Value Tracing and Priority in Cross-Border Group Bankruptcies: Solving the Nortel Problem from the Bottom Up
26 Pages Posted: 8 Dec 2020
Date Written: December 7, 2020
The Nortel bankruptcy case is simultaneously the biggest success and biggest failure in the recent history of cross-border restructuring practice. On the plus side, the coordinated sale of an insolvent telecom firm’s key assets created a pool of value worth $7 billion—much larger than could have been accomplished through piecemeal local liquidation of spectrum licenses and intellectual property rights. Indeed, that pool of assets was much more valuable than anybody imagined when the firm filed its bankruptcy petition. On the minus side, the fights over value allocation swallowed up a gargantuan part of that value—an estimated $2.6 billion. The fights centered on alleged entitlements to priority—upward deviations from equal treatment and pro rata distribution. These fights were complicated by Nortel’s structure as a global corporate group. The claims were based on, among other things: (1) liens; (2) corporate structure; (3) territorial jurisdiction; and (4) local statutory priorities. Interactions among these claims to priority made it virtually impossible to unscramble the egg. We suggest a simple, perhaps naïve, solution to this problem: a creditor asserting priority should have the burden of establishing the realizable value of its claim to priority.
This article proceeds in three steps. First, it describes the current architecture for dealing with the insolvency of corporate groups and the problem posed by cases like Nortel and Lehman. Second, it details the various types of claims to priority that can exist within a corporate group and explores the nature of priority and develops the concept of “homeless value.” Claims to priority may be hierarchical or they may be plural. They may be traceable to assets, countries, or entities, or they may inhere in the group. Regardless, when a firm continues to operate in bankruptcy, (or is sold as a going concern) the relative position of the claimants must be fixed at the outset. Thereafter, subject to respecting the priority of the newly fixed claims, governance should be situated with the variable claimants to this unsituated value—the “rump estate.” These are the claimants who will benefit from any increase in value and pay for any decrease. Third, we suggest an approach to value allocation that would vastly simplify cases like Nortel, but which also provides a mechanism to allocate value in rescue cases where the firm continues to operate. The simple point is that priority claimants should have the burden of establishing the realizable value of their priority. This establishes an entitlement floor for, and limits the veto rights of, these priority claimants. As such, it provides a legal default for allocating value in going concern sale cases, and a cram-down standard for restructurings.
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