Third-Party Releases in Insolvency of Multinationa

Third-Party Releases in Insolvency of Multinational
Enterprise Groups
by
ILYA KOKORIN*
Europe is experiencing the rise of restructuring proceedings, which has recently culminated
in the adoption of the Restructuring Directive. While being a major achievement in harmo-
nising substantive (pre)insolvency law in the EU, it lacks rules targeting restructuring of
multinational enterprise groups. As a result, effectiveness of group reorganisations may be
undermined. Nevertheless, some jurisdictions adopt innovative tools, facilitating group solu-
tions. Among them – third-party releases. Such releases entail a total or partial discharge or
amendment of claims against third parties, such as co-obligors, guarantors and collateral
providers (typically, group members) in the insolvency or restructuring proceeding of the
principal debtor.
The diversity of approaches to third-party releases highlights their controversial nature. Such
releases may frustrate legitimate expectations of creditors relying on cross-guarantees and
other forms of cross-liability arrangements. Extending the effects of debt reorganisation to
third parties in the absence of a separate insolvency proceeding may also run contrary to the
longstanding views on corporate insolvency and entity shielding. This article argues that a
single-entity-restructuring risks being short-sighted and that third-party releases are a mat-
ter of commercial necessity, synchronising legal responses with actual business models and
better addressing the complexity of group interdependencies, realised through various in-
tra-group liability arrangements.
Table of Contents ECFR 2021, 107–140
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
2. Intra-Group Finance and Rationale behind Third-Party Releases . . . . . . . 111
2.1. Protective and Opportunistic Functions of Cross-Guarantees . . . . . . . 111
2.2. Cross-Liability Arrangements and Group Restructuring . . . . . . . . . . 112
3. Third-Party Releases under English Schemes of Arrangement . . . . . . . . . . 118
3.1. Introduction to English Schemes of Arrangement . . . . . . . . . . . . . . . 118
3.2. Third-Party Releases in Corporate Groups: Scope and Requirements . . 121
4. Third-Party Releases under US Chapter 11 . . . . . . . . . . . . . . . . . . . . . 124
4.1. Main Features of Chapter 11 Reorganisation . . . . . . . . . . . . . . . . . . 124
4.2. Discordant Approaches of US Courts to Third-Party Releases . . . . . . . 127
* Meijers PhD candidate, Department of Financial Law, Leiden University, The Nether-
lands.
Open Access. © 2021 Ilya Kokorin, published by De Gruyter. This work is licensed under the
Creative Commons Attribution 4.0 International License.
108 Ilya Kokorin ECFR 1/2021
4.3. Comparison of the US and UK Approaches to Debt Reorganisation and

Third-Party Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
5. “Extension effect” of Restructuring Proceedings: Commercial Reality and
Limits of Corporate Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
5.1. Third-Party Releases and Centralised Group Restructuring . . . . . . . . 132
5.2. Pragmatic Solutions and Corporate Formalism . . . . . . . . . . . . . . . . . 135
5.3. Third-Party Releases, Creditors’ Expectations and Protective Function
of Group Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
6. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
1. Introduction
The modern age of insolvency law is characterised by the rise of restructuring

and rescue proceedings. This trend is clearly visible at both the national and
regional levels. The former can be traced in a series of recent reforms in the
Netherlands, the UK, France1 and Italy,2 which have introduced or plan to
introduce novel tools and mechanisms to facilitate compromises and arrange-
ments between financially distressed companies and their creditors. At a regio-
nal level, in the EU discussions about harmonising specific aspects of substan-
tive insolvency law to promote corporate reorganisations have taken place
since the 2010s. In November 2016, the European Commission (EC) pre-
sented a Proposal for a Directive on preventive restructuring frameworks
(Proposal).3 Its underlying ideas included crisis prevention, minimum court
involvement and availability of preventive restructuring procedures with an
arsenal of certain tools (e.g. protection of rescue financing, cross-class cram
down, debtor-in-possession, division of creditors into classes). The Proposal
resulted in the Directive 2019/1023, adopted in summer 2019 (Restructuring
Directive, Directive).4
1 For an overview of recent legislative developments in the area of insolvency and financial
restructuring in Denmark, France, Germany, the Netherlands and the UK, see David
Cristoph Ehmke/Jennifer L.L. Gant et al., “The European Union preventive restructur-
ing framework: A hole in one?” International Insolvency Review 2019, 184.
2 Vittorio Lupoli/Lucio Guttilla, “The Reform of the Bankruptcy Law (Italy)”, Middle
East and Africa Restructuring Review 2019, https://globalrestructuringreview.com/
print_article/grr/chapter/1194407/italy?print=true (accessed 30 January 2020).
3 European Commission, Proposal for a Directive of the European Parliament and of the
Council on preventive restructuring frameworks, second chance and measures to increase
the efficiency of restructuring, insolvency and discharge procedures, 22 November 2016,
COM(2016) 723 final.
4 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019
on preventive restructuring frameworks, on discharge of debt and disqualifications, and
ECFR 1/2021 Third-Party Releases in Insolvency of MEG 109
The Directive recognises that greater coherence of preventive procedures

should facilitate “restructuring of groups of companies irrespective of where
the members of the group are located in the Union.”5 Nevertheless, the Direc-
tive lacks provisions addressing problems specific to corporate groups and of-
fering tailor-made mechanisms to deal with their financial distress. The exis-
tence of multinational enterprise groups, conducting commercial operations
across national borders is a fact of life. According to UNCITRAL, individual
stand-alone corporations are typical only for small private businesses.6 The
Reflection Group on the Future of EU Company Law, which was established
in 2010 by the EC to address current problems in EU company law, confirmed
that the “international group of companies – not the single company – has
become the prevailing form of European large-sized enterprises.”7 The EC’s
Impact Assessment accompanying the Proposal (Impact Assessment) ac-
knowledged the increased coordination costs in cases of parallel restructuring
proceedings opened with respect to enterprise group members.8 Nevertheless,
it did not go any further than suggesting (separate) early restructuring of each
member of a corporate group.
Importantly, the Impact Assessment acknowledged that third-party releases
can be a useful tool to strengthen the chances of a successful group restructur-
ing. Third-party releases typically lead to a release of guarantors or co-obligors
(usually, companies in the same enterprise group) from their liability in the
insolvency or reorganisation proceedings of the primary debtor. At the same
time, it was recognised that third-party releases could interfere with national
provisions on guarantees and security of transactions.9 There was reluctance
from insolvency practitioners and strong opposition from financial institu-
on measures to increase the efficiency of procedures concerning restructuring, insolvency

and discharge of debt, and amending Directive (EU) 2017/1132.
5 Restructuring Directive, Recital 15.
6 UNCITRAL, Legislative Guide on Insolvency Law – Part three: Treatment of enterprise
groups in insolvency, 2010 (UNCITRAL Legislative Guide), p. 6.
7 José Engrácia Antunes/Theodor Baums et al., Report of the Reflection Group on the
Future of EU Company Law, Brussels, 5 April 2011, p. 59. The Report does not address
the issue of group insolvency, apart from limited considerations related to directors’ lia-
bility.
8 For instance, it was calculated that the average difference in length between cross-border
and domestic group proceedings was 55% and that financially distressed groups of com-
panies located in one Member State had better chances of being rescued in comparison
with a group having members in two or more jurisdictions. See European Commission,
Commission Staff Working Document Impact Assessment Accompanying the document
Proposal for a Directive on preventive restructuring frameworks, SWD/2016/0357 final –
2016/0359 (COD), 22 November 2016.
9 Impact Assessment, para. 5.5.1.
tions, which predicted the potential implications of introducing third-party

releases in the form of increased cost of credit.10
As a result, neither the Proposal nor the adopted Directive mention the possi-
bility of releasing guarantees or other cross-liability obligations in the context
of group distress. This, however, does not prevent European countries from
experimenting and supplementing their national restructuring or insolvency
regimes with relevant mechanisms. While some of them already permit third-
party releases (e.g. the UK), others are in the process of introducing them. On
26 May 2020 the Dutch House of Representatives (Tweede Kamer) expedi-
tiously voted in favour of the Act on Court Confirmation of Extrajudicial Re-
structuring Plans (Wet Homologatie Onderhands Akkoord or WHOA), which
modernises Dutch insolvency law and introduces fast and flexible restructur-
ing options, including third-party releases.11 On 6 October 2020, the Dutch
Senate (Eerste Kamer) gave its approval. Germany is also in the process of
adopting new restructuring instruments. On 14 October 2020, the German
Federal Government published a draft Act on the Further Development of the
Restructuring and Insolvency Law.12 It includes the Law on the Stabilization
and Restructuring Framework for Enterprises (Gesetz über den Stabilisier-
ungs-und Restrukturierungsrahmen für Unternehmen or StaRUG). Both the
Dutch WHOA and the proposed German StaRUG contain rules on third-
party releases.
This article investigates how third-party releases can coexist with or fit in the
traditional entity-by-entity approach to corporate insolvency, originating
from the company law doctrine of separate legal personality. It asks: (i) what
are third-party releases and what is the rationale behind them?; (ii) what are the
approaches to third-party releases in the UK and the USA?; (iii) how can third-
party releases be reconciled with the ideas of legal separateness and the need to
safeguard the protective role of group guarantees and parties’ legitimate expec-
tations?
The article does not deal with cross-border recognition and enforcement of
third-party releases, but solely concentrates on the analysis of national sub-
10 Ibid, para. 5.5.2.

11 Draft Amendment of the Bankruptcy Act in view of the introduction of the possibility
of court confirmation of extrajudicial restructuring plans (Act on Court Confirmation
of Extrajudicial Restructuring Plans). For unofficial English translation made by De
Brauw Blackstone Westbroek see https://www.debrauw.com/download/25341/ (ac-
cessed 15 June 2020).
12 Entwurf eines Gesetzes zur Fortentwicklung des Sanierungs- und Insolvenzrechts,
14 Oktober 2020, https://www.bmjv.de/SharedDocs/Gesetzgebungsverfahren/DE/
Fortentwicklung_Insolvenzrecht.html (accessed 19 October 2020).
stantive law. It also takes into account the diversity of business strategies and
corporate forms used in enterprise groups. Nevertheless, it primarily focuses
on large international, interconnected and integrated groups of companies,
characterised by the multiplicity of cross-liability arrangements.
2. Intra-Group Finance and Rationale behind Third-Party Releases
2.1. Protective and Opportunistic Functions of Cross-Guarantees
Corporate groups are special in many respects, including the way group mem-
bers attract financing from within and outside the group. Group entities fre-
quently provide guarantees and collateral or serve as co-obligors to secure per-
formance by another group member. These relations can be collectively re-
ferred to as cross-liability arrangements. They enable a group of companies to
be financed as a single economic unit, therefore securing more beneficial con-
ditions (e.g. lower interest rates and costs, and larger amounts) from outside
lenders, such as credit institutions and bondholders. Another advantage of
cross-guarantees and other forms of cross-liability is the protection of lenders
against uncontrolled asset shifting within the group. The transfer of assets
from one group member to another does not affect the position of a lender to
the extent that it can file its claim against all group members as guarantors,
collateral providers or co-debtors. This significantly reduces monitoring costs.
Thus, group-specific financial arrangements could make financing of an enter-
prise group more efficient and grant extra protection to lenders. Squire calls
this a “protective function” of intragroup guarantees.13
At the same time, cross-guarantees transmit credit risk across parent-subsidi-
ary boundaries, allowing simultaneous filing of claims against several related
companies. As a result, in case of financial distress the “race to the courthouse”
or a “grab race” transforms into multiple races to multiple courts,14 which wor-
sens the financial position of the group and complicates group-wide restruc-
turing attempts. Cross-guarantees, co-debtorship and cross-collateralisation
13 Richard Squire, Limits to Group Structures and Asset Partitioning in Insolvency: Sup-
pressing Value and Selective Perforation by Means of Guarantees, in: NACIIL Report,
The 800-Pound Gorilla. Limits to Group Structures and Asset Partitioning in Insol-
vency, 2019, p. 13.
14 See Thomas H. Jackson, “Bankruptcy, Non-Bankruptcy Entitlements, and the Cred-
itors’ Bargain”, The Yale Law Journal 1982, 857, 862, describing the incentive of cred-
itors to “take advantage of individual collection remedies, and to do so before the other
creditors act.” Jackson highlights that such an incentive creates monitoring costs (e.g.
monitoring court records) and could lead to premature termination of the debtor’s busi-
ness.
may also dilute the returns to non-guaranteed (unsecured) creditors in insol-

