U.S.-based companies doing global business often face challenges when they initiate bankruptcy proceedings. In the following interview, Kevin Neiman explains a few current issues concerning cross-border bankruptcies and some of the obstacles that companies must overcome to secure an administration of their bankruptcy cases.
Kevin Neiman is the owner and President of the bankruptcy law firm Law Offices of Kevin S. Neiman, PC. Kevin has experience in bankruptcy and commercial litigation, workouts and orderly wind-downs outside of the court system on behalf of debtors, creditors and trustees, among other constituents. Clients include foreign and domestic, public and private corporations in Chapter 11 reorganizations and Chapter 7 bankruptcy liquidations and other financial problems and commercial disputes, often of a sophisticated nature.
What are the most difficult issues companies involved in international restructuring and bankruptcy proceedings are facing?
Despite the adoption of the Bankruptcy Code’s UNCITRAL Model Law on Cross-Border Insolvency, which generally provides for the cooperation among courts in different countries and recognition of foreign insolvency proceedings, the main challenge remains that some foreign courts do not feel constrained to cooperate with U.S. courts and the restructuring process is fraught with uncertainty. A foreign jurisdiction that has not adopted the Model Law or some other similar regime can determine how much cooperation it wants to extend to the U.S. bankruptcy proceedings on a case-by-case basis and thus the outcome of proceedings is often unpredictable. Therefore, when issues start to emerge, predicting the outcome of formal proceedings can be challenging.
In addition to the fact that it may not be clear what law should be applied, time constraints and the economic, political and cultural differences can create obstacles to achieving the goal of bankruptcy proceedings.
Another issue is that the manner by which the returns to the company’s creditors are distributed in bankruptcy proceedings varies from country to country, although in principle most countries have bankruptcy regulations to maximize these returns. A U.S.-based company that is taking steps toward bankruptcy may have to spend its funds on protecting its assets located abroad. The lack of transparency and of clear rules on the treatment of foreign creditors may result in a petition for the company’s liquidating bankruptcy in another country after a number of attempts by those creditors to commence enforcement proceedings against the company’s assets located overseas. Therefore, companies with global operations involved in restructuring procedures not only have to deal with their assets located in a country or countries different from the one which hosts their registered offices, but must also consider claims made by foreign creditors to those assets located abroad.
What advice would you give to companies with global operations to help navigate the various legal systems and cultural issues that they may face?
Companies should select sophisticated counsel that they can trust, with experience in different jurisdictions. Also, they should obtain advice early in the process and avoid underestimating the time that selecting counsel will take. Oftentimes, the leaders of companies facing bankruptcy wait too long and don't fully grasp the potentially challenging and contentious nature of bankruptcy. Most companies have an existing network of advisers and lawyers that they turn to, but, in all probability, these advisers will not have the experience to deal with intricate international operations bankruptcy matters. Ask peers and clients about your potential counsel’s approach and skills and ask counsel about prior experience.
Multijurisdictional companies should also make every effort to determine whether a single proceeding can achieve their restructuring goals or if the cooperation of multiple insolvency regimes is required. In recent years, global companies have successfully reorganized under the insolvency regimes of the United States. They have been able to identify the obligations that they had to adjust and deploy tools able to bind enough of the creditors in just one jurisdiction, thus accomplishing their rehabilitation (or liquidation). Because creditors themselves may be global companies, if the holder of an obligation can be subject to sufficient proper coercion in another jurisdiction, it is not always necessary to reach every creditor where the obligation arose.
What are some of the strategies that companies with international operations preparing to get involved in bankruptcy proceedings can apply?
When entering into bankruptcy discussions, companies are advised to examine what goals are most important to redress the situation of the company. Is it a balance sheet adjustment? Should the restructuring focus instead on liquidity? What is required: an operational restructuring, disposing of non-core assets, a reduction in force or closing idle facilities? Once a company clarifies its goals, it can then determine the best course of action.
In addition, the leaders and advisers of the troubled businesses need to know that creditors’ true motivations may not always be immediately apparent. Therefore, early in the process, they need to examine what will be important to each key creditor. Also, in any case, it is crucial to keep open lines of communications with the major creditors. Too often, frightened or uninformed creditors take hasty actions based on ignorance, fear, or wrong assumptions and those actions harm, impede or even foreclose the chance of a consensual restructuring.