The main operating company of Suntech Power Holdings is in bankruptcy in China, less than a week after attempting to win some sort of award for the oddest restructuring attempt ever.
Shortly before its bonds were due, the company announced that a majority of bondholders had agreed to forgive the failure to pay when the bonds came due on March 15.
The remainder of the bondholders said “bully for you,†but the bond indenture clearly provides in section 6.07 that the right to timely payment is held by each bondholder individually. As is typical of bonds issued under the 1939 Trust Indenture Act, the right to timely payment cannot be changed without unanimous consent.
This follows the earlier ousting of the company’s founder. In a word, Suntech is a bit of a mess right now.
Now some distressed debt investors get to find out what exactly it is you buy when you buy American-issued debt in a company incorporated in the Cayman Islands and doing business in China. I suspect the answer will be “not much.â€
The case will be one of the highest profile tests of the still relatively new Chinese restructuring law, which was intended to incorporate the best features of British-American corporate bankruptcy law. To date, most reports have been that the law has primarily been used to merge publicly traded sells into more viable start-ups. Suntech presents the chance for a more traditional reorganization.
But what value, if any, will remain for creditors of the Cayman Island holding company That’s a bit unclear.
There may be an attempt to file an involuntary bankruptcy petition against the holding company.
But wait a second, just where might such a petition be filed
After all, this is a Chinese company incorporated in the Cayman Islands. There are at least three obvious places that could host a bankruptcy case, with New York being the least obvious of the three.
No doubt the bondholders, noting the New York choice of law clause and submission of jurisdiction in Manhattan in the indenture, would greatly prefer to see this case filed in New York.
Better hurry, because it seems pretty clear the company has no great desire to experience Chapter 11.
And given the limited connection to the United States, it also seems likely that a U.S. bankruptcy judge would defer to an earlier case filed in either China or even the Cayman Islands. And if the latter, a host of really boring case law makes clear that an American Chapter 15 case might not even be possible.
All of which raises the real question of whether this case even belongs in Chapter 11. Chapter 11 works fine for foreign debtors who want to work out a consensual deal with their creditors.
But the bankruptcy court has very limited ability to force participation on a reluctant foreign corporate debtor.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
