'Chapter 11 bankruptcy', the US insolvency regime, often features in the UK headlines. When Lehman Brothers filed under Chapter 11 in 2008, it marked the start of the global financial crisis. Chapter 11 (which refers to part of the US Bankruptcy Code) is a restructuring tool designed to rescue companies. Its closest UK counterpart is Administration, under Schedule B1 to the Insolvency Act 1986.
Like Administration, Chapter 11 is designed to be a flexible restructuring tool, with one of its main benefits being the extensive protections it provides to businesses who are seeking to restructure. Chapter 11 proceedings have extra territorial reach outside of the USA, which means that Chapter 11 filings in the US can affect UK creditors. So, what should landlords in the UK be aware of?
What type of companies can file for bankruptcy in the US?
There is no strict requirement for the company to be registered in the US to file under Chapter 11. Indeed, many companies choosing to file for bankruptcy in the US will be registered abroad. If the company has a connection such as a place of business or property in the US, then it will qualify as a 'debtor' under Chapter 11 and be able to the file.
Groups of companies are often structured so that they have entities and assets in multiple jurisdictions around the world. If any part of a group of companies has a connection with the US it can file for Chapter 11, taking advantage of the protections it offers without putting the entire group through the process. What we have found is that those subsidiaries and affiliates can account for UK commercial tenants.
What happens once the company has filed?
The automatic stay: Arguably, the most powerful tool under Chapter 11 is what's known as the 'automatic stay' on legal proceedings. Debtors are protected from legal action being brought or continued against them until a restructuring plan is agreed. In some cases, it can take up to 20 months from the date of filing for a plan to be agreed by the debtor and its creditors.
Does the stay extend to proceedings in the UK?
There is a mechanism by which Chapter 11 proceedings can be recognised in the UK. If that is achieved, it allows debtors to benefit from a cross-border moratorium on legal proceedings. However, the protection granted in the UK is not as extensive as it would be in the US, for example, landlords would still be able to enforce securities over the debtor’s assets in the UK.
What does this mean for landlords?
As creditors, recognition of Chapter 11 proceedings in the UK could act as a further obstacle to landlords seeking to recover arrears from their tenants. However, while there are numerous examples of Chapter 11 proceedings being recognised in the UK, the courts will lift the 'automatic stay' in certain circumstances. Examples include where legal proceedings are imminent or where the debtor has delayed its application to recognise the US proceedings. Nevertheless, landlords should stay tuned to any whispers of their tenants seeking to file across the pond.