Forum Shopping & Its Prevalence in Cross-Border Insolvency Matters

18th July, 2024 - 6:02 am Categories: News & Updates 0 Comments

INTRODUCTION

Forum Shopping is considered as a bad phenomenon or act of the party/parties in the eyes of Private International Law and when it comes to insolvency forum shopping, serious efforts have been put in by the European Union and the US, separately, to counter the use of the same. Recital 4 of the European Insolvency Regulation defined forum shopping – “[a] phenomenon in which debtor transfers assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position.”[i] For the cases concerning, cross-border insolvency, forum shopping can be simply defined as shifting of assets from one jurisdiction to another, and that too to the jurisdiction having laws in favour of the corporate debtor, to simply take advantage of those regulations. It is well-known that the law governing the insolvency cases is the law of the forum (i.e., lex fori), thereby the venue of adjudication or forum adjudicating the matter has an active role to play.[ii]

FAVOURABLE DESTINATION FOR THE FORUM SHOPPING – THE UK

The UK and the US are preferred destinations for forum shopping in insolvency cases because of certain legal possibilities that is not available to the companies in other jurisdictions or home jurisdiction.[iii]

The UK

In the United Kingdom, primarily two insolvency procedures are subscribed by its statutes – liquidation and administration. The interest of debtor who files for Bankruptcy protection is always to safeguard his interests including his entity. The UK legislation also provides for a scheme of arrangement, which is nothing more than equals to the restructuring plan in Indian context. The plaintiff or the corporate debtors shall always be interested in getting restructuring done and an administrator appointed to keep the business in order rather than directly getting liquidated as a result, the UK jurisdiction is preferred.

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The liquidation process in the UK has three main benefits. First, unique information collecting capabilities that aid in the collection of corporate assets are granted to the professionally certified insolvency practitioner (liquidator) who oversees a company’s activities during the process.[iv] Second, the liquidator may initiate “claw-back proceedings” in an attempt to reclaim transferred firm assets.[v] Third, if directors failed to take all reasonable steps to minimise loss to company creditors after realising there was no realistic chance the company would avoid going into insolvent liquidation, the liquidator may also file wrongful trading proceedings and demand a contribution to the company’s debts from them.[vi]

While administration has many of the same benefits, the process was intended to achieve a distinct goal.[vii] Administrators are required to carry out their duties with the intention of either (a) saving the business as a going concern or (b) getting a better outcome for all of the company’s creditors than would probably be obtained via liquidation.[viii] Administration is typically employed as a kind of quasi-liquidation, when firm assets are sold to a buyer who may continue the original business in whole or in part through the vehicle of a new corporate organisation. Seldom is the “rescue” goal accomplished, meaning that the original corporate organisation carries on with a modified business model. In order for this proposal to be feasible, the corporation could have to reduce its debt load entirely or in part, either via debt forgiveness, loan maturities being extended, or debt/equity exchanges. The act of administering itself prevents these outcomes from being achieved. However, administration may result in a plan of arrangement under the Companies Act or a voluntary arrangement under the Insolvency Act, and these processes allow the changes in creditor rights if a prescribed percentage of creditor agrees.[ix]

The liquidation and administrative procedures contained in the UK legislations are backed with a statutory stay i.e., moratorium, which is also available in Indian Insolvency law under Section 14 of the Insolvency and Bankruptcy Code.[x] Bankruptcy Law Reform Committee on Section 14 stated – “The motivation behind the moratorium is that it is value maximising for the entity to continue operation even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from, old lawsuits or on new lawsuits, for any manner of recovery from the entity.”[xi] Thus, this helps in getting company/entity back on its foot.

A best of example of forum shopping into English law is the case of Schefenacker AG.[xii] Established in 1935 in Esslingen, near Stuttgart, Germany, Schefenacker AG was a German incorporated business that produced automobile parts and had a revenue of €930 million. The company employed 7,900 people at 33 sites worldwide. When the firm bought the British mirror producer Britax in 2002—an acquisition that proved to be a too ambitious deal for the medium-sized company—it started to experience financial difficulties. Beginning in August 2006, Schefenacker AG became more and more concerned with maintaining the viability of its capital structure as well as the operational performance of the business and its subsidiaries. The prospect of moving to the UK to benefit from English insolvency proceedings and, crucially, the ability to force through a debt-for-equity swap using English insolvency statutes, drew the firm in. In February 2007, after months of deliberation between the shareholders and creditors, a binding term sheet was reached. This sheet not only gave Schefenacker and its subsidiaries the short-term liquidity they urgently needed, but it also served as the foundation for a proposal to propose a company voluntary arrangement (CVA) as an alternative to liquidation. Thus, in order to benefit from English insolvency law, Schefenacker was forced to relocate its COMI to England.[xiii]

As a result of the plan’s implementation, on February 9, 2007, Schofenacker plc took over all of Schefenacker AG’s assets and liabilities, including the bonds and indenture commitments. Thus, a cross-border merger was accomplished through the application of the German norms of universal succession. The former German corporation became an English limited company as a result. Crucially, in order to meet the criteria of the Insolvency Regulation for main proceedings, Schefenacker’s COMI also needed to relocate to the UK. The process of reorganisation has gone well thus far.[xiv]

Author: Siddhi Warkhade, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

REFERENCES

[i] Council Regulation (EC) No. 1346/2000, Article 4.

[ii] Council Regulation (EC) No. 1346/2000, Articles 4, 7.

[iii] Gerard McCormack, Jurisdictional Competition and Forum Shopping in Insolvency Proceedings, 68(1) Cam. L. J. 169, 197.

[iv] The Insolvency Act, 1986 §§ 234, 235, 236.

[v] The Insolvency Act, 1986 §§ 238, 239, 240, 244, 245, 423.

[vi] The Insolvency Act, 1986 § 214.

[vii] Re MF Global UK Ltd [2012] EWHC 3068; [2013] 1 WLR 903.

[viii] The Insolvency Act, 1986, Sch. B1 ¶ 3(1).

[ix] The Insolvency Act, 1986 § 4(3); Sch. B1 ¶ 73(1).

[x] The Insolvency and Bankruptcy Code, 2016 § 14.

[xi] The Report of the Bankruptcy Law Reforms Committee, Ministry of Finance (2015), https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf.

[xii] G. Quenby, “Moving with the Times (24 September 2007) available at http://www.thelawyer.com; A. Tashiro and V. Beissenhirtz, German Companies Heading towards England for Their Rescue, 4 International Corporate Rescue (2007) p. 171, at p. 174.

[xiii] B. Früchtl, Die Anwachsung gem. § 73811 BGB-Unbeachteter Eckpfeiler undgestaltbares Instrument des Personengesellschaftsrechts 10 Neue Zeitschrift for Gesellschaftsrecht (2007) p. 368.

[xiv] Schefenacker Press Release of 2 May 2007, available at http://www.visiocorp.com/pages/posts/schefenacker-successfully-concludes-refinancing6.php.