Global restructuring professionals are breathing a sigh of relief after a judge reaffirmed that a foreign restructuring can discharge debt governed by New York law—a common element of global insolvencies recently brought into question by a Hong Kong judge.
Judge Martin Glenn of the US Bankruptcy Court for the Southern District in July said his court would recognize and enforce, under Chapter 15 of US bankruptcy law, Chinese property developer Modern Land China Co.'s Cayman Islands court order that restructures $1.34 billion in debt governed by New York law. In doing so, Glenn helped to allay concerns raised in June by a Hong Kong judge who suggested that a US court’s recognition of a foreign company’s restructuring under Chapter 15 doesn’t discharge debt under US law.
Glenn’s decision in Modern Land—a company with assets in China and the US worth $12.49 billion as of June 2021—gave renewed confidence to cross-border restructuring professionals who had been left questioning the effectiveness of Chapter 15 for offshore companies that use foreign courts to restructure New York-law governed debt.
The issue, which Glenn deemed “critically important,” is significant because the Hong Kong decision could have given creditors an opportunity to go after a debtor’s property in Hong Kong, despite obtaining restructuring recognition in the US.
The decision also has broader significance because of how common Modern Land’s corporate structure is, with operations based in China but incorporation outside of the country, with debt raised in the US.
Additionally, the decision is notable in that it affects a large Chinese real estate developer amid ongoing turmoil among China’s real estate industry, which accounts for about a quarter of the world’s second biggest economy.
“Those who were holding their breath a little bit in the wake of the decisions out of the Hong Kong court can breathe a little easier,” said Michael S. Etkin, a partner at Lowenstein Sandler LLP’s Bankruptcy & Restructuring Department.
The bankruptcy code’s Chapter 15, created in 2005, is meant to help facilitate corporate insolvencies that involve more than one country. Generally, a debtor’s main insolvency case is brought outside of the US.
Recent high profile Chapter 15 cases include a Luckin Coffee Inc., which has been described as the Starbucks of China, and Singapore-based Three Arrows Capital, a cryptocurrency hedge fund that filed in New York last month.
The uncertainty around Chapter 15 commenced in June, when Hong Kong Justice Jonathan Harris issued a decision in the case of Rare Earth Magnesium Technology Group Holdings Limited.
In Rare Earth, Harris said while Chapter 15 procedurally prevents a creditor from taking action against a debtor’s property in the US, that “recognition does not appear as a matter of United States’ law to discharge the debt.”
Harris’s opinion suggested a Hong Kong court wouldn’t recognize a reorganization approved in an offshore court—then recognized in a US bankruptcy court under Chapter 15—because, in his view, it doesn’t have a worldwide effect.
“This is a distinction to which advisers need to be alert when dealing with transnational restructuring,” Harris wrote. “A scheme in an offshore jurisdiction purporting to compromise debt governed by United States law will not be effective in Hong Kong. Recognition of the scheme under Chapter 15 does not constitute a compromise of debt governed by United States law.”
Harris applied an English common law rule from 1890 that declines to recognize a discharge or change of English law-governed debt approved by a court outside of England. While US courts don’t follow that rule, it’s a key international issue because it’s used in jurisdictions around the world that include Cayman Islands, Bermuda, Canada, and Australia.
The interpretation raised concerns that creditors that didn’t participate in a foreign restructuring could go back to the Hong Kong court to take action against a debtor despite the debtor securing judicial recognition under Chapter 15. Dissenting creditors could try to avoid cramdowns—which allow debtors to implement a bankruptcy plan over creditor opposition—of a foreign restructuring if they could establish a connection in Hong Kong.
“This is something that we for a long time thought was unremarkable, but then the Hong Kong court issued this decision that caused everybody to sit up and take notice,” according to Madlyn Gleich Primoff, a restructuring partner at Freshfields Bruckhaus Deringer LLP.
The opinion suggested that if a global restructuring that involves debt governed by laws in multiple countries,the debtor might have to go to each of those jurisdictions to separately deal with it, Primoff said. Conducting a full scale restructuring in each jurisdiction where debt was governed, while possible, would be expensive and inefficient, she said.
Glenn granted Chapter 15 relief to Modern Land just six weeks after the Rare Earth decision, which is unrelated, came out. He recognized its Cayman restructuring, confirming the binding effect of its discharge of New York law-governed debt and the issuing of new notes.
His decision, which allowed for Modern Land to restructure $1.4 billion in bonds, clarified that the Rare Earth ruling isn’t the position under US or New York law, and that the court will continue to recognize foreign cases that file in the US under Chapter 15. As long as due process principles are observed in the foreign jurisdiction and other comity principles are satisfied, a foreign court can modify or discharge New York law governed debt, Glenn found.
Those factors make Glenn’s Modern Land response “huge,” Primoff said.
Though the Hong Kong court could respond again, Glenn’s decision should allow restructurings of offshore companies with US law debt to continue as they had before, Paul Apáthy, a partner at Herbert Smith Freehills LLP said.
“I think the Modern Land decision could be summarized as a return to the understood legal position of a Chapter 15 order prior to the uncertainty generated by the Rare Earth decision,” Apáthy said.