Insolvency Notes

Edited by Evan Hollander, White & Case LLP

DISTRICT COURT SUBSTANTIVE CONSOLIDATION ORDER DISTURBS COMMERCIAL LENDERS

On October 5, 2004, over the strong opposition of a consortium of banks, Senior District Judge Fullam of the United States District Court, Eastern District of Pennsylvania, sitting by designation in the Delaware District Court¹, approved the debtors’ motion for substantive consolidation of Owens Corning with its debtor and non-debtor subsidiaries.² Substantive consolidation is an equitable remedy that enables a court to merge the assets and liabilities of various entities for purposes of making a single consolidated distribution to creditors. If upheld on appeal, the ruling could result in a substantial dilution of the recoveries of the debtors’ commercial bank lenders, by eviscerating the structural seniority of the banks’ unsecured guaranty claims against various Owens Corning subsidiaries.

On October 5, 2000, as a result of increasing liabilities on asbestos-related claims, Owens Corning and seventeen of its wholly-owned subsidiaries (collectively, the "Debtors") filed for protection under Chapter 11 of the United States Bankruptcy Code. Creditors of the Debtors include a bank group led by Credit Suisse First Boston (the "Banks"), as well as numerous asbestos claimants, bondholders and other general unsecured creditors.

As of the filing date, the Banks were owed approximately $1.6 billion as a result of loans made to Owens Corning and five of its subsidiaries (Owens Corning, together with the subsidiary borrowers, the "Co-Borrowers"). The Banks’ loans were secured by liens on substantially all of the Co-Borrowers’ assets. In addition, each subsidiary of Owens Corning having a book value of $30 million or more executed an unsecured "net worth" guaranty ( i.e., a guaranty limited to the amount of the guarantor’s "net worth") of the Co-Borrowers’ obligations to the Banks.³

As a result of the "net worth" guaranties, the Banks hold direct claims against Owens Corning and each of its significant subsidiaries. Many other creditors, including bondholders, trade creditors and asbestos litigants, hold direct claims only against Owens Corning. Because these other creditors do not hold direct claims against the subsidiaries, absent substantive consolidation, their rights to the subsidiary assets would be structurally subordinated to the rights of holders of direct claims against the subsidiaries, such as the Banks. Absent substantive consolidation, these creditors would not be entitled to any distribution in respect of the subsidiaries’ assets until all of the direct claims against the subsidiaries had been paid in full, including the Banks’ "net worth" guaranty claims. Because the Banks’ direct claims against the subsidiaries were not secured, however, substantive consolidation could result in the merger of all of the assets of the Co-Borrowers and the subsidiaries into a single pool for ratable distribution in respect of all unsecured claims, including the Banks’ deficiency claims in excess of the encumbered assets of the Co-Borrowers.⁴

In analyzing the substantive consolidation issue, the court applied the standards adopted by the D.C. Circuit in Drabkin v. Midland- Ross Corp. (In re Autotrain Corp., Inc.), 810 F.2d 270 (D.C. Cir. 1987), and by the Eleventh Circuit in Eastgroup Prop. v. Southern Motel Assoc., Ltd., 935 F.2d 245 (11th Cir. 1991). According to the standards adopted by those courts, a prima facie case for consolidation is established if (i) there is substantial identity between the entities to be consolidated, and (ii) consolidation is necessary to avoid some harm or realize some benefits. Once a prima faciecase for consolidation has been established, the burden then shifts to the objecting creditor to establish (i) that it relied on the separate credit of one of the entities to be consolidated and (ii) that it would be prejudiced by substantive consolidation.⁵

Applying this standard, the court considered whether there was "substantial identity" between Owens Corning and its subsidiaries, and whether substantive consolidation would simplify and expedite the bankruptcy proceeding. Finding, among other things, that (i) the subsidiaries were controlled by a single central committee on a product-line, rather than subsidiary structure, basis, (ii) that the subsidiaries were dependent on Owens Corning for funding and capital and that "[n]o subsidiary exercised control over its own finances", and (iii) that it would be difficult to untangle the financial affairs of the various entities, the court determined not only that a prima facie case in favor of substantive consolidation had been made, but that substantive consolidation was a necessity.