vency.15 The fact that group-specific financial arrangements are often hidden
from outside creditors and may lead to opportunistic value-destroying beha-
viour of the debtor’s management has become the subject of extensive aca-
demic discussion.16 Squire refers to such behaviour and its effects as an “oppor-
tunistic function” of cross-guarantees.
2.2. Cross-Liability Arrangements and Group Restructuring
Despite economic interconnectedness and interdependence of corporate group

members, facilitated by the discussed intra-group financial arrangements, in-
solvency law traditionally and predominantly operates on the entity-by-entity
basis.17 This means that upon insolvency, as a general rule, group members fall
under separate insolvency proceedings, with separate insolvency estates and
separate pools of creditors.
In the last decade, the issue of insolvency of multinational enterprise groups
has attracted increased attention. Both the European Insolvency Regulation
(EIR Recast)18 and the UNCITRAL Model Law on Enterprise Group Insol-
vency (MLG)19 recognise the existence of corporate groups and offer special
tools to address their insolvency. A number of national legal regimes also con-
tain special regulation of corporate group insolvency (e.g. Germany, France,
Spain, Romania). Modernisation of insolvency law has been linked to better
cooperation and communication between insolvency proceedings opened
15 Richard Squire, “Strategic liability in the corporate group”, The University of Chicago
Law Review 2011, 605, 608.
16 Jay Lawrence Westbrook, “Transparency in Corporate Groups”, Brooklyn Journal of
Corporate, Financial & Commercial Law 2018, 33, 50, noting similarities between guar-
antees and security interest and suggesting the mandatory disclosure of guarantees, “so
that no intra-group guarantee would be enforceable in bankruptcy if not disclosed as
required.” Aart Jonkers, Selected Perforation by means of Guarantees: Dutch Law, in:
NACIIL Report, The 800-Pound Gorilla. Limits to Group Structures and Asset Parti-
tioning in Insolvency, 2019, p. 78, pointing out the opaque priority structure that guar-
antees create by effectively perforating or piercing the group structure.
17 Bob Wessels/Stephan Madaus, Rescue of Business in Insolvency Law, Instrument of the
European Law Institute, 2017, p. 342, noting that both national insolvency laws in the
EU and international proposals are based on the “principle of 5 one’s: one insolvency
debtor, one estate, one insolvency proceeding, one court and one insolvency office
holder.” See also UNCITRAL Legislative Guide (fn. 6), p. 17.
18 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May
2015 on insolvency proceedings (recast).
19 UNCITRAL, Model Law on Enterprise Group Insolvency, https://uncitral.un.org/en/
texts/insolvency (accessed 30 January 2020).
against enterprise group members. Thus, the EIR Recast and the MLG provide
for communication between courts and insolvency practitioners (IPs) and the
possibility of appointing the same IP in several proceedings. Other tools im-
proving group resolution include cross-border insolvency protocols and spe-
cial (i.e. group coordination and group planning) proceedings.20
Nevertheless, the traditional entity-by-entity (atomistical) approach to group
insolvencies, many times resulting in different rules and procedures applicable
to each group member, has persisted. Therefore, bringing all group members in
a single group-wide recovery plan or finding another solution, holistically ad-
dressing intra-group financial arrangements and implementing a group-wide
financial reorganisation remains highly problematic.21
Imagine the following (simplified) scenario. Group of companies consists of
Company A (debtor) and Company B (guarantor). The creditor is the Bank,
which extends a credit line to Company A, with Company B guaranteeing its
repayment. Company A experiences financial distress and enters a restructur-
ing proceeding, in which the claim of the Bank is significantly curtailed or is
fully written down. The following questions arise: (i) can the guarantor, having
performed to the Bank in full, file a ricochet (subrogation) claim against Com-
pany A and in what amount? and (ii) does the restructuring affect Bank’s rights
under the guarantee? In other words, can the Bank, despite the alteration or
discharge of the claim as applied to Company A, require performance from the
guarantor and in what amount? These two questions relate to another, more
general question: (iii) will the restructuring ignoring the cross-liability arrange-
ment be efficient in the long run? In the following paragraphs, I explore these
questions and give two reasons why cross-liability instruments may compli-
cate group restructuring and hinder long-term effectiveness of a restructuring
plan.
20 The new set of rules on group coordination proceedings in the EIR Recast has received a
mixed reception in legal literature, with some authors expressing doubts as to their effec-
tiveness and practical value, as well as the high costs that group coordination proceed-
ings may bring with them and their complex character. See Christoph Thole/Man-
uel Dueñas, “Some Observations on the New Group Coordination Procedure of the
Reformed European Insolvency Regulation”, International Insolvency Review 2015,
314. Burkhard Hess/Paul Oberhammer/Stefania Bariatti/Christian Koller/Björn Lau-
kemann/Marta Requejo Isidro/Francesca Clara Villata (ed.), The Implementation of the
New Insolvency Regulation: Improving Cooperation and Mutual Trust, 2018, p. 220.
21 The complexity of parallel reorganisation proceedings conducted simultaneously in two
or more different EU Member States (although in the context of a single debtor-entity)
has been discussed in detail by Richter, see Tomáš Richter, “Parallel Reorganizations
under the Recast European Insolvency Regulation – Selected EU Law Issues”, Interna-
tional Insolvency Review 2018, 340.
2.2.1. Performance by a Guarantor and Destabilising Force of Subrogation
In general, where the debt is discharged by a guarantor, such a guarantor steps

in the shoes of the creditor and acquires the right to file a subrogation (rico-
chet) claim against the principal debtor (borrower).22 Thus, if Company B dis-
charges the obligation of Company A, it acquires a right of subrogation against
the latter. The existence and extent of this subrogation claim in case the original
debt is restructured (e.g. decreased, postponed) or written down may differ
depending on applicable law, the character of discharge (voluntary or involun-
tary) and the nature of debt restructuring (pre-insolvency contractual or insol-
vency court-led restructuring).
For example, German insolvency law provides that the transformation of the
substantive relationship between the debtor and its creditor due to a restruc-
turing plan also applies to the right of recourse against the debtor.23 This means
that the subrogation claim follows the original claim in its reduced or extin-
guished scope. Dutch insolvency law adopts a similar approach, extending the
“liberating” effect of court restructuring to claims of third parties against the
primary debtor.24 The same result is reached under the Bank Recovery and
22 See 11 U. S. Code § 509, providing that “an entity that is liable with the debtor on, or
that has secured, a claim of a creditor against the debtor, and that pays such claim, is
subrogated to the rights of such creditor to the extent of such payment.” See also Re
Butlers Wharf Ltd., 30 March 1995, [1995] 2 BCLC 43, [1995] BCC 717, stating that
subrogation in the case of guarantees “is and has for over 150 years been part of English
law and to such an extent that it has been given statutory clothing in s. 5 of the Mercan-
tile Law Amendment Act 1856.”
23 Insolvency Act, InsO (Germany), § 254(2), stating that the debtor is released by the plan
to a co-debtor, guarantor or another person entitled to recourse. See Dirk Andres/Rolf
Leithaus, Insolvenzordnung, 4th ed., 2018; Alexander Fridgen/Arndt Geiwitz/Burkard
Göpfert, BeckOK InsO, 16th ed., 2019; Michael Huber/Stephan Madaus, Münchener
Kommentar zur Insolvenzordnung, 4th ed., 2020.
24 Article 157 Bankruptcy Act (the Netherlands) establishes that a “final arrangement with
the creditors (composition) that has been sanctioned (approved) by the court, is binding
on all unsecured creditors without exception, regardless whether or not they have filed
their claim in the bankruptcy.” See also WHOA, Article 370(2), stating that a guarantor
or a joint debtor may not recover from the debtor any amounts paid to the creditor
where such payments were made after confirmation of the plan. The rights under the
plan may be transferred to a guarantor or a joint debtor only if and insofar as the pay-
ment by such parties and the rights conferred under the plan would provide the creditor
with value that exceeds the amount of its claim as it existed before the plan was con-
firmed.
Resolution Directive (BRRD)25 in case of a bail-in – a resolution tool that en-

sures that “shareholders and creditors of the failing institution suffer appropri-
ate losses and bear an appropriate part of the costs arising from the failure of
the institution.”26 Application of bail-in powers by regulators may result in
conversion of liabilities or total or partial write down of debt.27 According to
the BRRD, bail-in takes effect and is immediately binding on the bank under
resolution, its creditors and shareholders.28 It is further clarified that the dis-
charge of the primary liability of the bailed-in bank extends to obligations or
claims arising in relation to that liability “for all purposes”.29 This should cover
ricochet claims of sureties, co-debtors and guarantors. As a result, such parties
are totally or partially barred from filing subrogation claims against the re-
structured bank to the extent that the original obligation of that bank is dis-
charged or reduced in bail-in.30 Bail-in, however, does not affect creditors’
rights against guarantors and security providers that are not subject to resolu-
tion actions.
The logic behind this approach is clear. Payne explains that allowing the sub-
rogation claim to be filed in full against the principal debtor “would defeat the
purpose of the compromise of the principal claim between company and cred-
itor.”31 Clearly, the effectiveness of the approved restructuring plan may be
severely hindered, should third parties be allowed to reimburse full amounts
from the debtor. It is questionable to what extent a non-insolvency out-of-
court debt restructuring (e.g. workout) can affect the rights of third parties
(e.g. guarantors, co-debtors) against the main debtor, short of special statutory
provisions analogous to Article 53 BRRD or § 254(2) InsO. For instance, the
mentioned “liberating” effect of Dutch insolvency restructuring (unless agreed
25 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014
establishing a framework for the recovery and resolution of credit institutions and in-
vestment firms.
26 BRRD, Recital 67.
27 Wolf-Georg Ringe/Jatine Patel, “The Dark Side of Bank Resolution: Counterparty Risk
through Bail-in”, EBI Working Paper Series, No. 31, 2019, p. 4.
28 BRRD, Article 53(1).
29 BRRD, Article 53(3).
30 Lynette Janssen, “Bail-in from an Insolvency Law Perspective”, Norton Journal of
Bankruptcy Law and Practice 26 (2017), explaining that the BRRD seeks “to ensure that
if a claim against a bank is written down, the bailed-in (part of the) debt can no longer be
collected from this bank” and that “Article 53(3) and (4) BRRD does not interfere in the
relationship with a third party who guarantees a bank’s debt obligations.” See also Mi-
chael Schillig, Resolution and Insolvency of Banks and Financial Institutions, 2016,
p. 295 et seq.
31 Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation, 2014, p. 24
et seq.
upon) is unavailable in a situation of a purely out-of-court (contractual) work-

