knowledge 7 November 2024 |

Restructuring Update: Third-Party Releases after Purdue Pharma – Solutions in Irish Law

In Harrington v Purdue Pharma,¹ the United States Supreme Court held that so-called “non-consensual third-party releases” were not permitted in restructuring plans proposed under Chapter 11 of the US Bankruptcy Code. A “third-party release” arises where creditors are asked to vote on a restructuring plan or scheme which not only proposes to release the debtor company (i.e. the company that has petitioned for bankruptcy or is proposing the scheme) from all liability but to also release other third parties from any associated liability. 

The non-consensual nature of third-party  releases has come to wider attention in the United States in recent years in connection with mass tort bankruptcies, as claims against, for example, the shareholders and officers of bankrupt companies have been excused from liability in exchange for making a financial contribution to the bankrupt estate, despite dissenting claimants objecting to the confirmation of the restructuring plan. However, releases of claims against a range of third parties, including guarantors, lessors and other stakeholders have become regular, and heretofore uncontroversial elements of a majority of Chapter 11 plans, providing certainty and finality to non-debtor parties in exchange for their support of and participation in the restructuring process. Nevertheless, when faced with the stark reality facing thousands of victims of the opioid crisis, the US Supreme Court in Purdue Pharma decided that such releases had reached the end of the road as a matter of US law.

Though now precluded in Chapter 11 cases, overseas restructurings which involve third-party releases can, for now, still obtain recognition and enforcement in the US under Chapter 15 of the US Bankruptcy Code. Chapter 15, which implements in US law the UNCITRAL Model Law on Cross-Border Insolvency, facilitates recognition of foreign restructuring proceedings which are not manifestly contrary to US public policy.

While restructuring  practitioners grapple with the impact of the Purdue Pharma decision on Chapter 11 cases, Irish restructuring processes may provide helpful solutions. Third-party releases are well established in Irish restructuring law, having been approved in a number of recent cases. In divergence from the English position, the Irish courts have adopted the pro-release approach found in other common law jurisdictions, including Australia and Singapore, permitting releases where there is a “sufficient nexus” between the claims being released and the creditor/debtor relationship. Crucially, each of the main Irish restructuring processes – schemes of arrangement and examinerships – are amenable to recognition in the US under Chapter 15, and across Europe. In this update, we explore some of the recent Irish case law regarding third-party releases, and suggest considerations which may be attractive to US and international debtors, creditors and restructuring practitioners when reviewing their options in the post-Purdue landscape. 

Schemes of Arrangement

A scheme of arrangement under Part 9 of the Companies Act 2014 (the “2014 Act”) is a court-supervised restructuring process, broadly similar to the English scheme of arrangement under Part 26 of the Companies Act 2006, enabling debtors to reach a compromise or arrangement with their creditors. There is no requirement for a debtor to show that it is insolvent to be eligible to propose a scheme and a moratorium on claims against the debtor is not automatically imposed (though a limited litigation stay can be ordered). The scheme must be approved by a special majority of those creditors who attend and vote at the meetings. A special majority is a majority in number representing  75% in value of those creditors present and voting. If more than one class of creditors is vote on the scheme, this special majority must be reached for each class. The scheme must then be sanctioned by  the High Court, following which it becomes binding on all creditors.

The Irish courts have repeatedly confirmed that third-party releases are permissible in schemes of arrangement. In Re Ballantyne,² the court considered an objection to the confirmation of the  proposed scheme on the ground that it would release claims against both the debtor itself and the guarantor of its most significant liabilities. Barniville J. (as he then was), in overruling the objection, endorsed the approach taken by the Federal Court of Australia to third-party releases in Re Opes Prime,³ to the effect that such releases are permissible where there is a “sufficient nexus” between the release and the relationship between the releasing creditor and the scheme company. He observed that the requirement for judicial sanction of the scheme represented a satisfactory protection of any creditors’ constitutional rights which may be engaged by the releases.  

This position was confirmed in Re Nordic Aviation Capital,⁴ which concerned a scheme proposed by a large aircraft lessor. This scheme provided for releases of creditors’ claims against not only the scheme company, which had guaranteed the relevant facilities and lease agreements, but also against all NAC group subsidiary companies who were primary debtors to the relevant facilities and lease agreements. Notwithstanding the absence of a direct “ricochet claim” by the primary debtors against the scheme company , Barniville J. held that there was no difference in substance from the releases sought in Re Ballantyne, and sanctioned the scheme on a similar basis. He was satisfied that there was a “sufficient connection” to the releases sought as the success or failure of the scheme company was dependent on the success or failure of the primary debtors given that they were subsidiaries of the scheme company.  

