Kyriaki Karadelis, Editor – Global Restructuring Review
WWL’s sister publication Global Restructuring Review reports on a talk by Singapore’s Justice Kannan Ramesh at GRR Live New York in September 2018.
Singapore’s Justice Kannan Ramesh invited an audience of restructuring and insolvency experts to consider how to deal with the commercial realities arising from a period of unprecedented change marked by disruption and globalisation.
The judge questioned the doctrine of separate legal personality as an unshakeable principle, and also raised a “fascinating twist” on the concept of synthetic secondary proceedings as a way of managing cross-border insolvencies.
“Businesses are evolving at a rapid pace to meet the immense challenges of this new paradigm and so must the law,” Justice Ramesh told delegates. “After all, if you change nothing, nothing will change.”
Justice Ramesh acknowledged that the century-old doctrine of separate legal personality is the first thing any student of common-law company law will learn, but he queried whether it should be an unshakeable principle that companies within an integrated business group should be treated as separate legal entities in an insolvency.
The idea of disregarding the doctrine might cause discomfort for some, he said, but insolvency proceedings by their very nature are designed to rework legal rights and responsibilities on the understanding that the greater good has to prevail over minority interests.
Justice Ramesh argued that avoidance measures, priority payments to new creditors, cramdown provisions and the limitation on ipso facto clauses all result in creditors’ rights being subordinated “to the imperative” of a restructuring – so why should the doctrine of separate legal personality be treated any differently?
He raised three rebuttals against the most common argument preventing the pooling of assets of separate entities upon insolvency: that creditors extending credit to a single group company whose creditworthiness they have assessed do so expecting it will be held by that entity and not be shared among the group.
The judge first offered that in the context of a “highly integrated business group” where cross-collateralisation of debt, cross-guarantees and cross-default provisions all exist, creditors arguably lend on the implicit understanding they’re lending to the entire business, not just to one entity. He noted that at the point of lending, the creditor’s credit assessment would not just be about the debtor, but also its guarantor.
Second, he said, creditors’ expectations are to some extent “a mere reflection” of the orthodoxy of separate legal personality. If incursions into the doctrine become more common in group insolvencies, expectations would adjust accordingly, the judge argued.
Third, Justice Ramesh suggested that creditor expectations may not be a decisive factor in restructurings and insolvency proceedings where other policy considerations arise. Where fraud is suspected, for example, “the lifting of the veil is ungirded” by the policy imperative to prevent abuse.
While fraud is an extreme example, it demonstrates one of the policy considerations justifying a lifting of the veil, the judge said, so the question could be asked whether some other policy considerations merit the same action in group insolvencies.
Some jurisdictions already accept the idea that group company assets may be better pooled in the event of insolvency under the doctrine of substantive consolidation, the judge further noted. Substantive consolidation is available in the US where creditors have already dealt with a corporate group as a single economic unit, and in cases where group assets are so intertwined that it would be too costly to separate them.
The UNCITRAL Legislative Guide on Insolvency Law also permits consolidation where extensive intermingling of group assets makes it too costly and time-consuming to separate them, and where a court is satisfied that group members are engaged in a fraudulent scheme or activity with no legitimate business purpose.
Moreover, in 2007, Australia amended its Corporations Act to permit pooling of assets in group liquidations either voluntarily or by court order. Singapore, meanwhile, has taken its first steps towards a consolidated approach for group insolvencies by introducing territorial and extraterritorial moratoria for related companies that are integral to the restructuring in its revised Companies Act, provided the court has in personam jurisdiction over affected parties.
“To be clear, I should not be understood as advocating the sacrifice of the doctrine of separate legal personality at the altar of group restructuring,” Justice Ramesh told delegates.
Instead, he said, he was merely raising the issue so that insolvency practitioners can start a dialogue on an approach whose use should be “carefully circumscribed and calibrated with adequate standards” given its “tremendous disruptive potential” if found to be appropriate.
Most cross-border insolvency practitioners will be aware of the concept of “synthetic” secondary proceedings, which were put to use successfully in the English case Collins & Aikman in 2006.
In that case, the English administrators of a Michigan-headquartered car parts group with multiple European subsidiaries promised foreign trade creditors that their claims would be dealt with in accordance with the local law of their debts to safeguard any favourable rights they had, if they agreed not to open secondary proceedings in their respective jurisdictions. Having secured support from most creditors, the administrators pooled the group’s assets and raised at least a third more from liquidation sales – an extra US$45 million – than initially estimated.
