Int'l Bankruptcy Court Shopping

♠ Posted by Emmanuel in at 7/18/2007 12:59:00 AM
International tax havens are so Eighties, dahling. While footloose and fancy-free capital is still circling the globe for ever-better returns unafflicted by the blight of taxation, less fortunate German manufacturers that have fallen under hard times are now seeking to incorporate in the UK prior to declaring bankruptcy because of its more lenient bankruptcy rules. Whereas bankruptcy in Germany is often perceived as literally the kiss of death there, i.e. the liquidation of a going concern, the UK's more"neoliberal" model sees it as more of a period of reorganization from which a viable concern can once again reemerge. Bloomberg has the story:
When Schefenacker AG, a German auto- parts maker, faced a default on bond debt last year, it fled the country where it was founded in 1935, moved its headquarters to England and filed for bankruptcy in London.

The maneuver allowed Schefenacker, after relocating on Feb. 11, to complete a 500 million-euro ($680 million) restructuring last month that company lawyers said would have been impossible under Germany's more stringent insolvency law.

``There is a significant question of whether the group would have survived under the German process,'' said Georgia Quenby, a lawyer in the London office of McDermott Will & Emery who represented Alfred Schefenacker, the company's owner.

Global court-shopping is on the rise, and European countries are examining their insolvency laws, bankruptcy lawyers say. Schefenacker's restructuring and a similar one by Deutsche Nickel AG in 2004 has Germany thinking of liberalizing its laws. France and Italy revised their laws in recent years to make restructuring easier.

The additional options give companies the ability to keep current management in place and an edge over bondholders and other creditors. In the Schefenacker case, the company was able to overcome the objections of a small group of bondholders that might have been able to force liquidation in Germany.

``In a market for restructuring, some jurisdictions work better than others,'' said Tony Horspool, a London partner at Cadwalader, Wickersham & Taft. ``Things like Schefenacker create an incentive for countries to continue to improve their systems.''

In 2004, Deutsche Nickel, based in Schwerte, Germany, completed a debt-for-equity restructuring similar to Schefenacker's and became a unit of U.K.-based DNICK Ltd. The reorganization included forming and dissolving German partnerships and creating U.K. corporations and subsidiaries.

The nickel wire and bar maker avoided a German requirement that a debt-for-equity swap be approved by about 95 percent of bondholders, a company lawyer said.

Deutsche Nickel couldn't locate enough bondholders to approve a consensual restructuring in Germany, its attorney Ingo Scholz said. The move to the U.K. allowed it to complete the restructuring with approval by 75 percent of voting bondholders.

``We were never able to find 50 percent of the bondholders,'' said Scholz, a Frankfurt partner at the law firm Ashurst. ``Some people must have been very surprised when their bonds had been converted into shares.''

German law also requires courts to name outside advisers to oversee insolvent companies. In the U.K., a company can pick its own administrator. In Europe, unlike the U.S., administrators decide how to restructure or liquidate companies, not management.

Most German judges ``think it is best that a person is appointed who has not previously worked with the company or the creditors,'' said Christoph Paulus, a law professor at Berlin's Humboldt University.

Paulus said court-shopping is being driven more by lawyers looking for clients than deficiencies of German law.

``English lawyers smell money here, and of course they want to market their product,'' according to Paulus, who said the process is now part of the standard set of services law firms consider for troubled companies.

Other European countries have eased the way for reorganization instead of liquidation. Italy passed a law in 2003 to help the food company Parmalat Finanziaria SpA restructure. France revamped its law in time for the 2006 reorganization case of Eurotunnel Plc, operator of the Channel Tunnel linking the U.K. to the European mainland.

The German Justice Ministry has appointed a committee to compare its insolvency laws with the U.K.

``There is definitely pressure on the Germans, and Schefenacker is a prime example,'' said lawyer Horst Piepenburg of Dusseldorf, Germany. ``You pack a few files on a truck, send them over the channel and all of a sudden a company is British.''

Germany overhauled its insolvency laws in 1999 to add U.S. bankruptcy features, including allowing management to keep control of a company. So far a few companies including KirchMedia GmbH, have taken advantage of the changes.

``It is not so much a difference in the law but rather one in the legal culture that makes the English approach much more flexible,'' Paulus said. ``In Germany, the tradition has rather been that once a company has become insolvent, it is a candidate for a shutdown...''

The biggest plant for Schefenacker, the world's largest maker of automotive mirrors, was already in Portchester, England. Its only tie to Germany was the holding company's offices. ``Less than 10 percent of Schefenacker's core assets were in Germany,'' said Sterling, a London partner at Allen & Overy.

The company also filed a related U.S. case to protect assets in America and restructure high-yield debt.

A European Union directive limits insolvency filings to the ``center of a debtor's main interests.'' That measure was cited in the Hans Brochier case and was used to allow Bank of America Corp. to wind up an Irish unit of Parmalat SpA in Dublin.

In the Schefenacker case, the court accepted that most of its administration had always been done in the U.K., said James Roome, a lawyer at the London office of Bingham McCutchen who represented bondholders in the case.

Roome, who also advised bondholders in a U.K. restructuring that involved two Luxembourg-based holding companies, said global filings aren't likely to end soon.

Sterling said the most important issues in a bankruptcy are how to repay creditors and preserve jobs, wherever in the world that might take a company.

``What's wrong with structuring a deal this way if all the stakeholders consent and at the end of the day we save 8,500 jobs?'' Sterling said.