While it is clear that chapter 11 of the U.S. Bankruptcy Code can be an effective tool of reorganisation for distressed foreign shipping companies that are locked in an adversarial dispute with their creditors, should an English scheme of arrangement be considered as an alternative to a U.S. bankruptcy case for shipping companies that are able to reach a consensual resolution with a majority of their creditors?
U.S. bankruptcy courts are often cited as the best place for shipping companies to effect a corporate reorganisation, as they are often viewed as the most accessible and debtor-friendly. This view is supported by the reality that an increasing number of foreign shipping companies seek to reorganise through a chapter 11 process. To many commentators, this is proof that foreign companies have surveyed the jurisdictional landscape and determined that only chapter 11 can provide them with an effective means to reorganise. And while a chapter 11 case can clearly provide this, can (and should) distressed shipping companies (and their lenders), especially in contentious situations, give some thought to whether other processes and jurisdictions – namely a scheme of arrangement through English courts – could provide similar results with less costs?
Many people assume that shipping companies choose chapter 11 because no other jurisdictions have the necessary processes in place to allow a company to reorganise. While it is certainly true that some jurisdictions do not provide a company which is insolvent or on the verge of insolvency with the ability to restructure effectively, it is also true that access to U.S. Bankruptcy Courts is more readily available to non-U.S. debtors than other jurisdictions which may be subject to stricter jurisdictional requirements. Under the E.C. Regulation on Insolvency Proceedings (the “Insolvency Regulations”), an EU company can only commence insolvency proceedings where it has its Centre of Main Interest (COMI). There is a rebuttable presumption that an entity’s COMI is in its place of incorporation. Therefore, a shipping company registered in the EU will typically be limited to commencing insolvency proceedings in a single jurisdiction within the EU, and is limited to the types of proceedings available in that country. Therefore, it is best not to frame the choice that a distressed shipping company has as which jurisdiction is best, but rather which jurisdiction has the better reorganisation procedures in place – the United States, or the jurisdiction where its COMI is found? But, what if that analysis is not quite right – what if distressed companies do have another choice in the form of an English scheme of arrangement?
The English scheme of arrangement is unique in that it is not an “Insolvency Procedure” under the Insolvency Regulations, but instead arises under the Companies Act, so the COMI requirement is not applicable and only minimal connections to England are required (for example, English law governed loan documents). A scheme of arrangement provides a company a means of restructuring its debts in many ways that are similar to a chapter 11, but with limited court involvement. While a scheme of arrangement does not have certain of the automatic advantages associated with a chapter 11 (i.e., no right to an “automatic stay”, although a stay can be requested by application to the court), it does allow a company to reorganise its debt pursuant to a proposed scheme that receives support of a majority in number of each class of creditors present and voting, and 75 per cent in value of the debt held by the creditors of each class present and voting. Dissenting classes cannot be “crammed down”, but a successful scheme is binding on all creditors of the restructured obligations, whether they voted for or against the scheme. Much like a pre-pack chapter 11, schemes are generally negotiated in advance and, once approved, can be implemented quickly and often with much lower costs than those associated with a chapter 11.
Chapter 11 clearly has been and will rightly continue to be a valuable means of reorganising a distressed company, and for many companies, whether shipping or otherwise, it is the best means for them to do so. That does not mean, however, that no alternatives are out there – especially for smaller companies that are able to reach agreement with the majority of the creditors and that have little or no connection with the United States. An English scheme of arrangement can provide a way to achieve substantially the same result in an expedited and efficient manner, and is supported by well-developed law and a knowledgeable legal system accustomed to dealing with schemes of arrangement and, importantly for shipping companies and their creditors, shipping disputes. Given this, maybe it’s time for people to start considering if there is an alternative to chapter 11 for distressed shipping companies, and if that alternative is an English scheme of arrangement.