By Joanne Collett, Timothy Haynes and Callum McNeil
In the prevailing economic climate, an increasing number of large corporate groups have occasion to consider restructuring their affairs, including business operations and debt obligations in order to meet the challenges of the day. Whilst the onshore mechanisms to achieve restructuring are well known, there are offshore actions which can be taken by creditors which need to be addressed as part of an overall restructuring strategy.
It is commonplace for conglomerates to raise finance and working capital by using special purpose vehicles (SPVs) to issue bonds to foreign investors from tax neutral jurisdictions, both onshore and offshore. This can cause problems if not addressed as part of an overall strategy as part of an onshore restructuring because the SPVs may be vulnerable to hostile insolvency proceedings, including, potentially, by bondholders directly. In such proceedings, creditors might succeed in appointing liquidators offshore who may then seek recognition onshore in competition with actions being taken by management or other foreign office holders in the group, who may in turn seek to enforce claims in relation to assets within the group. This may frustrate any onshore restructuring proceedings and potentially derail the same entirely. The potential for such action may then cause considerable difficulty for corporate groups which include offshore entities as they endeavour to carry their group through the restructuring process.
A stay of proceedings and execution sought and obtained in the jurisdictions in which the group has creditors and/or assets will be an essential protection for any company seeking to negotiate a compromise with its creditors and reorganise its business if there is a risk of adverse creditor action. Where offshore SPVs are left out of the onshore tactical planning for restructuring, bondholders have been able to appoint liquidators to the SPVs to usurp the powers of the directors to act to act for and on behalf of the SPV (for example to propose a Scheme of Arrangement). They may also frustrate recognition of a management led process in other jurisdictions (including the US) by seeking rival recognition of the offshore insolvency proceedings. Recent examples of creditors commencing litigation offshore to frustrate onshore restructurings have included proceedings in the US bankruptcy courts. This is relevant for Asia and Mena region general counsel because large corporate groups, no matter where they are based, may have dollar assets and bank accounts in the US.
Returning value to the group’s stakeholders can be greatly assisted via the continued business operations of the group and its companies. The interference caused to the orderly onshore restructuring by having rival foreign offshore proceedings competing for recognition in the US can and has caused long and expensive delays in carrying a wider restructuring plan through to a successful global outcome. Such difficulties can be averted at an early stage by taking proactive action offshore in order to also obtain the offshore courts’ assistance with the onshore process.
SPVs incorporated in Bermuda, the BVI and the Cayman Islands all have courts that can and will assist the onshore restructuring by imposing a local moratorium on claims against the SPV by bondholders. To do so, the offshore Courts may appoint provisional liquidators (PLs) to the SPVs for the purposes of carrying out a soft or light touch provisional liquidation in order to preserve the status quo and to allow the SPV (by its management and the PLs) to work together with the onshore process.
By making use of the offshore processes as part of the broader restructuring, offshore appointees can be informed of and participate in returning value to offshore bondholders and otherwise achieving the group’s restructuring objectives which may include proposing a scheme of arrangement for an offshore SPV, together with recognition of the scheme in the US court to effectively compromise the debt. Where the offshore jurisdiction is left out of the broader plan, any offshore appointee (via creditor action) may have no knowledge of the broader picture and might be duty bound to take such steps as might be open to them in order to seek to return value to bondholders. This can create a competition for control of the SPV between an offshore appointee and management of the group overall, which can frustrate the restructuring process.
In taking steps early on to include the offshore SPVs in the broader strategy, including making use of protective measures which are available offshore, general counsel can avail the group of the offshore restructuring tools which are well developed, tried and tested in order to carry their group through the sometimes difficult restructuring process. In doing so, companies will find a mature offshore process with courts that are ready, willing, and able to assist with the restructuring of the group as a whole with a view to maximising value for stakeholders.
E: joanne.collett@walkersglobal.com
E:Â timothy.haynes@walkersglobal.com
E:Â callum.mcneil@walkersglobal.com
T: (852) 2596 3433, (852) 2596 3425