out, which is comparable to a voluntary settlement of claims.32
The same outcome arises in English schemes of arrangement. English courts
have recognised that without a third-party release, the compromise of the
creditor’s claim against the scheme debtor may be undermined by a ricochet
claim of the guarantor against such debtor.33 Thus, in the absence of special
regulation, third-party claims may survive debt restructuring, potentially un-
dermining its efficiency.
2.2.2. Single Entity Restructuring and a Group Failure
Most commonly, insolvency of the principal debtor does not affect the rights
of creditors against guarantors, collateral providers or co-debtors.34 Any other
interpretation will lead to a situation where a creditor loses its claim against
both the principal debtor and the guarantor, co-debtor and collateral provider.
This will undermine the protective function of a guarantee or collateral. In the
given example, the fact that a claim of the Bank against Company A has been
reduced or written down in a non-consensual way shall not affect the rights the
Bank has under the guarantee or collateral arrangement.35
Nevertheless, in integrated groups of companies successful restructuring of a
group entity may require preservation of group synergies and survival of other
group members. A debtor may need their assistance to both effect its reorga-
nisation and continue its operational activity.36 This assistance can take the
32 See Dutch Civil Code, Article 6:14, which states that a “waiver of rights by the creditor
on behalf of one of the solidary debtors does not release this debtor towards the other
solidary debtors.”
33 In the Matter of Noble Group Limited, 14 November 2018, [2018] EWHC 3092 (Ch),
2018 WL 05982647, at paras. 24 and 26. In the Matter of Swissport Fuelling Ltd, 5 June
2020, [2020] EWHC 1499 (Ch), at para. 44, noting that a “scheme may operate to release
or modify the obligations of guarantors, as otherwise the creditors could claim against
the guarantors, which would, in turn, be able to make what is called a ricochet claim
against the borrower, thereby defeating the purpose of the scheme.”
34 Insolvency Act (Spain), Article 135(1); Insolvency Act (Germany), § 254(2); Bank-
ruptcy Act (the Netherlands), Article 160, clarifying that notwithstanding the restruc-
turing of debts in the proceedings against the debtor, creditors retain all their rights
against the guarantors and co-debtors of the debtor.
35 A situation is different if a creditor voluntarily discharges the principal debtor of its
liability. In such a case, because of the accessory nature of a guarantee or surety, the
corresponding liability of a guarantor should be discharged or reduced accordingly.
36 ABI Commission to Study the Reform of Chapter 11, Final Report and Recommenda-
tions, 2014, p. 255.
form of funding (intra-group financing, access to capital markets), business

commitments (supply of essential materials, provision of licenses and know
how, lease of premises, etc.), collaboration (sharing of information, develop-
ment and implementation of a common business strategy) and services (data
management, IT, marketing). Third parties37 (guarantors, co-obligors, collat-
eral providers) may be reluctant to contribute to the restructuring plan or ex-
tend assistance thereafter, if they remain exposed to the claims of the debtor’s
creditors. They might also be forced into insolvency or end up being sold to a
competitor. As a consequence, given the group centralisation and interdepen-
dence, the restructured primary debtor could become an “orphan” with re-
mote chances for the long-term survival. This is why a single-entity restructur-
ing without due consideration of the group context, position and interest of
other group entities risks being short-sighted and economically inefficient.
The next Section introduces a tool that has been embraced to overcome this
problem and to deal with ancillary liabilities of third parties, namely a third-
party release.38 Its application leads to a total or partial discharge of debt or its
alteration not only of the principal debtor, but also of other parties, whose
obligations are linked to the primary obligation (e.g. guarantors, sureties, co-
debtors, collateral providers). It can also be used to release a principal debtor in
the proceedings opened with respect to a guarantor or co-debtor. This tool
helps to get around a singular vision of a legal entity and the accompanying
separateness of insolvency proceedings, instead sanctioning the single enter-
prise approach. This approach entails the acceptance of a group as a single eco-
nomic unit39 and recognises the importance of a centralised crisis resolution.
Two jurisdictions with a long history of using third-party releases – the UK
and the USA – are studied in detail below. The choice of these jurisdictions and
their legal regimes (i.e. schemes of arrangement and chapter 11 reorganisations)
is premised on the fact that (i) they represent a source of inspiration for the
Restructuring Directive and many national laws,40 (ii) they are frequently used
37 In American literature and case law such third parties are typically referred to as “non-
debtors” (“non-debtors”). See e.g. ABI Commission (fn. 36), p. 253. However, this may
be confusing, as such parties can be qualified as debtors, even though not always pri-
mary ones.
38 Third-party releases in schemes are available, inter alia, in Singapore (Pathfinder Strate-
gic Credit LP v. Empire Capital Resources PTE Ltd., 30 April 2019, [2019] SGCA 29),
Australia (Re Tiger Resources Ltd., 23 December 2019, [2019] FCA 2186) and Ireland
(In the matter of Nordic Aviation Capital Designated Activity Company, 11 September
2020, [2020] IEHC 445).
39 UNCITRAL Legislative Guide (fn. 6), p. 16.
40 For Singapore see Gerard McCormack/Wai Yee Wan, “Transplanting Chapter 11 of the
US Bankruptcy Code into Singapore’s restructuring and insolvency laws: opportunities
by foreign companies seeking to restructure their obligations, and (iii) they are
especially popular among corporate groups, wishing to reorganise their debts
in a centralised manner.
3. Third-Party Releases under English Schemes of Arrangement
3.1. Introduction to English Schemes of Arrangement
A scheme of arrangement is a statutory procedure available under Part 26 (sec.

895–901) of the UK Companies Act 2006. Section 895 defines a scheme as a
compromise or arrangement between a company and its creditors, or any class
of them, or between a company and its members (i.e. shareholders). Compa-
nies are free to use schemes for a wide variety of debt-reduction strategies af-
fecting debt and/or equity. Such strategies may include debt-to-equity swaps,41
modification (e.g. extension of maturity dates42) or reduction of creditors’
claims.43
Schemes of arrangement have not always been as popular as they are today.
Available under the Companies Act 1948, they were regarded as time-consum-
ing, complex (requiring the involvement of experts and preparation of exten-
sive documentation), costly and not particularly designed for companies on the
verge of insolvency or insolvent companies.44 However, since the 2000s,
schemes have become a widely used mechanism for restructuring of financially
distressed and insolvent companies. There are several reasons for this revival
and the rising popularity. Presently, it is apparent that schemes of arrangement
are available to both solvent and insolvent debtors.45 To the extent that a
scheme is open for non-insolvent debtors and is regulated by non-insolvency
and challenges”, Journal of Corporate Law Studies 2019, 69. For France see Adam Gal-
lagher/Aude Rousseau, “French Insolvency Proceedings: La Révolution a Commencé”,
ABI Journal 2014. For Germany see Reinhard Bork, “Debt Restructuring in Germany”,
European Company and Financial Law Review 2018, 503.
41 Re Uniq Plc, 25 March 2011, [2011] EWHC 749 (Ch); Re Avanti Communications
Group Plc, 19 February 2018, [2018] EWHC 653 (Ch).
42 Re Apcoa Parking Holdings GmbH et al., 19 November 2014, [2014] EWHC 3849
(Ch).
43 Primacom Holdings GmbH, 20 January 2012, [2012] EWHC 164 (Ch).
44 Paul J. Omar/Jennifer L.L. Gant, “Corporate Rescue in the United Kingdom: Past,
Present and Future Reforms”, Insolvency Law Journal 2016, http://irep.ntu.ac.uk/id/
eprint/27854/ (accessed 30 January 2020).
45 See Scottish Lion Insurance Co Ltd v. Goodrich Corp, 29 January 2010, [2010] CSIH 6,
2010 SC 349, confirming that “[t]here is nothing in that statute nor in its descendents [...]
to suggest that applications for sanction of a “solvent scheme” are in principle to be dealt
legislation (i.e. Companies Act), it avoids the insolvency-related “failure” stig-

ma and usually does not trigger cross-default and forfeiture clauses in con-
tracts.46
Flexibility of schemes of arrangement makes them suitable for achieving a wide
range of purposes. In principle, schemes can be used for any compromise or
arrangement between the debtor and its creditors, as long as there is some form
of a “give and take” between participating parties.47 The procedure for entering
a scheme is rather straightforward and consists of two stages. The first one
involves a hearing on class composition and does not entail assessment of the
scheme on its fairness or merits.48 The second one comprises of a scheme meet-
ing, where creditors vote on the proposed arrangement, and a court confirma-
tion (sanctioning) hearing. At this hearing, the court must be satisfied that the
“arrangement is such as an intelligent and honest man acting in respect of his
own interest might reasonably approve.”49 The court does not easily substitute
creditors’ choice with its own assessment of what is economically or commer-
cially sound,50 but does ensure that no creditor has been prejudiced or unjusti-
fiably left out from the scheme.
Schemes of arrangement offer a practical mechanism to overcome the holdout
problem without opening a cumbersome litigation-heavy insolvency proce-
dure. It allows the majority of creditors to bind the minority in each creditor
class.51 For approval, a scheme requires a vote of 75% by value and the major-
with differently from those where the company is insolvent or on the verge of insol-
vency.”
46 Philip R. Wood, Principles of International Insolvency, 2nd ed., 2007, para. 23–038.
47 Thus, where creditors or shareholders “give up all their rights and receive no benefit,
there is no compromise or arrangement.” Re NFU Development Trust Ltd., 28 July
1972, [1972] 1 WLR 1548. In Re Uniq Plc, 25 March 2011, [2011] EWHC 749 (Ch), the
court was satisfied that a compromise was present in a situation where the existing share-
holders saw 100% of their equity stake diluted to 9.8%, but that dilution was an integral
part of a restructuring that allowed the company to remain viable and survive.
48 Re Telewest Communications plc (No. 1), 26 April 2004, [2004] EWHC 924 (Ch); [2004]
BCC 342.
49 Re National Bank plc, 16 March 1966, [1966] 1 WLR 819.
50 Re English, Scottish and Australian Chartered Bank, 13 July 1893, [1893] 3 Ch 385 at
409.
51 A creditor class must be “confined to those persons whose rights are not so dissimilar to
make it impossible for them to consult together with a view to their common interest.”
Sovereign Life Assurance Company v. Dodd, 6 July 1892, [1892] 2 QB 573. See also Re
Hawk Insurance Company Limited, 23 February 2001, [2001] EWCA Civ 241. For the
useful review of the current position on class composition, including the distinction
between different rights and different interests, see In Re Lehman Brothers Interna-
tional (Europe) Ltd, 27 July 2018, [2018] EWHC 1980.
ity in number of members in a class.52 If the requisite majority is reached, the

dissenting minority of creditors, including secured creditors, becomes bound
by the majority vote. In other words, the plan is made binding (crammed
down) on dissenting creditors. However, a scheme of arrangement does not
permit a cram down of entire classes of creditors – no cross-class cram down.
Since a scheme of arrangement is not considered an insolvency procedure, it
does not fall under the EIR Recast and its strict rules for determining interna-
tional insolvency jurisdiction, guided by the concept of “centre of main inter-
ests” (or COMI). According to the EIR Recast, COMI is the “place where the
debtor conducts the administration of its interests on a regular basis and which
is ascertainable by third parties.”53 In case of a company, there is a strong pre-
sumption that the place of its registered office coincides with COMI.54 To the
extent that schemes are not bound by COMI considerations, they provide a
gateway for foreign-registered companies to restructure their debts in English
courts, generally based on the “sufficient connection” test, which appears to be
more lenient than the COMI-test.55 This welcoming yardstick to access juris-
diction is of particular practical value for multinational enterprise groups,
wishing to restructure their debt in a single forum. Another reason why
schemes of arrangement are popular among international corporate groups is
the availability of third-party releases.56 This unique tool is discussed below.
52 Companies Act 2006, sec. 899.

