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Chapter 15: US Court Respects UK Scheme of Arrangement: Third-Party Releases Enforced

Judge Martin Glenn granted recognition to a UK scheme of arrangement with third-party releases that lacked full creditor consent.  In re Avanti Communs. Grp., PLC, No. 18-10458, 2018 Bankr. LEXIS 1078 (Bankr. S.D.N.Y. Apr. 9, 2018).  While stating that “granting third-party releases in chapter 11 cases is controversial,” Judge Glenn noted that courts will more willingly enforce third-party releases in chapter 15 cases, given the importance of comity and respect for foreign proceedings.

Avanti operated fixed satellite services on three continents.  Based in London, the debtor ran into financial difficulties after the launch of two satellites was delayed.  To deleverage its balance sheet, the debtor and noteholders agreed to equitize certain debt via a court proceeding in London.

A scheme of arrangement was sanctioned by the High Court of Justice of England and Wales.  UK law permits schemes of arrangements to include third-party releases.  The scheme in Avanti granted releases to non-debtor affiliate-guarantors.  Over 98 percent (but not 100 percent) of the class of creditors approved the scheme.  No creditor voted against it.

The scheme appointed a foreign representative to bring a chapter 15 case in the U.S.  The debtor didn’t have a place of business in the U.S., but could maintain chapter 15 jurisdiction.  In the Second Circuit, this means that Bankruptcy Code section 109(a) must be satisfied.  A debtor needs “a domicile, a place of business or property in the United States.”  Avanti had a retainer payment on deposit in its U.S. lawyers’ account at a bank in New York, and the Indenture at issue was governed by New York law.

Judge Glenn said that “[s]chemes of arrangement under UK law have routinely been recognized as foreign proceedings in chapter 15 cases.”[1]  And the evidence showed that the UK was the debtor’s center of main interests:  it was incorporated in the UK and had its registered offices and headquarters there.  Accordingly, Judge Glenn concluded that the UK case was a “foreign main proceeding” under chapter 15.

The crucial question was whether the Court should respect the third-party releases sanctioned in the scheme when less than 100 percent of the creditor class voted to support them.  Judge Glenn noted different approaches U.S. Courts of Appeals have taken in chapter 11 cases.  Some courts prohibit such releases absent creditor consent, while other courts permit them in “limited circumstances.”[2]  But Judge Glenn also observed that “[i]n the chapter 15 context, judges in this Court have often enforced third-party releases in foreign proceedings under section 1507 of the Bankruptcy Code.”[3]

Bankruptcy Code section 1521 permits courts to grant “any appropriate relief” as long as the interests of creditors and other parties are respected.[4]  Courts can provide “additional assistance, consistent with principles of comity.”[5]  Judge Glenn observed that the types of protections listed in section 1507 had previously been part of Bankruptcy Code section 304.  But in section 1507(b), “the principle of comity was removed as one of the factors and elevated to the introductory paragraph.  The legislative history confirms that the principle of comity was placed in the introductory language to section 1507 to emphasize its importance” in chapter 15 cases.[6]

The “exercise of comity” includes “recognizing and enforcing a foreign plan confirmation order.”[7]  Both comity and chapter 15’s emphasis on “cooperation with foreign courts” led Judge Glenn to conclude that the UK scheme of arrangement with third-party non-debtor guarantor releases “should be recognized and enforced under chapter 15 of the Bankruptcy Code.”[8]


[1] 2018 Bankr. LEXIS 1078, at *20 (citing multiple cases).

[2] Id., *2.

[3] Id., *30.

[4] Bankruptcy Code §§ 1521(a) and 1522.

[5] Bankruptcy Code § 1507.

[6] 2018 Bankr. LEXIS 1078, at *26-27.

[7] Id., *28.

[8] Id., *34.