In coming to such determination, the court further found that the Banks had relied on the overall credit of the Debtors and not on the credit of any specific enterprise(s), since (i) the decisions regarding which Owens Corning entity would borrow funds was made by the Owens Corning companies rather than the Banks, (ii) the Banks received only consolidated financial reports regarding the companies and no individual information about the subsidiary guarantors other than information that their book values equaled or exceeded $30 million (and no information regarding the subsidiaries’ liabilities), and (iii) the cross-guaranties provided in connection with the credit agreement permitted any guarantor held liable on its guaranty to seek indemnification from the actual borrowing entities.

This case has received a great deal of attention in light of its potential impact on the rights of lenders. Of equal concern is the potential windfall to certain unsecured creditors, such as the bondholders, who presumably were on notice of the structural seniority of the Banks’ claims. When presented with a motion for substantive consolidation, courts have generally considered the expectations of all creditors, including those who stand to benefit from consolidation, as the doctrine is in essence an equitable measure, not a mere mechanism to simplify administration of complex cases. In this regard, courts have held that "[b]ecause of the dangers in forcing creditors of one debtor to share on a parity with creditors of a less solvent debtor . . . substantive consolidation ‘is no mere instrument of procedural convenience…but a measure vitally affecting substantive rights’" (citations omitted). In re Augie/Restivo Baking Co., Ltd., 860 F.2d at 518. The decision is also unusual in its apparent sweeping consolidation of both debtors and non-debtors alike, without any specific finding as to the appropriateness of such relief.⁶ 

In light of the foregoing, the decision is somewhat troubling. It should be noted, however, that the Court left open the possibility for an equitable adjustment of the Banks’ claims to compensate them for the harm resulting from substantive consolidation, stating that it saw no reason why such issue could not be addressed as part of the plan process, where it may be determined that the Banks’ claims to the subsidiary assets should be treated as partially secured by the subsidiaries’ assets (which could, in effect, obviate the Banks’ concerns regarding substantive consolidation). 

Due to the prevalence of this type of loan structure in the marketplace, however, the court’s ruling is significant. The Banks have already filed a notice of appeal from the order to the United States Court of Appeals Third Circuit. The appeal has been docketed in the Third Circuit as case no. 04-4080.⁷ Until the question is resolved, lenders may be reluctant to rely on structural seniority whether vis-à-vis holding company debt or asbestos or other tort liability thought isolated at a given subsidiary. In the interim, those lenders willing to continue to loan into such situations should consider redoubling their efforts to obtain security for subsidiary guaranties and to insist upon certain protective measures, such as (i) demanding consolidating financial statements and restricting borrowings on an entity by entity basis, (ii) demanding covenants requiring that the borrowers and their guarantors conduct business on an entity by entity (as opposed to a product-line) basis, (iii) requiring the officers and directors of each subsidiary to prepare separate business plans and budgets, and (iv) taking any other measures that could evidence the lender’s reliance on the separate credit of each entity in making its determination to extend financing to the borrower. 

Even if the decision is overturned on appeal, however, the Banks’ structural seniority will remain in jeopardy pending resolution of the fraudulent transfer claims relating to the issuance of the "net worth" guaranties. As these types of limited guaranties were created for the express purpose of insulating lenders from fraudulent transfer claims, it is a certainty that the financial community will be watching the proceedings in this case very closely.⁸

1 Although the October 5, 2004 order carries the caption of the United States Bankruptcy Court for the District of Delaware, the reference with respect to the substantive consolidation motion (and the bank guarantee adversary proceeding discussed below) was withdrawn by the United States District Court for the District of Delaware on December 23, 2002. As such, the order approving the debtors’ motion for substantive consolidation was issued by the Delaware District Court as a court of original jurisdiction.

2 In their pleadings, the debtors requested that certain non-debtor subsidiaries also be included in the request for consolidation.

3 Lenders commonly believe that by limiting a subsidiary guaranty to the amount of its net worth, the guaranty will be insulated from avoidance as a fraudulent transfer. In October 2002, the Debtors and other creditor groups sued the Banks to avoid the subsidiary guaranties as fraudulent transfers. The action has been stayed, however, pending the final resolution of the substantive consolidation issue.

4 The adverse effect of substantive consolidation would arguably have been eliminated if the guarantee claims had been secured by unavoidable liens as the Banks would have retained security interests in the consolidated assets of the subsidiary guarantors.

5 Other Circuits have adopted a slightly different formulation: "(i) whether creditors dealt with the entities as a single economic unit and ‘did not rely on their separate identity in extending credit,’. . . or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors . . ." (citations omitted). Union Savings Bankv. Augie/Restivo Baking Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860 F.2d 515, 518 (2d Cir. 1988); see also In re Bonham, 229 F.3d 750, 766 (9th Cir. 2000).

