{"id":3963,"date":"2017-02-01T00:00:00","date_gmt":"2017-02-01T08:31:20","guid":{"rendered":"https:\/\/staging.voelkerrechtsblog.org\/articles\/inter-creditor-equity-in-corporate-and-sovereign-debt-restructuring\/"},"modified":"2020-12-09T13:26:26","modified_gmt":"2020-12-09T12:26:26","slug":"inter-creditor-equity-in-corporate-and-sovereign-debt-restructuring","status":"publish","type":"post","link":"https:\/\/voelkerrechtsblog.org\/de\/inter-creditor-equity-in-corporate-and-sovereign-debt-restructuring\/","title":{"rendered":"Inter-Creditor equity in corporate and sovereign debt restructuring"},"content":{"rendered":"

Broadly defined, inter-creditor equity represents a normative evaluation of the treatment a debtor accords to a certain creditor (or group of creditors) vis a vis the treatment that the debtor\u2019s other creditors have received.\u00a0 In the context of domestic insolvency laws, this evaluation is made possible (and enforceable) through detailed priority structures designed to favor certain creditor groups over other.\u00a0 When the debtor is sovereign, however, creditor priorities are only subject to an informal and arguably loose order developed through the practice of sovereign debt restructuring. \u00a0As Anna Gelpern notes<\/a> in the special edition of the Yale Journal of International Law on sovereign debt, \u201cThe modular sovereign debt restructuring regime did not reflect a general consensus on priorities and distribution. If a deal stood, it was \u2018\u2019fair enough\u201d for all practical purposes, though not necessarily fair or just by any shared standard. This attribute of the sovereign restructuring regime stands in contrast to domestic statutory bankruptcy\u2019\u2019.\u00a0 In the absence of a bankruptcy regime for states therefore, evaluations about inter-creditor equity might be no less intractable than judgment calls on what one considers equal or fair.\u00a0 This \u201cFoggy Status Quo<\/a>\u201d gives rise to inter-creditor battles in sovereign debt crises that would be all too familiar to the eye of some 19th century lenders (Wynne<\/a>, p. 141).\u00a0 Such battles, and their respective consequences for the sovereign debtor itself, beg the question of the extend to which notions of inter-creditor equity developed in domestic corporate reorganization regimes can shape what seems to be a rather amorphous concept in the context of sovereign debt.<\/p>\n

The Pari Passu Saga<\/strong><\/p>\n

What I am concerned with here is a particular understanding of inter-creditor equity espoused in the (now infamous) case of NML v. Argentina<\/a>. In this case, a group of hedge funds led by NML Capital that had held out from the country\u2019s 2005 and 2010 debt restructuring agreements was successful in obtaining an equitable remedy by New York courts to the effect of preventing the country from paying creditors that had voluntarily reduced their claims as part of the previous two deals.\u00a0 Importantly, the remedy fashioned by New York courts was the result of Argentina\u2019s violation of the pari passu clause contained in the country\u2019s sovereign bonds by virtue of servicing restructured debt while at the same time remaining in default on the holdout claims and also passing legislation prohibiting the government from settling these claims.<\/p>\n

In the realm of corporate debt, pari passu clauses constitute a contractual device to safeguard inter-creditor equity by affirming the equal legal ranking of unsecured claims on a forced distribution of the debtor\u2019s available assets to unsecured creditors.\u00a0 In that sense, they make for a modest concept of inter-creditor equity with no guarantee of actual equal treatment.\u00a0 According to their generally agreed meaning (in both corporate and sovereign debt), they do not require the debtor to pay all its debts pro rata and without discrimination (see Wood<\/a>, p. 85). \u00a0By requiring Argentina to do exactly that, US courts stretched the notion of inter-creditor equity to its limits and well beyond its traditional boundaries.<\/p>\n

