big-to-fail problem.286 According to resolution authority proponents, the only

285 See Too Big to Fail: The Role of Bankruptcy and Antitrust Law in Financial Regulation Reform: Hearing

Before the Subcomm. on Commercial and Administrative law, H. Comm. on the Judiciary, 111th Cong (2009)
(testimony of Michael S Barr, Assistant Secretary of the Treasury).
286 Regulatory Reform: Hearing before the H. Comm. on Financial Servs., 111th Cong (2009) (testimony of

Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System).

360
 V. Resolution Authority over Systemically Important Financial Institutions

alternatives to resolution authority are to allow these companies to fail in a disorderly fashion
the way Lehman Brothers was or to rescue them in an ad hoc fashion the way AIG was.
Critics asserted that the new resolution authority would not end too big to fail or reduce 8.173
moral hazard, but rather institutionalize them.287 These commentators have expressed a con-
cern that having a resolution authority under which certain creditors and other stakeholders
can be protected through the transfer of their assets and liabilities to third parties, creates
moral hazard for the institution and those market participants.
These critics pointed to the financial assistance provided to Freddie Mac and Fannie Mae in 8.174
connection with their conservatorships as examples, and argued that the new resolution
authority would create 20 new Fannie Maes and Freddie Macs.288 They asserted that the
institutionalization of such bailouts would increase moral hazard and give potentially cov-
ered companies a funding advantage over their competitors. Such critics would leave the
Bankruptcy Code in place to insure that shareholders, creditors, and counterparties of non-
depository institution financial companies suffer appropriate losses if such companies fail.
The Dodd-Frank Act attempts to strike an appropriate balance between the anti-moral- 8.175
hazard, anti-bailout and pro-financial-stability goals by:
prohibiting the Federal Reserve or the FDIC from providing any financial assistance to a
financial company unless the assistance is part of a market-wide programme or unless, in
the case of the FDIC, the company is being liquidated in an FDIC receivership;289 and
requiring the FDIC to recoup any costs incurred in the receivership of a systemically
important financial company by clawing back any excess benefits received by any of its
creditors whose claims are transferred to a third party or bridge financial company in the
receivership proceeding, while giving the FDIC an extended period of time (up to five to
ten years) to recoup such excess benefits.290
Only time will tell whether the government has the will to let large, systemically important 8.176
financial institutions go through even the government-controlled liquidation process.
3. The proper procedure for handling creditor claims
Some proponents of the general concept of resolution authority strongly supported giving a 8.177
federal agency core resolution powers modelled on the Federal Deposit Insurance Act.
But they believed that the Federal Deposit Insurance Act was the wrong model for the
claims process for left-behind assets and liabilities, as applied to non-depository institution
financial companies. They argued that an administrative claims process modelled on the
Federal Deposit Insurance Act is too opaque and does not provide the same level of due proc-
ess and judicial review as the Bankruptcy Code. They also argued that the rules defining
creditors rights in the Federal Deposit Insurance Act should not be used for the resolution

287 See, eg, Paul Mahoney and Steven Walt, Viewpoint: Treasury Resolution Plan Solves Nothing, Am

Banker, 20 November 2009; Peter J Wallison and David Skeel, Op-Ed: The Dodd Bill: Bailouts Forever, Wall
St J, 7 April 2010; John B Taylor, Op-Ed: How to Avoid a Bailout Bill, Wall St J, 3 May 2010.
288 On Systemic Regulation, Prudential Matters, Resolution Authority, and Securitization: Hearing before the

H. Comm. on Financial Servs, 111th Cong (2009) (testimony of Peter J Wallison, Arthur F Burns Fellow in
Financial Policy Studies, American Enterprise Institute). See also Koppell, Op-Ed: The Cloning of Fannie and
Freddie, Wall St J, 28 December 2009.
289 Dodd-Frank Act, 11011106.
290
Ibid, 210(o).

361
 Resolution of US Banks and other Financial Institutions

of non-depository financial companies.291 They asserted that using such rules would be
inconsistent with provisions in the resolution authority statute which guarantee all creditors
that they will receive the same recovery as they would have received in a liquidation under
the Bankruptcy Code.
8.178 In addition, critics asserted that the Federal Deposit Insurance Act rules are deliberately
designed to reinforce the priority of deposit creditorsa class of creditors that does not exist
for non-depository institutionsover unsecured non-deposit creditorsa class of creditors
that account for only a tiny portion of the balance sheets of most depository institutions. The
rule allowing the FDIC to set aside security interests if they were taken in contemplation of
insolvency would also create a serious risk that otherwise perfected security interests may be
set aside when applied to non-bank financial companies, thus causing secured credit to dry
up during times of financial stress.
8.179 Instead, they argued that the resolution authority needed to be adapted so that it provides a
more transparent claims process, additional judicial review, neutral rules governing credi-
tors rights, and protection of secured creditors rights modelled on the US Bankruptcy
Code.292
8.180 Finally, they argued that unless the proposed resolution authority reflected a compromise
between the Federal Deposit Insurance Act and bankruptcy or other applicable insolvency
models, it would have the unintended consequence of making our credit markets ineffi-
cientcreating uncertainty as to creditor treatment; increasing the cost and reducing the
availability of credit to these financial companies, consumers, small businesses, and others in
the system; slowing jobs growth; increasing unemployment; and causing liquidity to dry up
during times of financial stress.293
8.181 Defenders of the bank resolution model for both the core resolution powers and the ancillary
claims process countered that the right of de novo judicial review after the administrative
claims process has been completed would provide adequate due process for creditor claims.294
They argued that no significant difference in outcomes would arise between the FDICs
application of the rules defining creditors rights in the Federal Deposit Insurance Act and a
typical bankruptcy courts application of the rules in the Bankruptcy Code. As a result, they
asserted that the unintended consequences are more feared than real.
8.182 Proponents of the bankruptcy model for the ancillary claims process had responses to each
of these defences. First, they asserted that the administrative claims process under the Federal
Deposit Insurance Act was in fact more opaque and would provide far less due process and
judicial review than a bankruptcy process. Second, significant differences in outcomes would

291 Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the

H. Comm. on Financial Servs, 111th Cong 21 (2009) (testimony of Scott Talbot, Senior Vice President for
Government Affairs, Financial Services Roundtable).
292 Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the

H. Comm. on Financial Servs, 111th Cong 2 (2009) (testimony of Philip L Swagel, Visiting Professor,
McDonough School of Business).
293
Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the
H. Comm. on Financial Servs, 111th Cong 4 (2009) (testimony of Scott Talbot, Senior Vice President for
Government Affairs, Financial Services Roundtable).
294
See Too Big to Fail: The Role of Bankruptcy and Antitrust Law in Financial Regulation Reform: Hearing
Before the Subcomm. on Commercial and Administrative law, H. Comm. on the Judiciary, 111th Cong (2009)
(testimony of Michael H. Krimminger, Special Advisor for Policy, Federal Deposit Insurance Corporation).

362
 V. Resolution Authority over Systemically Important Financial Institutions

arise between the two sets of rules. Moreover, if no significant differences in outcomes really
would arise, the FDIC should be required to apply the rules under the US Bankruptcy Code
to avoid creating any legal uncertainty about the matter and to avoid any inconsistencies
between the applicable rules and the minimum recovery guarantees in both the House and
Senate versions.
Other defenders of the bank resolution model for both the core resolution powers and 8.183
the ancillary claims process argued that if the rules governing creditors rights in the pro-
posed resolution authority would impose greater losses on creditors or subject them to
greater legal uncertainty of recovery than the Bankruptcy Code, the rules would serve the
important public policy purpose of further enhancing market discipline and reducing moral
hazard.295
Proponents of the bankruptcy model for the ancillary claims process countered that it is 8.184
inconsistent with the minimum recovery provisions in the resolution authority to impose
greater losses on creditors than they would have suffered in a liquidation under the Bankruptcy
Code. Moreover, the public policy goals in favour of market discipline and reducing moral
hazard must be balanced against the important public policy goals of due process and funda-
mental fairness, and encouraging a healthy level of credit during normal times. Otherwise,
Congress could deny all recovery to creditors even if some assets were available to satisfy all
or part of their claims.
4. Funding
A significant policy discussion arose over who should bear the costs of failure of a systemi- 8.185
cally important financial company and whether an ex-ante resolution fund should be estab-
lished to address future failures of systemically important institutions, or whether ex-post
funding would be more appropriate. While under the Dodd-Frank Act, Congress adopted
an ex-post funding model that attempts to impose the costs first on creditors of the failed
institution and, to the extent of any shortfall, other large financial institutions, the debate
over the proper approach for funding these liquidations is likely to continue.
As adopted, the Dodd-Frank Act gives the FDIC the power to recover liquidation costs, first, 8.186
by clawing back any excess benefits received by any claimants that received more in the reso-
lution of a covered company than they would have received in a liquidation of the company
under chapter 7 of the Bankruptcy Code.296 To prevent this power from being destabilizing,
the FDIC has the discretion to recoup any excess benefits over an extended period of time,
instead of imposing immediate haircuts on creditors. If the FDIC is not able to recover all of
its costs in this manner, it may recover any shortfall by imposing assessments on certain large
US financial companies. To meet short-term funding needs in connection with a resolution,
the FDIC is empowered to borrow from the US Treasury.297
The first aspect of this debate is who should bear the costs of failure. Many argued that the 8.187
costs should be imposed on the large, complex financial institutions that ultimately might
have to be resolved under the new authority. Critics questioned whether it was appropriate

295 Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the

H. Comm. on Financial Servs, 111th Cong 45 (2009) (testimony of Sheila Bair, Chairman, Federal Deposit
Insurance Corporation).
296 Dodd-Frank Act, 210(o).
297 Ibid, 210(n).

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 Resolution of US Banks and other Financial Institutions

to impose the cost of the new resolution authority on the targeted pool of large companies.
The direct beneficiaries of the financial assistance would not be these companies, except to
the extent that they were among the creditors or counterparties whose claims are assumed by
a third party or bridge financial company pursuant to the FDICs exercise of its core resolu-
tion powers. Instead, the direct beneficiaries would be the creditors and counterparties whose
claims are assumed. To the extent the transfer of these claims helps to stabilize the financial
system, the indirect beneficiaries would be everyone who benefits from financial stability.
8.188 Critics also argued that unless the creditors and counterparties whose claims would be
assumed bear the cost of the financial assistance, they would in fact be insulated from losses,
undermining market discipline and creating a degree of moral hazard that would not exist if
all US financial companies were resolved under the Bankruptcy Code or other applicable
insolvency law.298 On the other hand, if there were to be some form of claw-back from these
creditors and counterparties equal to the difference between what they would have received
in a bankruptcy liquidation and what they actually received because of the third party
assumption of liabilities, it might undo the stabilization benefits of giving the FDIC the
power to transfer the claims.
8.189 As noted, the Dodd-Frank Act attempted to resolve this policy issue by giving the FDIC
power to recover its costs, first, by recouping any excess benefits from any claimants
who received more in the resolution than they would have received in a liquidation under
chapter 7 of the Bankruptcy Code and, second, from large financial companies.299 Only time
will tell whether such a claw-back power can be exercised in a way that is consistent with
promoting financial stability or whether it will have a destabilizing effect by creating an
incentive for creditors to run at the slightest hint of financial trouble.
8.190 A vigorous debate has also arisen over whether the tax to recover these costs should be
imposed before or after the resolution authority is exercised. The principal argument
advanced in favour of an ex-ante tax is that an ex-post tax would allow the companies that are
resolved to escape bearing any of the cost of their own resolution. The principal arguments
advanced against an ex-ante tax and in favour of an ex-post tax are (i) it is impossible to know
whether the resolution authority will ever be used or how much it will cost if used, and (ii)
the creation of a fund makes it more likely the fund will be put to use by placing an entity
into resolution under this authority, and creating an incentive on the part of the government
to bail out creditors and counterparties rather than using the claw-back procedure to impose
the costs of failure on those creditors and counterparties.

5. Who should be the resolving agency?

8.191 Under the Dodd-Frank Act, the FDIC must be appointed as the receiver for all covered
financial companies, except for insurance companies. The FDIC would be required to con-
sult with the state or federal regulators of a covered financial company in carrying out its
functions as receiver.300 The FDIC is required to prepare an orderly liquidation plan accept-
able to the Treasury Secretary before it could borrow any funds to cover its resolution costs.301

298 See Peter J Wallison, Task Force Report, Financial Reform Project, Pew Economic Policy Group, Briefing

Paper No 4: The Argument Against a Government Resolution Authority (2009), pp 89 .

299
Dodd-Frank Act, 210(o).
300 Ibid, 204(c).
301 Ibid, 210(n)(9).

364
 V. Resolution Authority over Systemically Important Financial Institutions

It would not be permitted to take any action inconsistent with this plan without the Treasury
Secretarys consent. But otherwise, nothing would require the FDIC to follow the direction
of any other regulator.
The FDIC has little to no experience with the type of large, complex, and global financial 8.192
institutions that would be the subject of the new resolution authority. Its supervisory experi-
ence is limited to community banks and other relatively small insured depository institu-
tions. Although the FDIC has resolved at least one relatively large savings association
(Washington Mutual), that savings association had relatively simple activities compared to
the targets of the new resolution authority, and that institution was resolved in such a way as
to minimize FDIC involvement as essentially all assets were transferred to a single institution
buyer. However, in truth there are no other logical choices within the government with
experience to handle the failure of a financial institution.
Given the lack of experience, a debate ensued over the degree of autonomy the FDIC should 8.193
be granted as it handled the resolution of a large, complex financial institution. Many argued
that some form of oversight board should be formed, consisting of the Treasury Secretary, the
Chairman of the Federal Reserve Board (or the Financial Institutions Regulatory
Administration), the Chairperson of the FDIC, and the primary federal regulator of the
company being resolved.302 The FDIC would carry out the resolution powers under the new
authority, subject to the direction of this oversight. They proposed that the oversight board
would also be the rule-making authority under the proposed resolution authority and be
responsible for international coordination.
6. Mandatory rule-making
The FDIC does not have a history of transparency in providing ex-ante legal certainty on how 8.194
ambiguities in the Federal Deposit Insurance Act are to be resolved. Although it has permis-
sive rule-making authority under the Federal Deposit Insurance Act, it has rarely exercised
that authority. It has also been very sparing in providing other forms of legal guidance,
including policy statements, general counsel opinions, and other interpretations. In addi-
tion, all of these sources of legal guidance may be withdrawn by the FDIC at any time with,
or in some cases without, notice.
Further, FDIC receiverships are handled primarily within the FDIC, with little judicial 8.195
oversight or review. This is to be contrasted with the US Bankruptcy Code, where there are
extensive statutes, rules, and procedures, and a well-developed body of case law. Further, in
a bankruptcy proceeding, the judge is directly involved, providing significant and substantial
oversight.
To counter this culture and tradition, the Dodd-Frank Act includes mandatory rule-making 8.196
authority, with the requirement that the FDIC use its authority to further harmonize the
rules governing creditors rights with those in the Bankruptcy Code.303

302 See Systemic Regulation, Prudential Matters, Resolution Authority and Securitization: Hearing before the H.

Comm. on Financial Servs, 111th Cong (2009) (testimony of T Timothy Ryan, Jr, President and CEO, Securities
Industry and Financial Markets Association).
303 Dodd-Frank Act, 209.

365
 Resolution of US Banks and other Financial Institutions

7. Valuation issues
8.197 Neither the new resolution authority nor any of its earlier versions has included any specific
procedures for ensuring that the FDIC obtains the highest possible price for any assets and
liabilities sold or transferred pursuant to its exercise of core resolution powers, or assigns a fair
value to what the assets would have been worth in a liquidation under chapter 7 of the
Bankruptcy Code. Because the amount received for such assets and liabilities, and the value
placed on those assets as if they had been liquidated under the Bankruptcy Code, has a direct
relationship to the size of the minimum recovery rights of left-behind claimants, the
law may eventually need to be amended to include some incentives and procedures, as well
as judicial review, to ensure that the FDIC does not sell any assets or liabilities at below the
maximum value possible over some reasonable time period or assigns an artificially low
value to what the assets would have been worth in a hypothetical liquidation under the
Bankruptcy Code.
8. Practical remedy for minimum recovery rights?
8.198 The Dodd-Frank Act also lacks a clear and practical remedy for left-behind claimants who
believe they did not receive their minimum recovery entitlement in a resolution proceeding
(ie the amount they would have received in a liquidation under chapter 7 of the Bankruptcy
Code). Each such claimant has the implied right to bring a separate proceeding in federal
court to recover the shortfall from the FDIC. But the cost of such individual proceedings
could be prohibitive and exceed the shortfall amount. The policy issue is whether to provide
aggrieved parties with an express right to a collective proceeding in a single federal district
court after the termination of the receivership. Proponents argued that such a collective
proceeding, or just the threat of such a proceeding, would keep the FDIC honest in carry-
ing out its duty to make sure all left-behind claimants receive what they would have received
in a liquidation under chapter 7 of the Bankruptcy Code. It would also give them a practical
remedy if the FDIC violated its trust. Critics argued that the FDIC is a federal agency that
can be trusted to carry out its statutory duties responsibly, and that a collective proceeding
could subject the FDIC to unnecessary litigation costs.

9. Haircuts on secured claims?

8.199 Early in the process of considering the new resolution authority, the FDIC argued for a pro-
vision that would have given the FDIC the discretionary authority to impose a 10 per cent
haircut on certain secured claims (other than those of certain favoured creditors like the
Federal Reserve), effectively turning 10 per cent of an otherwise secured claim into an unse-
cured claim. While incorporated into the House Bill, neither the Senate Bill nor the final
legislation included such a provision. Proponents argued that such a haircutting power
would be an appropriate way to help the FDIC recoup its resolution costs. Perhaps more
importantly, they argued that exposing a portion of a secured claim to unsecured risk would
increase the incentive of the secured creditor to monitor its debtor and create greater market
discipline. In the absence of such risk, proponents argued, secured creditors would not
adequately monitor their debtors. Critics of the proposal vigorously argued that this
power would reduce the supply of secured credit and increase its cost. Secured creditors
would respond by exiting the market or reducing the term of their credit to overnight or
intraday periods in order to be able to run at the slightest sign of trouble. It would also make
secured creditors unwilling to provide credit during a financial crisis, at the very time when
any liquidityeven secured liquidityis most needed from the private sector. It could

366
 V. Resolution Authority over Systemically Important Financial Institutions

transform central banks from lenders of last resort during a financial crisis to the only willing
lenders during a financial crisis.
As noted, the final legislation did not incorporate the haircut provision. However, there is to 8.200
be a mandatory study by the new Financial Stability Oversight Council as to whether
haircuts could improve market discipline and protect taxpayers.304
10. Extend automatic stay to QFCs
A final policy issue is whether to impose a stay on the ability of counterparties on qualified 8.201
financial contracts (QFCs) to exercise their close-out rights (liquidate collateral, etc) upon
the insolvency of a covered financial company. Such counterparties are exempt from the
automatic stay under the Bankruptcy Code. They are subject to a one-business-day stay
under the Federal Deposit Insurance Act and the new resolution authority.305 This one-
business-day stay is designed to give the FDIC time to decide whether to repudiate or trans-
fer a failed institutions QFCs to a third party or bridge bank, or simply to allow the
counterparties to exercise their close-out rights. The Conference Base Text would have
imposed a three-business-day stay, and earlier versions of the Senate Bill would have imposed
a five-business-day stay. The House Bill would have imposed only a one-business-day stay.
Some commentators argued for an indefinite stay. They contended that the exemption of 8.202
QFCs from an automatic stay is a major source of instability when a financial institution
fails.306 During the debate of the Senate Bill, Senator Nelson proposed an amendment that
would have eliminated the exemption for QFCs from the automatic stay under the
Bankruptcy Code and subject them to a 90-day stay under the new resolution authority.
Critics countered that such a rule would be far from stabilizing when looked at from an ex-ante 8.203
point of view, rather than ex post. They argued that the prospect of an automatic stay would
destabilize the derivatives markets, reduce the supply of credit including repurchase agree-
ment credit, and increase its cost. QFC counterparties would seek to protect themselves from
such a rule by reducing the term of their QFCs to the shortest term possible (including over-
night or even intraday) in order to facilitate a run at the slightest hint of financial trouble.

C. Alternatives Based on Bankruptcy Model

1. New chapter of the Bankruptcy Code
After the Obama Administration came out with its proposal for a resolution authority, 8.204
Republicans in the US House of Representatives proposed an alternative approach. Their
proposal would have created a new chapter 14 of the Bankruptcy Code to govern the resolu-
tion of insolvent non-bank financial institutions, regardless of size or systemic
importance.307
Cases administered under the new chapter 14 would be subject largely to the reorganization 8.205
provisions of chapter 11, with the exception of certain changes that purport to streamline the

304 Ibid, 216.

305
Ibid, 210(c)(10).
306 See, eg, Thomas Jackson and David Skeel, Op-Ed: Bankruptcy Reform Will Limit Bailouts, Wall St J,

21 April 2010.
307
See Consumer Protection and Regulatory Enhancement Act, 111th Cong (Referred to Comm 2009).

367
 Resolution of US Banks and other Financial Institutions

reorganization of a non-bank financial institution and reduce the adverse effects the reorga-
nization may have on the larger financial system.
8.206 Among the highlights of the Republicans proposed chapter 14 are:

A non-bank financial institution may not be a debtor, and a creditor may not commence
an involuntary case under chapter 14, unless the debtor or creditor consults with certain
federal agencies.
If a court determines that a trustee is warranted, the US Trustee must appoint a trustee
from a list of qualified, disinterested persons provided by certain federal agencies, subject
to court approval.
Upon motion by the non-bank financial institution and with the approval of certain fed-
eral agencies or the bankruptcy court, QFCs could be made subject to the automatic stay.
A chapter 14 reorganization could be converted to a chapter 7 liquidation under the nor-
mal standards that apply to such conversions.
8.207 The Republicans proposal would have also amended Section 364 of the Bankruptcy Code
to prevent the US from providing financing to an entity that operates its business under the
protection of the Bankruptcy Code. Presumably, this would preclude the US from providing
debtor-in-possession financing.
8.208 The advantages of such a procedure would have been (i) clear, ex-ante rules governing the
insolvency of these institutions; (ii) resolutions would be handled under the direction and
supervision of an experienced judge, with the openness and transparency associated with
court proceedings; and (iii) losses would have been imposed on creditors and counterparties
without the need for lengthy and protracted hearings after the fact. The proposal never
received serious consideration during the legislative process.

2. A hybrid bankruptcy/resolution approach

8.209 While the House Republicans proposal did not make it into the House Bill, the concept of
creating a new chapter of the Bankruptcy Code to address the resolution of systemically
important financial companies continued to receive attention in the Senate. Senators Corker
and Warner considered such an approach to the resolution authority. Their approach was
based largely on recommendations made by a Task Force of the Pew Charitable Trusts in its
Bipartisan Policy Statement on Principles of Financial Reform.308
8.210 The Task Force had recommended that a hybrid approach be adopted for non-depository
financial institutions consisting of a strengthened bankruptcy process as the default approach,
and a backstop administrative resolution process, available in exceptional circumstances
after strong safeguards are met. The Task Force had recommended the creation of a new
Federal Financial Institutions Bankruptcy Court which would have sole jurisdiction for the
resolution of failing non-depository financial institutions. On exceptional occasions when a
bankruptcy poses systemic risks, a new administrative resolution process would be used,
giving the resolving agency broad powers to manage the failing institution. This regime
would be administered by a newly created National Financial Regulator.

308 Task Force Report, Financial Reform Project, Pew Economic Policy Group, Principles on Financial

Reform: A Bipartisan Policy Statement (2009).

368
 VI. International Coordination of Cross-Border Resolutions

Under this approach, equity holders and subordinated debt holders would lose their invest- 8.211
ment, senior management responsible for the failure would lose their positions, and unse-
cured creditors would suffer losses. The Task Force supported an industry assessment to
recover any costs of such resolution.

VI. International Coordination of Cross-Border Resolutions

Many large US financial companies have international operations outside the US through a 8.212
network of branches, offices, and subsidiaries. These branches, offices, and subsidiaries are gen-
erally subject to different bankruptcy laws in different national jurisdictions. Currently, no set of
international agreements or arrangements exist to provide any overarching coordination when
a major cross-border financial firm fails. The failures of a few major cross-border financial firms
during the financial crisis have alarmed the international community. One fear is that each juris-
diction will attempt to grab assets and control as much of the process as possible in order to protect
its own citizensperhaps beneficial for the residents of the country fortunate enough to have
substantial assets within its boundaries, but perhaps not helpful in maintaining global stability.
Under the Dodd-Frank Act, the FDIC is required to consult with the state and federal regu- 8.213
lators of each covered financial company in exercising its powers as receiver.309 The FDIC is
also required to consult with the primary regulators for non-US subsidiaries and coordinate
regarding the resolution of those entities.310
A growing consensus has arisen that the international financial system needs a better mecha- 8.214
nism for resolving systemically important financial institutions. Many believe that the fail-
ure of Lehman Brothers exposed a process that does not meet appropriate standards for the
orderly winding up of systemically important financial institutions. The G-20 concluded
that the world needs to develop internationally coordinated tools and frameworks for the
effective resolution of large, financial groups to help mitigate the disruption of their failures
to the financial system and reduce moral hazard in the future. Leaders at the G-20 summit
in Pittsburgh specifically committed to address issues on cross-border resolution and crisis
management by the end of 2010.311

A. Living Wills312
The G-20 at their summit in Pittsburgh emphasized the development of internationally 8.215
consistent firm-specific contingency and resolution plans or living wills.313 All major cross-
border firms with an FSB supervisory college would be required to develop such plans,
considering both going-concern or gone concern scenarios. The plans to be prepared
by the firms would cover how to exit risky positions and scale back activities in an orderly

309 Dodd-Frank Act, 204(c).

310 Ibid, 210(a)(1)(N).
311 See Group of 20 [G-20], Leaders Statement: The Pittsburgh Summit (25 September 2009).
312
See Financial Stability Board, Overview of Progress in Implementing the London Summit
Recommendations for Strengthening Financial Stability, Report of the Financial Stability Board to G-20
Leaders (2009).
313
See Group of 20 [G-20], Leaders Statement: The Pittsburgh Summit (25 September 2009).

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 Resolution of US Banks and other Financial Institutions

fashion, and an effective, rapid, and cost-effective wind-down, if necessary. The FSB, under
its Cross-Border Crisis Management Working Group, scheduled such contingency planning
discussions with the major firms to take place later in 2009 and in the first half of 2010.
8.216 The Dodd-Frank Act requires systemically important financial companies to prepare and
maintain rapid resolution and recovery plans (ie living wills).314 These plans would be designed
to help the FDIC resolve any of these companies should they fall into financial trouble, but
would not be binding in an insolvency or resolution. The FDIC has recently proposed a rule
which would require insured depository institutions with greater than $10 billion in asserts
that are controlled by a holding company with greater than $100 billion in assets to submit a
living will, regardless of whether the parent company would be required to submit a living will
under the Dodd-Frank Act.315 The proposed rule establishes certain minimum components
that must be included in a living will. And the living will must be submitted within six months
of the effective date of the rule, and must be updated at least annually. The board of directors of
a covered insured depository institution or its designated executive committee must approve
the living will and attest that the information is accurate and current.

B. Cross-Border Bank Resolution and National Bank

Insolvency Regimes
8.217 The G-20 summit at Pittsburgh specifically endorsed two major international initiatives to
develop cross-border bank resolution frameworks.316 One initiative is the Cross-Border
Bank Resolution Group at the Basel Committee (CBRG). The CBRG recently issued a final
report that proposes actions to improve efficiency and effectiveness of cross-border crisis
management and bank resolutions.317 Among other things, the Basel Committee recom-
mended that national authorities and multinational groups should seek convergence on
national resolution regimes and put in place bilateral or multilateral procedures to facilitate
mutual recognition of crisis management and resolution proceedings.
8.218 The other initiative is the IMF/World Bank Global Bank Insolvency Initiative. The IMF and
World Bank issued a report in April 2009 that addresses insolvency regimes at the domestic
level.318 They will issue another report soon on cross-border bank insolvency, which is
expected to include practical steps to achieve consistency among national laws for crisis
intervention and bank resolution.319

314 Dodd-Frank Act, 165(d).

315 FDIC Press Release, FDIC Board Approves NPR for Additional Reporting, Analysis and Contingent
Resolution Plans at Certain Large Depositories (11 May 2010), <http://www.fdic.gov/news/news/press/2010/
pr10111.html>.
316 Financial Stability Board, Overview of Progress in Implementing the London Summit Recommendations for

Strengthening Financial Stability, Report of the Financial Stability Board to G-20 Leaders (2009). An international
NGO, the International Insolvency Institute, established a working group dedicated to promote the develop-
ment of special insolvency regimes at international forums, such as the G-20. See Committee on Extraordinary
Restructuring Solutions.
317
See Basel Comm on Banking Supervision, Report and Recommendations of the Cross-border Bank Resolution
Group (2010).
318 See International Monetary Fund and the World Bank Group, An Overview of the Legal, Institutional,

and Regulatory Framework for Bank Insolvency (2009).

319 See Financial Stability Board, Overview of Progress in Implementing the London Summit Recommendations

for Strengthening Financial Stability, Report of the Financial Stability Board to G-20 Leaders (2009).

370
 VI. International Coordination of Cross-Border Resolutions

With more European countries moving to institute special bank resolution regimes, it makes 8.219
more sense to harmonize differences, and ensure consistency, among the regimes across
countries. The European Commission released a consultative paper in October 2009 that
examines the issue of harmonizing rules of its member states for unwinding troubled banks
and will propose a Directive eventually.320

C. Contingent Capital, Recapitalization Programmes, and Bail-Ins

A number of persons have observed that domestic resolution authority, while a laudable first 8.220
step toward a cross-border resolution regime, will not provide sufficient power to resolve a
complex financial company with global operations.321 By giving domestic authorities the
ability to transfer the assets and liabilities of the parent company of a global financial com-
pany to a bridge financial company, it may prevent the sort of mass cross-defaults that caused
so much carnage for the counterparties at Lehman Brothers International. But the opera-
tions of such a global institution in any particular country will still be subject to local insol-
vency laws and authorities, who may seek to ring-fence the operations in the local territory
in order to protect the interests of local creditors rather than cooperate in a cross-border reso-
lution that maximizes the value of the entire group for the benefit of all creditors.
In order to bridge the time until a genuine cross-border resolution regime can be established 8.221
(which could take decades), these observers have suggested that various alternatives be stud-
ied and perhaps mandated by supervisory authorities in order to supplement or substitute
for a global resolution regime. These alternatives have been referred to in a variety of ways
contingent convertible capital, recapitalization waterfalls, or bail-ins. While each one of
these proposals have significant differences, they all have one feature in commonthey are
all designed to result in all or some portion of the liabilities of a financial company being
converted to common equity upon the occurrence of certain events or regulatory determina-
tions. For example, contingent convertible capital are debt securities that would convert into
common equity upon the occurrence of certain events. The most extreme version of these
proposals would be one that would establish a waterfall of priorities on the entire liability
side of a companys balance sheet, requiring one class of liabilities after another to convert
into common equity upon the occurrence of certain events or regulatory determinations.
In effect, the creditors of an institution would be forced to recapitalize the institution in
some orderly fashion rather than risk a taxpayer-funded bailout. In most of these proposals,
the equity holders would be wiped out and management replaced as a condition to triggering
the conversions.

320
See European Commission, An EU Framework for Cross-Border Crisis Management in the Banking Sector
(2009). In connection with proposing a new framework for cross-border bank resolution, the European
Commission recently released a Communication on Bank Resolution Funds, supporting the establishment of
ex-ante resolution funds, funded by a levy on banks, to facilitate the resolution of failing banks. See European
Commission, Bank Resolution Funds (2010).
321
See, eg, Squam Lake Working Group on Financial Regulation, An Expedited Resolution Mechanism for
Distressed Financial Firms: Regulatory Hybrid Securities (April 2009); Calello and Ervin, From Bail-out To
Bail-in, The Economist (30 January 2010); Charles Plosser, Convertible Securities and Bankruptcy Reforms:
Addressing Too Big to Fail and Reducing the Fragility of the Financial System, Speech at the Conference on the
Squam Lake Report: Fixing the Financial System (16 June 2010); Jones, Klutsey, and Christ, Speed Bankruptcy:
A Firewall to Future Crises (10 January 2010).

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 Resolution of US Banks and other Financial Institutions

VII. Conclusion
8.222 In summary, a growing interest in resolution authority has arisen around the world. This
chapter has described the fundamental characteristics of resolution authority as conceived in
the United States. The US has developed a workable model for the resolution of banks. It has
adapted its bank resolution model to Fannie Mae, Freddie Mac, and the Federal Home Loan
Banks. It has also established a new resolution authority for systemically important non-
bank financial companies based on its bank resolution model, but harmonized with the
substantive provisions of the US Bankruptcy Code in order to increase legal certainty and
reduce moral hazard and the risk of bailouts. Other countries are considering similar resolu-
tion laws and growing pressure has arisen for better coordination of the resolution of sys-
temically important financial groups with cross-border operations.

372
 Annex A
Annex A
Certain Key Differences Between the US Bankruptcy Code and the US Bank Resolution
Statute (Sections 11 and 13 of the Federal Deposit Insurance Act)
Topic Bankruptcy Code
Applicability Most individuals and business
entities with specified
connections to the United
States are eligible; exceptions
include most banks, credit
unions, insurance companies,
and insured depository
institutions.
Commencement By debtor (voluntarily) or
of Proceedings creditors (involuntarily).
Control of Debtor in possession or
Business bankruptcy trustee.
Stay of Litigation Automatic stay during the
proceedings. Creditors may not
prosecute litigation that was or
could have been commenced
before the filing of the petition;
remedies against property (like
foreclosure) also generally
stayed.
Close-Out of Protected financial contracts
Certain Financial can be closed-out/netted
Contracts by immediately, and remedies
Counterparties against collateral can be
exercised under exceptions to
the automatic stay.
373
Bank Resolution Statute
All US state or federally chartered banks or
savings associations whose deposits are insured
by the Federal Deposit Insurance Corporation.
By the institutions chartering authority or the
FDIC.
The FDIC, as receiver or conservator. Upon
appointment as such, the FDIC automatically
succeeds by operation of law to all of the rights,
titles, powers, and privileges of any stockholder,
member, officer, or director of the insured
depository institution.
No automatic stay in the case of receivership,
except for automatic temporary one-business-
day stay of the exercise of close-out rights on
QFCs (see below). In the case of
conservatorships, there is an automatic stay of
the enforceability of all contractual rights and
remedies that arise solely by virtue of
appointment of conservator or insolvency of the
institution, except in the case of D&O
insurance policies or depository institution
bonds (see enforceability of ipso facto clauses
below). The FDIC as receiver or conservator
may request a stay of litigation not to exceed
90 days or 45 days, respectively.
In the case of receivership, close-out/netting of
qualified financial contracts (QFCs) by
counterparties temporarily stayed for one
business day in the case of a receivership
(otherwise same as Bankruptcy Code) to allow
receiver to determine which QFCs to transfer
(all-or-none with a particular counterparty).
In the case of conservatorship, close-out/netting
of QFCs not permitted if triggered by
appointment of conservator or insolvency
(see enforceability of ipso facto clauses below).
(cont)
 Resolution of US Banks and other Financial Institutions
Topic Bankruptcy Code
Customer Customer property held by
Property stockbrokers and commodity
brokers is treated separately
and specific rules govern its
distribution. Customer name
securities to be delivered to
customers, with certain
exceptions in the case of
negative net equity.
Financial Subject to the requirement of
Assistance adequate protection of
existing lien holders, the debtor
can obtain post-bankruptcy
(DIP) financing and lenders
can receive priming liens and
super-priority claims (subject
to Bankruptcy Court
approval). Such financing can
be provided by any source,
including the federal
government.
Bridge Company No concept of a bridge
company, other than the
debtor in possession itself. The
business can be reorganized as a
continuation of the existing
debtor or a new entity or
entities. A plan of
reorganization will sometimes
distribute certain non-
operating assets (eg litigation
claims) to a liquidating trust
for the benefit of creditors.
Prompt Transfer Sale of assets to a third party
of Assets and permitted after notice and
Liabilities to hearing if good business
Buyer reasons (like declining values)
can be demonstrated.
Cherry-Picking Select assets can be sold free
Powers and clear of claims and liens,
subject to court approval of the the same class of creditors, subject to three
transfer, but limited by
close-outs of protected
financial contracts and subject what they would have received in a liquidation
to providing for the value of
existing liens. Selected
liabilities may be assumed by a counterparty, it must transfer all QFCs with
buyer.
374
Bank Resolution Statute
No express provisions protecting customer
property. Under very old case law, customer
property rights are respected only if properly
segregated from banks assets. Substantial legal
uncertainty under that case law regarding what
is required to satisfy segregation requirements
short of physical segregation given the
dematerialization of securities and other assets
since those cases were decided.
Emergency Open Assistance: upon a systemic risk
determination by the FDIC, the Fed and the
Treasury Secretary in consultation with the
President, the FDIC may provide wide range of
financial assistance to prevent financial
instability, subject to specified limitations.
Closed Assistance: as receiver, the FDIC may
provide a wide range of financial assistance to
assist in the resolution of the covered financial
company.
The FDIC can organize a bridge bank to assume
liabilities or purchase assets of the failed
institution, and such liabilities and assets can be
quickly transferred to such entity.
The FDIC has broad discretion to sell or transfer
assets and liabilities to a third party,
notwithstanding any otherwise applicable
consent requirements, subject to certain
limitations in the statute but no meaningful
judicial review.
The FDIC has broad discretion to cherry-pick
which assets or liabilities to transfer even among
limits: (i) any left-behind claimants would be
entitled to a minimum distribution equal to
as if no such transfer took place; (ii) if the FDIC
transfers any QFCs with a particular
that counterparty; and (iii) all assets are
transferred subject to pre-existing liens unless
the FDIC is able to invalidate the lien pursuant
to one of its super powers discussed below.
 Annex A

Topic Bankruptcy Code Bank Resolution Statute

Assumption or Executory contracts or leases The FDIC has broad discretion to repudiate or
Rejection of must either be assumed and disaffirm any contract or lease (not merely
Executory performed/assigned or rejected executory contracts) within a reasonable period
Contracts and upon approval of the of time (not defined) after its appointment as
Leases Bankruptcy Court. receiver.
Damages for Breach of contract damages Damages for repudiation or disaffirmance are
Rejected or generally allowed for rejected limited to actual direct compensatory damages
Repudiated contracts. Administrative (resulting in smaller damages claims than for
Contracts expense claims generally identical contracts rejected under the
allowed to the extent the Bankruptcy Code) determined as of the date of
debtor accepted benefits under the appointment of the receiver, with the
the contract after the petition exception of QFCs, for which damages are
date. calculated as of the date of disaffirmance or
repudiation and are measured in accordance
with market custom (cost of cover included).
Enforceability of Generally unenforceable, with Unenforceable in any contracts (other than
Ipso Facto exceptions for financing QFCs in receivership, D&O insurance policies,
Clauses contracts, protected financial or depository institution bonds).
contracts, and other protected
agreements.
Oral Contracts In some cases, oral agreements Only written contracts approved by the board or
can form the basis of a claim. loan committee of the failed institution
contemporaneously with acquisition of any
related asset and continuously maintained as an
official record of the failed institution will be
recognized under the statute.
Definition of a A right to payment, including a Not defined. Generally speaking, the amount of
Claim; contingent or unliquidated an allowed claim is determined by applicable
Contingent right. Generally speaking, non-insolvency law. The FDIC takes the
Claims contingent claims, such as position that contingent claims, such as under
under undrawn guarantees or undrawn guarantees or letters of credit, unused
letters of credit, loan loan commitments, or unused portions of
commitments, or unused committed lines of credit, are not provable
portions of committed lines of claims or can be repudiated without creating
credit, are provable and any claim for damages.
estimated by the Bankruptcy
Court.
Partially Secured Partially secured claims are Portion of claim that exceeds the value of the
Creditors divided into secured and collateral considered unsecured. No payments
unsecured portions based on may be made with respect to unsecured claims
the value of the collateral. The other than in connection with the disposition of
secured portion generally must all unsecured claims.
receive the value of the
collateral; the unsecured
portion receives distributions
comparable to other general
unsecured claims.
Post-Insolvency Generally disallowed, except Generally not payable, with exceptions for
Interest (i) where the debtor is solvent QFCs or as the FDIC may provide by
and (ii) to the extent the value regulation, policy statement, or staff
of a secured creditors collateral interpretation.
exceeds its principal claim.
(cont)