6 Courts generally apply a stricter standard ( e.g., a finding that the debtors and non-debtors are mere instrumentalities or alter egos of one another) in determining that substantive consolidation of debtors and non-debtors is appropriate. See In re Alico Mining, Inc., 278 B.R. 586, 588 (Bankr. M.D.Fla. 2002)(requiring finding that debtor and non-debtor entities are alter egos); Bracagliav. Manzo (In re United Stairs Corp.), 176 B.R. 359 (Bankr. D.N.J. 1995) (approving substantive consolidation upon finding that non-debtor entities were alter egos or instrumentalities of debtor entity); In re Baker & Getty Fin. Servs., Inc., 78 B.R. 139 (Bankr. N.D. Ohio 1987) (approving substantive consolidation upon finding that debtor and non-debtor parties were alter egos).

7 The Banks also filed a "precautionary" notice of appeal of the order to the United States District Court for the District of Delaware, which the Debtors have now moved to dismiss on the basis that the appeal is already properly docketed at the Third Circuit.

8 At least one bankruptcy court in the Third Circuit has concluded that the existence of limited "net worth" guaranties is not a sufficient basis to dismiss a fraudulent transfer complaint on a motion to dismiss. See Official Comm. of Unsec. Cred.v. Credit Suisse First Boston (In re Exide Tech., Inc.),299 B.R. 732, 748 (Bankr. D. Del. 2003).

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On October 15, 2004, the District Court for the Southern District of New York reversed and remanded a decision by the bankruptcy court granting summary judgment and awarding contract damages to an Enron unit, Enron Power Marketing, Inc. ("EPMI"), in connection with an alleged anticipatory breach by EPMI’s counterparty under a number of executory power trading contracts. The district court instructed the bankruptcy court to conduct further proceedings to determine whether EPMI had reasonable grounds to demand assurances and whether the assurances provided by the counterparty had been adequate, and admonished the bankruptcy court that, if the counterparty was found to have committed an anticipatory breach, the bankruptcy court must then determine that EPMI was ready and willing to perform its obligations under agreements before awarding damages as a result of the counterparty’s anticipatory breach.

On June 5, 2002, EPMI, a Chapter 11 debtor and debtor in possession, commenced adversary proceedings against Nevada Power Company and its parent company Sierra Pacific Power Company (together, "Nevada Power"). EPMI had entered into a series of power purchase and sale transactions with Nevada Power that were governed by the Western Systems Power Pool Agreement (the "WSPPA").

EPMI entered into the executory contracts with Nevada Power prior to petitioning under Chapter 11, and continued to perform its contractual obligations post-petition. Pursuant to the terms of the WSPPA, EPMI was entitled to request assurances if it had a reasonable basis to feel insecure about Nevada Power’s ability to continue to perform under the contract.1 When Standard and Poor’s downgraded Nevada Power’s securities to junk, EPMI demanded assurances of future performance by Nevada Power. EPMI alleged that Nevada Power failed to provide adequate assurances, and declared that an "Event of Default" had occurred, within the meaning of the WSPPA. EPMI commenced the June 5, 2002 an adversary proceeding to recover "Termination Payments" it claimed Nevada Power owed under the WSPPA as a consequence of Nevada Power’s alleged default.

Judge Arthur J. Gonzalez of the Bankruptcy Court for the Southern District of New York considered EPMI’s claim against Nevada Power for the Termination Payments. In an order entered August 28, 2003, Judge Gonzalez granted EPMI summary judgment. Enron Power Marketing, Inc. v. Nevada Power Co. (In re Enron Corp.), No. 02-02520, slip op. (Bankr. S.D.N.Y. Aug. 28, 2003).

In its opposition to EPMI’s motion for summary judgment, Nevada Power alleged that "EPMI’s claim for summary judgment is wholly dependent upon a showing that, at the time of making its demand for assurances, it was lawfully and contractually able to perform its own duties." Nevada Power Amended Opposition to Motion for Partial Summary Judgment, at 38 (filed July 25, 2003). Nevada Power further alleged that "EPMI was neither legally nor financially ‘eligible’ to be a power marketer and a party to the Transactions" and therefore that the claims for breach damages under the power agreements were groundless. Id. at 4. The court rejected these contentions in its August 28, 2003 order, ruling that:

[B]ecause the Termination Payments were due and owing once the Defendants breached their respective obligations to provide assurance, EPMI was not required to establish an ability to perform in the future under the contracts. Rather, EPMI then had a right to payment and had no future performance obligations to deliver power. Thus, EPMI is entitled to enforce the contracts and to collect the Termination Payments.

