Not Too Late to Salvage Financially-Distressed Businesses in Laos Through Judicial Processes: Comparative Law, The Cramdown under the new Restructuring Plan Process Pursuant to Part 26A of the UK Companies Act 2006 and the Cramdown Under Chapter 11 of the US Bankruptcy Code

Not Too Late to Salvage Financially-Distressed Businesses in Laos Through Judicial Processes: Comparative Law, The Cramdown under the new Restructuring Plan Process Pursuant to Part 26A of the UK Companies Act 2006 and the Cramdown Under Chapter 11 of the US Bankruptcy Code

By:       Xaypaseuth Phomsoupha, PhD.

            Researcher & Author[1]

This abridged article may be apt for Laotian legal practitioners, post-graduate students, and Lao University academic staff who provide international corporate finance and law courses.[2]

1. Introduction

Businesses tend to operate in a volatile financial environment these days. When encountering financial distress, companies funded by different classes of stockholders and banks must redress claims per their respective corporate commitments.[3] In addressing financial difficulties, companies operating under the jurisdiction of England and Wales and the US legislation go through either financial restructuring or business dissolving depending on circumstances surrounding petitions filed with the courts of competent jurisdiction.[4] One procedure of the entire modern financial restructuring process is a cramdown, which may be sanctioned by a court to provide judgements for petitioners to move on to a further step.

This paper relates the so-called business rehabilitation efforts the Lao authorities put in place in the wake of global resilience following the COVID-19 shock. Acquisition of shares by one business from others or state-owned entities, equitisation, securitisation, asset re-valuation, and other financial transactions fall into a financial rehabilitation effort internationally known as  “financial restructuring.”[5] With the fledgling statutory instruments, the Lao government restructured its judicial infrastructure and appointed the first-ever cohort of insolvency practitioners in anticipation of helping salvage businesses that are in financial distress.[6] Henceforth, numerous financially distressed businesses operating in the Lao jurisdiction have undergone financial restructuring through one or combined forms, spontaneously initiated by business owners, shareholders, and social creditors, but in very few cases by courts of competent jurisdiction.[7] Little is known whether applicable Lao law underpins the foregoing restructure and to what extent the rehabilitation exercises have involved Laotian lawyers. Retrieving his past research for two UK-based universities, the author relates comparative principles presented hereunder to Laos’s rehabilitation and insolvency efforts in this paper.

2. Understanding of Cramdowns in Modern Restructuring Practice in Overseas Judicial Processes

Before explaining a cramdown, which is the core matter of this section, the author revisits financing applying to businesses of different types during establishment and operation. Financing is a platform for bringing borrower companies, securities takers, and creditors into interplay.[8] Under several circumstances, businesses alleviating financial difficulties involve courts in seeking judgment on various procedures for the borrowers to deal with different classes of creditors in respect of the loans in accordance with the loans’ ranking.[9] When loans in a debtor-creditor relationship valued on the borrowers’ assets fall short, and the borrowers become delinquent, the creditors defer to judicial action to rectify the shortfalls.[10] In Bluebrook Ltd, IMO (UK) Ltd, and Spirecove Ltd,[11] Justice Mann sanctioned the schemes of arrangement and thereby prioritised the company’s assets allocation for the senior lenders to the mezzanine ones as classified by applicable statutes. The cramdowns analysed herein focus on limited liability companies, the shares of which are classified in accordance with the Companies Act 2006 or its predecessors.[12] Shares represent companies’ assets collateralised against borrowing in mobilising corporate debt financing. Shares are categorised into ordinary shares, deferred shares, preference shares or voting and non-voting shares that depend upon the proprietary rights of their owners.[13] A company as an entity raises corporate financing from the banks and non-bank institutions using its assets to secure repayment to the creditors, who have provided loans to the borrower company. Loans can be split into secured and unsecured or term loans and mezzanine loans.[14] The creditors providing loans for the company are labelled as classes in accordance with their rights attached to the loans.