375
 Resolution of US Banks and other Financial Institutions
Topic Bankruptcy Code
Unequal Generally, similarly situated
Treatment of creditors are required to receive
Similarly similar treatment in a
Situated reorganization under chapter 11
Creditors or a liquidation under chapter 7,
although favoured treatment
for selected creditors can be
authorized by the Bankruptcy
Court if such treatment is
found to preserve or enhance
the value of the estate for
remaining creditors. For
example, critical vendors
payments may be approved by
the Bankruptcy Court, and
selected liabilities may be
assumed by a buyer in a
Bankruptcy Court approved
sale, subject to the good
business reason test described
above.
Priority of Tax claims and certain allowed
Unsecured unsecured claims (including
Claims those based upon any
commitment by the debtor to a
federal depository institutions
regulatory agency, or the
predecessor to such agency, to
maintain the capital of an
insured depository institution)
have priority junior to
administrative expenses, but
senior to other unsecured
creditors.
Avoidability of Preferential transfers made on
Perfected account of antecedent debt
Security Interests within 90 days before
bankruptcy (or one year for
insiders) while debtor was
insolvent may be avoided
under Section 547, but
defences include transfers for
new value and transfers made
in the ordinary course of
business. Certain protected
financial contracts are exempt
from preference risk.
376
Bank Resolution Statute
The FDIC has broad authority to take actions
that result in unequal treatment of similarly
situated creditors (cherry-picking liabilities to
be assumed by third party or bridge company, as
described above). While the statute requires
left-behind creditors to receive at least as much
as they would have received in a liquidation as if
no unequal treatment took place, it is unclear
who makes this determination, the degree to
which judicial review is available, and the
remedy for failure to meet this standard after
transfer of assets to a bridge company or third
party.
Claims by the FDIC for administrative expenses
as receiver and claims of amounts owed to the
US generally have priority over general or senior
liabilities of the company.
The FDIC interprets the statute to give it the
power to avoid any security interest (unless
securing a QFC) if taken in contemplation of
the companys insolvency. No insolvency
requirement or new value exception. On its face,
substantial legal uncertainty about scope of this
avoidance power. But old case law has effectively
limited this avoidance power to security interests
taken within days of conservatorship or
receivership after the board of the insured
institution became aware the institution would
be closed because of the role of banks in
processing huge volumes of payments and
transfers for others. Security interests taken to
secure QFCs are avoidable only if taken with
actual intent to hinder, delay, or defraud.
 Annex A
Topic Bankruptcy Code
Fraudulent Pre-bankruptcy transfers made
Transfer or obligations incurred on or
within two years prior to the
petition date (i) with actual
intent to hinder, delay or
defraud creditors or (ii) for less
than reasonably equivalent
value and while the debtor was
insolvent or that rendered the
debtor insolvent, are generally
voidable, subject to certain
defences. State law fraudulent
conveyance laws also apply.
Certain protected financial
contracts are exempt from
constructive fraudulent
transfer risk.
Judicial Yes, by the Bankruptcy Court.
Supervision of
Claims Process
Rule-making and There are statutory
Legal Guidance requirements of notice and
hearing for most substantive
actions, as well as procedural
rules, case law, and legal
commentary interpreting the
Bankruptcy Code. The Federal
Rules of Bankruptcy Procedure
are prescribed by the federal
judiciary, subject to the right of
Congress to reject or modify
such Rules. The various
Bankruptcy Courts may enact
their own Local Rules.
Assessments Administrative creditors of the
debtor are granted priority over
pre-bankruptcy creditors with
respect to estate assets, and
trustees and professionals
receive compensation subject
to approval of the Bankruptcy
Court.
377
Bank Resolution Statute
The FDIC has the power to set aside fraudulent
transfers based on applicable state fraudulent
transfer law. In addition, the FDIC has the
power to set aside transfers by certain insiders or
debtors of the financial company if made within
five years of the receivership with the intent to
hinder, delay, or defraud. The FDICs power
under this special provision is superior to that of
a trustee in bankruptcy. Certain defences are
available.
No, the FDIC has broad authority to conduct
the administrative claims process, subject only
to after-the-fact de novo judicial review.
The FDIC has the right but not the duty to
make any rules or regulations implementing the
bank resolution statute. The FDIC has issued
only a few regulations (see 12 CFR Part 360).
Other guidance is limited to policy statements
(which can be withdrawn at any time, possibly
with retroactive effect) and staff opinions (which
are invariably expressly stated not to be binding
on the FDIC).
The FDIC would has the power to recoup its
costs, if any, of resolving a covered financial
company from the deposit insurance fund and
by making assessments against commonly
controlled insured depository institutions
(cross-guarantee liability).
This page intentionally left blank
 Part III

SOVERIGN DEBT RESTRUCTURING

This page intentionally left blank
 9
AN INTRODUCTION TO SOVEREIGN DEBT
RESTRUCTURING 1

I. Introduction 9.019.18

1
I. Introduction2
The Brady Plan was a plan articulated in 1989 by US Treasury Secretary Nicholas F Brady to 9.01
address the debt crises that occurred in the developing countries during the 1980s. The debt
crises were originated by loans granted by banks to sovereigns in order to refinance previous
loans. The main objective was to maintain the service of interests to keep the loans as per-
forming in their financial statements otherwise, they would have had to write them off. By
injecting fresh money to restructure principal and keep interests performing, debtors entered
into a debt trap that were not able to escape until the Brady Plan was put into place. Although
the Brady Plan evolved on a case-by-case basis, its main features were: (1) adjustment pro-
grammes; (2) menus of debt restructuring options assuring the collection of the credit and
that the new debt would be traded in order to diversify risks; and (3) new money.3
Since the outset of the Brady Plan in 1989, Argentina, Brazil, Bulgaria, Costa Rica, the 9.02
Dominican Republic, Ecuador, Ivory Coast (Cote dIvoire), Jordan, Mexico, Nigeria,
Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela, and Vietnam have been

1
Sovereign debt restructuring comprises multilateral, bilateral, and private debt instruments. The first
two have their own set of policies and rules on how to perform a restructuring. However, the latter lacks a struc-
tured or institutional approach. Therefore, the focus of this Part of the book will be on private sovereign debt
restructuring.
2
The author of this chapter, Rodrigo Olivares-Caminal, has written extensively about the legal framework
applicable in sovereign debt restructurings and this chapter incorporates and/or adapts some of his earlier work,
including among others: Legal Aspects of Sovereign Debt Restructuring, Sweet & Maxwell, 2009; Understanding
the pari passu clause in sovereign debt instruments: a complex quest, The International Lawyer, Vol 43, No 3,
Fall 2009; Is there a need for an international insolvency regime in the context of sovereign debt? a case for the
use of corporate debt restructuring techniques, Journal of International Banking Law & Regulation, Sweet &
Maxwell, Vol 24, No 1, January 2009; The use of corporate debt restructuring techniques in the context of
sovereign debt, ICR (Kluwer), Vol 2, No 5, September 2005; and, Rethinking sovereign debt restructuring
mechanisms, Law & Business Review of the Americas, Vol 9, No 4, 2003.
3 See Emerging Markets Trading Association, The Brady Plan, available at <http://www.emta.org/template.

aspx?id=35>. For an enlargement on the Brady Plans (and its predecessor, the Baker Plan) see Lex Rieffel,
Restructuring Sovereign Debt: The Case for Ad-hoc Machinery, Brookings Institution Press, 2003, pp 14977;
and, Ross P Buckley, Emerging Markets Debt: An Analysis of the Secondary Market, Kluwer, 1999.

381
 An Introduction to Sovereign Debt Restructuring

able to restructure their unsustainable debtmostly in syndicated loansby the issuance of

Brady bonds. In other words, by means of the Brady Plan, sovereigns were able to swap non-
performing loans for tradable debt instruments (Brady Bonds) with a longer maturity
profile.
9.03 The countries that participated in the Brady Plan as well as others that did not default during
the 1980s and 1990s continued issuing bonds on a regular basis to cover their budget deficits
or simply to raise money from the capital markets, amassing enormous amounts of debt
sometimes unsustainable.
9.04 As a result, most of the emerging market debt held by private investors is now in the form of
bonds, not in commercial bank loans.4 As noted by Krueger, since 1980, emerging market
bond issues have grown four times as quickly as syndicated bank loans.5 As a result of the
rapid increase of bond issuance, together with the increased frequency of virulent financial
crises, bond restructuring has gained in importance, particularly for sovereign borrowers.6
9.05 Debts documented in syndicated loans were relatively easy to restructure within the frame-
work of the London Club. The London Club is an informal group of commercial banks
gathering together to negotiate their claims against a sovereign debtor.7
9.06 As result of the use of bonds to finance sovereign deficits, capital markets have become more
efficient and diversified. However, there are a number of serious downsides when a country
faces unsustainable debt. These include: (1) creditors who have become increasingly numer-
ous, anonymous, and difficult to coordinate; (2) variety of debt instruments involved and
the range of legal jurisdictions in which debt is issued, with no single, statutory legal frame-
work applicable (enhancing creditors to holdout or litigate for better terms).8 In addition,
recent sovereign debt crisis or episodes have shown a higher degree of aggressiveness from
both, creditors (eg some of the Argentine creditors after the debt crisis of 20012002) or
debtors (eg Ecuador in its 2009 default).
9.07 Substantially, the conventional remedy of providing debt service relief through a combina-
tion of rescheduling the principal and compulsory new money infusions has been virtually
exhausted for many debtor countries.9 A sovereign bond restructuring is usually performed
by means of an exchange offer. An exchange offer can be understood as an offer to voluntarily
exchange the original debt instruments for new debt instruments with new terms. Usually,
the new terms of the bonds entail an extension in the maturity, a par value reduction, and a
lower interest rate in order to let the debtor gain some breathing space. There is no set rule to

4
Lee C Buchheit, Unitar Training Programs on Foreign Economic Relations, Doc. No. 1, Sovereign Debtors
and Their Bondholders, p 4 (2000), available at <http://www2.unitar.org/training_materials_publication.
htm>.
5
Anne Krueger, International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring,
address at the National Economists Club Annual Members Dinner American Enterprise Institute (November
26, 2001), available at <http://www.imf.org/external/np/speeches/2001/112601.htm>.
6
Report by the secretariat of the United Nations Conference on Trade and Development, New York and
Geneva 2001, p 143, available at <http://www.unctad.org/en/docs/tdr2001_en.pdf> (Trade and Development).
7
See International Monetary Fund, A Guide to Committees, Groups and Clubs: A Factsheet, August 2006,
available at <http://www.imf.org>.
8 See International Monetary Fund, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM): A

Factsheet, January 2003, available at <http://www.imf.org/external/np/exr/facts/sdrm.htm>.

9 Lee C Buchheit, Alternative techniques in sovereign debt restructuring, University of Illinois Law Review

371, 374, 1988.

382
 I. Introduction

determine which terms should be amended during an exchange offer, and this may also
include an amendment to other non-financial terms as well, for example legal covenants,
governing law, etc.10
In this context, debtors and creditors need to: (1) obtain debt sustainability by reducing debt 9.08
burden in an orderly manner; (2) protect the value of the assets and the rights of the creditors
to avoid litigation; (3) achieve the restructuring over a short period of time to reduce disrup-
tions and regain access to capital markets; (4) share a common effort; and (5) avoid moral
hazard to shun market distortions. Not only debtors and creditors would benefit from this
but also the international capital markets.
A series of new developments took place in 2004 in the area of sovereign debt restructuring. 9.09
These new developments were: (1) the Republic of Argentina (Argentina)International
Monetary Funds star-performer11obtained a 75 per cent nominal haircut (Buenos Aires
Terms12) after the rejection of the 92 per cent net present value reduction originally proposed
(Dubai Terms13); (2) Iraq obtained the approval to achieve a 75 per cent write-off on its
bilateral loan agreements (Paris Club);14 (3) the LNC v Republic of Nicaragua case that was
resolved in a Belgian court,15 addressing the pari passu clause issue in sovereign debt instru-
ments and overturning the Elliott case;16 (4) Germanys issuance of the Aries Bond, repack-
aging the Paris Clubs debt owed by Russia in order to count the proceeds as budget revenues
and, thus, help meet European Unions budget deficit criteria;17 (5) Belgium passed Law
No 4,765 providing insulation to the payments made through Euroclear to avoid the attach-
ment of monies used to service debt instruments;18 (6) extensive Italian litigation that derived
in the sanction of two banks in 2005 (Intesa and Unicredit) by the Commissione Nazionale
per la Societ e per la Borsa (CONSOB); (7) the filing of a bill of law with the Italian Parliament
to protect investors due to the lack of information and breach of fiduciary duties by banks as
the result of Argentinas default, which resulted in a decree enacted by the Consiglio dei
Ministri to indemnify retail investors; (8) Urban v Republic of Argentina was the first ever class

10 It is also worth noting that there have been cases where only one of the so-called financial terms (ie matu-

rity, interest rate, or par value) were amended.

11
See eg International Monetary Fund, IMF Executive Board Discusses Lessons from the Crisis in
Argentina, Public Information Notice (PIN) No 04/26, 24 March 2004.
12
This was the second restructuring proposal made by the Argentine Government on 1 June 2004 in Buenos
Aires, the capital city of Argentina. Therefore, it is known as the Buenos Aires terms in relation to the place of
announcement of the proposal.
13 This was the first restructuring proposal made by the Argentine Government on 22 September 2003

almost two years after the moratoriumand it was known as the Dubai Terms because it took place within the
IMF and World Bank Annual Meetings in Dubai.
14
The settlement with the Paris Club was reached on 21 November 2004.
15
Republique Du Nicaragua v LNC Invs LLC, No 2003/KR/334, at 2 (Cour DAppeal de Bruselas, Neuvieme
Chambre (Ct App Brussels, 9th Chamber) 2004) (on file with author).
16
See Elliott Assocs LP, General Docket No 2000/QR/92, Court of Appeals of Brussels, 8th Chamber,
26 September 2000 (not reported). Also see 948 F Supp 1203, SDNY, 13 December 1996; 961 F Supp 83,
SDNY, 28 April 1997; 12 F Supp. 2d 328, SDNY 6 August 1998; 194 F 3d 363, 2nd Cir (NY), 30 October
1999; and 194 FDR 116, 54 Fed R Evid Serv 1023, SDNY, 1 June 2000.
17 See Jane Brauer and Ralph Sueppl, Russias New Aries Bond, Merrill Lynch Emerging Markets Report,

IEM: Sovereigns, 30 June 2004; and Tim Ash, Russia: Repackaging of Paris Club Debt to Germany, Bear &
Sterns, Sovereign Eastern Europe Update, Emerging Markets Sovereign Debt Research, 30 June 2004.
18 See C-2004/03482 and Chambre des Reprsentants de Belgique, Chambre 2e Session de la 51e Lgislature

20032004, pp 6365 (on file with author).

383
 An Introduction to Sovereign Debt Restructuring

action certified upon a sovereign default;19 and (9) in Silvia Seijas, Heather M Munton and
Thomas L Pico Estrada v the Republic of Argentina, where it was shown thatindirectly
organized creditors (blocking holdings) are a threat to a sovereign debtor.20
9.10 The most important development measured by its significance was that Iraq21 and Argentina22
reached an agreement to restructure a significant part of their external debtwhich in each
case was slightly over $120 billion23achieving a 75 per cent reduction in par value. No
prior restructuring episode reached such a significant par value reduction (eg Ecuador
achieved 40 per cent par value reduction in 2000 or Russia 36 per cent par value reduction
in 199824). While the Iraqi case is important due to its geopolitical weight and its landmark
significance vis--vis the Paris Club,25 the Argentine case is important for its implications to
the international financial architecture26 due to the complexities that it entailed.
9.11 The Iraqi case presents a completely different scenario. Iraq reached an agreement with the
Paris Club on 21 November 2004 to restructure $37,158 million of which $29,727 million
had been cancelled and $7,431 million been rescheduled. $65 billion was owed to other
bilaterals (non-Paris Club members, ie most Persian Gulf countries) and the remainder to
private creditors. The key issue in the Iraqi case does not relate to private creditors. On the
contrary, it relates to other sovereigns that entered into bilateral agreements with Iraq. How
will future restructurings under the Paris Club take place? What will be the argument to
refuse a request of a 75 per cent write-offor using the jargon, haircutin a bilateral agree-
ment if it has been granted in the past to an illiquid but solvent country?27 A defaulting

19 HW Urban GmbH v Republic of Argentina, No 02 Civ 5699 (TPG), 2003 US Dist LEXIS 23363 (SDNY

30 Dec 2003).
20 See Silvia Seijas, Heather M Munton and Thomas L Pico Estrada v The Republic of Argentina (04 Civ 400).

On 15 November 2004, Argentina filed a Memorandum of Law with the District Court of the Southern
District of New York in opposition to plaintiffs motion for a preliminary injunction. Argentina confirmed that
it would not use exit consents in their final exchange offer launched on 12 January 2005.
21 For a more detailed description of Iraqs debt composition see Michael A Weiss, Iraq: Debt Relief , CRS

Report for the US Congress, updated on 11 March 2005, available at <http://www.fas.org/sgp/crs/mideast/

RS21765.pdf>. Though Iraqs debt is not part of the scope of this book, reference to it will be made for illustra-
tion purposes.
22 Argentinas debt, $120 billion, includes the so-called eligible debt (debt to be under the scope of the restruc-

turing as will be seen in more detail in the chapters addressing Argentinas debt restructuring episode) and the debt
owed to bilaterals and multilaterals. See Dr Guillermo Nielsen, Speech of Secretary of Finance: Argentinas
Restructuring Guidelines (22 September 2003) at <http://www.argentinedebtinfo.gov.ar/ing_presen.htm>.
23
Although in both cases was above $120 billion not all their external debt was subject to the
restructuring.
24 Other sovereign debt restructuring episodes such as Ukraine (1999), Pakistan (1999), and Uruguay

(2003) made no par value reduction.

25
The Paris Club is an informal group of official creditors willing to treat in a coordinated way the debt due to
them by the developing countries. It describes itself as a non-institution. Decisions are made on a case-by-case
basis in order to permanently adjust itself to the individuality of each debtor country. It was established in 1956,
when Argentina agreed to meet its public creditors in Paris. See Paris Clubs webpage and IMF, n 7 above.
26 For a description of the emergence of the International Financial Architecture see Mario Giovanoli, A

New Architecture for the Global Financial Market: Legal Aspects of International Financial Standard Setting
in Mario Giovanoli (ed), International Monetary Law: Issues for the New Millennium, Oxford, 2000, pp 359.
For a detailed description of the proposals on the new International Financial Architecture see Barry Eichengreen,
Towards a New International Financial Architecture: a Practical Post-Asia Agenda, Washington, DC: Institute
for International Economics, 1999; and see Rosa M Lastra, Legal Foundations of International Monetary Law,
Oxford University Press, 2006, pp 448499.
27 Liquidity problems are evidenced when a debtor fails to perform his obligations when they have fallen due

(liquidity test). However, an illiquid debtor might still be solvent despite the fact that he is not able to perform
his obligations. Additionally, if the amount of obligations of the debtor has exceeded the value of his assets,

384
 I. Introduction

creditor would not understand that due to its lack of geopolitical weightas Iraqcannot
be treated to the same write-off. These are the current dilemmas that should be analysed.
The solution should come from innovative features developed jointly by governments and
the international capital markets. An example that creative solutions can still be brought up
is Germanys Aries bond issuance to repackage Russias debt.
The 20012002 Argentina sovereign debt crisis,28 is of particular interest and unusual com- 9.12
plexity, presenting a challenge for Argentina, the International Monetary Fund (IMF), and
the future of sovereign bond restructuring. Although the exchange offer closed in early
2005,29 there was a 23.85 per cent bondholders holdout30 that had to be dealt with. In a
second exchange offer made to those outstanding creditors that did not participate in the
first exchange offer, Argentina managed to reduce the holdout percentage to 7 per cent. Not
only Argentina is facing this problem but also the IMF, in its role as the main player involved
in protecting the international financial architecture.
The Argentine sovereign default episode has certain particular characteristics. It is the biggest 9.13
default ever, in terms of monetary amount and number of creditors. Moreover, it has other
complex characteristics, that is, the number of applicable laws (eight) and the geographical
distribution of creditors. With regard to the first issue (ie monetary amount), Argentina
defaulted on $95 billion of debt obligations, while the second biggest bond defaulter was
Russia in 1998 with $31.6 billion (ie Argentinas default is 66.7 per cent greater). With
regard to the second matter (number of creditors), Argentina had more than 700,000 credi-
tors atomized within the international financial community.31
Although each sovereign debt restructuring episode is unique, there are certain similarities 9.14
that can be recognized. It is my aim to identify the common elements involved in previous
debt restructuring episodes and the roles played by each party in these processes to provide a
basis for understanding their different interests in a restructuring. Sovereign debt restructur-
ing has an important degree of complexity because it merges the perspectives of the debtor,
creditors, and international financial institutions. However, it is worth noticing that the
perspective of creditors involved in a sovereign debt restructuring episode has different
shades since retail and sophisticated creditors do not share the same interests. In addition,
even within the same type of creditors, in the case, for example, of sophisticated creditors, a
hedge fund and an investment bank do not necessarily share the same interest.
After the restructuring experiences of the late 1990s (ie Russia, Ukraine, Pakistan, Ecuador, 9.15
and Uruguay) and the criticism the IMF has suffered due to its International Lender of Last

irrespective of whether he timely performs his obligations (assets test) he would be insolvent. However, the dif-
ference between liquidity and insolvency is difficult to establisheven more in the context of a sovereign state
where solvency is presumed.
28
Argentina announced a moratorium on its external debt on 23 December 2001. However, the first event
of default occurred on 3 January 2002 when Argentina missed an interest payment in the amount of $20 mil-
lion on an Italian lira denominated bond. Consequently, Argentina technically entered default 30 days after the
event of default was not cured, ie 3 February 2002. On 6 March 2002, DCA Grantor Trust filed in New York
the first claim against Argentina in the amount of $1,265 million.
29 Precisely, on 25 February 2005.
30 See the document issued by the Ministry of Economy on 18 March 2005 titled Oferta de Canje

Anuncio Final, p 5.
31 A Balls and A Thomson, Argentina defiant towards private creditors, Financial Times, 11 March 2004, p 1.

385
 An Introduction to Sovereign Debt Restructuring

Resort (ILOLR) role in the Mexican and Asian crises,32 it can be said that two alternatives
were developed to tackle the key problem of the holdout33 creditor in the context of sover-
eign bond restructuring (a statutory Sovereign Debt Restructuring Mechanism proposed by
the IMF and commonly known under its acronym SDRM;34 and, a contractual approach by
the use of exit consents35 and collective action clauses, commonly known by their acronym:
CACs36). Both alternatives within the contractual approach either have flaws (eg CACs are
not included in all bonds, only in those issued as of late 2003) or can be improved (eg by
using them combined or with special features37).
9.16 The experience shows that the contractualmarket-orientedapproach should be endorsed
(CACs, prospectus terms enhancement,38 trust indentures,39 exit consents,40 advisory
committees,41 etc). Additionally, the role of the IMF should be redefined since it has been
drifting from one extreme (ILOLReg Mexico 1995) to another (no involvement in the
debt crisiseg Argentina 2001) without being exempt from criticisms. The IMF should
play an active role in the restructuring procedures, similar to its role during the implementa-
tion of the Brady Plan. In extreme cases, the IMF can even endorse a sovereigns request
before the United Nations (UN) to prevent creditors from seizing assets during a short
restructuring period as occurred in the recent case of Iraq.42 Within an ad hoc legal frame-
work, this can be an ad hoc SDRM.

32 See Charles W Calomiris, The IMFs Imprudent Role as Lender of Last Resort, The Cato Journal, Vol 3,

No 17, 1998. See also Rosa M Lastra, Lender of Last Resort, an International Perspective, The International
and Comparative Law Quarterly, Vol 48, No 2, April 1999, pp 340361.
33 Those creditors who do not take part in the debt exchange are usually referred to as holdouts.
34 See IMF, n 8 above.
35 Lee Buchheit and G Mitu Gulati, Exit Consents in Sovereign Bond Exchanges, UCLA Law Review,

Vol 48, 2001, pp 5984.

36 See Liz Dixon and David Wall, Collection Action Problems and Collective Action Clauses, Financial Stability

Review, June 2000.

37 It can be argued that in the restructuring of Uruguay sovereign debt in 2003 various techniques were used

together (ie tick-the-box exit consents, the adoption of CACs with the possibility of aggregation, and term
enhancements). However, it is worth noticing that in the case of Uruguay there was no default and the restruc-
turing was launched to prevent a moratorium on the outstanding debt.
38
eg the mandatory pre-payment clause or the mandatory re-instatement of principal clause used in
Ecuador sovereign debt restructuring in 2000.
39
In the US and the UK, the common practice is to issue bonds under a trust indenture. This implies the
appointment of a trustee in respect of the bonds to represent the bondholders. The appointment of a trustee
benefits the bondholders in many aspects, inter alia: (1) sophisticated monitoring; (2) unified enforcement; (3)
pro-rata payment, etc. It also benefits the issuer as well since namely: (1) it protects it against rogue creditors;
(2) provides greater flexibility for waivers and modifications; (3) the issuer only has to deal with one single
representative of all the creditors; etc. See Philip Wood, International Loans, Bonds and Securities Regulation,
Law and Practice of International Finance, Sweet & Maxwell, 1995, pp 164166.
40
Exit consents is the technique by which holders of defaulted bonds which have accepted an exchange
offerat the moment of accepting said offergrant their consent to amend certain terms of the bonds to be
restructured. By using the exit consents technique, the exchange offer is conditioned to a minimum threshold
of creditors acceptance and the amendments to the terms are performed once the required majority has been
obtained forcing those creditors that do not want to participate in the exchange offer to take part. Otherwise,
they will be left with a depreciated bond that does not have its original features and can be difficult to enforce
or sell in the secondary market.
41 The advisory committees are committees comprising representative creditors that interact with the sover-

eign in trying to find a workable proposal for both parties, debtor and creditors. They were used many times
during the Brady Plan era.
42 UN Res No 1483/03.

386
 I. Introduction

Finally, it is worth stressing that every episode of sovereign debt restructuring includes a 9.17
heavy influence of politics and the need for additional financing in order to keep the econ-
omy running. As Gelpern has clearly stated, it is impossible to separate politics and finance
in sovereign workouts.43 Therefore, despite the impossibility of separating politics from
sovereign debt restructuring, the primary focus will be on the legal issues.
Upon an event of default, a creditor is faced with two alternatives: (1) pursue remedies 9.18
against the debtor in a court of law trying to collect the full par value of the credit; or (2) enter
into negotiations with the debtor to reach a restructuring agreement, which usually implies
worsening the original terms of the credit. Chapter 10 will address the different issues
that need to be considered before initiating litigation against a sovereign, with parti-
cular emphasis on the enforceability of a favourable ruling. Then, an analysis of the
current status quo of the ad hoc sovereign debt restructuring framework is provided
in Chapter 11. Particular emphasis will be put on the techniques and mechanisms
developed to tackle the holdout problem in view of the lack of universal insolvency
regime applicable to sovereigns, including a brief note on the recent development
of the use of class actions as a sovereign debt restructuring tool. Towards the end of
Chapter 11, the analysis of a case study is provided to illustrate in practice how these
techniques and mechanisms are applied and to highlight the challenges and complexi-
ties that they entail. Finally, some conclusions will be provided.

43 Anna Gelpern, What Iraq and Argentina Might Learn from Each Other, Chicago Journal of International

Law, Vol 6, No 1, 2005, p 414.

387
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 10
LITIGATION ASPECTS OF
SOVEREIGN DEBT

I. Litigation 10.0110.100 D. The Interaction of the Pari Passu

Clause vis--vis Multilateral Debt
A. An Introduction to Sovereign
Payments 10.6110.66
Debt Litigation 10.0110.24
E. The NML Capital Ltd v the
B. Some Preliminary Distinctions:
Republic of Argentina Case 10.6710.100
In Using a Fiscal Agent and a
Trust Structure 10.2510.29 II. Conclusion 10.10110.103
C. The Elliott Case and Other
Relevant Legal Precedents 10.3010.60

I. Litigation

A. An Introduction to Sovereign Debt Litigation

A disruption in the economy of a country might trigger a crisis of considerable magnitude to 10.01
force creditors to examine their legal options for recovery.1
In debt documented in tradable instruments, this disruption would be evidenced by an 10.02
event of default. The following are considered standard events of default in a bond issu-
ance: (1) non-payment (non-payment of principal or interest for a period of 30 consecutive
days); (2) breach of other obligations (breach of other obligations over the grace period
following written notice to remedy the failure); (3) cross default; (4) moratorium; (5) con-
testation (contest the validity of the debt securities); (6) failure authorizations (failure
or modificationsin a manner that adversely affects the performance of the material
obligationsof the authorizations necessary to perform); (7) monetary judgment (any
monetary judgment exceeding an amount agreed in the prospectus and it is not adequately
satisfied, bonded, contested in good faith, or receives a stay of execution in respect of, such
judgment within a grace period); (8) illegality (the adoption of any applicable law, rule, or
regulation which would make it unlawful to comply with the obligations agreed); (9) IMF
membership cessation.2

1 See Paul L Lee, Central Banks and Sovereign Immunity (2003) 41 Columbia Journal of Transnational

Law 394.
2 See Prospectus of the Repblica Oriental del Uruguay to issue debt securities and/or warrants to purchase

debt securities up to $3,000,000,000 (reflecting additional filings made with the SEC pursuant to Rule

389
 Litigation Aspects of Sovereign Debt

10.03 Upon a default scenario, sovereign states usually establish that the situation is of public emer-
gency by means of passing a law or enacting an executive order or decree.3 Then, it is likely
that local courts will not rule against the default and extraordinary emergency situation
instituted by the sovereigns government due to the situation of emergency that the country
is facing.4 Even if this type of norm is not in place when the claim is initiated, the affected
government might resort to any recourse to impede a favourable ruling or its enforcement.
As stated by Wood, a state is in charge of its own law-making machinery and can therefore
change its laws and compel its courts to give effect to changes.5 This is the reason why credi-
tors are left with almost only one choice: to pursue their credit in a country different from
that of the debtor. Otherwise, they have to face the uncertainty of litigating in an unpredict-
able and unfriendly jurisdiction where the legislative machinery can change the rules.
10.04 In pursuit of fairness and neutrality, creditors will prefer to sue in the courts of their own
country or in the courts of the applicable law of the debt instruments, which is usually other
than that of the debtors country.
10.05 Usually, in bond issuances, there would be a choice of law. Thereafter, the court would apply
its own choice of law rules to decide whether the contractual choice made by the parties can
be upheld. This will imply that a court might have to apply a law with which it has no famili-
arity. Therefore, in international bond issuances, this uncertainty has been resolved by the
sovereign borrowers submission to a perceived fair, neutral, and expert forum in the jurisdic-
tion of the selected governing law which in most cases results in the application of either
English or New York state law.6
10.06 It is also arguable that a creditor would prefer to sue in a jurisdiction where it can executeif
it succeedsa favourable judgment. However, the fact that the sovereign has assets in any
given jurisdiction does not imply that those assets will remain there until a judgment is ren-
dered or even an interim measure is granted. This evaluation should be performed together
with deciding where is the most favourable jurisdiction to sue, to consider whether there
would be assets to execute and to collect on the judgment.
10.07 Having briefly considered the threats or risks that suing a state in its own forum entails and
upon analysing the convenience of suing in the forum of the governing law, it can be said that

424(b)(3) on 15 April 2003 and 9 May 2003), pp 7374 and Prospectus, dated 27 December 2004, of the
Republic of Argentina exchange offer to exchange eligible securities for Par Bonds due 2038, Discount Bonds
due December 2033, Quasi-Par Bonds due December 2045, and GDP-linked Securities that expire in
December 2035; and the Prospectus dated 27 December 2004, pp 204205. For example: (1) the grace period
for breach of other obligations is 60 days in the case of Uruguay and 90 in the case of Argentina; and (2) the
agreed amount in the monetary judgment is $60 million in the case of Uruguay and $90 million in the case of
Argentina.
3
For example, upon the Argentine crisis of 2001 the Congress passed law 25,561 declaring a public emergency
of Argentina, particularly in the social, economic, administrative, financial, and currency exchange areas.
4 Even in some cases where the sovereign immunity has been waived by the debtor, that immunity is limited

within its own territory. For example in the Prospectus of the Repblica Oriental del Uruguay to issue debt
securities and/or warrants to purchase debt securities up to $3,000,000,000 (reflecting additional filings made
with the SEC pursuant to Rule 424(b)(3) on 15 April 2003 and 9 May 2003), on p 87, the sovereign immunity
clause reads as follows: Uruguay will waive that immunity in respect of any claims or actions regarding its
obligations under the securities, except that Uruguay will not waive immunity from attachment prior to judg-
ment and attachment in aid of execution under Uruguayan law.
5 Phillip R Wood, Project Finance, Subordinated Debt and State Loans, Sweet & Maxwell 1995, p 99.
6 As will be analysed below, the applicable law is relevant when a sovereign is under distress because the

alternatives of the debtor would be different depending on the applicable law.

390
 I. Litigation

it is highly probable that the creditor would prefer to sue the sovereign debtor either in New
York or England. These two jurisdictions will provide the certainty and predictability that a
creditor requires. In addition, they provide a certain level of insulation to avoid the interference
of other legal systems, conceptual sophistication, and the fact that both are English-speaking
jurisdictions, English being the language of the international financial markets. Therefore,
most sovereign debt issuances are subject either to New York state law or English law.
After having preliminarily decided where to sue, the creditor is faced with another dilemma. 10.08
Is the debtor entitled to sovereign immunity or state immunity, as referred under New York
and English law, respectively? Both, under New York law and English law7 there are certain
situations in which the sovereign is entitled to sovereign/state immunity from jurisdiction or
adjudication as well as from attachment and execution.8
In addition to proving the effectiveness of a waiver of immunity or an immunity exception 10.09
from jurisdiction, a bondholder has to demonstrate that the court has personal jurisdiction
over the sovereign as well as subject matter jurisdiction over the suit to be able to sue a
sovereign.
Once a creditor has decided where to sue and after going through the issues of: (1) having to 10.10
determine if the foreign state has sovereign immunity; and (2) establishing whether the court
has personal jurisdiction over the foreign state and subject matter jurisdiction over the case,
the intervening court may not be in a position to adjudicate the merits of the claim against a
sovereign based on the fact that the foreign sovereigns act is subject to the application of the
act of state and comity doctrines.
A common practice in sovereign debt financing is the submission to jurisdiction, ie that the 10.11
sovereign has: (a) submitted to the court; (b) appointed a process agent; and (c) expressly
waived immunity from suit. Even, if this is not the case, obtaining a favourable judgment to
collect on defaulted debt instruments issued by a sovereign under New York and English law
is relatively straightforward. Since issuing a bond is a commercial activity, the sovereign
issuer submits himself to the jurisdiction as a private party subject to the courts of law.
If there were any doubts in this respect, in 1992 the US Supreme Court had to resolve a case 10.12
involving the rescheduling of sovereign bonds, which became a landmark in sovereign
immunity. In Republic of Argentina v Weltover, Inc,9 bondholders brought a breach of con-
tract action against Argentina and its central bank pleading that the issuance of bonds and
Argentinas unilateral extension of its payment date fell within the Foreign State Immunity
Act 197610 (FSIA) immunity exception because it is a commercial activity of the foreign
state that has a direct effect in the United States. The Supreme Court held that: (1) [w]hen
a foreign government acts, not as a regulator of a market, but in the manner of a private
player within it, the foreign sovereigns actions are commercial within the meaning of the

7
Focus is given to US and English law, this notwithstanding it is worth noting that other countries have
enacted acts de-immunizing state immunity (eg the Singaporean State Immunity Act 1979; the Pakistani State
Immunities Ordinance 1981; the South African Foreign States Immunity Act 1981; the Canadian State
Immunity Act 1982; or the Australian Immunities Act 1982).
8 For general background on the topic, its history, and evolution see Gamal Moursi Badr, State Immunity:

An Analytical and Prognostic View, Martinus Nijhoff Publishers, The Hague, 1984; or, Charles J Lewis, State
and Diplomatic Immunity, 2nd edn, Lloyds of London Press Ltd, London, 1985.
9 Republic of Argentina v Weltover, Inc, 504 US 607, 112 S Ct 2160, USNY, 1992.
10 Title 28, 1330, 1332, 1391(f ), 1441(d), and 16021611 of the United States Code.

391
 Litigation Aspects of Sovereign Debt

Foreign Sovereign Immunities Act;11 and (2) a unilateral rescheduling of the bond payments
has a direct effect in the United States, which was designated as the place of performance for
Argentinas ultimate contractual obligations even though the bondholders were foreign cor-
porations.12 As noted by Lee, the decision in the Weltover case removed any lingering doubts
as to whether the issuing of debt instruments by a government constitutes a commercial
activity under the FSIA.13
10.13 Therefore, New York and English courts normally have personal and subject matter jurisdic-
tion. In addition, issuing a bond is neither protected by sovereign immunity nor an act of
state. State immunity will bar the court from hearing the case and passing judgment. Act of
state will bar the court from re-opening to questioning an act of a foreign stateit assumes
the lawfulness of the act. In any of these two situationswhether the sovereign has submit-
ted to jurisdiction or notthe creditor would be able to bring a suit and, if it is successful,
he will be entitled to a court judgment for the payment of money. Upon obtaining a favour-
able judgment, the creditor would have different alternatives to enforce the money judg-
ment. However, the basic enforcement device is property execution. Here is where creditors
are faced with two alternatives: (1) execute property within the debtors territory by means
of recognition of a foreign court decision; or (2) try to execute property abroad. These two
alternatives have pros and cons.
10.14 Executing property in the sovereign state faces the creditor with the issue that it would be
highly probable that due to public ordre, the judgment would not be enforced or if enforced
it would be payable with other debt instruments with very unattractive financial terms (long-
term maturity and trading in a secondary market at steep discount). The pros are that there
would be assets to enforce the money judgment forcing the sovereign to settle or be con-
demned to pay in specie (with bonds). The cons, that the execution process would be com-
pletely uncertain.
10.15 On the other hand, if the creditor tries to execute the money judgment abroad, for example
in New York or England, the pros are that the whole process is clearly determined and even
an outcome can be easily predicted because there have been many cases where sovereigns
have been sued as a result of their default (in opposition to suing in the sovereigns own courts
where the process will be characterized by its uncertainty).14 However, the cons are that it
would be very difficult to find assets to enforce the money judgment. The basic enforcement
device is execution of property. The key element is to be able to attach property to execute.
For example, in the recent default crisis, the Argentine government was doing everything
that was within its reach to avoid the attachment of assets abroad, even before the default

11
In this regard, the Supreme Court added that under 1603(d), it is irrelevant why Argentina participated
in the bond market in the manner of a private actor . . . [i]t matters only that it did so.
12
In Verlinden BV v Central Bank of Nigeria (461 US, at 489, 103 S Ct 1969), the US Supreme Court
expressly stated that the FSIA permits a foreign plaintiff to sue a foreign sovereign in the courts of the United
States, provided the substantive requirements of the Act are satisfied.
13
Paul L Lee, Central Banks and Sovereign Immunity, 41 Columbia Journal of Transnational Law 327.
14 See eg Pravin Bankers Associates Ltd v Banco Popular del Per 165 BR 379, SDNY (1994); 895 F Supp 660,

SDNY (1995); 912 F Supp 77, SDNY (1996); 109 F 3d 850 (1997); 9 F Supp 2d 300, SDNY (1998); Elliott
Associates LP v Banco de la Nacin y Repblica del Per, 948 F Supp 1203, SDNY (1996); 961 F Supp 83, SDNY
(1997); 12 F Supp 2d 328, SDNY (1998); 194 F 3d 363, 2nd Cir (NY) (1999); 194 FDR 116, 54 Fed R Evid
Serv 1023, SDNY (2000); Lightwater Corp Ltd v Repblica Argentina, 2003 WL 21146665, SDNY (2003); EM
Ltd v Repblica Argentina, 2003 WL 22120745, SDNY (2003); LNC Investments, Inc v The Republic of
Nicaragua, No 96 Civ 6360, SDNY (2 Apr 1999).