Nevada Power,No. 02-02520, slip op. at 11.

Nevada Power appealed the summary judgment order to the District Court for the Southern District of New York. Judge Barbara Jones, for the Southern District, vacated the bankruptcy court order and remanded the case for further consideration. Enron Power Marketing, Inc. v. Nevada Power Co. (In re Enron Corp.), No. 03 Civ. 9318, 03 Civ. 9332, 2004 WL 2290486 (S.D.N.Y. Oct. 12, 2004). The district court held that there were unresolved issues of material fact regarding Nevada Power’s alleged breach of its contract with EPMI. First, the district court found that there was a genuine issue as to whether EPMI had a reasonable basis to demand assurances from Nevada Power as a result of Nevada Power’s rating downgrade.

Second, the district court held that the bankruptcy court erred in not considering whether the assurances proposed by Nevada Power were "reasonably satisfactory." Id.at *4 – *5.

The district court also found that even if EPMI had made a reasonable demand for assurances, and even if the assurances offered by Nevada Power were not "reasonably satisfactory", thereby establishing that Nevada Power had in fact breached the WSPPA, the bankruptcy court had erred by awarding damages to EPMI without first establishing that EPMI was willing and able to perform at the time of the alleged breach by Nevada Power. Id.at 6. The district court concluded that: "[w]hile it is true that a party need not continue to perform after another party has breached, in order to collect damages the first party must demonstrate that it was able and willing to perform under the contract…at the time of the breach." Id.

In the district court’s analysis, if the bankruptcy court had considered and concluded that (i) Nevada Power’s downgrade was a reasonable basis for EPMI to feel insecure, and (ii) the assurances provided by Nevada Power were not reasonably satisfactory, then EPMI would have had the right to terminate the contract, but could not seek damages unless it first established its willingness and ability to continue to perform under the contract at the time of the breach. What is not clear from the district court opinion is whether its restrictions on a debtor’s ability to collect breach of damages is limited only to an anticipatory breach of an executory contract, or whether the holding would be equally applicable to all contract breaches. If such a restriction applies to all claims by a debtor for breach of contract, and not just to anticipatory repudiation breaches, this would provide for a significant fall back defense to a debtor’s counterparty facing a breach of contract claims by the debtor. Further, the opinion does not address the issue of whether the non-debtor counterparty may demand adequate assurance and suspend performance without first seeking relief from the automatic stay. If such demand and suspension is not barred by the automatic stay, it could provide an alternative to a motion to compel a debtor to assume or reject.

It is generally held that a company need not be insolvent in order to commence a Chapter 11 proceeding. Two recent decisions, NMSBPCSLDHB, L.P.v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 2004 WL 2086058 (3rd Cir. Sept. 20, 2004), and In re Liberate Technologies, 2004 WL 2008956 (Bankr. N.D. Cal. Sept. 8, 2004), however, have put some limitations on the circumstances where a solvent company may utilize Chapter 11. Both courts based their decisions on the same rationale—the failure of the debtors to satisfy an implied requirement of good faith in connection with the commencement of a Chapter 11 case.1

In Integrated Telecom Express, the Third Circuit ruled that a commercial tenant did not file its Chapter 11 proceeding in good faith where the company was "financially healthy", had "no intention of reorganizing or liquidating as a going concern", there was "no reasonable expectation that Chapter 11 proceedings [would] maximize the value of the debtor’s estate for creditors" and the filing was made "solely to take advantage of a provision in the Bankruptcy Code that limits claims on long-term leases." 2004 WL 2086058, *¹.

The Third Circuit first noted that the filing was not necessary to preserve or maximize the value of Integrated’s assets which would otherwise be threatened ( Id.at *9 – *12), because (a) there was no going concern value to preserve as the company’s board of directors had, pre-petition, determined to dissolve the company and (b) although Integrated was losing money (net losses of $36.2 million in 2001), it was sufficiently solvent that it was not in "financial distress" as its assets ($105.4 million in cash plus $1.5 million in other assets according to its bankruptcy schedules) were more than sufficient to cover its debts even at their full alleged values. Thus, the court concluded that the filing did not serve a valid business purpose.

