Third-Party Releases are common in English law schemes of arrangement and restructuring plans, and US courts have so far indulged that approach in granting recognition.
If Prospero’s plea to the audience at the conclusion of The Tempest may not be so willingly granted by dissenting creditors crammed down in a restructuring, releases continue to be commonly sought for entities other than a scheme or plan company. Co-debtors, guarantors, or security providers, or even principal debtors (if a scheme or restructuring plan is proposed by a co-debtor or guarantor) have all been granted releases in recent cases, in addition to other third parties involved in the restructuring process, such as directors, insolvency officeholders, agents, and legal and financial advisers to the parties.
We explore in this article the permissible extent of third-party releases in English law restructurings and their cross-border recognition and enforcement in the United States.
English Law Pragmatism
Third-party releases of non-proprietary rights are common in English law schemes of arrangement and, more recently, restructuring plans. The court's jurisdiction clearly extends to releases of co-debtors, third-party security providers, and/or guarantors securing the financial obligations of the company that are ancillary to the scheme/plan and necessary to its effectiveness. Absent such releases, third parties could remain liable in relation to compromised debt which might give rise to a subrogation claim against the scheme/plan company. Such a “ricochet” claim may well undermine the restructuring because the affected claim will not have been fully compromised.
However, it is not a strict requirement that a third-party release is necessary: the court will consider the degree of connection (or lack of it) between the scheme/plan company and its creditors on the one hand, and the subject matter of the scheme/plan on the other, in determining whether to exercise its discretion to sanction a scheme/plan and allow a more tangential third-party release. This practice builds on the English court’s willingness to give the term “arrangement” a broad and generous interpretation, and reflects a pragmatic approach and an undiminished appetite to accept jurisdiction for international restructurings.
However, as the recent Oceanfill caseOceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd. [2022] EWHC 2178 (Ch). has demonstrated, the English court will not “read into” a scheme/plan third-party releases that have not been expressly provided in the scheme/plan and disclosed in the explanatory statement. In that case, a third-party (non-group) guarantor remained liable for sums due under a lease notwithstanding that the primary lease obligation had been compromised under the plan. This position is perhaps not surprising: the discharge of a debtor that statutorily binds its creditors does not automatically release a co-debtor, third-party security provider, or guarantor. In the context of a scheme/plan, a third-party release can never be implied.
The English court will sanction a scheme or plan only if it is satisfied that it is likely to have substantial effect. If the scheme/plan relates to liabilities governed by foreign law or owed by foreign parties, this entails evidencing — typically by local law expert advice — that the effect of the scheme or plan will likely be enforceable overseas. Across the pond, Chapter 15 proceedings are commonly used to buttress English law compromises of US liabilities (for example, New York-law governed debt). The US courts’ approach to third-party releases in the context of Chapter 15 is markedly different from their domestic approach under Chapter 11.
The Procedural Approach Under Chapter 15
For Chapter 15 recognition to be granted, fundamental standards of procedural fairness and due process must have been upheld during the relevant foreign proceedingsIn re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. 2019).. So long as these standards are fair and do not violate US public policy, judges will not in principle scrutinise the outcome of the proceedings In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010)., even if this leads to enforcing third-party releases In re Avanti Communications Group plc, 582 B.R. 603 (Bankr. S.D.N.Y. 2018).. A high level of creditor support is a persuasive factor in granting relief and, generally speaking, comity is more easily extended to sister common law jurisdictions that afford creditors comparable rights and opportunity to vote, such as an English law scheme or restructuring plan.
US bankruptcy courts have refused relief in instances in which parties have not sufficiently established to their satisfaction that the debtor had its centre of main interests in the jurisdiction of the foreign proceedingIn re Shimmin, No.22-10039 (Bankr. W.D. Okla. Oct.14, 2022).. They have also refused relief when, due to inadequate record-keeping, they could not ascertain the rationale for the releases and the fairness of the foreign proceedings. Relief has also been denied to non-debtor guarantors if creditor approval was obtained in part through votes from insiders that would have been disenfranchised under US lawIn re Vitro S.A.B. de C.V., 473 B.R. 117 (Bankr. N.D. Tex. 2012)..
The public policy exception is read narrowly, which is of particular interest given that restructuring arrangements with third-party releases are not always recognised in US law-governed processes. Under Chapter 11 proceedings, approaches vary per circuit and sometimes per judge. This will usually depend on whether the third-party releases are deemed consensual and backed by statutes, noting that explicit authority has only been provided for asbestos-related liabilities. The recent confirmation of the third-party releases under the Purdue Pharma plan by the US Court of Appeals for the Second CircuitIn re Purdue Pharma L.P., No. 22-110-bk(L) (2d Cir. May 30, 2023). (overturning the order of the District Court, which held that non-consensual third-party releases were not permitted under the Bankruptcy Code) and the 2021 bill introduced to prohibit all non-consensual releases of third-party liabilities in Chapter 11 plans of reorganisationNondebtor Release Prohibition Act of 2021. (currently lacking sufficient congressional support) illustrate how contentious the area has become. In a Chapter 15 context, anything manifestly contrary to public policy has been described as being restricted to the most fundamental policies of the USH.R. Rep. No. 109-31 (2005).. Therefore, the concerns expressed in the context of Chapter 11 non-consensual third-party releases should not adversely affect the prospect of obtaining Chapter 15 relief for a foreign proceeding.
Relief can therefore be obtained under Chapter 15 even if it would not be available had the debtor filed under other chapters of the US Bankruptcy Code and sought to release a non-debtor third-party from liability to creditors. The US courts’ willingness, under Chapter 15, to depart from the traditional single-entity approach to bankruptcy proceedings has to date proved an efficient way of ensuring that third-party releases within a foreign proceeding will be enforceable in the US through a single point of restructuring (the foreign proceeding), thereby avoiding the need for multiple parallel proceedings. The market will closely watch the extent to which the US courts will continue to indulge the English approach to set third parties free.
ENDNOTES
- 1Oceanfill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd. [2022] EWHC 2178 (Ch).
- 2In re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. 2019).
- 3In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010).
- 4In re Avanti Communications Group plc, 582 B.R. 603 (Bankr. S.D.N.Y. 2018).