392
 I. Litigation

(eg Central Bank reserves that were deposited in New York banks were withdrawn; funds of
the Banco Nacinthe national bankthat were in their New York branch were repatri-
ated; salaries of government employees abroad were paid into deposit accounts in Argentina
or the money was sent via the so-called diplomatic pouch, which enjoys immunity; the presi-
dential airplane avoided landing in countries where bondholders had asked for garnish-
ments, such as Germany; and the frigate Libertad, also avoided certain ports).15
Sovereign states usually do not have many assets located abroad and if they do, not all of 10.16
them are capable of being attached because some of them enjoy statutory immunity16 from
the processes of execution (injunctive relief and execution). The US restricted sovereign
immunity through its FSIA and the UK through its State Immunity Act 1978 (SIA).17
As noted by Schreuer, a distinction should be made between property intended for com- 10.17
mercial purposes and that designated for sovereign or official functions.18 However, to make
a distinction on the functionality of the property is not new since it had already been carried
out in 1891 by the Institut de Droit International.19 The distinction between sovereign or
official property and commercial property does not always provide a clear answer and it is
here where a deeper analysis is required.
Hence, it is relevant to analyse which are the assets that a sovereign state usually has or might 10.18
have abroad and if those assets can be attached as a means to levy the execution of a money
judgment. For example, as noted by Lee, the accounts of a foreign central bank in the US will
be a natural target for creditors holding dollar claims against a foreign government.20
If prior to the judgment the debtor transfers all its property from the jurisdiction the judg- 10.19
ment execution will not be able to be levied, deceiving the creditor.21 Thus, New York law22
provides for an order of attachment with notice23 or without notice24 to be granted before a
New York judgment against property of the debtor when: (1) the defendant is a non-
domiciliary residing outside the state, or is a foreign corporation not qualified to do business
in the state; (2) the defendant resides or is domiciled in the state and cannot be personally

15 See Alejandro Rebossio, El Gobierno se Protege de los Embargos, La Nacin, 5 February 2004.
16 Due to the increase of commercial affairs between countries, a distinction between acts of government
(acta jure imperii) and acts of a commercial matter (acta jure gestionis) was developed and the principle became
restrictive. The sovereign immunity principle not only applies to the state itself but also to the sovereign of the
state in his public capacity, to the government of the state, and any department of its government. The immu-
nity protects a foreign state not only in direct proceedings against it in personam but also in indirect proceedings
against property which is in its possession or control or in which it claims an interest. For an enlargement on the
topic see Chapter 1.
17 Also, there is a European Convention on State Immunity 1972 (Cmnd 7742).
18
Christoph H Schreuer, State Immunity: Some Recent Developments, Cambridge, Grotious Publications
Ltd, 1998, p 145.
19
See Article 2 of the Projet de Rglement International Sur la Comptence des Tribunaux dans les Procs Contre
les Etats, Souverains ou Chefs dEtat trangers adopted by the Institut de Droit International, 1891.
20 Paul L Lee, Central Banks and Sovereign Immunity, 41 Columbia Journal of Transnational Law 327,

394.
21
See Reade H Ryan Jr, Mitigation of Loss: Remedies in the Event of Debtor Non-Performance in Michael
Gruson and Ralph Reisner (eds), Sovereign Lending: Managing Legal Risk, Euromoney Publications, 1984,
p 178.
22 6201 of the New York Civil Practice Law & Rules.
23 6210 of the New York Civil Practice Law & Rules.
24 According to 6211(b) of the New York Civil Practice Law & Rules, if the order of attachment is granted

without notice to the debtor, it requires a subsequent motion by the plaintiff for the court to confirm the order
on notice to the debtor for a period not exceeding five days after the levy of attachment.

393
 Litigation Aspects of Sovereign Debt

served despite diligent efforts to do so; (3) the defendant, with intent to defraud his creditors
or frustrate the enforcement of a judgment that might be rendered in the plaintiffs favour,
has assigned, disposed of, encumbered, or secreted property, or removed it from the state or
is about to do any of these acts; or (4) the cause of action is based on a judgment, decree, or
order of a court of the United States or of any other court which is entitled to full faith and
credit, or on a judgment which qualifies for recognition under the Uniform Foreign Money-
Judgments Recognition Act.25
10.20 Figure 10.1 below summarizes the main issues related to the litigation aspects of
sovereign debt.

Successful

Sue the Obtaining

sovereign jurisdiction
- Immunity from YES
Where? suit? Enforcing the
When? - Personal and judgment
How? subject matter
Creditor facing jurisdiction?
- Act of state?
a distressed Unsuccessful
sovereign
NO
Restructure
(exchange
offer/debt
swap)

Figure 10.1 Main Issues related to Litigation Aspects of Sovereign Debt

10.21 Although it is fairly straightforward to obtain a favourable judgment, enforcing it is a com-

pletely different story. Although the litigators imagination has no boundaries, a sovereign
usually does not have many attachable assets abroad. Even those few assets that are located
abroad, ie diplomatic missions, central bank reserves, payments to and from international
financial institutions (eg IMF), military assets, etc, usually enjoy a certain level of immunity.
Therefore, unless there are certain exceptional circumstances, a bondholder of a sovereign
state should be better off participating in a restructuring arrangement where it can have
certain leverage as a group.
10.22 Before analysing the transactional aspects of sovereign debt restructuring, some key litiga-
tion cases will be analysed since important conclusions can be drawn from these cases. The
cases chosen for the analysis highlight the impact that litigation can have in the outcome of
a whole restructuring. One of the cases, based on the breach of a pari passu clause included
in one of the debt instruments, could have led to the default of the newly issued debt instru-
ments resulting from an exchange offer. In the other, a creditor managed to temporarily
block the settlement of an exchange offer which could have had serious implications for the
debtor and all those creditors that accepted the exchange offer.

25 The Uniform Foreign Money-Judgments Recognition Act 1962 has been codified in New York Civil

Practice Law, article 53.

394
 I. Litigation

First, Elliott Associates LP(Elliot) v Republic of Peru and Banco de la Nacin del Peru cases,26 10.23
which was trialled in New York and Belgium (among other jurisdictions). This is a leading
case because a Belgian court addressed the scope of the pari passu clause and because by
means of this case Peru was forced to enter into a settlement agreement with Elliot. Also, the
LNC Investments v Nicaragua case27 will be analysed since these cases are the second part of
the pari passu saga, jointly with other relevant cases that were handled by New York and
English courts. Finally, a relatively recent enactment of law 4765 (C-2004/03482) in
Belgium seeking to protect payments through Euroclear is also considered.
Second, is the analysis of the EM Ltd v Argentina (restraining notice) and NML Ltd v 10.24
Argentina (attachment) cases.28 These cases are relevant since they represent another threat to
a sovereign to reach an agreement with its bondholders.

B. Some Preliminary Distinctions: In Using a

Fiscal Agent and a Trust Structure
When issuing debt, the sovereign has to choose between using either a fiscal agent or a trust 10.25
structure. A brief comment on the use of trust deeds and fiscal agreements is required since
they represent an important issue in sovereign debt issues structuring, particularly in the case
of potential litigation.
Under a fiscal agent agreement, a fiscal agent is appointed to handle the fiscal29 matters of 10.26
the issuer (eg redeeming bonds and coupons at maturity). Under a trust structure (indenture
or deed, depending if it is under New York or English law), a trustee is appointed as a fiduci-
ary managing the matters related to the issuance to ensure that the issuer meets all the terms
and conditions of the issuance. The main difference between these two structures used in
bond issuances is that the fiscal agent acts as a representative and agent of the issuer while the

26 948 F Supp 1203, SDNY (13 December 1996); 961 F Supp 83, SDNY (28 April 1997); 12 F Supp 2d

328, SDNY (6 August 1998); 194 F 3d 363, 2nd Cir (NY) (30 October 1999); 194 FDR 116, 54 Fed R Evid
Serv 1023, SDNY (1 June 2000). Also see Elliott Assocs LP, General Docket No 2000/QR/92, Court of Appeals
of Brussels, 8th Chamber, 26 September 2000 (not reported, on file with the author).
27 LNC Investments, Inc v The Republic of Nicaragua, No 96 Civ 6360, 2000 US Dist LEXIS 7738, at 1

(SDNY, 6 June 2000), unilateral order granted by the Vice-President of the Commercial Tribunal of Brussels
(Tribunal de commerce de Bruxelles) (RR 101/03) dated 25 July 2003 in Re La Republique du Nicaragua v LNC
Investments LLC et Euroclear Bank SA (not reported, on file with the author); Republique Du Nicaragua v LNC
Invs. LLC et Euroclear Bank, No RK 240/03 (Tribunal de Commerce de Bruxelles) 2003 (Belg) (not reported,
on file with author); and Republique du Nicaragua v LNC Invs LLC, No 2003/KR/334, at 2 (Cour DAppeal de
Bruselas, Neuvieme Chambre (Ct App Brussels, 9th Chamber) 2004) (on file with author).
28 The analysis provided is based on (1) EM Ltd et al v The Republic of Argentina, summary order, 13 May

2005, United States Court of Appeals for the Second Circuit, New York; (2) Amicus Curiae brief by the Clearing
House Association on behalf of Argentina in connection with the EM Ltd case; (3) Amicus Curiae brief by the
Clearing House Association on behalf of Argentina in connection with the NML Ltd case; (4) Amicus Curiae
brief by the Pension Fund Union (Asociacin de Fondos de Jubilaciones y Pensiones) on behalf of Argentina; (5)
Amicus Curiae brief by Fintech Advisory Inc on behalf of Argentina in connection with the EM Ltd case; (6)
Amicus Curiae brief by the Emerging Markets Creditor Association (EMCA) in connection with the NML Ltd
case; (7) Appellants Brief and Appendix due on 6 April 2005; Appellees Brief in Opposition due on 13 April
2005; Reply Brief due on 20 April 2005; (8) NML Capital, Ltd, et al v Republic of Argentina unreported opinion
dated 31 March 2005; (9) NML Capital, Ltd, et al v Republic of Argentina, hearing transcript, 29 March 2005,
United States District Court for the Southern District of New York; and (10) NML Capital, Ltd v Republic of
Argentina, ex parte motion, 21 March 2005, United States District Court for the Southern District of New York
and the Memorandums of Law filed.
29
Fiscal is used in a monetary sense as involving financial matters rather than taxes only.

395
 Litigation Aspects of Sovereign Debt

trustee is a fiduciary representing the bondholders. The fiscal agent structure has been the
prevailing practice in international bond issuances, recent bond issuances have shifted to the
use of trust structures (eg Argentina on its bonds subject to English and New York law,
Belize, Dominica, Ecuador, Grenada, and Uruguay).30
10.27 The distinction between the fiscal agent and the trustee is not a minor issue. The difference
is that payments made through a trustee cannot be attached because as soon as the funds are
deposited in the trustees account they are no longer the sovereigns funds, on the contrary,
they are held by the trustee acting on behalf of the bondholders. The case of the fiscal agent
is different since the funds held on a fiscal agent account are funds of the sovereign until those
funds are deposited in each creditors account.
10.28 However, until the funds have been deposited in the trust account they are in transit and
subject to attachments (they still are funds of the sovereign). This is the reason why the place
of payment is relevant and indistinctly if they are going to be deposited in the fiscal agent or
the trustees account. There are two possible scenarios, ie that the fiscal agent or the trustee
has an account outside or inside the sovereigns jurisdiction. If the account is held outside the
sovereigns jurisdiction, the funds can be threatened by an attachment. The second scenario,
ie accounts held within the sovereigns jurisdiction requires a twofold analysis: the case of
the fiscal agent and the case of the trustee. In the case of the fiscal agent with an account
within the jurisdiction of the sovereign, the situation would be the same as in the case of an
account outside the jurisdiction because the fiscal agent will have to repatriate the funds to
arrange the payments to the sovereigns creditors. The case of the trustee is different because
funds can be safely deposited in the trustees account within the sovereigns jurisdiction and
then be transferred abroad. Once the funds have safely reached the trustees account, the
ownership over those funds is transferred to the creditors via the fiduciary duty of the
trustee.
10.29 Finally, it is worth mentioning that the safety of the governmental funds within its own
jurisdiction is so because it will arbitrate the required mechanisms to shield or insulate said
funds from potential attachments. It could be either by passing or enacting emergency laws,
decrees, or resorting to the legislative branch and bending its arm in favour of the stability
and wellbeing of the countrys economy; overruling the rule of law (if necessary).

C. The Elliott Case and Other Relevant Legal Precedents

1. Pravin Banker Associates v Banco Popular del Peru
10.30 As an introduction to the Elliott cases, the Pravin Banker Associates v Banco Popular del Peru
cases31 should also be considered.
10.31 Pravin Banker Associates (Pravin) invested in debt issued by Banco Popular del Peru
(Banco Popular).32 Banco Populars main shareholder, Republic of Peru (Peru), collateralized

30
See Lee C Buchheit, Supermajority Control Wins Out, International Financial Law Review, April 2007.
31 165 BR 379, SDNY (24 February 1994); 1995 WL 102840, SDNY (8 March 1995); 895 F Supp 660,
SDNY (24 August 1995); 912 F Supp 77, SDNY (19 January 1996); 1996 WL 734887, SDNY (24 December
1996); 109 F 3d 850, 65 USLW 2640, 2nd Cir (NY) (25 March 1997); and 9 F Supp 2d 300, SDNY (15 June
1998).
32 See Pravin Banker Assocs v Banco Popular del Peru, 109 F 3d 850 at 852, 2nd Cir (1997).

396
 I. Litigation

the debt.33 Due to Peru's financial crisis, Banco Popular defaulted on its principal payments
on the debt.34 Pravin, after sending a notice to the defaulted debtor, claimed payment for the
total outstanding debt.35 Peru appointed a liquidation committee to restructure Banco
Populars debt.36 Pravin refused to participate in Perus liquidation process, and filed a claim
for the payment of its debt (at a nominal value) against Banco Popular and Peru.37
During the trial, Peru stated that Pravin had bought Peruvian debt with a substantial dis- 10.32
count over its par value, and that a total recovery of the debt could not be considered by any
party. A total recovery would have meant an illegal enrichment and would have allowed
Pravin to obtain an unexpected gain due to Peru's disgrace. In Pravin Banker Associates v
Banco Popular del Peru, the New York Court of Appeals balanced two principles to determine
if international comity should be extended: the success of public debt restructuring, includ-
ing the IMFs involvement under the Brady Plan, and the payment of valid debts under
contract law principles.38
After having granted two waiting periods (six months and two months, respectively), the Court 10.33
of Appeals held that Pravin was not obligated to abide by the Brady Plan since the participation
of creditors in such restructuring processes was strictly voluntarily.39 In addition, the Court
considered that an undefined suspension of the proceedings would affect US interests (the
respect of the terms and conditions of valid contracts executed under US law).40

2. Elliott Associates LP v Banco de la Nacin

After the Pravin case, Peru found itself in court again in Elliott Associates LP (Elliott) v Republic 10.34
of Peru and Banco de la Nacin del Peru. Elliott was a vulture fund that in 1996 had purchased
defaulted bonds in the secondary market with a steep discount. Elliott acquired $20.7 million
par value bonds for which it paid $11.4 million.41
The District Court ruled in favour of Peru.42 However, the Court of Appeals reversed this 10.35
decision and argued that the purchase of Perus distressed sovereign debt with the intention
to bring suit was not in violation of section 489 of New York Judiciary Law.43 Section 489
prohibits the purchase of a claim with the intent and for the purpose of bringing an action
or proceeding thereon.44 The Court of Appeals held that the investor did not violate the law
since the debt instrument was acquired for the primary purpose of enforcing it, with the
intent to resort to litigation only if necessary to accomplish the enforcement.45 The decision
to file a claim was the consequence of not performing the payment.46

33 Ibid.
34
Ibid.
35
Ibid, at 853.
36
Ibid, at 853.
37
Ibid, at 853.
38 Ibid, at 855.
39
Ibid, at 855. Also see International Debt Management Act of 1988, 22 USC 5331(b)(4).
40
See supra n 38.
41 Ministry of Economy and Finance of Peru, Final Report on the Elliott case, September 2000 (on file with

the author).
42 12 F Supp 2d 328, SDNY (6 August 1998).
43 See 194 F 3d 363 at 372, 2nd Cir (1999).
44 NY [Jud] 489 (Consol 1983).
45 See supra n 43.
46 194 F 3d 363 at 379, 2nd Cir (1999).

397
 Litigation Aspects of Sovereign Debt

10.36 As in the Pravin case, the Court of Appeals balanced two aspects: (1) granting the possibility
to US citizen bondholders to claim the payment of their credit, which limited the chances of
achieving debt restructuring under the IMFs umbrella; and (2) not allowing the claim
because it would affect New York as a financial world centre.47 Both issues were important
for US foreign affairs policy.48 The Court of Appeals believed that the protection of investors
was a priority.
10.37 The peculiarity of this case, although similar to the Pravin case, was the lack of assets to attach
in the US which forced the claimant to resort to the courts of Belgium, Canada, England,
Germany, Luxembourg, and the Netherlands to seek enforcement of the decision.49 However,
it is worth noticing that prior to following the international path, attachment orders were
obtained in different US states (Florida, Maryland, New York, and Washington DC) which
interfered with the payments to be performed by the fiscal agent. Therefore, Peru arranged
the creation of a trust to make twice a year the payment of the interest due on the Brady
Bonds on its behalf.50
10.38 Elliotts attempt to enforce the judgment in Belgium was reversed on first instance. However, on
26 September 2000, Elliott obtained a restraining order from a Brussels Court of Appeals51 pro-
hibiting Chase Manhattan (financial agent) and Euroclear (clearing house) to pay interest on
Perus Brady Plan bonds (approximately $80 million that were due on 6 October 2000).52 The
Court of Appeals resolution stated that [i]t . . . appears from the basic agreement that governs the
repayment of the foreign debt of Peru that the various creditors benefit from a pari passu clause
that in effect provides that the debt must be repaid pro rata among all creditors.53
10.39 The Brady bonds were issued as the result of a sovereign debt restructuring in which Elliott
decided not to take part. With the judicial order of not making any payment, Peru was facing
the possibility of defaulting again, on the recently restructured bonds totalling $3837 mil-
lion.54 Although Peru did not make the payment of interest on the due date, it technically
had a 30-day period to fulfil the payment before entering into default. As noted by Lpez-
Sandoval, Elliotts strategy was twofold: (1) trying to attach the funds at the level of the fiscal
agent; and (2) capturing funds at the level of the clearing houses.55

47 John Nolan, Special Policy Report 3: Emerging Market Debt & Vulture Hedge Funds: Free-Ridership, Legal

& Market Remedies, Financial Policy Forum, at <http://www.financialpolicy.org/DSCNolan.htm>.

48
See Samuel E Goldman, Comment, Mavericks in the Market: The Emerging Problem of Hold-Outs in
Sovereign Debt Restructurings (2000) 5 UCLA Journal of International Law & Foreign Affairs 159, 196.
49 See Eduardo Luis Lpez Sandoval, Sovereign Debt Restructuring: Should We Be Worried About Elliott?,

Harvard Law School, Seminar on International Financial Law, May 2002, p 12.
50
See Ministry of Economy and Finance of Peru, Final Report on the Settlement Agreement with Elliott
Associates LP, September 2000 (on file with the author). In relation to the trust structure, see Resolution No
140-2000-EF/75 of the Ministry of Economy and Finance of Peru.
51 Elliott Associates, LP, General Docket No 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber, 26

September 2000) (not reported, on file with the author).

52
Ibid. These payments were going to be made by the Fiscal Agent (Chase Manhattan Bank) through
Depositary Trust Company (DTC) in New York, Euroclear in Brussels, and Clearstream in Luxembourg.
53
Ibid.
54 See Ministry of Economy and Finance of Peru, Final Report on the Settlement Agreement with Elliott

Associates LP, September 2000 (on file with the author).

55 Eduardo Luis Lpez Sandoval, Sovereign Debt Restructuring: Should We Be Worried About Elliott?,

Harvard Law School International Finance Seminar, May 2002, p 13, available at <http://www.law.harvard.
edu/programs/about/pifs/llm/sp44.pdf>.

398
 I. Litigation

Facing this situation, Peru desisted in implementing the trust structure because not only 10.40
payments through DTC were curtailed as a result of the attachment orders in different states
in the US but also through Euroclear. The only window that was left openalthough tem-
porarilywas to perform the payments through Clearstream. Performing the interest pay-
ments through Clearstream would have implied that only those bondholders holding an
account with Clearstream would be paid or that bondholders not holding an account with
Clearstream should open an account there (which implied a delay and an additional cost to
Peru).56 In addition, it was only a matter of time before Elliott would obtain a restraining
order in Luxembourg, where the main offices of Clearstream are located.
This scenario forced Peru to reach an agreement with Elliott in order to avoid a new default 10.41
on its recently restructured debt under the auspices of the Brady Plan. On 28 September
2000, Peru enacted an Urgent Decree No 083-2000 and Resolution No 143-2000-EF of
the Ministry of Economy and Finance of Peru to negotiate and settle Elliotts claim. These
norms were complemented by Urgent Decree No 084-2000 that authorized a loan granted
by the National Bank to the Ministry of Economy and Finance to procure the required funds
to settle Elliotts claim.
The total debt calculated as of 30 September 2000 totalled $57.47 million. To this sum, $9 10.42
million should be added to cover legal expenses. The final settlement agreement implied a
payment for all concepts in the total amount of $58.45 million. The settlement agreement
was executed on 29 September 2000 and ratified by Supreme Decree No 106-2000-EF.
General releases were executed together with the settlement. Finally, Peru was able to pay the
due interest in time to avoid incurring a new default. By means of this agreement, Elliott
obtained a gain worth 400 per cent of the purchase value of the defaulted bonds.57
The decision of the Belgian Court of Appeals was grounded on the violation of equal treat- 10.43
ment of creditors under the pari passu clause. The pari passu clause, as noted by Buchheit is
short, obscure and sports a bit of Latin; all characteristics that lawyers find endearing.58 An
analysis on the scope, interpretation, and judicial reception of this clause follows.

3. The pari passu clause in sovereign debt instruments

As a result of the ruling in the Elliott case by a Belgian court various creditors in different 10.44
jurisdictions (Belgium, California, England, and New York) have argued that as a result of
the pari passu clause sovereigns should be prevented from making payments to other credi-
tors without paying the litigating creditors on a pro-rata basis.59
Pari passu literally means with equal step, from the Latin pari, ablative of par, equal and 10.45
passu, ablative of passus, step. That is to say, that pari passu refers to things that are in step,
things that rank equally. In 1900 Palmer expressed that [t]here is no special virtue in the
words pari passu, equally would have the same effect, or any other words showing that

56 See Ministry of Economy and Finance of Peru, Final Report on the Settlement Agreement with Elliott

Associates LP, September 2000, p 3 (on file with the author).

57 See John Nolan, Special Policy Report 3: Emerging Market Debt & Vulture Hedge Funds: Free-Ridership,

Legal & Market Remedies, Financial Policy Forum, at <http://www.financialpolicy.org/DSCNolan.htm>.

58 Lee Buchheit, How To Negotiate Eurocurrency Loan Agreements, IFLR, 2nd edn, pp 8283.
59 Financial Market Law Committee, Pari Passu Clauses, Issue 79, March 2005, p 3, available at <http://

www.fmlc.org>.

399
 Litigation Aspects of Sovereign Debt

the [bonds] were intended to stand on the same level footing without preference or priority
among themselves.60
10.46 A pari passu clause is a standard clause included in public or private international unsecured
debt obligations (syndicated loan agreements and bond issuances). Buchheit and Pam traced
the origins of this clause and discovered that it was used in unsecured cross-border debt
instruments in the early 1970s.61 In the case of bond issuances, it reads, for example, as fol-
lows (emphasis added):
The Securities are general, direct, unconditional, unsubordinated and unsecured obligations
of [Country XYZ] for the payment and performance of which the full faith and credit of
[Country XYZ] has been pledged and [Country XYZ] shall ensure that its obligations hereun-
der shall rank pari passu among themselves and with all of its other present and future unse-
cured and unsubordinated Public Debt.62
10.47 From a close reading of the clause, it can be argued that it has two limbs: (1) an internal limb,
ie that the bonds will rank pari passu with each other; and (2) an external limb, ie that the bonds
will rank pari passu with other unsecured (present or future) indebtedness of the issuer.
10.48 However, not all pari passu clauses are drafted in the same way. They vary according to the
drafter, denoting diversity in the language of the clause which might derive in different inter-
pretations. Therefore, a pari passu clause can also read as follows (emphasis added):
The Notes and Coupons of all Series constitute direct, unconditional, unsecured and unsub-
ordinated obligations of [Country XYZ] and shall at all times rank pari passu and without any
preference among themselves. . . The payment obligations of the [Country XYZ] under the Notes
and the Coupons shall at all times rank at least equally with all its other present and future unse-
cured and unsubordinated External Indebtedness.63,64
10.49 This second type of pari passu clause complicates things since it opens two possible interpreta-
tions. These possible interpretations are: (1) the narrow or ranking interpretation, where obli-
gations of the debtor rank and will rank pari passu with all other unsecured debt obligations;
and (2) the broad or payment interpretation, that when the debtor is unable to pay all its
obligations, they will be paid on a pro-rata basis. Wood is of the opinion that the key word is
rank and that rank means rank, not will pay or will give equal treatment.65
10.50 According to Buchheit and Pam, the broad or payment interpretation has four practical impli-
cations: (1) it may provide a legal basis for a creditor to seek specific performance of the cove-
nant (ie a court order directing the debtor not to pay other debts of equal rank without making
a rateable payment under the debt benefiting from the clause); (2) it may provide a legal basis
for a judicial order directed to a third party creditor instructing that creditor not to accept a

60
Francis B Palmer, Company Precedents, 8th edn, 1900, pp 109110.
61
See Lee Buchheit and Jeremiah Pam, The Pari Passu Clause in Sovereign Debt Instruments (2004) 53
Emory Law Journal 902.
62
Offering Memorandum of the Government of Belize dated 18 December 2006, for the exchange of US
Dollar Bonds due 2029, p 142.
63 Clause included in the Information Memorandum of the Republic of Argentina of a Medium Term Note

Programme of $15,000,000,000 dated 31 October 2000.

64 According to Wood, the statement that bonds are the direct, unconditional, and other calefactive adjec-

tives does not add anything and could safely be omitted (see Philip Wood, Pari Passu ClausesWhat Do They
Mean? (2003) 18(10) Butterworths Journal of International Banking and Financial Law 373 (November
2003).
65 Ibid, at 372.

400
 I. Litigation

payment from the debtor unless the pari passu-protected lender receives a rateable payment; (3)
it may provide a legal basis for a court order directing a third party financial intermediary such
as a fiscal agent or a bond clearing system to freeze any non-rateable payment received from the
debtor and to turn over to the pari passu-protected creditor its rateable share of the funds; and
(4) it may make a third party creditor that has knowingly received and accepted a non-rateable
payment answerable to the pari passu-protected creditor for a rateable share of the funds.66
In this regard, the Elliott case67 works as a benchmark that sets an ex ante and ex post scenario 10.51
in relation to the interpretation of the pari passu clause. The ex ante situation was that the
only possible interpretation of the clause was the narrow or ranking interpretation and that
it was included to avoid the creation of preferences either by the sovereign (paying one or
some creditors in detriment to others) or by creditors. This is the reason why commercial
banks in the early 1970s started using the clause in unsecured debt instruments.68 Particularly,
two countries gave origin to the inclusion of the pari passu clauses in unsecured debt instru-
ments, namely Spain and the Philippines.
Articles 913(4) and 1924(3)(a) of the Spanish Commercial and Civil Code, respectively, 10.52
refer to the preference of creditors whose credit is instrumented by means of a public deed
(notarized by a Notary Public).69 This type of credit had a preference over thosealthough
of the same typenot instrumented in a public deed.70 The Philippinesstrongly influ-
enced by the Spanish Civil Codehave a norm similar to the one of Spain. Article 2244(14)
of the Philippines Civil Code grants priority to those credits that appear in a public instru-
ment or a final judgment.71 These two countries are the main reason for the emergence and
broad spread of the pari passu clause in sovereign bonds.72
After the decision of the Belgian court in the Elliott case, other cases followed. Creditors were 10.53
willing to benefit from the broad or payment interpretation. The analysis of these cases
follows.

66 Lee Buchheit and Jeremiah Pam, The Pari Passu Clause in Sovereign Debt Instruments, 53 Emory Law

Journal 869, 880.

67 See Elliott Associates, LP, General Docket No 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber,

26 September 2000) (not reported, on file with the author).

68
See Lee Buchheit and Jeremiah Pam, The Pari Passu Clause in Sovereign Debt Instruments, 53 Emory
Law Journal 903.
69
The Spanish Insolvency Law 22/2003 of 9 July 2003 amended s 1924 of the Spanish Civil Code. Although
under s 91of the new insolvency law a whole new ranking of preferences not including credits instrumented
through public deeds is included, subsection (3)(a) of s 1924 of the Spanish Civil Code has not been amended.
Therefore, in the event of sovereign issuancesnot subject to insolvency lawsthe unamended s 1924(3)(a) of
the Civil Code still applies.
70
See Philip Wood, International Loans, Bonds and Securities Regulation: Law and Practice of International
Finance, Sweet & Maxwell, 1995, p 41.
71
Section 2244(14) of the Philippines Civil Code (Republic Act No 386) reads as follows: Credits which,
without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among themselves in the order of priority of the dates
of the instruments and of the judgments, respectively (the full text of the Philippines Civil Code is available at
<http://www.chanrobles.com/civilcodeofthephilippinesbook4.htm>).
72
Buchheit and Pam also consider Argentina as a country that forced the inclusion of the pari passu clause
since in 1972 it re-enacted a practice dating back to 1862 where foreign creditors where subordinated to local
creditors in the bankruptcy of an Argentine debtor (see Lee Buchheit and Jeremiah Pam, The Pari Passu Clause
in Sovereign Debt Instruments, 53 Emory Law Journal 905, quoting Emilio J Cardenas, International
Lending: Subordination of Foreign Claims Under Argentine Bankruptcy Law, in David Suratgar (ed), Default
and Rescheduling, 1984, p 63).

401
 Litigation Aspects of Sovereign Debt

4. The Red Mountain case (California)

10.54 On 29 May 2001, in Red Mountain Financial Inc v Democratic Republic of Congo and National
Bank of Congo,73 the court was requested to enforce different provisions of a credit agreement
between the plaintiff and defendants. Among the provisions was a pari passu clause from a
1980 credit agreement. The District Court expressly denied the performance of the pari
passu clause but nonetheless enjoined Congo from making any payments in relation to its
external indebtedness without making a proportionate payment to Red Mountain.74 Finally,
the parties settled the case.

5. The Kensington International case (England)

10.55 On 20 December 2002, in Kensington International Ltd v Republic of Congo,75 the pari passu
clause was again under scrutiny. This is an English case where the plaintiff claimed to recover
defaulted debt76 governed by a loan agreement subject to English law; and, to prevent Congo
from making payments to other creditors oninter aliaa pari passu clause.77 The interven-
ing judge denied the plaintiff s request78 on other grounds and his decision was upheld by
the Court of Appeal.79 It has been stated that the views on the pari passu clause in this case
are of persuasive authority only.80

6. The Kensington International II case (against BNP) (New York)

10.56 The Kensington saga had a second part in New York. This case is very interesting because it
gave the pari passu clause a new twist, taking it to another level after the new lecture of the
pari passu in the Elliott case.81 A claim was filed in a New York state court in 2003: Kensington
International Limited v BNP Paribas SA.82 One of the arguments of this claim was that BNP
tortuously interfered with Kensingtons rights to collect the monies due from the Republic
of Congo as per the pari passu clause included in the 1984 loan agreement giving rise to the
plaintiffs credit against Congo. This resulted from the fact that under the plaintiff s argu-
mentative line, BNP had received payments from new financings entered into between the
defendant and Congo after 1985. In other words, from the fact that BNP collected money
without distributing it on a pro-rata basis with Kensington, which should have occurred as
a result of the broad or payment interpretation of the pari passu clause.

73
Red Mountain Financial, Inc v Democratic Republic of Congo, No CV 00-0164 R (CD Cal, 29 May 2001).
74 Congo and its Central Bank were enjoined from making any payments to be made on their behalves with
respect to any External Indebtedness . . . unless and until Congo and its [central bank] (or each one of them)
make or cause to made a proportionate payment to Red Mountain at the same time. (See Red Mountain
Financial, Inc v Democratic Republic of Congo, No CV 00-0164 R (CD Cal, 29 May 2001)).
75
16 April 2003, unreported. Approved by the Court of Appeals [2003] EWCA Civ 709.
76
The debt was acquired after Congo defaulted on the loan agreement.
77 The relevant part of the pari passu clause reads as follows: the claims of all other parties under [the loan]

agreement will rank as general obligations of the Peoples Republic of the Congo, at least pari passu in right and
priority of payment with the claims of all other creditors of the Peoples Republic of the Congo.
78 2002 No 1088 at 6:1316 (Commercial Ct, 16 April 2003).
79
16 April 2003, unreported. Approved by the Court of Appeals [2003] EWCA Civ 709.
80 Financial Market Law Committee, Pari Passu Clauses, Issue 79, March 2005, p 12, available at <http://

www.fmlc.org>.
81 An example of a case of tortuous liability for breach of contractual provision prior to the Elliott interpretation

is Citibank NA v Export-Import Bank of the United States, No 76 Civ 3514 (CBM) (SDNY, 9 August 1976).
82 See Kensington International Limited v BNP Paribas SA, No 03602569 (NY Sup Ct, 13 August 2003).

402
 I. Litigation

7. The LNC case (Belgium)

In 1999, the New York courts rendered LNC Investments, Inc a decision by which Nicaragua 10.57
was obligated to pay $87 million resulting from defaulted commercial loans granted in the
1980s.83 LNC Investments preferred to file a claim rather than participate in the successful
sovereign debt restructuring procedure.84 LNC Investments enforced the US decision in a
Brussels Court, following the precedent of Elliott.85
As in Elliott, LNC Investments obtained a judicial order that prohibited interest payments 10.58
of restructured bonds.86 The order was directed to both Deustche Bank AG, as fiscal agent,
and Euroclear.87
The decision was appealed by Nicaragua, and the Brussels Court of Appeal reversed the 10.59
decision.88 Even though it seems that the Brussels courts reversed the criteria set forth in the
Elliott case, it is premature to determine so because the Brussels court did not directly con-
sider the pari passu clause as it did in Elliott. The case was resolved on procedural grounds
the Court of Appeals reversed the decision because Euroclear was not a proper party to the
litigation.89

8. Applestein, Macrotecnic International Corporation and EM Ltd v Argentina

On 15 January 2004, upon the memorandum of law of Argentina and the plaintiffs, the US 10.60
Statement of Interest90 and the amicus curiae briefs filed by the Federal Reserve Bank of New
York91 and the New York Clearing House,92 a New York court was asked to consider whether
the pari passu covenant in Argentinas bonds could not be used by judgment creditors as a
legal basis to interfere with Argentinas payment of its other indebtedness (should the
Argentine Government continue paying international organizations such as the IMF or
other non-defaulted unsecured creditors as the holders of domestic bonds?). Although the

83 LNC Investments, Inc v The Republic of Nicaragua, No 96 Civ 6360, 2000 US Dist LEXIS 7738, at 1

(SDNY, 6 June 2000).

84 Ibid, at 13.
85 Republique Du Nicaragua v LNC Invs LLC, No 2003/KR/334, at 2 (Cour DAppeal de Bruselas, Neuvieme

Chambre (Ct App Brussels, 9th Chamber) 2004) (on file with author).
86 Ibid, at 7.
87 Ibid.
88
Ibid, at 19.
89 See William W Bratton, Pari Passu and A Distressed Sovereigns Rational Choices, 53 Emory Law Journal

823, footnote 10.

90
In the US statement of interests, it was stressed that [a] novel reading of the pari passu clause, however,
that would prohibit sovereign debtors from making payments to third party creditors or require sovereign debtors
to make simultaneous, ratable payments to all creditors would undermine [a] well understood established frame-
work . . . (see Statement of Interest of the United States at 14, Macrotecnic Intl Corp v Republic of Argentina and
EM Ltd v Republic of Argentina (SDNY, 12 Jan 2004) (No 02 CV 5932 (TPG), No 03 CV 2507 (TPG)).
91
The Federal Reserve Bank of New York urged the court to interpret the pari passu clause narrowly so as to
discourage the terrorism of payments and settlement systems, and to encourage parties to compromise in sov-
ereign debt restructurings (see Memorandum of Law of Amicus Curiae Federal Reserve Bank of New York in
Support of Defendants Motion for an Order Pursuant to CPLR 5240 Denying Plaintiffs the Use of Injunctive
Relief to Prevent Payments to Other Creditors at 13, Macrotecnic Intl Corp v Republic of Argentina and EM Ltd
v Republic of Argentina (SDNY, 12 Jan 2004) (No 02 CV 5932 (TPG), No 03 CV 2507 (TPG)).
92
The New York Clearing House Association LLC stated that its members have long understood [the pari
passu] clause . . . to prohibit a debtor from creating unsecured debt that ranks senior in legal rights of payment
to the payment obligations the debtor has. See Memorandum of Amicus Curiae the New York Clearing House
Association LLC in Support of Motion Pursuant to CPLR 5240 to Preclude Plaintiff Judgment Creditors
from Interfering with Payments to Other Creditors at p 2, Macrotecnic International Corp v Republic of Argentina
and EM Ltd v Republic of Argentina (SDNY, 12 Jan 2004) (No 02 CV 5932 (TPG), No 03 CV 2507 (TPG)).

403
 Litigation Aspects of Sovereign Debt

court did not resolve the pari passu issue, the plaintiffs had to sign an agreement giving the
court 30 days notice before filing papers intended to stop such payments under the pari passu
clause.93 Although the core issue was not resolved, an order was issued by the court ordering
Argentina to divulge information about government property outside the country that is used
for commercial purposes: a discovery measure.

D. The Interaction of the Pari Passu Clause vis--vis

Multilateral Debt Payments
10.61 The Financial Markets Law Committee noted that in the event that a sovereign is not able to
service its debt as result of the broad or payment interpretation, it will not be allowed to pay
either the IMF, World Bank, or other multilateral organizations or its government ministers,
civil servants, police force, armed forces, judges, and state teachers.94 Since a sovereign cannot
bring its essentials services to a halt (even on an event of default), the broad or payment
interpretation seems not to be the correct one.
10.62 A particular note should be made of the IMFs and other multilateral organizations pre-
ferred status since it is a recurring issue. Moreover, this priority does not emanate from any
normit is a general understanding that has only been challenged by means of the pari passu
clause. As noted by the IMF, the preferred creditor status is fundamental to its financial
responsibilities and its financing mechanism.95 In addition, a President of the World Bank
stated that [t]he pari passu clause, for example, does not prevent a debtor from, as a matter
of practice, discriminating in favour of international financial institutions such as the
[World] Bank and the IMF in making debt service payments.96 Duvall has noticed that
many developing countries have continued to make payments to multilateral financial insti-
tutions even when they were unable to service commercial bank loans.97 He also argues that
the so-called preferred creditor status of the World Bank rests on practical considerations
rather than legal grounds and, thus, is not thought to violate such countries pari passu
undertakings. But, most importantly, the preferred status emanates from the ILOLR role of
the IMF. This role not only benefits the IMF (and its members) but other creditors (bilateral
and private) that end in a better position by the assistance provided by the IMF to the sover-
eign to regain sustainability and therefore an orderly restructuring. The ILOLR is performed
by the IMF when other credit providers are not willing to lend as a result of the deteriorated
situation of the country.

93
Transcript of Conference before Judge Thomas P Griesa at 9, Applestein v Republic of Argentina and
Province of Buenos Aires (SDNY, 15 Jan 2004) (No 02 CV-1773 (TPG)).
94
Financial Market Law Committee, Pari Passu Clauses, Issue 79, March 2005, p 14, available at <http://
www.fmlc.org>.
95
International Monetary Fund, Financial Risk in the Fund and the Level of Precautionary Balances, prepared
by the Finance Department (in consultation with other departments), approved by Eduard Brau, 3 February
2004, available at <http://www.imf.org/external/np/tre/risk/2004/020304.pdf>.
96
Lee Buchheit and Jeremiah Pam, The Pari Passu Clause in Sovereign Debt Instruments, 53 Emory Law
Journal 869, footnote 13, quoting the Review of IBRDs Negative Pledge Policy with Respect to Debt and Debt
Service Reduction Operations, Memorandum from Barber B Conable, President, World Bank, to Executive
Directors (19 July 1990).
97 Thomas A Duvall, Legal Aspects of Sovereign Lending in Thomas M Klein (ed), External Debt

Management: An Introduction, World Bank Technical Paper No 245 (1994) pp 4344.