The Third Circuit next rejected Integrated’s assertion that a "good faith" basis for its filing was established merely by the fact that it had filed to obtain the benefits of a valid bankruptcy provision. In so doing, the court noted that while such action may have established an absence of bad faith, it did not establish a good faith basis for the filing. Id. at *16 – *17. Rather, the Court determined that the use of a particular code provision "assume[s] the existence of a valid bankruptcy, which, in turn, assumes a debtor in financial distress." Id. at *17. According to the Third Circuit, in order to establish good faith, a filing must be made in order to create or preserve value that would otherwise be lost—not merely to redistribute the value of a solvent debtor from one stakeholder (the landlord) to another (equity). Id.

Similarly (and only a few weeks prior to the decision in Integrated Telecom Express), the Northern District of California Bankruptcy Court ruled, in In re Liberate Technologies, that a company with several pending lawsuits, declining revenues and substantial operating losses, did not file its Chapter 11 petition in good faith because it had cash on hand well in excess of all of its conceivable liabilities and because it concluded that Liberate could satisfy all of its liabilities without threatening its status as a going concern. The court also rejected Liberate’s argument that the bankruptcy filing was necessary in order for it to sell its assets as it found that there was evidence that at least one purchaser has offered to buy the assets outside of bankruptcy and the fact that Liberate might be able to get better terms pursuant to a Section 363 sale is not persuasive where the debtor could "clearly pay all creditors in full". Id.at *8 – *9.

1 There is no explicit requirement in the Bankruptcy Code that a prospective debtor commence a Chapter 11 proceeding in "good faith". However, several courts have concluded that such a requirement can be implied from Section 1112(b) of the Bankruptcy Code, which contains a non-exclusive list of grounds upon which a bankruptcy court may either convert or dismiss a Chapter 11 proceeding.

In In re New Power Company, 313 B.R. 496 (Bankr. N.D. Ga. 2004), the United States Bankruptcy Court for the Northern District of Georgia recently issued a decision, siding with the minority view, which determined that unsecured creditors could assert unsecured claims for post-petition legal fees and costs which were incurred in connection with a debtor’s bankruptcy case to the extent that the creditor had a contractual or statutory right to such amounts.

Upon the particular facts of this case, the court found that, while the Master Service and Participation Agreement New Power Company, the debtor, and Automated Power Exchange ("APX"), the creditor, did not provide a basis for the payment of any legal fees or costs to APX, applicable California statutory law entitled APX to reimbursement of certain of its costs and it thus awarded APX an unsecured claim for such costs.

The EC Regulation on Insolvency Proceedings (Council Regulation (EC) 1346/2000) came into effect in May of 2002 and applies in all 25 European Union countries¹ other than Denmark. We should start by stating what the regulation is not. The regulation does not provide a federal bankruptcy law for Europe. Each jurisdiction retains its own distinct bankruptcy laws. The regulation is intended to cover conflict of law issues and to ensure that countries will recognise each other’s bankruptcy procedures in the event of cross-border corporate failure or bankruptcy of individuals, principally by identifying which country’s procedure is the main procedure in any given case.

Since most businesses that operate in more than one European country do so through separate subsidiaries in each jurisdiction, it was thought by many commentators that the EC regulation would not be particularly relevant or often used. However, the regulation has been used in innovative ways in order to allow some limited forum shopping for the commencement of bankruptcy proceedings, and the courts of various countries have been willing to interpret the EC regulation in a flexible way that allows practical solutions for the benefit of debtors and creditors. There remain significant questions on the meaning of the regulation, and it is expected that it will lead to much more case law in future. Indeed, the first referral has already been made to the European Court of Justice in relation to Eurofoods, an Irish subsidiary of the Parmalat group where there is a dispute between the Irish and Italian courts over which has jurisdiction.

One of the central concepts to the regulation is the centre of main interests ("COMI"). There is no actual definition of COMI within the regulation, though Article 3(i) of the regulation says that the registered office should be presumed to be the centre of main interests in the absence of proof to the contrary. Paragraph 13 of the preamble to the regulation provides more guidance and states that the COMI "should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties." The COMI is important because, as discussed below, it determines where the main proceedings can be commenced in any insolvency. In the 2003 English case of re: Daisytek/ISA Limited², the court found that a group of companies with subsidiaries incorporated in England, Germany and France, all had their centre of main interests in England. In that case, the head office of the company was based in England and many of the key decisions relating to purchasing, recruitment, provision of services to customers, branding and corporate strategy were made in England. The banking activities were also carried out from England. The English court found that the majority of the company’s potential creditors, namely the financiers and trade suppliers would have looked to the main office in England in this regard. The insolvency proceedings were therefore commenced in England for all three companies. The French Appeal Court, when dealing with a challenge to this decision by the directors of the French subsidiary, strongly endorsed the English court’s view.

