Spotlight on insolvency - restructuring in US, UK, Norway and Singapore
In this issue of The Field, Nick March of Skuld Singapore, with assistance from the law firms Royston Rayzor, Rajah & Tann and Steenstrup Stordrange, and Barristers' Chambers 20 Essex Street, looks at some of the options available for an operator facing significant financial challenges and how they work.
Oil prices declined from more than USD 100 per barrel in June 2014 to approximately USD 80 per barrel the day before the November 2014 OPEC meeting. At this meeting, OPEC took the decision to block oil production cuts which sent oil prices plunging and the oil industry spiralling further into depression. Ever since, analysts have made various predictions about when the oil price would rebound and, correlatively, when the offshore service industry would recover. While the oil price has recovered somewhat, and there are signs that the cycle may well be starting to slowly turn, there is still, unfortunately, a great deal of uncertainty and a number of players in difficult circumstances.
This has had a significant impact in a number of the major offshore hubs: In the US, notable players in the offshore industry have gone through insolvency reorganization and have wiped out billions of dollars of debt and gained agreement to defer future repayments, but with heavy dilution of existing shareholder equity. In Singapore, a host of household names have been impacted, making the front page of the business section grim reading for those involved in the industry. Chinese shipyards remain full of speculatively built offshore vessels looking for a home and there are plenty of unwanted offshore drilling units available.
Consequently, more and more parties in the industry are facing the harsh reality of dealing with insolvencies, whether themselves or with their contractual partners. It is therefore imperative that all within the industry have some familiarity with the various proceedings which can be invoked in these circumstances and how matters can develop.
For parties facing the prospect of insolvency proceedings or restructuring, it is also important to consider the implications of that from an insurance perspective. In terms of cover, insolvency is a basis for termination of the insurance cover. However, in situations where there is a close dialogue between the assured (and their brokers) and the insurer as to the process to be followed and the steps being taken, we can work together with a view to maintaining cover (and having cover in place is invariably a contractual requirement) to allow the vessel or units to continue trading, where appropriate.
Anybody with a passing interest in the Offshore industry has heard talk of Chapter 11 proceedings over the last three years. The reason for the prominence given to that recovery mechanism is the powerful way in which it operates to protect those companies falling under it. As the established 'leader' in that field, Chapter 11 will likely maintain its position as the 'go to' large-scale insolvency protection. However, Singapore has recently brought in a similar system and that may become a strong alternative, particularly for companies based in countries in that region.
While the courts in the UK and Norway perhaps provide a more traditional model for dealing with insolvency, they are not without options for rescuing a stricken company. Administration and debt negotiation proceedings are alternatives to simply winding-up a company and distributing its assets amongst creditors, and can ensure the continued viability of the company. However, these are perhaps not as expansive or attractive to debtors as Chapter 11 type proceedings.
From the beginning of 2015 to July 2017, approximately 150 bankruptcies were filed in the US from the oilfield service and offshore sectors, including a number of notable offshore players. Given the number of bankruptcy filings in the offshore sector, it is important that all participants in this industry are familiar with the bankruptcy process generally and with a Chapter 11 reorganisation in particular.
What is Chapter 11 reorganisation?
Chapter 11 is designed to give the debtor the time and opportunity to restructure its balance sheet and reorganise its business. The "automatic stay" set out in Section 362 of the Bankruptcy Code prevents creditors from continuing foreclosure actions or filing lawsuits after the filing of a Chapter 11 petition. The automatic stay is probably the most important Chapter 11 concept as it stops all existing litigation against the debtor and all subsequent actions seeking to recover debts in existence prior to the filing of the bankruptcy petition. As reflected by its name, the automatic stay occurs automatically with the filing of the bankruptcy petition and is in force throughout the case.
A Chapter 11 case starts with the filing of a petition with the bankruptcy court where the debtor has its principal place of business or assets. Immediately upon the filing of that petition, the debtor becomes the "debtor-in-possession" and, generally, will keep possession and control and management of its assets during the reorganisation process. As debtor-in-possession, the debtor continues to operate the business.
Generally, several "first day orders" are entered into which address a variety of issues. Typically, first day orders include motions for orders authorising: the debtor to pay pre-petition claims of critical vendors; the debtor to pay pre-petition employee wages and benefits; the employment of professionals; use of cash collateral; post-petition financing; and, rejection of leases effective as of the petition date.
Timeline of requirements
- Within 14 days of filing the petition, the debtor must file the lists, schedules and statements required.
- Between 21 and 40 days after filing the petition, the Office of the US Trustee will convene a meeting of the creditors, known as a 341 meeting. At this meeting, the creditors may ask questions of the debtor.