53 EIR Recast, Article 3(1).
54 The strength of the registered office presumption has been confirmed in CJEU, 2 May
2006, Eurofood IFSC Ltd., C-341/04, ECLI:EU:C:2006:281; CJEU, 20 October 2011,
Interedil Srl v. Fallimento Interedil Srl, Intesa Gestione Crediti SpA, C-396/09, ECLI:
EU:C:2011:671. See also Ilya Kokorin/Bob Wessels, “COMIs Under chapter 15 and EIR
Recast: Brothers, but Not Twins”, ABI Journal, 20 August 2018, highlighting the strict-
ness of the registered office presumption in the EU and comparing it with the flexible
approach of the US chapter 15.
55 For discussion see Jennifer Payne, “Cross-border schemes and forum shopping, Cross-
border Schemes of Arrangement and Forum Shopping”, European Business Organiza-
tion Law Review 2013, 563. For recent cases see In Re Stripes US Holdings Inc, 12 No-
vember 2018, [2018] EWHC 3098; Re Noble Group Ltd, 14 November 2018, [2018]
EWHC 3092; Re Agrokor D.D., 14 February 2019, [2019] EWHC 445 (Ch).
56 Third-party releases are commonly approved with respect to group members of (for-
eign) companies. See In Re La Seda de Barcelona SA, 26 May 2010, [2010] EWHC
1364 (Ch); Re Magyar Telecom BV, 3 December 2013, [2013] EWHC 3800 (Ch); In the
Matter of New World Resources N.V., 5 September 2014, [2014] EWHC 3143 (Ch); In
the Matter of Lecta Paper UK Limited, 28 January 2020, [2020] EWHC 382 (Ch).
3.2. Third-Party Releases in Corporate Groups: Scope and Requirements
As noted above, English schemes of arrangement require some “give and take”
on each side.57 The question arises whether this “give and take” and the under-
lying arrangement is only available for the primary debtor and its creditors or
also extends to third parties. In Re T&N Ltd. the court ruled for the latter.58
The case was decided under the Companies Act 1985 (sec. 425) and concerned
actual and potential claims of employees and former employees of T&N Lim-
ited and 57 associated companies (debtors) for damages for personal injuries
arising from exposure to asbestos. Under the scheme, debtors and employees
(claimants) agreed not to assert claims against liability insurers, on the condi-
tion that the insurers would establish a fund of £36.74 million to be held on
trust to pay the damages, whenever they become established. It was objected
that the proposed scheme did not constitute an arrangement between T&N
Limited and its creditors, but instead represented a compromise between the
debtors and insurers, since the scheme did not compromise rights of claimants
against the scheme companies. The court dismissed this objection and affirmed
the scheme. It held that the term “arrangement” had a broad meaning, which
encompassed a settlement of litigation between T&N Limited and insurers, to
the extent that such settlement (“not immediately”) affected the position of the
debtors and was effectively a “tripartite matter”. According to the court, the
scheme was “an integral part of a single proposal affecting all the parties.”59
This extensive reach of schemes was affirmed in Re Lehman Brothers (Europe)
International,60 where the court noted that it was “entirely logical” to extend
the jurisdiction to approve a scheme that varies or releases creditors’ claims
against both the primary debtor and third parties “designed to recover the
same loss.” Claims subject to a release can be both contractual or tortious in
nature (like in the T&N case), secured or unsecured. Importantly, the court
ruled that the release of a third party should be ancillary to the arrangement
between the debtor and its own creditors and that such a release must be ne-
cessary in order to give effect to the arrangement. Another qualification added
by the court was that the rights of creditors against third parties should be
closely connected with their rights against the primary debtor. On this point
the court highlighted that “the decision in T&N Ltd (No. 3) ... [was] near the
outer limits of the scope of s. 895.”61
57 Re NFU Development Trust Ltd (fn. 47).

58 Re T&N Ltd. (No. 3), 16 June 2006, [2006] EWHC 1447 (Ch).
59 Ibid.
60 Re Lehman Brothers (Europe) International (in administration), 6 November 2009,
[2009] EWCA Civ 1161.
61 Ibid.
A more recent case Far East Capital Limited62 involved the discharge of obli-
gations under two sets of loan notes in return for a payment by the debtor of a
settlement amount. The scheme included the release of third parties (group
entities), which provided guarantees and security for the notes. Additionally,
the release was given to other identified “protected parties” who had been in-
volved in the preparation, negotiation or implementation of the scheme. In
Van Gansewinkel Groep BV and others, the court held that a release should be
“necessary to give legal or commercial effect to the compromise or arrange-
ment between the scheme company and its creditors.”63 The case concerned
the release of group members under guarantees. In La Seda De Barcelona,64
the court sanctioned a scheme, which provided for the release of a third-party
(group member Artenius) under the guarantee agreement, in exchange of that
third party releasing other group members of its own claims. Thus, the release
of Artenius benefited the scheme creditors because its release of the debtor and
other group companies improved their financial position. In the alternative
scenario, the claims of Artenius could have triggered the “insolvency of a com-
pany which would have escalated group bankruptcy proceedings.”65
In Noble Group Limited,66 the scheme was a part of a complex group restruc-
turing, where in return for the write off of creditors’ claims, such creditors
received debt instruments issued by the newly incorporated companies. Addi-
tionally, the scheme entailed the release of claims against debtor’s management,
a group of its senior creditors (“Ad Hoc Group”), their related parties and
officers, directors, employees, agents, advisors and representatives. It encom-
passed claims relating to the scheme claims and the preparation, negotiation,
sanctioning or implementation of the scheme. The court first accepted the
breadth of the suggested release to include any claims arising from or related
to the scheme claims. It then noted that an issue could arise where a scheme
creditor has a more tangential claim against the to-be-released third party (e.g.
a claim by a creditor in negligence against an independent financial adviser,
who advised that creditor to purchase debt instruments). The court accepted
that this could affect class composition, as only some creditors or classes of
creditors are entitled to pursue such a claim. This was, however, found irrele-
vant for the case at hand.
To sum up, English schemes of arrangement are flexible and commercially dri-
ven when it comes to third-party releases. In practice claims arising from var-
62 In the matter of Far East Capital Limited S.A., 3 November 2017, [2017] EWHC 2878
(Ch).
63 Re Van Gansewinkel Groep BV, 22 July 2015, [2015] EWHC 2151 (Ch).
64 Re La Seda De Barcelona SA (fn. 56).
65 Ibid.
66 In the matter of Noble Group Limited (fn. 33).
ious types of intercompany liability arrangements (cross-guarantees, co-debt-

orship and collateral arrangements), facilitating group interconnectedness and
interdependence, will commonly be eligible for a release. This release can be
granted in the case where a scheme company is the principal debtor,67 where it
is one of the principal debtors,68 as well as where it is a guarantor.69 There are
three major elements or characteristics worth stressing.
First, third parties may include both related parties (e.g. group entities, their
directors and officers) and non-affiliates (e.g. insurers, auditors, legal and fi-
nancial advisors). Such parties can have their registered office or COMI in jur-
isdictions other than the UK. Second, claims subject to a release can be con-
tractual (e.g. based on a guarantee, co-debtorship, surety or collateral arrange-
ment) or non-contractual (e.g. based on tort). They can be secured or
unsecured. Third, there are certain additional requirements imposed on third-
party releases. Payne distinguishes four of them:70
– A scheme should involve a genuine “give and take” between a third party
and a scheme creditor. This does not necessarily entail equal monetary
consideration and could include indirect benefits in the short or long run
(e.g. financial stability of a group as a whole). Courts do not always closely
scrutinise this requirement.71
67 Re APCOA Parking Holdings GmbH, 19 November 2014, [2014] EWHC 3849 (Ch),
2014 WL 5833966; Noble Group Limited (fn. 33).
68 Re NN2 Newco Ltd, 22 July 2019, [2019] EWHC 1917 (Ch). In this case NN2 was
specifically incorporated in England for the purposes of facilitating a scheme of arrange-
ment. Upon incorporation, NN2 voluntarily became co-issuer and co-obligor under
financial obligations, assuming joint and several liability under the debt instruments.
The court noted that such technique to create jurisdiction for a scheme was not abusive.
See also Re Codere (UK) Ltd, 17 December 2015, [2015] EWHC 3778 (Ch).
69 Swissport Fuelling Ltd (fn. 33). In this case, the scheme company was a guarantor rather
than a borrower. It was incorporated in England and Wales, while the borrowers were
incorporated in Luxembourg and Switzerland and might have been unable to establish a
sufficient connection with England. Initially, the borrowers did not have a right of con-
tribution or indemnity against the guarantors. However, in order to create interconnect-
edness (i.e. ricochet claims), the scheme company entered into a deed in favour of the
borrowers, under which it assumed the position of a primary obligor, together with the
borrowers.
70 Payne (fn. 31), p. 23–24.
71 See In the matter of Syncreon Group BV, 10 September 2019, [2019] EWHC 2412 (Ch),
2019 WL 04279919, briefly noting that the scheme companies confirmed the need of
third-party releases “in order to give full effect to the schemes” and that such releases
are “a relatively regular feature of the schemes.” Additionally, the court also mentioned
that the release provisions were explained to creditors. The same “regular feature” rea-
soning has been previously adopted in Noble Group Limited (fn. 33).
– Creditors’ rights against a third party shall be sufficiently closely con-

nected with claims against the primary debtor. This goes beyond claims
under guarantees, collateral arrangements and relationship of co-debtor-
ship, and may encompass other claims that might potentially affect the
success of the proposed scheme and obligations of the primary debtor.
The review of recent case law shows that the requirement that the released
claims should be closely connected to the scheme claims seems to have
been significantly weakened.72
– Creditors’ rights against a third party should be personal and not proprie-
tary (i.e. not based on creditors’ title over assets).
– A creditor shall benefit from the release of its rights against the third party
“to the extent that if it were to exercise them this would adversely affect
what it might recover under the scheme.”73 In other words, a scheme en-
compassing a third-party release should make commercial sense and (di-
rectly or indirectly) benefit scheme creditors.
4. Third-Party Releases under US Chapter 11
4.1. Main Features of Chapter 11 Reorganisation
The chapter 11 procedure of the US Bankruptcy Code was named “the most
important insolvency procedure worldwide.”74 It has also been suggested that
chapter 11 deserves a prominent place in “the pantheon of extraordinary laws
that have shaped the American economy and society and then echoed through-
out the world.”75 Introduced in the US Bankruptcy Code of 1978, chapter 11
has quickly gained popularity and has become a source of inspiration for in-
solvency and reorganisation laws in other countries.76 There are several reasons
for this success.
72 See Noble Group Limited (fn. 33), noting that “[t]he jurisdiction is not [...] limited to
guarantees and claims closely connected to scheme claims.”
73 Payne (fn. 31), p. 31.
74 Bob Wessels/Rolef J. de Weijs (ed.), International Contributions to the Reform of Chap-
ter 11 U. S. Bankruptcy Code, Eleven International Publishing, 2015, p. 2. Chapter 11 is
a chapter of Title 11 of the US Bankruptcy Code.
75 Elizabeth Warren/Jay Lawrence Westbrook, “The Success of Chapter 11: A Challenge
to the Critics”, Michigan Law Review 2009, 603, 604.
76 Nathalie Martin, “The Role of History and Culture in Developing Bankruptcy and In-
solvency Systems: The Perils of Legal Transplantation”, Boston College International
and Comparative Law Review 2005, 4.
Reorganisation under chapter 11 aims at debt restructuring through the adop-

