Vitro S.A.B. de C.V., a leading manufacturer of glass in Mexico, recently received approval of its restructuring plan under Mexican Insolvency Law (Ley de Concursos Mercantiles), in large part because a federal bankruptcy court in the U.S. halted the efforts of certain bondholders to prosecute a New York lawsuit against Vitro that contravened chapter 15 of the Bankruptcy Code.
In July 2011, Vitro sought protection of its U.S. assets by petitioning the federal bankruptcy court to commence an ancillary proceeding in the U.S., pursuant to chapter 15 of the Code. Vitro had previously filed a prepackaged bankruptcy in Mexico under the Ley de Concursos Mercantiles in December 2010. In doing so, Vitro sought to restructure approximately $3.4 billion in debt.
Chapter 15 generally grants foreign companies, which are involved in an insolvency proceeding in their own country, protection from U.S. creditors. Pursuant to section 1504 of the Code, a chapter 15 proceeding is commenced when a foreign company petitions a U.S. bankruptcy court for recognition of the company’s foreign insolvency proceeding. A petition for recognition must include:
- a certified copy of the decision commencing a foreign proceeding and appointing a foreign representative;
- a certificate from the foreign court affirming the existence of such foreign proceeding and the appointment of a foreign representative; or
- in the absence of the above items, any other evidence acceptable to the U.S. bankruptcy court of the existence of such foreign proceeding and the appointment of a foreign representative.
The petition for recognition must also be accompanied by a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative.
The effect of being recognized as a foreign proceeding under chapter 15 can be significant. Section 1520 of the Code provides, among other things, that after recognition the automatic stay under section 362 of the Code enjoins the commencement or continuation of any action in the U.S. against the foreign debtor or any property of such debtor. Other protections normally afforded to bankrupt entities in the U.S. are also extended to the foreign debtor, and section 1521 of the Code even grants the bankruptcy court additional powers to protect the foreign debtor’s assets.
In Vitro’s case, the U.S. bankruptcy court’s recognition of the Mexican insolvency proceeding stayed a lawsuit against Vitro by a group of dissenting bondholders in the U.S., thereby allowing Vitro to confirm its concurso plan in accordance with Mexican insolvency law. Vitro’s plan swaps $1.5 billion in defaulted debt for $814.6 million of new bonds maturing in 2019 and $95.8 million of debt convertible to shares.
While 74.2% of the restructured debt voted in favor of the plan, the U.S. bondholders who dissented from approval pointed out a significant difference between Mexican and American insolvency laws; namely that Vitro’s subsidiaries, which held the majority of the debt, were able to vote the intercompany debts owed by the parent (Vitro) in favor of the concurso plan.
Nonetheless, the Monterrey-based manufacturer heralded the approval of the concurso plan as a turning point in the Company’s more than century old history. According to Vitro’s CEO, Hugo A. Lara Garcia, “[w]e are sure that our clients, suppliers, our more than 17,300 workers and the communities we are located, will share our excited about this ruling.” And this ruling was made possible in no small part by the enforcement of chapter 15 of the Code.
Stay tuned, as the U.S. bondholders have not given up fighting.