The Reorganization Analogy<\/strong><\/p>\n

The claim that NML v. Argentina was wrongly decided<\/a> is certainly not novel.\u00a0 What has drawn less attention though is the more subtle point about the relation between the overly ambitious concept of inter-creditor equity advanced therein with its understanding in various other legal disciplines, most importantly that of corporate insolvency law.\u00a0 Normatively, this relation is not at all insignificant given the role of domestic law in the development of international law through general principles of law (but also customary law).\u00a0 Of course, the reception of international law within a given jurisdiction is in itself a convoluted and not always harmonious process.\u00a0 At the very least, however, an internationally accepted principle of inter-creditor equity would be relevant in informing restructuring negotiations in a world without predetermined creditor priorities such as that of sovereign debt.\u00a0 More ambitiously, it could persuasively steer the interpretation of pari passu clauses clear from the recent outcome in NML v. Argentina.<\/p>\n

The most obvious area from which parallels to sovereign insolvency could be drawn is that of notions of inter-creditor equity found in domestic corporate reorganization regimes.\u00a0 Indeed, in this context inter-creditor equity has a rather flexible meaning, with even pari passu creditors commonly receiving differentiated treatment according to the terms of the debtor\u2019s reorganization plan.\u00a0 Under the most influential corporate reorganization statute globally, chapter 11 of the US Bankruptcy Code, the debtor\u2019s plan will be sanctioned<\/a> by the bankruptcy court if its terms do not discriminate \u201cunfairly\u201d among different creditor classes. \u00a0Unfair discrimination is not defined in the code, but it has been held that what it entails is differentiated treatment to similarly situated creditors [in re AOV Industries, 792 F.2d 1140 (D.C.Cir. 1986)]. In practice, US bankruptcy courts generally apply a permissive test to determine whether unfair discrimination has taken place, thereby giving significant leeway to debtors in devising their reorganization plan.\u00a0 Elements of reasonableness, good faith and proportionality play a significant role in their judgment.<\/p>\n

The German Insolvency Statute on corporate reorganization largely draws upon the US example.\u00a0 Accordingly, reorganization plans providing for differentiated treatment between creditor groups will be approved<\/a> by the court if each group participates to a reasonable extent in the economic value devolving on the parties under the plan (Section 245 (1) Insolvency Statute). \u00a0In addition, the court exercises an ex officio review of procedural fairness and propriety regarding the plan\u2019s approval (Section 250 Insolvency Statute).<\/p>\n

Under UK law, the protection of creditor minorities is generally stronger.\u00a0 A creditor class cannot be bound to the terms of a scheme of arrangement<\/a> without its consent (courts do not have so-called \u201ccram-down\u201d powers).\u00a0 This reduces the ability of debtors to differentiate between their creditors, thereby supporting a more rigid understanding of inter-creditor equity.\u00a0 At the same time, however, UK courts have recognized that minority creditors should not be given an effective veto over plans that would benefit the creditor community as a whole by rehabilitating the debtor.\u00a0 This is reflected in the debtor\u2019s capacity to group creditors in the same class for voting purposes as long as creditors voting in the same class have a sufficient community of interest allowing them to consult together with a view to their common interest (see here<\/a>). \u00a0Therefore, the power of the debtor company to decide on creditor class formation functions in practice as a powerful tool against holdouts.\u00a0 Courts will sanction a scheme of arrangement between a company and its creditors if they are further satisfied that (i) the relevant statutory requirements have been complied with; (ii) each class was fairly represented by those attending the court meeting;\u00a0 (iii) the statutory majority was acting bona fide in the interests of the class; and (iv) it would be reasonable to approve the scheme. \u00a0With regard to the reasonableness test, it is significant that relevant considerations include whether the scheme was concluded after comprehensive negotiations with creditors and also the degree of support that the scheme received from the majority of creditors.<\/p>\n

