Cenargo: A Global Strategy For Bankruptcy Is Vital

Thursday, January 1, 2004 - 01:00

The U.S. Bankruptcy Court presiding over the Cenargo Chapter 11 cases
recently decided to allow in part and deny in part the requests for fees of
Cenargo's professionals. This decision brought to a close a matter that briefly
threatened the well established cooperative relationship between the U.S.
bankruptcy courts and the English courts and raised significant cross border
insolvency issues. This article looks at some of the lessons to be learned by
anyone involved in the restructuring/turnaround of U.S. corporate entities with
operations or subsidiaries in the European Union ("EU"). The case is also
relevant to any creditor of a company located in the EU that has significant
U.S. based creditors.

The Cenargo group consisted of companies (mostly
incorporated in England) operating ferries between the UK and various European
destinations. It had no operations in the U.S. A number of the Cenargo entities
issued high yield notes to investors. The ferries were the subject of leasing
arrangements with an English lessor ("Lombard"). Lombard is an English company
and an indirect subsidiary of the Royal Bank of Scotland. In late 2002, Cenargo
was under pressure from its creditors. In particular, the holders of the high
yield notes were concerned about possible exposure as unsecured creditors. In
contrast, Lombard was fully secured, although the leasing arrangements were in
default.

In January 2003, following a threat by U.S. creditors of an
involuntary bankruptcy filing, Cenargo filed a voluntary petition for Chapter 11
relief. It appears that Cenargo and its advisers made a deliberate decision at
that time not to apply for similar relief in England (for example, for an
administration order which would have brought a stay into effect in all EU
countries): apparently on the grounds of cost. Lombard was represented by U.S.
counsel at the initial Chapter 11 hearings. However, soon after those U.S.
Chapter 11 hearings, English counsel for Lombard made an application (without
notice to Cenargo, its U.S. lawyers or the U.S. Bankruptcy Court) and obtained
an order from the English court for (a) the appointment of provisional
liquidators (an emergency insolvency procedure), and (b) an injunction to
restrain the directors of Cenargo (all of whom were English) from taking any
further steps in the Chapter 11 proceedings. At the same time, another Cenargo
creditor invoked the jurisdiction of the French Courts and took steps to arrest
one of the ferries in France; which, potentially, could have disrupted ongoing
operations.

The appointment of provisional liquidators in England
brought the EU Insolvency Regulation (the "Regulation") into play. Essentially,
the Regulation (which takes effect in EU countries through domestic legislation)
is designed to prevent courts in EU countries from competing with each other to
establish jurisdiction. The Regulation achieves this outcome principally by
providing that the proceedings in the court that first takes jurisdiction
(usually on the basis that the "centre of main interest" of the company
concerned is in that country) will be the main proceedings, with proceedings in
all other jurisdictions being ancillary to them. In this case, therefore, the
French court recognized the English provisional liquidation as the main
proceedings and released the arrest of the vessel.

Cenargo responded to
the commencement of the English insolvency proceedings by applying to the U.S.
court for an order enforcing the U.S. bankruptcy automatic stay provision
against Lombard and its lawyers. Lombard, of course, was subject to the
jurisdiction of the U.S. court as a member of the Royal Bank of Scotland Group
(which has businesses and assets in the U.S.). After a period of intensive
negotiations, the stand off between the courts was resolved on the basis of a
protocol between the U.S. court and the English court involving the appointment
of an administrator in England (a procedure which would have been available to
Cenargo at the outset in conjunction with its Chapter 11 filing) to act in the
interests of all creditors. This brought about a stay binding on all creditors
(whether in the U.S., England or any other EU country) and the continuing
operation of Cenargo as originally contemplated in the Chapter 11 cases, but
subject to the supervision of the English administrator. This solution, from
hindsight, seems both appropriate and rather obvious. Why then was litigation
necessary in courts which have a long tradition of cooperating in such
matters?