Indebted companies operating in financial distress, which fail to repay debts to creditors when such debts fall due, are subjected to legal challenges taken by their creditors. The US Bankruptcy Code, Chapter 11, was enacted to address small, financially distressed businesses and individual borrowers operating under US jurisdiction in the second half of the last century before being enforced on publicly traded companies until today.[15] Likewise, the Companies Act 2006, Part 26, is the overarching legislation to govern companies in financial distress connected with the England and Wales jurisdiction.[16] Under many circumstances, before proceeding to an administration, financially distressed companies may go through a pre-pack by initiating a pre-arranged sale of the company’s assets.[17] Graham defined a pre-pack as an arrangement for disposing of the company’s assets as a going concern sale, whether in whole or part before formal insolvency takes place.[18] Generally, a petition can be filed with a court, whether under Chapter 11 of the US Bankruptcy Code or Part 26 of the Companies Act 2006, by either the borrowers or lenders after the borrowers have not repaid a certain amount of due debts.[19] After the court has received the petition, a moratorium under either legislation may not start automatically. The moratorium commences upon certain prerequisites, including an application, which is to be initiated by the petitioners.[20] There are several steps prior to the courts’ action to take a cramdown approach.

A cramdown approach is prevalently found and exercised by courts of the US territory and recently by UK courts in England and Wales. Legal practitioners define “cramdown” as “Court [court] confirmation of a Chapter 11 bankruptcy plan despite the opposition of certain creditors. Under the Bankruptcy Code, a court may confirm a plan even if it has not been accepted by all classes of creditors…”[21] When a court sanctions a cramdown approach, it is binding upon creditors who dissent from the submitted restructuring plan. In many cases, cramdowns take place after pre-packaged administration.[22] For the cramdown approach, after companies have chronically faced financial difficulties and failed to repay due debts, the stockholders or lenders may file a petition with a competent court.[23] The petitioners submit a financial restructuring plan to the court outlining a procedure to deal with the company’s indebtedness to different classes of creditors. Quite often, creditors of all classes do not agree to the plan submitted to the courts by the borrower company or some classes of the creditors, as the case may be. In the event some groups of creditors disagree, the court may cram the financial restructuring plan down by ignoring objections of those dissenting and thereby sanctioning the restructuring plan to go ahead.[24] However, under certain circumstances, a court does give its sanction to the restructuring plan where (i) the consenting creditors’ vote is equal to or more than 75% of the total financial value or economic interest to be received by those consenting creditors;[25] and (ii) the court is satisfied that no dissenting creditors are worse off than they would have been in any alternative as a result of the execution of the submitted restructuring plan.[26] The cramdown, as described, has been found in an attempt to rescue companies from financial collapse. In Re Virgin Active Holdings,[27] and Re Deep Ocean 1 UK Ltd,[28] the English courts sanctioned the financial restructuring plans, in which some creditors objected. The courts approved the proposed restructuring plan by ignoring dissenting creditors, whose votes were cast and accounted in the minority.

3. To Compare the Cramdown Imposed under Chapter 11 of the US Bankruptcy Code and the Cramdown under the New Restructuring Plan Process Pursuant to Part 26A of the Companies Act 2006

3.1. Similarities

The court’s intention, as legislated into law under the US territory and UK jurisdiction, tends to introduce a cramdown regime to the corporate financing sphere to reorganise financially distressed companies.[29] The cramdown on minority creditors who do not support a restructuring plan is a judicial step to revive business aimed at achieving equitable goals.[30] However, dissenting parties are bound by the plan despite their disagreement when the court has confirmed the restructuring plan.[31] Cork Report labelled the intention of competent courts to deal with companies’ financial difficulties as a rescue culture with an emphasis on the interest of the borrowers, creditors and employees working for the two foregoing groups.[32] Thus, the cramdown regime legislated into law under the US and UK legislation empowers courts of competent jurisdiction to impose a term on dissenting and consenting participants of restructuring to come to a common ground in finding a better solution had no alternative has been put in place.

