Third-Party Releases in Insolvency of Multinational Enterprise Groups

Abstract

Europe is experiencing the rise of restructuring proceedings, which has been facilitated by the Restructuring Directive (Directive (EU) 2019/1023 of 20 June 2019). While being a major achievement in harmonizing substantive (pre)insolvency law in the EU, it lacks rules targeting restructuring of multinational enterprise groups. As a result, effectiveness of group reorganizations may be undermined. Nevertheless, some jurisdictions adopt innovative tools, offering group solutions. 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 insolvency or restructuring proceedings of a principal debtor.

The diversity of approaches to third-party releases highlights their controversial nature. They may frustrate legitimate expectations of creditors relying on cross-guarantees and other forms of cross-liability arrangements. Extending the effects of debt reorganization 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 matter of commercial necessity, synchronizing legal responses with actual business models and better addressing the complexity of group interdependencies, realized through various intra-group liability arrangements.

Keywords: Third-Party Release, Schemes of Arrangement, Chapter 11, Cross-Guarantees, Subrogation, Cross-Liability Arrangements, Enterprise Groups, Group Restructuring, Legitimate Expectations, Whoa, StaRUG

JEL Classification: K10, K11, K12, K22, K33, H12, G21, G30, G32, G33, G34, L14, L22