\u2026 and its Limits<\/strong><\/p>\n

How far can then the analogy between corporate reorganization and sovereign debt restructuring be extended?\u00a0 One should certainly be careful about expectations.\u00a0 If the goal is to derive a fully operational concept of inter-creditor equity applicable to the sovereign context, then the analogy is likely to disappoint.\u00a0 Corporate reorganization laws are different to sovereign debt workouts in many respects: most prominently, creditor concessions in reorganization plans are not superimposed by the debtor but by creditor majorities.\u00a0 This has only recently become the trend in sovereign bonds governed by New York law through the inclusion of collective action clauses.\u00a0 Argentina could not rely on such clauses, and the only way to restructure was to bet on the willingness of its creditors (including NML) to voluntarily reduce their claims.\u00a0 One could reasonably question, however, the appropriateness of transferring the broad powers of corporate debtors to devise reorganization plans following the approval of a majority of creditors to a regime where creditor discretion is statutorily unfettered and only voluntarily limited through contract, such is the case in sovereign insolvency.<\/p>\n

Moreover, concepts of inter-creditor equity applicable to reorganization laws might be of limited significance to the sovereign context for a different reason.\u00a0 Corporate debt structures are almost invariably much more complex than what is the case in the world of sovereign debt.\u00a0 Beyond differences on provisions regarding governing law, currency of denomination or date of maturity, modern sovereign debt restructurings mostly involve bondholders with largely similar instruments.\u00a0 Any differences would most likely not constitute grounds for separate classification under corporate reorganization law, thereby limiting the rationale for differentiated treatment among the sovereign\u2019s creditors.\u00a0 Structures of sovereign debt become complex because of the inclusion of various types of official creditors, some of them pursuing separate agendas.\u00a0 Corporate reorganization laws have nothing to offer in addressing those challenges though.<\/p>\n

Conclusion<\/strong><\/p>\n

Having said that, it would be also mistaken to ignore the experiences gained through the practice of corporate reorganization on concepts of inter-creditor equity as valuable insights in the realm of sovereign insolvency.\u00a0 As previously mentioned, corporate reorganization practice converges on debtors being given considerable leeway in devising reorganization plans.\u00a0 Differentiated treatment of even pari passu creditors is not per se excluded.\u00a0 Concerns regarding the viability of reorganization are paramount, even to the detriment of senior creditors.\u00a0 Overall, inter-creditor equity is not a rigid concept but rather subject to a criterion of fairness and reasonableness that allows for differentiated treatment of differently situated creditors.\u00a0 This was certainly not the view of judge Thomas Griesa in the \u201ctrial of the century\u201d in sovereign debt. In fact, the position on inter-creditor equity in NML v Argentina was the very antithesis of its understanding as a flexible and ultimately policy driven concept (the policy being the success of the reorganization plan).\u00a0 Following such an approach would have required heeding more closely to the differentiation made by the Argentine government between participating bondholders and holdouts as a policy option for achieving high participation in the debt operation and restoring solvency.<\/p>\n

 <\/p>\n

Vassilis Paliouras<\/a> is a PhD student at Queen Mary University of London.<\/em><\/p>\n

 <\/p>\n

Cite as: Vassilis Paliouras, “Inter-Creditor Equity in Corporate and Sovereign Debt Restructuring”, V\u00f6lkerrechtsblog<\/em>, 1 February 2017, DOI: 10.17176\/20170206-020743.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Broadly defined, inter-creditor equity represents a normative evaluation of the treatment a debtor accords to a certain creditor (or group of creditors) vis a vis the treatment that the debtor\u2019s other creditors have received.\u00a0 In the context of domestic insolvency laws, this evaluation is made possible (and enforceable) through detailed priority structures designed to favor […]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6639],"tags":[],"authors":[4558],"article-categories":[3572],"doi":[4559],"class_list":["post-3963","post","type-post","status-publish","format-standard","hentry","category-uncategorized","authors-vassilis-paliouras","article-categories-symposium","doi-10-17176-20170206-020743"],"acf":{"subline":""},"meta_box":{"doi":"10.17176\/20170206-020743"},"_links":{"self":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/3963","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/comments?post=3963"}],"version-history":[{"count":0,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/3963\/revisions"}],"wp:attachment":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/media?parent=3963"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/categories?post=3963"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/tags?post=3963"},{"taxonomy":"authors","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/authors?post=3963"},{"taxonomy":"article-categories","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/article-categories?post=3963"},{"taxonomy":"doi","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/doi?post=3963"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}