Arms of U.K. Administration Embrace U.S. Companies
Changes to Administration Under the EU Insolvency Regulation
Historically, administration orders could only be made over U.K. incorporated companies.2 A limited exception arose through a regime of cooperation under §426 of the U.K. Insolvency Act of 1986, but this only extended administration to a list of designated countries (essentially Commonwealth countries such as Australia, Canada and Bermuda). Importantly, the list did not include the United States or any European countries, so administration was not an option for a company incorporated in the United States or Europe.
This has changed with the introduction of the EU Insolvency Regulation in May 2002. The EU Regulation was primarily aimed at coordinating insolvency proceedings throughout Europe and it has a direct effect in the local courts.3 The test for opening U.K. administration proceedings is now whether a company's "center of main interests" (COMI) is located in the United Kingdom.4 While the starting point is that the COMI is where the company's registered office is located, that presumption is rebuttable. The recitals to the regulation say that COMI should correspond to "the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties." If that is in the United Kingdom, then irrespective of where the company is incorporated, an administration order can be made.
This means that a U.S. company with a U.K. COMI can be put into administration, which is precisely what happened in the case of BRAC Rent-A-Car International Inc.,  EWHC (Ch) 128, in January (BRACII). Before the BRACII case, it was open to debate whether the EU Regulation gave the U.K. court jurisdiction to make an administration order over a U.S. company. At the BRACII hearing, a creditor argued that the EU Regulation should only apply to European companies. However, the judge rejected that argument and put BRACII into administration, even though it was incorporated in Delaware.
Pausing for a moment on the COMI test, it is immediately apparent that the legal hurdle under the EU Regulation is significantly higher than the chapter 11 jurisdiction test. A mere bank account in the United Kingdom would fall a long way short of proving that a company's COMI was in the United Kingdom, and even having an office in the United Kingdom with employees and assets would not necessarily suffice. The court must be satisfied that the United Kingdom is the COMI, over and above any other country. Legally speaking, a company can have only one COMI, so the court has to decide between any competing jurisdictions.
Lowering the Legal Hurdle
While the COMI hurdle looks high, in practice it is significantly lower than might be expected, especially for the debtor. There are two reasons for this. First, the hearing to open administration proceedings is generally unopposed, largely because very few people need to be notified in advance. On a debtor's administration petition,5 the company only needs to notify any creditors that hold floating-charge security, which is unlikely to be anyone other than a bank. Floating-charge creditors are often involved in restructuring negotiations, and their support is generally needed in any event. At the hearing, the debtor will address the court as to where its COMI is located. While the debtor should put "points against" as well as "points for," it is always easier to win a match if the other team does not show up. A debtor's COMI is said normally to correspond to the debtor's head office,6 and if the debtor goes on oath saying that its COMI is in the United Kingdom, a judge is unlikely to second-guess the company—especially if no one is arguing the contrary. Importantly, once administration proceedings are opened in the United Kingdom, that decision can only be challenged in the U.K. court itself. For many creditors, especially those outside the United Kingdom (who are likely to feel more aggrieved than U.K. creditors), this operates as a major disincentive to a challenge.
Second, the COMI test is easier in practice because it is not clear what factors determine a company's COMI. Unlike §304, there is no list of points to be considered by the court. This opens the door to creative arguments, as was shown by the U.K. administration of Enron Directo SA (unreported). Enron Directo was a Spanish company with Spanish operations and Spanish employees, and most of its day-to-day operations were performed in Spain. However, some of its strategic decisions were made in London at Enron's European headquarters, and certain board meetings were held in London. Accordingly, the argument was that the debtor's head office functions took place in London. At the unopposed hearing, the U.K. court accepted that as being the test for COMI and opened U.K. administration proceedings.
The Enron Directo approach is of particular significance given that many U.S. groups base their European headquarters in London, and so that is where the high-level strategic decisions are taken. This creates the potential to coordinate a group restructuring by obtaining U.K. administration orders over all the subsidiaries operating in Europe. Provided their COMIs are in the United Kingdom, it does not matter that they may be incorporated in different European countries, or even in the United States.
Why Have Administration if You Can Have Chapter 11?
While the scope for U.K. administration has greatly expanded, why would a company want to go into administration if chapter 11 is available? Doesn't chapter 11 automatically have extra-territorial worldwide effect? The simple answer is "yes" if you are in America, but not necessarily if you are not. The long-arm jurisdiction of the U.S. courts is problematic in European courts, especially in continental European courts and if based on what are seen as manufactured jurisdictional links. This means that, absent local ancillary proceedings, a creditor may not be prevented from pursuing its debt in Europe even though the company is in chapter 11. (However, it would run the risk of incurring the wrath of the U.S. court for breaching the chapter 11 moratorium.) The striking recent U.K. and U.S. proceedings concerning Cenargo International plc have clearly highlighted this potential.