The issue of the centre of main interests has also given rise to a new power for the English courts. Prior to the regulation, it was generally accepted that only a company incorporated in England and Wales could apply for administration (an insolvency procedure aimed at rehabilitation of companies). The only exceptions to this rule were companies from certain former colonies of Britain where the courts of the country in question have made a request to the English court. The English courts interpreted the EC regulation as giving them power to make an administration order in respect of any company if it had its centre of main interests in England. In this particular case, the company had been incorporated in Delaware.³

 One thing that does appear to be clear from the regulation is that the centre of main interests of a company is not necessarily fixed in one place for all time. It is entirely possible for a company to move its operations in such a way that the centre of main interests also moves. For this reason, it has become common practice in the London market for loan agreements to contain a covenant from the borrower that they will not move their centre of main interests to another jurisdiction. In this way, lenders can have some comfort (assuming that this covenant is honored) that any bankruptcy proceedings will be in the jurisdiction which the parties contemplated when the transaction was structured.

Under the regulation, insolvency proceedings will be "main proceedings", "secondary proceedings" or "territorial proceedings". Main proceedings are those proceedings commenced in the country where the debtor’s centre of main interests is situated. These proceedings can be either some form of rehabilitation proceeding or a liquidation. The secondary proceedings can then be commenced in any other country where the debtor has an "establishment". Establishment is defined as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods". Secondary proceedings, i.e., those commenced after main proceedings have been commenced, must always be winding-up proceedings. That would mean that in England, the administration procedure would not be available as a secondary proceeding. This is viewed by many as unfortunate since it would restrict the ability of a company to enter into rehabilitation proceedings in a number of jurisdictions at the same time. The regulation does allow for non winding-up proceedings in a country other than that where the centre of main interests is situated, and such proceedings are called territorial proceedings. However, those proceedings must be started before the main proceedings are started and can only be begun where either there is a legal impediment in the country of the centre of main interests, or where a creditor in that secondary jurisdiction is the one who begins the procedure. Therefore, if a debtor is planning to seek protection in a number of countries with a view to a rescue, it should first seek a friendly creditor to petition for bankruptcy in its secondary locations, then proceed to file for bankruptcy in its COMI jurisdiction. However, given that it is only the debtor who can file for rescue proceedings (as opposed to liquidation) in some jurisdictions, this may not be possible.

Article 4⁴ of the regulation contains the fundamental principle of the regulation: the bankruptcy laws of the EU state in which proceedings are commenced shall be the law applicable to the bankruptcy in all EU states. Article 4 then lists a number of issues which will be construed in accordance with the laws of the EU state where the main proceeding is commenced, including which assets form part of the estate, the effect of insolvency on contracts, admissions of claims and rules relating to "voidness, voidability or unenforceability of legal acts detrimental to all the creditors". This last expression is intended to cover actions such as preference actions or actions against transactions at an undervalue ( i.e.,fraudulent conveyances). There are, however, a number of exceptions to this rule.

The first, and probably most important, exception is that "rights in rem" of creditors or others over assets situated in another jurisdiction are not affected by the commencement of proceedings. Principally this means that secured creditors can continue to enforce their security in another jurisdiction; that lease creditors can repossess leased assets; and that those entitled to use certain intellectual property rights cannot be disenfranchised. A major problem is that this would appear to mean that a stay or moratorium imposed by the commencement of proceedings, say in England, will not prevent creditors with security or assets in France from taking immediate action. Other exceptions mean that local laws will take priority in relation to set-off, retention of title, contracts dealing with immovable property (real estate) and employment contracts. However, a number of the exceptions are qualified by the regulation so that the courts supervising the main bankruptcy proceedings may still bring challenges to those transactions as preferences or on other similar grounds (the "actions for voidness, voidability or unenforceability" mentioned above).

There is still much for the EU courts to determine when it comes to interpreting the regulation, and there are likely to be many more test cases on specific aspects of it. The general view, however, is that although helpful, the regulation only goes a small part of the way towards dealing fully with cross border bankruptcies within the EU.

The content of these articles is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.