Describing the case as “an excellent illustration of party autonomy in forum selection”, Justice Ramesh noted that synthetic secondary proceedings like those envisaged in Collins & Aikman allow a single, centralising court to holistically assess the entire restructuring process and make decisions in a coordinated manner. They also have the benefit of preventing inconsistent outcomes by multiple courts on key issues and manage a balance between local creditors’ interests and the overall interests of the restructuring.
These benefits are “the cornerstone of modified universalism”, he said.
Before contemplating a “fascinating twist to the paradigm”, Justice Ramesh acknowledged some of the difficulties with synthetic proceedings, including that some jurisdictions require direct judicial supervision of insolvency processes, while courts in others, particularly in civil law countries, may be hesitant to apply foreign law or may lack the statutory power to do so. Occasionally, corporations with mobile assets may end up in a jurisdiction simply as an “accident of the timing of the insolvency filing and the vagaries of the business”, the judge said, or as a result of pressure by creditors to move the assets there because of more favourable priority rules – a process Professor Jay Westbrook, the Benno C Schmidt chair of business law at the University of Texas, Austin, has referred to as “forum stashing”.
But Justice Ramesh pointed out that these “fair observations” were arguments against secondary proceedings in general, and not synthetic secondary proceedings in particular. The latter was merely a tool to relocate the forum of adjudication.
He noted that both the recast European Insolvency Regulation (EIR 2015) and the latest set of draft legislative provisions on group enterprise insolvencies drawn up by UNCITRAL’s Working Group V endorse synthetic secondary proceedings if deployed with proper safeguards. Effective court-to-court communications and even joint hearings between main and ancillary courts can help promote wider acceptance of synthetic proceedings too, the judge argued, referencing the Judicial Insolvency Network (JIN) Guidelines, issued by the international network of insolvency judges formed in Singapore in 2016.
Justice Ramesh asked the audience to consider the possibility of a “reverse” Collins & Aikman: a synthetic main proceeding. He painted a picture of a multinational group with operating subsidiaries in emerging markets and a holding company with its centre of main interest (COMI) in a jurisdiction with “a robust and thriving financial, legal and restructuring ecosystem”.
In circumstances where the operating subsidiaries holding the economic value of a group launch proceedings in their separate COMIs, it would make sense to facilitate a group plan by centralising the plan in the COMI of the holding entity. The main court of the holding entity would resolve issues concerning the operating companies as ancillary court.
To work, synthetic main proceedings would require creditor support, and court-to-court communication and cooperation through carefully drafted protocols, the judge noted.
“Synthetic main proceedings, have, to my knowledge, not been attempted; but as Collins & Aikman so vividly demonstrates, new approaches should never be discounted,” Justice Ramesh said.
As a final point, the judge noted that while synthetic proceedings can be an alternative to actual secondary proceedings in some cases, they cannot completely replace them “in the current state of affairs”. Only with greater harmonisation of global insolvency and priority rules would the need for secondary proceedings disappear.
In Asia, harmonisation efforts have already begun in a joint project by the International Insolvency Institute (III) and the Asian Business Law Institute, Justice Ramesh explained. The Asian Principles of Restructuring Project will map the existing legal regimes in the ASEAN region and key Asian economies, and formulate a set of restructuring principles for Asia.
GRR Live New York took place at Cleary Gottlieb Steen & Hamilton’s offices the day after the III’s 18thAnnual Conference. It was co-chaired by Cleary partner Lisa Schweitzer and Don Bernstein, insolvency and restructuring chair at Davis Polk & Wardwell.
Bernstein congratulated Justice Ramesh on a “provocative” speech that set the tone for the rest of the half-day’s discussions. Opening the second panel – on enforceability questions that the UNCITRAL Model Law has so far failed to provide answers to – he said there were three important things to consider when starting a new group restructuring: whether to have a single forum, whether to have a single law and whether to treat the group as a single entity.
“There are efficiencies in all of these things,” Bernstein told delegates, but it is “difficult for countries to give up their sovereignty”.
The day continued with a look at whether Europe and the UK should adopt Chapter 11-style reorganisation regimes as Singapore has, with a panel examining how close planned insolvency reforms in England and Wales and the EU may come to creating them.
The full version of Justice Ramesh’s speech is available at www.globalrestructuringreview.com