404
 I. Litigation

1. A new legislative development to curtail the applicability of the pari passu clause
Finally, to provide a comprehensive coverage of the pari passu clause reference should be 10.63
made to a recent legislative development in Belgium. Law 4765 (C-2004/03482) was passed
on 19 November 2004 reinforcing Article 9 of the Belgian Law of 28 April 1999 that imple-
mented the EU Directive of the European Parliament and of the Council of 19 May 1998
on settlement finality in payment and securities settlement systems (EU Settlement Finality
Directive).98
Although the EU Settlement Finality Directive does not prevent attachments, the objective 10.64
by reinforcing the law implementing this Directive was to shield the flow of funds through
Euroclear. The text of the reformed norm reads as follows (emphasis added):
No cash settlement account with a settlement system operator or agent, nor any transfer of
money to be credited to such cash settlement account, via a Belgian or foreign credit institution, may
in any manner whatsoever be attached, put under trusteeship or blocked by a participant
(other than the settlement system operator or agent), a counterparty or a third party.99
According to the explanatory memorandum that accompanied the new law (ie Law 4765 10.65
(C-2004/03482)), the aim is to avoid disruptive actions by creditors by attaching cash
accounts held with Belgian clearing systems or obtaining injunctions such as the ones
obtained by Elliott and LNC.100

2. The Elliott case and its implications for the pari passu clause
It can be said that the pari passu clause mistakenly migrated from secured private lending 10.66
to unsecured sovereign lending. Once rooted in unsecured sovereign lending instruments
it faced certain provisions like the ones in Spain or the Philippines that can allow a creditor
to create a preference situating itself in a better position vis--vis other creditors, and it
becomes a must have provision in this type of debt instrument. Then, pari passu clauses
stayed in unsecured debt instruments due to the fear of earmarking revenues or the risk of
the sovereign preferring one group of creditors over another. These two fears were tackled
by an expanded negative pledge clause and the Libra101 and Allied Bank102 cases. Therefore,
if a proper due diligence was conducted there was no need to have a pari passu clause unless
in exceptional circumstances like the ones of Spain or the Philippines. Unfortunately, a
misguided interpretation of the pari passu clause in the Elliott case opened the door to liti-
gation on incorrect grounds (payment interpretation or broad interpretation of the pari
passu clause). It was a mistake that was widely embraced by creditors. The issue is that in
Elliott there was no breach of the pari passu clause, simply an incorrect understanding of
its meaning.

98
98/26/EC, OJ L 166 published on 11 June 1998, p 45.
99
The text emphasized corresponds to the amendment introduced in November 2004.
100 See DOC 51 1157/011 of the Belgium Parliament (Chambres des Reprsentants de Belgique) dated 25

May 2004, p 64 (on file with the author).

101 Libra Bank Ltd v Banco Nacional de Costa Rica,570 F Supp 870 (SDNY 1983); Libra Bank Ltd v Banco

Nacional de Costa Rica, 676 F 2d 47, CA 2 (NY), 12 April.

102 Allied Bank International v Banco Credito Agricola deCartago, 566 F Supp 1440 (SDNY, 1983); Allied

Bank International v Banco Credito Agricola de Cartago No 83-7714, slip op (2d Cir, 23 April 1984); and Allied
Bank International v Banco Credito Agricola de Cartago, 757 F 2d 516.

405
 Litigation Aspects of Sovereign Debt

E. The NML Capital Ltd v the Republic of Argentina Case103

1. General aspects
10.67 Another relevant case to analyse in the sovereign debt context is NML Capital Ltd v the
Republic of Argentina. This case is relevant since, as in the Elliott case, the creditors were able
to pose a threat to the whole restructuring process. Also, the arguments of the claimants were
novel and very ingenious, opening a new possibility to future sovereign debt litigation.
10.68 NML Capital Ltd (NML) had initiated two legal actions against Argentina that still are
awaiting a resolution.104 Both actions had been initiated for contractual breach and derived
damages as the result of the failure to meet contractually mandated principal and interest
payments to NML according to the debt instruments issued by the Republic of Argentina by
means of the Fiscal Agency Agreement dated 19 October 1994 executed between Argentina
and the Bankers Trust Company.
10.69 The instruments that gave origin to the two legal actions are the following:

(1) First Case (03 Civ 8845 (SDNY) (TPG)): was initiated on 7 November 2003 by the
breach in the payment of:
(a) The 12 per cent Global Bonds issued by Argentina and maturing on 1 February
2020. NML is the holder of $60,244,000 of these bonds. It is worth noting
that 92 per cent of the par amount was acquired by NML or its affiliates before
29 November 2001 at an average of 55 per cent of its par value.
(b) The 10.25 per cent Global Bonds issued by Argentina and maturing on 21 July
2030. NML is the holder of $111,909,000. It is worth noting that over 97 per cent
of the par value was acquired by NML or its affiliates before 28 November 2001 at
an average of 62 per cent of its par value.
(2) Second Case (05 Civ 2434 (SDNY) (TPG)): was initiated on 28 February 2005 by the
breach of payment of the Floating Rate Accrual Note or FRANs issued by Argentina,
maturing on 10 April 2005. NML is the holder of FRANs in a total amount of
$32,000,000.
2. Request of attachment
10.70 As previously mentioned, both cases were not resolved at the moment that the filing of the
action by NML was made, aiming to obtain a pre-judgment attachment to protect their
interests and prevent Argentina from disposing of the assets.
10.71 In requesting this preventive measure, NML argued that the same court previously granted
a summary judgment105 in Lightwater Corporation Ltd, Old Castle Holdings Ltd and

103
The analysis provided is based on the cases listed in n 72 above.
104 NML Capital Ltd v The Republic of Argentina, 03 Civ 8845 (SDNY) (TPG); and NML Capital Ltd v The
Republic of Argentina 05 Civ 2434 (SDNY) (TPG).
105 According to Hazard Jr and Taruffo, in a summary judgment the motion contends that the evidence

clearly establishes the facts and that the moving party is entitled to judgment on those facts (G Hazard Jr and
M Taruffo, American Civil Procedure: An Introduction, Yale University Press, New Haven, 1993, p 113).

406
 I. Litigation

Macrotecnic International Corp;106 EM Ltd;107 and in Allan Applestein TTEE FBO DCA.108
In these five cases the court resolved that: (1) the obligation of Argentina is unconditional;
(2) sovereign immunity has been waived; and (3) Argentina is in default. Hence, NML
argued that there are sufficient elements to show that there is no genuine issue as to any mate-
rial fact and that the moving party is entitled to a judgment as a matter of law (FRCP 56).
Likewise, referring to an article published in an Argentine newspaper, NML argued that the 10.72
Argentine government was carrying out everything that was within its reach to avoid the
attachment of assets abroad way before the default.109
According to Rule 64 of the Federal Rules of Civil Procedure of the US, a court can order 10.73
pre-judgment attachment under the circumstances and in the manner provided by the law
of the state in which the district court is held, existing at the time the remedy is sought.
Under the law of the State of New York, the plaintiff may obtain an ex parte pre-judgment
attachment of the interests of the defendant if:110 (1) it has stated a money judgment claim;
(2) it has a probability of success on the merits; (3) the existence of one of more grounds
enumerated in CPLR 6201; and (4) the amount claimed exceeds all counterclaims known
to the plaintiff.
The intervening court understood that these four prongs were given, and on 21 March 2005 10.74
ordered an ex parte pre-judgment attachment on:111
(1) the bonds tendered by the bondholders of Argentina that resolved to participate in the
exchange offer launched by Argentina in January 2005 and that were received by the
Bank of New York in its capacity of Exchange Agent in descending order of interest yield
up to a total principal value of $7 billion; and
(2) the assets of Argentina, and any interest of Argentina in personal property, and any debt
due or to become due to Argentina within the State of New York, which are used for a
commercial activity in the US, and other property otherwise subject to pre-judgment
attachment as a result of the existence of an express waiver of immunity therefrom, but
not of (a) property belonging to any consulate, embassy, or permanent UN mission of
Argentina and/or; (b) any property that is, or is intended to be, used in connection with
a military activity and is of a military character or is under the control of a military
authority or defence agency, as will satisfy the sum of $366,481,703 million and the fees
and expenses of the Marshal.
According to an estimation made by NML representatives, faced value bonds in the amount 10.75
of $7 billion would be needed to satisfy its credit. They arrived at this figure since the bonds
in the secondary market were being sold at 30 per cent of their par value. Therefore, $1.2
billion would be needed to satisfy their credit. But considering that the value in the second-
ary market can diminish, NML representatives requested an enlargement of that sum to a
total of $7 billion, the total amount that was endorsed by the court. This amount would be

106 2003 WL 1878420.

107
2003 WL 22110745.
108 2003 WL 22743762.
109 Rebossio, supra n 15.
110 According to NY CPLR 6201, 6211, and 6212(a).
111 NML Capital, Ltd v Republic of Argentina, ex parte motion, 21 March 2005, United States District Court

for the Southern District of New York.

407
 Litigation Aspects of Sovereign Debt

able to cover NMLs claim even if the bonds were sold at 5 per cent of their par value. A side
note, it is worth stressing that the bonds being attached were defaulted bonds that were ten-
dered in the exchange offer.

3. Vacatur of the attachment and the restraining notices

10.76 After granting the ex parte pre-judgment attachment, the court signed other similar orders
and also approved certain applications relating to restraining notices112 under New York state
law. As stated by the court, restraining notices under state law are different from attachments
in that they can have prospective effect, whereas an attachment is only valid as to property
which is subject to attachment at the time of the service of the order of attachment on the
party holding the property or supposedly holding the property.113
10.77 The court summoned all the parties involved to a hearing on 29 March 2005 based on the
fact that Argentina brought on a motion to vacate the original order of attachment and pro-
vided enough documentation to raise an issue about the validity of all orders of attachment
and the validity of the restraining notices or applications relating to restraining notices.
Besides Argentina and NML, the other parties involvedeither due to an attachment order
or a restraining noticewere, inter alia, EM Ltd, Lightwater Corporation Ltd, and Old
Castle Holdings Ltd.
10.78 As stated by the judge, there [were] merits to the arguments of both sides and there [were]
difficulties to the arguments on both sides.114 This notwithstanding, after considering the
arguments of the plaintiffs and the defendant, the judge resolved to vacate the attachment
and to vacate and deny the applications with regard to the restraining notices.115
10.79 In order to arrive at this conclusion, there were two main arguments to be analysed. First, it
was considered whether the bonds tendered at the exchange offer were the property of
Argentina or not. In this respect, it was resolved that the bonds still were the property of its
holders and not of Argentina. The bonds could only become property of Argentina after the
exchange offer was settled, which originally was scheduled to happen on 1 April 2005.116
Secondly, it was considered what had really been attached prior to the vacatur decision. Over
which assets were the restraining notices granted? It was the contractual right of Argentina to
receive the tendered bonds on the date of the settlement.
10.80 One of the central arguments of the plaintiffs was that upon the acceptance of the exchange
offers, Argentina had an irrevocable obligation to exchange the bonds.
10.81 In this regard, the Prospectus Supplement states that [o]nce the [e]ligible [s]ecurities have
been tendered pursuant to the [o]ffer, tendering holders may not withdraw their tenders

112
The restraining notices were issued pursuant to Fed R Civ P 69 which authorizes the process to enforce
judgments in accordance with the practice and procedure of the state in which the district court is held.
Additionally, 5222 of the Civil Procedure Laws and Rules of New York specifically addresses issues related to
restraining notices.
113 NML Capital Ltd v Republic of Argentina, not reported in F Supp 2d, 2005 WL 743086 (SDNY).
114
Ibid.
115 According to Blacks Law Dictionary, vacate is to nullify or cancel, to make void or invalidate. Vacatur is

one of the mechanisms of annulling a judicial decision to restore the status quo prior to the enactment of the
judicial decision that is vacated. A vacated decision has no precedental value (see Bryan A Garner (ed), Blacks
Law Dictionary, 7th edn, West Group (1999), p 1546).
116 Argentina, supra n 2, Prospectus Supplement S-2.

408
 I. Litigation

except under certain limited circumstances.117 Prior to that, within the Risk Factors listed
in the Prospectus Supplement, Argentina warned the bondholders that holders should be
aware that the terms of the offer allow Argentina to terminate or extend the offer, to with-
draw or amend the offer in one or more jurisdictions, and to reject valid tenders of eligible
securities, in each case at Argentinas sole discretion . . . [a]ccordingly, there can be no assur-
ance that the exchange of eligible securities for new securities pursuant to the offer will be
completed (in any particular jurisdiction or at all).118
However, the Prospectus Supplement states that [o]nce Argentina has announced the 10.82
acceptance of tenders on the [a]nnouncement [d]ate . . . Argentina's acceptance will be
irrevocable [and] [t]enders, as so accepted, shall constitute binding obligations of the sub-
mitting holders and Argentina to settle the exchange.119
Although Argentina had not subjected the acceptance or consummation of the exchange 10.83
offer to any minimum level of participation,120 it took into consideration the outstanding
claims121 and expressly stated that there can be no assurance that it will be completed in
accordance with the schedule and terms set forth in [the] prospectus supplement.122
Summing up, if the wording of the Prospectus Supplement is followed, it can be argued that: 10.84
(1) until Argentina accepts the tendered bonds it has the right to reject themindividually
or collectivelyat its sole discretion;123 (2) on 18 March 2005 Argentina announced the
acceptance of all the tendered bonds,124 which made the acceptance irrevocable as per the
wording stated in the Prospectus Supplement;125 (3) on the same date, ie 18 March 2005,
upon the acceptance of the tendered bonds, Argentina acquired the (future) contractual
right on the bonds that were going to be settled.
Returning to the analysis of the court resolution, the judge understood that there was a con- 10.85
tractual obligation on Argentina to accept or reject the tendered bonds. Upon acceptance,
bonds will be settled and upon settlement the tendered bonds will become the property of
Argentina. In this scenario, the judge argued that an exchange offer implies an exchange
like its name indicatesand it is because of it that Argentina has the right to cancel the
bonds tendered in the exchange offer. Hence, under the exchange offer, Argentina does not
only have the right to receive the bonds but also to cancel them. Likewise, the judge under-
stood that the plaintiffs not only do not have faculties to cancel the tendered bonds but
besides that they do not intend to do so because they consider that there is a secondary
market for them. In the judges own words: (1) upon acceptance of the exchange offer, the
bondholders have an irrevocable obligation to tender their bonds; (2) [t]he terms of the
exchange offer also express the idea that [Argentina] will have an obligation to issue the new

117
Ibid S-29.
118
Ibid S-29. The capital letters of the terms Offer, Eligible Securities, and New Securities as defined in
the Prospectus Supplement have been omitted.
119
Ibid S-48.
120
Ibid S-47.
121 Ibid S-30 and S-31.
122
Ibid S-20.
123 Ibid S-47.
124 See the document issued by the Ministry of Economy on 18 March 2005 titled Oferta de Canje

Anuncio Final, p 5.
125 Once Argentina has announced the acceptance of the tenders . . . Argentinas acceptance will be irrevo-

cable. Argentina, supra n 46, Prospectus Supplement S-48.

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 Litigation Aspects of Sovereign Debt

bonds in place of the old ones which have been tendered and which would be surrendered at
the time of the closing; (3) an essential part of the contractual right of [Argentina] is the
right to cancel [the] bonds which it receives at the closing; (4) the foundation of the exchange
offer is to do what the name states, to have an exchange; (5) [Argentinas] contractual rights
under the exchange offer are not merely to receive the bonds but to receive the bonds and to
cancel those bonds; (6) The attaching plaintiffs have no power to cancel the bonds and, of
course, no intention [since] [t]hey contemplate the idea that the bonds would remain in
effect and would have a market value.126
10.86 A key element in the judges argumentative line and as he stated one flaw in the position of
the attaching plaintiffs127 is that there is a contractual right of cancellation that would have
been affected in case of not ordering the vacatur of the attachments and the restraining notic-
es.128 Thus, the judge argued that the exchange offer could not be performed since it would
lack one of its fundamental elements.129 It is worth noting that the Financial Representative
in the US for the Republic of Argentina stated in a declaration in support of Argentinas
application for an order to show cause why the Court should not vacate its order of 21 March
2005 that if the attachments and restraining notices were not vacated the exchange offer
would not be carried out.130 Therefore, the judge resolved that:
(1) There is no realistic basis . . . to assume that there is some ironclad contractual right
of the republic to receive the bonds on the closing date if these attachments are
in effect.
(2) Consequently . . . the existence of the attachments would, if allowed to stand, negate the
very contractual obligations which are cited as a basis for the attachments, and I am
granting the motion to vacate the attachments.
(3) . . . the restraining notices have the same problems as the attachments in effectively
frustrating the carrying out of the exchange offer, [t]herefore, for basically the same
reasons that I gave in dealing with the attachments, it is my ruling that there is not, and
it is not foreseeable in the future that there will be, property in the form of bonds to be
subject to restraining notices.
10.87 There is an important issue that seems to have been overlooked or misapprehended by the
judge. According to the contractual terms, upon the acceptance of the tendered bondswhich
occurred on 18 March 2005the bondholders have an irrevocable obligation to tender their
bonds.131 This is so because: (1) Argentina made an offer to the bondholders, an offer to
exchange their bonds in default for new bonds; (2) the bondholders accepted this offer, express-
ing their consent by tendering the bonds which would be cancelled and replaced by the new
bonds on the settlement date; and (3) according to the contractual terms of the Prospectus
Supplement, [o]nce Argentina has announced the acceptance of the tenders . . . Argentinas
acceptance will be irrevocable. Having stated clearly the irrevocable character of the Argentine
obligation to settle the bonds, which implies the cancellation of the tendered bonds and their

126
See supra n 113.
127 Ibid.
128
Ibid.
129 Ibid.
130 See para 13 of the Declaration of Federico C Molina, Financial Representative in the United States of

America for the Republic of Argentina, dated 24 March 2005 filed in NML Capital Ltd v The Republic of
Argentina, 03 Civ 8845 (TPG) and 05 Civ 2434 (TPG).
131 Argentina, supra n 2, Prospectus Supplement, S-48.

410
 I. Litigation

replacement with the new bonds to be issued, a different issue to consider is the order of rights
or obligations. It is true that if Argentina does not settle the bonds, the future contractual right
of Argentina on the bonds that would emerge upon settlement will not emerge. But also a new
and different obligation emerged on 18 March 2005, ie to settle the tendered bonds. After that,
on 21 March 2005, the attachment was ordered on the future right that Argentina would have
on the settled bonds. Although, as previously mentioned, this future contractual right would
not emerge as the result of the attachment, Argentina due to the acceptance of the tendered
bonds on 18 March 2005 had the obligation to settle the bonds. After the acceptance on
18 March 2005, Argentina did not have the right to settle, it had the obligation to settle. If
Argentina did not perform the settlement, it would be liable for breach of its contractual obliga-
tion. Therefore, the argument of the judge regarding there being no realistic basis to assume
that there was some ironclad contractual right of Argentina to receive the bonds on the closing
date if these attachments were in effect was not accurate. Therefore (1) above can be rebutted.
As regards the second issue listed in (2) above, that the existence of the attachments wouldif 10.88
allowed to standnegate the very contractual obligations which were cited as a basis for the
attachments (the emergence of the contractual right over the tendered bonds upon settle-
ment), is not accurate either. This is so because the attachment over a total principal value of
$7 billion of tendered bonds is not applicable over all the tendered bonds, which totalled
$62.3 billion. That amount of the attachment is only 11.2 per cent of the total tendered debt.
Besides the fact that it would only negate partially the very contractual obligation, Argentina
still had the chance to satisfy the contractual obligation to settle despite the attachment (in
the event that it would have not been vacated). If Argentina had issued an additional amount
of $7 billion in bondsto tender the bonds of those creditors who had tendered their bonds
but those bonds had been subject to the attachmentthis would not result in an impossibil-
ity to perform on behalf of Argentina. It would have only resulted in an increase in the eco-
nomic costs of the whole exchange offer process, or rephrased in a different way, it would
have been a less beneficial exchange offer. However, instead of increasing the whole cost of
the restructuring in $7 billion, Argentina could have opted to settle the claims with NML
and the other creditors that enjoined. Settling would have resulted in at least a 70 per cent
reduction of the cost.132 In summary, these are the costs that a sovereign has to bear as a result
of not honouring its outstanding obligations, ie defaulting and angering its creditors.
As regards the third issue listed in (3) above, reference should be made to the two previous 10.89
paragraphs because the arguments applied in the analysis of the viability of the attachment
are applicable to the restraining notices.
Finally, a brief reference should be made to what has been held in three previous sovereign 10.90
debt restructuring cases, ie Allied Bank International v Banco Credito Agricola de Cartago,133
Pravin Banker Assocs v Banco Popular del Peru;134 and National Union Fire Ins Co of Pittsburgh,
Pa v Peoples Republic of the Congo.135

132
The lawyers of NML argued that bonds should be valued at 30 per cent of their par value for a calculation
on the amount necessary to satisfy their claim. Therefore, it can be said that only a 30 per cent of the $7 billion
(which anyway has been increased to play on the safe side) is the real claim of the plaintiffs.
133 757 F 2d 516 (2d Cir 1985).
134 895 F Supp 660 (SDNY 1995).
135 729 F Supp 936 (SDNY 1989).

411
 Litigation Aspects of Sovereign Debt

10.91 In the Allied case, the Court of Appeals held that allowing the foreign sovereign to refuse
payment of financial obligations would vitiate an express provision of the contracts between
the parties something the Court of Appeals concluded would be inconsistent with the law
and policy of the United States.136 Thus, the Court of Appeals found that any cooperative
adjustments of sovereign debt were grounded in the understanding that, while parties may
agree to renegotiate conditions of payment, the underlying obligations to pay nevertheless
remain valid and enforceable.137
10.92 In the Pravin case, the court held that the United States policy under Brady Plan was essen-
tially call for voluntary participation by creditor banks in negotiations with foreign debtor
nations to restructure their debt, and Plan did not abrogate contractual rights of creditor
banks nor compel creditors to forbear from enforcing those rights while debt structuring
negotiations were ongoing, or prohibit them from opting out of settlements resulting from
such negotiations.
10.93 In the National Union Fire Insurance case, the court considered that if it were to refuse to
enforce this default judgment on the ground that to do so would interfere with the Congo
making payments pursuant to a debt rescheduling agreement entered into with other credi-
tors, it would have the effect of depriving a creditor of its right to choose whether to resched-
ule a debt or to enforce the underlying obligation to pay, which would be contrary to the US
policy as articulated in the Allied case.138
(a) Stay order in the vacatur
10.94 In the hearing where the judge resolved to vacate the attachments and to vacate and stay the
restraining notices, the representative of one of the plaintiffs argued that if Argentina went
forward with the settlement of the exchange offer and settled (cancelled the tendered bonds
and issued the new bonds in their place) the plaintiffs would not have an opportunity to
appeal.139
10.95 Therefore, in order to maintain the status quo as it existed as of the date of the judges
resolution to vacate the attachments and to vacate and stay the restraining notices, the
plaintiffs representative requested a stay on the effect of the order to vacate until the Second
Circuit Court of Appeals resolved the issue.140 The motion was made pursuant to Federal
Rule of Civil Procedure 7(b)(1)141 and granted not only in regard to the plaintiff that
motioned but to all the plaintiffs (ie to all the judicial proceedings in which it had been put
into effect).
(b) Resolution of the Court of Appeals
10.96 On 13 May 2005, the Court of Appeals for the Second Circuit unanimously granted a
Summary Order affirming the District Courts order vacating the ex parte attachment and

136 This is taken from the reference to the Allied case in Elliott Associates, LP v Republic of Peru, 948 F Supp

1203 (SDNY 1996). Due to its brilliance, it is an almost exact quotation.

137 Ibid.
138 See National Union Fire Ins Co of Pittsburgh, Pa v Peoples Republic of the Congo, 729 F Supp 936 (SDNY

1989).
139 See supra n 113.
140 Ibid.
141 Rule 7 of the Rules of FRCP deals with pleadings and the form of motions.

412
 I. Litigation

the restraining and execution orders in the two main procedures,142 ie EM Ltd v Republic of
Argentina (restraining notice) and NML Ltd v Republic of Argentina (attachment). This also
applies in the other enjoining related matters.
In order to reach this resolution, the Court of Appeals acknowledged that the reason for the 10.97
District Court to vacate the restraint and attachment is that if these measures are still in
effect, the conclusion of the exchange offer is in doubt. The Court of Appeals expressly
endorsed the argument of the District Court stating that it acted well within its authority to
vacate the remedies in order to avoid a substantial risk to the successful conclusion of the
debt restructuring.143 Moreover, the Court of Appeals itself stated [t]hat restructuring is
obviously of critical importance to the economic health of a nation.144 This notwithstand-
ing, the court also acknowledged that the parties disputed a number of issues including
whether: (1) the tendered bonds could be regarded as assets or debts of Argentina; and (2) if
Argentina was impermissibly trying to defeat the collection efforts of the plaintiffs/appel-
lants by using the threat of a failure of the debt restructuring to fend off the restraint and
attachment remedies.145
The Court of Appeals considered that it was not necessary to rule definitively on any of the 10.98
substantive law issues disputed by the partieseven if the District Court view on some of
the issues was wrongand therefore it did not find any issue in the decision of the District
Court that was arguably incorrect in the view of procedural law. As previously mentioned,
the Court of Appeals considered that the District Court acted within its authority. The issue
under analysis was the exercise of discretion of the District Court.
As stated in a previous sovereign restructuring case, [u]nder New York law, granting of pre- 10.99
judgment attachments is discretionary with trial court, and even when statutory requisites
are met, attachment may be denied.146 A plaintiff is never entitled to attachment as a matter
of right, it is discretionary for the court and the practice is that it should be used sparingly.147
Additionally, in many cases of the forum it has also been ruled that an attachment is a harsh
remedy and should be construed strictly against the moving party.148
A final comment in regard to this case is that both the District Court and the Court of 10.100
Appeals were concerned about the viability of the exchange offer. Although the analysis is
based on a procedural aspect where the District Court exercised its discretion, which accord-
ing to the Court of Appeals was subject to law, upon an analysis of the substantive issues the
outcome might have been different. It seems that since it was not a substantive issue affecting
US foreign policy, the court used its discretion with a utilitarianist focus to avoid a major
harm.

142 131 Fed Appx 745 CA 2 (NY), 2005.

143 Ibid.
144 Ibid.
145 Ibid.
146 Elliott Associates, LP v Republic of Peru, 948 F Supp 1203 (SDNY 1996). Also see Filmtrucks, Inc v Earls,

635 F Supp 1158, 1162 (SDNY1986); Trigo Hnos, Inc v Premium Wholesale Groceries, Inc, 424 F Supp 1125,
1133 (SDNY 1976).
147
See Katz Agency, Inc v Evening News Assn, 514 F Supp 423 (DCNY 1981).
148 See Sidwell & Co, Ltd v Kamchatimpex, 632 NYS 2d 455 (NY Sup 1995).

413
 Litigation Aspects of Sovereign Debt

II. Conclusion
10.101 These two casesone successful and the other unsuccessful from the creditors perspective
are useful to illustrate the difficulties and complexities in suing a sovereign state. The difficul-
ties are evidenced by the enforcing tactics required in the Elliott case where attachment orders
were obtained in four different US statesFlorida, Maryland, New York, and Washington
DCplus the need to resort to the courts of Belgium, Canada, England, Germany,
Luxembourg, and the Netherlands to seek enforcement of the decision. The complexities,
are evidenced in the EM/NML Ltd cases where the lack of assets forced the creditors to
attempt to attach an intangible right over a future asset of the debtor.
10.102 Successful cases like Elliott are rarely seen in sovereign debt restructuring, most divergences
are settled rather than litigated.
10.103 As a result of cases like Elliott and in an attempt to create a more orderly restructuring frame-
work, the IMF proposed a structured restructuring approach based on US chapter 11 which is
known as the Sovereign Debt Restructuring Mechanism or better by its acronym SDRM. The
market rejected the IMF proposal of an orderly structured approach and developed other tech-
niques, ie the use of contractual provisions such as credit enhancement terms, collective action
clauses, or the use of exit consent. All these techniques are used to enhance exchange offers.
These structured market-oriented approaches are analysed in the following chapter.

414
 11
TRANSACTIONAL ASPECTS OF SOVEREIGN
DEBT RESTRUCTURING

I. Transactional Aspects of Sovereign D. The Use of CACs, Exit

Debt Restructuring 11.0111.164 Consent, and Term
Enhancements 11.6511.117
A. An Introduction to the
Transactional Aspects of E. Some Notes on Class
Sovereign Debt Restructuring 11.0111.07 Actions in the Sovereign
Debt Context 11.11811.144
B. Current Debate on Sovereign
Debt Restructuring: F. Case Study: Uruguays Debt
Procedures and Methods 11.0811.15 ReprofilingHow to Perform
a Successful Exchange Offer 11.14511.164
C. The Sovereign Debt Restructuring
Mechanism (SDRM) Proposed II. Conclusion 11.16511.176
by the IMF 11.1611.64

I. Transactional Aspects of Sovereign Debt Restructuring

A. An Introduction to the Transactional Aspects

of Sovereign Debt Restructuring
The amount of accumulated debt and its progressive increase have led to repayment problems 11.01
and, in some cases, default. Thus, as countries amass unsustainable debt burdens (ie when the
ratio of debt to gross domestic product rises to such an extent that the application of policies
cannot revert the situation), they have an increasing need to restructure their sovereign debt.1
Broadly speaking, sovereign debt restructuring can be understood as the technique used by 11.02
sovereign states to prevent or resolve financial and economic crises and to achieve debt sus-
tainability levels. It has two aspects: procedural and substantial. While the procedural aspect
focuses on the way in which the restructuring should be performed (eg via an exchange offer
sometimes enhanced by the use of other techniques), the substantial aspect involves the
actual restructuring of debt, which is characterized by rescheduling amortization schedules
as well as the possibility of reducing interest rates and/or principal.
Another available option is a debt reprofiling. A debt reprofiling is a voluntarily exchange 11.03
offer prior to default. In other words, the main difference between a debt reprofiling and a

1 See International Monetary Fund, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM):

A Factsheet, January 2003, available at <http://www.imf.org/external/np/exr/facts/sdrm.htm>.

415
 Transactional Aspects of Sovereign Debt Restructuring

debt restructuring is the timing when the exchange offer is performed. A debt reprofiling can
help the pressure of an internal devaluation by reducing the debt servicing burden. Jamaica
is an excellent example, where interest costs and principal repayments exceeded the country's
revenues. Through a voluntarily domestic debt exchange offer performed in early 2010 with-
out entering into default, Jamaica released some of its servicing debt burden.
11.04 As a result of the use of exchange offers as the mechanism to restructure sovereign debt, after
settlement, on most occasions there are outstanding bondholders that hold out and do not
take part in the exchange offer. The non-participation of bondholders does not necessarily
mean that they decided to holdout, it can be the case that bondholders were not aware of the
exchange offer.2 Due to the existence of holdouts, the dynamics in the relationship of the
involved parties change. The parties involved are:
(1) the sovereign, debtor of the so-called old bonds and the new bonds. The old bonds are
those held by the holdouts that did not participate in the exchange offer. The new bonds
are those that were issued to creditors as a result of the exchange offer, ie as a result of the
tender of their old bonds in exchange for new bonds;
(2) the bondholder who holds an old bond, ie the holdout;
(3) the bondholder who holds a new bond, ie the creditor that entered the exchange offer.
11.05 Both bondholders, the holdout, and the creditor, would like to collect on their bonds. The
holder of the old bond would like to collect principal and accrued interest by trying to attach
any possible assets of the sovereign adopting an active litigation role.3 Different would be the
role to be performed by the holder of the new bonds who will have a passive role waiting for
their interest payments to become due (usually every six months) and collect principal upon
maturity. With this scenario, the sovereign debtor does not have many options left. The
sovereign debtor would have to pay the holders of the new bonds regularly because otherwise
it will be in default again, while at the same time try to avoid an attachment on its assets that
will disrupt the flow of payments. The priority of the sovereign debtor is to maintain the flow
of payments to its majority creditors unaltered, while sorting out how to deal with the hold-
out minority.
11.06 With many banks and retail bondholders now involved, private creditors have become
increasingly numerous, anonymous, and difficult to coordinate. The variety of debt instru-
ments and derivatives in use has also added to the complexity to be faced. As the IMF
stated:
Bondholders are more diverse than banks, and so too are the goals with which they approach
a restructuring. Some are interested in a rapid and orderly restructuring that will preserve the
value of their claims. Others, which buy debt on the secondary market in hope of profiting
through litigation, prefer a disorderly process allowing them to buy distressed debt more
cheaply. Individual bondholders also have more legal leverage than banks and are less vulner-
able to arm-twisting by regulators.4

2 It is not uncommon that when trying to delist a company some stockholders were not able to be traced and

the intervention of a court is required. This problem is amplified in the case of a sovereign where the bondhold-
ing is atomized around the globe.
3 The perils of litigation have been analysed in the previous chapter.
4 Anne Krueger, International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring,

address at the National Economists Club Annual Members Dinner American Enterprise Institute (26
November 2001), available at <http://www.imf.org/external/np/speeches/2001/112601.htm>.

416
 I. Transactional Aspects of Sovereign Debt Restructuring

The goal of debt restructuring should be a better and more timely handling of unsustainable 11.07
sovereign debts, while at the same time protecting asset value and creditors rights.5 The next
section will consider the different techniques used to facilitate debt restructuring or, in the
case of majority action clauses, to achieve a debt restructuring. It will also refer to the posi-
tions held by the different parties (ie the official and the private sector actors) involved in the
development and/or use of these techniques.

B. Current Debate on Sovereign Debt Restructuring:

Procedures and Methods
Transactions are typically regulated by the law chosen by the parties. In the case of a bond 11.08
issuance or other debt obligations, it is the issuer (or the lender in other debt obligations)
who decides which will be the applicable law. According to Tennekoon,6 there are many
issues that should be considered in order to decide which should be the proper law that will
govern the debt obligation. These are: (1) the level of insulation (ie how effective is the system
to reject the interference of other systems); (2) the certainty and result predictability in
applying the chosen law; (3) the degree of party autonomy to avoid judicial interference; (4)
conceptual sophistication; (5) market familiarity; (6) language (English is the language of
the financial markets); and (7) legal limitations on the choice of law. Therefore, most sover-
eign debt obligations are subject either to New York law or English law. As analysed below,
the applicable law is relevant when a sovereign is under distress because the alternatives avail-
able to the debtor are different depending on the applicable law. These alternatives not only
refer to litigation, but also refer to the transactional aspects of a debt restructuring.
While there is widespread agreement for a revamped sovereign debt restructuring process, there is 11.09
also disagreement over what the actual process should be.7 As Buchheit and Gulati have observed,
a sovereign bond issuer of the early twenty-first century is much in the same spot as a distressed
corporate or railroad bond issuer of the early twentieth century.8 They contend that the financial
community is again confronted with the same three options: (1) a insolvency reorganization
procedure (SDRM); (2) the inclusion of contractual provisions in the bonds that would allow a
restructuring of those instruments with the consent of the required majority of the bondholders
(CACs); or (3) the pursuit of a court-supervised debt restructuring, engaging the equitable powers
of the civil courts to oversee such a process (class actions).9 As noted by Roubini, the question is:
when sovereign debt restructuring, reprofiling, and reduction become necessary and unavoidable,
what will be the appropriate regime that will provide an orderly mechanism while safeguarding
the balance of rights, both of creditors and the debtor?10

5
Ibid.
6
See Ravi C Tennekoon, The Law and Regulation of International Finance, Butterworths, London, 1991,
pp 1624.
7
See Randall Dodd, Sovereign Debt Restructuring (2002) 9 Financier 1-4, available at <http://www.the-
financier.com>.
8 Lee C Buchheit and G Mitu Gulati, Sovereign Bonds and the Collective Will (2002) 51(4) Emory Law

Journal 13171363.
9 Ibid.
10 See Nouriel Roubini, Private Sector Involvement in Crisis Resolution and Mechanisms for Dealing with

Sovereign Debt Problems, paper prepared for the Bank of England Conference on the Role of the Official Sector
and Private Sector in Resolving International Financial Crises, 2324 July 2002, available at <http://www.
bankofengland.co.uk/publications/events/conf0207/roubini.pdf>.

417
 Transactional Aspects of Sovereign Debt Restructuring

11.10 Miller is of the opinion that Buchheit and Gulati, taking historical experience with corporate
debt into consideration, are suggesting two ways to move forward: the New York court-
ordered approach (either the equitable powers of the civil courts to oversee such a process or
the sovereign debt restructuring mechanism or SDRM) and/or the London-style solution of
self-organizing creditors.11
11.11 Figure 11.1 summarizes this ad hoc legal framework applicable to sovereign debt restructur-
ing (mainly bonds).

Sovereign debt restructuring

NY law English law

NY approach London approach

Court supervised Contractual terms

CACs
Class action SDRM Exchange offer
Exit
consent

Figure 11.1 The Ad-Hoc Legal Framework of Sovereign Debt Restructuring

11.12 In order to understand the ad hoc legal framework applicable to sovereign debt restructur-
ing, Figure 11.1 has simplified the choice of law in sovereign bonds issuances. It focuses on
New York and English law, which account for most of the issuances. Other laws are assimi-
lable to these two laws (eg bonds issued under German law are comparable to bonds issued
under New York law; and, bonds issued under Japanese and Luxembourg law are comparable
to bonds issued under English law).
11.13 So far, in the sovereign debt restructuring episodes of the 1990s, the major issue of concern
has been the holdout problem, ie creditors holding-out aiming at obtaining a better deal. In
light of this situation, the IMF had come with a statutory approach proposing the SDRM,
based on chapter 11 of the US Bankruptcy Code for corporations.12 The market itself came
up with two techniques to deal with the same issue: (1) exit consents or exit amendments;
and (2) the use of CACs. In addition, enhanced contractual arrangements that are used to
make the exchange offer more attractive can also be included under the market initiative.
Among the proponents of the decentralized market-oriented approachas opposed to the

11 See Marcus Miller, Sovereign Debt Restructuring: New Articles, New Contractsor No Change?,

International Economic Policy Briefs, No PB02-3 (April 2002), available at <http://www.iie.com/publica-

tions/pb/pb02-3.pdf>.
12 See 11 USC 11211141. Chapter 11 is a court-supervised reorganization of an insolvent or near

insolvent business while continuing with its day-to-day operations.

418
 I. Transactional Aspects of Sovereign Debt Restructuring

centralized, non-market approach of the SDRM13are Buchheit and Gulati;14 the G 1015
members; US Treasury;16 Roubini;17 INSOL International (an association of international
insolvency practitioners);18 Emerging Markets Creditors Association (EMCA); Emerging
Markets Trade Association (EMTA); Institute of International Finance; International
Primary Market Association; International Securities Market; Securities Industry Association;
Bond Market Association; and Bartholomew, Stern, and Liuzzi.19
Since the holdout problem has been the major concern in sovereign debt restructuring, 11.14
the IMF came up with the statutory approach proposal of a SDRM. The main features of
the proposed SDRM are: (1) a stay upon the decision of a super-majority vote of creditors;
(2) preferred creditor status for new money upon the decision of a super-majority of credi-
tors (similar to debtor-in-possession financing, ie 11 USC 364); (3) negotiations with
creditors and a programme supported by the IMF; and (4) super-majority voting across
all classes.20 Besides the fact that the SDRM is not in place, it still has to overcome political
resistance towards it and to resolve some shortcomings.21
The sections below analyse the statutory arrangement of the SDRM proposed by the IMF. 11.15
In addition, further detail is provided on the status quo of the decentralized, market-oriented
approach and the use of CACs, exit consents, and term enhancements. The analysis on these
issues will follow.

13
See Dodd supra n 7, p 3.
14
Buchheit and Gulati supra n 8.
15
The G 10 Rey Report was issued in May 1996 and recommends the adoption of CACs as a measure to
facilitate debt restructuring. The Group of 10 (G 10) refers to the group of countries that have agreed to partici-
pate in the General Arrangements to Borrow (GAB). The GAB was established in 1962, when the governors of
eight IMF membersBelgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, and the
United Statesand the central banks of two othersGermany and Swedenagreed to make resources avail-
able to the IMF for drawings by participants, and under certain circumstances, for drawings by non-partici-
pants. The GAB was strengthened in 1964 by the association of Switzerland, then a non-member of the IMF,
but the name of the G 10 remained the same. The following international organizations are official observers
of the activities of the G 10: Bank of International Settlements, European Commission, IMF, and OECD
(see <http://www.imf.org/external/np/exr/facts/groups.htm#G10>.
16 John B Taylor, Sovereign Debt Restructuring: A U.S. Perspective, remarks at the conference on Sovereign

Debt Workouts: Hopes and Hazards? at the Institute for International Economics, 12 April 2002, Washington
DC, available at <http://www.ustreas.gov/press/releases/po2056.htm>.
17 See Roubini supra n 10.
18 INSOL International, Statement of Principles for a Global Approach to Multi-Creditor Workouts,

available at <http://www.insol.org/pdf/Lenders.pdf>.
19 Ed Bartholomew et al, Two Step Sovereign Debt Restructuring, 17 February 2004, available at <http://

www.law.georgetown.edu/international/documents/Bartholomew.pdf>.
20 See IMF supra n 1.
21 Among other things, one of the main questions regarding the SDRM is what would happen if a sovereign

state obtained an agreement with its creditors through a SDRM and thereafter defaults again? A twice-default-
ing country would show that the SDRM is not a panacea, and it would question the IMFs ability to provide
supervision. It is worth bearing in mind that the administration of a country cannot be replaced or intervened
in, nor the assets sold to the highest bidder. See Alina Arora and Rodrigo Olivares-Caminal, Rethinking the
Sovereign Debt Restructuring Approach (2003) Law & Bus Rev Am 636.