3.2. Differences

Cramdowns imposed by US competent courts under Chapter 11 of the US Bankruptcy Code relate to judicial power exercised under section 1129(b) in respect of redressing financial difficulties in the relationship between debtors and creditors.[33] However, before any court imposes a cramdown, a plan filed with the courts shall satisfy requirements under section 1129(a) in respect of disclosure of would-be payments in the event the courts ultimately approve such a plan.[34] Creditors of different classes formed according to their claims vote for and against the plan to assess whether it is judicially feasible for the courts to cram it down on dissenting creditors.[35] In confirming a financially disagreed restructuring plan, courts rule in favour of the absolute, statutory majority of the highest secured creditors in order of precedence of their ranking. Those who are secured but are in the lower ranking and those who are unsecured creditors come second.[36] The courts also judge that secured creditors will receive their claims in full before the unsecured. Whether ordinary or fixed preference shareholders, dissenting equity holders will likely get nothing if the higher-ranking classes leave no interest.[37] Cramdowns under Chapter 11 of the US Bankruptcy Code have created their specific enclaves by not cramming down on any dissenting secured creditors. Likewise, the courts do not rule out any entire dissenting class. In Czyzewski et al. v Jevic Holding Corp. et al.,[38] a wrongly evaluated majority of claims prejudiced to secured creditors, resulting in the structuring of dismissals by the court of appeal. According to their claims, the petitioners, classed as the lowest ranking, were initially judged. Later, the appeal court crammed the plan down on dissenting petitioners and upheld the distribution by judging that the priority was given to affected secured creditors’ consent.[39] According to the cramdown principle applied under Chapter 11 of the US Bankruptcy Code, the court ruled in favour of the highest secure creditors before the other classes.

The courts in the UK jurisdiction dealt with the reorganisation of financially distressed companies since the late 1980s. The restructuring later incorporated cramdown rules, giving rise to rights exercised by the competent courts. The most recent cramdown development with respect to the restructuring plan was legislated into law in the Companies Act 2006 and Corporate and Governance Act 2020.[40] The consenting parties have the right to ask the court to sanction the plan in their favour even though dissenting remains.[41] Unlike the cramdowns under the US jurisdiction, the UK courts have the power to make a cramdown on dissenting creditors within a class but not to cram it down on an entire class.[42] In Re DeepOcean 1 UK Limited,[43] Re DeepOcean Subsea Cables Ltd,[44] and Re Enshore Subsea Ltd,[45] the petitions were filed with the courts in the UK jurisdiction to apply for a sanction to reorganise three subsidiaries, including DeepOcean 1 UK Limited (“DO1”), Enshore Subsea Limited (“ES”), DeepOcean Subsea Cables limited (“DSC”). Four classes of creditors approved the restructuring Plans for DO1 and ES but not the Plan for DSC.[46] The secured creditor voted in favour of the DSC’s Plan; nonetheless, the unsecured creditors fell short of the statutory requirement. The court held that it sanctioned the Plan at its discretion.[47] Unlike in the US, a cramdown is sanctioned by the UK only when the courts find that no class of creditors is worse off than had no alternative been in place.

 4. Not Too Late to Salvage Financially-Distressed Businesses In Laos

It appears that cramdowns enjoyed by UK courts and the courts functioning in the US jurisdiction intend to rescue secured creditors rather than companies in financial distress as generally perceived. For most cross-border insolvency cases, people tend to locate a centre of main interests relating to creditors other than the companies. In re Rodenstock GmbH,[48] the Claimant had its business seat and centre of main interests in Germany; however, the centre of main interests in respect of the cross-border insolvency case deferred to the subject outlined in a loan agreement, which was signed by the Claimant and a group of creditors seated in the UK. In entering into a dispute resolution, most creditors based in the UK supported a scheme sanctioned by the UK court according to Part 26 of the Companies Act 2006.[49] The UK court held that it satisfied all requirements to sanction the scheme under the Companies Act 2006.[50] Thus, the UK courts judged the restructuring case favouring the creditors domiciled in the UK jurisdiction despite a petition being instituted outside the Kingdoms.[51] Conversely, if a cramdown is sanctioned under Chapter 11 of the US Bankruptcy Code or Companies Act 2006 following financial distress causation emanating from secured creditors, the court should favour the lower unsecured creditors and equity receiving their respective claims cramming a restructuring plan down on the dissenting secured creditors.

