U.S. a Preferred Destination for Corporate Bankruptcy Tourists
U.S. a Preferred Destination for Corporate Bankruptcy Tourists
You may be familiar with the term “medical tourism” – the practice of traveling from a country with expensive health care to a different country for a medical procedure. Now, in similar fashion, multinational corporations that become financially distressed are coming to the United States to file for bankruptcy.
A 2014 article published by The New York Times suggests that the current volume of foreign debtors filing in the United States – termed “bankruptcy tourism” – is likely to escalate. The culprit: increases in bond debt issued by foreign corporations, particularly in Europe. The article was based on a study by Oscar Couwenberg, an economist at the University of Groningen in the Netherlands, and Stephen Lubben, New York Times columnist and bankruptcy expert. It showed that U.S. Bankruptcy Courts, particularly those in New York and Delaware, are already a destination for multinational corporate bankruptcy filings.
“For global companies, there are few, if any, better alternatives for staging a restructuring than in the United States,” says Anne Eberhardt, a Senior Director in the firm’s Valuation and Litigation Consulting practice. “The well-established legal framework for bankruptcy in this country can provide a stable outcome that will be binding on any financial institution that conducts dollar-denominated business, which, practically speaking, means most financial institutions.”
The tourists’ perspectives
A foreign corporation, particularly one that is large enough to have assets or business interests in multiple countries, faces some grave risks if it becomes financially distressed. Different national insolvency procedures could claim jurisdiction over assets and debts of the corporation. Instead, foreign corporations see the value of debtor-friendly U.S. bankruptcy law, which allows corporations to administer their global assets without being subjected to filing a bankruptcy petition in each jurisdiction where they have assets or do business.
Additional benefits for corporate bankruptcy tourists filing in the United States include:
- One bankruptcy estate to protect the debtor company’s property.
- All creditors become bound to one bankruptcy plan.
- The power of the American bankruptcy court enforces the bankruptcy process regardless of the location of the debtor’s assets or operations.
- The United States does not require insolvency as a prerequisite to filing, which allows the firm to reorganize its debt before the directors might face statutory liabilities in the home jurisdiction.
- U.S. bankruptcy proceedings provide the opportunity to reach a restructuring plan in a comparatively short period of time.
But how could a foreign corporation be legally able to file for bankruptcy in the United States? U.S. bankruptcy code allows a corporation to file if it has property in the United States – with “property” to be simply interpreted as a bank account. This makes it relatively easy for a foreign corporation to qualify.
“Because New York is a primary financial center, any corporation that has issued debt securities will have done so either with a U.S.-based bank or with one that conducts a significant portion of its business in dollars. Accordingly, those financial institutions will be bound by U.S. law during and following any U.S. bankruptcy proceeding,” says Eberhardt.
The court’s perspective
U.S. Bankruptcy Court balances many factors when determining a foreign corporation’s right to bankruptcy protection. It has to weigh the legitimacy of the foreign debtor to reorganize and it must also weigh the legitimate interests of the secured creditors and determine if the United States is the best forum to do so.
“It is possible that the court will be forced to weigh the political risks of asserting jurisdiction when doing so might contribute to a sense of heavy-handed interference, particularly in certain parts of the world,” adds Eberhardt.
The court often walks a thin tightrope of politics and diplomacy in these matters.
“As a practical matter, with the recent growth of global high-yield debt, if there is a significant uptick in debt restructurings, it is unlikely that other jurisdictions will have developed the capacity to provide workout arrangements that are capable of reaching resolution as efficiently and economically as those that can be reached in the United States,” says Eberhardt.