419
 Transactional Aspects of Sovereign Debt Restructuring

C. The Sovereign Debt Restructuring Mechanism (SDRM)

Proposed by the IMF
11.16 Recently, the debate on the reform of the international financial architecture has been cen-
tred on how to ensure orderly sovereign debt restructuring.22 This is a recurrent debate that
has come to the fore once more with the recent 20072009 crisis and the delicate situation
of countries like Iceland or Greece. In this sense, the IMF believes that incentives are lacking
to help countries with unsustainable debt resolve the problem promptly and in an orderly
fashion.23 This drives up the cost of default, ie it is harmful to the country, its citizens, and
the international community.24 Sovereigns sometimes unnecessarily delay decisions (and
actually actions) trying to avoid the unavoidable fearing the effect that this will have on their
reputation which will be translated in higher interest rates.
11.17 Therefore, since domestic insolvency law serves as a useful model in the distressed/insolvency
context, the IMF started considering a sovereign debt restructuring mechanism for sovereign
debt in 2001. However, UNCTAD was the first international organization to call for an orderly
workout procedure for external debt of developing countries drawing on national insolvency
laws, notably chapters 9 and 11 of the United States bankruptcy law.25 In search of justice, it is
fair to stress that it was Sachs26 who reignited the discussion in 1995 with an influential paper
on international bankruptcy procedures for sovereigns.27 Moreover, Schwarcz28 in 2000 elabo-
rated on the idea and proposed a convention to avoid reliance on the IMF.
11.18 The IMF proposed a twin-track mechanism known as SDRM, which was based on two
complementary approaches to create a more orderly and predictable process for sovereign
debt restructuring. First, the contractual approach in which debt restructuring would be
facilitated by enhanced use of certain contractual provisions in sovereign debt contracts.29
Secondly, the establishment of a universal statutory framework would create a legal frame-
work for collective decisions by debtors and a super-majority of its creditors.30 As explained
by the IMF, the central objective is to put countries and their creditors in a better position to

22 See IMF supra n 1.

23
Krueger, supra n 4, p 1.
24 See IMF supra n 1.
25
See UNCTAD, Trade and Development Report, 1986.
26
Jeffrey Sachs stated that [t]here is considerable confusion as to how the principles of bankruptcy should
translate to the case of sovereign borrowers, ie governments. In the international context there is little formal law
covering state insolvency, and certainly no bankruptcy code. Therefore, the question is mostly a normative one
how should international practice, and specifically IMF practice, be arranged in view of the lessons of bankruptcy
law. (See Jeffrey Sachs, Do We Need an International Lender of Last Resort?, Frank D Graham Lecture, Princeton
University, 1995, available at <http://www.earth.columbia.edu/sitefiles/file/about/director/pubs/intllr.pdf>.
27
According to Kenneth Rogoff and Jeromin Zettelmeyer (Early ideas on Sovereign Bankruptcy Reorganization:
A Survey, International Monetary Fund, March 2002, WP 02/57) the idea of a bankruptcy procedure for sov-
ereigns can be traced backat leastto 1776 when Adam Smith stated [w]hen it becomes necessary for a State
to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair,
open and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least
harmful for the creditor (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of the Nations).
28 Steven L Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach (2000) 85

Cornell Law Review 956.

29 International Monetary Fund, IMF Board Discusses Possible Features of A Sovereign Debt Restructuring

Mechanism (7 January 2003), available at <http://www.imf.org/external/np/sec/pn/2003/pn0306.htm>.

30 Ibid.

420
 I. Transactional Aspects of Sovereign Debt Restructuring

restructure unsustainable sovereign debt in an orderly and timely manner.31 Although a

country could access the SDRM after default, ideally the SDRM would encourage a country
with unsustainable debt and its creditors to restructure before default becomes the only
option.32 It is worth stressing that the SDRM would have only applied to sovereign debt
governed by foreign law or debt subject to the jurisdiction of foreign courts.33
According to the IMF, the objectives of the SDRM are:34 11.19

(1) to put countries and their creditors in a better position to restructure unsustainable
sovereign debts in an orderly and timely manner;
(2) to benefit citizens of the countries whose debts are being restructured because the period
of economic dislocation is reduced and to benefit creditors since their asset values are
preserved;
(3) to increase the efficiency and stability of the global financial system by creating a more
predictable environment for workouts in cases of unsustainable debt burdens, which
will result in a reduction of the overall risk of lending to emerging market countries.
A formal SDRM would need to be built on the following four key issues to achieve its 11.20
objectives:35
(1) Deterring disruptive litigation: preventing creditors from obtaining relief through
national courts. For example, granting a legal stay or a standstill to avoid holdouts, rogue
creditors, free riders, and vulture funds from disrupting negotiations that could lead to
a restructuring agreement.
(2) Protecting creditor interests: providing a guarantee that the debtor country would act
responsibly during the course of any standstill.
(3) Priority financing: encouraging private lenders to provide fresh money during the
restructuring procedure to facilitate ongoing economic activity.
(4) Majority restructuring: restructuring agreements reached by the parties should be bind-
ing to all of them, and not only on the majority who have agreed to them.
In order to achieve these objectives, the IMF proposed an SDRM with the following 11.21
features:
(1) super-majority voting;36
(2) a mechanism that would deter disruptive litigation;37
(3) good faith negotiations;38

31 See IMF supra n 1, at A.2.

32
Ibid, p 8.
33
See Report of the International Monetary Law Committee, International Law Association
(MOCOMILA), Berlin Conference (2004), p 6, available at <http://www.mocomila.org/publication/2004-
mocomila-berlin-report.pdf>.
34 See IMF supra n 1.
35
Krueger supra n 4.
36
Super-majority voting will resolve the new terms of the restructuring agreement and prevent minority
creditors from blocking an agreement or enforcing the terms of the original debt contracts. See IMF supra n 1.
37
In the 2003 version of the SDRM, the IMF replaced the original idea of an automatic stay by a mechanism
to deter disruptive litigation by creditors during the debt restructuring negotiations. This notwithstanding, no
further specification has been made (IMF supra n 1).
38 Ibid. Creditors would have assurance that the debtor will negotiate in good faith and will pursue poli-

ciesmost likely designed in conjunction with financial support from the IMFthat will help protect the
value of creditor claims and limit dislocations in the economy.

421
 Transactional Aspects of Sovereign Debt Restructuring

(4) transparency requirements;39

(5) grant of seniority to new lenders;40 and
(6) the establishment of a dispute resolution forum.41
11.22 The SDRM was designed only to help sovereign states whose debts are unsustainable. The
process would allow states to reorganize their finances and activities to restore debt payments.
The SDRM would allow creditors to decide collectively on a restructuring, though ultimately
a debtor cannot use the SDRM without the consent of a super-majority of its creditors.42
11.23 In April 2002, the International Monetary and Financial Committee (IMFC)43 endorsed
the work performed in the elaboration of the SDRM and encouraged the IMF to continue
to examine the legal, institutional, and procedural aspects of two approaches, which could
be complementary and self-reinforcing: (1) a statutory approach, which would enable a
sovereign debtor and a super-majority of its creditors to reach an agreement binding all
creditors; and (2) an approach, based on contract, which would incorporate comprehensive
restructuring clauses in debt instruments.44

1. The interaction of the SDRM with other creditors, preferred status of

the IMF, and special treatment of HIPCs
11.24 Other relevant matters under the umbrella of the SDRM are the treatment to be given to
other debt, ie domestic debt, Paris Club debt, and other international financial institutions
(IFIs) debt (including the IMF).
11.25 According to the IMF, the inclusion of domestic debt in the SDRM should be considered on
a case-by-case basis since foreign or non-resident investors may only be willing to provide
substantial debt reduction if they know that domestic creditors are shouldering a fair share
of the burden too.45
11.26 With regard to Paris Club debt, there has been some inclination by the IMF to exclude these
claims from the formal framework of the SDRM. This notwithstanding, it should be borne

39 Ibid. The SDRM would establish transparency requirements that would, among other things, enable

creditors to have information about how other creditors are being treated during the restructuring process.
40 Ibid. Creditors could agree to give seniority and protection from restructuring to fresh private lending, in

order to facilitate ongoing economic activity through the continued provision of trade and other types of credit.
41 Ibid. A dispute resolution forum would be established to resolve disputes that may arise during the voting

process or when claims are being verified.

42 Ibid at questions D.3 and D.4.
43 The IMFC was established on 30 September 1999, by a resolution of the IMF Board of Governors, to

replace the Interim Committee of the Board of Governors on the International Monetary System (usually
known simply as the Interim Committee), which had been established in 1974. The change signified a strength-
ening of the role of the primary advisory committee of the Board of Governors. The IMFC usually meets twice
a year, in September or October before the Bank-Fund Annual Meetings, and in March or April at what are
referred to as the Spring Meetings. Like the Interim Committee, the IMFC has the responsibility of advising, and
reporting to, the Board of Governors on matters relating to the Board of Governors functions in supervising the
management and adaptation of the international monetary and financial system, including the operation of the
adjustment process, and in this connection reviewing developments in global liquidity and the transfer of
resources to developing countries; considering proposals by the Executive Board to amend the Articles of
Agreement; and dealing with disturbances that might threaten the system. The IMFC has 24 members who are
Governors of the IMF (generally ministers of finance or central bank governors). See International Monetary
Fund, A Guide to Committees, Groups and Clubs: A Factsheet, August 2006, available at <http://www.imf.org>.
44 See International Monetary Fund, Communiqu of the International Monetary and Financial Committee

of the Board of Governors of the International Monetary Fund, 20 April 2002, available at <http://www.imf.
org/external/np/sec/pr/2002/pr0222.htm>.
45
IMF supra n 1.

422
 I. Transactional Aspects of Sovereign Debt Restructuring

in mind that Paris Club minutes of agreements usually include a comparability of treatment
provision and a pull-back clause to ensure that the debtor will not agree better terms with
its private creditors and if it does, then it will be entitled to exit the agreement reached with
the debtor. These two clauses, using Pakistans agreed minute with the Paris Club on 30
January 1999 as an example, read as follows:
Comparability Treatment Provision: [i]n order to secure comparable treatment of its debt
due to all its external public or private creditors, the Government of the Islamic Republic
of Pakistan commits itself to seek from bond holders the reorganization of bonds. This
reorganization will be done on terms comparable to those set forth in the present Agreed
Minute. The Government of the Islamic Republic of Pakistan commits itself not to accord any
category of creditors a treatment more favourable than that accorded to the Participating
Creditor Countries.
Pullback Clause: [t]he participating Creditor Countries will review the implementation of the
conditions stated ... for the comparability of treatment between all external creditors; if the
Participating Creditor Countries determine that these conditions are not substantially ful-
filled, they will declare the provisions set forth [in the present Agreed Minute] null and void.
As widely known, the lender of last resort (LOLR) role of the central bank remains the 11.27
major rationale for most central banks around the world, both in developed and developing
countries as recently witnessed during the credit-crunch and the US sub-prime mortgage
crises. The LOLR role is to provide credit in emergency situations. This role of the LOLR has
been adopted by the IMF in the international level (ILOLR), in favour of its member states
during economic and/or financial crises (eg the IMFs massive financial packages interven-
tions in Mexico (1994), Russia (1994), and Asia (1997)).
Since the IMF is not a commercial organization seeking profitable lending opportunities and 11.28
often lends at a time when other creditors are reluctant to do soand at interest rates that are
below those that would be charged at that juncture by the private sector46preferred creditor
status should be assigned to this lending. The IMF has clearly explained that the ILOLR role
benefits not just the Funds members but official and private creditors alike by allowing the
Fund to assist member countries in regaining a sustainable financial path and helping to
promote orderly resolutions to debt problems, when necessary.47 As noted by Lastra, the IMF
plays different roles by wearing different hats. Among these are: (1) that of an honest broker
or arbiter between creditors and debtors; (2) a primary lender by means of providing financial
assistance to countries experiencing balance of payment needs; (3) a preferred creditor with
an interest at stake; (4) an ILOLR; (5) a crisis manager; and (6) a standard setter.48 Therefore,
putting the IMF claims together with commercial claims in a workout would fundamentally
undermine the Funds capacity to play those vital roles in future.49
The reasons outlined in the previous paragraph, are the rationale for the de facto priority 11.29
claimed by and implicitly assigned to the IMF, World Bank, and regional developing banks.50

46 IMF supra n 1.
47
International Monetary Fund, Financial Risk in the Fund and the Level of Precautionary Balances, Prepared
by the Finance Department (in consultation with other departments), approved by Eduard Brau, 3 February
2004, available at <http://www.imf.org/external/np/tre/risk/2004/020304.pdf.>.
48 See Rosa M Lastra, Legal Foundations of International Monetary Law, OUP, 2006, p 499.
49 IMF supra n 1.
50 See Nouriel Roubini and Brad Setser, The Reform of the Sovereign Debt Restructuring Process: Problems,

Proposed Solutions and the Argentine Episode paper prepared for the conference on Improving the Sovereign
Debt Restructuring Process co-hosted by the Institute for International Economics and Institut Francais

423
 Transactional Aspects of Sovereign Debt Restructuring

However, Bolton and Skeel Jr contend that this de facto priority is partly an illusion because
the IMF has generally agreed to roll over its loans when the sovereign is unable or unwilling
to pay.51
11.30 The possibility of obtaining debtor-in-possession (DIP) financing is a feasible alternative to
financing restructurings in replacement of the ILOLR. It is an alternative in terms of priva-
tizing the source of money, ie shifting the source of funds from international organizations
to private lenders. It should be pointed out as an example that, in 1992, Macys (a US depart-
ment store) obtained new working capital in a $600 million loan through DIP financing
only three weeks after filing its petition under chapter 11 of the US Bankruptcy Code while
Russia had to wait more than a year.52 Shifting the source of funding from the ILOLR to the
capital markets will foster inter-creditor coordination and would reduce moral hazard. This
change of source of credit for the sovereign will not diminish current creditors status since
the IMF, World Bank, or other regional developing banks already have de facto priority over
non-secured creditors.
11.31 Schwarcz points out that permitting debtors to grant priority in order to attract new
money credits tends to create value for the unsecured creditors, even though those creditors
claims are subordinated to the new money.53 The availability of new money credit increases
a debtors liquidity, thereby reducing the risk of failure and increasing the expected value
of unsecured claims. Likewise permitting a debtor state to grant priority in order to increase
liquidity will reduce the risk of economic failure to some extent.54
11.32 DIP financing can be in the form of syndicated loans or may be raised again from the capital
markets. Schwarcz has proposed that this funding may be raised from the capital markets by
the IMF acting as an Intermediary Funding Source rather than involving itself directly.55
Accordingly, the IMF would borrow funds from the capital markets on a non-recourse basis
and re-lend those funds to the debtor state. The debtor states priority loan would be given as
collateral for the capital borrowed by the IMF from the market. Schwarcz considers that the
lenders thus would be in the same position as if they had made the loan directly to the state.
Further, because the borrowing would be on a non-recourse basis, the IMF would avoid
liability for the debtor states potential default and thereby reduce moral hazard given that
the capital market lenders could look only to their collateral (the debtor states assigned loan)
for repayment. Moreover, the intermediary funding approach would enable the IMF to
continue its current practice of imposing conditionality on funding.
11.33 With regard to Schwarczs proposal, we would like to point out that it has been based on the
basic premise that the IMF can act as an intermediary funding source and issue collateral-
ized securities. It is highly improbable that the articles of the IMF, unless they are amended,
would be interpreted to permit the IMF to act as an intermediary funding source and to

des Relations Internationales, Paris, 9 March 2003, p 4; Lastra supra n 48, p 486; Schwarcz supra n 28,
pp 9561034 and Idiots Guide to Sovereign Debt Restructuring (2004) 53 Emory Law Journal 11891218;
IMF supra nn 1 and 47.
51 Patrick Bolton and David Skeel Jr, Redesigning the International Lender of Last Resort (2005) 6 U

Chicago Journal of International Law L 177.

52 See Jeffrey D Sachs, IMF, Reform Thyself , Wall St J, 21 July 1994.
53 Schwarcz, supra n 28.
54 Ibid.
55 Ibid.

424
 I. Transactional Aspects of Sovereign Debt Restructuring

issue securities.56 However, instead of the IMF, the World Bank or the International Finance
Corporation (IFC) may act as the intermediary funding source, as has already been done
in the past. Asset-backed securitization may be used for a variety of reasons, including
a desire for liquidity, reducing financing costs or mismatches between assets and liabilities,
and managing balance sheets better.57
In the light of the remote possibility of an IMF bail-out or funding for restructuring, a sov- 11.34
ereign would be required to arrange financing for restructuring through a mechanism similar
to DIP financing. What would be the financial price of the DIP financing for the sovereign
country? Although it may seem at first sight to be very expensive and difficult due to the
distressed situation, financing is not impossible and in fact may prove to be financially more
viable. This DIP financing could be raised by the World Bank or the IFC, acting as an inter-
mediary financing fund to borrow funds from the capital markets by securitization of the
asset pool of receivables from the sovereign debtor and simultaneously re-lend those funds
back to the sovereign debtor. The asset pool of receivables from the sovereign debtor on these
loans would be the collateral for the capital raised by World Bank or the IFC from the
market. Figure 11.2 below illustrates how to structure such a transaction.
Loan

Intermediary Funding Source

(World Bank / IFC) Sovereign debtor
Debt payments

Sale of Debtor
receivables payments

Securities Servicing
sales proceeds fee
Credit/Liquid enhancers
fee
sup port/
Credit

Special purpose vehicle Services/fee Arranger

Secu
rities
rating
Securities Rating agencies
purchase price

Principal-Interest
Securities
payments

Investors

Figure 11.2 Structure to Obtain Dip Financing from the Capital Markets through
Securitization58

56 International Monetary Fund, Article V: Operations and Transactions of The Fund 2.

57 Hal S Scott and Philip A Wellons, International Finance: Transactions, Policy, and Regulations (8th edn,
2001), 759.
58 Figure 11.2 is a simplified structure for sovereign DIP financing based on Scott and Wellons securitiza-

tion structure (ibid at 760, Exhibit 1).

425
 Transactional Aspects of Sovereign Debt Restructuring

11.35 To ensure that the investors do not have recourse to the World Bank or the IFC and to avoid
any liability for the sovereign debtors potential default, the World Bank or the IFC would
have to set up a Special Purpose Vehicle (SPV) and transfer all the assets (the receivables) to
it. The investors would only have recourse to the assets of the SPV (the asset pool of receiva-
bles from the sovereign debtor), which will also be the collateral for the securities. Such a
financing plan could be a workable solution in cases where the number of series or the total
outstanding amount is limited. Nevertheless, the possibility of the World Bank or the IFC
accepting to issue the securities backed by the right to collect the amount due by the sover-
eign rests on a political issue.
11.36 It is worth stressing, however, that the IMFs proposal of a SDRM is not based on the notion
of insolvency for countries because countries cannot become insolvent.59 The IMF was pro-
moting a mechanism to facilitate debt workout negotiations which differed from insolvency
laws because it did not include: (1) an automatic stay on the enforcement of creditors rights;
(2) there is no ultimate sanction of liquidation; (3) policies are not supervised by an insol-
vency court; and (4) creditors cannot insist on a change in management.60
11.37 Finally, the debt problems of low-income countries are dealt with under the Highly Indebted
Poor Country (HIPC) initiative.61 Debt relief under the HIPC initiative was launched
jointly by the IMF and the World Bank in 1996.62 In 1997, this initiative was linked to the
Poverty Reduction and Growth Facility (PRGF) and a trust administered by the IMF was set
up, ie the HIPC-PRGF Trust.63 In 1999, the international community recognized the need
for a concerted effort to deal with the external debt problem of certain countries (mostly
African) and revamped the HIPC initiative to provide faster and deeper debt relief to allow
HIPC to reach a level of sustainability.64 On 8 December 2005, the IMFs Executive Board
approved the Multilateral Debt Relief Initiative (MDRI) involving a total debt relief of
HIPC and those countries with per capita income below $380 and outstanding debt to the
IMF at end-2004.65 On the same date, the Exogenous Shocks Facility was also approved as

59 Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad-hoc Machinery, Brookings Institution Press,

2003, p 289.
60 IMF supra n 1.
61 According to the IMFs glossary of selected financial terms, the HIPC Initiative was adopted in 1996 and

provides exceptional assistance to eligible countries to reduce their external debt burdens to sustainable levels,
thereby enabling them to service their external debt without the need for further debt relief and without com-
promising growth. It involves multilateral, Paris Club, and other official and bilateral creditors. To be eligible
for the HIPC, countries must: (1) have established a strong track record of performance under programmes
supported by the IMFs Poverty Reduction and Growth Facility (PRGF) and the International Development
Association (IDA); (2) be IDA-only and PRGF-eligible; (3) face an unsustainable debt burden; and (4) have
developed a Poverty Reduction Strategy Paper. In 2005, the HIPC Initiative was supplemented by the
Multilateral Debt Relief Initiative (MDRI) which allows for 100 per cent relief on eligible debts of countries
completing the HIPC Initiative process. See <http:www.imf.org>.
62
See IMF, Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative: A Factsheet, avail-
able at <http://www.imf.org/external/np/exr/facts/hipc.htm>.
63
Instrument to establishunder Article V, Section 2(b)the Poverty Reduction and Growth Facility
Trust, decision No 8759(87/176) ESAF 18 December 1987 as amended.
64 The HIPC include: Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad,

Comoros, Cte dIvoire, Democratic Republic of the Congo, Eritrea, Ethiopia, Ghana, Guinea, Guinea-Bissau,
Guyana, Haiti, Honduras, Kyrgyz Republic, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique,
Nepal, Nicaragua, Niger, Republic of Congo, Rwanda, So Tom & Prncipe, Senegal, Sierra Leone, Somalia,
Sudan, Tanzania, The Gambia, Togo, Uganda, and Zambia.
65 See IMF, IMF Executive Board Agrees on Implementation Modalities for the Multilateral Debt Relief

Initiative, Public Information Notice (PIN) No 05/164, 8 December 2005, available at <http://www.imf.org/

426
 I. Transactional Aspects of Sovereign Debt Restructuring

part of the PRGF Trust to support HIPCs in the event of economic shocks caused by rising
oil prices, natural disasters, contagion of conflicts, or crisis in neighbouring countries, etc.
Since the SDRM deals with issues concerning sovereign debt to private sector creditors, it is 11.38
more relevant to those countries that have borrowed on international capital markets which
is usually not the case with HIPC countries.66

2. Disadvantages of the SDRM

Under the SDRM, a super-majority of creditors, regardless of the bond issue or loan obliga- 11.39
tions held, would be able to vote to accept new terms of payment under a restructuring
agreement and minority creditors would be bound by the decision of the majority.67
Consequently, a dispute resolution forum would be created for different purposes, such as
verifying claims, guaranteeing the integrity of the voting process that led to the restructur-
ing, and adjudicating disputes among creditors. Thus, to grant a legal stay binding on all
parties, the mechanism must have the force of universal law.68 Otherwise, creditors would be
able to sue the debtor state in their own jurisdiction, in the jurisdiction regulating the bond
issuance, or in the jurisdiction of the debtor state. Obtaining a convention or a treaty bind-
ing all countries would be likely to take a very long time. In 2002, an IMF official stated that
even with unanimous political support this approach could not be in place for at least two
or three years.69 This IMF officer was not aware that two years later and due to the criticism
and scepticism towards the SDRM, another IMF officer expressly stated that [t]he debate
on the Sovereign Debt Restructuring Mechanism [SDRM] has been shelved for the time
being.70 Some critics believe the process could take decades and could end up being ineffec-
tive if too many nations refuse to join [in].71
The imposition of standstills and the use of majority voting in debt restructuring agreements 11.40
binding on a dissenting minority require an amendment to the IMFs Articles of Agreement;
or a new treaty. In order to amend the Articles of Agreement of the IMF, two criteria have to
be met: (1) the amendment is supported by a two-thirds majority of members (numerosity);
and (2) the number of members voting for the amendment hold at least 85 per cent of the
voting power.72 The US has a decisive vote in amending the IMFs Articles of Agreement

external/np/sec/pn/2005/pn05164.htm>; and The Multilateral Debt Relief Initiative (MDRI): A Factsheet,

April 2007, available at <http://www.imf.org/external/np/exr/facts/mdri.htm>.
66
IMF supra n 1.
67 Barry Eichengreen and Ashoka Mody, Is Aggregation a Problem for Sovereign Debt Restructuring? ( January

2003), available at <http://emlab.berkeley.edu/users/eichengr/research/aeapapers&proceedings5jan15-03.

pdf.>.
68
Krueger supra n 4.
69
Ibid.
70
International Monetary Fund, Interview with Mark Allen: IMF needs to do far more to help countries
learn from each others successes and failures, IMF Survey, Vol 33, No 7, 12 April 2004, p 99, available at
<http://www.imf.org/external/pubs/ft/survey/2004/041204.pdf>. In the same sense, see international press
articles (The Economist, Dealing with Default, Washington DC, 8 May 2003; Paul Blustein, Bankruptcy
System for Nations Fail to Draw Support, Washington Post, 2 April 2003; Alan Beattie, Brown Plan to Reform
Global Financial System Meets Opposition, Financial Times, 14 April 2003).
71 Owen C Pell, Nations Need Bankruptcy Process, Outside the Box, 8 February 2002, available at <http://

www.whitecase.com/files/Publication/03e66ae8-3c8c-4a4b-8d01-a8e3f92b6266/Presentation/
PublicationAttachment/26fe173a-d3ac-417d-a874-adce8d10058f/article_nations_need_bankruptcy_proc-
ess_pell.pdf>.
72 See Art XXVIII(a) of the Articles of Agreement of the IMF.

427
 Transactional Aspects of Sovereign Debt Restructuring

since its quota,73 ie the countrys economic position relative to other members, entitles it to
371,743 votes which represents 16.77 per cent of the total members voting rights. Therefore,
if the US does not vote in favour of the amendment, the second criteria cannot be attained.
In order to vote in favour of the amendment, the US Congress must approve the change.
There is no indication, however, that there would be sufficient political support for the
SDRM in the US Congress.74
11.41 If a treaty were to be adopted, it has to emanate from an international body, which will take
several years of political negotiations and several more (in the event that it is finally agreed)
for ratification.75
11.42 Even if a binding treaty were adopted, the IMF would have serious decisions to make: would
the treaty be binding to pre-existing debt obligations (ie retroactive effect)? This requires a
twofold analysis: (1) on one hand, it can be easily argued that the default and the need to use
the SDRM occurred after the adoption of the treaty; but (2) on the other hand, the terms
and conditions of the debt instruments giving rise to the rights of the bondholders were
agreed prior to the adoption of the treaty. Regarding the latter, it is worth mentioning that
Article 28 of the 1969 Vienna Convention on the Law of Treaties sets the non-retroactivity
of treaties as the general rule, unless otherwise established.
11.43 Notwithstanding the aforementioned practical difficulties in implementing the SDRM, the
IMF believes that due to a greater predictability in the restructuring progress afforded by the
adoption of the SDRM, an improvement in the functioning of international capital markets
should be expected.76 However, according to Heise, while an SDRM would make the process
of restructuring easier and faster, this may create an environment where governments do not
try their hardest to avoid defaults in the first place.77 As sovereign debt always has the poten-
tial to lead to opportunistic defaults (unwillingness to pay as opposed to inability to pay) as
evidenced in 2009 by Ecuador,78 where a restructuring that is too easy may poison the func-
tioning of the markets.
11.44 Krueger stated:
[T]he Funds involvement would be essential to the success of such a system [referring to the
SDRM]. We are the most effective channel through which the international community can
reach a judgment on the sustainability of a countrys debt and of its economic policies, and
whether it is doing what is necessary to get its balance of payments back into shape and to
avoid future debt problems.79

73 As of August 2008, the US quota was SDR 37,149.3 million (17.14%). SDR stands for special drawing

rights, an international reserve asset created by the IMF in 1969 as a supplement to existing reserve assets. See
<http://www.imf.org/external/np/exr/facts/quotas.htm>.
74
Patrick Bolton, Toward a Statutory Approach to Sovereign Debt Restructuring: Lessons form Corporate
Bankruptcy Practice Around the World, at 2728, available at <http://204.180.229.21/external/pubs/ft/
staffp/2002/00-00/pdf/bolton.pdf>.
75
For example, the 1983 Vienna Convention on Succession of States in Respect of State Property, Archives
and Debts has not been ratified yet.
76 IMF supra n 1.
77
Michael Heise, An Improved International Finance Architecture Contributions from the Official and
Private Sector, Speech at the Conference for New Sovereign Debt Restructuring Mechanisms: Challenges and
Opportunities (2122 February 2003).
78 See Lee Buchheit and Mitu Gulati, The Coroners Inquest, International Financial Law Review,

September 2009, p 3; and Ben Miller, Ecuador Restructuring: Inside Job, Latin Finance, 1 July 2009.
79 Krueger supra n 4.

428
 I. Transactional Aspects of Sovereign Debt Restructuring

What would happen if a sovereign state obtained an agreement with its creditors through an 11.45
SDRM and thereafter defaulted again? It should be noted that although the SDRM is based
on the US chapter 11, there is no ultimate sanction of liquidation and creditors cannot insist
on a change in management as happens in the case of corporations. The lack of sanctions
alters the whole rationale of the system and therefore the dynamics are different than those
of an insolvency regime. A twice-defaulting country would demonstrate that the SDRM is
not a panacea, and it would question the IMFs ability to provide supervision and an ade-
quate economic and financial plan.
Further, establishing a quasi-judicial entity under the IMF would likely be a time- 11.46
consuming and difficult process.80 In addition, many countries fear that the introduction
of statutory and even contractual mechanisms for debt restructuring would impair their
access to international capital markets and discourage capital flows.81
Thus, it is apparent that the SDRM has some shortcomings and many enemies. Its enemies 11.47
include the private financial sector, especially representatives of different actors in the inter-
national bond market, and developing countries who feel no ownership of the proposal and
express even less enthusiasm for it. In addition, it is unclear where developed countries stand
or if they stand together.82 The question then is whether an institutional change in the inter-
national financial system providing for orderly sovereign debt restructuring is needed.83
Despite its shortcomings, the SDRM does provide some benefits. It is innovative in bringing 11.48
debtors and creditors together (irrespective of the use of CACs). It is also innovative because
it secures greater transparency and provides a mechanism for dispute resolution.84 The
SDRM goes further than the CAC restructuring approach by not requiring separate
decisions from the holders of individual bond series or other creditors and allowing a single
vote to restructure multiple debt instruments. The vote is an aggregate of the votes of the
creditors holding participating debt instruments. Thus, it permits the debtor and its
creditors to act as if all of the debt was governed by a single collective action clause.85 This
aggregation mechanism was used in Uruguays 2003 debt reprofiling. Therefore, if the
SDRM is not applicable retrospectively, the wide spread of CACs and the possibility of series
aggregation as in Uruguays debt reprofiling can replicate these advantages.
Although the adoption of the SDRM could be considered as a positive step in debt restruc- 11.49
turing, the effects of the SDRM could also be achieved through the broader use of CACs in
a decentralized market-oriented approach as proposed by Taylor86 (using the tools we already
have), or perhaps using them more creatively and more confidently to promote orderly

80
Mark Jewett, Legal Approaches and Procedures, Speech at the Conference for New Sovereign Debt
Restructuring Mechanisms: Challenges and Opportunities (2122 February 2003).
81
Yilmaz Akyz, Some Reflections on SDRM, Speech at the Conference for New Sovereign Debt
Restructuring Mechanisms: Challenges and Opportunities (2122 February 2003), available at <http://www.
networkideas.org/alt/feb2003/alt27_SDRM.htm>.
82
See Barry Herman, The International Community Should Continue Work on a Mechanism for
Restructuring Sovereign Debt, Speech at the Conference for New Sovereign Debt Restructuring Mechanisms:
Challenges and Opportunities (2122 February 2003), available at <http://www.inwent.org/ef-texte/sdrm/
herman.htm>.
83 See Roubini supra n 10.
84 See Akyz supra n 81.
85 See IMF supra n 1.
86 See Taylor supra n 16.

429
 Transactional Aspects of Sovereign Debt Restructuring

workouts, as proposed by Buchheit and Gulati.87 It is important to note that the sovereign
debt restructuring regime proposed by the IMF would not be substantially different from a
contractual approach, mainly it would be creditor-centred rather than IMF-centred.88
11.50 According to Cohen and Portes,89 the proposal SDRM was shelved because it would have
required an amendment to the Articles of Agreement. However, Lastra contends that a more
modest alternative, could be a creative interpretation of Article VIII, Section 2(b) of the
IMF Articles of Agreement as a means to impose a stay on creditors.90 This position is also
supported by Francotte91 and Gianvitti.92 The latter also argues that an interpretation under
Article XXIX of the Articles of Agreement can be reached to create uniformity of interpreta-
tion within the courts of IMF members.93
11.51 This notwithstanding, the SDRM remains a live issue since the IMF has not given up on it
even though its development has been halted.94 Moreover, the recent financial crises have
reignited the discussion of a structured approach to deal with sovereign debt issues. Yet, as
Sgard stated, the fact that the SDRM proposal was eventually shelved does not imply it has
lost any political or historical significance since it indeed highlights the range of possible
solutions which dominant states are ready to consider.95
11.52 Although a market-oriented approach has worked in the restructuring cases of Russia,
Ukraine, Ecuador (2000), Pakistan, Uruguay, Belize, Grenada, etc, the view of the IMF is
that the costs at present are too high and too disruptive to the international community
as a whole.96 As previously discussed, Buchheit and Gulati contend that the existing
collective decision-making provisions in sovereign bonds canif used more confidently and
creativelyreplicate certain features of domestic corporate bankruptcy, ie automatic stays;
cramdowns; and DIP financing, but not its coordination feature. Coordination among dif-
ferent series of bonds was resolved in Uruguays debt reprofiling by the aggregation mecha-
nism in which amendments to any terms (including payment terms) was incorporated
into one or more series of bonds simultaneously.97 More importantly, the proposed

87 Lee C Buchheit and G Mitu Gulati, supra n 8.

88 See Roubini supra n 10.
89 Daniel Cohen and Richard Portes, Dealing with Destabilizing Market Discipline , paper prepared for

the conference on Market Discipline: the Evidence across Countries and Industries, organized by the Bank for
International Settlements and the Federal Reserve Bank of Chicago, 30 October1 November 2003, p 5, avail-
able at <http://faculty.london.edu/rportes/research/FRBC-BIS220104.pdf>.
90 Lastra supra n 48, p 481.
91 See Pierre Francote, The Fund Agreement in the Courts in Robert Effros (ed), Current Legal Issues

Affecting Central Banks, Vol 1, Washington DC, IMF, 1992.

92 See Franois Gianvitti, The Reform of the International Monetary Fund in Rosa M Lastra (ed), The

Reform of the International Financial Architecture, London, Kluwer Law, 2001, p 102.
93 Ibid.
94 Ross P Buckley, Deficiencies in the International Financial System and Their Impact on the Poor, paper

prepared for the Foundation for Development Cooperation, available at <http://www.fdc.org.au/files/buckley-

canberra.pdf>.
95
Jrme Sgard, The Renegotiation of Sovereign Debts and the Future of Financial Multilateralism, paper
presented at the Fifth Pan-European Conference of the Standing Group on International Relations, The Hague,
911 September 2004, available at <http://www.sgir.org/conference2004/papers/Sgard%20-%20Sovereign
%20debt%20and%20financial%20multilateralism.pdf>.
96
IMF supra n 1.
97 In order to approve the amendment, a double majority is required: (1) 85 per cent of the aggregate prin-

cipal amount of all affected series; and (2) 66 per cent of each specific series.

430
 I. Transactional Aspects of Sovereign Debt Restructuring

SDRM: (1) excludes the debt obligations of the IMF as well as other IFIs; and (2) is inclined
to exclude the Paris Club and domestic creditors. Eichengreen and Mody consider that
an approximately similar degree of coordination to the SDRM can be achieved by the use
of CACs.98

3. An alternative SDRM
The recent case of Iraq highlighted the possibility of using a different alternative to achieve 11.53
the same outcome as an SDRM, without the need of having a formal statutory regime put in
place for said specific purpose. This section will analyse the mechanisms and types of resolu-
tions adopted by the UN in the case of Iraq and will also illustrate how they can be used to
recreate an SDRM.
(a) UN resolutions
A UN resolution is a formal text adopted by a UN body. Although any UN body can issue 11.54
resolutions, in practice most resolutions are issued by the Security Council or the General
Assembly. There are two types of UN resolutions, ie substantive or procedural resolutions. In
addition, resolutions can be classified by the organ that takes the decision, eg UN General
Assembly resolutions or UN Security Council resolutions. The UN General Assembly con-
sists of all the members of the United Nations.99 Each member of the General Assembly shall
have one vote.100 Decisions of the General Assembly on what have been referred as impor-
tant questions shall be made by a two-thirds majority of the members present and voting.
Decisions on other questions, including the determination of additional categories of ques-
tions to be decided by a two-thirds majority, shall be made by a majority of the members
present and voting.
The UN Security Council has 15 members, out of which five are permanent members 11.55
(China, France, Russia, UK, and the US).101 Resolutions on procedural matters shall be
made by an affirmative vote of nine members. Decisions on all other matters shall be made
by an affirmative vote of nine members including the concurring votes of the permanent
members.
Most General Assembly resolutions are considered non-binding. Articles 10 and 14 of the 11.56
UN Charter refer to General Assembly as recommendations. The International Court of
Justice, ie the principal judicial organ of the UN,102 has reiterated the recommendatory
nature of General Assembly resolutions. However, some General Assembly resolutions deal-
ing with matters internal to the UN, such as budgetary decisions or instructions to lower-
ranking organs, are binding on their addressees. Resolutions adopted under Chapter VII of
the UN Charter (ie Action with Respect to Threats to the Peace, Breaches of the Peace, and
Acts of Aggression) are adopted by the Security Council. Under Article 25 of the UN
Charter, UN member states are bound to carry out decisions of the Security Council in
accordance with the present Charter.

98 Eichengreen and Mody supra n 67.

99 See Art 9 of the UN Charter.
100 See Art 18 of the UN Charter.
101 See Art 23 of the UN Charter.
102 See Art 92 of the UN Charter and Art 1 of the Statute of the International Court of Justice.

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 Transactional Aspects of Sovereign Debt Restructuring

11.57 Resolutions made under Chapter VII are considered binding because there is an enforce-
ment mechanism under Articles 41, 42, and 43, but resolutions under Chapter VI (Pacific
Settlement of Disputes) have no enforcement mechanisms and are generally considered to
have no binding force under international law.
11.58 In 1971, the majority of the members of the International Court of Justice (ICJ) stated in a
(non-binding) Namibia advisory opinion that all UN Security Council resolutions are
legally binding.103 This is based on Article 25 of the UN Charter that states that [t]he
Members of the United Nations agree to accept and carry out the decisions of the Security
Council in accordance with the present Charter. Moreover, the ICJ argued that Article 25
of the UN Charter has no limitation as to which type of decisions (ie Chapter VI or Chapter
VII) and that Article 25 is immediately after Article 24 in the part of the Charter which deals
with the functions and powers of the Security Council. The ICJ stated that [i]f Article 25
had reference solely to decisions of the Security Council concerning enforcement action
under Articles 41 and 42 of the Charter, that is to say, if it were only such decisions which
had binding effect, then Article 25 would be superfluous, since this effect is secured by
Articles 48 and 49 of the Charter.
11.59 In May 2003, the UN Security Council adopted Resolution No 1483/03 shielding Iraq
from possible seizures or attachments of its oil reserves. The effects of this resolution can be
assimilated to those of a standstill as proposed by the SDRM without the need to reform the
IMFs articles of association or without the need to adopt an international treaty. The effects
of this resolution are considered in the next section.
(b) The Iraqi case and the use of UN resolutions
11.60 The UN Security Council adopted Resolution No 1483/03 in May 2003. This resolution shielded
Iraq from possible seizures or attachments of its oil reserves until 31 December 2007. Security
Council Resolution No 1546/04 dated 8 June 2004 decided that the provisions of paragraph 22
of Resolution No 1483/03 shall continue to apply, with the exception that the privileges and
immunities provided in that paragraph shall not apply with respect to any final judgment arising
out of a contractual obligation entered into by Iraq after 30 June 2004.104 In extreme cases, the
IMF can even endorse a sovereigns request before the UN to prevent creditors from seizing assets
during a short restructuring period as occurred in the recent case of Iraq.
11.61 Since UN Security Council resolutions are not self-executing and do not confer rights on US
citizens which are judicially enforceable in US domestic courts in the absence of implementing
legislation,105 the US President enacted Executive Order No 13,303.106 Executive Order
No 13,303 was enacted on the same date as the UNs Security Council Resolution No 1483/03.
The only substantial difference between both pieces of legislation is that the US Executive

103
See International Court of Justice, Legal Consequences for States of the Continued Presence of South
Africa in Namibia (South West Africa) notwithstanding Security Council Resolution 276 (1970), Advisory
Opinion of 21 June 1971.
104
The rationale behind this resolution is to extend immunity to Iraqi obligations with the exception of
those entered into by the new government. 30 June 2004 was the date of the transfer of sovereignty back to the
Iraqi citizens.
105 See Diggs v Richardson, 555 F 2d 848 (DC Cir 1976).
106 Executive Order 13,303 Protecting the Development Fund for Iraq and Certain Other Property in

Which Iraq Has an Interest, 68 Fed Reg 31931 (28 May 2003).