In Laos, hundreds of businesses are in financial distress; participants, including investors and financiers, have no idea how to recover their respective investments or move their undertakings forward. Under many circumstances, players of each category have never met insolvency authorities and expressed concerns due to unsettled settings.[52] The forgoing dilemma has created a so-called ‘no-go-no-come` state, which in turn leaves a large number of assets, supposed to be productive, stranded. Some businesses spontaneously disposed of their valuable assets, neither complying with applicable law nor being in line with relevant international treaties ever accessed by the Lao state.[53] Many state-owned corporations are likely to be delinquent and subject to lenders’ exercising step-in rights once non-repayment is prolonged, exceeding a permitted period.[54] The temptation to recover losses without lawyers’ participation exposes numerous risks of breach of loan covenants, thereby deteriorating the financial standing of many corporations. Few people realise that modern corporate finance and banking are enshrined in Lao legislation and that qualified Laotian lawyers specialising in corporate finance law are not idle too, thanks to a trend in M&A. Besides, Laotian CPAs avail themselves to work with financial lawyers in the rehabilitation effort of the Lao authorities.

Now is the right time for the authorities to utilise all available tools, including the Law on Rehabilitation and Insolvency, the Law on Accounting, and other statutory instruments to salvage businesses from loss. The author urges qualified lawyers, insolvency practitioners, and judicial staff to act according to their respective roles to abide by the applicable laws and international practices to the extent accessed by the Lao legislation. Once businesses, including but not limited to creditors, borrowers, insurers, and other participants, feel safe, financing costs tend to go down and thereby, a gainful environment is foreseeable.

5. Conclusion

The financial restructuring, whether sanctioned by a court of UK jurisdiction or US legislation, has recently been regarded in rescue culture. Like the Companies Act 2006, Chapter 11 of the US Bankruptcy Code has given financial participants in a financially distressed company a chance to deal with their respective difficulties before deferring to a court decision.[55] As international financing has progressively developed its coverage, the legislations enforced in the US and UK jurisdictions have coped with complex issues these days.

Despite sharing similarities, the cramdowns imposed by courts of competent jurisdictions in the US differ from the cross-class cramdowns practices in the UK. In Czyzewski et al. v Jevic Holding Corp. et al.,[56] the participants classified in the group of unsecured creditors got nothing if those classified as the secured creditors had not been paid in full. The equity holders were ranked further at the far end of the claim row. In Re DeepOcean 1 UK Limited, [57]Re DeepOcean Subsea Cables Ltd,[58] and Re Enshore Subsea Ltd,[59] the cramdown on the dissenting unsecured creditors discretionarily imposed by the UK court was seen as an equitable and fair solution compared with no alternative.

The cramdowns introduced under Chapter 11 of the US Bankruptcy Code and the UK Companies Act have served as a piece of legislation whereby the courts of the respective jurisdiction have applied to recover businesses in financial distress. [60] Acknowledging at the point of entry into a business, one must understand that each class of secured and unsecured creditors and equity holders are exposed to different risks. When the business prospers under bonanza, each class reaps different undertaking outcomes.[61] But, when the company is in financial distress, a cramdown sanctioned by a court gives rise to one party being better off and the other being worse off, as per Pareto optimality, should be equitable and fair.[62] Ultimately, even though the restructuring results in reviving the companies as a going concern, distribution following should be better than a fiasco after the end of the business.

In Laos, statutory instruments akin to provisions found under USC Chapter 11 and Company Act 2006, Part 26 support human actors, including but not limited to business people, financiers, public administrators, lawyers, and judicators, to work under the same roof for a common goal. Despite being a recent phenomenon, business rehabilitation in the Lao context shall draw successful experiences from other jurisdictions. Thus, it is NOT too late for entities doing business under Lao jurisdiction to defer to Lao authorities’ action to salvage financial distress per the legal process successfully carried out overseas.