tion of a financial restructuring plan. The procedure is usually commenced by
the debtor on a voluntary basis. Involuntary (creditor initiated) chapter 11 fil-
ings are possible,77 but remain rare in practice. Chapter 11 does not require
material insolvency of a debtor as an entry threshold.78 Still, chapter 11 reorga-
nisation is a matter of insolvency (bankruptcy) law regulated by the federal
statute (Title 11 of the United States Code). Madaus explains this seeming in-
consistency by referencing to the specificity of the US constitutional regime
and the division of powers between the federal government and the States.79
Under this regime, non-consensual debt impairment requires a legal basis in
bankruptcy law (which falls under the exclusive federal jurisdiction),80 irre-
spective of the actual insolvency of the debtor.81
The filing of a voluntary petition automatically opens the case with important
consequences. Among them, a worldwide stay or a moratorium on debt-en-
forcement actions by all creditors, whether secured or unsecured.82 Notably, as
a general rule, the automatic stay provisions of the US Bankruptcy Code do
not extend to third parties, such as guarantors or co-debtors.83 During the re-
organisation procedure, debtor’s management continues to run the business
(debtor in possession).84 In cases of fraud, dishonesty, incompetence, or gross
mismanagement by current directors or if it is “in the interests of creditors, any
equity security holders, and other interests of the estate”, the court may ap-
77 11 U. S. Code § 303.
78 However, the lack of a valid reorganizational purpose may be interpreted as “bad faith”
and constitute a ground for dismissal or conversion under 11 U. S. Code § 1112(b). See
In re SGL Carbon Corp., 29 December 1999, 200 F.3d 154 (3d Cir. 1999), stating that
courts “have consistently dismissed Chapter 11 petitions filed by financially healthy
companies with no need to reorganize under the protection of Chapter 11.”
79 Stephan Madaus, “Leaving the Shadows of US Bankruptcy Law: A Proposal to Divide
the Realms of Insolvency and Restructuring Law”, European Business Organization
Law Review 2018, 615, 628.
80 Constitution of the United States, Article I, Section 8, Clause 4: Bankruptcy Clause:
“The Congress shall have Power to establish [...] uniform Laws on the subject of Bank-
ruptcies throughout the United States.”
81 Constitution of the United States, Article I, Section 10, Clause 1: Contract Clause: “No
State shall [...] pass any [...] Law impairing the Obligation of Contracts.”
82 11 U. S. Code § 362.
83 Credit Alliance Corp. v. Williams, 5 July 1988, 851 F.2d 119 (4th Circ. 1988); In re S.I
Acquisition, Inc., 29 May 1987, 817 F.2d 1142, 1147 (5th Cir.1987); In re Supermercado
Gamboa, 8 December 1986, 68 B.R. 230, 232 (Bankr. D.P.R.1986). For rare cases where
a stay can be extended to third parties, see fn. 97.
84 11 U.S Code § 1107. Under § 1101, “debtor in possession” means debtor except when a
person that has qualified under section 322 of this title is serving as trustee in the case.”
point a bankruptcy trustee.85 The trustee then assumes the powers of the debt-
or’s management.
Chapter 11 is a flexible instrument. It allows the debtor to preserve going con-
cern value, while negotiating a wide range of options for financial recovery.86
These should be included in the reorganisation plan, which the debtor has an
exclusive right to propose within a 120-day period following the commence-
ment of the insolvency proceeding.87 The plan shall designate creditor classes,
specify their treatment88 and provide adequate means for the plan’s implemen-
tation. It may prescribe such measures as the transfer of assets to other entities,
extension of maturity dates, impairment of any class of claims, including claims
of secured creditors, assumption, rejection, or assignment of any executory
contract, and other commercially driven measures. There are several important
requirements that need to be satisfied for a plan to be sanctioned.89 First, the
plan must comply with applicable law. Second, it must be proposed in good
faith, which generally indicates that there exists “a reasonable likelihood that
the plan will achieve a result consistent with the objectives and purposes of the
Bankruptcy Code.”90 Third, the plan must be fair and equitable. This means
that the plan must comply with the best interest of creditors test91 and the ab-
solute priority rule.92
Chapter 11 solves the holdout problem by allowing consensual and non-con-
sensual plan confirmation. The former encompasses acceptance by a class,
which is present if more than one-half in number of the allowed claims and
two-thirds in amount vote in favour of the plan.93 Non-consensual plan con-
firmation allows a restructuring plan to be imposed (crammed down) on dis-
senting classes of creditors (cross-class cram down), as long as at least one im-
paired class has approved the plan and the plan complies with other require-
85 11 U. S. Code § 1104.
86 On the evolving nature of chapter 11, see Mark J. Roe, “Three Ages of Bankruptcy”,
Harvard Business Law Review 2017, 187, 205, noting that instead of implementing the
original idea of a deal among creditors and a debtor, chapter 11 is now increasingly used
for a market sale of failed firms. For similar observations see ABI Commission (fn. 36),
p. 15.
87 11 U. S. Code § 1121(b).
88 All creditors within a class shall be treated equally. See 11 U. S. Code § 1123(a)(4).
89 11 U. S. Code § 1129.
90 In re Madison Hotel Associates, 6 November 1984, 749 F.2d 410, 424-25 (7th Cir. 1984).
91 11 U. S. Code § 1129(a)(7). This test guarantees that every dissenting creditor receives in
chapter 11 at least as much as it would have received under chapter 7 liquidation.
92 11 U. S. Code § 1129(b)(2). This rule stipulates that no junior class may receive any dis-
tribution unless more senior classes have been repaid in full.
93 11 U. S. Code § 1126(c).
ments, such as good faith, best interests of creditors, absolute priority, feasibil-
ity, fairness and equity.94
The popularity of chapter 11 as a debt restructuring instrument among for-
eign-registered companies and multinational enterprise groups is equally pre-
mised on its jurisdictional accessibility. The US Bankruptcy Code does not tie
the jurisdiction to the presence of debtor’s COMI. It establishes a low bar to
entry, so that “a dollar, a dime, or a peppercorn” of property in the US suf-
fices.95
Explaining the attractiveness of the US chapter 11 among foreign companies,
McCormack mentions: (i) the worldwide automatic stay; (ii) debtor in posses-
sion regime; (iii) provisions on rescue financing; (iv) cram down possibilities;
and (v) procedural consolidation.96 Notably, the availability of third-party re-
leases is not cited. The next Section explains why this might be the case.
4.2. Discordant Approaches of US Courts to Third-Party Releases
The position of US law regarding third-party releases is complex and indeter-

minate. To clarify the current American approach, three points can be made.
First, US courts distinguish between a temporary injunction staying enforce-
ment and suits against third parties, and a permanent release of claims against
them. It is generally accepted that injunctions to protect third parties (typically,
guarantors and co-debtors) are permissible in certain circumstances.97 In this
94 11 U. S. Code § 1129(b)(1).
95 In re Theresa Mctague, 15 July 1996, 198 BR 428, 431 (Bankr. W.D.N.Y. 1996). See also
Ray Warner, “Conflicting Norms: Impact of the Model Law on Chapter 11’s Global
Restructuring Role”, International Insolvency Review 2019, 273, 275, calling the US
bankruptcy law approach “aggressive universalist”.
96 Gerard McCormack, “Bankruptcy Forum Shopping: The UK and US as Venues of
Choice for Foreign Companies”, International and Comparative Law Quarterly 2014,
815, 827.
97 For instance, the power of a court to enjoin actions against third parties has been recog-
nised in cases where such actions interfere improperly with the purposes of the bank-
ruptcy law or the debtor’s reorganisation efforts, or when “there is such an identity
between the debtor and the third-party defendant that the debtor may be said to be the
real party defendant and that a judgment against the third-party defendant will in effect
be a judgment or finding against the debtor.” In McKillen v. Wallace (In re Ir. Bank
Resolution Corp.), 27 September 2019, No. 18–1797, 2019 U. S. Dist. LEXIS 166153
(D. Del. 2019) the court ruled that such an identity existed in the case of a claim against
a foreign representative of a debtor, whose insolvency was recognised under chapter 15.
See also Menard–Sanford v. Mabey (In re A.H. Robins Co.), 16 June 1989, 880 F.2d 694
(4th Cir.1989); Inc. v. Piccinin, 10 April 1986, 788 F.2d 994 (4th Cir.1986); In re Bora
way the protective shield of a stay could extend beyond the entity undergoing
chapter 11 restructuring.
Second, courts usually approve third-party releases when there is affirmative
and explicit consent by creditors, whose claims are being released.98 Differing
opinions, however, exist about what constitutes “consent”, and whether
deemed or implied consent suffices to sanction a third-party release.99 Some
courts find voting in favour of a plan sufficient to assume consent to a third-
party release included therein,100 whereas other require manifest assent to the
release, so that the mere voting for a plan is not enough.101 Yet the third cate-
gory of courts consider abstaining from voting or failure to opt out as con-
sent.102 The commission established by the American Bankruptcy Institute to
study the reform of chapter 11 (ABI Commission) in its authoritative report
favours the express consent to the release, which covers: (i) voting for a plan
that includes a third-party release; (ii) a separate point on the ballot indicating
consent to a release; or (iii) a separate agreement with the affected creditor ap-
proving the release.103
Third, non-consensual third-party releases are particularly problematic. It is
difficult to summarise the approach of American courts on the issue, since
there is no harmonized and consistent approach, but a great variety of varying
and, at times, conflicting approaches. This comes from the fact that the US
Bankruptcy Code does not expressly and unequivocally permit third-party
Bora, Inc., 20 January 2010, 424 B.R. 17, 24 (Bankr. D.P.R. 2010); In re Bailey Ridge
Partners, LLC, 16 May 2017, 571 B.R. 430 (Bankr. N.D. Iowa 2017).
98 In re SunEdison, Inc., 8 November 2017, 576 B.R. 453, 458 (Bankr. S.D.N.Y. 2017); In
re Specialty Equip. Cos., Inc., 23 August 1993, 3 F.3d 1043, 1047 (7th Cir. 1993).
99 Dorothy Coco, “Third-Party Bankruptcy Releases: An Analysis of Consent Through
the Lenses of Due Process and Contract Law”, Fordham Law Review 2019, 231, 233,
arguing that divergence in case law leads to inconsistent application of the Bankruptcy
Code, raises due process concerns and causes forum shopping.
100 In re Chassix Holdings Inc., 9 July 2015, 533 B.R. 64 (Bankr. S.D.N.Y. 2015); In re
Specialty Equip. Cos. (fn. 98); In re Zenith Elecs. Corp., 2 November 1999, 241 B.R.
92, 111 (Bankr. D. Del. 1999).
101 In re Digital Impact, Inc., 22 July 1998, 223 B.R. 1, 14–15 (Bankr. N.D. Okla. 1998),
emphasizing that the court “must ascertain whether the creditor unambiguously man-
ifested assent to the release of the nondebtor from liability on its debt.”
102 In re DBSD N. Am., Inc., 26 October 2009, 419 B.R. 179, 217-19 (Bankr. S.D.N.Y.
2009), holding that “[e]xcept for those who voted against the Plan, or who abstained
and then opted out, [...] Third Party Release provision [is] consensual.” In re Indiana-
polis Downs, LLC, 31 January 2013, 486 B.R. 286, 306 (Bankr. D. Del. 2013), stressing
that “parties were provided detailed instructions on how to opt out, and had the op-
portunity to do so by marking their ballots.”
103 ABI Commission (fn. 36), p. 255.
releases, other than in asbestos cases.104 Section 524(e) provides that a “dis-
charge of a debt of the debtor does not affect the liability of any other entity
on, or property of any other entity for, such debt.”105 Courts have grappled
with the scope and application of this provision. The minority of circuit
courts (Ninth,106 Tenth107 and Fifth108 circuits) have adopted a restrictive view
on third-party releases, ruling that sec. 524(e) altogether prohibits them. Other
circuit courts avoid this narrow interpretation and may under certain limited
conditions be willing to consider and approve third-party releases. Courts in
these circuits focus on sec. 105(a) of the US Bankruptcy Code, which grants
them equitable powers to “issue any order, process, or judgment that is neces-
sary or appropriate to carry out the provisions of [the Bankruptcy Code].”109
However, permissibility of third-party releases does not result in a single judi-
cial standard for their approval.
For instance, in Dow Corning Corporation, the Sixth Circuit listed seven fac-
tors, necessary for approval of a third-party release. According to these, a re-
lease can be granted if:
(1) There is an identity of interests between the debtor and the third party, usually an indemnity
relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will
deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorga-
nization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the
debtor being free from indirect suits against parties who would have indemnity or contribution
claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept
the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes
affected by the injunction; (6) The plan provides an opportunity for those claimants who choose
not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual find-
ings that support its conclusions.110
104 11 U. S. Code § 524(g)(1)(B).