432
 I. Transactional Aspects of Sovereign Debt Restructuring

Order does not have an expiration date regarding the shielding of Iraqi assets. On 29
November 2004, Executive Order No 13,364 was enacted to protect central bank assets.107
As noted by Gelpern, the great powers stand ready to give less fortunate governments 11.62
extraordinary legal protections in extreme legal circumstances.108 It is very important to trace
a time line between what has been happening in the SDRM arena and the adoption of UN
Security Council Resolution No 1483/03 in order to stress the real importance of the latter.
As previously explained, various scholars agree that the SDRM proposal has been shelved.
However, one particular scholar is more precise in stating that the IMF Board officially
shelved the proposal as politically unfeasible109 on 11 April 2003 in the Report of the
Managing Director to the Internationally Monetary and Financial Committee on the IMFs
Policy Agenda.110 Therefore, it can be argued that only 40 days after the SDRM was shelved,
an ad hoc SDRM was adopted by UN Security Council Resolution No 1483/03 of 22 May
2003, shielding Iraqs oil reserves from creditors. Although creditors can obtain final judg-
ments they are not able to enforce them against oil reserves (or central bank reserves).
Within an ad hoc legal framework of sovereign debt restructuring, this can be an ad hoc 11.63
SDRM to the one proposed by the IMF. It is of worthy note that oil reservesthe main asset
targeted by UN resolutionsaccount for more than 75 per cent of Iraqis total sources of
income.111
The United Nations Conference on Trade and Development (UNCTAD) has recently launched 11.64
a project aiming at promoting responsible sovereign lending and borrowing. The main envis-
aged output of this project is an agreed set of principles that will promote responsible practices.
These voluntary principles are intended to establish clear responsibilities on both the borrowers
and the lenders sides with the aim of reducing the prevalence of sovereign debt crises and pro-
moting sustained economic growth. In the event that disputes and/or defaults occur, negotia-
tions will be facilitated if lenders and borrowers can refer to an agreed set of standards during
the negotiation phase. The parties would then not only be encouraged to follow generally
accepted principles that enhance responsible practices but they would also have a common
reference point in the case of a dispute. A distinctive element of these draft principles is their
focus on the fiduciary duty of governments which emphasizes that sovereign borrowing and
lending to sovereigns involves diverse interests, including future generations of citizens, and a
wide range of public and private, domestic, and international claimants on state resources.

107 Executive Order No 13,364 Modifying the Protection Granted to the Development Fund for Iraq and

Certain Property in Which Iraq Has an Interest and Protecting the Central Bank of Iraq, 69 Fed Reg 70177 (29
November 2004). Other relevant Executive Orders regarding the protection of assets in the US include: (1)
Executive Order 13,315 dated 28 August 2003; and, (2) Executive Order 13,350 dated 29 July 2004. Finally
on 22 May 2006, in accordance with section 202(d) of the National Emergencies Act (50 USC 1622(d)), the
US President decided to extend the national emergency protecting the Development Fund for Iraq and certain
other property in which Iraq has an interest for a year.
108
Anna Gelpern, What Iraq and Argentina Might Learn from Each Other (2005) 6(1) Chicago Journal
of Internacional Law 414.
109
Ibid, p 399.
110 See Report of the Managing Director to the Internationally Monetary and Financial Committee on the

IMFs Policy Agenda, available at <http://www.imf.org/external/np/omd/2003/041103.htm>.

111 See IraqLetter of Intent, Memorandum of Economic and Financial Policies, and Technical

Memorandum of Understanding, Baghdad, 24 September 2004, available at <http://www.imf.org/external/

np/loi/2004/irq/01/index.htm>.

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 Transactional Aspects of Sovereign Debt Restructuring

Other issues addressed by the draft principles include: transparency and accountability, due
diligence, audits, country ownership, and social responsibility.

D. The Use of CACs, Exit Consent, and Term Enhancements

11.65 CACs and exit consents are two market-oriented techniques that were developed as a response
to the holdout problem and the IMFs proposal of a statutory approach. These two are com-
plemented by the use of contractual term enhancements. The analysis of these two tech-
niques, jointly with the contractual term enhancers will follow. Further, there is a need to
address the interrelated topic of bonds amendment terms under New York and English law,
which will also be addressed.
1. Collective action clauses
11.66 Collective action clauses are clauses that sometimes are included in the prospectus of a bond
issuance and require the interaction of bondholders to perform an action provided for in said
clause. There are four different types of CACs. These are:112 (1) collective representation
clauses;113 (2) majority action clauses; (3) sharing clauses;114 and (4) acceleration clauses.115
11.67 Since CACs is the genus that comprises different species which entail a collective action
(including particularly majority action clauses, which are the most developed in the area of
sovereign debt); the widely used terms collective action clauses or CACs are used inter-
changeably with majority action clauses, unless otherwise specified.
11.68 Majority action clauses have been the focus of the international financial architecture since
the endorsement of the G 10 Rey Report in 1996.116 Former US Under Secretary John B
Taylor was the father of this approach.117 Since the Rey Report, majority action clauses were
promoted by the official sector and many academics and have been effectively incorporated
in bond issuances. Therefore, special focus will be provided on CACs.118

112 See Liz Dixon and David Wall, Collection Action Problems and Collective Action Clauses, Financial Stability

Review, June 2000.

113 The collective representation clause is intended to coordinate representation of the bondholders as a

group.
114 These clauses provide that any proceeds obtained from the debtor would be shared among all the credi-

tors on a pro-rata basis.

115
These are common clauses included in US bonds issued through a fiscal agent agreement which require
25 per cent of the outstanding bonds to accelerate unmatured principal upon an event of default.
116 See the Resolution of Sovereign Liquidity Crises (May 1996) drafted by a working group under the

auspices of the G 10 Deputiescommonly referred to as the G 10 Report or the Rey Report (named after Jean-
Jacques Rey).
117
Taylor supra n 16.
118
For an elaboration of CACs see G 10, Report of the G 10 Working Group on Contractual Clauses, 26
September 2002; International Monetary Fund, Collective Action Clauses in Sovereign Bond Contracts
Encouraging Greater Use (prepared by the Policy Development and Review, International Capital Markets and
Legal Departments in consultation with other Departments), 6 June 2002 and The Design and Effectiveness
of Collective Action Clauses (prepared by the Legal Department in consultation with the Policy Development
and Review and the International Capital Markets Departments), 6 June 2002, both available at <http://www.
imf.org>; Mark Gugiatti and Anthony Richards, Do Collective Action Clauses Influence Bond Yields? New
Evidence from Emerging Markets, Reserve Bank of Australia, Research Discussion Paper 2003-02, March
2003; Anna Gelpern, How Collective Action is Changing Sovereign Debt, IFLR, May 2003, pp 1923;
Stephen Choy and Mitu G Gulati, Innovation in Boilerplate Contracts: The Case of Sovereign Bonds (2004)
53 Emory L J 929.

434
 I. Transactional Aspects of Sovereign Debt Restructuring

CACs enable the amendment of any of the terms and conditions of the bondsincluding 11.69
the payment termsif the required majority therein established is obtained. The use
of CACs proposes that the sovereign borrowers and their creditors put a package of new
collective action clauses in the bonds that describe as precisely as possible what happens
when a country decides that it has to restructure its debt.119 This would prevent a minority
of creditors from blocking negotiations with the debtor120 and create a more orderly and
predictable workout process.121 These clauses would represent a decentralized, market-
oriented approach because the debtor and creditors would have determined both the con-
tracts and the workout process contained in the contracts on their own terms.122
The origin of these clauses under English law can be traced back to 1879, when debtors 11.70
facing liquidity problems were faced with no alternative but liquidation, which they wanted
to avoid.123 In the US, the use of CACs was not widely accepted as in English law due to
section 316(b) of the Trust Indenture Act of 1939 (TIA)124 that expressly states that the
amount due under a publicly issued corporate bond cannot be affected without the consent
of each bondholder and provides that a deferment of a maximum of three years is acceptable
upon the approval of 75 per cent of the bondholders. As noted by Buchheit and Gulati,
although the TIA is not applicable to foreign sovereign bonds issued in the US, the amend-
ment clauses included in such sovereign bonds have almost invariably followed the TIA-
driven approach to amendments.125
Currently, the inclusion of these clauses in sovereign bonds is optional and often depends on 11.71
the market convention.126 While bonds issued under trust deeds and fiscal agency agree-
ments governed by English law contain CACs, they are not included in bonds governed by
New York law issued before 2003, including Brady bonds.127 These clauses, however, have
been excluded from bonds issued under New York law as a matter of practice and not due to
any legal impediment. However, as of 2003 there has been a widespread use of CACs in bond
issuances including those issued under New York law.
CACs found in international sovereign bonds that have been restructured consist only of: (1) 11.72
majority restructuring provisions, which enable a qualified majority to bind a minority to a
restructuring plan (including payment terms) either before or after default; and (2) majority
enforcement provisions, which enable a qualified majority to limit the ability of a minority
to enforce their rights following a default.128

119 Taylor supra n 16.

120
Dodd supra n 7, p 3.
121
Taylor supra n 16.
122
Ibid.
123
See Sir Francis B Palmer, Company Precedents for use in Relation to Companies Subject to the Companies acts
1862 to 1900 : With Copious Notes (Stevens and Sons, London, 9th edn, 1903).
124
USC 15 77 et seq.
125
Buchheit and Gulati supra n 8, p 1329.
126 Report by the Secretariat of the United Nations Conference on Trade and Development, New York

and Geneva 2001, p 144, available at <http://www.unctad.org/en/docs/tdr2001_en.pdf> (Trade and

Development).
127 International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crisis

Restructuring International Sovereign Bonds (prepared by the Policy Development and Review and Legal
Departments) p 4, available at <http://www.imf.org/external/pubs/ft/series/03/IPS.pdf>.
128 Ibid, pp 4 and 9.

435
 Transactional Aspects of Sovereign Debt Restructuring

11.73 In 2002 Taylor proposed the inclusion of a new package of clauses based on the following
template of CACs:129
(1) Majority Action Clauses: designed to empower a super-majority (often 75 per cent) of
bondholders to agree to a change in payment terms in a manner that is binding on all
bondholders, thereby preventing holdouts.
(2) Collective Representation Clauses: designed to establish a representative forum (such as
a trustee or committee) for coordinating negotiations between the issuer and the
bondholders and to empower it to initiate litigation, at the behest of a specified majority
of bondholders.
(3) Cooling-off Period Clauses: designed to provide a cooling-off period between the
date when the sovereign notifies its creditors that it wants to restructure and the date
that the representative is chosen, setting a fixed time limit. During this temporary
suspension, a deferral of payments might be necessary and the possibility of such suspen-
sion or deferral should be incorporated in the clause along with appropriate penalties.
During the cooling-off period, bondholders would be prevented from initiating
litigation.
11.74 The official sector, however, in addition to the Taylor proposals, supports the inclusion of
the standard sharing clause as in syndicated loans agreements (along with representation
clauses and majority action clauses) because this ensures that all payments made by the
debtor are shared among the creditors on a pro-rata basis.130 The official sector also believes
that if such a clause is included in bonds, it would help to prevent maverick litigation,
rogue creditors, and vultureseven after the cooling-off period proposed by Taylor.131
Orderly restructuring would then result. Moreover, some speculate that the absence of the
sharing clause in the Brady bonds has made litigation a more attractive option for the new
class of creditors.132
11.75 On practical grounds, it is very difficult to enforce a sharing clause in a bond issuance.
It should be borne in mind that there is a shift of responsibility (and liability) to the creditor
that successfully collects. This type of clause will not be effective in fiscal agency structures
due to practical reasons.

(a) The expansion in the use of CACs

11.76 After the Mexican debt crisis in 1998, the official sector has been urging emerging market
borrowers to include the aforementioned CACs in bond contracts in efforts to improve com-
munication with bondholders and to facilitate bond restructuring.133 The G 10 agreed to
work with emerging market countries and creditors to incorporate standardized contingency
clauses134 into debt contracts, and to simultaneously coordinate with the IMF to provide

129 Taylor supra n 16, p 3.

130
For a detailed description of the object and purpose of this clause as well as the differences between the
US and UK in the use of this clause, see Lee Buchheit, How To Negotiate Eurocurrency Loan Agreements (IFLR,
2nd edn), pp 8283.
131
Trade and Development supra n 126, p 143.
132 See Philip J Power, Sovereign Debt: The Rise of the Secondary Market and its Implications for Future

Restructurings (1996) 64 Fordham L Rev 2701.

133 Trade and Development supra n 126, p 143.
134 These include majority action clauses, engagement clauses, and clauses regulating the conditions under

which a rescheduling or a restructuring would be initiated.

436
 I. Transactional Aspects of Sovereign Debt Restructuring

incentives for the adoption of these clauses.135 According to the UN Trade and Development
Report 2001, however, it is estimated that only half of all outstanding international
bond issues (including those issued by the industrialized countries) do not include CACs,
and that this proportion is even greater for emerging market bonds.136 The IMF has noted
that 70 per cent of the international bonds in current stock have been issued after 1995,
meaning that if the G 10 Rey Report was endorsed, the vast majority of the bonds would have
contained CACs.137 It should be noted that 55.8 per cent of the sovereign bonds that are
being traded in the market do not include CACs,138 ie that their payment terms cannot be
amended unless there is unanimous consent because they are subject to New York law.
Buchheit and Gulati have stated a number of reasons for the resistance to the inclusion of 11.77
CACs in sovereign bonds.139 First, as long as sovereign borrowers have the expectation of
receiving an official sector bailout, they will see no advantage in adopting a debt instrument
that could permit a consensual restructuring without the need of a bailout.140 Secondly,
some sovereign borrowers may exclude them deliberately to demonstrate to the market that
there is no possibility of restructuring.141 Thirdly, these provisions facilitating the orderly
restructuring of debt could invite casual requests to restructure.142 Fourthly, including these
provisions in their bonds would raise the costs of borrowing.143
Further discussion is required regarding pricing, costs, and yields of bonds with CACs. 11.78
Gugiatti and Richards provide empirical evidence that the inclusion of CACs has not influ-
enced borrowing costs over the past decade and they have also made a comparison between
bonds issued in Europe with CACs and bonds issued in the US and Europe without CACs,
concluding that the inclusion of CACs does not impact secondary market yields.144 In addi-
tion, two other empirical studies have demonstrated thathistoricallythe market does
not pay attention to the inclusion of CACs145 and neither has the inclusion of CACs been an
important variable in the decision of borrowers or investors.146
Taylor has also suggested that the inclusion of CACs could be encouraged by making them 11.79
a requirement for every country that has or is seeking IMF funding.147 Alternatively, it could

135 See Richard H Clarida, Remarks at the Conference on The Role of the Official and Private Sectors in

Resolving International Financial Crises (2324 July 2002), available at <http://www.bankofengland.co.uk/

conferences/conf0207/clarida.pdf>.
136 Trade and Development, supra n 126, p 144.
137
IMF Collective Action Clauses in Sovereign Bond ContractsEncouraging Greater Use, supra 118, p 6.
138
International Monetary Fund, Progress Report on Crisis Resolution, 21 September 2005, available at
<http://www.imf.org/external/np/pp/eng/2005/092105.pdf>.
139 Buchheit and Gulati supra n 8.
140
Ibid.
141
Ibid.
142
Ibid.
143
Ibid.
144 Mark Gugiatti and Anthony Richards, Do Collective Action Clauses Influence Bond Yields?

New Evidence from Emerging Markets, supra n 118.

145
Torbjorn Becker, Anthony Richards, and Yunyong Thaicharoen, Bond Restructuring and Moral Hazard:
Are Collective Action Clauses Costly? (2003) 61(1) Journal of International Economics, Elsevier, 127161.
146
Clifford R Dammers, remarks in a Panel Discussion at Reinventing Bretton Woods Committee
Conference, New Rules of the Game in Global Finance: An International Bankruptcy Procedure for Sovereign
Debtors?, New York, 2829 May 2002; and Peter Petas and Rashique Rahman, Sovereign BondsLegal
Aspects that Affect Default and Recovery, Deutsche Bank Global Emerging MarketsDebt Strategy, May
1999, pp 5978.
147 Taylor supra n 16.

437
 Transactional Aspects of Sovereign Debt Restructuring

serve as the basis for lower borrowing costs on loans from the IMF.148 In the words of
Eichengreen and Mody, a combination of moral suasion, regulatory, and financial incentives
would be used to encourage lenders and borrowers to adopt these provisions.149 As explained
below, there would be no need to use any carrot or stick since they have become widely
accepted since 2003.
11.80 In 2003, with bond issuances by Mexico and Brazil, majority action clauses were incorpo-
rated in sovereign bonds issued under New York law. The path set by Mexico and Brazil was
rapidly followed by Belize, Chile, Colombia, Costa Rica, Egypt, Guatemala, Indonesia,
Israel, Korea, Lebanon, Panama, Peru, the Philippines, Poland, Qatar, South Africa, Turkey,
Uruguay, Venezuela, and many more thereafter. Before 2003, only bonds subject to English
law included majority action clauses allowing for the amendment of any term, even payment
terms.
11.81 Also in 2003, Uruguay reprofiled all its outstanding sovereign debt and included majority
action clauses in the terms of the new bonds issued under New York law. This means that in
the event of a future debt restructuring, it can be performed in an orderly manner by merely
tendering the votes of the required number of bondholders without having to resort to an
exchange offer. Moreover, this would eliminate the problem of holdouts since an agreeing
majority would bind all the dissenting creditors.150
11.82 So far, the required threshold to amend the terms of the bonds containing majority action
clauses has been 75 per cent in aggregate principal amount of the outstanding bonds (eg
Egypt, Lebanon, Mexico, Qatar, Uruguay, etc). Brazil has been the only case where 85 per
cent has been required.
11.83 Uruguay is a particular case since by an aggregation mechanism, amendments to any terms
(including payment terms) can be incorporated into two or more series of bonds simultane-
ously. In order to approve the amendment applicable to two or more bond series, a double
majority is required: (1) 85 per cent of the aggregate principal amount of all affected series;
and (2) 66 per cent of each specific series.151
11.84 2003 was the year that defined the discussion of whether the inclusion of CACs in sovereign
bonds is convenient and/or if it would impact on the bond prices. A clear example that the
inclusion of these clauses would not affect the price of the bond was that Brazils issuance
including CACswas oversubscribed by 700 per cent. Moreover, in the same year, Uruguay
closed a comprehensive reprofiling of its foreign currency bondsincluding CACs and an
aggregation mechanismwith 93 per cent participation. However, not everything is a bed
of roses in the international financial markets, as there are some allegations that the inclusion
of CACs in Chilean bonds means that the Chilean authorities are bowing to pressure from

148 Ibid.
149
Eichengreen and Mody, supra n 67.
150 Rodrigo Olivares-Caminal, Reestructuracin de Deuda Pblica: Diferentes Mecanismos, La Ley,

Argentina, November 2003, p 97.

151 See Prospectus of the Repblica Oriental del Uruguay to issue debt securities and/or warrants to

purchase debt securities up to $3,000,000,000 reflecting additional filings made with the SEC pursuant to
Rule 424(b)(3) on 15 April 2003 and 9 May 2003, S-39 to S-41.

438
 I. Transactional Aspects of Sovereign Debt Restructuring

the US Treasury, which has been pushing for all emerging-market issuers to include such
clauses.152
Finally, a remark on Belize should be made. In 2006, it became the first sovereign after more 11.85
than 70 years to restructure bonds subject to New York law using CACs. Of the total $1.1
billion outstanding debt, 50 per cent approximately was deposited in five different bonds
placed in the Caribbean region,153 three bonds were subject to English law with CACs, and
the other two bonds were subject to New York lawone with CACs and the other without
(therefore requiring unanimous consent to reform payment terms).154 The bonds under New
York law with CACs had a threshold of 85 per cent to amend their terms. Belize requested
bondholders of this bond issue to tender their bonds in an exchange offer and to, simultane-
ously, consent in writing to amend the payment terms of this bond to match the terms of the
new bonds. Tenders representing 96.8 per cent of the aggregate principal amount of the eli-
gible claims were received into the exchange, resulting in 98.1 per cent of the total eligible
claims stemming from the use of the CACs feature.155 The percentage of acceptance within
the New York bonds with CACs was 87.3 per cent.
A related topic to CACs is how to deal with those bonds that were issued under New York 11.86
law prior to 2003 and that do not include CACs. The next section will address the use of exit
consents and the interrelated topic of how to perform amendments to the terms of the bonds
issued under New York and English law.
Finally, as noted in the 2004 MOCOMILA report, it is relevant to stress that CACs (and exit 11.87
consents) appear to have no effect on bondholders that have obtained a court judgment prior
to the exchange offer.156 However, these only represent a very small percentage of the total
outstanding debt obligations.
2. The use of exit consents and amendments to the terms of the bonds under
New York and English law
Exit consent is a technique by which holders of bonds in default which have accepted an 11.88
exchange offerat the moment of accepting said offergrant their consent to amend cer-
tain terms of the bonds being exchanged. By using the exit consent technique, the exchange
offer is conditioned on a minimum threshold of creditors acceptance and the amendments
to the terms are performed once the required majority has been obtained.
By means of performing certain amendments to the terms and conditions of the bonds in 11.89
default, which subject to the exchange offer are less attractive (in legal and financial terms),
forcing a greater number of bondholders to accept the exchange offer. Otherwise, if bond-
holders do not accept the exchange offer they will be holding an impaired bond, not featur-
ing some of the original contractual term features.

152
Nick Ashwell, Chile Places First Sovereign Bond with Collective Action Clause, World Markets
Research Centre (Global Insight), 27 January 2004.
153 See Joanna Chung and Richard Beales, Belize Blazes a Trail with Sovereign Debt, Financial Times,

12 February 2007.
154 See Lee C Buchheit, Supermajority Control Wins Out, International Financial Law Review, April

2007, p 2.
155 See Government of Belize, Belize Closes Exchange Offer: 98.1% Commercial External Debt

Restructured, Press Release dated 20 February 2007.

156 See MOCOMILA supra n 33, p 6.

439
 Transactional Aspects of Sovereign Debt Restructuring

11.90 In order to amend the bonds subject to New York law (and not including CACs), their terms
and conditions can be divided into three categories:157
(1) Category I: these clauses are those that expressly require unanimous amendment (100
per cent of the bondholders) and are related to payment terms. Examples of these clauses
include: the amount of debt or par value of the bond, the maturity date, the issuance
currency, and the conditions for amending the bonds terms.
(2) Category II: these are the set of clauses that if modified, produce an effect on the clauses
related to the payment terms mentioned above (eg applicable law, events of default and
acceleration rights).
(3) Category III: these are all the remaining clauses that are not included under Category I
or II (eg jurisdictional immunity, financial covenants, listing requirements, pari passu
clause, etc).
11.91 Under New York law, in order to amend the clauses under Category I, the affirmative vote of
100 per cent of the bondholders is requireda threshold almost impossible in international
issuances. Category IIas noted by Buchheit and Gulatiis a grey area that has not
been tested yet. Finally, Category III includes bond clauses that can usually be amended by
the favourable vote of a 66 2/3 per cent in aggregate principal amount of the outstanding
bonds.158
11.92 On the other hand, under English law, although the requirements are more flexible than under
New York law, it varies according to the conditions established at the moment of the issuance.
They usually vary from a simple majority with an aggravated quorum to 75 per cent in aggre-
gate principal amount of the outstanding bonds. For example, under an Argentine bond issu-
ance subject to English law, in order to amend the payment terms (Category I under New York
law) a quorum of two or more persons holding or representing not less than 75 per cent (or, at
any adjourned such meeting not less than 25 per cent) is required and the amendment can be

157
Lee Buchheit and G. Mitu Gulati, Exit Consents in Sovereign Bond Exchanges (2001) 48 UCLA Law
Review 5984. In the same sense, Michael M. Chamberlin, At the Frontier of Exit Consents, at the Bear
Stearns & EMCA Sovereign Creditors Rights Conference on 8 November 2001, available at <http://www.
emta.org/privateAssets/0/113/1806/2a8b0d38-3474-459d-8bab-79e962e0b3a0.pdf>.
158
66 is the percentage usually required to amend Category III clauses. See, eg, Republic of Argentina
Amendment No 3 to Registration Statement Under Schedule B No 333-117111, Fed Sec L Rep 201
(4 September 2004). The following is an example of an amendment clause from Republic of Argentina under
Registration Number 333-117111 sovereign debt prospectus under New York law: Modifications: Any
modification, amendment, supplement or waiver to the terms and conditions of the debt securities of a single
series, or to the indenture insofar as it affects the debt securities of a single series, may generally be made, and
future compliance therewith may be waived, with the consent of Argentina and the holders of not less than
66-2/3% in aggregate principal amount of the debt securities of such series at the time outstanding. However,
special requirements apply with respect to any modification, amendment, supplement or waiver that would: (i)
change the due date for the payment for the principal of (or premium, if any) or any installment of interest on
the debt securities of a series; (ii) reduce the principal amount of the debt securities of a series, the portion of the
principal amount which is payable upon acceleration of the maturity of the debt securities of a series, the interest
rate of the debt securities of a series, or the premium payable upon redemption of the debt securities of a series;
(iii) change the coin or currency of payment of any amount payable under the debt securities of a series; (iv)
shorten the period during which Argentina is not permitted to redeem the debt securities of a series, or permit
Argentina to redeem the debt securities of a series if Argentina had been permitted to do so prior; (v) change the
definition of outstanding or the percentage of votes required for the taking of any action pursuant to the modi-
fication provisions of the indenture (and the corresponding provisions of the terms and conditions of the debt
securities) in respect of the debt securities of a series; (vi) change the obligation of Argentina to pay additional
amounts; (vii) change the governing law provision .

440
 I. Transactional Aspects of Sovereign Debt Restructuring

resolved by a simple majority.159 In this sense, it is worth noting that in an issuance by the
Republic of Moldovaalso subject to English lawthe required quorum is two or more per-
sons holding or representing not less than 75 per cent (or, at any adjourned such meeting, not
less than 25 per cent) and the resolution shall be adopted by a majority consisting of not less
than 75 per cent in aggregate principal amount of the outstanding bonds.160
Considering that under English law all the terms and conditions can be modified (including, 11.93
payment terms included in the so-called Category I under New York law) by a majority
without requiring the unanimous consent of all its bondholders, it is said that bonds issued
under English law include CACs (technically speaking, majority action clauses).

159 The following is a sample clause according to these specifications:

Meetings of Noteholders, Modification and Waiver: (a) Meetings of Noteholders: [T]he quorum for any
meeting to consider an Extraordinary Resolution will be two or more persons holding or representing a clear
majority in nominal amount of the Notes of the relevant Series for the time being outstanding, or at any
adjourned meeting two or more persons holding or representing holders of Notes of the relevant Series whatever
the nominal amount of the Notes of the relevant Series held or represented, unless the business of such meeting
includes consideration of proposals, inter alia, (i) to amend the dates of maturity or redemption of the Notes of
any Series or any date for payment of interest thereon, (ii) to reduce or cancel the nominal amount of the Notes
of any Series, (iii) to reduce the rate or rates of interest in respect of the Notes of any Series or to vary the method
or basis of calculating the rate or rates or amount of interest, (iv) if there is shown on the face of the Notes of any
Series a Final Redemption Amount, Early Redemption Amount, Optional Redemption Amount, Minimum
Rate of Interest and/or a Maximum Rate of Interest, to reduce such Redemption Amount, Minimum Rate of
Interest and/or such Maximum Rate of Interest, (v) to change the method of calculating the Final Redemption
Amount, the Early Redemption Amount, the Optional Redemption Amount or the Amortised Face Amount,
as the case may be, in respect of the Notes of any Series, (vi) to change the currency or currencies of payment of
the Notes of any Series or (vii) to modify the provisions concerning the quorum required at any meeting of
Noteholders of any Series or the majority required to pass the Extraordinary Resolution, in which case the
necessary quorum will be two or more persons holding or representing not less than 75 per cent., or at any
adjourned meeting not less than 25 per cent., in nominal amount of the Notes of the relevant Series for the time
being outstanding In the Trust Deed, Extraordinary Resolution is defined to mean a resolution passed at a
meeting of holders of Notes of a Series, which meeting was duly convened and held in accordance with the
provisions of the Trust Deed, by a majority consisting of not less than 50 per cent. of the votes cast. Information
Memorandum from the Republic of Argentina, $20,000,000,000, Medium-Term Note Programme for the
Issuance of Notes due from 30 days to 30 years from the Date of Issue 34-35 (2001).
160 This clause reads as follows: 12. Meetings of Noteholders, Modification and Waiver: (a) Meetings of

Noteholders. The Agency Agreement contains provisions for convening meetings of Noteholders to consider
matters relating to the Notes, including the modification of any provision of these Conditions or the Deed of
Covenant. Any such modification may be made if sanctioned by an Extraordinary Resolution (as defined
below). The quorum at any such meeting for passing an Extraordinary Resolution shall be two or more persons
holding or representing a clear majority of the principal amount of the Notes for the time being outstanding, or
at any adjourned meeting two or more persons being or representing Noteholders whatever the principal
amount of the Notes for the time being outstanding so held or represented, except that at any meeting the busi-
ness of which includes consideration of proposals, inter alia, (i) to modify the maturity of the Notes or the dates
on which interest is payable in respect of the Notes, (ii) to reduce or cancel the principal amount of, or interest
on, the Notes, (iii) to change the currency of payment of the Notes, or (iv) to modify the provisions concerning
the quorum required at any meeting of Noteholders or the majority required to pass an Extraordinary
Resolution, the necessary quorum for passing an Extraordinary Resolution shall be two or more persons hold-
ing or representing not less than 75 per cent., or at any adjourned such meeting not less than 25 per cent., of the
principal amount of the Notes for the time being outstanding. As used in this Condition 12, Extraordinary
Resolution means a resolution passed at a meeting of the Noteholders duly convened and held in accordance
with the provisions contained in these Conditions and the Agency Agreement by a majority consisting of not
less than 75 per cent. of the persons voting thereat upon a show of hands or if a poll shall be duly demanded then
by a majority consisting of not less than 75 per cent. of the votes given on the poll. An Extraordinary Resolution
passed at any meeting of Noteholders will be binding on all Noteholders, whether or not they are present at the
meeting. Republic of Moldova, 9.875% Notes due 2002, $75,000,000 (see Buchheit and Gulati supra n 8,
annex).

441
 Transactional Aspects of Sovereign Debt Restructuring

11.94 To summarize:

(1) the terms and conditions usually required to amend a sovereign bond issued under New
York law (in the absence of CACs) are: (a) a 51 per cent nominal value quorum in the
first meeting or a 25 per cent quorum on any subsequent adjourned meeting; (b) unani-
mity (100 per cent of the nominal value of the series) to amend the payment terms
(Categories I and II); and/or (c) a 66 2/3 per cent of the nominal value of the series to
amend any other term (Category III) which does not imply amending the clauses
included under Categories I and II;
(2) the terms and conditions usually required to amend a sovereign bond issued under
English law are: (a) simple majority of the nominal value of each series to adopt resolu-
tions; (b) the quorum required to amend the payment terms or other clauses that may
affect the payment terms (Categories I and II) will be two or more persons holding or
representing not less than 75 per cent, or at any adjourned meeting not less than 25 per
cent of the nominal value of the series; and (c) the quorum required to amend any other
terms of the bond that does not affects the payment terms (Category III) will be two or
more persons holding or representing not less than 50 per cent of the nominal value of
the series.
11.95 CACs and exit consents are two collective decision-making techniques used in the sovereign
context. On the one hand, CACs are used to facilitate the restructuring by avoiding distur-
bances and reducing costs. This type of clause is only available in bonds issued under English
law and in most bonds issued under New York law since 2003.161 On the other hand, exit
consents are primarily used in bonds issued under New York law that do not include CACs
to force a majority of bondholders to participate in an exchange offer. This notwithstand-
ing, it may be the case that even if the bonds include CACs, the threshold to amend the
payment terms (a super-majority) cannot be achieved while the percentage to amend other
terms can (more than 66 per cent and 75 per cent). In this case, it may be more convenient
to use exit consents rather than majority action clauses in the restructuring. Finally, in gen-
eral terms and with regard to the use of CACs, bonds subject to German law are comparable
to bonds issued under New York law. In the same manner, bonds issued under Japanese and
Luxembourg law are comparable to bonds issued under English law.
11.96 The following section will deal with the evolution of these techniques and how they have
been used in actual sovereign debt restructuring episodes.

3. CACs, exit consents, and term enhancements in practice

11.97 Restructurings by Ukraine (1999) and Ecuador (2000) clearly established that restructuring
is possible within the given parameters and limitations by the tactical and often complemen-
tary use of exchange offers and collective decision-making provisions. The terms of the bonds
in each of these cases had determined the restructuring technique that was to be adopted,
ie exchange offers and amendments (exit amendment or exit consents and CACs).

161 For the draft models of CACs, see the G10 report prepared by the Working Group on Contractual

Clauses dated 26 September 2002; and, the document issued on 4 February 2003 by the Institute of International
Finance (IIF) and the Emerging Market Traders Association (EMTA), the International Primary Market
Association (IPMA), the Bond Market Association (BMA), the Securities Industry Association, the International
Securities Market Association (ISMA), and the Emerging Markets Creditors Association (EMCA).

442
 I. Transactional Aspects of Sovereign Debt Restructuring

The restructurings involved sovereign bonds that were governed both by English law162
(issued under trust deeds and fiscal agency agreements and included CACs), as well as bonds
governed by New York law (including Brady bonds, that did not contain such clauses).
As previously noted, the vast majority of bonds issued by emerging market sovereigns are
governed either by New York law or English law. Unlike sovereign bonds issued under
English law, payment terms for bonds issued under the New York law can be restructured
only by unanimous consent of the bondholders unless they include CACs. Therefore,
the technique of exchange offers is the only available option to amend bonds issued under
New York law that do not contain CACs.163
In the cases of Ukraine and Ecuador: 11.98
each of the restructuring involved an exchange offer in which bondholders were invited to
exchange their instruments for new longer maturity instruments. In each case, it was possible
to secure agreement on comprehensive restructurings that both provided immediate cash-
flow relief and contributed toward putting the members debt onto a basis consistent with a
return to medium-term viability. In each case, participation rates were high, and there was no
creditor litigation.164
In addition, Ukrainian bonds were restructured using an innovative hybrid mechanism that 11.99
combined an exchange offer for all of the instruments with the use of collective action provi-
sions in three of the instruments.165 Of the four outstanding bonds, one series of bonds was
governed by German law and did not contain CACs and was therefore restructured by a one-
step exchange offer for the new bonds. Bondholders of the other three bonds, which con-
tained CACs and were governed by Luxembourg law, were invited to tender their old bonds
and, at the same time, to grant an irrevocable proxy vote to the exchange agent. The vote
would be cast at a subsequent bondholders meeting and would favour modifications to the
old bonds that would bring them in line with the payment terms of the new bonds being
offered in exchange. As opposed to the Pakistani bond restructuring in 1999, Ukraine made
an innovative use of the CACs. Pakistans bonds were governed by English law, but due to the
uncertainty of the outcome of the bondholders meetings, the use of CACs was not
triggered.
To overcome this uncertainty, Ukraine predicated the calling of the bondholders meeting 11.100
for the proposed amendments to the payment terms, subject to the receipt of sufficient
irrevocable proxies in favour of the proposed amendments. Upon the receipt of sufficient
proxies to amend the payment terms of the original bonds, a meeting was called, the proxies
voted, and the amendments were adopted, thereby making them binding on all the bond-
holders of the three series. Subsequent to the meetings, the bondholders participated in the
exchange by tendering the modified bonds for new bonds containing the amended payment
terms. As noted by the IMF, using a tender process permitted numerous additional modifica-
tions of non-payment terms to be adopted without bondholders formally having to accept
each as an amendment to the old bond and ensured that the four original issues were merged

162 The governing law in the Ukraine restructuring was Luxembourg law, which, for the purpose of CACs

and amendment terms, is the same as English law.

163 Lee C Buchheit, Unitar Training Programs on Foreign Economic Relations, Doc No 1, Sovereign

Debtors and Their Bondholders, p 4 (2000), available at <http://www.unitar.org/dfm/Resource-center/

Experts/Buchheit/BooksChap,htm>.
164 IMF supra n 127.
165 Ibid, p 6.

443
 Transactional Aspects of Sovereign Debt Restructuring

into two relatively large issues which differed only in terms of the currency of denomination
and the associated coupons.166
11.101 All participating creditors, irrespective of their roles and responsibilities, share a basic inter-
est to prevent and resolve crises and promote greater financial stability. As such, they would
be willing to expedite restructuring by participating in debtor-creditor consultations. The
Ukrainian case is an illustration of how the common inter-creditor interests and market
mechanics could facilitate coordination. The restructuring of the bonds through an exchange
offer was made in the context of an arrangement under the IMFs Extended Fund Facility,
and a request for a debt restructuring by Paris Club creditors (although at the time of the
exchange offer, the Ukraines right to draw under the arrangement had been temporarily
suspended).167
11.102 This ground-breaking technique of using CACs with the predicated requirement of a major-
ity of irrevocable proxies, the breach of which entailed substantial civil liabilities, not only
provided certainty that bondholders who had tendered proxies would not backtrack and
reject the proposed amendments at the meetings, but also solved the holdout problem feared
by Pakistan. Even if dissenting bondholders refused to participate in the exchange, they were
still bound to the payment terms adopted by the qualified majority. Thus, Buchheit and
Gulati argue that holdouts were faced with the prospect of being left with an amended illiq-
uid old bond that paid out no earlier than the very liquid new bond offered in the
exchange.168
11.103 The Ecuadorian debt restructuring performed in 2000 led to the creation of another innova-
tive technique, called exit consents (also known as exit amendments). This innovation was
the result of the limitations involved in restructuring Brady bonds and eurobonds governed
by New York law, which require the unanimous consent of the bondholders for the amend-
ment of payment terms. Unlike the Ukrainian restructuring, where the CACs permitted the
majority to amend all the terms of the bonds (payment and non-payment) and make them
binding on the minority, Ecuador did not have such an option and therefore would have had
to resort primarily to the exchange offer technique. Although the Ecuadorian bonds did not
contain CACs to amend payment terms, they did contain amendment clauses permitting a
simple majority to amend all other terms, such as waivers of sovereign immunity, submis-
sions to jurisdiction, and financial covenants. Ecuador was the first sovereign to use the
amendment clauses through exit consents to deal with the potential holdout problem in the
restructuring of international sovereign bonds that do not contain CACs applicable to pay-
ment terms.169
11.104 As Buchheit and Gulati have explained, through an exit amendment the specified majority
or super-majority of bondholders can exercise their power to amend the old bondjust
before they exit the old bondas an incentive for all other holders to come along with
them.170 To address this potential holdout problem, Ecuador used exit consents to modify
certain non-payment terms in order to make the old bonds less attractive, thereby creating

166 Ibid, p 33.

167 Ibid.
168
See Buchheit Gulati supra n 8, p 24.
169 See IMF supra n 127, p 29.
170 Lee Buchheit and G Mitu Gulati, supra n 157.

