By: Jennifer Delasco
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
A scheme of arrangement is a mechanism in the United Kingdom (UK) and other countries providing for the estimation and liquidation of a debtor’s liabilities.[1] A scheme of arrangement will generally provide for a discharge of the debtor.[2] A scheme may also contain a third-party release, pursuant to which a nondebtor third party will non-consensually release a claim or cause of action against another nondebtor third party.[3] In the United States, a plan proposed under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) may contain a third-party release.[4] There is a split in United States courts as to whether a third-party release in a Chapter 11 plan can be enforced.[5]
In In re Avanti Communications Group PLC, the United States Bankruptcy Court for the Southern District of New York held that a scheme of arrangement that provides for a third-party release could be enforced under Chapter 15 of the Bankruptcy Code.[6] There, the foreign representative of the debtor, Avanti Communications Group PLC, had been involved in a proceeding in the UK where the court sanctioned the exchange of all of the debtor’s outstanding 2023 Notes for 92.5% of the debtor’s then enlarged issued share capital under the arrangement scheme and granted the guarantor releases.[7] The foreign representative of the debtor sought recognition of the UK Proceeding as a foreign main proceeding under Chapter 15 of the Bankruptcy Code.[8] In addition, the foreign representative sought an order enforcing the scheme of arrangement in the U.S. pursuant to the principles comity and cooperation with foreign courts.[9] The scheme of arrangement was previously sanctioned by the UK Court and approved by 98% of that class of creditors.[10] The U.S. Bankruptcy Court ultimately granted the foreign representative’s request for recognition and enforcement of the Scheme and the UK Proceeding judgment.[11]
Under § 1517(a) of the Bankruptcy Code, a court shall, after notice and a hearing, enter an order recognizing a foreign main proceeding if (1) such foreign proceeding for which recognition is sought is a foreign main proceeding within the meaning of § 1502; (2) the foreign representative applying for recognition is a person or body; and (3) the petition meets the requirements of § 1515.[12] Upon recognition of the foreign proceeding under 11 U.S.C. § 1517, the court may grant “appropriate relief,” including enforcement of a foreign scheme and third-party releases, under § 1521.[13]
The Avanti court, in the Second Circuit, held that enforcing the Scheme, including the releases, as discretionary relief under § 1507/1521 was proper because a failure to do so could result in prejudicial treatment of creditors to the detriment of the debtor’s reorganization efforts and prevent the fair and efficient administration of the restructuring.[14] Additionally, the Court stressed that the Scheme’s creditors had a full and fair opportunity to vote on, and be heard in connection with, the Scheme.[15] The creditors gave near-unanimous support – all creditors that voted cast votes in favor of the Scheme – for the Scheme.[16] Therefore, noting the importance of the principle of comity and the creditor vote, the court recognized and enforced the Scheme.[17]
Although Circuits have split on whether the Bankruptcy Code permits a bankruptcy court to grant releases against a third-party in a Chapter 11 plan, the Avanti court allowed it because the requirements of § 1517(a) were satisfied and the recognition and enforcement of the Scheme and Sanction Order furthered the goals of chapter 15.[18] Yet, the Avanti decision leaves open possible avenues for a future court to deny enforcement of the releases against a third-party.[19] When discussing the Fifth Circuit’s decision in In re Vitro S.A.B. de C.V.,[20] the Avanti court noted facts and circumstances favoring denial of enforcement, including lack of overwhelming creditor support or support only by inside creditors.[21] Therefore, a court could deny enforcement of the releases if the requirements of § 1507 and § 1521 are not satisfied, if the goals of chapter 15 would not be furthered by enforcement, or if enforcement would prejudice the rights of United States citizens or violate domestic public policy.[22]
[1] See Jennifer D. Morton, Recognition of Cross-Border Insolvency Proceedings: An Evaluation of Solvent Schemes of Arrangement and Part VII Transfers Under U.S. Chapter 15, 29 Fordham Int'l L.J. 1312, 1313–14 (2006) (“A scheme of arrangement is a business plan that establishes a procedure for estimating and settling all liabilities against an insurer.”).
[2] See Ian F. Fletcher, The Law of Insolvency, 441 (3d ed. 2002) (asserting “[t]he approval of a voluntary arrangement imports a statutory protection for the corporate debtor from its creditors, and can result in a discharge of debtor’s liability towards them.”).
[3] See Ryan M. Murphy, Shelter from the Storm: Examining Chapter 11 Plan Releases for Directors, Officers, Committee Members, and Estate Professionals, 20 J. Bankr. L. & Prac. 4 Art. 7 (2001).
[4] Id.
[5] The Fifth, Ninth, Tenth and the District of Columbia Circuits have held that the Bankruptcy Code only permits a bankruptcy court to grant releases against a debtor, and prohibits third-party releases absent consent. In re Avanti Communications Group PLC, 582 B.R. 603, 606 (Bankr. S.D.N.Y., 2018). The Second, Fourth, Sixth, Seventh, and Eleventh Circuits have held that third-party releases may be given consensually and, in limited circumstances, may be approved without consent. Id.
[6] Id. at 618.
[7] Id. at 610.
[8] Id. at 607.
[9] Id.
[10] Id.
[11] Id. at 619.
[12] 11 U.S.C. § 1517(a) (2012).
[13] Id. at 615. The discretion that is granted to a court under § 1521(a) is “exceedingly broad,” since a court may grant “appropriate relief” that would further the purposes of Chapter 15 and protect the debtor’s assets and the interests of creditors. Id. at 612. In addition to § 1521’s provisions regarding “appropriate relief,” § 1507(b) provides that: In determining whether to provide additional assistance . . . shall consider whether such additional assistance, consistent with the principles of comity, will reasonably assure – (1) just treatment of all holders of claims against or interests in the debtor’s property; (2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of the debtor; (4) distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by this title; and (5) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns. 11 U.S.C. § 1507(b). In determining whether to grant “appropriate relief” under § 1521 or “additional assistance” under Chapter 15, courts are guided by principles of comity and cooperation with foreign courts. In re Avanti, 582 B.R. at 616.
[14] Id. at 618–19.
[15] Id. at 618.
[16] Id.
[17] Id. at 619.
[18] Id. at 613.
[19] Id. at 619.
[20] In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1042 (5th Cir. 2012) (affirming a bankruptcy court’s decision in a Chapter 15 case declining to grant comity and to enforce a Mexican court order approving a Mexican reorganization plan that released guarantees of U.S.-based nondebtor affiliates of the Mexican debtor’s debt).
[21] In re Avanti, 582 B.R. at 617.
[22] Id. at 619.