105 11 U. S. Code § 524(e).
106 Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 10 October 1995, 67 F.3d 1394,
1402 (9th Cir. 1995), restating that “[t]his court has repeatedly held, without exception,
that § 524(e) precludes bankruptcy courts from discharging the liabilities of nondeb-
tors.”
107 Landsing Diversified Props.-II v. First Nat’l Bank & Trust Co. of Tulsa (In re W. Real
Estate Fund, Inc.), 28 December 1990, 922 F.2d 592, 601 (10th Cir. 1990), holding that
“Congress did not intend such [discharge of debt] to third-party bystanders.”
108 Bank of N.Y. Tr. Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.),
29 September 2009, 584 F.3d 229, 252 (5th Cir. 2009).
109 11 U. S. Code § 105(a).
110 Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 29 Jan-
uary 2002, 280 F.3d 648, 658 (6th Cir. 2002). The same factors are applied by the Fourth
Circuit, see Nat’l Heritage Found., Inc. v. Highbourne Found., 25 July 2014, 760 F.3d
344, 348-51 (4th Cir. 2014). In its recommendations (p. 256), the ABI Commission
(fn. 36) rejected the application of the Dow Corning factors and favoured a different
The comprehensive analysis of different tests applied by American circuit

courts in adjudicating the issue of third-party releases falls outside the scope of
this article. As noted above, several US districts prohibit third-party releases as
contravening the statutory language of sec. 524(e) Bankruptcy Code. Other
tend to apply the heightened scrutiny standard when considering the matter.111
They highlight that third-party releases can be allowed in rare, unique and
unusual cases,112 when they are “integral” to the restructuring and “absolutely
required” for the reorganisation.113 The hesitation of American courts in ap-
proving non-consensual releases can also be explained by the risks of their
abuse. As the court in Metromedia warned, “a nondebtor release is a device
that lends itself to abuse. [...] In form, it is a release; in effect, it may operate as
a bankruptcy discharge arranged without a filing and without the safeguards of
the Code.”114
4.3. Comparison of the US and UK Approaches to Debt Reorganisation and

Third-Party Releases
Chapter 11 reorganisations and English schemes of arrangement are similar in

some respects, but very different in other. Both instruments permit restructur-
ing of financial obligations of an overleveraged debtor, irrespective of its sol-
vent or insolvent condition. However, whereas the schemes of arrangement fall
under company legislation (Companies Act 2006), chapter 11 is a part of the
US bankruptcy law (Title 11 of the United States Code). This is one of the
reasons why, unlike English schemes, chapter 11 provides for an automatic
worldwide stay on debt-collection/debt-enforcement actions against debtor’s
assets. Both instruments seek to solve the collective action problem by allow-
test applied in Re Master Mortg. Inv. Fund Inc., 28 February 1994, 168 B.R. 930
(Bankr. W.D. Mo. 1994).
111 The trend towards increasingly restrictive interpretation has also been noticed in the
literature. See Michael S. Etkin/Nicole M. Brown, “Third-Party Release? – Not So
Fast! Changing Trends and Heightened Scrutiny”, AIRA Journal 29 (2015) 22, 26,
concluding that “a focus on the courts’ application of the standards illustrates the
movement of the Permissive Circuits towards a more restrictive view.”
112 Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metro-
media Fiber Network, Inc.), 21 July 2005, 416 F.3d 136, 141 (2d Cir. 2005); In re Dow
Corning Corp. (fn. 110) at 657–658, stressing that a third-party release is “a dramatic
measure to be used cautiously.” In re Transit Grp., Inc., 6 December 2002, 286 B.R.
811, 817 (Bankr. M.D. Fla. 2002), explaining that courts that grant third-party releases
“hold that the granting of such releases is justified only in unusual circumstances.”
113 In re Millennium Lab Holdings II LLC, 19 December 2019, 945 F.3d 126 (3rd Cir.
2019).
114 In re Metromedia Fiber Network, Inc., 21 July 2005, 416 F.3d 136 (2nd Cir. 2005).
ing the majority of creditors to bind the dissenting minority (i.e. cram down),
provided a certain voting threshold is reached and the suggested plan complies
with other mandatory criteria. At the same time, chapter 11 cram down is
much more far-reaching and intrusive compared to that available in English
schemes of arrangement. While the relevant English law only permits inter-
class cram down,115 US law provides for the cram down of the entire classes of
creditors. Both regimes are open to foreign-registered companies and corpo-
rate groups, wishing to reorganise their debt efficiently and in a single forum.
When it comes to third-party releases, there are certain features that align and
distinguish the chapter 11 approach from that adopted in English schemes of
arrangement. Both require that a release plays an important part in the debtors’
reorganisation plan. Both are flexible when it comes to the identity of a “third
party” (e.g. affiliate group companies, directors, officers, advisers, insurers).
Both permit a release of different types of claims (e.g. arising from contract or
tort). Most of the similarities, however, end here.
Third-party releases are clearly allowed and frequently used in English
schemes of arrangement (pro-release approach). To the contrary, US courts
either prohibit them or permit in rare circumstances, after applying close scru-
tiny. Such scrutiny results in the requirements of specific facts and detailed
evidence supporting the release. In particular, this relates to the requirement of
“contributions” made by third parties to a restructuring plan. Normally, such
contributions need to be made in the form of “substantial assets”, including
provision of funds.116 For instance, in Millennium Lab Holdings, the court
permitted the release of claims against the debtor’s shareholder entities, which
had made a USD 325 million contribution to reorganisation.117 Without such a
release, there would have been no contribution. Without a contribution, there
would have been no reorganisation.118
115 For the critique of the current legal approach and suggestions to introduce cross-class
cram down see Jennifer Payne, “Debt restructuring in English law: lessons from the
United States and the need for reform”, Law Quarterly Review 2014, 282. The Corpo-
rate Insolvency and Governance Act 2020, adopted in the summer of 2020, introduced
a new Restructuring Plan procedure that is similar to schemes in many respects, but
includes the tool of cross-class cramdown. It allows dissenting classes of creditors to
be bound by the plan, if sanctioned by the court as fair and equitable.
116 In re Lower Bucks Hosp., 2 January 2013, 488 B.R. 303, 323 (E.D. Pa. 2013) aff’d, 571
F. App’x 139 (3rd Cir. 2014); In re Dow Corning Corp. (fn. 110); In re Master Mortg.
Inv. Fund Inc (fn. 110); Deutsche Bank AG (fn. 112) at 142–144.
117 Opt-Out Lenders v. Millennium Lab Holdings II, LLC (In re Millennium Lab Hold-
ings II, LLC), 21 September 2018, 591 B.R. 559 (D. Del. 2018).
118 In re Millennium Lab Holdings (fn. 113).
This is in stark contrast to a loose interpretation of “give and take” embraced

by English courts when sanctioning schemes of arrangement. As an example,
in Noble Group Limited, discussed above, the High Court of Justice held that a
release of claims against directors and officers has become a “regular feature of
schemes”.119 Quite the opposite, in Washington Mutual the court denied a
third-party release in favour of the debtor’s directors and officers, despite the
potential indemnification claims of such persons against the debtor. Any other
interpretation, would, in view of the court, “justify releases of directors and
officers in every bankruptcy case.”120 Another issue concerns the plan voting.
American courts command “overwhelming” support by the affected classes of
creditors,121 pay close attention to class formation (i.e. whether the affected
class has a separate claim against third parties) and are extremely cautious in
approving broadly formulated releases.122 In comparison, English courts do
not impose special voting (threshold) requirements and may be willing to ac-
cept broad and encompassing releases.
Against these divergent approaches, the next Section discusses how third-party
releases may fit in with the ideas of corporate separateness, protective role of
group guarantees and legitimate expectations of affected creditors.
5. “Extension effect” of Restructuring Proceedings: Commercial Reality and

Limits of Corporate Form
5.1. Third-Party Releases and Centralised Group Restructuring
In the context of integrated and interconnected corporate groups, pierced by

cross-guarantees and other types of cross-liability arrangements, efficient and
effective restructuring may require a single enterprise approach. Section 2
above concluded that a single entity restructuring, ignoring group interdepen-
119 Noble Group Limited (fn. 33).