444
 I. Transactional Aspects of Sovereign Debt Restructuring

incentives for bondholders to participate in the exchange.171 Bondholders who tendered

instruments under the exchange offer automatically voted in favour of a list of amendments
to the non-payment terms in the instruments that they were about to leave. The amend-
ments they consented to involved the deletion of some of the non-payment terms such as:
(1) the requirement that all payment defaults must be cleared as a condition for any rescis-
sion of acceleration; (2) the provision restricting Ecuador from purchasing any of the Brady
bonds while a payment default is continuing; (3) the covenant prohibiting Ecuador from
seeking a further restructuring of Brady bonds; (4) the cross-default clause; (5) the negative
pledge covenant; and (6) the covenant to maintain the listing of the defaulted instruments
on the Luxembourg stock exchange.172 Following the example of Ukraine, each tender for
exchange was made irrevocable and the completion of the exchange was made subject to
bondholders holding the requisite majority consenting to the amendments.173
Aside from the use of exit consents to weaken the legal rights of bondholders who decided 11.105
not to participate in the exchange, the Ecuadorian government made some additional com-
mitments to enhance the exchange offer. For example, the Ecuadorian government included
the following clauses in the bonds:
(1) Mandatory prepayment arrangement: this required the retirement of an aggregate out-
standing amount of each type of bond by a specified percentage each year starting after
11 and six years for the 2030 and 2012 bonds, respectively, through purchases in the
secondary market, debt-equity swaps or by any other means. As Ecuador could purchase
the bonds on the secondary market, it would provide the liquidity that investors want-
ed.174 According to the IMF: [t]his feature is intended to give bondholders some assur-
ance that the aggregate amount of the new bonds would be reduced to a manageable size
prior to their maturity dates while giving Ecuador flexibility to manage its debt profile.175
If Ecuador failed to meet the reduction target, a mandatory partial redemption of the
relevant bond would be triggered in an amount equal to the shortfall.176
(2) Mandatory reinstatement of principal clause: this obliged Ecuador to issue additional
bonds in the same amount of the debt reduction obtained through the exchange offer in
the event that an interest default occurs during the first ten years of the new issuance, and
if this default continues for a period of 12 months. This clause was also introduced to
discourage casual defaults on the new bonds by giving the government an incentive to
make payments.177
Thus, the novel use of exit consents, combined with the above described incentive clauses in 11.106
the Ecuador debt restructuring, proved effective in ensuring that by the expiry of the exchange
offer, 97 per cent of its bondholders agreed to participate.178 Exit consents were criticized at
the time, as well as later, by some of Ecuadors creditors as being more coercive than
encouraging.179

171
See IMF supra n 127, p 29.
172
Ibid, pp 8 and 35.
173 Ibid, p 35.
174
Hal S Scott and Philip A Wellons, supra n 57, p 1304.
175 See IMF supra n 127, p 33.
176 Ibid, pp 3334.
177 Ibid.
178 Ibid, p 35.
179 See Chamberlin supra n 157.

445
 Transactional Aspects of Sovereign Debt Restructuring

11.107 The Ecuadorean case involvedfor the first time in sovereign bond restructurings a pure
and simple use of the exit consents technique. The case of Ukraine represented a mixed tech-
nique, in the sense that it combined both exit consents and the use of majority action clauses.
In the Ukrainian case, a proxy was granted to use the majority action clause to amend the
terms of the old bonds to make them equal in terms to the new bonds offered.
11.108 Prior to the Ecuadorian restructuring, an article by Buchheit and Gulati argued that in com-
parison with other proposals for addressing the holdout creditor problemsuch as interna-
tional insolvency codes, IMF-administered stays on creditor remedies, and generally
applicable legal defences for sovereign debtorsexit consent, assuming they can be made to
work, would do far less violence to the existing fabric of international financial and legal
relationships.180 The case of Ecuador proves that exit consents can be made to work.
Chamberlin, however, believes that sovereigns attempting to push the exit consents frontier
too far will someday be challenged in court by holdout creditors.181
11.109 In 2003, it was the turn of Uruguay to reprofile its debt. To achieve this, Uruguay organized
a series of meetings with its creditors, enabling it to be aware of the degree to which its offer
was acceptable. Therefore, Uruguay sought the consent of the bondholders to amend three
clauses of the old bonds: (1) removal of the cross-default clause; (2) delisting of the bonds
requiring stock exchange listing; and (3) amendment of the waiver immunity clause. The
amendment of the cross-default clause and the delisting of bonds were previously used in the
case of Ecuador. This notwithstanding, in the case of Uruguay it was the first time that
the waiver immunity clause was amended. The aim in amending this clause was to reinstate
the immunity that sovereigns enjoy in the US by means of the FSIA and in the UK by means
of the SIA only with regard to the payment streams due under Uruguays new bonds. The
rationale behind this was to avoid the seizure of interest payments by creditors who had not
participated in the restructuring as had occurred in the Elliott case with respect to Perus
Brady bonds.
11.110 Following the Ecuadorian path, Uruguay used exit consents in 2003. Uruguays exchange
offer included check-the-box exit consents to amend the waiver of immunity among other
features.182 In contrast to the Ecuadorian case, the use of exit consents in the case of Uruguay
was consensual. This means that creditors were able to choose if they wanted to grant their
exit consents aside from accepting the commercial terms of the offer. The means by which
creditors consented to the use of exit consents was through the ticking of a box, giving rise to
the term check-the-box exit consents. The use of exit consents through this innovative way
of obtaining creditors approval was widely accepted in all the bond series, save for one where
it was rejected by 13 per cent of its holders.183
11.111 In contrast to the cases of Ecuador and Uruguay, the use of exit consents was not available in
the case of Argentinas sovereign exchange offer in 2005. This technique was not available
because of the time lapse between the announcement of the moratorium and the date at
which the exchange offer to amend the terms of the bonds was made effective. The time lapse
permitted creditors to organize themselves. Consequently, Argentina feared the risk of

180 Lee C Buchheit, supra n 163, p 25.

181 See Chamberlin supra n 157, p 4.
182 Lee Buchheit and Jeremiah Pam, Uruguays Innovations (2004) 19(1) JIBLR 2831.
183 Ibid.

446
 I. Transactional Aspects of Sovereign Debt Restructuring

having to face a blockade by holdout creditors representing more than a 33 1/3 per cent.
Therefore, Argentina decided not to use the exit consents technique184 due to the possibility
of blocked holdings that would have prevented reaching the required 66 2/3 per cent needed
to amend the terms of the bonds.
Since the development of the use of exit consents in the sovereign context in 2000, there have 11.112
been three cases in which this technique was considered as an option. Ecuador and Uruguay
were able to use exit consents to obtain an overwhelming degree of creditors participation in
their exchange offers97 per cent and 93 per cent, respectively.185 On the other hand,
Argentina, without using exit consents, obtained 76.17 per cent participation. There is a
1721 per cent gap between the Argentinian creditors rate of participation in the exchange
offer and those of other sovereigns which used exit consents.
Argentinas case was much more complex due to the number of bond series (152), the number 11.113
of applicable laws (eight), the number of creditors spread around the world (over 700,000),
and the haircut proposed (75 per cent of the par value). Future restructurings with similar
characteristics to that of the Argentine case would be needed to determine if the use of exit
consents is a panacea or not.
The fact that Argentina achieved a 76.17 per cent participation does not necessarily mean 11.114
that it would have been able to restructure the terms of the bonds. There is a mathematical
chance that although Argentina exceeded the 66 per cent in aggregate principal amount of
the outstanding bonds (being 66 per cent in aggregate principal amount the threshold
requirement under New York law to restructure the terms of the bonds), at the moment of
de-aggregation of each series, the required percentage might have not been achieved.
Argentina launched a second exchange offer in 2010 to the creditors that did not participate
in the previous exchange offer launched in 2005 aiming at reducing the percentage of hold-
out creditors. This second exchange offer was carefully drafted not to trigger the most
favoured creditor clause that would have given the option to those that participated in the
first exchange offer to exchange their dent instruments. Argentina managed to reduce the
number of outstanding creditors achieving an aggregate acceptance between both exchange
offers of 93 per cent.
The aforementioned restructuring cases are a clear illustration of Buchheit and Gulatis argu- 11.115
ments that the existing collective decision-making provisions in sovereign bonds, even
within their given parameters and limitations, can, if used more confidently and creatively,
mimic most of the features of domestic corporate bankruptcy to varying degrees, such as
automatic stays; cramdowns; and, eventually, debtor-in-possession (DIP) financing.186

184
On 15 November 2004 Argentina filed a Memorandum of Law with the District Court of the Southern
District of New York in opposition to plaintiffs motion for a preliminary injunction in the case Silvia Seijas,
Heather M. Munton and Thomas L Pico Estrada v The Republic of Argentina (04 Civ 400) in which Argentina
confirmed that it would not use exit consents in their exchange offer. The relevant part of this Memorandum
reads as follows: Plaintiffs ex parte motion for a preliminary injunction is based on their incorrect specula-
tion that the Republics as-yet unannounced Exchange Offer will contain exit consents that will somehow
inflict irreparable harm upon them. Of course had plaintiffs simply waited until the November 29 launch of the
Exchange Offer (which is not scheduled to close until 2005) they would have learned what the Republic has
publicly confirmed: the Exchange Offer will not include exit consents .
185 It is worth noting that Uruguays debt reprofiling took place without it having defaulted.
186 See Buchheit and Gulati supra n 8.

447
 Transactional Aspects of Sovereign Debt Restructuring

11.116 The coordination feature among bondholders and other types of creditor, ie bilaterals, IFIs,
and trade creditors, Buchheit and Gulati point out that the existing CACs have one serious
limitationsince they operate within the four corners of the bonds containing the clauses,
CACs cannot be used to deal with the coordination problem.187 According to the two
authors, some other method, yet undiscovered or unused, will have to be used to encourage
closer coordination among the various creditors, such as the Paris Club, trade creditors, and
multilateral creditors.188
11.117 With regard to the issue of intra-coordination (coordination within similarly situated credi-
tors such as different series of bonds), there are two alternatives: (1) aggregation, as in the case
of Uruguay (but unfortunately this feature is only available to future bond issuances); or (2)
as suggested by Buchheit and Gulati, in cases where the majority of the bonds are issued and
governed by New York lawto engage in the equity powers of the US federal courts under
Rule 23 of the Federal Rules of Civil Procedure (FRCP 23) where bondholders can be
homogenized into a single voting class and any court-approved compromise of the action
would bind all members of the class.189 A brief comment on class actions as a restructuring
tool in the sovereign debt context is provided in the next section.

E. Some Notes on Class Actions in the Sovereign Debt Context

11.118 A class action under US law is a special action whereby a sufficiently large class of persons
affected by similar questions of law or facts may file in a single lawsuit the questions of law or
facts that affect all the members of the class. It is not necessary for each of the members of the
class to be present in the process in order to claim any award arising from the adjudication.190
According to Blacks Law Dictionary, a class action is a lawsuit in which a single person or a
small group of people represent the interests of a larger group.191
11.119 Class actions are prescribed under Rule 23 of the US Federal Rules of Civil Procedure. A class
action is an exception to the general principle of US law that a person cannot be subject to a
ruling handed down in an action in which such person was not involved as a party. For such
reason, a class action is subject to various rules aimed at protecting and safeguarding the
interests and rights of the members of the class who are represented by other members.
11.120 The principles on which the notion of class action is based are: (1) protection of defendants
from potential inconsistencies arising from different adjudications on a single issue; (2) pro-
tection of the interests of the absent class members; (3) provision of a more convenient and
economical action for disposing of similar suits; and (4) creation of a procedure that provides
a means to facilitate spreading litigation costs among numerous litigants with similar
claims.192

187
Ibid, pp 2122.
188 Ibid, p 22.
189
Ibid, p 30.
190 Robert H Klonoff, Edward K M Bilich and Susette M Malveaux, Class Actions and Other Multi-party

Litigation: Cases And Materials (Thompson West, American casebook series, 2nd edn).
191 See Bryan A Garner (ed), Blacks Law Dictionary (West Group, 7th edn, 1999), p 243.
192 Timothy E Eble, The Federal Class Action Practice Manual, 1999, Internet edition, available at <http://

www.classactionlitigation.com>.

448
 I. Transactional Aspects of Sovereign Debt Restructuring

In summary, class actions are intended to provide a forum that allows the economy of 11.121
resources by both the courts and the parties involved in the litigation by means of a unified
proceeding, making it possible to reduce procedural costs by avoiding the repetition and
overlap of similar proceedings. The court has powers to issue orders to ensure procedural
fairness of the action to all members of the class.193 Moreover, to ensure this, it has an obliga-
tion to notify all members of the class of any dismissal or compromise.194
Prior to Argentinas 20012002 default on its sovereign debt, attempts to use class action in 11.122
sovereign debt restructuring were tested in two cases: Carl Marks & Co, Inc v Union of Soviet
Socialist Republics195 and Hirshon v Republic of Bolivia.196
In Carl Marks & Co, Inc v Union of Soviet Socialist Republics, an action was brought in 1988 11.123
against the Soviet Union to recover on debt instruments issued by the Russian Imperial
Government in 1916. The plaintiffs acted individually and on behalf of all other holders of:
(1) Five Year Five and One-Half Per Cent External Gold (Dollar) Bearer Bonds issued by the
Imperial Russian Government on 1 December 1916 and due on 1 December 1921; and, (2)
Participation Certificates in the $50,000,000, 6 per cent interest three-year credit issued
by the Imperial Russian Government dated 10 July 1916 and due on 18 June 1919.
The District Court for the Southern District of New York vacated default judgments previ- 11.124
ously entered against the Soviet Union and dismissed complaints for lack of jurisdiction. An
appeal was filed and the Court of Appeals held that the FSIA did not confer jurisdiction over
action on claims arising before the US State Department issued the Tate Letter in 1952,
whereby it adopted a restrictive theory of sovereign immunity that excluded non-public
and commercial activities.197 Unfortunately, the issue regarding the FRCP 23 and the collec-
tive action was not addressed.
In the other case, Hirshon v Republic of Bolivia,198 the plaintiffs Hirshon and Rosen filed 11.125
a complaint in a district court for the District of Columbia pursuant to FRCP 23(a)
and 23(b)(3), alleging breach of contract for recovery of the amount due under the bonds
following a prolonged default. The plaintiffs asserted that the defendant defaulted on its
obligation to redeem and pay interest on bonds which it issued in 1968199 and which were
owned by the plaintiffs and other members of the proposed class.
On 17 December 1996, approximately one year after the action was filed, the court issued 11.126
an order resolving the following issues: (1) preliminarily approving the proposed settlement;
(2) conditionally certifying a settlement class; (3) approving the form and manner of notice
to the class; and (4) setting a fairness hearing on the proposed settlement (FRCP 23(e)). The
plaintiffs reached a settlement with the Republic of Bolivia whereby the bonds of the former
would be redeemed at 33 per cent of their face value.

193
FRCP 23(d).
194
Ibid, 23(e).
195 Carl Marks Co, v Union of Soviet Socialist Republics, 665 F Supp 323 (SDNY 1987).
196
Hirshon v Republic of Bolivia, CA No 1.95CV1957 (DDC 1995); post-settlement challenge dismissed,
979 F Supp 908 (DDC 1997).
197 See 665 F Supp 323 (SDNY 1987).
198 See supra n 196.
199 In October 1968, Bolivia issued 2%, 2%, and 3% External Sinking Fund Bonds of 1968 due on

1 October 1995 and a Bond Scrip in the aggregate principal amount of $ 61,905,800.

449
 Transactional Aspects of Sovereign Debt Restructuring

11.127 Notice to all class members was sent on 8 January 1997 and it was also published in several
newspapers on 15 January 1997. Dissenting members of the class action were able to opt
out of the class.
11.128 The plaintiffs Memorandum in Support of Final Approval of the Proposed Class Action
Settlement stated that the settlement terms were reasonable in light of the risk that the plain-
tiffs might be unable to collect on a judgment, even if they were successful at trial.200 On 4
April 1997, the court issued a final order and judgment of dismissal with prejudice, approv-
ing the joint stipulation as entered into in good faith and as fair, reasonable, and adequate to
the class within the meaning of FRCP 23 and in the best interests of the class. The order also
dismissed the action with prejudice as to the Republic of Bolivia and all of its agencies and
instrumentalities.
11.129 Finally, on 23 October 1997, the court granted a motion to transfer funds by the Republic
of Bolivia, directing the Bank of New York to transfer settlement payments relating to bonds
into interest-bearing accounts. As noted by Debevoise and Orta, it is important to stress that
class action cases aregenerally speakingresolved through settlement.201

1. Recent developments in class actions as result of Argentinas default

11.130 The class action saga moved to a different level as a result of litigation in the courts due to
Argentinas default: a class was certified and no settlement was reached.202 This section will
analyse the evolution of the use of class actions in the sovereign debt context.
11.131 In May 2003, Judge Griesa denied class certification motions sought under FRCP 23(b)(3)
in two lawsuits: (1) Allan Applestein TTEE FBO DCA Grantor Trust v Repblica Argentina
(Applestein);203 and (2) HW Urban GMBH v Repblica Argentina (HW Urban).204 Each
lawsuit was brought on behalf of holders of numerous series of bonds issued by Argentina
and were denied because they would have proven unmanageable. It has been argued that
these classes were so badly framed that it is difficult to imagine how the judge could have
done anything different.205
11.132 In the Applestein class certification motion, the District Court relying on FRCP
23(b)(3)(D) stated that the proposed class was an amorphous ill-defined class and that it is
not a reasonable manageable class.206
11.133 The same line of thinking was used in denying the class certification motion in HW Urban.
It is worth mentioning that the plaintiff tried to maintain a class that would consist of the
holders of 68 series of Argentine bonds, payable in six different currencies. The District
Court, again relying on FRCP 23(b)(3)(D) argued that a single class suit would not be rea-
sonably manageable, as 68 different series of bonds were involved, with thousands or tens of

200 Plaintiffs Memorandum in Support of Final Approval of the Proposed Class Action Settlement, 3 April

1997, p 7 (CA No 1.95CV01957 (DDC 1995)).

201
Whitney Debevoise and David Orta, The Class Action Threat to Sovereign Workouts, IFLR, July 3003,
p 44.
202
HW Urban GmbH v Republic of Argentina, No 02 Civ 5699 (TPG), 2003 US Dist LEXIS 23363
(SDNY, 30 Dec 2003).
203 2003 WL 21058248, (SDNY, 12 May 2003).
204 See HW Urban GmbH v Republic of Argentina supra n 202.
205 David A Skeel, Why the Class Action Strategy is Worth a Second Look? (2003) 22(9) IFLR.
206 See supra n 203.

450
 I. Transactional Aspects of Sovereign Debt Restructuring

thousands of bondholders, billions of dollars issued in six different currencies.207 Moreover,

it stated that the proposed class is too large, too diverse, and too vaguely defined to be the
basis for a manageable class action.208
Following the denial of the class certification motion, the plaintiff in the HW Urban case 11.134
amended its complaint by narrowing it to seek to represent only holders of two series of
bonds, ie the 11 per cent bonds due 30 January 2017 and the 11 per cent bonds
due 7 April 2009.209 On 30 December 2003, a class certification was granted in HW
Urban210 under this narrower class. Due to its clarity and capacity to simplify the functioning
of FRCP 23, the most relevant part of this ruling is transcribed below:
... this action complies with the requirements of Fed. R. Civ. P. 23 is clear and requires little
discussion. The class is sufficiently numerous for class action treatment. The questions of law
and fact upon which liability depends are common to all members of the class, since liability
depends on contractual terms applicable to all bonds. Plaintiff, being a bondholder, has claims
typical of those of the class by virtue of being subject to the same contractual terms. There is
no reason to doubt that plaintiff can act as a proper representative, and his attorneys have a
record of experience in comparable litigation.
What has been said covers the requirement of Rule 23(a). With regard to Rule 23(b), the court
needs to find, in addition to what is required under 23(a), that one of three alternative condi-
tions is satisfied. The part of Rule 23(b) relevant to the present case is Rule 23(b)(3), which
provides that class action treatment is appropriate where: (3) the court finds that the questions
of law or fact common to the members of the class predominate over any questions affecting
only individual members, and that a class action is superior to other available methods for the
fair and efficient adjudication of the controversy. The matters pertinent to the findings include:
(A) the interest of members of the class in individually controlling the prosecution or defence
of separate actions; (B) the extent and nature of any litigation concerning the controversy
already commenced by or against members of the class; (C) the desirability or undesirability
of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely
to be encountered in the management of a class action.
It is clear that the questions of law and fact common to the members of the class predominate
over any individual questions. As already described, all questions relating to liability are com-
mon. Questions as to the type of relief will also be common. The remaining individual issues
about the quantum of relief can undoubtedly be resolved by the processing of claims, which
need not be unduly complex. As to the superiority of a class action to other procedures, the
court notes the following. As indicated earlier, certain bondholders prefer to bring their own
individual actions, and have done so. But for those who wish to be part of this proposed class
action, it is reasonable for them to believe that it is superior to their bringing individual
actions. For those who do not wish to be a part of the present class action, they will have an
opportunity to make that choice.
What has just been said takes care of items (A) and (B). As to item (C), there is surely nothing
desirable about having the claims of the members of the proposed class spread around in dif-
ferent courts.
Regarding item (D), the court does not see that there will be any particular difficulties in
management, now that the class has been defined to relate to two series of bonds. At least, there

207 HW Urban GmbH v Republic of Argentina not reported in F Supp 2d, 2003 WL 21058254 (SDNY).
208 Ibid.
209 The original principal amount under these two series of bonds was $3.5 billion.
210 See HW Urban GmbH v Republic of Argentina supra n 202.

451
 Transactional Aspects of Sovereign Debt Restructuring

would appear to be no greater difficulty than occurs in other large class actions. The court does
not agree with the Republic that notice will present an insuperable difficulty. Although it may
be necessary to go through an institution, or even more than one institution, to reach the
actual bondholders, this is apparently accomplished in order to make payments of interest,
and the same should be true for giving notice of the action.
The court wishes to add the following comment as to how the action will proceed. The court
is required, under Rule 23(c)(2), to give notice to class members, offering them an opportu-
nity to opt out. But the court also has discretion under Rule 23(d) to require class members
to come forward affirmatively and present claims ...
11.135 Aside from its clarity and simplicity, the transcript of the ruling is relevant for an understand-
ing of the topic since it creates a new type of class action, ie the opt-in. Class members, instead
of opting-out as a typical FRCP 23(b)(3) will have to opt-in to become a member of the class.
It is worth stressing that holders of those series of bonds had three alternatives: (1) to opt-in
and become part of the class and the FRCP 23 class action litigation;211 (2) to affirmatively
opt-out of the class and pursue individual litigation against Argentina;212 or (3) to participate
in an exchange offer but not be permitted to participate in the class action.
11.136 On 28 October 2004, the sole representative of the class moved to enjoin Argentina from
engaging in or otherwise consummating an exchange offer relating to the two series of bonds
held by potential class members on the ground that any such exchange offer must be made
only through class counsel rather than directly to potential class members. On 16 November
2004, the District Court resolved that Argentina was entitled to launch such an exchange
offer but recognized that class members should be notified about the class action, its exist-
ence, the definition of the class, and explain to them that by accepting the exchange offer, a
potential class member would not have any right to join the class action.
11.137 Finally, it is worth noting that besides the certified class in HW Urbanas of December
200414 class actions had been filed in which plaintiffs sought to represent classes consist-
ing of holders of other Argentinean bonds.
11.138 On 5 November 2004, the plaintiff in Seijas v The Republic of Argentina,213 moved ex parte to
enjoin Argentina from engaging in an exchange offer. On 16 November 2004, the District
Court denied the request and reserved any further decision on the issue pending resolution
of the motion for class certification in that matter.
11.139 There are three key issues regarding the class actions filed in the saga of the Argentine litiga-
tion that are worth commenting on.
11.140 First, Hon Griesa created a new kind of class action. Aside from the two stated in the law, ie
mandatory class action214 and opt-out class action,215 Hon Griesa created a new type of class
action since creditors who wanted to be part of the class action had to express their intention
to be a part of it, ie an opt-in class action.

211 In addition, in this case, the District Court ordered that, to participate in the class, eligible bondholders

must ultimately present individual claims to the court.

212 See Prospectus of the Republic of Argentina dated 27 December 2004 for the issuance of Debt Securities,

Warrants and Units, p 191.

213
04 Civ 0400 (TPG).
214 FRCP 23(b)(1) and (2).
215 FRCP23(b)(3).

452
 I. Transactional Aspects of Sovereign Debt Restructuring

The second key issue is that the class originally certified by the court (after it was narrowed 11.141
by the plaintiffs) was narrowed by the court. Narrowed in the sense that those creditors
who were part of the certified class and who had accepted the exchange offer, upon the
settlement proposed by Argentina, were no longer entitled to be considered as potential class
action plaintiffs. Therefore the number of plaintiffs in the class action was reduced in
number.
Thirdly, upon the certification of the class action, no aggressive campaign to make creditors 11.142
opt into the certified class(es) was pursued. Moreover, the fact that the exchange offer was
settled without the requirement for the class actions court consent before settling the offer
weakened the class action plaintiffs position. It is likely that the debtorArgentinawould
request a motion to dismiss as result of the failure to move after the required timeframe had
elapsed. In other words, it might have become an action in vain since the restructuringthe
objective of Argentinahad already been performed and the fact that there is a litigation
focus in the US will not deter the sovereign.
The class actions initiated against Argentina illustrate an intermediate approachbetween a 11.143
formal statutory approach and a market-driven approach. The statute does not apply per se.
On the contrary, one of the parties must make a judicial request for the statute to apply.
Although it might be early to make any assumptions, this might be the development
of another market-based technique to deal with holdout creditors with the help of a
court. Whether sovereigns will be willing to subject themselves to the jurisdiction of
US courts and whether foreign courts will enforce a US class action ruling remains a matter
of controversy. An additional issue to keep in mind is that Paris Club creditors and IFIs
would not be subject to the courts jurisdiction in a debt settlement. It is possible that the
court could decide that it could not approve any settlement of a bondholder class action
as fair, adequate, and reasonable until it has received confirmation that the other creditor
groups have also agreed to moderate their own claims on the sovereigns foreign exchange
reserves or, in the case of multilateral creditors, agreed to augment those reserves through
new lending.216
Although class actions might not be the best device to resolve a sovereign debt crisis they can 11.144
be used as a technique to organise bondholders and engage the sovereign in a meaningful
dialogue with creditors.217

F. Case Study: Uruguays Debt ReprofilingHow to Perform

a Successful Exchange Offer
1. Introduction
In this section, the case of Uruguays debt reprofiling in 2003 is used to illustrate how an 11.145
exchange offer can be carried out in a successful manner. By means of an exchange offer,
Uruguay extended the maturity of its debt obligations and reduced interest rates (in some
series) averting default. Usually, countries try to unnecessarily delay the unavoidable
(ie default) so that markets do not financially punish the sovereign with high interest rates

216 See Buchheit and Gulati supra n 8, pp 3233.

217 See Debevoise and Orta supra n 201, p 44.

453
 Transactional Aspects of Sovereign Debt Restructuring

once a restructuring has been carried out and it tries to re-access the capital markets. Uruguay
did exactly the opposite: a fast and smooth exchange offer that permitted its re-access to the
markets within a month and without applying a penalty interest rate.
11.146 This restructuring is of paramount significance because it is the first time that a sovereign has
replaced all its bonds with new ones that bear CACs.218

2. A success story in debt reprofiling

11.147 First, a brief analysis of the economic situation of Uruguay will be provided. Second, an
analysis of the legal techniques used is also rendered.
11.148 Uruguays economy suffered a vast deterioration during 2002 and the beginning of 2003 due
to the 20012002 Argentine crisis. The Argentine upheaval severely impacted Uruguay due
to the number of Argentine depositors in the Uruguayan banking system. Uruguay por-
trayed its offer as a pre-emptive step to deal with a serious liquidity problem before the situ-
ation would deteriorate into a full-fledged default.219 Uruguays restructuring has been
described by Beattie220 as one that is almost straight out of the US Treasury Wall Street
Rulebook of voluntary market-based solutions. This notwithstanding, the bond market
rapidly reacted to the Uruguayan strategy and the value of the bonds reached default levels.
Uruguays total outstanding amount of debt was approximately $5.3 billion. The outstand-
ing international debt totalled $3.8 billion, including $400 million of Brady bonds and
$200 million of Samurai bonds.221 The international bonds were 19 series subject to English
and New York law and were denominated in USD, EUR, JPY, GBP, and Chilean Pesos
(CLP).222 Approximately 50 per cent of the outstanding debt was held by retail investors and
the same percentage was held by domestic investors.
11.149 The offer was preceded by extensive consultations with bondholders in several financial cen-
tres. In public announcements, AtchugarryUruguays former Minister of Economy and
Financestated that the terms and conditions of the offer reflected the negotiations held
with the bondholders. In part, the success of the reprofiling is attributable to the continuous
interaction between the Uruguayan government and its creditors.
11.150 The debt reprofiling consisted of: (1) an exchange offer to restructure all the outstanding
domestic and international debt; and (2) amendment to the terms and conditions of the
Samurai bond using CACs. The offer was announced on 10 April 2003, and completed on
29 May 2003, resulting in a successful restructuring with a bondholders acceptance of 93
per cent. The transaction thus challenged the widely held view that investors will refuse to
take seriously a proposal to restructure sovereign bonds unless they are forced to confront an
open payment default.223

218 John Barham, Cooking Up a New Solution, Latin Finance, June 2003, p 12.
219 See Buchheit and Pam supra n 182, pp 2831.
220 See Alan Beattie, Uruguay Provides Test Case for Merits of Voluntary Debt Exchange, Financial Times,

23 April 2003, available at <http://www.globalpolicy.org>.

221 A Samurai bond is a yen-denominated bond issued by a non-Japanese borrower mainly targeting the

Japanese market.
222 See Buchheit and Pam supra n 182, pp 2831.
223
Ibid.

454
 I. Transactional Aspects of Sovereign Debt Restructuring

Two types of bonds were offered to the bondholders: 11.151

(1) the so-called Bonos Extensin, which were a new bond in the same currency of origin,
bearing the same interest rate, with a five-year deferral on the original maturity date of
the old bond; and,
(2) the so-called Bonos Liquidez that offered greater liquidity than the old bonds since they
are expected to be traded in the secondary debt market and they would provide a bench-
mark for future issues.
In separate but cross-conditioned transactions, Uruguay conducted a domestic exchange 11.152
offer on terms similar to the international offer and asked holders of Uruguays Samurai
bond, which contained a CAC allowing changes to payment terms with the consent of 66
per cent of holders voting at a meeting with a 50 per cent quorum, to amend its payment
terms to extend the maturity date.224 Both, the legal analysis underlying the use of the clause,
and the procedures for that use, were untested in Japan at the time Uruguay sought a five-
year deferral of the maturity date of its Samurai bond.225 The CACs were successfully used to
extend the maturity from 2006 to 2011, and to raise the interest rate from 2.2 per cent to 2.5
per cent.226
According to Buchheit and Pam,227 Uruguays exchange offer included several innovative 11.153
legal techniques, some of them are: (1) check-the-box exit consents; (2) the use of exit con-
sents to amend the waiver of immunity; (3) incorporation of CACs in all the new bonds; (4)
aggregation; (5) vote packing; (6) disenfranchisement; and (7) prohibition of the use of exit
consents coactively. These techniques are analysed below.

(a) Check-the-box exit consents

As previously mentioned, exit consents were used for the first time in the debt restructuring 11.154
of Ecuador in 2000. In that opportunity, by accepting the terms and conditions of the new
bonds that were offered creditors were also granting their consent for the use of exit consents.
As opposed to the 2000 Ecuadorian case, by accepting the exchange offer bondholders were
obliged to grant their exit consent. The use of exit consents in the case of Uruguay was con-
sensual. This meant that creditors were able to choose if they wanted to grant their exit
consents besides accepting the commercial terms of the offer. The way by which creditors
gave their consent to the use of exit consents was by the sole fact of ticking a box, thereby it
was so-called check-the-box exit consents. The use of exit consents by this innovative mech-
anism of getting the consent of creditors was widely accepted in all the series except in one
where it was rejected by 13 per cent of its holders.
(i) The use of exit consents to amend the waiver of immunity As a result of various 11.155
meetings held between the government and its creditors, Uruguay was aware of the degree

224 See Puhan Chunam and Federico Sturzenegger, Default Episodes in the 1980s and 1990s: What Have

We Learned? World Bank, p 55, available at <http://profesores.utdt.edu/~fsturzen/chuhanfinal.pdf> (draft

chapter of the forthcoming book titled Managing Volatility Crises: A Practitioners Guide, on file with the author);
and, Cleary, Gotlieb, Stean, and Hamilton, Uruguay in Groundbreaking $5.2 Billion Debt Restructuring,
29 May 2003, available at <http://www.cgsh.com/>.
225 See Buchheit and Pam supra n 182, pp 2831.
226 See Chunam and Sturzenegger supra n 224.
227
See Buchheit and Pam supra n 182, pp 2831.

455
 Transactional Aspects of Sovereign Debt Restructuring

of acceptance of its offer among creditors. Therefore, Uruguay sought the consent of the
bondholders to amend three clauses of the old bonds: (1) to remove the cross-default
clause; (2) to de-list the bonds that require to be listed on a stock exchange; and, (3) to
amend the waiver immunity clause.
11.156 The amendment of the cross-default clause and the de-listing of the bonds were previously
used in the case of Ecuador. This notwithstanding, in the case of Uruguay it was the first
time that the waiver immunity clause was amended. The aim in amending this clauseonly
in regard to the payment streams due under Uruguays new bondswas to reinstate the
immunity that sovereigns have in the US and the UK by means of the FSIA and SIA,
respectively. The rationale behind this was to avoid the seizure of interest payments by credi-
tors that do not participated in the restructuring as happened to Perus Brady bonds in the
Elliott case.228
(b) Incorporation of CACs in all the new bonds
11.157 Uruguay included CACs in all its new bonds issued as a result of the exchange offer. Uruguay
followed the proposed CAC by the G 10 working group in 2002. This means that in the
hypothetical case that Uruguay needs to restructure its bonds again, any term of the bonds
(including the payment terms) can be amended with the consent of holders of 75 per cent of
the aggregate principal amount of each series. It is worth mentioning that Uruguay bonds are
subject to New York law.
(c) Aggregation
11.158 This is one of the most innovative features of Uruguays debt reprofiling. By the aggregation
mechanism, amendments to any terms (including payment terms) can be incorporated into
one or more series of bonds simultaneously. In order to approve the amendment, a double
majority is required: (1) 85 per cent of the aggregate principal amount of all affected series;
and (2) 66 per cent of each specific series.
(d) Vote packing
11.159 Uruguay included a covenant in the new bonds to guarantee the bondholders that new
bonds would not be issued nor any existing series of bonds would be re-opened. The aim
of this covenant was to avoid the new bonds being placed in the hands of investors
that would vote in favour of a proposed amendment, thereby diluting the bondholders
holding.
11.160 This clause reads as follows: Uruguay agrees that it will not issue new debt securities or
reopen any existing series of debt securities with the intention of placing such debt securities
with holders expected to support any modification proposed by Uruguay (or that Uruguay
plans to propose) for approval pursuant to the modification provisions of the indenture or
the terms and conditions of any series of debt securities.229
(e) Disenfranchisement
11.161 The disenfranchisement feature means that bonds owned or controlled by Uruguay or any
public sector instrumentally of Uruguay are to be disregarded in a vote on a modification to

228
Elliott Associates, LP, General Docket No 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber, 26
September 2000) (unreported, on file with the author).
229 See Uruguay supra n 151.

456
 II. Conclusion

the terms of the bonds. Prior to any vote, Uruguay shall deliver to the trustee a certificate
signed by an authorized representative of Uruguay specifying any debt securities that are
owned or controlled by Uruguay or any public sector instrumentality.230
( f ) Prohibition of the use of exit consents coactively
In order to avoid the use of exit consents in future potential restructuring in a coercive way, 11.162
Uruguays new debt instruments foreclose any possibility of mischief in this regard. To
achieve this, the terms of the bonds require that any modifications to the payment terms of
the bonds proposed in the context of a future exchange offer cannot make the terms of that
exchange offer less favourable than the current terms.
Uruguays prospectus reads as follows: [i]f any modification is sought in the context of a 11.163
simultaneous offer to exchange the debt securities of one or more series for new debt instru-
ments of Uruguay , Uruguay shall ensure that the relevant provisions of the affected debt
securities, are no less favourable to the holders thereof than the provisions of the new
instrument being offered in the exchange, or, if more than one debt instrument is so offered,
no less favourable than the new debt instrument issued having the largest aggregate principal
amount.231
(g) Some concluding remarks on Uruguays exchange offer
Uruguays debt swap was successful and groundbreaking because it avoided default obtain- 11.164
ing the desired maturity stretch and the inclusion of CACs in all its new bonds which will
facilitate any future potential debt restructuring. In order to make the proposal more attrac-
tive, an incentive was tendered to sweeten the terms of the exchange offer (ie upfront cash to
international debt maturing in the near to medium term; and, upfront cash to the domestic
debt maturing in 2003232). In 2003, after the debt exchange the economy resumed growth
in 2003, with a 2.5 per cent rise in GDP.

II. Conclusion
To sue or not to sue? That is the question. It is very likely that a creditor will be able to obtain 11.165
a favourable ruling in a New York or English court to collect the monies owed by a sovereign
resulting from a debt obligation.
Enforcing a ruling is a completely different story. The creditor will have to face two different 11.166
issues. On the one hand sovereign immunity granted either by the FSIA or the SIA. And, on
the other, be able to find attachable assets.

230
Ibid. Public sector instrumentality means Banco Central, any department, ministry, or agency of the
government of Uruguay or any corporation, trust, financial institution, or other entity owned or controlled by
the government of Uruguay or any of the foregoing, and control means the power, directly or indirectly,
through the ownership of voting securities or other ownership interests or otherwise, to direct the management
of or elect or appoint a majority of the board of directors or other persons performing similar functions in lieu
of, or in addition to, the board of directors of a corporation, trust, financial institution, or other entity.
231 Ibid.
232 Chunam and Sturzenegger supra n 224, p 55.

457
 Transactional Aspects of Sovereign Debt Restructuring

11.167 The first issue does not present much uncertainty since the US Supreme Court has cleared
any discussion by means of the Weltover case. In that case it was stated that when a sovereign
performs commercial activities in the manner of a private player within the market,
its actions should be considered as commercial according to the scope of the FSIA. Therefore,
it will not be protected by sovereign immunity. The same is the case with the law in the
England.
11.168 The second issue, ie to find attachable assets, is one of great difficulty. Usually, assets located
beyond the sovereigns own jurisdiction are not attachable (eg diplomatic missions, military
assets, payments to or from multilateral organizations, etc). In addition: (1) central bank
reserves enjoy a sovereign immunity that goes beyond the normal standard of immunity (ie
pre-judgment attachment is forbidden in the US and subject to an express waiver in the
England; in addition, there is an overwhelming care in regard to the nature of said reserves
under both regimes); and (2) payments of other debt instruments (mainly those resulting
from a restructuring exercise) have been shielded either by an increase in the use of trust
structures (the trustee acting as an agent of the bondholders) or as a result of norms as the one
adopted in Belgium to protect payments made through clearing and settlement systems.
Moreover, a sovereign in distress will repatriate attachable assets and/or avoid exposing them
in other jurisdictions (eg planes or vessels).
11.169 There is some scope for litigation for those that make a living out of trading and investing in
distressed debtsophisticated investors that are familiar with the risks and can cope with the
costs of several years of litigation, usually in different jurisdictions.
11.170 This leads to the fact it is more likely that creditors will participate in an exchange offera call
to voluntary tender the old bonds in exchange for new bondsto restructure the non-
performing/defaulted bonds. Exchange offers have been successful to restructure the out-
standing bonds of a sovereign, eg Belize, Grenada, Ecuador, Pakistan, Russia, Ukraine,
Uruguay, and even Argentina. Recalcitrant creditors (holdouts or vulture funds) will con-
tinue trying to collect their monies. In fact some of them make a living out of it. However, this
is not detrimental to the capital markets since they are necessary to provide liquidity. In addi-
tion, holdouts can be discouraged and therefore the degree of participation can be increased
by means of certain techniques (eg exit consents or enhancement of contractual provisions).
11.171 Therefore, if exchange offers are the way forward to restructure sovereign debt, the question
to be faced is: which is the applicable legal framework, if there is one? The answer is that
there is an informal ad hoc legal framework built on contractual law, previous restructuring
experiences, and mainly New York case law. Since most bond issuances are subject to differ-
ent laws (mainly New York and English law), these laws would also shape the ad hoc legal
framework.
11.172 The current ad hoc legal framework has two perspectives. One from the standpoint of the
sovereign and one from the standpoint of the creditors. The path to be followed by the sov-
ereign is either an exchange offer orin most of the cases with bonds issued as of 2003to
use the collective will of bondholders in the event that the bonds contain CACs. The path to
be followed by the bondholders is either entering into an exchange offer or suing (collectively
as a group or class or individually to collect on their claim).
11.173 Would the SDRM proposal be a solution to deal with rogue debtors? Not necessarily.
The IMF should perform on the one hand, a discretionary role similar to that performed by

458
 II. Conclusion

central banks when they provide emergency liquidity assistance. On the other hand, it should
develop a consistent policy in its dealing with member countries when experiencing balance
of payments problems. With the benefit of hindsight, neither the bail-outs of Mexico (1995),
Southeast Asia (19971998), and Russia (1998) nor the lack of intervention as in the case of
Argentina (20012002) are desired. The involvement of the IMF in the restructuring nego-
tiations as an uninterested third party to provide a critical analysis to the fiscal and budgetary
projections (ie repayment capacity) can enhance creditor participation (in certain ways simi-
lar to that performed during the Brady plan). This is not something different to the current
IMFs surveillance duty. It will only imply more pro-activity. Conditionality also plays an
important role in ascertaining political conscience, something which many developing
countries lack.
The IMFs SDRM proposal created a big intellectual debate but this initiative has been 11.174
shelved due to lack of support. Its occurrence is not foreseen in the near future and we may
wonder if it will ever happen. Bonds are instruments of the financial markets and financial
markets are neither keen on big changes nor on the intromission of third parties to regulate
their functioning or a part of it (its restructuring) unless there is a real need.
In summary, the endorsement of the decentralized market-oriented approach vis--vis the 11.175
centralized statutorily non-market-oriented approach is the best alternative to address sov-
ereign debt restructuring. Within the decentralized market-oriented approach, CACs have
been useful to re-draft the whole scenario facilitating further restructurings and discouraging
holdouts (the dissenting minority can be crammed down by the agreeing majority). Exit
consents (despite the criticism after the Ecuadorian restructuring)233 and the enhancement
of contractual terms are useful techniques to augment the participation percentage.
Different cases have demonstrated that litigation is not necessarily a solution. Therefore, 11.176
the use of trust structures should also be favoured as in the case of Uruguay and partially
Argentina. Trust structures not only simplify dealings with creditors but also discourage
litigation. In addition, they curtail attempts to freeze payments of the debtor, as payments
are no longer in the hands of the sovereign.

