Major jurisdictions around the world are overhauling their company insolvency and restructuring regimes to make them more like U.S. laws and more friendly to debtor companies. Ocean shipping companies will benefit, lawyers believe.
Robert J. Gayda, a partner in corporate restructuring and bankruptcy at New York- and Washington, DC-based law firm Seward & Kissel, gave an overview of changes at the Marine Money Week Asia 2019 conference, which was held this week in Singapore.
“Recent changes have been almost universally debtor friendly,” he told delegates, adding that they are a “significant step toward a U.S. process. The restructuring paradigm worldwide is changing. There’s a need for this. It’s interesting, it’s needed and it’s good for everyone.”
Significant changes to corporate debtor laws are being made in Singapore, across the EU, in the U.K., Australia and Dubai.
The EU directive “is going to be a big deal”
Gayda discussed the European Union directive (Directive 2019/1023 on preventative restructuring frameworks), which initially affects the 28 member states of the EU. It entered into force in July this year. The aim of the directive is to harmonize restructuring and insolvency laws across the European Union. The directive will require the member states of the EU to adopt and publish minimum corporate restructuring standards by July 2021.
“It’s one of the more significant developments for shipping… [across] the EU. The directive is going to be a big deal,” Gayda told a packed room.
Key elements of the EU directive
There are several key aspects of the directive. It gives debtors the right to remain totally, or at least partially, in possession of their assets and in the operation of their businesses. Debtors will be given the protection of a stay against legal proceedings (i.e. creditors will be prevented from suing for their debts), but the member states of the EU can vary that protection on certain grounds. However, creditors will be able to apply to the courts to try to have the stay overturned.
The initial duration of the stay will be four months with a maximum stay of 12 months. However, in certain circumstances the stay can be permanent.
Creditors will be banned from invoking so-called “ipso facto” clauses. These allow one of the parties to a contract to declare that there is a default on a contract if there are restructuring negotiations or if there is a stay against proceedings.
The directive also creates the ability to create “priority lending,” which gives priority over unsecured creditors to new lenders. The aim is to encourage lenders to lend money to a viable company that is having financial difficulties.
Finally, the directive allows for “cross-class cramdown,” which allows the majority of the voting classes of creditors to bind minority voting classes of creditors into a restructuring plan that they do not want. Different groups of creditors are grouped into “classes” and different classes have different rights. For instance, a group of creditors that has taken out a fixed charge over a debtor’s assets will have more secure rights as against, say, unsecured trade creditors. There are several protections for the minority voting classes.
Corporate insolvency laws are changing around the world
But it’s not just in the EU that corporate insolvency laws are becoming more like U.S. law. There are similar laws being enacted around the world.
In Singapore, which is a major maritime center in Asia, the city state allows companies with a “substantial connection” to Singapore to be restructured in its courts. This substantial connection can be the mere nomination of Singapore as the appropriate jurisdiction under a choice-of-law clause in a loan agreement.
Upon merely filing an application for a court-ordered moratorium in Singapore, there is an immediate grant of a 30-day moratorium. The court in Singapore can then order a further moratorium on legal proceedings.
A debtor in Singapore also can incur priority debt financing, which Gayda says “largely mirrors” the U.S. Bankruptcy Code, and the court can approve a cramdown on dissenting creditors under certain circumstances.
In Dubai, a major center for Middle East maritime operations, directors of distressed companies will be allowed to continue to manage the company’s affairs and there is a 120-day moratorium upon the application for an appointment for an insolvency practitioner. Companies under a moratorium are protected against the termination of contracts. The Dubai International Financial Center court can approve new priority financing and there is the option for cross-class cramdown.
Meanwhile, Australia has enacted laws that provide a “safe harbor” for corporate directors that will protect them from personal liability for insolvent trading if the company is undertaking a restructuring. Ipso facto clauses that allow contract termination are restricted in relation to voluntary administration, receiverships or schemes of arrangements.
In the U.K., there are proposals to allow cross-class cramdown but, again, these are subject to certain protections.
Commentary and analysis
Commenting on this global alignment of corporate insolvency laws, Gayda added that there are limitations and that court systems and new legal regimes are untried. They need time to be tested.
He also pointed out that there is always the threat of debtors or creditors simply not recognizing or not complying with a court order if they have no business or assets in a particular jurisdiction. However, he warned, the U.S. and the U.K. regimes have global reach.
Speaking to lawyers at the side of the Marine Money Week Asia 2019 conference, FreightWaves was told that one of the reasons for the global harmonization is that governments are seeking to act against “forum shopping” — i.e. parties seeking the legal jurisdiction that is most advantageous to their interests in a restructuring.
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