BIBLIOGRAPHY AND SOURCES

Primary Sources

Cases

Re DeepOcean 1 UK Ltd [2021] EWHC 138 (Ch)

Re DeepOcean Subsea Cables Ltd [2021] EWHC 138 (Ch)

Re Enshore Subsea Ltd [2021] EWHC 138 (Ch)

Re Rodenstock GmbH [2011] WL 1151484

Re Virgin Active Holdings [2021] EWHC 1246 (Ch)

Bluebrook Ltd, IMO (UK) Ltd, Spirecove Ltd, and Companies Act 2006 [2009] EWHC 2114 (Ch)

Czyzewski et al. v Jevic Holving Corp. et al., [2017] 137 US. Ct. 973

Statutes

Companies Act 2006

Corporate and Governance Act 2020

US Bankruptcy Code 1934

Secondary Sources

Books

Blackaby N and Partasides QC C, International Arbitration (6th edition, Oxford Press University 2015)

Gullifer L and Payne J, Corporate Finance Law: Principles and Policy (3rd edition, Hart Publishing 2020 )

Miles R, Principles of Corporate Insolvency Law (Sweet & Maxwell 2014)

Schillig M, Resolution and Insolvency of Banks and Financial Institutions (1st edition Oxford University Press 2016)

Zweiten v K, Goode on Principles of Corporate Insolvency Law (4th edition, Sweet & Maxwell 2011)

 Articles

Isaac M Pachulski, “The Cram Down and Valuation under Chapter 11 of the Bankruptcy Code”, [1980] North Carolina Law Review Volume 58/Number 5, Article 3<http://scholarship.law.unc. edu/nclr/iss5/3

Kenneth Cork, Insolvency Law, and Practice: Report of the Review Committee, (London H.M.S.O 1982)

Maria McNally, “The Restructuring Plan and Dissenting Classes – Cross-Class Cram Down” [2021] Cleaver Fulton Rankin

Michael Schillig, ”Corporate Insolvency Law in the Twenty-First Century: State Imposed or Market-Based?” [2014] Journal of Corporate Law Studies Vol 14 Pt 1, DOI:10.5235/1473970.14.1.1

Richard F Broude, “Cramdown and Chapter 11 of the Bankruptcy Code: The Settlement Imperative” [1984] The Business Lawyer Vol 39, No 2<https://www.jstor.org/40686562

Teresa Graham “Graham Review into Pre-Pack Administration” (CBE 2014) 14<https://assets. publishing.service.gov.uk>accessed on 14 February 2022

[1] The author is undertaking an after-doctorate project in banking and debt finance law at the University of Gloucestershire, Gloucester and the University of Law, London, UK

[2] The full research report was submitted to the Repository of King’s College, London. Thus, this abridged paper is posted here for academic purposes only

[3] Companies Act 2006, Pt 26; US Bankruptcy Code 1934, Ch 11

[4] Companies Act 2006, Pt 26

[5] Per., Com.,

[6] Per., Com.,

[7] Per., Com.,

[8] Louis Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (3rd edition, Hart Publishing 2020 ) 11

[9] Kristin van Zweiten, Goode on Principles of Corporate Insolvency Law (4th edition, Sweet & Maxwell 2011) 33-36

[10] Companies Act 2006, Pt 26

[11] Bluebrook Ltd, IMO (UK) Ltd, Spirecove Ltd, and Companies Act 2006 [2009] EWHC 2114 (Ch)  [80]-[81]

[12] Companies Act 2006, Pt 2

[13] Companies Act 2006, Pts 17, 23

[14] Louis Gullifer and Jennifer Payne, Corporate Finance Law: Principles and Policy (3rd edition, Hart Publishing 2020 ) 11

[15] US Bankruptcy Code 1934, Ch 11

[16] Companies Act 2006, Pt 26

[17] Michael Schillig, Resolution and Insolvency of Banks and Financial Institutions (1st edition Oxford University Press 2016) 431-432