- After the commencement of the case and throughout the matter, the debtor must file monthly operating reports.
- A creditor's committee, or additional committees of creditors, may be appointed.
- The debtor has the exclusive right to file a proposed Plan of Reorganization within 120 days after the order of relief, unless such exclusivity period is extended by court order.
- Thereafter, the debtor has the exclusive right to obtain acceptance of the plan from the creditors within 180 days after the order for relief (or 60 days after the deadline to file the plan).
- The bankruptcy court will conduct a hearing on the disclosure statement and, upon such approval will conduct a confirmation hearing on the Chapter 11 plan.
- Thereafter, there will be solicitation and voting on the plan and either certification of acceptance or rejection of it.
- Confirmation of a plan is stayed until the expiration of 14 days after the entry of the order approving the plan unless otherwise ordered.
- Typically, the bar date for filing proof of claims is 90 days after the meeting of the creditors.
- The time from the filing of the Chapter 11 petition until confirmation will typically run at least one year.
The basis for Chapter 11
The ultimate goal of a Chapter 11 filing is for the debtor to obtain the court's approval of the company's business reorganisation. This plan must address how the existing creditors will be paid and how the company will operate prospectively. In the offshore sector, companies attempting to reorganise under Chapter 11 must make sure that the proposed restructuring plan does enough to repair balance sheet issues in order to avoid being at risk of a relapse. A "Chapter 22" company is a term formulated by restructuring experts for companies who ultimately file a second Chapter 11 petition having failed to adequately correct balance sheet problems during the first one. Not surprisingly, companies at the greatest risk of Chapter 22 are those whose initial Chapter 11 plan leaves significant debt in comparison to estimated future earnings. During 2016, an offshore contractor filed a second Chapter 11 petition in June 2016 after initially filing in August 2015 as its debt load could not be supported when its projected earnings came in less than expected due to an increase in expenditures.
It is anticipated that the challenging environment in the offshore sector will continue for the immediate future and that there may be further significant restructurings. However, while an increase in the number of bankruptcy filings is typically a sign of industry decline, some commentators have noted that the increase in filings can be interpreted more positively and could reflect an intention to protect the resources necessary to develop offshore once the hope for recovery arrives.
Skuld Offshore is grateful to Kevin P Walter of Royston Rayzor for his assistance in preparing this briefing.
Basis for winding up
Insolvency procedures are normally engaged in the UK when a creditor of a company petitions the court to wind up the debtor company. The grounds on which a company may be wound up by the court are listed in s.122 of the Insolvency Act 1986 (the Act), but by far the most common ground is that the company is unable to pay its debts.
It is sufficient to show that a company is either cash flow or balance sheet insolvent to justify winding up. Most commonly, a petitioner will claim cash flow insolvency – i.e. that the company has not paid a debt which is both due and not disputed. Balance sheet insolvency is where the total value of the company's assets is less than its liabilities, taking into account contingent and future liabilities.
It is critical that the debt is not disputed. The UK courts are strict in this regard and consider it an abuse of process for insolvency procedures to be used to litigate a debt in respect of which there is a substantial dispute. If the court considers that the winding up petition ought not to have been brought then costs sanctions may be applied against the petitioning creditor. In cases where the creditor is unsure whether the debtor intends to dispute the debt, it may be that the creditor first files a statutory demand for payment.
Bringing a petition
Once a valid winding up petition is presented, there are certain procedural formalities to be complied with – for example, the petition must be properly advertised. If these formalities are met, the court will hear the petition at a brief hearing and will order that the debtor company be moved into compulsory liquidation unless there is some reason why that would not be appropriate. It is at this stage that the debtor company might seek to delay the winding up to try and pay the debt, or the debtor may seek to have the company put into some other insolvency process such as creditors' voluntary liquidation. The court will entertain requests for time to pay, but its attitude is that a valid petition should not be stalled unnecessarily – i.e. that the insolvency procedure is intended for the winding up of a company, not the collection of debts.
Effect of petition
Even before a winding up order is granted, the act of a petition being presented has an effect on the company. The Act provides that the court hearing the petition, or any other court hearing the case, may stay (halt) any proceedings in which the company is a respondent. This includes proceedings executing a previously-obtained judgment, or a sale of any goods already seized in execution. The court's guiding principle when exercising this power is to ensure that the company's creditors as a whole are treated fairly – e.g. no one creditor can seek to place itself above the others by selling off the debtor company's property once a petition is presented.