120 In re Washington Mut., Inc., 7 January 2011, 442 B.R. 314, 349 (Bankr. D. Del. 2011).
For similar reasoning see Nat’l Heritage Found., Inc. (fn. 110).
121 See In re SL Liquidating, Inc., 14 May 2010, 428 B.R. 799, 804 (Bankr. S.D. Ohio
2010), noting that “[g]iven the fact that the baseline voting requirement for plan con-
firmation is one-half in number and two-thirds in amount, it is arguable whether or not
the acceptance [by 82% in number and 69% in amount] is overwhelming.”
122 In re Aegean Marine Petroleum Network, Inc., 8 April 2019, 599 B.R. 717, 726 (Bankr.
S.D.N.Y. 2019), complaining that “[i]nstead of targeting particular claims and explain-
ing why the release of those particular claims is necessary to some feature of the reor-
ganization, the proposed releases usually are as broad as possible in their scope.”
dences and cross-liability, risks being inefficient in the long run. It can trigger
contagion, leading to the failure of affiliated group members and ultimately,
collapse of the principal or scheme debtor.123
One way to restructure debt of corporate group members is to open parallel
restructuring or insolvency proceedings against each of them. Clearly, this so-
lution is cumbersome, costly and time-consuming. An alternative scenario is to
solve financial problems of the enterprise group in a single forum and in one
proceeding. This can be done through substantive consolidation, which leads
to a pooling of assets and liabilities of several companies together, thus elimi-
nating cross-entity obligations. As efficient as it may be, substantive consolida-
tion is not available in the majority of EU Member States.124 It also remains rare
in the US.125 This is due to the fact that such consolidation disregards the sepa-
rate identity of each group member involved.126
Centralised and global resolution of group distress can also be achieved with
the help of third-party releases, which resolve claims against both the primary
debtor and its affiliates. Third-party releases are primarily available in common
law jurisdictions, including Australia,127 Canada,128 Singapore,129 the UK and
the USA. More recently, however, the tool of third-party releases has been in-
corporated in the WHOA, under which a restructuring plan may amend the
rights of creditors against legal entities that form a group with the debtor.130 A
group is defined as “an economic unit in which legal persons and commercial
123 Michael Veder/Adrian Thery, “The release of third party guarantees in pre-insolvency
restructuring plans”, in: D. Faber, B. Schuijling and N. Vermunt (eds.), Trust and
Good Faith across Borders, Liber Amicorum Prof. Dr. S.C.J.J. Kortmann, 2017.
124 Wessels/Madaus (fn. 17), p. 348. In those few jurisdictions where substantive consoli-
dation is permitted, its application remains very limited and typically restricted to cases
of intermingling of assets and liabilities of different group members or to cases of fraud
and abuse of corporate form. For an overview in selected jurisdictions, see Stefan Sax/
Ming Dong/Christiaan Zjderveld/Thiago Junqueira, “Substantive Consolidation and
Other Aspects of Cross-Border Insolvency of Groups of Companies”, III NextGen
Leadership Program, 2018.
125 Stephen McNeill/Ryan Slaugh, “Non-Debtor Substantive Consolidation: The Ten-
sions of Form and Substance”, Norton Annual Survey of Bankruptcy Law, 2017, em-
phasising that “substantive consolidation is an extraordinary remedy vitally affecting
substantive rights, which due to the potential inequities caused [...] should only rarely
be granted.”
126 UNCITRAL Legislative Guide (fn. 6), p. 60.
127 Re Opes Prime Stockbroking Ltd, 3 August 2009, [2009] FCA 813.
128 ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp., 18 August
2008, 2008 ONCA 587 (Ont. C.A.).
129 Pathfinder Strategic Credit LP (fn. 38).
130 WHOA, Article 372.
partnerships are organisationally interconnected.”131 Third parties that are not

members of a closely integrated and interconnected group, such as debtor’s
directors and officers, insurance companies, legal and financial advisors cannot
benefit from a third-party release. Also, entities that are not linked by the eco-
nomic unity are excluded.
In terms of the conditions for third-party releases, the WHOA lists four of
them. First, claims against third parties should be ancillary to the obligations
of the primary debtor.132 This is similar to the “sufficiently close connection”
test as applied in English schemes of arrangement. Second, all third parties sub-
ject to a release must be in a state of financial distress.133 This requirement is
added to prevent situations in which creditors are barred from pursuing their
claims against solvent group members. Third, the group entities concerned
need to consent to the release.134 Fourth, the court should have jurisdiction
over third parties in a situation where these legal entities would themselves
offer a restructuring plan.135 Additionally, the WHOA stipulates that when
hearing the request for court confirmation, the court ex officio or on request
assesses if the proposed plan “in respect of the third parties” complies with the
general confirmation criteria.136 Thus, the proposed Dutch arrangement in its
approach to third-party releases is closer to English schemes rather than US
chapter 11 reorganisations. It welcomes them and recognises their value as a
tool to reorganise financial obligations in complex group restructurings. At the
same time, it tailors this tool to a situation of group insolvency, which distin-
guishes it from both the UK and the US perspectives.
131 Dutch Civil Code, Article 2:24b. The existence of economic unity and organisational
interconnectedness are main characteristics of a corporate group. They highlight inter-
dependence of group members, importance of group synergies and (typically) centra-
lised management.
132 WHOA, Article 372(1)(a).
133 Ibid, Article 372(1)(b).
134 Ibid, Article 372(1)(c).
135 Ibid, Article 372(1)(d). In a public procedure, this amounts to the presence of COMI of
all relevant entities in the Netherlands. In a non-public restructuring, sufficient connec-
tion to the Netherlands would normally suffice.
136 Among them: (i) the best interest of creditors test (Article 384(3), which is not applied
ex officio and requires a request by dissenting creditors or shareholders; and (ii) the
absolute priority rule with a reasonableness exception (Article 384(4)(b). The deviation
from the absolute priority rule is permitted when it is reasonable, and the interests of
creditors and shareholders concerned are not prejudiced. Just like the best interests of
creditors test, the absolute priority rule is applied at the request of creditors or share-
holders.
5.2. Pragmatic Solutions and Corporate Formalism
A phenomenon of a third-party release is born of commercial necessity. It en-

sures a single point of entry to the resolution of group crises, therefore saving
costs, which would otherwise arise from multiplicity of proceedings. But its
significance goes much further than simple cost-saving. Third-party releases
pierce the boundaries of a single entity, subject to debt restructuring, and cover
related but separate entities. In other words, the liberating effect of debt altera-
tion or debt discharge is extended to cover third parties. This effect can be
referred to as “extension effect”. The same effect, even though in a somewhat
lighter version, is achieved by operation of enforcement stays or moratoria
whenever they are applied (“spilled over”) to third parties (e.g. co-debtors,
guarantors, security providers).137
The economic benefits of third-party releases are clear – they safeguard the con-
tinuity of a single enterprise against the opportunistic function of cross-guaran-
tees. Section 2 explained that without third-party releases a restructuring may be
undermined by ricochet claims, as well as destabilizing outcomes of enforce-
ment actions against group entities, acting as guarantors or co-debtors. How-
ever, the extension effect does not sit well with the traditional entity-by-entity
approach to corporate insolvency. It affects the rights of creditors against third
parties and obligations of such parties without opening separate (additional) re-
structuring or insolvency proceedings. Consequently, non-consensual amend-
ment or discharge of creditors’ claims, being an extraordinary feature of a re-
structuring or insolvency proceeding, is carried out in its absence. The main rea-
son why the extension effect appears problematic is the longstanding company
law doctrine of separate legal personality, resulting in the “demarcation of a pool
of assets” of the company from the assets and liabilities of its owners (share-
holders).138 This represents the entity shielding function of a corporate veil.139
137 Stays with extension effect are available, inter alia, in chapter 11 proceedings (fn. 97),
WHOA arrangement (Article 372(3)), Singapore’s schemes of arrangement (see Sec.
211C Companies Act, repealed and replaced by the sec. 65(1) of the Insolvency, Re-
structuring and Dissolution Act 2018; Re IM Skaugen SE and other matters, 27 No-
vember 2018, [2018] SGHC 259 (Skaugen)), proposed StaRUG (§ 56(3)), stating that
“the order [enforcement stay] may also block the right of creditors to enforce rights
arising from intra-group third party guarantees (section 4 paragraph 4).”
138 John Armour/Henry Hansmann/Reinier Kraakman/Marianna Pargendler, What is
Corporate Law? in: Reinier Kraakman/John Armour/Paul Davies/Luca Enriques/Hen-
ry Hansmann/Gerard Hertig/Klaus Hopt/Hideki Kanda/Mariana Pargendler/Wolf-
Georg Ringe/Edward Rock (ed.), The Anatomy of Corporate Law, 3rd ed., 2017, p. 5.
139 Henry Hansmann/Reinier Kraakman/Richard Squire, “Law and the Rise of the
Firm”, The Harvard John M. Olin Discussion Paper Series, Discussion Paper No. 546,
2006, noting that “entity shielding is the sine qua non of the legal entity.”
However, it may be argued that because cross-liability arrangements pierce

corporate veil, its entity shielding function becomes less pronounced and
authoritative. Outside insolvency, corporate formalities frequently give way to
economic efficiency, oftentimes translated into the notion of “group inter-
est”.140 It is due to operational, financial, tax and regulatory considerations that
companies may become engaged in the establishment of special financing ve-
hicles to raise funds on capital markets and provide extensive group support,
inter alia, in the form of cross-guarantees and intragroup loans.141
Insolvency law should not lose touch with commercial reality. It cannot ignore
how businesses actually operate and must not be prevented by corporate form-
alities from facilitating and enforcing efficient group-wide reorganisations.142
In other words, formalism should not frustrate pragmatic solutions, furthering
functions and goals of insolvency law. In corporate law, it was argued that
courts should be less reluctant to disregard or treat more flexibly legal parti-
tions within corporate groups,143 to the extent that such partitions are wea-
kened by overlapping debt, close business integration and the lack of reliable
entry-level accounting. This logic should also be applied to the approval of
third-party releases, which represent an integral part of a “much larger chal-
lenge of integrating a theory of the firm with the law of corporate reorganiza-
tions.”144 This challenge was aptly formulated by Judge Ramesh, who asked to
what extent “is it permissible to disregard the traditionally inviolable separate
140 The discussions about the recognition of the group interest in European company law
have taken place since the 1990s and resulted in a number of initiatives (see e.g. the
Company Law Action Plan). Despite the generally positive attitude of scholars and
business community, these initiatives have not resulted in any legislative proposals. On
the issue of “group interest” see Pierre-Henri Conac, “Director’s Duties in Groups of
Companies – Legalizing the Interest of the Group at the European Level”, European
Company and Financial Law Review 2013, 195; Martin Winner, “Group Interest in
European Company Law: an Overview”, Acta Universitatis Sapientiae: Legal Studies 5
(2016), 85.
141 INSOL International, “Restructuring Cross-border Groups: Key Considerations
Around Foreign Tax and Finance-driven SPVs”, June 2020, para. 2.3., acknowledging
that in a going concern situation “[c]reditors [...] typically look at the group as a whole
and do not focus particularly on the SPV that issued the debt instruments.”
142 For a similar stance on the need to refocus on honouring substance over form, as ap-
plied to corporate partitions and asset securitization see Daniel Bussel, “Corporate
Governance, Bankruptcy Waivers, and Consolidation in Bankruptcy”, Law & Eco-
nomics Research Paper No. 19–08, 2019.
143 Henry Hansmann/Richard Squire, “External and Internal Asset Partitioning: Cor-
porations and Their Subsidiaries”. Yale Law & Economics Research Paper No. 535,
2016, https://ssrn.com/abstract=2733862 (accessed 30 January 2020).
144 Douglas Baird/Anthony Casey, “No Exit? Withdrawal Rights and the Law of Corpo-
rate Reorganizations”, Columbia Law Review 2013, 1, 48. See also Irit Mevorach, In-
legal personality [...] in order to attain an effective restructuring solution for

the group as a whole?”145
5.3. Third-Party Releases, Creditors’ Expectations and Protective Function

of Group Guarantees
Third-party releases may disrupt the protective function of guarantees and

other similar (security) arrangements. They can also run contrary to the legit-
imate expectations of parties relying on them. Protection of legitimate expecta-
tions and certainty of transactions is one of the fundamental principles of in-
solvency law.146 Weakening of the protection afforded by guarantees and col-
lateral might negatively affect the amount creditors get upon debtors’ default.
Ultimately, this may result in the increase of the cost of credit, potentially lim-
iting its availability to fund new and existing projects.147 Cross-guarantees and
other forms of cross-liability arrangements should not be disregarded for the
sole reason that they have been provided by members of a corporate group in
pursuit of a mysterious group interest. Moreover, release of guarantees or col-
lateral provided by independent self-sustained group members (e.g. companies
responsible for separate business lines and not integrated in the group struc-
ture) might be unnecessary for the success of the restructuring plan.
However, reliance on intra-group liability arrangements may be overstated in
situations where creditors extend funds on the implicit understanding that they
are transacting with the entire group, an impression empowered by the exis-
tence of cross-collateralisation of debt, intragroup loans, cross-guarantees and
other cross-liability arrangements. A good example is lending to a special pur-
pose vehicle (SPV). Such lending includes a purchase of debt instruments (e.g.
bonds) and is typically done on the understanding that the main source of re-
payment comes from other group entities (e.g. production affiliates or a parent
company), providing their guarantees or collateral. An SPV does not conduct
revenue-generating operations or business of its own. This type of relationship
was extensively discussed in the Oi Group case, involving the restructuring of
solvency within Multinational Enterprise Groups, 2009, p. 33, noting a gap between
commercial realities and legal infrastructure.
145 Kannan Ramesh, “Synthesising Synthetics: Lessons from Collins & Aikman”, 2nd
Annual GRR Live New York, 2018, p. 17.
146 Reinhard Bork, Principles of Cross-Border Insolvency Law, 2017.
147 Peter Boyle, “Non-Debtor Liability In Chapter 11: Validity of Third-Party Discharge
In Bankruptcy”, Fordham Law Review 1992, 421, 443, noting that the “availability of
the guarantee may reduce the cost of credit because the interest rate on loans will de-
crease as the risk of default decreases.”
a Brazilian telecommunication provider Oi S.A. (Oi) and its foreign subsidi-