233 In addition, the criticism has become ungrounded as a result of the use of voluntary tick-the-box exit

consents in the Uruguayan debt reprofiling of the year 2003.

459
This page intentionally left blank
 INDEX

absolute priority rule purpose 7.11, 7.197.27

Chapter 11 plans 3.753.89 Objective 1, support for private purchaser or
accounts bridge bank 7.19
matter statements 1.34, 1.35 Objective 2, normal administration 7.27
administration 7.09 see also bank administration statutory claims 7.49
procedure, pre-packaged administrations bank failure see resolution authority, special
Chapter 11, comparison with 3.1543.191 resolution regime
perceptions of 3.1883.191 bank insolvency procedures (BIP) see winding up
practical differences 3.1583.187 Bank of England
theoretical differences 3.157 financial stability, responsibility for 6.01
differences with Chapter 11 bank resolution
debtors, ability to raise new role under banking legislation 6.136.27, 6.46,
financing 3.1833.185 6.47, 6.536.61
debtors, management of 3.1593.163 property sales 6.626.78
contracts, termination by third parties 3.164 share transfers 6.626.78
creditors, ability to bind 3.1863.187 bank resolution see resolution authority, special
practical 3.1583.187 resolution regime
theoretical 3.157 bank supervision in UK 5.135.25 see also bank
insolvency proceedings regulation supervision in US, banking regulation
secondary proceedings, use in 2.90 capital and liquidity requirements 5.215.25
moratoria, and 3.1743.182 consolidated supervision 5.175.18
Argentina deposit insurance 7.847.100
sovereign debt restructuring 9.12, 10.6710.100 large exposures 5.195.20
class action, against 11.122, 11.13011.144 Northern Rock 6.036.11
exit consents, and 11.111, 11.114 objectives 5.14
assets property sales 6.62, 6.796.99
Cross-Border Insolvency Regulations 2006 creditors interests 6.796.99
distribution, under 4.1774.180 share transfers 6.62
disposal of 1.23 shareholders interests 6.636.78
location of 2.43, 2.44 special resolution regime 6.04, 6.146.16,
rights in rem 6.436.52
statutory moratorium, on 2.46 cross-border cooperation between
regimes 6.1126.115
balance sheet test Dunfermline Building Society 6.1016.108
accounting concepts holding companies 6.100
relevance of 1.301.35 investment banks 6.1096.111
cash flow insolvency test, distinguished 1.07, 1.16, parent undertakings 6.1166.119
1.20, 1.26 property sales 6.62, 6.786.99
contingent and prospective liabilities 1.27, 1.28 share transfers 6.62, 6.636.78
definition, statutory 1.25 tripartite regime 6.136.42
meaning of 1.04 threshold conditions 5.16
rationale 1.26 bank supervision in US 5.265.43 see also bank
bank administration procedure (BAP) 7.107.54 supervision in UK, banking regulation
administration capital and liquidity requirements 5.525.54
process 7.287.54 chartering authorities 8.228.23
termination 7.507.54 common law standard 5.56
administration orders consolidated supervision 5.395.41
application process 7.147.18 deposit insurance 8.24
Objective 1, support for private purchaser or directors duties 5.55
bridge bank 7.19 statutory provisions 5.575.59
Bank of England, role of 7.317.45 Office of the Comptroller of the Currency
Objective 2, normal administration 7.27, (OCC) 5.28, 8.22
7.467.48 Office of Thrift Supervision (OTS) 5.30, 8.23

461
 Index

banking cease and desist order (C&DO) 5.63

Commissions in UK 7.1137.117 centre of main interests (COMI) 2.01, 2.02
definition Bankruptcy Code, and 4.32
UK 6.12 Chapters 11 and 15 cases
US 5.44, 5.45 COMI outside US 4.614.68
industry, as an 5.01 forum shopping, and 2.97
vulnerability of system 5.03 group companies sharing 2.572.80
banking holding companies 5.41 insolvency proceedings regulation, and 2.112.13
banking regulation see also bank supervision in UK, jurisdiction 2.182.24
bank supervision in US, Financial Services time when COMI assessed 2.252.26
Authority, resolution authority, special meaning of in insolvency proceedings 2.182.24
resolution regime migration of
introduction 5.015.04 failed migration 2.1302.139
UK model 5.055.25 insolvency proceedings, timing of
US model 5.265.43 opening 2.1152.142
banking, defined 5.44, 5.45 mergers, and 2.152
banking holding companies 5.41 reasons, for 2.1052.110
cease and desist order 5.63 registered office, transfer of 2.1232.129,
consolidated supervision 5.395.41 2.1402.142
dual banking system 5.285.29 Chapter 11
enforcement actions 5.605.64 administration
financial holding companies 5.39, 5.40 comparison, with 3.1543.191
regulatory bodies 5.305.38 automatic relief 4.74
reform 5.47 automatic stay 3.1653.174, 4.694.71
safety and soundness 5.485.51 Bankruptcy Code
BAP see bank administration procedure provisions available to Chapter 11 4.77
BCFP see Bureau of Consumer Financial Protection Chapter 15 cases
Belize Comparison, with 4.694.79
CACs, use to restructure bonds 11.85 foreign debtors choosing between Chapters 11 and
best interests test 15 4.694.71
Chapter 11 plans 3.733.74 relationship, with 4.614.68
BHCs see banking holding companies confirmation
BIP see winding up effect of 3.125
bonds see securities, sovereign debt post-confirmation activities 3.1243.126
Brady Plan 9.01, 9.02, 9.03 confirmation hearing 3.1203.123
bridge banks acceptances and rejections, determination
bank administration procedure, and 7.19 of 3.121
resolution authority, and 8.618.62 impaired class acceptance of plan 3.122
building societies impaired class rejection of plan 3.123
Dunfermline Building Society 6.1016.108 confirmation order
insolvency 7.767.79 effectiveness of 3.124
Bureau of Consumer Financial Protection cramdown provision 3.75, 3.293
(BCFP) 5.38 creditors
ability to bind non-consenting
C&DO see cease and desist order creditors 3.1863.187
CACs see collective action clauses debtors
cancellation of debt income (COD income) financing where debtors in possession 4.724.73
income tax considerations 3.68 management of 3.1593.163
cash flow insolvency test differences with administration
application of 1.12 practical 3.1583.187
assets, disposal of 1.23 theoretical 3.157
balance sheet insolvency, distinguished 1.07, filing 3.1123.119
1.16, 1.20 debtors standard filing 3.1133.114
borrowings 1.24 pre-arranged plans, additional filing 3.1153.119
courts pre-packaged plans, additional filing 3.1153.119
general approach, to 1.14 jurisdiction
definition, statutory 1.10 post-confirmation 3.126
evidence 1.12 plan standards 3.703.99
future debts 1.161.21 absolute priority rule 3.753.89
meaning of 1.04 additional statutory standards 3.913.99
principles 1.14, 1.15 best interests test 3.733.74
rationale 1.11 confirmation, consensual 3.71

462
 Index
confirmation, non-consensual 3.71, 3.75,
3.76, 3.80
fair and equitable rule 3.803.89
feasibility of 3.90
plan objectives 3.70, 3.71
plan requirements 3.71
unfair discrimination rule 3.763.79
perceptions of 3.1883.191
pre-arranged Chapter 11 plan 3.101
advantages of 3.1273.133
disadvantages of 3.1273.133
pre-packaged Chapter 11 plan 3.100
adequate information standard 3.106
advantages of 3.1273.133
creditors, dissemination of information to 3.108
disadvantages of 3.1273.133
disclosure, sufficiency of 3.1043.105
disclosure statement, contents 3.107
disclosure statement, court approval
of 3.1023.103
voting deadline 3.109
reorganization plan 3.1103.111
stay of proceedings
automatic stay 3.1653.174
third parties
termination of contracts with
debtors 3.1643.182
Chapter 15 4.104.133
application 4.214.24
restrictions, upon 4.24
avoidance actions, and 4.78
Bankruptcy Code, section 304 4.114.20
comparison, with 4.174.20
factors affecting grant of relief 4.13
foreign proceeding, defined 4.14
framework 4.124.14
provisions available to Chapter 15 4.75, 4.76
case studies 4.804.127
Chapter 11 cases
comparison, with 4.684.79
foreign debtors choosing between Chapters 11 and
15 4.694.71
relationship, with 4.614.68
COMI
litigation, regarding 4.804.120
commencement of case 4.254.28
cooperation and communication 4.50
development 4.1284.133
foreign proceeding
classification of 4.31
definition 4.30
foreign representative
ability to act 4.464.47
definition 4.25
history 4.114.20
legislative history 4.154.16
insurance companies 4.584.60
interpretation 4.55
litigation
COMI, regarding 4.804.120
relief, regarding 4.1214.127
multiple proceedings 4.514.54
463
overview 4.10
petition for recognition
documents accompanying 4.28
filing 4.25
statements accompanying 4.26
statutory presumptions 4.27
provisional relief 4.20
recognition 4.294.33
classification of foreign proceeding 4.31
schemes of arrangement 4.564.60
standard 4.17
timeline 4.33
relief 4.344.47
additional assistance 4.424.44
automatic relief 4.35
conditions, to 4.45
discretionary relief 4.364.38, 4.79
foreign representative 4.464.47
litigation, regarding 4.1214.127
provisional relief 4.394.41
venue 4.484.49
charges
registration on bank insolvency 7.83
choice of forum
forum shopping under EU law 2.972.152
sovereign debt litigation, and 10.06, 10.07, 10.11
choice of law
insolvency proceedings regulation
general rule 2.342.35
general rule, exceptions to 2.372.45
lex concursus and ranking of claims 2.36
paying off secured creditor 2.47
rights in rem, statutory moratorium on 2.46
set-off 2.45
sovereign debt litigation, and 10.05
sovereign debt restructuring mechanism,
and 11.08
class actions
Argentina 11.13011.144
sovereign debt restructuring, and 11.11811.144
COD income see cancellation of debt income
collective action clauses (CACs) 9.15, 9.16, 11.65,
11.6611.87 see also sovereign debt
Belize, and 11.85
collective representation clauses 11.73
cooling-off period clauses 11.73
majority actions clauses 11.73
Uruguay debt reprofiling, and 11.157
use 11.7611.87, 11.9711.117
COMI see centre of main interests
commercial insolvency see cash flow insolvency test
companies see also centre of main interest, group
companies
registered offices
transfer of 2.1232.129, 2.1402.142
company voluntary arrangements
(CVAs) 3.1983.200
cram-down, and 3.293
challenge, to 3.2083.226
horizontal comparison 3.2193.226
vertical comparison 3.2153.218
disadvantages of 2.87
 Index

company voluntary arrangements (cont.) exclusions 4.138, 4.139

insolvency proceedings regulation foreign courts
main proceedings, use in 2.852.88 cooperation, extent of 4.1944.204
secondary proceedings, use in 2.892.90 cooperation, with 4.1904.193
moratorium 3.2273.229 foreign creditors
process 3.2013.207 rights of access 4.1874.189
restructuring, role in 3.1983.233 foreign proceeding
retail businesses 3.2303.233 definition 4.148
cram-down venture financing 3.22 recognition 4.1524.167
creditors foreign representative
administration and Chapter 11, cooperation, extent of 4.1944.204
compared 3.1863.187 cooperation, with 4.1904.204
assignment for benefit of 3.24 definition 4.147
bank insolvencies 7.807.83 framework 4.1374.140
certainty implementation 4.1344.136
requirement, for 2.1012.104 insolvency
company voluntary arrangements, and presumption of 4.163
challenge, to 3.2083.226 jurisdiction 4.144
rights of creditors, and 3.207 public policy, and 4.139
voting 3.205, 3.206 private international law, and 4.140
creditors interests recognition
common law principle 1.37 application, for 4.1524.156
directors duty to consider 1.371.40, 1.46 common law, at 4.145
group restructurings 2.782.80 decision to recognize 4.164
property sales on bank failure 6.796.99 effects of 4.168
United States, and 1.551.58 interim relief pending 4.167
foreign creditors presumptions 4.1564.163
cooperation in British courts, extent relief
of 4.1944.204 assets, distribution of 4.1774.180
cooperation in British courts, fact of 4.1904.193 automatic stay 4.1684.170
groups of coordination of 4.2054.210
directors duty to consider 1.501.54 disclosure 4.181
insolvency proceedings regulation 2.552.56 discretionary relief 4.1714.181
junior secured creditors stay and suspension 4.1714.176
restructuring imposed upon 3.2933.316 rights of access
notice foreign creditors 4.1874.189
section 363 sale 3.138 foreign representative 4.147
protection under English cross-border statutory provisions
legislation 4.1824.183, 4.1844.186 relationship, with 4.1414.145
schemes of arrangement stay and suspension 4.1714.176
class issues 3.2743.284 third parties
meaning of in this context 3.2633.270 protection of 4.1824.183
workouts cross-border resolutions see also Cross-Border
ad hoc creditors committee 3.14 Insolvency Regulations 2006, UNCITRAL
negotiations, during 3.13 Model Law on Cross-Border Insolvency
cross-border insolvencies 7.1017.108 see also alternative means of resolution
Chapter 15, Cross-Border Insolvency Regulations bail-ins 8.2208.221
2006, cross-border resolutions, UNCITRAL contingent convertible capital 8.2208.221
Model Law on Cross-Border Insolvency recapitalization programmes 8.2208.221
Cross-Border Insolvency Regulations international coordination of 8.2128.222
2006 4.1344.210 living wills 8.2158.216
application 4.1374.140, 4.1524.156 national bank insolvency regimes, and 8.2178.219
assets, distribution of 4.1774.180 CVAs see company voluntary arrangements
automatic stay 4.1684.170
concurrent proceedings debt conversion deals 3.23
commencement of 4.2054.210 debt restructuring see also administration, Chapter 11,
creditors Chapter 15, company voluntary arrangements,
avoidance of detrimental actions, to 4.1844.186 exchange offers, out-of-court restructuring,
protection of 4.1824.183 pre-packaged administrations, schemes of
debtor, defined 4.150, 4.151 arrangement, sovereign debt, workouts
definitions 4.1464.151 directors duties, and 1.361.58
disclosure 4,181 negotiations, and 1.591.67

464
 Index

debtors forum shopping 2.972.152

administration group companies 2.572.80
management of 3.1593.163 interpretation 2.04
Cross-Border Insolvency Regulations 2006 judgments, recognition and enforcement
definition 4.150, 4.151 2.052.07, 2.482.53
debtors in possession (DIP) 4.72 judicial cooperation 2.54
DIP financing 4.724.73 jurisdiction 2.112.33
debtors in possession (DIP) 4.72 main and territorial proceedings 2.272.31
debts see also inability to pay debts purpose 2.03
cancellation of debt income (COD income) 3.68 recognition proceedings 2.482.53
contingent and prospective liabilities 1.08, rescue plans 2.812.96
1.27, 1.28 scope 2.082.10
debts absolutely due 1.08 territorial proceedings 2.272.31
discharge of 2.812.84 mergers
variation of 2.812.84 COMI migration, and 2.152
deepening insolvency exchange offers 3.263.69 see also securities,
theory of 1.561.58 sovereign debt
deposit insurance 7.847.100, 8.24 acceptance by exit consent 11.88
DIP see debtors in possession Ecuador, and 11.9711.98, 11.103,
DIP financing 4.724.73, 11.3011.34 11.10511.108, 11.110, 11.112
directors duties exit consents, and 3.583.59, 11.8811.89
common law, at 1.37 income tax considerations 3.68
creditors interests qualified institutional buyer 3.49
duty to consider 1.371.40, 1.46 rationale 3.303.31
groups of 1.501.54 securities laws, affecting 3.323.56
debt restructuring, and 1.361.58 anti-fraud rules 3.363.37, 3.46
fraudulent trading, and 1.43 early consent deadlines 3.383.42
insolvency, upon 1.02 early tender deadlines 3.383.42
misfeasance or breach of fiduciary duty 1.42 equity tender offer rules 3.43
primary duty 1.36 new securities, issuance of 3.443.55
schemes of arrangement 3.3103.312 registration of new securities 3.453.55
United States, and 1.551.58 tender offer rules 3.333.35, 3.383.43
banks 5.55, 5.56 sovereign debt restructuring, and 11.04,
wrongful trading test 1.41 11.170, 11.171
directors disqualification 1.43 state laws, affecting 3.56
disclosure structure of 3.27
Chapter 11 plans 3.1023.108 tactics to facilitate participation 3.573.67
Cross-Border Insolvency Regulations 2006 4.181 bankruptcy, threat of 3.61
down-round financing 3.21 coupon increases or covenant
Dunfermline Building Society 6.1016.108 enhancements 3.60
exit consents 3.583.59
Ecuador leapfrog 3.623.66
sovereign debt restructuring prepayment and extension of maturity 3.67
CACs, and 11.9711.98 trends, affecting 3.283.29
exchange offer, and 11.9711.98, Uruguay debt reprofiling, and 11.14511.164
11.10511.108, 11.110, 11.112 exit consents 3.583.59, 9.15, 9.16, 11.65,
exit consents, and 11.9711.98, 11.103, 11.95, 11.9711.117 see also sovereign
11.10511.108, 11.110, 11.112 debt
establishment check the box consents 11.110, 11.154
EU law Ecuador, and 11.9711.98, 11.103,
definition 2.322.34 11.10511.108, 11.110, 11.112
EU law see also centre of main interests, group exchange offers, and 11.8811.89
companies, rescue plans Uruguay debt reprofiling, and 11.15411.156,
insolvency proceedings 11.16211.163
cross-border regulation 2.032.56, 7.1017.104
insolvency proceedings regulation fair and equitable rule 3.803.89
application 2.082.10 Fannie Mae 8.02, 8.1418.156
choice of law 2.342.47 background, to resolution 8.1418.144
COMI, date of assessment 2.252.26 regulatory legislation 8.149
COMI, meaning of 2.182.24 resolution authority 8.1508.154, 8.155
creditors rights 2.552.56 statutory resolution scheme under
establishment, meaning of 2.322.34 FHFA 8.1508.154

465
 Index

Federal Deposit Insurance Corporation (FIDIC) financial company

5.29, 8.24 definition 8.159
assisted transactions 8.638.99 financial holding companies 5.39, 5.40
process, bidding 8.678.77 financial institutions, resolution authority over see
process, initiation of 8.648.66 resolution authority
transaction structure 8.788.99 Financial Services Authority (FSA)
claims process 8.1008.101 authorization 5.105.11
contingent claims not provable 8.1058.106 bank supervision 5.135.25
contracts capital and liquidity requirements 5.215.25
enforcement, high bar to 8.1078.111 consolidated supervision 5.175.18
enforcement, power to despite ipso facto large exposures 5.195.20
clauses 8.1128.114 objectives 5.14
qualified financial contracts, special treatment risk calculation 5.22
of 8.1228.126 threshold conditions 5.16
repudiation of 8.1158.118 capital and liquidity requirements 5.215.25
domestic depositor preference rule 8.1038.104 early intervention, powers of 6.286.42
fraudulent transfers establishment 5.05
super priority over 8.133 fit and proper person test 5.11
guarantees financial stabilization
cross-guarantees, treatment of 8.134 role to maintain 6.136.42
orderly liquidation authority framework, judgement-based approach 5.06
and 8.1588.167 objectives 5.09, 5.14
recovery right permission to carry out regulated activities
maximum liability 8.1318.132 threshold conditions 5.12
resolution unit, structure of 8.258.26 principles setting business obligations 5.09
security interests reform 5.07
protection from avoidance 8.1278.130 risk-based approach 5.15
super powers 8.1028.140 scope of responsibilities 5.085.12
contingent claims not provable 8.1058.106 special resolution regime 6.436.119
contracts enforcement of 8.1078.111, role of FSA 6.136.27
8.1128.114 Sourcebooks 5.22
contracts, repudiation of 8.1158.121 Supervision handbook 5.13
cross-guarantees 8.134 Financial Services Compensation Scheme
domestic depositor preference rule 8.1038.104 (FSCS) 7.847.100
fraudulent transfers, priority over 8.133 Financial Stability Oversight Council
limitations 8.1358.140 (FSOC) 5.425.43
qualified financial contracts, special treatment floating charges
of 8.1228.126 avoidance of 1.891.90
recovery right, maximum liability attached foreign courts
to 8.1318.132 cooperation
removal powers 8.1358.140 duty of British courts 4.1904.193
security interests 8.1278.130 extent of in British courts 4.1944.204
tolling 8.1358.140 foreign proceedings
Federal Financial Institutions Examination Council classification of 4.31
(FFIEC) 5.36, 5.37 definition
Federal Housing Finance Agency (FHFA) 8.149, 8.155 Bankruptcy Code, section 304 4.14
FFIEC see Federal Financial Institutions Examination Chapter 15 4.30
Council Cross-Border Insolvency Regulations 2006
FHCs see financial holding companies 4.148, 4.149
FHFA see Federal Housing Finance Agency foreign representatives
FIDIC see Federal Deposit Insurance Corporation cooperation
filing duty of British courts 4.1904.193
Chapter 11 petitions 3.1123.119 extent of in British courts 4.1944.204
Chapter 15 petitions 4.25 definition 4.147
debtors standard filings forum shopping
administrative filings 3.113 background, to 2.982.100
operational filings 3.114 COMI, migration of 2.97, 2.1232.142
pre-arranged plans creditors requirement for certainty
additional filings 3.1153.119 2.1012.104
pre-packaged plans freedom of establishment, and 2.1432.151
additional filings 3.1153.119 insolvency proceedings

466
 Index

timing of opening after migration of schemes of arrangement

COMI 2.1152.142 leave to convene 3.2733.284
judicial support, for 2.1112.114 sanction hearing 3.2863.292
reasons, for 2.1052.110
restructuring tool, as 2.972.152 inability to pay debts
France definition 1.04
insolvency proceedings regulation general (principal) tests 1.04, 1.06
procedural consolidation 2.752.77 introduction, to 1.07
fraudulent conveyances 1.911.104 tests
constructive fraudulent conveyance general (principal) 1.04, 1.06, 1.09
balance sheet solvency test 1.100 specific 1.04, 1.05, 1.09
elements of 1.961.98 informal wind downs 3.24
inability to pay debts as they become due INSOL see International Federation of Insolvency
test 1.104 Professionals
reasonably equivalent value 1.96 insolvency 7.017.08 see also balance sheet insolvency
statutory tests 1.991.104 test, bank administration procedure, cash flow
unreasonably small capital test 1.1011.03 insolvency test, inability to pay debts,
intentional fraudulent conveyance receivership, winding up
badges of fraud 1.94 balance sheet insolvency test 1.251.35
elements of 1.941.95 cash flow insolvency test distinguished 1.07,
preferences 1.1051.113 1.16, 1.20
antecedent debt 1.110 meaning of 1.04
defences 1.113 building societies 7.767.79
generally 1.1051.106 cash flow insolvency test 1.101.24
insolvency, presumption of 1.111 balance sheet insolvency test
transfer, creditors benefit requirement 1.112 distinguished 1.07
transfer, defined 1.1081.109 meaning of 1.04
trustees right to bring action 1.107 concept of 1.02
trustees right to bring action 1.92-.193 deepening insolvency
Freddie Mac 8.02, 8.1418.156 theory of 1.561.58
background, to 8.1418.144 definition 1.04
regulatory legislation 8.149 EU law
resolution authority 8.1508.154, 8.155 forum shopping 2.972.152
statutory resolution scheme under framework 2.032.56
FHFA 8.1508.154 groups of companies 2.572.80
freedom of establishment reform 2.1532.154
forum shopping, and 2.1432.151 rescue plans 2.812.96
FSA see Financial Services Authority fraudulent trading test 1.43
FSCS see Financial Services Compensation Scheme inability to pay debts
FSOC see Financial Stability Oversight Council definition 1.04
tests 1.04, 1.09, 1.101.35
Germany solvent defined 1.03
insolvency proceedings regulation wrongful trading test 1.41
procedural consolidation 2.752.77 insurance companies
group companies Chapter 15, and 4.584.60
centre of main interests (COMI) International Federation of Insolvency Professionals
sharing of 2.572.80 (INSOL)
group restructuring INSOL Principles 1.62
local creditors interests, management investment banks
of 2.782.80 insolvency law reform 7.1097.112
insolvency proceedings regulation 2.572.80 special resolution regime 6.1096.111
procedural consolidation 2.61, 2.752.77 Iraq
procedural consolidation, criticism of 2.62, 2.63 sovereign debt restructuring mechanism,
procedural consolidation, English and 11.5311.64
courts 2.642.69
procedural consolidation, German and French judiciary
courts 2.702.74 forum shopping
rustling 2.63 judicial support, for 2.1112.114
insolvency proceedings regulation
haircutting 8.14, 8.1998.200 judicial cooperation 2.54
hearings pre-packaged administrations, and 3.2453.260

467
 Index

jurisdiction cramdown, and 3.294

insolvency proceedings 2.112.34
COMI, date of assessment 2.252.26
COMI, meaning of 2.182.24
establishment, meaning of 2.322.34
main and territorial proceedings 2.272.31
transactions at undervalue 1.88
leapfrog 3.623.66
meaning 3.62
priority of debts
increased contractual 3.63
increased priority of new securities 3.66
increased structural 3.64
leveraged buyouts 3.28
liquidation see winding up
London approach 1.60, 1.61
London Club 9.05
majority bank mechanism 1.64
matter statements 1.34, 1.35
mergers
COMI migration and forum shopping 2.152
Northern Rock
legislative response to banks collapse 6.036.11
OCC see Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
(OCC) 5.28, 8.22
Office of Thrift Supervision (OTS) 5.30, 8.23
orderly liquidation authority 8.1598.167
OTS see Office of Thrift Supervision
out-of-court restructuring see also workouts
cram-down venture financing 3.22
creditors
assignment for benefit of 3.24
debt conversion deals 3.23
down-round financing 3.21
failure
bankruptcy ramifications of 3.25
informal wind downs 3.24
United States, in 3.033.67
washout venture financing 3.22
payment in kind 1.32
Peru
sovereign debt restructuring litigation 10.3010.43
pre-arranged Chapter 11 plan see Chapter 11
preferences 1.781.87
definition 1.78, 1.86
United States 1.1051.113
antecedent debt 1.110
defences 1.113
generally 1.1051.106
insolvency, presumption of 1.111
transfer, creditors benefit requirement 1.112
transfer, defined 1.1081.109
trustees right to bring action 1.107
pre-packaged administrations 3.2343.260
courts approach, to 3.2453.260
criticisms of 3.2363.237
guidelines 3.2383.244
practical evolution 3.2343.235
section 363 sales, comparison with 3.3133.316
pre-packaged Chapter 11 plan see Chapter 11
qualified institutional buyer 3.49
receivership see also winding up
restructuring
role, in 3.1923.197
rescue plans
company voluntary arrangements 2.852.88,
2.892.90
insolvency proceedings regulation 2.812.96
schemes of arrangement 2.912.96
resolution authority see also cross-border resolutions,
special resolution regime
background 8.228.32
chartering authorities 8.228.23
deposit insurance 8.24
Bankruptcy Code
alternative approach, to 8.2048.211
comparative table of statutory measures Annex A
banks
failure, prevention of 8.338.47
resolution of in US 8.208.140
bridge banks 8.618.62
chartering authorities 8.228.23
claims process 8.11, 8.1008.101
cross-border resolutions see cross-border resolutions
deposit insurance 8.24
Fannie Mae 8.02, 8.1418.156
background, to 8.1418.144
legislation 8.149
statutory resolution scheme under
FHFA 8.1508.154
federal home loan bank system
background, to 8.1458.148
legislation 8.149
statutory resolution scheme under
FHFA 8.1508.154
Federal Housing Finance Agency (FHFA) 8.149,
8.155
FIDIC resolution unit 8.258.26
appointment, effect of 8.54
appointment, timing of 8.55
assisted transactions 8.638.99
duties 8.56
resolution transaction 8.578.60
super powers 8.1028.140
financial institutions, systemically
important 8.1578.211
Bankruptcy Code, and 8.1698.171
Bankruptcy model, alternatives to 8.2048.211
creditor claims, procedure for 8.1778.184
financial company, defined 8.159
funding when institutions fail 8.1858.190
orderly liquidation authority 8.1598.167
policy issues 8.1688.203

468
 Index
qualified financial contracts, automatic stay
of 8.2018.203
recovery rights 8.198
resolution agency, identity of 8.1918.193
rulemaking, mandatory authority
for 8.1948.196
secured claims, haircuts on 8.1998.200
too big to fail/moral hazard debate 8.1728.176
valuation issues 8.97
Freddie Mac 8.02, 8.1418.156
background, to 8.1418.144
legislation 8.149
statutory resolution scheme under
FHFA 8.1508.154
fundamentals of 8.058.19
guarantees 8.468.47
guidance
limited nature of legal guidance 8.308.32
haircutting 8.14, 8.1998.200
history 8.018.03
illiquidity
provision of credit 8.428.43
legal guidance 8.308.32
Office of the Comptroller of the Currency
(OCC) 5.28, 8.22
Office of Thrift Supervision (OTS) 5.30, 8.23
open bank assistance 8.45
orderly liquidation authority
framework 8.1598.167
costs 8.165
FIDIC, relationship with 8.160, 8.1618.162
property protection 8.163
time limits 8.167
policy issues 8.1688.203
Bankruptcy Code, and 8.1698.171
creditor claims, procedure for 8.1778.184
funding when institutions fail 8.1858.190
qualified financial contracts, automatic stay
of 8.2018.203
recovery rights 8.198
resolution agency, identity of 8.1918.193
rulemaking, mandatory authority
for 8.1948.196
secured claims, haircuts on 8.1998.200
too big to fail/moral hazard debate
8.1728.176
prevention of bank failure 8.338.47
process 8.488.62
administrative nature of 8.278.29
claims 8.11, 8.1008.101
closure, grounds for 8.498.53
principal components 8.05, 8.06
prompt corrective action 8.358.38
purchase and assumption transaction 8.578.60
resolution powers 8.07, 8.09
resolution transaction 8.578.60
source of strength obligation 8.398.41
supervision, examination and
enforcement 8.338.34
troubled asset relief programme 8.44
US banks, and 8.208.140
469
resolution and recovery plans (RRPs) 6.55, 6.59, 8.03
retail businesses
company voluntary arrangements, and 3.2303.233
rights in rem
choice of law
statutory moratorium, on 2.46
rights of access
foreign creditors 4.1874.189
foreign representatives 4.147
RRPs see resolution and recovery plans
safety and soundness
principle in US banking regulation 5.485.51
schemes of arrangement 3.2613.292
case studies 3.2973.300
cram-down, and 3.293
creditor
meaning of 3.2633.270
directors duties 3.3103.312
insolvency proceedings regulation 2.912.96
recognition in US under Chapter 15 4.564.60
sanction hearing 3.2863.292
scheme meetings 3.285
stages of a scheme 3.2713.292
hearings, leave to convene 3.2733.284
valuation of junior creditors interest 3.3013.309
SDRM see sovereign debt restructuring
mechanism
section 363 sale alternative 3.1343.153
Chrysler case 3.1443.149
General Motors case 3.1503.152
judicial developments 3.1433.152
pre-packaged administrations, comparison
with 3.3133.319
sound business reason test 3.1343.140
contemplation of fair and reasonable
price 3.137
good faith of purchaser 3.1393.140
notice requirements 3.138
sound business purpose 3.1353.136
sub rosa plan 3.141
securities
anti-fraud rules 3.363.37
bonds
amendment to terms 11.8911.96
equity tender offer rules 3.43
exchange offers 3.263.69
private placements 3.483.52
registration 3.453.55
advantages of 3.47
disadvantages of 3.46
exemptions 3.483.55
registration statement 3.45
resale shelf registration 3.52
section 3(a)(9) exemption 3.533.55
state laws, affecting 3.56
tender offer rules 3.333.35
early consent deadlines 3.383.42
early tender deadlines 3.383.42
set-off
bank insolvencies, and 7.817.82
 Index
special resolution regime 6.04, 6.436.119, 8.03 see
also bank administration procedure, resolution
authority
bank failure in UK, and 6.016.02
Bank of England, role 6.136.27
early intervention, and 6.286.42
code of practice 6.146.16
cross-border cooperation between regimes
6.1126.115, 8.03, 8.2128.222
Dunfermline Building Society 6.1016.108
early intervention, and 6.286.42
Financial Services Agency, role of 6.136.27
early intervention, and 6.286.42
holding companies 6.100, 6.6.1166.119
investment banks 6.1096.111
parent undertakings 6.1166.119
property sales 6.62
compensation 6.99
creditors interests 6.796.99
partial property transfers 6.826.96
property held on trust 6.976.98
purpose 6.43
resolution and recovery plans 6.536.61
share transfers 6.62
shareholders interests 6.636.79
Treasury, role of 6.136.27
early intervention, and 6.286.42
stabilization options 6.46
solvent
definition 1.03
sound business reason test
section 363 sale 3.1343.140
sovereign debt see also collective action clauses,
exchange offers, exit consents, sovereign debt
restructuring mechanism
bonds
amendments, to 11.8911.94, 11.9711.117
debt reprofiling 11.03
Uruguay 11.14711.164
DIP financing 11.3011.34, 11.115
events of default 10.02
fiscal agent structure
trust structure distinguished 10.2510.28
litigation 10.0110.103, 11.16511.176
attachment, vacatur of 10.7610.100
case studies 10.3010.60, 10.6710.75
choice of forum 10.06, 10.07, 10.11
choice of law 10.05
class actions 11.11811.144
events of default 10.02
fiscal agent structure 10.2510.28
judgments, execution of 10.14, 10.15,
10.16
pari passu clauses in sovereign debt
instruments 10.4410.53
precedents 10.3010.60
property 10.1710.19
restraining notices, vacatur of 10.7610.100
state immunity 10.09, 10.13
sovereign immunity 10.09, 10.12, 10.13
trust structure 10.25, 10.28
470
pari passu clauses in sovereign debt
instruments 10.4410.53
applicability of 10.6310.65
payment interpretation of 10.50, 10.56, 10.61
multilateral debt payments, interaction
with 10.6110.66
use of 10.66
restructuring
Argentina 9.129.13, 10.6710.100, 11,111,
11.11211.113
Brady Plan 9.01, 9.02, 9.03
choice of law 11.08
collective action clauses (CACs) 9.15, 9.16,
11.65, 11.6611.87
defined 11.02
developments 9.099.11
Ecuador 11.9711.98, 11.103, 11.10511.108,
11.110, 11.112
exit consents, use of 9.15, 9.16, 11.6511.117
exchange offers 9.07
goals 11.07
introduction 9.019.19
legal framework 11.11, 11.12
London Club 9.05
mechanism see sovereign debt restructuring
mechanism
term enhancements 11.6511.117
transactional aspects of 11.0111.07
Ukraine 11.9711.100, 11.07
trust structure
fiscal agent structure distinguished 10.25, 10.28
Uruguay
exchange offer, case study 11.14511.164
sovereign debt restructuring mechanism
(SDRM) 9.15, 9.16, 11.0811.15, 11.1611.64
back-door SDRM 11.5311.64
choice of law 11.08
holdout problem 11.1311.14, 11.65
IMF proposals for SDRM 11.1611.64,
11.173, 11.174
criticisms of 11.3911.52
DIP financing 11.3011.34
domestic debt, inclusion of 11.25
features of SDRM 11.21
highly indebted poor country (HIPC) initiative,
and 11.37
multilateral debt relief initiative (MDRI),
and 11.37
objectives 11.19, 11.20
Paris Club debt, inclusion of 11.26
preferred status of IMF 11.2711.29
twin-track mechanism 11.18
Iraq, and 11.5311.64
legal framework 11.11, 11.12
procedures 11.10
reform 11.0811.15
SRR see special resolution regime
Standstill Period 1.621.67
transactions at undervalue 1.701.75
transactions defrauding creditors 1.761.77
 Index

Treasury fraudulent conveyances 1.911.104

special resolution regime, role within 6.136.27 Office of the Comptroller of the Currency
(OCC) 5.28, 8.22
UNCITRAL Model Law on Cross-Border Insolvency Office of Thrift Supervision (OTS) 5.30, 8.23
see also Chapter 15, Cross-Border Insolvency out-of-court restructuring 3.033.67
Regulations 2006, cross-border resolutions workouts 3.013.25
application 4.054.06 Uruguay
guidance 4.2114.216 debt reprofiling 11.14711.164
interpretation 4.074.09 aggregation, and 11.83, 11.158
objectives 4.034.04 CACs, and 11.81, 11.157
signatories 4.01 disenfranchisement of creditors 11.161
English version 4.1344.210 exit consents, and 11.154, 11.16211.163
US version 4.104.55 vote packing 11.15911.160
unfair discrimination rule sovereign debt
Chapter 11 plans 3.763.79 exchange offer, and 11.14511.164
United Nations
sovereign debt restructuring mechanism, Virgos-Schmit Report 2.06
and 11.5311.64 vulnerable transactions 1.681.90
United States see also bank supervision in US, banking courts
regulation, Chapter 11, Chapter 15, exchange jurisdiction of 1.88
offers, fraudulent conveyances, out-of-court floating charges
restructuring, resolution authority, workouts avoidance of 1.89190
avoidance actions 1.911.113 preferences 1.781.87
banking regulators 5.305.41 transactions at undervalue 1.701.75
Bankruptcy Code transactions defrauding creditors 1.761.77
absolute priority rule 3.753.89
bank resolution, table of comparative statutory washout venture financing 3.22
measures Annex A winding up 7.557.75
best interests test 3.733.74 application 7.567.59
Chapter 11 plan compliance standards 3.923.99 misfeasance or breach of fiduciary
COMI, defined 4.32 duty 1.42, 7.72
section 304 4.114.20 process 7.607.75
strong arm provisions 1.92, 1.107 termination 7.737.75
systemically important financial institutions, wrongful trading test 1.41
and 8.1698.171 workouts 3.013.25 see also out-of-court
bankruptcy court restructuring
jurisdiction post-confirmation Chapter 11 3.126 advantages of 3.05
Bureau of Consumer Financial Protection collateralization 3.17
(BCFP) 5.38 creditors
directors duties 1.551.58 ad hoc committee 3.14
dual banking system 5.285.29 negotiations, with 3.13
exchange offers 3.263.69 debt repayment 3.15
Federal Deposit Insurance Corporation see Federal disadvantages. of 3.06
Deposit Insurance Corporation management changes 3.18
Federal Financial Institutions Examination Council moratorium 3.103.12
(FFIEC) 5.36, 5.37 negotiations with creditors 3.13
Financial Stability Oversight Council rationale 3.02
(FSOC) 5.425.43 types of restructuring 3.193.24

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