Once a winding up order has been made by the court, there is an automatic stay of any case in which the company is a respondent, subject to the discretion of the court. The Official Receiver becomes the liquidator of the company, save in certain circumstances such as where the company was already in administration or subject to a voluntary winding up. The liquidator will be responsible for realising and distributing any remaining assets of the debtor company, and is also able to bring claims on behalf of the company to increase the funds available for distribution to the company's creditors and shareholders.
The timeline for a winding up is inevitably subject to a great deal of variation depending on how it is approached by both the petitioner and the debtor.
In a straightforward case of a debt that is not paid by the debtor, the creditor is able to prepare and file a winding up petition in a matter of days. The petition will be first heard about four weeks after the date that the petition is issued. If the petition is not reasonably capable of dispute, the papers are in order, and the debtor does not obtain time to settle the debt, the court will order liquidation on that date.
However, this 4-5 week timescale from start to finish will commonly be increased by about 4-12 weeks if the debtor persuades the court to give it time to satisfy the debt. The court will scrutinise any request to delay a winding up, but will often give the benefit of the doubt to the debtor (at least at first) since liquidation is, of course, a final remedy and has dramatic effects on the debtor's business. More complicated petitions can take longer, but the court will always be aware that the insolvency procedure is intended to wind up companies, not to conduct substantial litigation.
Skuld Offshore is grateful to Matthew McGhee of 20 Essex Street for his assistance in preparing this briefing.
The Norwegian bankruptcy system is based on liquidation of the debtor's assets rather than restructuring of the company. In the Norwegian system, the debtor's assets are seized by the estate, 'realised' and then funds are distributed to the creditors. The estate's main objective is to ensure equal treatment of all the creditors by way of an efficient liquidation to settle the debtor's outstanding claims.
Norwegian bankruptcy legislation is regulated by two acts: The Bankruptcy Act which regulates procedure; and, the Creditors Security Act, which regulates the creditors' rights and obligations. These apply to both personal and company insolvency proceedings.
Initiating bankruptcy proceedings
Bankruptcy proceedings may be opened in Norway for all companies domiciled in Norway and for companies considered to have their main place of business in Norway. A company may be considered to have their main place of business in Norway even though they are registered in another jurisdiction.
Proceedings are initiated by an application to the Probate Court, either by the debtor or an unsecured creditor. The Probate Court will determine whether the requirements for bankruptcy are present - the debtor must be "illiquid" (unable to pay debts as they fall due more than temporarily) and "insufficient" (the debts exceed the assets).
Once bankruptcy proceedings have been opened, the trustee will request all creditors to file their claim(s) with the estate. The bankruptcy will be made public, and the estate will publicly notify the closing date for filing of claims. Creditors with a claim must act diligently in making sure that their claims are notified in the correct manner and within the set deadline.
Procedures and operations
The estate may set aside securities under certain circumstances, even if they are validly established and have legal protection. This is typically the case for security established within a period of three months prior to the opening of the bankruptcy estate. One example is the case where security is established for already existing debt, e.g. such as pledge in an asset in favour of the parent company for an intra-group loan which already exists.
Mortgages and pledges established at an earlier point in time may be set aside if the security is deemed to improperly give preference to one creditor at the expense of the others, if the other party knew or should have known that establishing the security would have such effect due to the debtor's financial circumstances.
The right to set off, however, is not affected by the opening of bankruptcy so a creditor holding a counter claim against the debtor will be able to set off this claim. However, certain special rules apply – which are based on the concept of loyalty between creditors in a bankruptcy situation. This means that a creditor may not breach a contract in order to position itself into a set off right. As with mortgages and pledges, set off rights acquired shortly prior to the opening of bankruptcy may be set aside.
The bankruptcy estate has a right, but not an obligation, to step into any contracts held by the debtor. The estate may "cherry pick" any favourable contracts in order to increase the assets of the estate. However, a trustee is usually reserved and careful to avoid taking risk or increasing the obligations of the estate. Creditors should be aware that even if the contract establishes a right to terminate in case of bankruptcy, this is not automatically applicable pursuant to Norwegian law.
Closing the estate
If and when secured creditors are covered, unsecured creditors will receive dividends estimated at a percentage share of the size of each claim. When the proceedings are closed, the company is dissolved and no longer liable for the uncovered claims.
Board member liability
Following a bankruptcy, the question of board members' liability for losses incurred as a result of bankruptcy not being opened at a sufficiently early stage, may arise. As the board has the right and obligation to take such actions as required to ensure the survival of the company, allowance is made for certain degree of optimism. However, consideration must also be given to creditor(s) and their position.