More recently, in Re EFE 21 Renewable Energy,⁵ Quinn J. approved a scheme providing for releases of claims against the directors, officers, shareholders and advisors of the scheme companies. The Court took comfort from a carveout from the release for claims in respect of “fraud, gross negligence or wilful misconduct by any released party”, notwithstanding that any such claims, though not released, were to be stayed for a period of three years after the effective date of the scheme.

This recent experience confirms that the Irish courts will take a commercial, pro-release approach, which should provide significant comfort to debtors and their advisors. Notably, in Re Ballantyne, Barniville J. expressly rejected the requirement that the releases be “necessary in order to give effect to the arrangement”, the so-called “Lehman necessity”⁶ test imposed by the English courts when considering third-party releases in schemes of arrangement.  His preference for the “sufficient nexus” test set forth by the Australian courts in Re Opes Prime cements the Irish scheme of arrangement as a firmly pro-release restructuring process; coupled with its amenability to EU-wide recognition under the Recast Judgments Regulation, represents a significant mark in favour of the Irish process.  

Examinership

Examinership under Part 10 of the 2014 Act closely resembles (and indeed is modelled upon) US Chapter 11 processes, featuring an automatic moratorium on claims, cross class cram down and close judicial supervision. Available to companies which are insolvent (or likely to become so) but which have a reasonable prospect of survival as a going concern, the process involves the appointment of an insolvency practitioner (the examiner) who must, over a period of 100 days, seek new investment for the debtor to fund a compromise with creditors.

In Re Norwegian Air Shuttle,⁷ the Norwegian Airlines examinership, Quinn J. confirmed the examiner’s scheme, which provided for releases in respect of liabilities of group companies to one another (primarily under intergroup leases and sub-leases, and related security arrangements) in circumstances where each company concerned was also in examinership. The Court noted that while third-party releases were unusual in the context of examinership, the legislative intent behind Part 10 indicated that releases of liabilities among companies which were each in examinership was unobjectionable. Quinn J. expressly applied the “sufficient nexus” test from Re Opes Prime, which Barniville J. had adopted in respect of schemes of arrangement in Re Ballantyne.

The Irish courts have not yet been asked to confirm a scheme in an examinership providing for releases of claims against third-parties who are not themselves in examinership, such as those provided to officers and shareholders in Re EFW 21. However, given the flexible and commercial approach taken by the Irish Courts to cross-border restructurings, it is possible that such releases may be facilitated by the Irish Courts in the future. While Part 10 limits the ability of an examinership to release the liability of guarantors who are not themselves in examinership, different considerations relate to the various classes of third parties in respect of whom releases could be sought.  The reliance placed in Re Norwegian Air Shuttle on the “pro-release” case-law endorsed by Barniville J. in Re Ballantyne is a useful indicator in this regard.

Recognition & Conclusions

Chapter 15 recognition has been extended to Irish schemes of arrangement (e.g. Re Ballantyne, Re Nordic Aviation Capital DAC, Asia Pulp and Paper) and examinerships (e.g. Re Norwegian Air Shuttle), giving effect to these processes in the US. Similarly, examinership is an “Insolvency Proceeding” for the purposes of the EU Insolvency Regulation, providing automatic recognition across all EU member states, while schemes of arrangement can be recognised in the EU pursuant to the Recast Judgments Regulation. Particularly post-Brexit, their pro-release approach and ready international recognition confirm Irish restructuring processes as a welcome part of the cross-border practitioner’s toolkit.

As practitioners and observers will be aware, the position in respect of third-party releases in Chapter 15 cases is not yet settled. The US Trustee, a government official appointed to supervise the administration of the bankruptcy system, has filed a motion in the Chapter 15 case of Yuzhou, a Chinese developer, arguing that following the decision in Purdue, third-party releases should similarly be prohibited in Chapter 15. Were this motion to succeed, a  review of the global approach to cross-border restructuring  may  be required.

However, regardless, the significant recent experience of the Irish Courts in dealing with complex, cross-border restructurings, together with the significant cost and time savings available when compared to other restructuring regimes  should place Ireland firmly on the radar for global insolvency practitioners considering next steps in the “post-Purdue” world.  The McCann FitzGerald LLP Restructuring & Insolvency group has wide expertise in cross-border restructuring mandates, having acted in almost all the major Irish cases in the area. Please contact the group to discuss these matters further.

Also contributed to by Joshua Kieran-Glennon