It comes as a surprise to many U.S. lawyers that chapter 11 proceedings are not automatically legally recognized in Europe. This surprise is understandable, as chapter 11 proceedings are often recognized as a matter of practice by European creditors. Creditors do so because they are reluctant to act in contempt of the U.S. court, particularly if they have assets or operations in the United States. In light of the dominance of the U.S. economy, this practical point means that many creditors act as if chapter 11 proceedings are enforceable in Europe.
Given that chapter 11 proceedings are not by themselves legally effective in Europe, a major advantage of administration is that it does have effect throughout Europe. A key part of the EU Regulation is that proceedings such as administration have direct and automatic effect and govern the restructuring in all the member states of the European Union.7 There are specified carve-outs, but as a general rule the administration order with its moratorium bites on all assets and creditors in Europe.8 The U.K. administrators are automatically recognized by all the European courts and, subject to any carve-outs, have power to control the debtor's assets throughout Europe.
Administration can also be quicker and cheaper than chapter 11. In administration, the power to run the company is taken from the directors and given to the administrators, who are licensed by a professional body and are typically partners in an accountancy firm. Some of the existing management will be retained to assist in the day-to-day operations, but this is in marked contrast to the debtor-in-possession (DIP) approach. Because administrators are independent professionals and their duty is to act in the best interests of creditors, commercial decisions are taken by the administrators, and the requirements for court and creditor approval to be obtained in advance are minimal compared to the U.S. model. Therefore, the sale of assets, for example, is primarily a matter for the administrators' commercial judgment. This means that administration sales can be much quicker than §363 sales or reorganization plans. As a result, the costs of administration tend to be lower than those of chapter 11, particularly because in administration, the creditors' committee plays a much smaller role, and it is rare for the committee to have separate legal representation.
Having said that, chapter 11 has some powerful features that can facilitate a restructuring and that are not present in administration. For example, there is no parallel in administration to the §365 process of curing, adopting and assigning executory contracts, so contractual termination or non-assignment clauses remain valid. Further, while technically administrators can borrow funds and give the lender priority status, that cannot trump existing security, and the administration lending market is undeveloped compared to DIP lending in the United States.
Returning to current developments that are making administration more attractive, the U.K. Enterprise Act is due to come into force this June or July. This will simplify and reduce the costs of administration because, for example, it will be possible for directors to appoint an administrator without a court hearing at all. The Enterprise Act changes in respect of administration are primarily procedural but nevertheless will make the process more streamlined and should result in an increase of administrations.
Administration and Chapter 11 or §304
Ultimately, it seems likely that U.K. administration will become more common in cross-border restructurings. In particular, debtors might look to take the European benefit of opening administration proceedings as well as opening chapter 11 proceedings. This benefit can outweigh the cost implications, and has happened in restructurings such as Federal-Mogul, BRACII and Maxwell, although protocols may be helpful to regulate the interplay between the courts. Alternatively, administration alone may be favored for its speed, cost and automatic effect around Europe, with protection in the United States being obtained through a §304 order. What is best for a given restructuring will be determined primarily by the structure of the company or group, the location of the assets and where the creditors are based.
With its expanded jurisdiction, automatic recognition around Europe and lower costs, administration seems destined to become an increasing feature of international restructurings involving European operations. It certainly should be added to the list of options.
1 Ken Baird is a partner and Richard Tett is a senior associate in Freshfields Bruckhaus Deringer's Restructuring and Insolvency Group, and they are based in London. Freshfields Bruckhaus Deringer has a network of 28 offices worldwide with 18 in Europe. Return to article
2 The U.K. courts always had much wider jurisdiction to grant winding-up orders. However, as a winding-up order envisaged the company being liquidated, it was unattractive in the context of a restructuring. Lawyers had sought to "fill the gap" by using provisional liquidation. While this was successful to an extent, it brought with it various complications; a more detailed discussion of this topic is outside the scope of this article. Return to article
8 Under the EU Regulation, the starting point is that U.K. administration proceedings, as "main proceedings," govern all aspects of the debtor's insolvency around Europe. However, there are local law carve-outs including for security, set-off, real estate and employment contracts and for member states where local "secondary proceedings" are opened. Return to article