New York court allays doubts under Hong Kong judge’s Chapter 15 – Bloomberg Law | Vette Leader

Global restructuring experts breathe a sigh of relief after a judge confirmed again that a foreign restructuring can pay off debts governed by New York law – a common element of global bankruptcies recently questioned by a Hong Kong judge.

Judge Martin Glenn of the US Bankruptcy Court for the Southern District said in July his court would recognize and enforce the court order of Chinese real estate developer Modern Land China Co. in the Cayman Islands, under Chapter 15 of the US bankruptcy law, to pay 1.34 debts Billion dollars restructured governed by New York law. In doing so, Glenn helped address concerns expressed in June by a Hong Kong judge who claimed that a US court’s recognition of the restructuring of a foreign company under Chapter 15 does not constitute debt relief under US law.

Glenn’s decision in Modern Land – a company with assets in China and the US valued at $12.49 billion as of June 2021 – gave cross-border restructuring professionals who are investigating the effectiveness of Chapter 15 for offshore companies, The foreign courts claim had challenged new trust restructuring debt governed by New York laws.

The matter, which Glenn deemed “vital”, is significant as the Hong Kong decision may have given creditors the ability to pursue a debtor’s property in Hong Kong despite receiving restructuring recognition in the US.

The decision also has broader implications given Modern Land’s corporate structure, with operations in China but incorporations outside of the country and debt in the US, is widespread.

Additionally, the decision is notable in that it affects a major Chinese real estate developer amid ongoing turmoil in China’s real estate industry, which accounts for about a quarter of the world’s second-largest economy.

“Those who have held their breath a little after the Hong Kong court’s decisions can breathe a sigh of relief,” said Michael S. Etkin, partner in Lowenstein Sandler LLP’s bankruptcy and restructuring practice.

Chapter 15

Chapter 15 of the Bankruptcy Act, created in 2005, aims to help facilitate corporate bankruptcies involving more than one country. Generally, a debtor’s main bankruptcy case is brought outside the United States.

Recent high-profile Chapter 15 cases include Luckin Coffee Inc., which has been described as the Starbucks of China, and Singapore-based Three Arrows Capital, a cryptocurrency hedge fund, which was filed in New York last month.

Rare earth

Uncertainty surrounding Chapter 15 began in June when Hong Kong Judge Jonathan Harris issued a ruling in the Rare Earth Magnesium Technology Group Holdings Limited case.

in the Rare earthHarris said while Chapter 15 procedurally prevents a creditor from taking action against a debtor’s property in the US, “acknowledgment does not appear as a matter of US law to settle the debt.”

Harris’ opinion indicated that a Hong Kong court would not recognize a reorganization approved by an offshore court — and then recognized by a US Chapter 15 bankruptcy court — because he believed it had no global effect.

“This is a distinction consultants must be aware of when dealing with transnational restructurings,” Harris wrote. “A scheme in an offshore jurisdiction purporting to jeopardize debt governed by United States law will not be effective in Hong Kong. Acceptance of the Chapter 15 program does not constitute a debt compromise governed by United States law.”

Harris applied an 1890 English common law rule which refuses to recognize a discharge or modification of debts governed by English law authorized by a court outside of England. Although US courts do not follow this rule, it is a major international issue as it is used in jurisdictions around the world including the Cayman Islands, Bermuda, Canada and Australia.

The interpretation raised concerns that creditors not participating in a foreign restructuring could go to court in Hong Kong to challenge a debtor even though the debtor has obtained Chapter 15 judicial recognition. Dissenting creditors might seek to avoid cramdowns — which allow debtors to enforce a bankruptcy plan against creditor opposition — of a foreign restructuring if they could make a connection in Hong Kong.

“For a long time we thought this was inconspicuous, but then the Hong Kong court issued this decision that made everyone sit up and take notice,” said Madlyn Gleich Primoff, restructuring partner at Freshfields Bruckhaus Deringer LLP.

The opinion indicated that in a global restructuring that involves debts subject to the laws of multiple countries, the debtor may need to go to each of those jurisdictions to deal with them separately, Primoff said. Carrying out a major restructuring in every jurisdiction where debt is settled would be possible, but expensive and inefficient, she said.

modern country

Glenn granted Modern Land discharge just six weeks after Chapter 15 Rare earth Decision that has nothing to do with it came out. He acknowledged the Cayman restructuring and confirmed the binding effect of the discharge of New York law debt and the issuance of new debentures.

His decision, which allowed Modern Land to restructure $1.4 billion in bonds, clarified that the Rare earth Decision is not the position under US or New York law, and that the court will continue to recognize foreign cases filed in the US under Chapter 15. As long as the principles of due process in the foreign jurisdiction are observed and other comity principles are satisfied, a foreign court can amend or exempt debts governed by New York law, Glenn noted.

These factors make Glenn’s modern country Answer “huge,” said Primoff.

Although the Hong Kong court could answer again, Glenn’s decision should allow restructurings of offshore companies with US law debt to proceed as before, said Paul Apáthy, a partner at Herbert Smith Freehills LLP.

“I think the Modern Land decision could be summed up as a return to the understood legal position of a Chapter 15 order prior to the uncertainty created by the Rare Earths decision,” Apáthy said.

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