[18] Teresa Graham “Graham Review into Pre-Pack Administration” (CBE 2014) 14<https://assets. publishing.service. gov.uk>accessed on 14 February 2022

[19] US Bankruptcy Code 1934, Ch 11; Companies Act 2006, Pt 26A

[20] Corporate and Governance Act 2020, s 1

[21]  Blackaby N and Partasides QC C, International Arbitration (6th edition, Oxford Press University 2015)

[22] Royston Miles, Principles of Corporate Insolvency Law (Sweet & Maxwell 2014) 381

[23] US Bankruptcy Code 1934, Ch11; Companies Act 2006, Pt 26A

[24] ibid, Ch 11

[25] Companies Act 2006, art 901C

[26] ibid, art 901F

[27] Re Virgin Active Holdings [2021] EWHC 1246 (Ch)

[28] Re Deep Ocean 1 UK Ltd [2021] EWHC (Ch) [4] [6-7], [28]

[29] US Bankruptcy Code 1934, Ch 11; Companies Act 2006, Pt 26A

[30] Isaac M Pachulski, “The Cram Down and Valuation under Chapter 11 of the Bankruptcy Code”, [1980] Volume 58/Number 5, Article 3, 927, North Carolina Law Review<http://scholarship.law.unc. edu/nclr/iss5/3

[31] ibid, 928-929

[32] Kenneth Cork, Insolvency Law and Practice: Report of the Review Committee, (London H.M.S.O 1982) 268

[33] US Bankruptcy Code 1934, Ch11, s 1129(b)

[34] ibid, s 1129(a)

[35] Isaac M Pachulski, “The Cram Down and Valuation under Chapter 11 of the Bankruptcy Code”, [1980] North Carolina Law Review Volume 58/Number 5, Article 3, 957-60, <http://scholarship.law.unc. edu/nclr/iss5/3

[36] US Bankruptcy Code 1934, Ch 11, s 1129(b)

[37] Richard F Broude, “Cramdown and Chapter 11 of the Bankruptcy Code: The Settlement Imperative” [1984] The Business Lawyer Vol 39, No 2, 442 <https://www.jstor.org/40686562

[38] Czyzewski et al. v Jevic Holving Corp. et al., [2017] 137 US. Ct. 973

[39] ibid, 11-18

[40] Companies Act 2006, Pt 26A; Corporate and Governance Act 2020, s 1

[41] Maria McNally, “The Restructuring Plan and Dissenting Classes – Cross-Class Cram Down” [2021] Cleaver Fulton Rankin, 3

[42] Companies Act 2006, Pt 26A

[43] Re DeepOcean 1 UK Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[44] Re DeepOcean Subsea Cables Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[45] Re Enshore Subsea Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[46] ibid [6], [6-7], [28]

[47] ibid [6], [6-7], [28]

[48] Re Rodenstock GmbH [2011] WL 1151484 [68], [78], [85]

[49] ibid, [2], [5]

[50] ibid, [68], [78], [85]

[51] ibid, [68], [78], [85]

[52] Per., Com.,

[53] Per., Com.,

[54] Per., Com.,

[55] Companies Act 2006, Pt 26; US Bankruptcy Code 1934, Ch 11

[56] Czyzewski et al. v Jevic Holving Corp. et al., [2017] 137 US. Ct. 973

[57] Re DeepOcean 1 UK Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[58] Re DeepOcean Subsea Cables Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[59] Re Enshore Subsea Ltd [2021] EWHC 138 (Ch) [4], [6-7], [28]

[60] US Bankruptcy Code 1934, Ch 11; Companies Act 2006, Pt 26A

[61] Companies Act 2006, Pt 23

[62] Michael Schillig, ”Corporate Insolvency Law in the Twenty-First Century: State Imposed or Market-Based?” [2014] Journal of Corporate Law Studies Vol 14 Pt 1, 30-31, DOI:10.5235/1473970.14.1.1