The decision and order entered by the U.S. court was made in
connection with requests for professional compensation in the Chapter 11 cases.
The applications were opposed by the English administrators and the Ad Hoc
Committee of Noteholders, who sought to disallow the professional fees being
sought, on the basis, among others, that filing the Chapter 11 cases was
inappropriate and services provided after the appointment of the administrators
were not authorized by the administrators. It became necessary for the U.S.
court to review the whole history of the Cenargo Chapter 11 cases. In reaching
its decision to allow the fees sought in part and disallow them in part, the
decision provides some instructive insights for anyone faced with a similar
cross-border insolvency case in the future.

One of the significant issues
discussed by the U.S. court in determining whether to allow fees was whether
Cenargo should have applied for relief in England or been prepared to do so in
short order (by petitioning for the appointment of an administrator) at the same
time as the Chapter 11 filing. This was of particular relevance given the arrest
of the vessel in France as the U.S. court acknowledged that in the absence of an
order from the English court it would not have been possible to obtain release
promptly (if at all) with consequent serious harm to Cenargo and its ability to
continue trading. Although the U.S. court accepted that it may have been
appropriate not to make an application in England at the outset on the grounds
of cost, it appears to have acknowledged that, based on the facts presented, the
English proceedings were necessary for an orderly outcome.

Another
significant issue that the U.S. court focused upon regarding the conduct of
counsel seeking an award of fees was the application for the anti-suit
injunction made by Lombard in England without notice and after Lombard had
entered an appearance in the Chapter 11 cases. The court commented that this
course of action had sent a "mixed message" to Cenargo, its advisers and other
creditors and was sharply critical of the disregard shown for the pending
Chapter 11 cases. The U.S. judge commented that the foreseeable result of such
unilateral action (even if not desired by Lombard) was a period of "confusion
and disruption."

The anti-suit injunction was also used by the English
administrators in support of their argument that the fees of the U.S. advisers
should be disallowed. The argument made was that those advisers could not have
been acting on behalf of Cenargo, since the directors were not in a position to
give instructions either because of that injunction or because their powers of
corporate governance terminated upon the appointment of liquidators in England.
The U.S. court disposed of this robustly by commenting that Cenargo's advisers
had been under an obligation, under U.S. law, to take action in the U.S. to
protect the jurisdiction of the U.S. court irrespective of any decision of the
English court.

With the benefit of hindsight what are the lessons to be
drawn? One of the crucial issues in the litigation concerned the extra
territorial effect of the automatic stay imposed upon the filing of a U.S.
bankruptcy case and the extent (if any) to which the English courts should
recognize that stay. Ultimately, the issue was resolved on the basis of the long
and co-operative relationship between the courts in the U.S. and England
(although not without costs and delay). As a general proposition, it would seem
dangerous to rely on creditors outside the U.S. recognizing the extra
territorial effect of the automatic stay, even where those creditors have
business interests in the U.S., which make them susceptible to the jurisdiction
of the U.S. bankruptcy court.

The issue is made potentially more complex
by the operation of the Regulation, where a company operates in more than one EU
country. By way of illustration, in Cenargo, if the arresting creditor in France
had been able to persuade a French court to take insolvency jurisdiction before
the appointment of provisional liquidators in England, any English insolvency
procedures would have been purely ancillary to the French insolvency. Leaving
aside any issues of whether the French insolvency regime is as helpful to
creditors as the U.S. or English regime, the involvement of the courts of a
third country could only have served to make an already difficult matter more
complex. It is worth noting at this point that although the Regulation has only
recently become effective there are already signs that the courts of individual
EU countries may be taking differing approaches to the principles set out in
it.

A further lesson relates to the use of the injunction in England by
which the English creditors tried to restrain the English directors from taking
steps in the U.S. cases. Plainly this placed those directors in a difficult
position. It is interesting that the U.S. court resolved this difficulty by
establishing an obligation on those advising the company to continue with the
U.S. cases to protect the jurisdiction of the U.S. court. Although this aspect
of the case was not considered by the English court, it would appear to
circumvent the effect of the anti-suit injunction in England

In summary,
as business becomes more global, cases like Cenargo serve as a valuable
illustration of how it is necessary to approach insolvency and bankruptcy
matters on a global basis and to take into account the interests of all parties
in seeking to reach commercial solutions to complex
problems.

Paul M. Flood, is a Counsel in the London office and
Ira L. Herman, is a Partner in the New York office of Bryan
Cave LLP.