The question of liability will often be decided on the basis of whether the assessments made and actions taken prior to the bankruptcy were based on reasonable and realistic assessments and the objective chance of survival of the company.
Debt negotiation proceedings
As an alternative to bankruptcy, a debtor may enter into judicial debt negotiation proceedings. This is initiated by an application by the board and creditors cannot make for such and application. If proceedings are opened, the debtor is normally under bankruptcy protection for three months. A Debt Negotiation Committee and an accountant are appointed to supervise and assess the business and the debtor is not permitted to undertake or renew debt, mortgage, or sell or rent assets without the Committee's approval.
In collaboration with the Committee, the debtor is obliged to compose a debt settlement. This can be either a voluntary or compulsory composition, but voluntary composition is rarely seen, as this requires unanimity amongst the creditors. Compulsory composition requires the debtor to offer at least 25 % recovery to all creditors, and the such offer must be accepted by a majority of both creditors and the amount of debt represented. As the recovery offer increases, the support required amongst the creditors decreases. If the debt settlement offer is accepted by a sufficient percentage of the creditors and the Court gives its approval, the debtor is released from the remaining debt. If the negotiation fails at any level, the Court will, normally upon the Committee's recommendation, open bankruptcy proceedings.
Skuld Offshore is grateful to Camilla Barr and Oddbjørn Slinning of Advokatfirmaet Steenstrup Stordrange for their assistance in preparing this briefing.
In Singapore, there are three different options of rescue and insolvency:
- Scheme of arrangement
- Judicial management
Scheme of arrangement
A scheme of arrangement is considered the equivalent of the US Chapter 11 restructuring mechanism. It allows for a company to compromise or reschedule its debts and obligations with its creditors and shareholders. This is one of the primary means in Singapore for a company to restructure its debts and continue trading through periods of insolvency or financial distress.
Under Chapter 11, although the company has priority in presentation, creditors may submit their own reorganisation plans. It is important to note that the required majority is different for creditor voting under Chapter 11 and under a scheme of arrangement.
Procedure for a scheme of arrangement
Initiation – The company, any of its creditors, shareholders or its liquidator must first apply to the court for an order to hold a meeting of all creditors or members, at which they will consider and vote on the proposed scheme of arrangement. The scheme must be approved by the requisite majority.
Administration – The scheme of arrangement, once approved, must then be submitted to court for its sanction. The court may make amendments or set conditions before approving the scheme. Once court sanction is obtained, the scheme is administered by the scheme manager.
Moratorium – To protect against creditors' claims disrupting the process, a company usually applies to court for a moratorium to restrain any legal proceedings against the company when a scheme of arrangement has been proposed, or where it intends to propose such a scheme.
Judicial management provides an avenue for companies in financial distress to restructure their debts and continue as a going concern. A judicial manager is appointed to take control of the company and propose a reorganisation plan.
The procedure for judicial management
Initiation – The company, its directors or creditors can apply for the company to be placed under judicial management. The company must first obtain the resolution of its members or board of directors.
Moratorium – There is an automatic moratorium for all proceedings against the company once a judicial management application is made.
Administration – A judicial manager, who is an officer of the court, will then take over the functions and powers of the board of directors. The judicial management order expires after 180 days, but may be extended.
The winding-up or liquidation of a company involves the collection and sale of its assets to meet its debts before the company is dissolved.
The procedure for winding-up
Initiation – For a creditor's voluntary liquidation, initiated by the debtor company, a shareholders' resolution must be obtained. For a compulsory liquidation, initiated by a creditor, an application to the court must be made.
Moratorium – An automatic moratorium is put in place prohibiting any legal proceedings against a company under liquidation.
Administration – When a company is placed under liquidation, the appointed liquidator or official receiver takes control of the company and its assets.
Singapore can recognise foreign restructuring or insolvency procedures
Singapore does recognise restructuring and insolvency procedures conducted in other jurisdictions. Singapore has adopted the UNCITRAL Model Law on Cross Border Insolvency. A foreign representative (being the person or body administering the foreign restructuring or insolvency) may apply to the Singapore court for the recognition of the foreign proceedings.
For cross-border insolvency proceedings, Singapore law also provides for the cooperation of the Singapore courts and the Singapore insolvency officeholder with the foreign court or representative, facilitating direct communication in relation to the insolvency proceedings in their respective jurisdictions.
The Singapore courts may, upon application and depending on the circumstances of the case, grant orders to assist in foreign insolvency and restructuring proceedings, such as the stay of current or future proceedings against the insolvent company in Singapore.
Skuld Offshore is grateful to Kah Wah Leong and Winston Kwek of Rajah & Tann for their assistance in preparing this briefing.