aries.148 The group’s management and profit-generation centre was in Brazil.
Two Dutch finance subsidiaries issued the majority of Oi’s bond debt, guaran-
teed by the Brazilian parent company. The funds received by the SPVs from
the sale of bonds were on-lent to Oi to be spent on operational activities. Thus,
repayment under bonds fully depended on the viability and creditworthiness
of the operating companies, which was made clear in the bond disclosure
documentation. When reviewing this type of intra-group relationship, the US
court, tasked with a recognition request, paid particular attention to the cred-
itors’ expectations. It observed that the bond offering memoranda spoke of the
Oi Group as a “single integrated operation” and described the SPV’s “conduit
role and dependence on the Brazilian entities.”149 In other words, the offering
memoranda focused on the Oi Group as a whole and not on the individual
debtors.
To the extent that financing is carried out on a group rather than an entity
basis, the possibility of a group-wide financial reorganisation should be con-
sidered as entering parties’ legitimate expectations.150 In view of this there may
be a strong impetus to favour centralised crisis resolution, extending its liberat-
ing effects to third parties (i.e. financing vehicles or operating companies, de-
pending on how the restructuring is organised). Otherwise, simultaneous en-
forcement of cross-liability obligations may result in the destruction of an en-
terprise value, primarily to the detriment of (unsecured) creditors not covered
by guarantees. To allow this is to let the protective function of cross-guarantees
be substituted with the opportunistic function.
148 For an overview of the Oi Group restructuring, see Richard Cooper/Francisco Cestero/
Jesse Mosier, “Oi S.A.: The Saga of Latin America’s Largest Private Sector In-court
Restructuring”, Emerging Markets Restructuring Journal 2018, 209.
149 In re Oi Brasil Holdings Coöperatief U.A., 4 December 2017, Case No. 17–11888
(SHL) (Bankr. S.D.N.Y. 2017).
150 Gabriel Moss, “Group Insolvency – Choice of Forum and Law: The European Experi-
ence Under the Influence of English Pragmatism”, Brooklyn Journal of International
Law 2007, 1105, arguing that “[s]ince business is done in groups of related entities, so
rescue and restructuring, bankruptcy, and liquidations need to take place in the same
groups.” Ramesh (fn. 145), p. 19, convincingly pointing out the self-reinforcing nature
of the expectations argument and concluding that “if incursions into the separate legal
personality doctrine become more common in group insolvencies, creditors’ expecta-
tions for their investment to be ring-fenced upon insolvency would be less justified.”
6. Concluding Remarks
Europe is experiencing the rise of restructuring proceedings, which has re-

cently culminated in the adoption of the Restructuring Directive. While being
a major achievement in the harmonisation of substantive (pre)insolvency law
in the EU, it lacks developed rules targeting restructuring of multinational en-
terprise groups. This is surprising, considering the fact that the majority of
medium and large-sized enterprises in Europe operate as groups of companies.
As a result, effectiveness of group reorganisations may be undermined. The
major challenge lies in applying traditional insolvency and restructuring law
tools, underpinned by a singular (atomistical) vision of legal entities, to eco-
nomically integrated and interdependent groups of companies. While the Re-
structuring Directive does not address this challenge, solutions may be found
in national laws. Among such solutions – a third-party release.
Third-party releases facilitate centralised one-point-of-entry resolution of
group distress. An alternative scenario is the opening of multiple insolvency or
restructuring proceedings against group members. The latter scenario results
in additional costs and may promote conflicts or inconsistences, undermining
the effectiveness of group restructuring and complicating the adoption of a
common resolution strategy. The idea of a centralised crisis resolution is not
novel. For example, it manifests itself in a single point of entry (SPOE) strat-
egy, commonly adopted in the resolution of banking groups.151 It also embo-
dies the ideology of unity and universalism (as extrapolated to the enterprise
group context), implementing a global approach that imitates the commercial
reality of integration and avoids business fragmentation and liquidation of eco-
nomically viable group entities.152 The latter may be caused by simultaneous
enforcement pursuant to cross-liability instruments, including cross-guaran-
tees, co-debtorship and collateral arrangements.
Some jurisdictions have a long history of approving third-party releases to re-
solve mounting debt pressure of enterprise groups. Both the US chapter 11
reorganisations and UK schemes of arrangement permit them, although in a
very different way and to a different extent. While English courts are flexible
151 Financial Stability Board (FSB), Recovery and Resolution Planning for Systemically
Important Financial Institutions: Guidance on Developing Effective Resolution Stra-
tegies, 16 July 2013, p. 13, https://www.fsb.org/wp-content/uploads/r_130716b.pdf
(accessed 30 January 2020). A SPOE strategy entails the application of resolution
powers at the top parent or holding company level without operating subsidiaries en-
tering resolution. According to the FSB, this strategy is more suitable to a firm that
“operates in a highly integrated manner.”
152 Irit Mevorach, The Future of Cross-Border Insolvency: Overcoming Biases and Clos-
ing Gaps, 2018, p. 10.
and consider third-party releases a common practice, American courts either

disallow them or permit in very limited circumstances. The proposed Dutch
framework for confirmation of extrajudicial restructuring plans (WHOA), in-
spired by the two mentioned regimes, chooses a middle ground and tailors
third-party releases to financial distress in closely integrated corporate groups.
The diversity of approaches to third-party releases highlights their complex
and controversial nature. Such releases may frustrate legitimate expectations of
parties relying on guarantees and other cross-liability arrangements and harm
their protective function. Extending the effects of debt reorganisation to third
parties in the absence of separate insolvency or restructuring proceedings
could also run contrary to the longstanding views on corporate insolvency and
entity shielding. On a more fundamental level, third-party releases and other
mechanisms with extension effect are manifestations of group synergies and
the concept of a “group interest”, characteristic of interconnected and interde-
pendent enterprise groups. This concept does not easily fit the singular vision
of legal entities prevalent in insolvency and company law.
This article argues that the “extension effect” of third-party releases is a matter
of commercial necessity, synchronising legal responses to actual business mod-
els and better addressing the complexity of group interdependences, realised
through intra-group liability arrangements. To protect legitimate expectations
of creditors, the application of the rules affecting third-party rights must be
foreseeable and predictable. It should also be allowed only in cases of closely
integrated enterprise groups where third-party releases are indispensable to
facilitate efficient (i.e. speedy, cost-effective, consistent and coherent) group
financial restructuring, when there is an identity of interests between the pri-
mary debtor and a third party and where the rights of the affected creditors are
sufficiently protected.
At the same time, to the extent that cross-liability arrangements pierce corpo-
rate boundaries, upholding formalities of a corporate form becomes less justi-
fiable, especially if it blocks effective and efficient restructuring. The strict ad-
herence to the entity-by-entity approach can be the result of pure legal form-
alism and path dependency. Besides, in cases where creditors extend funds on
the understanding that they transact with the entire group rather than a parti-
cular entity, it may be argued that also guarantees, co-debtorship and collateral
provided by separate group members are granted by the group as a whole. This
makes centralised restructuring of group indebtedness both logical and pre-
dictable for creditors.

Third-Party Releases in Insolvency of Multinationa

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Third-Party Releases in Insolvency of Multinationa

Uploaded by

Copyright:

Available Formats

Third-Party Releases in Insolvency of Multinational

Table of Contents ECFR 2021, 107–140

4.3. Comparison of the US and UK Approaches to Debt Reorganisation and

The modern age of insolvency law is characterised by the rise of restructuring

The Directive recognises that greater coherence of preventive procedures

on measures to increase the efficiency of procedures concerning restructuring, insolvency

tions, which predicted the potential implications of introducing third-party

10 Ibid, para. 5.5.2.

2. Intra-Group Finance and Rationale behind Third-Party Releases

2.1. Protective and Opportunistic Functions of Cross-Guarantees

may also dilute the returns to non-guaranteed (unsecured) creditors in insol-

2.2. Cross-Liability Arrangements and Group Restructuring

Despite economic interconnectedness and interdependence of corporate group

2.2.1. Performance by a Guarantor and Destabilising Force of Subrogation

In general, where the debt is discharged by a guarantor, such a guarantor steps

Resolution Directive (BRRD)25 in case of a bail-in – a resolution tool that en-

upon) is unavailable in a situation of a purely out-of-court (contractual) work-

2.2.2. Single Entity Restructuring and a Group Failure

form of funding (intra-group financing, access to capital markets), business

3. Third-Party Releases under English Schemes of Arrangement

3.1. Introduction to English Schemes of Arrangement

A scheme of arrangement is a statutory procedure available under Part 26 (sec.

legislation (i.e. Companies Act), it avoids the insolvency-related “failure” stig-

ity in number of members in a class.52 If the requisite majority is reached, the

52 Companies Act 2006, sec. 899.

3.2. Third-Party Releases in Corporate Groups: Scope and Requirements

57 Re NFU Development Trust Ltd (fn. 47).

ious types of intercompany liability arrangements (cross-guarantees, co-debt-

– Creditors’ rights against a third party shall be sufficiently closely con-

4. Third-Party Releases under US Chapter 11

4.1. Main Features of Chapter 11 Reorganisation

Reorganisation under chapter 11 aims at debt restructuring through the adop-

4.2. Discordant Approaches of US Courts to Third-Party Releases

The position of US law regarding third-party releases is complex and indeter-

104 11 U. S. Code § 524(g)(1)(B).

The comprehensive analysis of different tests applied by American circuit

4.3. Comparison of the US and UK Approaches to Debt Reorganisation and

Chapter 11 reorganisations and English schemes of arrangement are similar in

This is in stark contrast to a loose interpretation of “give and take” embraced

5. “Extension effect” of Restructuring Proceedings: Commercial Reality and

5.1. Third-Party Releases and Centralised Group Restructuring

In the context of integrated and interconnected corporate groups, pierced by

119 Noble Group Limited (fn. 33).

partnerships are organisationally interconnected.”131 Third parties that are not

5.2. Pragmatic Solutions and Corporate Formalism

A phenomenon of a third-party release is born of commercial necessity. It en-

However, it may be argued that because cross-liability arrangements pierce

legal personality [...] in order to attain an effective restructuring solution for

5.3. Third-Party Releases, Creditors’ Expectations and Protective Function

Third-party releases may disrupt the protective function of guarantees and

a Brazilian telecommunication provider Oi S.A. (Oi) and its foreign subsidi-

Europe is experiencing the rise of restructuring proceedings, which has re-

and consider third-party releases a common practice, American courts either

You might also like